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Sunday, August 31, 2014
Some Not Ready for Prime Time Minor Developments
Originally Published on forbes.com on February 23rd,2012
As usual, there are a few items that don’t seem to transform themselves into full length posts, but I feel a need to share. If you look at my old blog you will see the original source on most things I have written about since starting with forbes.com last June and quite a few items that never even made it this far. I try to at least look at everything, although I have to admit that I find private letter rulings rather tedious and I may miss a good one from time to time.
I read about this case in Shaun Martin’s California Appelate Report, in which he reviews Ninth Circuit cases. From his summary, I thought the case was utterly ridiculous. which is one step short of RFD (Ree – diculous – the “F” is silent). Mr. Naify had a $660,000,000 capital gain that he wanted to avoid paying California income tax on. The way I read Mr. Matin’s summary, I thought he wanted to take federal income tax deduction for the $62,000,000 in California tax that he was trying not to pay. It wasn’t quite that ridiculous. It turns out that he had died and it was his estate that was trying to take an estate tax deduction for the contingent liability to California. The IRS allowed the estate a deduction for the $26,000,000 that it ended up paying California in settlement, but that wasn’t good enough. The estate’s expert testified that the plan had a 67% of failing so the contingent claim was worth $47,000,000 at date of death. For the life of me, I can’t figure out how people assign percentages to the chance of a tax scheme working or not even though that is a requirement under GAAP now for uncertain tax positions. The Court wasn’t buying it. If the scheme had worked, they would actually have saved significantly more by having a sketchy plan to beat California, than they would have saved by just moving to Florida.
This was a response by the Chief Counsel to an inquiry from Congressman Adam Kinzinger. Congressman Kinzinger’s constituent had been a POW during the First Gulf War and along with some other prisoners had sued Iraq and obtained a settlement. He wanted to know if the settlement had to be included in gross income. That’s easy. Of course not. Who cares why ? It’s obviously the right answer, we’re not going to hassle a guy like that. Being the chief counsel and all, they had to come up with a better answer than mine:
We do not know the terms of the settlement agreement involving your constituent. The underlying lawsuit, however, indicates that the prisoners of war were physically tortured, severely beaten, starved, and deprived of medical care. Thus, it would appear that any payment that your constituent received on account of such treatment would be excluded from gross income under section 104(a)(2), even though the United States made the payment rather than Iraq.
Back in the good old days of manual preparation, my favorite review note was RTFI. It stood for “Read the instructions – silent F again), The IRS comes out with something like Rev.Proc 2002-15 every year at the beginning of tax season. It tells you what constitutes adequate disclosure to avoid certain penalties. Everyone involved in preparation of returns with more than a few moving parts should read it. Interestingly, sometimes adequate disclosure just means reading the instructions and filling in the forms thoroughly, not putting in “As required” when the form asks for number of hours. Of course since everybody except Robert Flach, the Wandering Tax Pro, now uses “expensive and unreliable software”, nobody thinks to read the instructions anymore. Read this revenue procedure and you will see that some common practices are penalty bait.
This one got way too lawyerly for me, but the initial question was really fascinating. The IRS had to decide whether to release tax information to an Assitant US Attorney. Here is why it was needed:
In one instance, the IRS received a court order demanding that the IRS produce tax records for a list of individuals who had been assassinated by an organized crime figure convicted under the RICO statute. The AUSA wanted to calculate the amount of restitution for sentencing purposes using the descendants’ lost revenue, based on income reported before their deaths.
Keep that in mind if you ever go into the hit man business, you may want to stick with low income victims to keep your potential restitution charges down. I think there is the makings of a Law and Order episode buried in this statement.