Merdjanoff v. Commissioner:
The Regulation Jungle
The Internal Revenue Code can get complicated, and tax attorneys will often get an additional 1-year degree called an "LLM" or "Master of Laws." (I'm not sure why it's not called an "ML") Indeed, the New York City bar association "prefers" us to have one to be on their referral panel. LLM classes cover more complex topics like international transactions.
I decided to forego the LLM and teach myself some of these topics, using some of the pedagogical skills from my days as a piano teacher. Merdnjanoff was one of many cases where this was put to the test.
U.S. citizens can claim something called a "foreign income exclusion"; there's a particular form that they have to use. There are also limitations under Treasury Regulations when the form is filed late. These regulations state that late-filed returns claiming the foreign income exclusion must have the text "Filed Pursuant to Section 1.911-7(a)(2)(i)(D)" written at the top. However, this regulation also states that the foreign income exclusion will not be denied based on an "inadvertent error."
Merdjanoff was a case about an NYC resident with foreign income - he had filed the proper form, but he did not write this text on the actual Form 1040 return, and the issue was whether or not it was an "inadvertent error." Given the complexities of the applicable rules, I had a lot to work with in constructing this argument. (in fact, even the IRS' own instructions for foreign income exclusion didn't mention this rule in the regulations) Even the IRS' attorneys were not immediately familiar with the rule; I sent them a summary which helped.
I was able to win on the "inadvertent error" issue; and reduce the bill by about $50,000.