July 14, 2010
What else is new from the courts

Court: Couple owes taxes and penalties on stock sale

A recent Tax Court case serves as a reminder that you have a responsibility to comply with the tax law, even when you use professional advisers.

In this case, Lizzie and Albert Calloway entered into a transaction in which they transferred approximately $100,000 worth of IBM stock and received cash that was characterized as a loan. The Calloways did not report a gain from the sale of the stock, and the IRS took issue. The Tax Court sided with the IRS and ruled that the Calloways received sales proceeds rather than a loan.

Importantly, the court also upheld penalties against the Calloways.

For some reason, the Calloways had failed to file their original income tax return by the due date. Because they were expecting a refund, the couple apparently decided there was no need to be diligent about timely filing their return. The IRS does not assess late filing penalties if no tax is owed when the return is filed.

But as the court case shows, once a tax liability was upheld by the court, the late filing penalty applied to the additional taxes, even though the original return was filed showing a refund due. The return was filed late, so any additional taxes assessed for that year were subject to the penalty.

The IRS also asserted a penalty for substantial understatement of tax. The court noted that this penalty should not be imposed if the Calloways acted with reasonable cause and in good faith and if they relied on the advice of a competent professional adviser. However, the court found that the Calloways did not file their subsequent tax returns in a manner consistent with the purported loan transaction. And they made no effort to determine the competence of the individuals who provided tax advice in connection with the transaction. As a result, the court also upheld this penalty. 

Read more in Lizzie W. and Albert L. Calloway v. Commissioner, 135 T.C. ___, No. 3, July 8, 2010.

Contact our firm if you have any questions or comments about this article.

The technical information here is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.

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