For a Taxpayer to Bar IRS Collection of a Tax Deficiency Because of the 3 Year Limitation, Less than 25% of Gross Income Should be Omitted from the Petitioner’s Return – Los Angeles Income Tax Planning and Income Tax Litigator Attorney Bruce Givner

by Bruce Givner on February 14, 2013

Mr. Daniels, petitioner, and his sister were equal beneficiaries of a Trust, which was funded by IRA proceeds when Daniels’ mother died. In 2006, Charles Schwab issued the trust a Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reporting a taxable distribution of $325,204.59 for the transfer from the IRA to the trust. For 2006, Daniels filed Form 1041, U.S. Income Tax Return for Estates and Trusts, reporting income of $325,204 and an income distribution deduction in the same amount for distributions made to petitioner and his sister. Daniels, however, did not file Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, nor did he include the trust distribution as income on his filed 2006 Form 1040EZ.

In 2008, Daniels amended the 2006 Form 1041 to claim an income distribution deduction of $314,449, and filed a Schedule K-1 to reflect his amended share of the trust’s 2006 income, $157,225. Petitioner did not, however, amend his 2006 Form 1040EZ to include any trust distribution as income.

In 2010, the IRS issued the petitioner a notice of deficiency for the omitted trust distribution income. Petitioner then timely petitioned the Tax Court arguing that the three year statute of limitations barred assessment of this tax deficiency. The IRS argued a six year period of limitations applied because the petitioner omitted more than 25% of his gross income from his return.

Petitioner reported gross income of $28,296.98 on his 2006 Form 1040EZ. Since his share of trust income, $157,225, was more than 25% of the $28,296.98, the IRS had a six year period of limitations to collect any tax deficiency. While the notice of deficiency was mailed after the expiration of the three year period of limitations, it was mailed within six years.

Decision entered for respondent. Daniels v. Commissioner of Internal Revenue.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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