According to
Law360 a former ad agency executive won his appeal for more than $10 million in tax refunds when the Ninth Circuit ruled on September 24, 2018 that he had fulfilled a legal requirement to report inconsistencies between his personal tax return and that of his now-defunct advertising placement company.
Thomas Rubin had sued the Internal Revenue Service, claiming the agency had denied him a tax refund even after being advised that the bankruptcy trustee for Focus Media Inc. had incorrectly accounted for nearly $67 million of cancellation of indebtedness income and more than $23 million of bad debt expenses that Focus was entitled to write off.
The IRS had argued that Rubin had failed to meet a statutory requirement to report inconsistencies between the corporate and shareholder returns. Even though Rubin filed a statement explaining how his income flowed from Focus and provided information on where he disagreed with the bankruptcy trustee, the IRS said he did not identify the right inconsistencies.
The Ninth Circuit disagreed with the IRS, saying there is nothing on the form for reporting inconsistencies that “directs or requires the taxpayer to report figures taken directly from the corporation’s return.”
The three-judge panel also rejected the IRS’ contention that the 20-plus pages of information that Rubin filed to explain the inconsistencies were unduly burdensome.
“That fact does not … impose such a burden that the IRS could not reasonably accomplish its duty, particularly in light of the size of the claimed refund,” the panel said.
The ruling reverses an October 2016 decision from a lower district court in favor of the government. That decision, from U.S. District Judge R. Gary Klausner, concluded that the pro forma tax return Rubin had attached for Focus to his individual amended tax returns did “not constitute an an attempt to amend Focus’ tax returns.”
The case now returns to Judge Klausner’s court for further proceedings.
Rubin had claimed in his lawsuit that the net income for Focus had been substantially overstated for the 2000 tax year, and since the company’s income flowed through to him, he ended up owing substantially more in income tax payments.
According to court documents, Focus’ largest customers had become concerned about the possible misuse of funds and sued the company to prevent further payments. Eventually, Focus’ creditors put it into involuntary bankruptcy, and a bankruptcy trustee was appointed. The trustee deemed the company’s receivables worthless.
Rubin initially filed his personal tax return based on the income reported in Focus’ return for 2000. He later filed an amended return for that year as well as the two preceding years. He also filed a pro forma amended tax return for Focus reflecting the different treatment of bad debt expenses and cancellation of indebtedness income, according to the Ninth Circuit’s opinion.
The opinion also noted that Rubin had submitted a chart and explanations describing amounts as they were originally reported, the net change and the amended amounts. The case is Thomas Rubin v. USA, case number 16-56633, in the U.S. Court of Appeals for the Ninth Circuit.
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On August 23, 2018 we posted IRS to Introduce New Tax Transcript as of 9/23/18! where we discussed that the IRS announced in IR-2018-171 that it is moving to better protect taxpayer data, in a new format for individual tax transcripts that will redact personally identifiable information from the Form 1040 series. 
