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Ralph Michel (Michel) was the outside C.P.A., and he
prepared tax returns for Paulan and Sidal for 1997, 1998, and
2000 and for petitioners for 1997-2000. He has been the
principal tax adviser to petitioners since 1976 and to Paulan and
Sidal since their formation in 1993. Ernst & Young (EY) prepared
and compiled financial statements for Paulan and Sidal and
prepared tax returns for those entities for 1999. EY did not
audit the books of either entity.
Prior Audits and Tax Planning Discussions Between Michel and
Petitioners
Respondent audited petitioners’ 1995 and 1996 returns. A
result of that audit was the denial of petitioners’ deductions of
Sidal’s 1995 and 1996 losses on the ground that petitioners
lacked bases in Sidal. Petitioners paid the deficiencies
relating to the denial of those deductions. After that audit,
Michel spoke with the Internal Revenue Service (IRS) agent who
conducted the audit regarding the proper way to structure future
loans to Sidal so as to enable petitioners to achieve bases in
Sidal equal to the loan amounts. In 1997, after that
conversation, Michel advised petitioners that loans to Sidal
could be structured to obtain tax bases for them in Sidal, and he
advised them regarding that structure. The 1997-2000 loans to
Sidal were structured in accordance with Michel’s advice. The
IRS agent auditing petitioners’ 1997 and 1998 tax years did not
challenge petitioners’ passthrough deductions of Sidal’s losses
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Last modified: May 25, 2011