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CPA Can't Access Client's IRS Appeal Documents to Assist in His Criminal Case

(Parker Tax Publishing February 2019)

A district court rejected a CPA's request for documents generated in connection with an appeal to the IRS by the CPA's former tax client who had been assessed taxes and penalties for a distribution of individual retirement account (IRA) assets that the IRS determined was unlawfully reported as a qualified rollover on the client's tax return. The court found that the CPA's argument relied on speculation and lacked any factual basis that supported directly or inferentially the central premise of his motion that there was internal IRS disagreement over the unlawfulness of the tax treatment of the IRA assets in question. U.S. v. Nardozzi, 2019 PTC 6 (D. Mass. 2019).

In an indictment filed on January 18, 2018, CPA John Nardozzi was charged with conspiracy to defraud the United States, and eight counts of aiding in the filing of false tax returns. Nardozzi's conduct involved preparing tax returns for former Massachusetts State Senator Brian Joyce, his wife, and business entities associated with one or both of them. In 2014, Joyce withdrew $400,000 from a Simplified Employee Pension - Individual Retirement Account (SEP-IRA) and used those and other funds to purchase $471,250 in stock in a privately-held insurance brokerage company. The stock was issued in the name of Brian A. Joyce SEP-IRA and Mary Joyce SEP-IRA. Nardozzi prepared the tax return reflecting this event, treating the stock purchase as a rollover of IRA assets, and filed the return in September 2015. The lawfulness of the tax treatment of these IRA assets was the basis of the charges in the indictment.

Thereafter, the IRS issued a notice to Joyce of an assessment of tax and penalty, finding that the transaction did not qualify as a rollover, but rather constituted a distribution to the taxpayer, triggering a penalty for early withdrawal of IRA assets and a tax on the distribution. Joyce initiated an appeal in the IRS Office of Appeals, but no decision was rendered. Nardozzi sought access to the records of this appeal and filed a discovery motion.

The government conceded that it had possession of the IRS's file relating to the Joyce appeal. However, it also said that it had reviewed the file and that there was no information in it that was responsive to Nardozzi's discovery request. Nardozzi argued that if the Joyce appeal file reflected an internal IRS dispute about the proper tax treatment of the IRA assets - taxable distribution or qualified rollover - then such information was exculpatory, and material to the preparation of his defense.

The district court denied Nardozzi's discovery motion. According to the court, Nardozzi's argument depended on speculation and plainly distinguishable case law. The court said that, first and foremost, the government represented at the hearing that it had reviewed the Joyce appeal file and that there was no information in it responsive to Nardozzi's discovery request. The court also said that Nardozzi's motion failed to suggest a reason to question the government's representation. The court noted that the rules for a discovery motion require a memorandum of the reasons why the motion should be granted and Nardozzi failed to set forth in his motion facts or information that established - or even suggested - the basis for his assertion that there was any disagreement within the IRS regarding the proper tax treatment of Joyce's liquidation of IRA assets.

The court noted that, in Nardozzi's reply brief, he pointed to case law to support the argument that there is an absence of tax guidance about the requirements of a qualified IRA rollover. But, the court said, there was no evidence that Nardozzi relied on any of these cases in his treatment of the Joyce IRA disposition of assets; indeed, two cases were decided after the September 2015 tax filing at issue. So, the court observed, it was not possible to know whether Nardozzi relied on any particular decision in his treatment of the IRA assets in the instant situation. However, if he did, the denial of the discovery motion was no impediment to his proving his reliance, in the court's view.

The court noted that a reading of one of the cited cases, Vandenbosch v. Comm'r, T.C. Memo. 2016-29, did suggest a circumstance regarding a taxpayer's control of the IRA assets that was determinative of taxability. But in the instant case, Joyce had unfettered control of the IRA assets when he liquidated his IRA account, and used them to purchase stock. Accordingly, the case law, whether or not relied on by Nardozzi, rather than suggesting a vague or highly debatable tax question, suggested to the court a settled standard by which distribution versus rollover is judged.

For a discussion of the tax treatment of IRA distributions, see Parker Tax ¶134,540.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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