In a recent case, the United States Tax Court held that the taxpayer, a foreign corporation, was not liable for penalties related to failure to report US taxable gain or file a US income tax return because it had relied in good faith on advice of a US tax advisor. Grecian Magnesite, Industrial & Shipping Co., SA v. Commissioner, 149 T.C. 3 (2017).
In Grecian Magnesite, the taxpayer had received a distribution in full redemption of its interest in a US company treated as a partnership. The distribution resulted in a gain, a portion of which was attributable to the company's US real estate. Based on the advice of an experienced certified public accountant (CPA), the taxpayer did not report any of the gain as US taxable income, and did not file a US tax return for one of the years in which it received redemption proceeds. The CPA who advised the taxpayer had been referred by the taxpayer's US legal counsel, and while experienced, had never advised a non-US client.
The taxpayer and the Internal Revenue Service (IRS) agreed that the CPA's advice had been partially incorrect and that the portion of the gain attributable to US real estate was taxable in the US. The Tax Court determined that the remainder of the gain was not subject to US tax. More details regarding the Tax Court's substantive holding, which involved rejection of an IRS Revenue Ruling, are available in an Eversheds Sutherland legal alert.
The IRS asserted the accuracy-related, failure-to-file and failureto-pay penalties with respect to the failure to report the taxable portion of the gain. The taxpayer argued that the penalties did not apply because of good faith reasonable reliance on the advice of the CPA. The IRS argued that, in order to establish reliance on the advice of the CPA, the taxpayer was required 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.
The Tax Court rejected the IRS' arguments. The court reasoned that, given the taxpayer's relative inexperience with US tax laws, it reasonably relied on the recommendation of its legal counsel in hiring the CPA. The court also held that, despite the lack of an LL.M., the CPA had sufficient credentials to justify the taxpayer's reliance. Accordingly, the taxpayer had demonstrated reasonable cause and was not liable for accuracy-related, failure-to-file or failure-to-pay penalties. The Grecian Magnesite decision is consistent with longstanding case law and rejects the IRS' attempt to narrow foreign corporations' ability to rely on advice from a tax advisor to demonstrate reasonable cause for failure to file a US tax return. More details regarding the procedural aspects of the case are available in an Eversheds Sutherland legal alert.