To,
The appropriate authority (Agent / manager),
One Montvale Avenue
Stoneham, MA 02180
Re: Tax protest letter point out detailed explanation to justify the letter.
Respected sir / madam,
I have been appointed to represent D, E, F and the D, E and F PC on tax related matters and writing this tax protest letter on their behalf. The agent had rejected the arguments put forward by the clients regarding fees paid to them by the PC as attorney fees. According to the agent, the attorney fees paid by the PC is not a valid expenditure and not to be deducted from income of the PC to compute its taxable income for the year. On behalf of D, E, F and the PC the protest is here by initiated against the contention of the agent to not allow the attorney fees as expenditures in computing the taxable income of the PC. A letter has already been sent to the appropriate authority requesting extension of time to submit the tax protest letter with proper explanations and justifications. This letter of protest is only written after getting the permission from the IRS to submit the tax protest letter within the extended time. Accordingly, complying with the provision of I.R.C. § 7502(a) the tax protest letter is filed within the time allotted for the same by the IRS.
The information provided to support the matter in the tax protest letter.
Conference:
The findings of the agent, in charge of examining the tax returns of D, E, F and the PC (here in after to be referred to as the clients only in this document) shall provide a conference relating to this appeal and a request in this regard has already put forwarded before an Appeals Officer in the regional appeals office.
Taxpayer’ name and address:
D, E & F, PC
20 Etawa Street
Nowhere, LA 01234
D
21 Etawa Street
Nowhere, LA 01234
E
12 Park Street
Nowhere, LA 01234
F
16 Still in the making Street
Nowhere, LA 01234
Letter of transmittal date:
August 15, 2019
Letter of transmittal symbol:
Letter 660(DO) (Rev. 6-2018) and Letter 760 (Rev. 19-2019)
Details about the amount of dispute as well as the time period:
D of D, E &F, PC was engaged as the attorney of record to represent the Estate of John Smith. It was case of wrongful death action against Interdistrict Telephone Company. After 2 years in August, 2010 the parties to the case decided to enter in a settlement and it was decided that the attorney, i.e. D on behalf of D, E &F, PC would receive $3,000,000 as a lump sum payment for his services as attorney to John Smith. Accordingly, the payment was received by D and he after keeping his share in the lump sum payment, i.e. $1,000,000 distributed $1,000,000 each two other two equal partners of D, E &F, PC, i.e. E and F (“Commissioner v. Culbertson, 337 U.S. 733 (1949)”, 2017).
D followed the following procedure subsequent to the receipt of $3,000,000 as attorney fees from John Smith after the settlement of the case.
D reported the receipt of $3,000,000 in Schedule C of form 1040 as required by the provision of IRS.
Claim deduction for the balance paid to the other two partners:
D rightfully claim deduction of $2,000,000 for distributing $1,000,000 each to E and F as they are equal partners of D, E &F, PC along with D.
Issuance of forms 1099-MISC to E and F:
As per the provisions of IRS D rightfully issued form 1099-MISC to both E and F for distribution of $1,000,000 each to them from the gross amount of $3,000,000 receipt in settlement of John Smith case.
E reported the receipt in Schedule C in form 1040:
Subsequent to the receipt of $1,000,000 from D as attorney fee from JOHN Smith case E reported the same in Schedule C in form 1040.
F reported the receipt in Schedule C in form 1040:
Subsequent to the receipt of $1,000,000 from D as attorney fee from JOHN Smith case F reported the same in Schedule C in form 1040.
Adjustments to the tax treatments:
Agent’s contention: To include the entire amount of $3,000,000 in the gross income of the PC without allowing any deduction for the attorney fees paid to the three attorneys in their professional capacity in the year 2010.
The distribution of $1,000,000 each to three partners each shall be considered as distribution of profit, i.e. dividend and shall be taxed accordingly for the year 2010 in the hands each individual partner.
The PC has paid the three partners, D, E and F $1,000,000 each in their capacity as professionally qualified attorneys and not as partners of the firm. Since the fees were reasonable and justified hence, the same is allowed as expenditure of the PC and accordingly, deducted from gross income of the PC to calculate taxable income. The attorneys have already accounted the receipt of $1,000,000 each as professional fees in Schedule C in form 1040 and paid taxes accordingly for the year 2010.
The agent has just concluded the examination of income tax return of PC for 2010 and has decided to include the gross fees of $3,000,000 receipt in the settlement of John Smith case as income of the PC for the year 2010. In addition the agent also concluded that the distribution of $1,000,000 each to the three partners were in the nature of dividend paid by the PC and accordingly, those were to be taxed in the hands of the indidviauls as such (“Johnson v. Commissioner, 78 T.C. 882 (1982);”, 1982).
However, it is important to note that the provisions of IRS do not contemplate double taxation on single receipt at any cost. The equal partners in the PC are professionally qualified attorneys and deserve attorney fees if they have represented any case for the PC in their capacity as professional attorneys. In case such fees are reasonable and justified then the same is allowed to be deducted as the expenditure of the law firm, in this case the PC to compute its taxable income for the year. No provision in IRS can deny such right to the PC. Hence, the amount of $3,000,000 receipt as attorney fees in lump sum from the settlement of John Smith case if within the prescribed limits of the attorney fees and reasonable then the same is allowed as expenditure to be deducted from gross revenue of the PC to compute its taxable income.
Further the indidviauls partners, i.e. D, E and F receiving $1,000,000 each as attorney fees have received the amount in their professional capacity as attorneys in the case and have reported the same in Schedule C of forms 1040. Thus, they have included the receipt of $1,000,000 in their incomes to pay tax on the same accordingly in their individual capacity. Hence, the payment of $1,000,000 cannot be considered as dividend distributed by the PC to its partners (Wray, Whitehead, Setter & Treas, 2018).
“Lucas v. Earl, 281 U.S. 111 (1930) and U.S. v. Basye, 410 U.S. 441 (1973)” stated that the income must be taxed in the hands of its earners. Further it is stated that the income must be taxed when it is earned irrespective of the time of its receipt. The agent has relied upon the following authority in giving his opinion on the tax issue.
Johnson v. Commissioner, 78 T.C. 882 (1982); IRC §301(c); Treas. Regs. §1.301-1.”
Relying on I.R.C. §162(a) and Treas. Regs. § 1.162-7, the agent has rejected the arguments of the clients to allow deduction of attorney fees paid to the partners in computing the taxable income of the PC.
In Johnson v. Commissioner, 78 T.C. 882 (1982) it was decided that the controller of the earnings is the one responsible for paying taxes on such income. Hence, the element of control was discussed in the judgment in this case.
In Home Juice Company, Inc. v. Commissioner, T.C. Memo. 1977-386 the importance of recognizing each and every single income is mentioned by the judges. According to the judgment the tax payers must ensure that the Federal Income Tax return must contain each and every single income he / she has earned in the period.
The concept of gross income was defined properly by the judges in Loftin & Woodard, Inc. v. U.S., 577 F.2d 1206 (5th Cir. 1978). The judges also mentioned the importance of including each and every single income in the gross income of an organization to correctly report its income to the tax authority.
IRC § 162 explains the expenditures that are allowed as deduction from business revenue to compute the taxable income of a business. Business organizations whether corporate entities, partnership firms or sole proprietorship firms, all are allowed to deduct eligible business expenses from gross income to compute the income which is subjected to income tax in the country. Thus, IRC § 162 enlighten the tax payers on the eligible business expenses. According to the provision of this section a business organization irrespective of its character will be eligible to deduct each and every single expenditure which it incurred, whether paid or accrued, to earn revenue from business that is subjected to tax in the country is allowed to be deducted from gross revenue for the purpose of computing taxable income of such business.
The provisions of IRC further provided that a business can pay to its proprietor or partner or owner professional fees if the person is professionally qualified to receive such fees and has render services in his or her capacity as a professional to the business. In such case the IRC code will not disallow the expenditure or payment to the owner or partners just because that person is the owner or partner/ partners of the firm. Hence, if a professionally qualified person is paid professional fees for his professional services to contribute to the revenue of the business then such payment is an eligible expenditure and allowed to be deducted from the revenue of the business to compute taxable income of such business.
In this case the attorney fees of $3,000,000 paid to D, E & F by the law firm (PC) is due to the professional services that the three have provided to John Smith in the disputed case. Hence, the attorney fees paid to the partners was certainly to be included in the gross income of the PC but the attorney fees paid by the PC to its partners shall also be allowed as deduction since it is eligible expenditure as per IRC § 162. Thus, the contention of the agent in rejecting deduction of the attorney fees from gross income of the PC is not in accordance fair income tax provisions applicable in the country (Belding, 2018).
Faithfully and sincerely submitted,
D, E, F and PC
(Name of the student), Attorney
D, E, F and PC
Dated: 13th November, 2019
The above protest letter has been prepared on behalf of D, E &F, PC and it is important to note that the documents provided by the clients are true and correct as per the limited knowledge of mine.
References:
Belding, A. (2018). Lucas v. Earl, 281 U.S. 111 (1930); U.S. v. Basye, 410 U.S. 441 (1973)”. Lucas V. Earl, 281 U.S. 111 (1930); U.S. V. Basye, 410 U.S. 441 (1973)”, 111(16), 441-441. doi: 10.1177/002205743011101602
Commissioner v. Culbertson, 337 U.S. 733 (1949). (2017). Commissioner V. Culbertson, 337 U.S. 733 (1949), 55(21), 331. doi: 10.2307/3926154
Johnson v. Commissioner, 78 T.C. 882 (1982);. (1982). Johnson V. Commissioner, 78 T.C. 882 (1982);, [1982] VR, 871-882. doi: 10.25291/vr/1982-vr-871
Wray, K., Whitehead, T., Setter, R., & Treas, L. (2018). I.R.C. §162(a) and Treas. Regs. § 1.162-7. Federal Income Tax, 30(2), 162-177. doi: 10.1097/00006216-200604000-00016
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