Academic journal article Journal of Accountancy

Recovering Litigation Costs

Academic journal article Journal of Accountancy

Recovering Litigation Costs

Article excerpt

If a taxpayer successfully challenges the IRS, can that taxpayer recover reasonable litigation costs? Recently, the Tax Court applied the substantial justification standard when it reviewed Images and Allemeier, two cases involving litigation costs.

In Images, Denise Lopez owned and operated a dance studio. The IRS challenged her classification of dance instructors as independent contractors. After interviewing Lopez and the instructors and reviewing the employee manual, the IRS examining agent concluded an employer-employee relationship existed between Lopez and her staff. On administrative appeal, however, the appeals officer decided Lopez would likely win at trial. Lopez then sought to recover reasonable costs of litigating the matter.

In Allemeier the taxpayer claimed as business expenses the cost of an MBA and other expenses related to his work. The IRS argued the MBA was a minimum educational requirement that qualified the taxpayer for a new trade or business. The Tax Court held for Allemeier, who then sought to recover the reasonable litigation costs.

Result. In Images, for Lopez; in Allemeier, for the IRS. Under IRC section 7430 (c)(4), a taxpayer who is the prevailing party can recover reasonable litigation costs. …

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