Academic journal article Journal of Accountancy

Litigation Costs for Unreasonable Penalty Recovered

Academic journal article Journal of Accountancy

Litigation Costs for Unreasonable Penalty Recovered

Article excerpt

In Mitchell, (TC Memo 2000-145), the Tax Court awarded a taxpayer litigation costs attributable to an accuracy-related penalty, after finding it was not reasonable for the IRS to impose such a penalty.

In the original case (Mitchell, TC Memo 1999-283), the issue was the rule in IRC section 162(a). Under it, for costs paid or incurred after 1992, a taxpayer away from home for a period of employment that exceeds one year generally is not treated as being temporarily away from home and cannot deduct travel expenses.

The taxpayer was a self-employed consultant who worked out of a home office in Chicago. From 1991 through 1995, he was busy on a number of projects for one client. Each assignment lasted one year or less. He did some of the work at his home office, but frequently traveled to California and worked there for the client for extended periods of time. He stayed in a rented apartment in California for 155 days during 1994 and 113 days during 1995. During these projects, he was free to work for other clients.

The IRS disallowed the taxpayer's travel expenses for 1994 and 1995 and claimed the taxpayer's tax home had shifted from Chicago to California because of his extensive work there. It said that because the taxpayer worked for a single client in California for at least five years, the work violated the one-year rule in IRC section 162(a). In addition, the IRS imposed an accuracy-related penalty under section 6662. …

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