Court Taxes Litigation Support Payments Received by Attorney

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Matthew L. Roberts

Matthew L. Roberts

Principal

469.998.8482
mroberts@freemanlaw.com

Mr. Roberts is a Principal of the firm. He devotes a substantial portion of his legal practice to helping his clients successfully navigate and resolve their federal tax disputes, either administratively, or, if necessary, through litigation. As a trusted advisor he has provided legal advice and counsel to hundreds of clients, including individuals and entrepreneurs, non-profits, trusts and estates, partnerships, and corporations.

Having served nearly three years as an attorney-advisor to the Chief Judge of the United States Tax Court in Washington, D.C., Mr. Roberts leverages his unique insight into government processes to offer his clients creative, innovative, and cost-effective solutions to their tax problems. In private practice, he has successfully represented clients in all phases of a federal tax dispute, including IRS audits, appeals, litigation, and collection matters. He also has significant experience representing clients in employment tax audits, voluntary disclosures, FBAR penalties and litigation, trust fund penalties, penalty abatement and waiver requests, and criminal tax matters.

Often times, Mr. Roberts has been engaged to utilize his extensive knowledge of tax controversy matters to assist clients in their transactional matters. For example, he has provided tax advice to businesses on complex tax matters related to domestic and international transactions, formations, acquisitions, dispositions, mergers, spin-offs, liquidations, and partnership divisions.

In addition to federal tax disputes, Mr. Roberts has represented clients in matters relating to white-collar crimes, estate and probate disputes, fiduciary disputes, complex contractual and settlement disputes, business disparagement and defamation claims, and other complex civil litigation matters.

Novoselsky v. Comm’r, T.C. Memo. 2020-68 | May 28, 2020 | Lauber, J. | Dkt. No. 22400-13

Short Summary: During 2009 through 2011, Mr. Novoselsky, an attorney, practiced law with a focus on class action litigation.  In those years, he executed “litigation support agreements” with various individuals and entities.  Under those agreements, the individuals and entities made upfront payments to support the costs of litigation.  If the litigation was successful, Mr. Novoselsky was obligated to pay the counter-party, from his award of attorney’s fees and costs, the initial payment advanced to Mr. Novoselsky plus a premium.  However, if the litigation was not successful, Mr. Novoselsky had no obligation to return any funds to the counter-party.

Mr. Novoselsky and his wife filed joint returns with a Schedule C, Profit or Loss From Business, to report the business activities of Mr. Novoselsky’s law firm.  On the Schedule C, Mr. Novoselsky did not report any of the funds advanced to him pursuant to the litigation support agreements in which he had no obligation to repay the counter-party.  The IRS examined the returns and issued a notice of deficiency to Mr. and Mrs. Novoselsky.  In the notice of deficiency, the IRS determined that the advanced funds for which there was no repayment obligation should be reported as gross income to Mr. Novoselsky.  In addition, the IRS asserted accuracy-related penalties with respect to these items.

Key Issue:  Whether the funds advanced to Mr. Novoselsky constitute a loan or gross income and whether Mr. and Mrs. Novoselsky are liable for accuracy-related penalties.

Primary Holdings:

Key Points of Law:

Insight:  The Novoselsky decision shows the breadth of I.R.C. § 61 and its statutory language that gross income includes all income from whatever source derived.  Because the taxpayer received advances from third parties in which there was no obligation to repay, the Tax Court determined the payments represented gross income.  Notably, if Mr. Novoselsky used the payments for deductible business expenses, he would be entitled to a deduction to offset the gross income, but the decision does not address this issue.

 

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