Question

Odin Tools purchased land with commercial buildings suitable for manufacturing its primary product, automotive tools in 2005 for 5.5 million dollars. Subsequently, in 2015 Odin Tools’ shareholders entered into an agreement to exchange all of the outstanding stock to Victory tools in exchange for Victory Tools’ common stock. In financial accounting, this would result in Odin becoming one of Victory Tools’ subsidiaries. Prior to concluding the deal, Victory Tools notified Odin that they had learned through discovery that the title to the Odin Tools’ real property was encumbered by $1,000,0000 in “liens” filed by Ulysses Ray Stuck in the county courthouse. In 2016 and 2017 Odin Tools paid legal expenses of $56,000 and $120,000 respectively to successfully remove those “liens”. The trial court found that the liens filed by U.R. Stuck were fraudulent. Odin Tools deducted these legal costs when filing their tax returns for 2016 and 2017. The Internal Revenue Service denied the deductions, restated Odin’s taxable income, assessed additional income taxes, and included a charge for interest on the disputed tax bill. The stock acquisition of Odin Tools was completed in 2018 by Victory Tools. Odin Tools has paid the additional taxes and interest to “stop the clock” and is seeking your advice on a course of action to recover those disputed taxes and interest from the Internal Revenue Service.

Answer 1

ODIN Tools (OT) has paid additional taxes and interest to stop the clock. However ODIN must be sure that they have done the following before proceeding further with the recovery of disputed taxes and insterest:

1. Received a W9 form from the attorney/lawyer stating their taxpayer ID number.

2. Send out 1099-MISC form to the attorney/lawyer for the payments made in the years of 2016 and 2017.

3. The additional taxes and interest paid to Revenue, must have been specified as a DEPOSIT. A written statement must be sent stating the same to be a Deposit and the tax year, tax type and grounds of disagreement must be stated therein.

Since the legal expenses incurred here are not personal in nature, nor related to any capital asset construction or startup, they quality as business expense and must be proceeded in the following manner to recover the additional taxes and interest paid:

File an Appeal with the IRS Appeals office

Or,

Take the matter to the IRS Taxpayer Advocate Service (TAS)

Or,

Goto court. Odin tools can goto the US Tax Court. Odin Tools can also goto Feferal District Court/US court of Federal Claims, since they have already paid the tax dues with interest. So they can file a refund claim with the IRS and got for court proceedings.