Originally published on Passive Activities and Other Oxymorons on February 21st, 2011.
In a previous post, I explained the need for occasional purges of material that does not transform itself into a full length post. Now I'll explain the Amazon ads. All hope of them being a means of monetizing has vanished. They are purely decorative. The only thing my readers, who apparently now number in the scores (If you have trouble remembering what a score is here is a little trick. Remember "Four score and seven years ago". Now subtract the year of the Declaration of Independence from the year of the Battle of Gettysburg. Then subtract seven. Then divide by four. Piece of cake.). do is come to the site. I have a little gadget next to where I type the blog and I can search Amazon and then click to move the link and image into the blog. I thought I would see what I got with Goodbye and up comes one of my favorite books. It's very short and I read it from time to time to cheer myself up.
As the title indicates this is the last of the 2010 material. I would have gotten it in sooner, but it got pushed aside by two much more interesting recent developments. One was about mercenaries and the other was about breasts. So how was blog housekeeping going to compete? With no further fanfare here is the last of 2010:
Private Letter Ruling 201051024
This was a ruling on exempt status. Exempt status ruling are a fairly rich source of tax humor, although it will be a while before somebody tops Free Fertility Foundation. I'm not inclined to mock this particular effort, although it does provide a slightly heightened reading on my bs detector.
You were incorporated under the nonprofit laws of the state of M on x. According to your Articles of Incorporation your purpose is to advance the religious beliefs, cultural traditions and lifestyles of four N churches (the "churches") by providing loans and other assistance for real estate purchases and other farm and business related purchases to members of the churches; to encourage savings and thrift and continue to be committed to Christian principles of operation by providing investment and borrowing opportunities to enhance economic social and spiritual well being of the N Brotherhood; and to operate exclusively for charitable, religious or educational purposes.
Investors are limited to residents of M who are members of the churches. Eligible individuals meeting the minimum-investment requirement ($10,000), up to a maximum of 25 new investors annually (to comply with the requirements for exemption from the security laws of the state of M), will be accepted on a first-come, first-serve basis.
You state that both your lending and borrowing activities will support your exempt purpose of advancing your religious beliefs, cultural traditions and lifestyles of the churches. You represent that central to your religious doctrine is a belief (i) in Biblical financial truths, including brotherly financial aid, responsibility for stability in family finances, the collective responsibility for all members of the church for each other's well being and personal stewardship and (ii) that deacons of your churches are called by God to oversee and, where applicable, alleviate the financial hardship of their church's members. You state that all of these principles lead to the rejection of laws that permit or facilitate the avoidance of responsibility, such as bankruptcy and insolvency laws.
Although you were initially funded by contributions from founding board members and received a church offering from each of the churches, you do not plan to engage in further fundraising activities. Your primary method of raising capital will be interest bearing loans from investors. Your sole source of income will be interest charged to borrowers. You plan to use the spread between the interest rates paid to investors and those charged to borrowers to pay all necessary future expenses.
The organization did not qualify for exempt status.
Articles 4(a) and (b) of your Articles of Incorporation states that you were formed to provide investment and borrowing opportunities. Providing investment and borrowing opportunities to members is not an exempt purpose described in section 501(c)(3).
Your primary purpose is to operate a trade or business, a lending institution which directly competes with commercial lending institutions. Your business practices are consistent with those of the industry in general. You will be funded by capital from investors. Your method of determining fees is similar to the method used by commercial lending institutions.
The minor mystery in this is what the organization expected to gain by its exempt status since it was planning on just breaking even and would not be getting charitable contributions. It may be there was some state law benefit. In my recent post on exempt organizations I note one that was trying to qualify so it could get a liquor license. Presumably that was not the plan with this one.
I'm not much of a scriptural scholar, but I'd like to know where the stuff about bankruptcy comes from. I think there is more in there about forgiving debts.
Humphrey E. Igberaese v. Commissioner, TC Memo 2010-284
This is really a run of the mill substantiation case. It concerns a host of deductions including charity.
Cash Charitable Contributions Igberaese asserts that he contributed $200 to his church in cash every week of the year, for a total of $10,400. He said that when he was in town, he would attend church and would personally donate the $200 to the church. He said that when he would be out of town, he would provide the cash to other church members in sealed envelopes to take to the church for him. He said he did not recall, even approximately, how often he provided the cash to other church members to donate for him. Nor did he remember the names of any of these members. He presented a printout of a computer spreadsheet consisting of the name of the church, the date of each contribution (each Sunday of the year), the amount of each contribution ($200), and the yearly total ($10,400). He testified that he made each entry around the time of that week's contribution.
Putting aside the formal substantiation requirements for charitable contributions, I'd advise people like Mr.Igberaeseke to work on their stories a little better. I don't have personal acquaintance with tax court judges, but I believe I've learned a bit about them from reading their opinions for the last thirty years. Among the things that I have surmised is that they are not idiots and that they live in the same world that I do. Some of them probably go to church and will therefore know that people who drop cash in the collection plate mostly still think that George Washington is our holiest president. If the ushers know who's face is on a C note, it is not from experience gained counting the collection
We do not find the evidence Igberaese introduced to be credible. As we discuss in connection with each deduction, Igberaese presented little beyond his own unpersuasive testimony and self-created documentation to corroborate his series of implausible deductions. Several of his explanations for the absence of further corroboration were also implausible.
We are similarly skeptical of Igberaese's documentary evidence, which shows little more than that he has written down his implausible assertions
Trout Ranch, LLC, et al. v. Commissioner, TC Memo 2010-283
This was a dueling expert case. The Trout Ranch had donated a conservation easement. The partnerships expert indicated that it was worth 2.1 million. He based the valuation on other easements sold in the area. The Tax Court was not greatly impressed :
In essence, in all three cases the conservation easements all but eliminated residential development. In stark contrast, the Trout Ranch CE restricted development from at least 40 residential lots to 22 lots (a reduction in potential development of 45 percent). We are simply not convinced that the value of a conservation easement that restricts development to at most one residential lot sheds any light on the value of a conservation easement that allows as many as 22 residential lots.
The Service had originally wanted to allow $485,000, but when it came to trial they decided to reduce that to 0. I mean, what the heck, why not say the property was worth more with the easement and have them pick up income ? The switch led to some fancy burden of proof discussion, which the Court indicated didn't matter because they were able to determine the true value.
The Tax Court came in at $560,000. We know that is the right answer, because its what the Tax Court said. The case is worth reading if you are interested in valuation issues. It's not great for my purposes as I couldn't find any good quotes.
Richard A. Frimml, et ux. v. Commissioner, TC Summary Opinion 2010-176
My tentative title for this was "Paint Your Horses". It is a hobby loss (Section 183) case. The IRS seems to be firmly convinced that people take care of animals much larger than themselves that appear to defecate copiously for fun. Go figure. The couple was raising American Paint Horses. The Tax Court ruled that they were in fact trying to make money.
Petitioners' knowledge at trial was extensive as it related to breeding and artificially inseminating Paint horses. Their knowledge included the genetics, the mechanics and the financial aspects of breeding. Even the horses aren't having any fun.
The worst thing about people who win hobby loss cases around horse breeding is that the Tax Court gives them extra points for heartlessness.
Petitioners made many business decisions regarding the purchase, care and sale of a number of Paint horses for their horse activity. Petitioners paid extensive amounts to care for Special when he was injured. On the other hand, petitioners decided to put down a 2-year-old foal that hurt her leg in a fence accident because the cost to heal her exceeded the projected price in selling her.
In case you are wondering what was so special about "Special".
They have identified semen production by Special as a potential future source of revenue.
This case is similar to that of Johnny L. Dennis TCM 2010-216 which I gave a brief mention. Besides doing a cost benefit analysis on the vet bills, the other thing that they have in common was not riding the horses themselves.
U.S. v. RUTH, JR., Cite as 106 AFTR 2d 2010-7443
The decision itself is about criminal procedural issues which are not of great interest to me. If you have an interest in such things check out Jack Townsend's blog. I read cases like this because the story behind the story is often interesting.
The conduct at issue began while Ruth and Pilkey were incarcerated at the Federal Correctional Institution in Fort Dix, New Jersey. The defendants submitted tax returns to the IRS claiming refunds in the names of fellow inmates for wages never earned and giving addresses where the inmates never lived. These inmates fell into three groups: (1) those who were aware of the fraud, (2) those who were not aware of the fraud and had instead provided their personal information in order to receive legal assistance from Ruth and Pilkey, and (3) those who testified they did not know the defendants. Ruth and Pilkey were able to avoid having to submit W-2 forms by misrepresenting that fellow prisoners were working at companies that had gone bankrupt. As part of the scheme, defendants obtained employer identification numbers for these bankrupt companies. To avoid detection by prison authorities, defendants enclosed envelopes addressed to the IRS within large envelopes sent to collaborators outside of prison. Defendants had the tax returns sent to mail-forwarding services who would then deliver the returns to their collaborators.
I became interested in accounting in part from reading stories about epic frauds. I doubt anybody will ever top Alfredo Reis. Read the book about him if you don't believe me. He convinced the British bank note printing company that printed the money issued by the Bank of Portugal that he worked for the bank and got them to print money for him. He used the money to buy stock in the Bank of Portugal which was the only entity that could prosecute counterfeiting. These fellow aren't in the same league, but given the adverse conditions they were working under (being in prison and all), they really achieved a lot. Of course you might expect that the IRS computers would catch them eventually. That's not exactly the way it turned out.
Defendants' scheme resulted in the IRS issuing refunds of tens of thousands of dollars. Eventually the IRS became suspicious of returns filed by persons in federal custody using the same type of form and listing the same employers and addresses. In May 2004, an inmate came forward who informed prison officials about the fraudulent tax scheme. Based on this information, prison officials searched the lockers of several inmates, including Ruth and Pilkey, and recovered records and material used to file the fraudulent tax returns.
So that is it for 2010. Goodbye 2010.