I came across this post from the Tax Update Blog concerning the importance of saying (or complying with) magic words, particularly when one is dealing with the U.S. Tax Code.
As tax attorney Joe Kristan writes, "Sometimes the magic words really matter...Congress and the IRS have become less nit-picky in recent years. It is now fairly easy to make late S corporation elections good, for example. It also used to be impossible to catch a break for taking more than 60 days to roll over an IRA withdrawal; now there are good cause exceptions. Even so, there are still parts of the tax law where only the right words on a timely-filed form stand between the taxpayer and tax disaster. The Estate of John Clause learned that lesson the hard way in Tax Court yesterday. Mr. Clause wanted to take advantage of Section 1042 of the Internal Revenue Code. Section 1042 allows taxpayers who sell shares of a C corporation to the company Employee Stock Ownership Plan (ESOP) to avoid current tax on their gain if they reinvest the proceeds...if certain other requirements are met. One of the requirements is an election under Section 1042 on a timely-filed tax return. Mr. Clause did his part, reinvesting the proceeds. His CPA prepared his return excluding the gain. Unfortunately, the tax returns failed to include an election required under the Section 1042 regulations. The taxpayer failed to convince the Tax Court that "substantial" compliance had been achieved. The judge says: "Having not literally complied with the election requirements in the statute and the regulation, petitioner argues that he substantially complied with the requirements of section 1042 and should, therefore, receive the benefits of the section because the failure to file the elections was 'purely administrative in nature'. We disagree."
Mr. Clause turned out be less than Santa to his heirs, as the estate then had to contend with an almost additional $400,000 in tax liability. Read the rest of Mr. Kristan's post here.
Comments