Question

Eggers Corporation filed an amended Form 1120, claiming an additional $400,000 deduction for payments to a contractor for a prior tax year. The amended return was based on the entity's interpretation of a Regulation that defined deductible advance payment expenditures. The nature of Eggers's activity with the contractor did not exactly fit the language of the Regulation. Nevertheless, because so much tax was at stake, Eggers's tax department decided to claim the deduction. Eggers's tax department estimated that there was only a 15% chance that Eggers's interpretation would stand up to a Tax Court review. If no penalty is due, enter "0".

a. What is the amount of tax penalty that Eggers is risking by taking this position? $

b. What would be the result if there was a 45% chance that Eggers's interpretation of the Regulation was correct? $

Answer 1

1.AMOUNT OF TAX PENALTY

=(400000*20%)

=$80,000

Whenever a claim is later found to exceed the final amount allowed by the IRS or a court ,a penalty of 20% of the disallowed funds results

because of this $80,000 would be the tax penalty eggers is risking by taking this position

2.If eggers has a 45% chance of reasonable cause ,then eggers corporation would have a zero penalty.

ie. because penalty for an improper refund claim is waived if the tax payer can show a reasonable cause for the refund claim (1/2 the chance that the court would allow the refund)

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