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Larry J. Austin, TC Memo 2014-249TC Memo 2014-249

The Tax Court has denied an individual’s request for an award of litigation and administrative costs.While IRS incorrectly asserted that the taxpayer had income from bank deposits, IRS’s position was substantially justified such that the taxpayer was ineligible for costs.

Background.Under Code Sec. 7430, taxpayers who prevail against the U.S. in court (or at the administrative level) may be awarded reasonable litigation and administrative costs (including the costs of recovering the award).Recovery of such costs is subject to limitations—the taxpayer must have exhausted administrative remedies, must not have unreasonably protracted the proceedings, and must meet financial eligibility and timing-related requirements.In addition, a taxpayer will not be awarded costs as a prevailing party where IRS proves its position in the proceeding was substantially justified.(Code Sec. 7430(c)(4)(B))

Facts.The taxpayer, Larry J. Austin, received a law degree from Harvard Law School in ’80.From the late ’90s through mid-2005, he participated in and/or facilitated various listed transactions subject to disclosure under Reg. § 1.6011-4(b)(2), including intermediary transaction tax shelters, tax avoidance using artificially high basis transactions, partnership straddle tax shelters, and distressed asset debt transactions.

From 2001 to 2004, Austin was one of three managing directors of Chenery Associates, Inc. (Chenery), a corporation with its main office in San Francisco, California.Chenery coordinated the purchase of distressed assets in South Korea by U.S. residents. In 2001, Austin established an account (Korean bank account) with the Seoul branch of Citibank Korea, Inc., titled solely in his own name and over which he held signatory authority.In 2001, there were total deposits of $4,108,631 into the Korean bank account. In 2002, $773,911 was deposited into the Korean bank account, and $1,450,000 was withdrawn.In 2004, $349,968 was deposited into the Korean bank account, and $350,095 was withdrawn.Austin admitted that the 2002 and 2004 transactions resulted in about $1.8 million of potential taxable income to him with respect to his connection to the Korean bank account.

Austin also established a bank account in his name at Korea Development Bank (KDB account) in December 2001 when he transferred $1 million from the Korean bank account to the KDB account.In February 2002, he transferred $406,026 from the Korean bank account to the KDB account.In December 2004, he transferred $30,000 from the Korean bank account to his personal Chase Visa credit card account.

Austin didn’t timely file individual income tax returns for tax years 2000-2004.In September and October 2006, he filed late returns for tax years 2000-2004.He reported interest income from the Korean bank account on his delinquent returns for 2001, 2002, 2003, and 2004.

IRS issued a notice of deficiency to Austin on Aug. 31, 2009; it determined deficiencies in his income tax of $143,696, $1,778,265, $75,702, $219,843, and $133,846 for tax years 2000, 2001, 2002, 2003, and 2004, respectively.IRS also determined accuracy-related penalties for those years.IRS asserted that the deficiencies arose chiefly from the following:

1. Austin’s failure to report on his 2000 tax return a State income tax refund of $581,314;
2. adjustment of his distributive loss from Platypus Holdings, Inc., from $106,277 as reported on his 2001 tax return to $16,842, and
3. allocation of taxable income to him in the amounts of the gross receipts deposited into the Korean bank account during 2001, 2002, and 2004.

On Nov. 30, 2009, Austin filed a Tax Court petition claiming that: (1) as part of Chenery’s purchase of distressed Korean assets, Korea Development Bank (KDB) required Chenery to establish an escrow account funded with $1 million, (2) the Korean bank account forms did not allow him to indicate on the name of the account that he was acting as an escrow agent, which is why the account was titled solely in the name of “Larry J. Austin”, and (3) no part of the funds that passed into or out of the Korean bank account was his personal funds.

Austin and IRS entered into a stipulation of settled issues on Nov. 15, 2012.The stipulation of settled issues recited deficiencies in Austin’s Federal income tax and penalties due for tax years 2000, 2001, and 2004.In reaching the stipulation of settled issues, IRS conceded that “several large transfers” out of the Korean bank account were not income, and Austin conceded over $500,000 as income related to the Korean bank account.

IRS argument for denying costs.IRS conceded that Austin substantially prevailed with respect to the amount in controversy and met the financial eligibility requirements but argued that he should be denied an award of administrative and litigation costs and fees because IRS’s position in the proceedings was substantially justified.

No costs.The Tax Court noted that IRS’s position is substantially justified if, in view of all of the facts and circumstances and the legal precedents relating to the case, IRS acted reasonably.Due to concessions, the only issue was whether IRS was substantially justified in its position that Austin had unreported income from the Korean bank account.

As the Court noted, bank deposits are prima facie evidence of income, and IRS does not need to prove a likely source of such income.In this case, there were large deposits into and withdrawals out of the Korean bank account in 2001, 2002 and 2004.The account was titled solely in Austin’s name, and he held signatory authority over it.He reported interest income from the account on his personal income tax returns for 2001-04.He also transferred substantial amounts from the Korean bank account to the KDB account and to his personal credit card account.

Austin argued that his own sworn statements and an affidavit from his co-promoter at Chenery, Roy Hahn, should have been sufficient to establish that the deposits into the Korean bank account did not constitute taxable income.The Court stressed, however, that IRS reasonably requested third-party documentation to corroborate his statements, and he did not provide any documentation.Given this, the Court found that IRS’s position with regard to Austin having unreported income from the Korean bank account was substantially justified.Therefore, Austin was not the prevailing party with respect to this issue and could not recover any administrative or litigation costs.

References:For recovery of litigation costs, see FTC 2d/FIN ¶ U-1240 ; United States Tax Reporter ¶ 74,304 ; TG ¶ 71406 .

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