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Duly Noted

IRS Will Keep Fighting Tax-Saving Gift Structures. The Internal Revenue Service says it will continue to litigate cases in which taxpayers seek to specify the value of gifts they make to avoid triggering unanticipated taxes. The agency suffered a major setback last year in Wandry v. Commissioner, in which the Tax Court rejected IRS arguments that such “formula” gifts violate public policy. In Wandry, the taxpayer made gifts of a closely held business under a document that established dollar limits on each gift, based on the value ultimately determined by the tax authorities. This prevented the IRS from assessing additional tax, because an auditor’s increase in the value per share would result in fewer shares changing hands as part of the gift. Tax Court Judge Harry Haines ruled that public policy is not violated by such gifts, observing: “The Commissioner’s role is to enforce tax laws, not merely to maximize tax receipts.” But the IRS announced its “nonacquiescence” to Haines’ decision, meaning it will continue to challenge such clauses in court. AOD 2012-04, Internal Revenue Bulletin 2012-46.

Tax Preparer Regulation Program Halted. In another legal setback for the IRS, a federal judge ruled that the agency has no legal authority to regulate tax return preparers. U.S. District Judge James Boasberg of Washington, D.C., struck down a set of standards requiring tax preparers to pay a registration fee to the IRS, pass a test and take regular continuing education classes. Boasberg rejected the IRS position that, as an arm of the Treasury, it had authority to regulate preparers under a law dating to the 1880s, decades before the current income tax system was established. Boasberg also rejected an IRS request to delay his decision’s effective date to allow the new regulations to take effect this year. The IRS said it will appeal. Loving v. Internal Revenue Service, No. 12-385.

Taxpayer Gets A Break To Reverse An IRA Conversion. A taxpayer who was experiencing financial hardship, acting on bad financial advice, converted a regular IRA to a Roth IRA without realizing this would trigger a large tax bill. The taxpayer’s tax adviser compounded the problem by not alerting the taxpayer that the Roth conversion could be reversed, or “recharacterized,” any time before the taxpayer’s tax return was due. The deadline passed, and the taxpayer was stuck with the unwanted tax liability. But the IRS granted the taxpayer special relief and allowed an additional two-month window to reverse the conversion, finding that the taxpayer had acted reasonably and in good faith by relying on professional advisers. PLR 201301020.

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