On July 13, 2017, the Tax Court, in Grecian Magnesite, Industrial & Shipping Co., SA v. Commissioner, 149 T.C. 3 (2017), rejected Internal Revenue Service (IRS) arguments that, in order to establish good faith reliance, the taxpayer, a non-US corporation unfamiliar with US tax law, needed to have (i) conducted an independent investigation into the advisor’s background and experience, and (ii) hired an expert who specialized in international tax law or an attorney with an LL.M. degree.

  • Although this decision applies existing law, the IRS’ argument that the taxpayer needed an expert who specializes in international tax or an attorney who possesses an LL.M. degree is not supported by case law or the Internal Revenue Manual guidelines. Thus, the IRS attempted to impose greater conditions on when a taxpayer may rely on a US tax advisor, which the Tax Court held were not required. The decision provides further guidance on when a taxpayer may rely on a tax advisor.

Grecian Magnesite Mining, a Greek corporation (GMM), owned an interest in Premier Chemicals LLC, a Delaware limited liability company treated as a partnership for US income tax purposes (Premier). In 2008, Premier fully redeemed GMM’s interest in Premier for $10.6 million by making one payment in July 2008 and another payment in January 2009. GMM realized a gain of $6.2 million on the redemption, approximately $2.2 million of which was attributable to Premier’s US real estate. Based on the advice of an experienced certified public accountant (CPA), GMM did not report any of the gain from the redemption as US taxable income on its 2008 tax return and did not file a 2009 US tax return.

The IRS determined that the entire $6.2 million gain was subject to US tax, and GMM was liable for an accuracy-related penalty under section 6662(a) and failure-to-file and failure-to-pay penalties under sections 6651(a)(1) and 6651(a)(2). The parties agreed that, under section 897(g), $2.2 million of the gain was subject to US tax, and GMM was required to report that gain as taxable income in 2008 and 2009. The Tax Court also addressed the treatment of the remaining $4.0 million of gain, which it found was not subject to US tax, and, in so doing, rejected Rev. Rul. 91-32, 1991-1 C.B. 107. See our prior Eversheds Sutherland legal alert on Grecian Magnesite here.

The Tax Court held that accuracy-related, failure-to-file and failure-to-pay penalties were applicable, subject to reasonable cause. GMM asserted reasonable cause on the basis of its reliance on its tax advisor, a licensed attorney and CPA with 40 years of experience preparing US tax returns. The tax advisor had been referred to GMM by its US legal counsel. While the tax advisor was experienced, GMM was its first non-US client.

The IRS argued that GMM’s reliance on the advisor was not in good faith because GMM hired the tax advisor based on its counsel’s recommendation, without having conducted an independent investigation of the tax advisor’s background and experience. The Tax Court found that, given GMM’s relative inexperience with US tax laws, it reasonably relied on the recommendation of its legal counsel in hiring the tax advisor.

The IRS also took issue with the fact that GMM did not hire an expert who specialized in international tax or an attorney with an LL.M. degree. The Tax Court noted that the actual standard was not whether the advisor had an LL.M. but rather whether “[t]he advisor was a competent professional who had sufficient expertise to justify reliance.” The Tax Court found that the tax advisor, notwithstanding its lack of an LL.M., had sufficient credentials to justify GMM’s reliance. Accordingly, the Tax Court held that GMM had reasonable cause and was not liable for accuracy-related, failure-to-file or failure-to-pay penalties.