Elliot Pisem and David E. Kahen
A taxpayer suffers a loss by reason of errors made by a tax advisor, and the tax advisor makes a payment to compensate the taxpayer for the loss. May the payment be excluded from the taxpayer’s income subject to tax? The courts and the IRS have, in some circumstances, found such payments to be non-taxable returns of capital. In McKenny v. United States, a recent decision of the U.S. Court of Appeals for the Eleventh Circuit (126 AFTR 2d 2020-5943), however, the court concluded that the taxpayers before it could not exclude the payment at issue from income.
Background in ‘McKenny’
Mr. McKenny (McKenny) was an independent consultant providing advice to car dealerships. He engaged an accounting firm (the Accountant) to advise him on matters including tax strategy.
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