Subscribe Sign In Sep 23, 2020,01:06am EDT U.S. Tax Court Affirms Most Penalties In Patel Microcaptive Shelter Case But Kicks Out Some For IRS Procedural Errors Jay AdkissonContributor Personal Finance I cover Wealth Preservation in its legal permutations Listen to article U.S. Tax Court GETTY Taxpayer, an ophthalmologist in Texas, got caught up in a microcaptive tax shelter. Ultimately, the IRS disallowed the taxpayer's deductions and assessed an aggregate deficiency over $1.7 million against the taxpayer for the tax years 2013 through 2016, and also assessed the taxpayer nearly $400,000 in penalties for those years, consisting of a 40% penalty in 2013 and 20% penalties in 2014 to 2016. Ouch! The taxpayer filed a case in the U.S. Tax Court contesting the deficiencies and the penalties, alleging among other things that the IRS had not correctly followed the necessary procedure in assessing the penalties; mainly, that the IRS agent who assessed the penalties did not secure timely written approval from their supervisor. In a highly technical opinion that probably only the most hardcore tax practitioner could even contemplate enjoying the U.S. Tax Court held that the IRS agent who assessed the penalties had not obtained all the necessary supervisory approval for 2013, and so some of those penalties were kicked out, but the IRS agent did follow the correct procedure for 2014 to 2016 and so those penalties were allowed to stand. ANALYSIS The practical upshot of this opinion is that the U.S. Tax Court is continuing to affirm the penalties assessed by the IRS in microcaptive transactions, both the 20% accuracy-related penalty and the 40% tax shelter penalty (a/k/a "nondisclosed noneconomic substance transaction"), where the IRS can show that the proper procedures were following in assessing those penalties. But it also demonstrates that the U.S. Tax Court will not hesitate to kick out those penalties where the IRS doesn't follow the procedural steps in the right order. The rules that the IRS agents have to follow are arguably as complex as the tax code itself, and over the long haul of an examination it is probably easier for agents to trip themselves on some minor this-or-that than to make it through without any errors. This opinion also illustrates the type of cases that the U.S. Tax Court has before it: An ophthalmologist in Texas paying a couple of million in insurance premiums over four years? C'mon man. A case like that is a loser out of the gate, and about the only thing that the taxpayer can do is to assert hyper-technical arguments about the IRS not following the rules and hope that something sticks (as it did here for part of the penalties for one tax year). Considering the high fees for tax lawyers to even get these arguments before the U.S. Tax Court, it doesn't seem like a particularly good bet and probably in many cases the taxpayers should simply cut their losses by paying what they owe (including penalties) and move on. MORE FOR YOU How To Get Approved For Student Loan Forgiveness Student Loan Forgiveness Won’t Be Available For Everyone, But This Plan Is Available Now Biden Cancelled $1.5 Billion Of Student Debt For Borrowers, But You Can Still Apply Now I have no idea what legal fees the taxpayer was charged in this case, but would guess that it was well into six-figures. But even spending just $100,000 to avoid maybe $50,000 in penalties doesn't seem like such a hot deal. Of course, you've got to remember that a lot of the folks who got into these deals to begin with weren't paying much attention to either the math or common sense from the outset, which is exactly why they got burned. These captive owners might not have been in pari delicto with the promoters who got them into these microcaptive deals, but they were almost certainly at least delicto in a goodly number of cases. There are probably a lot more of these foot-fault type opinions that are probably going to come out of the U.S. Tax Court in the next few years. Don't expect me to report on each and every one of them, as my own sanity simply will not permit that, but if some really juicy opinion regarding penalties or procedure comes down then I will try to let you know. CITE AS: Patel v. CIR, T.C. Memo 2020-133 (Sept. 22, 2020), full opinion below: http://captiveinsurancecompanies.com/cases/patel/Patel_Opinion_200922.pdf Follow me on Twitter or LinkedIn. Check out my website or some of my other work here. Jay Adkisson I am a partner of Adkisson Pitet LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My practice is in the areas of creditor-debtor law... Read More Reprints & Permissions Cookies on Forbes YOUR CHOICES REGARDING COOKIES ON THIS SITE Please choose whether this site may use cookies or related technologies such as web beacons, pixel tags, and Flash objects ("Cookies") as described below. You can learn more about how this site uses cookies and related technologies by reading our privacy policy linked to below. Your choices on this site will be applied globally. This means that your settings will be available on other sites that set your choices globally. You can change your mind and revisit your preferences at any time by accessing the "Cookie on Forbes" button on the left side of this site. While we need to use required cookies to make our site work, we won't set optional cookies unless you enable them. WE AND OUR PARTNERS We and our partners: process personal data such as IP Address, Unique ID, browsing data for: Use precise geolocation data | Actively scan device characteristics for identification. Some partners do not ask for your consent to process your data, instead, they rely on their legitimate business interest. View our list of partners to see the purposes they believe they have a legitimate interest for and how you can object to it. Accept All Choose Cookies Privacy Statement Powered by: