Saturday, May 31, 2014

PAOO Reaches 100 - Merry Christmas

Originally published on Passive Activities and Other Oxymorons on December 25, 2010. Blogging about your own blog represents the height of self-absorption, so I more or less only do it at "century" marks now.
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For I was hungry and you gave me food, I was thirsty and you gave me drink, I was a stranger and you welcomed me,  I was naked and you clothed me, I was sick and you visited me, I was in prison and you came to me.’  Then the righteous will answer him, saying, ‘Lord, when did we see you hungry and feed you, or thirsty and give you drink?  And when did we see you a stranger and welcome you, or naked and clothe you?  And when did we see you sick or in prison and visit you?’  And the King will answer them, ‘Truly, I say to you, as you did it to one of the least of these my brothers, you did it to me

I've got three posts scheduled for next week, but as I was poking around.  I realized that the next post to go up will make 100 published posts.  From the reports that I  get from Google I can safely say that my readership can be numbered in the scores.  I am grateful to each and every one of you.  I realize that most of you are not clicking on the ads, because you are afraid that the flood of revenue might motivate me to quit my day job.  Don't be concerned, it is the furthest thing from my thoughts.  You can click in peace.

My goal in this blog is to highlight tax developments either because they are interesting, practical or funny.  I am most pleased when I highlight something that has otherwise been largely overlooked.   I feel particularly pleased when I do a google search and find that PAOO is near the top.  Here are some to try:

PMTA 2010-058

parsonage second home

does land need to have business purpose to be part of flp  (make bottom of page 1 on this one - not an elegant query, but somebody used it and found me)

Early in December I shared with you what the greatest hits have been.  There has not been much change except for my post on people who have been strongly encouraged to get out of the tax preparation business moving into the top five.

I took down most of the non-tax posts I made early in the blog (the ones taken down do not count as part of the 100), but I left a couple.  One in particular is timely for the Christmas season.  I have heard that things are working out well for the homeless fellow that my friend "James" helped out back in May.  I should no longer do even simple math in my head, but I'm taking a chance here and saying that it is only 82 days to St. Patrick's Day.  In some circles, this is thought to be a holiday to be celebrated by drinking to excess.  A nascent movement known as San Patricios Against Hunger stands for the proposition that Americans of Irish descent are more than likely descended from famine refugees and that they should celebrate the holiday by donating to hunger fighting charities.

I haven't commented at length on the recent tax compromise and probably won't.  I did mention a peculiar opportunity with respect to the generation skipping tax that requires action this week.  My other observation is that with respect to income taxes things have been pretty much left intact, which means that general principles of tax planning are back in full effect.  One of the general rules is to accelerate deductions (This was much more significant when money actually earned interest).  People were holding back on this thinking that rates would be higher next year.  So first thing tomorrow get out your check book or its electronic equivalent and make some charitable contributions.  Now because of the material I work with this blog will often teach you more about what not to do.  If you want to get a tax deduction don't give to an organization that has had its exempt status revoked like the Free Fertility Foundation.  Also, although I think its a wonderful thing to invite homeless people to lunch and its probably quite rewarding to watch the ushers gasp when you drop a couple of C Notes in the collection plate as was the habit of Hardy Ray Murphy, you won't get any deductions. (Buy the homeless guys lunch anyway).  So on a more positive note I'll suggest a couple of qualified organizations that will provide you with a proper acknowledgement.

I divide my practice between Central Massachusetts and Central Florida.  The two regions seem to be at peace with one another.  A Unitarian minister from Worcester once led a regiment that occupied Jacksonville, but many of the men in Thomas Wentworth Higginson's First South Carolina Volunteers were native to Florida.  I don't like basketball so I really don't need to get passionate about either the Celtics or the Magic.  I am however passionate about supporting two charities Grace Medical Home which is a marvelous model of how to provide medical care to the working poor and Jeremiah's Inn which provides substance abuse recovery and runs a neighborhood food pantry.  Moving beyond the local I would recommend Just Detention International, the only human rights organization devoted exclusively to ending sexual abuse of prisoners.  It happens that I am the longest serving board member of JDI and the only current member recruited by Stephen Donaldson.  I hope you will consider those three as you are making out your checks this week.

So Merry Christmas.  And be sure to not shoot your eye out.

What's New With The Chief Counsel?

Originally published on Passive Activities and Other Oxymorons on December 24, 2010.
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There have been quite a few items of interest from the chief counsel's office.  Here is what I think was worth noticing through mid December.  I've got next week ready to go and these will start getting stale, so I'll make this a Merry Christmas bonus post.

CCA 201049041

The IRS will not transfer or redesignate a payment that has been applied to a taxpayer's account to satisfy a different liability of the taxpayer if the payment was applied according to the taxpayer's instructions. If the IRS applies a payment contrary to a taxpayer's instructions, the IRS will, upon request by the taxpayer, transfer the payment to the intended tax liability.
A corporation that believes it will have overpaid its estimated tax for the tax year may apply for a quick refund on Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, before the 16th day of the 3rd month after the end of the tax year at issue, but before it files its income tax return, if the overpayment is at least 10% of the expected tax liability and at least $500. A corporation should not file Form 4466 before the end of its tax year.

If you run into cash flow problems it would be nice if you could apply estimated income tax payments to payroll tax deposits, which have much more ferocious penalties.  No such luck though.  An estimated income tax payment is gone at least until after the end of the year in question.


CCA 201049040

As we discussed, we agree with your conclusion. Lines 3 and 8 of Form 6251 do not apply to taxes incurred in connection with a trade or business. See § 56(b)(1)(A), (b)(1)(D); Reg § 1.62-1T(d)

There is an AMT preference for taxes, but it would not apply, for example, to real estate taxes on Schedule E for a rental property.  I don't think the principle extends to state income taxes attributable to a Schedule C activity.

CCA 201049035

The email responds to your request for assistance. You asked for advice regarding whether there is any limitations period applicable to reducing tax liability based on a net operating loss (NOL) carryback.

Section 6511(a) provides that a “[c]laim for credit or refund of an overpayment . . . shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” Section 6511(d)(2) provides an additional special period of limitation with respect to a claim for a refund or credit relating to an overpayment attributable to a NOL carryback. The relevant portion of section 6511(d)(2) provides, in lieu of the 3 year period of limitation prescribed in section 6511(a), the period shall be the period ending 3 years after the due date of the return (plus extensions) for the taxable year of the NOL.

In this case, the Service disallowed the taxpayer's purported claim for credit because it determined that it was untimely. However, you provided that the NOL carryback, if allowed, would not result in an overpayment which would generate a credit or refund but would simply reduce the taxpayer's outstanding tax liability. Even though there are restrictions on the time within which the Service may allow a claim for credit or refund, no such statutory impediments exist to prevent the carryback of an NOL to reduce a taxpayer's outstanding tax liabilities.

This might be of interest to someone dealing with collections who has had things go from bad to worth.  Possibly a carryback from a subsequent disastrous year can alleviate an outstanding debt.

CCA 201049030

 Subject: Filing joint return after filing of substitute for return ————

You asked whether a taxpayer can elect joint status after the Service has filed a substitute for return under section 6020(b) and has issued a notice of deficiency to the taxpayer. The Tax Court held in Millsap v. Commissioner, 91 T.C. 926, 936-937 (1998), acq. in result, AOD-1992-03, that a taxpayer is not foreclosed from electing joint status after the Service has prepared a return under section 6020(b) because the return does not constitute a “separate return” filed by the individual for purposes of section 6013(b). Because the taxpayer has not previously filed a separate return in this case, section 6013(b) does not apply, therefore, the taxpayer may file a joint return provided that none of the exceptions in section 6013(a) apply.

Section 6013(a)(2) states that “in the case of death of one spouse the joint return may be made by the surviving spouse . . . if no return for the taxable year has been made by the decedent, no executor or administrator has been appointed, and no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse.” The facts that you provided did not state whether an executor or administrator had been appointed. Thus, if an executor or administrator was not appointed, the taxpayer may file a joint return with respect to himself and his deceased spouse. See IRC section 6013(a)(2). 

If you are married and he Service does your return for you it will be married filing separately.  You may be able to reduce the tax if your spouse will consent to a joint return.  If your spouse happens to be dead, you might be able to consent for them.  Definitely has the makings of a Law and Order episode.

Wednesday, May 28, 2014

Year End Estate Move - Other Than Plug Pulling

Originally published on Passive Activities and Other Oxymorons on December 22, 2010.
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Sunday, I did a brief post, on an opportunity created by the recent tax compromise.  I pointed to an article in Forbes, which explains it in some detail.  It concerns the Generation Skipping Tax.  My limited study of the GST forces me to conclude that its true role is a white collar jobs program.  Simplistically it is designed to insure that substantial pools of wealth get taxed at least once in every generation.  The tax can be triggered by a direct gift to grandchildren or a direct bequest to grandchildren.  The other trigger would be when wealth put into trust is distributed to grandchildren.  Of course it is vastly more complicated than that and has big enough exemptions that you don't have to worry about buying your grandchildren computers for Christmas.  Unless you were thinking about a Cray.

Regardless, the recent tax bill has created a limited window of opportunity with respect to the generation skipping tax.  Like the estate tax, the generation skipping tax had been repealed for 2010 to be reinstated in 2011.  The problem was that nobody could figure out exactly what that meant, what the best way to deal with it was and whether there might be a retroactive reinstatement.  The tax compromise reinstated the estate tax for people dying in 2010, although it allows them to elect out of the estate tax at the price of living with carryover basis (I suppose "living with" might not be quite the perfect choice of words).  So plug pulling remains a viable strategy for the ultra wealthy and promises to be a interesting plot twist in TV cop shows and mystery novels for the next several years. More significantly and less macarbly the act also retroactively reinstated the generation skipping tax.  There is a special wrinkle though.  For 2010, the GST rate is 0%.

So the strategic move to make is to trigger the generation skipping tax in 2010.  Who should be thinking about this ?

1. If your net worth is greater than $5,000,000 and you have not yet used up your $1,000,000 in lifetime taxable gifts now is the time to do it and the gift should skip over your children.

2.  If your net worth is even higher and you are thinking dynastically you could make a major gift on which you will pay gift tax, but which will skip your children.  Frankly if you are such a person, you are probably hearing from your advisers about this already, but you never know, so I'm mentioning it.

3. If you are involved in any way with a trust that was established since 1986 that is not GST exempt, you should be looking to see if a triggering transfer would make sense.  I'm particularly thinking about irrevocable life insurance trusts.

4. If you are related to an estate tax attorney and you are wondering why they are not going to be at home much this Christmas season, now you know why.

Much like picking a Christmas gift, it is always difficult to pick the best wealth transfer gift.  I would not suggest setting up a family limited partnership inside a week.  Too many ways to screw up.  My suggestion is a gift of cash to an intentionally defective grantor trust.  You can spend some time next year designing the perfect vehicle, which you can then sell to the new trust.

It is critical that you use a good estate tax attorney in trying to execute anything like this.  Your accountant might also be able to help you in selecting assets and running scenarios.

How Much Process Do We Really Need?

This was published on Passive Activities and Other Oxymorons on December 24, 2010.
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Susan Fay Mostafa v. Commissioner, TC Memo 2010-277 , Code Sec(s) 6330.

In my professional life, I represent taxpayers.  So my general inclination is to root for them.  Sometimes, though, I really wonder if we have too much process.  Susan Fay Mostafa did not file her 1996 return (Sometimes I have this time warp thing where I will type 1995 where I really mean 2005.  That's not the case here.  I really mean 1996).  The IRS issued a notice of deficiency which Ms. Mostafa appealed to Tax Court.

In her first round in Tax Court (TCM 2006-106) she brought up some unique arguments.  She argued that the IRS was barred from assessing her by the statute of limitations (You have to file a return to start the statute).  She had blown an IRA rollover by just 4 days but had no explanation.  She also asked for attorneys fees. The court indicated that she hadn't made the motion properly.  Regardless, you don't get attorney fees when you lose.  They didn't even mention that she was representing herself.

Having lost in tax court, she still didn't pay.  So the IRS proposed to levy her assets.  Of course she got out trusty old form 12153 and requested a collection due process hearing.  She also mailed a check to the IRS for $701 with the notation "Endorsing this check accepts 1996 tax return paid in full".  (The tax liability was $1,377 with a 25% non-filing penalty tacked on. I don't want to think about how much interest there must be.)  The check was processed.

The appeals officer did not buy her argument that processing her check compromised the liability:

The Tp wanted to bring up liability issue but I explained to her that the hearing is to setup a collection alternative, such as a OIC as that is the box she marked on form 12153. TP states she has been to tax court but disagrees with amount owed and stated she was told that if she sent in the payment $701.00 that the account would be full paid and she said she stated that on her check (if check was cashed that would be agreeing account was full paid) On November 19, 2008, the Appeals Office issued a notice of determination sustaining the proposed levy. The notice of determination stated that Mostafa had attempted to raise the issue of her underlying tax liability but that she could not do so because she had received a deficiency notice.

So Ms. Mostafa decided to go to Tax Court, again.  And, being experienced now, she represented herself, again.

The Tax Court did not buy her argument,  It noted that she did not make her offer in compromise on the approved form and the IRS did not inform her it had been accepted.

There are a couple of practical points here.

If you are anywhere near owing tax you should file a return even if you think you don't owe tax.  That will get the statute of limitations working for you in the event you are mistaken.  (If you are married and not filing a joint return, you should always file a separate return since you can be deemed to have consented to a joint return you didn't sign.)

A friend of mine who does collections indicates that when he does form 12153, he always checks all the boxes, which includes "Doubt as to Liability".  If Ms. Mostafa had done that maybe the Appeals officer would have considered her argument.  It's like if you are accused of murdering somebody you say you weren't there and if you were there you didn't do it and if you did it it was self-defense and anyway you're insane.

Finally, the paid in full trick on the check is really clever, but it does not work.

On a policy level, my question is whether somebody should really be entitled to two trips to Tax Court on the same liability which will be almost 14 years old if it finally is collected.  It appears to me that for some people, the income tax really is voluntary.

Some Items of Interest

Originally published on Passive Activities and Other Oxymorons on December 22, 2010.
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I've got quite a few developments that I'd like to share that I can't seem to work into a full length treatment.  In rough chronological order they are :

NEW PHOENIX SUNRISE CORP. v. COMM., Cite as 106 AFTR 2d 2010-7116, 11/18/2010


Tentative title was "How Sweet it Is ?".  This was similar to the currency swap I wrote about in October. This deal had a business purpose fig leaf.  Even though the transaction on which millions of dollars of losses were claimed was almost guaranteed to have a loss of around $100,000 there was a chance of an enormous return :
The fourth possible outcome would occur if the spot rate for one of the option pairs “hit the sweet spot,” meaning that the long option and the short option comprising one of the option pairs expired in the money and out of the money, respectively. This would happen if the spot rate on December 12 were 127.75 or 127.76 yen per dollar, or if the spot rate on December 18 were 128.75 or 128.76 yen per dollar. Then, Capital would earn a profit of $73,500,000 on its net investment of $131,250 because it would have an additional receipt of $73,631,250 on either December 14 or December 20. The final possible outcome would occur if both option pairs hit the sweet spot. Then, Capital would earn a profit of $147,131,250 on its net investment of $131,250 because it would have additional receipts or $73,631,250 on both December 14 and December 20.

According to the IRS expert that the Court accepted there actually was no chance of the sweet spot being hit since the counter party had enough discretion and market clout to prevent it.

CC 2011-004

The following steps should be taken when a taxpayer is alleging, in an appeal to the Tax Court from a notice of determination sustaining a levy action, that the levy should not proceed because it would cause economic hardship: 1) the administrative record should be reviewed to determine whether the taxpayer raised economic hardship and whether the facts support the assertion that the levy would prevent the taxpayer from meeting necessary living expenses; and 2) if a credible argument of economic hardship was raised, but the settlement or appeals officer did not address the issue, a motion should be filed requesting that the case be remanded to Appeals so that the settlement or appeals officer can consider properly whether the levy action is inappropriate because the taxpayer would suffer an economic hardship if a levy is served.


This is a change in IRS policy regarding levies where taxpayers are not in current compliance.  Regardless of the current compliance, the appeals officer must consider hardship.  A study of collection cases sometimes makes me think that the income tax really is voluntary.

Hardy Ray Murphy, et ux. v. Commissioner, TC Memo 2010-264

Tentative title was "Brother Can You Spare a Deductible Dime". This was a substantiation case.  Taxpayer was taking a deduction for lunches that he bought for some homeless men that he befriended.  For a period of time he and his wife were regular churchgoers

Mr. Murphy claims he contributed between $100 and $200 each time he went to church for a total of $300 to $500 each week. While Lake Avenue Church did provide envelopes for contributions, petitioners did not use them. In addition to contributions to Lake Avenue Church, petitioners contend they made small contributions to San Gabriel Union Church and St. Mark's Episcopal School. Both Mr. Murphy and his daughter attended St. Mark's Episcopal School. Mr. Murphy asserted that the total amount of tithing to the two churches and the school was approximately $20,000.

The Tax Court pointed Mr. Murphy to the substantiation rules for charitable contribution.  I'd like to believe Mr. Murphy, but I don't recall any news reports of church ushers dying from shock when they found portraits of Benjamin Franklin in the collection plate so I'm a little skeptical.


U.S. v. BOWDEN, Cite as 106 AFTR 2d 2010-7195, 11/30/2010

Tentative title for this one was "King David Headed for the Clink".

Wesley David Bowden appeals his conviction on six counts of attempted tax evasion and his six concurrent prison terms of 24 months each. The Government has moved to dismiss the appeal as frivolous or for summary affirmance or, alternatively, for an extension of time.

Bowden asserts that the only issue on appeal is whether the district court had jurisdiction to convict him. He contends that it did not because he is a sovereign and not subject to the laws of the United States.

The Court found his appeal to be frivolous.  So maybe he should try jester rather sovereign.

NEVADA PARTNERS FUND, LLC v. U.S, Cite as 105 AFTR 2d 2010-2133, 04/30/2010

At the October 2, 2001, meeting, Williams and his attorneys met with KPMG agent Donna Bruce, who understood that the purpose of the meeting was to alleviate large gains arising from the B.C. Rogers note exchange, having been informed that the gain would amount to nearly $20,000,000.00. She told Williams that KPMG had been recommending to its clients facing the imminent prospect of large ordinary and capital gains a new strategy to be pursued through an investment advisor experienced in financial structure, hedge funds and more exotic forms of investment designed to provide tax benefits. Bruce named several investment advisors to be considered by Williams, including a hedge fund called Bricolage, LLC, in New York City, an entity owned and managed by one Andrew Beer.

Another convoluted KPMG deal that didn't work out as intended.  I think I'm going to stop studying these things as I might get confused by them.

CCA 201048043


Tentative title was "Say What ?" I really don't know what they are talking about here.  I suppose if I ran down the references I would have a clue, but I don't think I'll bother.  Hope it is nothing important.
UIL No. 6227.00-00
Release Date: 12/03/2010
ID: CCA_2010102109152937
Release Date: 12/3/2010 Office: —————

UILC: 6227.00-00

From: —————————- Sent: Thursday, October 21, 2010 9:15:31 AM To: —————————— Cc: —————- Subject: RE: TEFRA question ————-


Correct. If an NBAP has been issued, then any AAR issues would be resolved in the FPAA and no separate petition of the AARs could be filed. I.R.C. 6228(a)(2)(B). In addition, we cannot issue any affected item notices of deficiency until after the partnership proceeding is complete. GAF v. Commissioner.

EMMANUEL OWENS v. COMMISSIONER OF INTERNAL REVENUE, TC Memo 2010-265

Mr. Owens is a corrections officer in a state system.  The way the judge in this decision kept emphasizing that he had signed one return under pains and penalties or perjury and then an amended return with a significantly different position also under such pains and penalties, I was thinking the judge was hinting that he could end up in a federal facility in a capacity other than as corrections officer.  His original return had $22,921 in unsubstantiated schedule A job related deductions.  The amended return moved them to Schedule C.  They remained unsubstantiated and thus non-deductible.  Fairly typical tax court case, but I found it a little amusing.

Well, I'm back to studying the tax bill.  You won't be learning about it here unless there is something quirky that is not being heavily noticed.

Tuesday, May 27, 2014

Something to Keep Busy With


Very brief post on Passive Activities and Other Oxymorons on December 19, 2010.  Quite prescient is my noticing an article by Janet Novack, who six months later would accept me as a forbes.com contributor and has been my editor since.
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The tax compromise that is closing out the year doesn't really seem all that exciting.  The tax rates next year will be pretty much unchanged.  The estate tax change is significant, but it seems like you can wait to do whatever seems best next year.  For a small group of people though the bill confirmed an opportunity that will vanish at the end of the year.

For 2010, there is a generation skipping tax in effect, but the rate is 0.  So trusts that have non-exempt portions may want to trigger the 0% tax in the next two weeks.  An article by Janet Novack in Forbes explains the issue in detail.  I give myself credit for noticing this as I was studying the bill but I figured there was some sort of language I wasn't seeing that would knock out transfers at the end of the year.  I discussed it with an attorney though and he pointed me to the Forbes article.

Year End Estate Move - Other Than Plug Pulling

Originally published on Passive Activities and Other Oxymorons on December 22, 2010.
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Sunday, I did a brief post, on an opportunity created by the recent tax compromise.  I pointed to an article in Forbes, which explains it in some detail.  It concerns the Generation Skipping Tax.  My limited study of the GST forces me to conclude that its true role is a white collar jobs program.  Simplistically it is designed to insure that substantial pools of wealth get taxed at least once in every generation.  The tax can be triggered by a direct gift to grandchildren or a direct bequest to grandchildren.  The other trigger would be when wealth put into trust is distributed to grandchildren.  Of course it is vastly more complicated than that and has big enough exemptions that you don't have to worry about buying your grandchildren computers for Christmas.  Unless you were thinking about a Cray.

Regardless, the recent tax bill has created a limited window of opportunity with respect to the generation skipping tax.  Like the estate tax, the generation skipping tax had been repealed for 2010 to be reinstated in 2011.  The problem was that nobody could figure out exactly what that meant, what the best way to deal with it was and whether there might be a retroactive reinstatement.  The tax compromise reinstated the estate tax for people dying in 2010, although it allows them to elect out of the estate tax at the price of living with carryover basis (I suppose "living with" might not be quite the perfect choice of words).  So plug pulling remains a viable strategy for the ultra wealthy and promises to be a interesting plot twist in TV cop shows and mystery novels for the next several years. More significantly and less macarbly the act also retroactively reinstated the generation skipping tax.  There is a special wrinkle though.  For 2010, the GST rate is 0%.

So the strategic move to make is to trigger the generation skipping tax in 2010.  Who should be thinking about this ?

1. If your net worth is greater than $5,000,000 and you have not yet used up your $1,000,000 in lifetime taxable gifts now is the time to do it and the gift should skip over your children.

2.  If your net worth is even higher and you are thinking dynastically you could make a major gift on which you will pay gift tax, but which will skip your children.  Frankly if you are such a person, you are probably hearing from your advisers about this already, but you never know, so I'm mentioning it.

3. If you are involved in any way with a trust that was established since 1986 that is not GST exempt, you should be looking to see if a triggering transfer would make sense.  I'm particularly thinking about irrevocable life insurance trusts.

4. If you are related to an estate tax attorney and you are wondering why they are not going to be at home much this Christmas season, now you know why.

Much like picking a Christmas gift, it is always difficult to pick the best wealth transfer gift.  I would not suggest setting up a family limited partnership inside a week.  Too many ways to screw up.  My suggestion is a gift of cash to an intentionally defective grantor trust.  You can spend some time next year designing the perfect vehicle, which you can then sell to the new trust.

It is critical that you use a good estate tax attorney in trying to execute anything like this.  Your accountant might also be able to help you in selecting assets and running scenarios.

Parsonage Exclusion - Shouldn't Enough be Enough?

Originally published on Passive Activities And Other Oxymorons on December 19,2010, this post commences my fascination with the parsonage exclusion - Code Section 107, which provides for an unlimited exemption from income tax of the housing allowances, in-kind or cash , of "ministers of the gospel".  When I did a recap of my coverage on the issue in November 2013, there were over twenty posts and there have been more since.  IRS won on appeal to the Eleventh Circuit in the Driscoll case, but of much greater interest has been Freedom From Religion Foundation's constitutional challenge.  As of this point, FFRF has won in District Court and government has appealed to the Seventh Circuit.

Covering the parsonage issue has made me some of my best blogging buddies including Robert Baty and Reverend William Thornton.
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Philip A. Driscoll, et ux. v. Commissioner, 135 T.C. No. 27

Foxes have holes, and birds of the air nests; but the Son of man hath not where to lay his head.

Robert Harris's book 101 Things Not to Do Before You Die is a fantastic blend of humor and wisdom.  One particular piece of advice which actually caused me to change my regular behavior was:

Don't accumulate nonfunctional pens.

Following the form of most of his advice he describes a person who reaches into a jar of ballpoint pens, tests the pen to see if it works, finds it doesn't  and then puts it back.  What do you say about such a person ? Don't be one of them !

Check your pens and let go of the ones that no longer serve you - even if it is painful.  Keep only the ones that you can reach for with confidence.  This way when you feel the urge to write or draw or doodle, you can get started without needless delay and frustration.

There is another piece of advice, one  that I generally don't follow.  Although he is referring to sports on TV, I think it has broader implications.  That advice is :

                                           Don't be a passive spectator

When you're watching two teams, always pick one to pull for.  Cheer and boo.  Laugh and cry.  Eat and drink.  And experience not just the game, but the competition.

In my blog, I have adopted an attitude of - It is what it is.  Before long it will be something different.  Deal with it.  Other tax bloggers seem to enjoy advocating for one side or the other.  The Tax Court's decision in Phillip A. Driscoll has motivated me to finally do some serious booing.  The issue is the parsonage exclusion.  I have previously written about an effort to have the exclusion declared unconstitutional.  I think my post on the constitutionality of the parsonage exclusion took a pretty balanced view.

The case of Phillip Driscoll is another matter.  Reverend Driscoll heads Mighty Horn Ministries.  The ministry is not apparently classified as a church since it files Form 990.  If you look at the website, it strikes one more as being a record label, albeit one that specializes in religious music.  Since 2007, perhaps coincidental with the Reverend's visit to a federal facility because of a misunderstanding about taxes, the organization has been officially known as Phil Driscoll Ministries. Their 990 is available on guidestar.org (registration is free). In 2009, it had gross receipts in excess of $3,000,000.  Officers salaries were fairly modest $77,440 to President Phillip Driscoll, $5,700 to Jamie Driscoll the VP and $31,700 to Lynn Driscoll.  The Reverend Phil, however, had expense accounts and "other allowances" totalling $283,032.  This nicely ties with the item in other expenses labelled parsonage.  If you know anything about airplanes, take a look at the depreciation schedule on page 21 of the adobe file and you can let me know if I should get cranked up about that.  The mission of Phil Driscoll Ministries (a/k/a) Mighty Horn is:

Spreading the gospel of Jesus Christ to approximately 500,000 people annually through concerts and other ministry opportunities.

As occasionally happens to me further research has shown that a case I have found of interest is actually a late act in old news.  Reverend Driscoll did time in 2007 for tax evasion.  At least one commentator believes the real villain in that case was the IRS.  In his post Welcome Home Phil, James Paris speculated that Phil was being persecuted for his Christianity.  You can find similar comments in the Christian music realm of the blogosphere.  Apparently Reverend Driscoll is quite a celebrity with even Bill Clinton trying to help him avoid prison time.  It will be interesting to see if this tax court decision is seen as something of a vindication of him.

At issue were parsonage exclusions covering the years 1996 to 1999 totalling just over $400,000.  The largest being $195,778.72 in 1999.  This was not Reverend Driscoll's entire parsonage allowance.  This was the portion attributable to his second home (for parts of 1998  it was "second homes").  Just a little bit of tax history here.  The parsonage exclusion goes back to the Revenue Act of 1921.  It excludes from income the rental value of a residence provided to a "minister of the gospel".  This exclusion might have been rendered redundant by the subsequent creation of an exclusion from income for lodging provided to employees for the convenience of the employer.  In the classic "parsonage" or, if you are Catholic, "rectory", situation, presumably the convenience of the employer standard would be met.  It's convenient for the congregation to have the minister living next to the church in a house maintained by the church.  Maybe not so convenient for the minister's spouse or the minister's kids.

Here is where we get into the tension between the establishment clause and the free exercise clause.  Some denominations and congregations might think, perhaps with some encouragement from the clergy, that it is not such a good idea to have the minister live in a house owned by the church.  Since you wouldn't want to treat them differently than other denominations or congregations the parsonage exclusion was expanded to include "rental allowances".  There is no dollar limitation on such rental allowances and no limit on the relationship that they can bear to taxable compensation.  The money just has to be spent on providing housing.  If the housing allowance is used to pay deductible expenses they are still deductible.

The question the tax court had to decide in this case was whether a parsonage allowance should be allowed with respect to a second home.  In 2002, the Code was amended to limit the exclusion to the fair rental value of a home.  Prior to that it would presumably have been legitimate to have a $500,000 parsonage exclusion that was used to be buy a house.  Since the parson would have basis in the house it could be subsequently sold for $500,000 with no taxable income.  The case which prompted the Code change was not nearly that extreme.

Interestingly the question of whether the parsonage allowance can apply to a second home has never been addressed before.  The court was left to try to figure out what Congress was up to when it first enacted this thing in 1921.  They didn't get very far:

One commentator has suggested that the in-kind exclusion grew out of “the general respect held by Congress and the public for churches,”

What they came down to was statutory construction.  The language in Section 107 says "provide a home", but when you go to the definition section of the Code you find :

In determining the meaning of any Act of Congress, unless the context indicates otherwise— words importing the singular include and apply to several persons, parties, or things;

So providing a home includes providing two or, in this case for part of the time, three places to live.  And of course Reverend Driscoll in 2007 had free housing provided by the federal government, although that was just for himself.

I really don't think this type of thing does the cause of religion much good.  I doubt that it is good for the clergy to have their own special tax gimmick that while appearing modest can be gamed to exclude from income tax as much as 100% of above average incomes in some cases.  If 107 were simply repealed it would not cause the taxation of clergy who are provided a place to live by their congregations.  They would be covered by the convenience of the employer exception even if the residence had a theoretically high rental value (conceivably a bishop's residence or the like).

There is another option, which as far as I know is original with me, although whenever I think that it turns out that I am wrong.  Code Section 134 excludes from income a number of military benefits including a housing allowance. A rationale similar to that for the parsonage exclusion can be made here.  Members of the military are frequently and perhaps more so traditionally provided with housing at a place convenient to the employer, think Fort Apache. It is reasonable that a cash allowance in lieu of that benefit would be exempt.  From a policy viewpoint the military housing exclusion is less troubling, since there is nothing disturbing about the federal government deciding who is entitled to it (Unless you are a far out militia type).  Perhaps more significantly, since it is paid by the federal government, it is limited.  The allowance varies by whether the service member has dependents, by region and as you might expect rank.  If you look at the table, though, you will see that the variation by region is the most dramatic with junior enlisted ranks in Alaska having housing allowances greater than a general in Alabama.  My recommendation is that the parsonage allowance be limited to no more than the highest military allowance anywhere.  You could come up with something more complicated than that.  The important thing is that there be some dollar limit.

Dropping back to my normal persona as amoral tax advisor congregations and ministers might consider whether there is an opportunity here to further pump up housing allowances.  I don't know how many clergy members own multiple homes, but I will predict that as word of this decision gets out, the number will increase.  A cautionary note.  The Tax Court was divided on this opinion.


Thursday, May 22, 2014

Making Room For The New

This was originally published on Passive Activities and Other Oxymorons on December 17, 2010.
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I explained my blogging method in a recent post and that wasn't even the first time.  One of the byproducts of the method is a host of items that deserve mention, but not perhaps an entire post.  Things had been pretty quiet on the fronts that I observe. Yesterday and today though produced a flurry of interesting items.  Before I get to them though I will pass on the developments that are starting to get stale and will not get a lengthy treatment.

Private Letter Ruling 201044019, 11/05/2010


This ruling is an adverse determination on exempt status.  They were seeking to be recognized as a church.  The church had one minister, its founder:

She was ordained by B. B is not a tax-exempt organization under section 501(c)(3). You operate out of your founder's personal residence.

As of yet it did not have a lot going on :

You state that your regularly scheduled religious services will consist of a weekly online discussion centered on a topic that will be posted by your minister. Visitors to your website will be able to discuss the topic by posting comments. To date, you have not posted any topics or engaged in activities using your website. Based on your representations, your only activity thus far, except for establishing your website, has been to distribute funds to individuals

With respect to your program of distributing funds to the needy, neither your application nor your subsequent submissions describe this program, specify the criteria you will use to determine whether an individual is needy or indicate how individuals are referred to you.

With respect to the operation of a church, you describe your creed or statement of faith as follows, "We are all sons and daughters of the same universe. Our doors are open to all. We make no demands of our members. We offer freedom of faith. We seek to unite and instill the truth that everyone is equal." You describe your formal code of doctrine and discipline as follows, "Do unto others as you would have them do unto you." You indicate that your form of worship consists of meditation and communication.

It is troubling that we have the IRS saying what is or is not a church.  It seems to be problematic with the establishment clause of the First Amendment.  You need however to look at the whole sentence:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;

In order to not interfere with "free exercise", you have to define when it is that people are exercising religion.  It is still disturbing.  As I mentioned in a previous post on The Foundation for Human Understanding, Jesus and his apostles would not easily fit into the IRS definition of a church.

FlextronicsAmerica, LLC v. Commissioner, TC Memo 2010-245

I did a few posts on Fidelity International Currency, one of which, is one of my all time greatest hits.  That was a partnership designed by KPMG which went spectacularly bad.  In this one a KPMG design that the IRS did not like was blessed by the Tax Court.  It was fiendishly complicated and due to legislative changes probably doesn't work anymore so I won't go into it.  There was, however, a significant quote in it:

Respondent emphasizes KPMG's role with respect to the inventory transactions. Certainly Canadian Parent and KPMG contemplated different ways to bolster the appearance of a business purpose relating to the inventory transactions. There is no doubt KPMG fervently encouraged the use of the planning technique. Receiving KPMG's advice did not, however, nullify petitioner's bona fide business purposes for the transactions. KPMG was simply advising a client on different ways to minimize the tax consequences of a proposed transaction—precisely what tax accountants are paid to do.


The difference between this case and Fidelity International is the KPMG was figuring out the most tax efficient way to execute a legitimate business transaction rather than creating entities to engage in transactions to shelter unrelated income.

Gregory Q. Teeters v. Commissioner, TC Memo 2010-244

This was pretty much a run of the mill protester case.  I've studied this topic quite a bit, having once found myself between a protester and the IRS, resulting in 12 years of torture in the probate court.  Some of the arguments are fairly well crafted in that all the citations will check out (You just have to ignore that they are taken wildly out of context).  I have trouble believing that the people who craft them think that they are valid.

To support his objection to the deficiencies and additions to tax, petitioner relies predominantly on a single frivolous legal argument; viz, that he did not receive wages under section 3401(a). Petitioner is wrong. The companies that issued him Forms W-2 were his employers under section 3401(d) and he was their employee under section 3401(c). Thus, the remuneration those companies paid him for his services was wages under section 3401(a). Those provisions are clear on their face. See, e.g., United States v. Latham, 754 F.2d 747, 750 [55 AFTR 2d 85-846] (7th Cir. 1985) (the argument that “under 26 U.S.C. § 3401(c) the category of `employee' does not include privately employed wage earners is a preposterous reading of the statute”). Moreover, petitioner received several letters from respondent explaining that his position was frivolous and suggesting that he seek advice. At trial, although petitioner acknowledged that seeking advice would have been reasonable, he conceded that he did not do so. Instead, petitioner persisted in advancing the same frivolous argument. We find that petitioner did not have a good faith misunderstanding of the law. Petitioner timely filed Federal income tax returns for 1990, 1991, 1992, 1993, 1994, 1995, 1997, and 1998. Petitioner knew of his legal duty and sought to avoid it.

DORAN v. METROPOLITAN LIFE INSURANCE COMPANY, Cite as 106 AFTR 2d 2010-6999

This was a case of someone suing an insurance company because they had unexpected income when they cashed in an annuity.  They thought they had basis in it, but it turned out there had been a previous roll overs that confused matters.  The insurance agents advising them had not been aware of it.  The insurance company was granted summary judgement.






CCA 201045023

Individual wrongfully convicted and incarcerated for crime who served several years in prison before being exonerated, may exclude from gross income, under IRC Sec(s). 104(a)(2) , compensation received as result of state-enacted legislation for wrongful conviction and physical injuries and sickness suffered while unjustly incarcerated. But, if individual receives title to/constructive or economic receipt of corpus or assets used to fund future periodic payments, then some portion of future periodic payments may not be excludable. And, punitive damages and interest are included in gross income.

I had once looked at this issue for somebody and had concluded that incarceration, in and of itself, is not a physical injury under 104 (Don't yell at me that that doesn't make sense.  It's not a requirement).  The facts here are just a little different.  Human rights attorneys should pay attention to this.

Gail P. Drayer v. Commissioner, TC Memo 2010-257

I write a lot about taxpayers not being able to prevail on innocent spouse status.  There are two reasons for this.  One is that there seem to be more cases in Tax Court where the taxpayer loses.  The other is that those cases reinforce my advice to be cautious in signing joint returns.  Don't just think about the tax savings.  Consider the implications of joint and several liability.  This does not mean that seeking innocent spouse relief is not worth doing.  I'm sure it is frequently granted by the IRS, which is not going to show up in Tax Court.  Also sometimes taxpayers do win in Tax Court.

Mrs. Drayer had 5 of the eight factors in her favor, one against and two neutral as determined by the Tax Court.  Mrs. Drayer was under the mistaken assumption that she was legally required to file a joint return, which is not one of the factors.  Most dramatic was the abuse factor:

Times were tough for the Drayers, and their marriage became increasingly rocky. Mr. Drayer would often get very angry and had frequent outbursts, particularly in the context of discussions about finances and taxes. Petitioner worried about unpaid tax liabilities, but Mr. Drayer would furiously insist that he would handle the problem and would submit another offer- in-compromise to the Internal Revenue Service. Petitioner provided specific examples of angry outbursts, including a time when Mr. Drayer threatened to hit her and broke specific items. He also, after one such incident, told petitioner that he had intended to commit suicide. Mr. Drayer called petitioner derogatory names and publicly humiliated her. He also regularly drank a lot of alcohol and often smoked marijuana.


Realistically I know that I will probably never run out of material.  It feels good to have a backlog, although I may feel obligated to do some bonus posts for the sake of timeliness.









Looks Like a Duck -Walks Like a Duck - Talks Like a Duck - Not a Duck

This was originally published on Passive Activities and Other Oxymorons on June 9, 2011.  There is a followup to it on forbes.com, that talks of another minister who got caught up in the corporation sole scam.  An appeal on that case has recently been decided by the Fifth Circuit, and forbes.com coverage of that decision will be coming soon.

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Thomas F. Chambers, et ux. v. Commissioner, TC Memo 2011-114
U.S. v. MAGGERT, Cite as 107 AFTR 2d 2011-XXXX

For we are taking pains to do what is right,not only in the eyes of the Lord but also in the eyes of men.”2 Corinthians 8:21 From the Evangelical Center for Financial Accountability Seven Standards of Responsible Stewardship

He said he talked to Jesus all the time. Even when he was driving his car. That killed me. I just see the big phony bastard shifting into first gear and asking Jesus to send him a few more stiffs. From The Catcher in the Rye.

The First Amendment tells us that the government should not establish religion.  On the other hand, it also tells us that government is not supposed to interfere with the free exercise of religion.  People with a very secular perspective like the Freedom from Religion Foundation focus on the first aspect.  Deeply religious people might focus more on the second.  The tension shows up in the relationship that IRS has with churches. It is very hands off not requiring the level of reporting that other not for profits are subject to.  On the other hand it is put in the awkward position of having to decide what is and is not a church.  Although this seems to contradict the establishment clause it is necessary so that the sphere of religion where government is hands off does not become a gaping hole that tax cheats drive trucks through. The favorable tax treatment of churches, that in my view is mandated by the free exercise clause, is, quite predictably, a magnet for "phony bastards".  Two recent cases illustrate this problem.

U.S. v Maggert is an extreme case:

Maggert, a dentist, worked for several dental offices as an independent contractor. In 1998, Maggert and his wife attended a seminar by American Rights Litigators (“ARL”) and Eddie Kahn at which they were told they did not have to pay federal income tax. Maggert relayed this information to his accountant, who counseled Maggert against ARL's advice and ended their professional relationship when Maggert persisted. Maggert dissolved his professional association, Mark S. Maggert, D.D.S., P.A., and, from 1998 to 2005, did not file a federal tax return or pay federal income tax.

Eddie Kahn, by the way, was Wesley Snipes "tax adviser". I might have missed that if I wasn't following Joe Kristan's blog.  Joe frequently gets to the same cases I do, usually before I do.

Beginning in 2002, Maggert instructed the accountants for the dental offices where he worked to make his paychecks payable to Total Business Systems, LLC, a Florida corporation, or to Mark's Word of Faith International, a Nevada corporation. The accountants complied and issued Form 1099s, using the corporate identification numbers for these organizations rather than Maggert's social security number. Maggert deposited the paychecks into accounts he opened in these organization's names and withdrew money from the accounts on a regular basis (over $40,000 in 2002, over $52,000 in 2003, $178,000 in 2004 and $128,000 in 2005, for a total of $398,600).

The articles of organization for Total Business Systems, LLC identified the managing member as Geneva Holdings, Inc., in Australia and the registered agent as Ronald Saltzer. The articles of organization were signed by Saltzer and Alan R. Horne, the “Director” of Geneva Holdings, Inc. Saltzer admitted that he knew nothing about Total Business Systems, LLC or Geneva Holdings, Inc., and had never met Maggert or Horne. Saltzer had agreed to act as the registered agent and sign the articles of incorporation in exchange for a meal provided by Eddie Kahn.

Panhandlers are facing a generational problem right now.  I sometimes want to shake the guys to explain to them that they can't be Vietnam veterans if they are more than a couple of years younger than I am.  Offering to be registered agents could open up a whole new field.  Somebody once explained to me that one of the ways to get an individual to take on unlimited liability so you could have a partnership was to trade a bottle of Thunderbird for the signature.  I wonder if cheap wine sales went down when they put in the check the box regulations.  At any rate on to the religious patina of the plan.

The articles of incorporation for Mark's Word of Faith International listed Maggert as the “Presiding Patriarch (Overseer).” Maggert's wife signed the articles of incorporation as a witness and “Scribe.”

It can be the little things that screw up a plan.  If Dr. Maggert wanted to be Patriarch, why couldn't he have made his spouse "Chief Priestess" rather than something that sounds like the medieval version of secretary and reminds you of Pharisees ? Maybe she would have been more enthusiastic.

Maggert's wife admitted there was no such religious organization and that Maggert was not a spiritual leader or priest

We really don't want the IRS inquiring as to who is really a spiritual leader or a priest, but it is these type of shenanigans that makes it necessary.  Sadly, I think that the IRS agents who are tasked with dealing with this nonsense get a little jaded, which may have been part of the problem in the Chambers case.

The case of Thomas Chambers is much more troubling.  It was not being proposed that he be deprived of his liberty but the IRS was asserting a 75% fraud penalty, which is about as bad as it gets short of doing time.  It is pretty clear that Reverend Chambers (and I'm not being ironic with the Reverend) was not running a tax scam:

Mr. Chambers is an ordained minister who, during the years in issue, was the sole pastor of Biblical Church Ministries (sometimes also referred to as Biblical Church or Biblical Church and Global Ministries). Before he founded Biblical Church during 2003, Mr. Chambers had been the senior pastor of Pilgrim Bible Church since 1991. He resigned from his position at Pilgrim Bible Church because he wanted to concentrate more on global evangelism and planned to be out of the country for many weeks during the year. However, about a dozen of his former congregants at Pilgrim Bible Church asked him to continue leading them in studying the Bible on Sunday mornings. Mr. Chambers agreed to continue leading them in Sunday worship with the understanding that he would be ministering abroad a number of weeks during the year and that someone else would lead worship when he was absent.

On the other hand, if he had been endeavoring to make himself look like he was running a tax scam, he would have been hard pressed to find more effective means than what he stumbled on. It is fairly clear that in his choice of organizational structure Reverend Chambers made a mistake.

During 2003 Mr. Chambers organized Biblical Church as a “corporation sole” under Utah law. He designated himself as “overseer” of Biblical Church. As overseer, he had full control over the corporation sole, including the authority to amend its articles of corporation sole and appoint his successor. During 2006 petitioners transferred the ownership of their home from themselves as individuals to Mr. Chambers as overseer of Biblical Church, a corporation sole.

A corporation sole is a way to associate ownership of property with the holder of an office.  Who owns all those church buildings and schools that make up a Catholic diocese?  The bishop does as a corporation sole.  This can come as something of a shock to parishioners as a lengthy drama in Worcester Mass several years ago illustrates.  On the other hand you don't have to worry about your parish becoming affiliated with another denomination, which can happen with a congregational polity.  I suspect that Reverend Chambers chose corporation sole because it fit a "strong pastor" model of church governance that was consistent with his theology.  Then again, you can't rule out bad advice.

Unfortunately it is also a property ownership device that is part of one of the IRS's dirty dozen.  Unless the office holder is subject to removal by some higher authority (other than the highest authority that we are all ultimately subject to) corporation sole is an excellent scamming structure.  Too excellent.  I think that when he chose corporation sole Reverend Chambers painted a target on his back.



Here is a portion of Revenue Ruling 2004-27:

The Service is aware that some taxpayers are attempting to reduce their federal tax liability by taking the position that the taxpayer’s income belongs to a “corporation sole” created by the taxpayer for the purpose of avoiding taxes on the taxpayer’s income. The Service also is aware that promoters, including return preparers, are advising or recommending that taxpayers take frivolous positions based on this argument. Some promoters may be marketing a package, kit, or other materials that claim to show taxpayers how they can avoid paying income taxes based on this and other meritless arguments.

By choosing "corporation sole" Reverend Chambers made himself look like a duck.

Mr. Chambers followed through on his plans to participate in many overseas evangelism trips. In addition to his job as a pastor at Biblical Church, he is on the staff of e 3 Partners, 3 an organization that is exempt from tax pursuant to section 501(c)(3). Mr. Chambers' role with e 3 Partners is “church planter”, and his primary responsibility is to lead short-term mission trips to other countries, where he trains local pastors and other volunteers in evangelism.

e3 Partners Ministry is a substantial organization.  According to their most recent 990 they grossed over 18,000,000.  They have many hallmarks of legitimacy.  Not the least of which is having an accounting firm with a blogging partner.  I think the IRS phony church hit squad should have backed off when they saw that Reverend Thomas was affiliated with them.  When I looked at the board I saw a substantial business person I happen to know who is honest as the day is long and sharp as tack.

The team members were responsible for raising their own funds for each trip, but e 3 Partners coordinated fundraising by receiving donations on behalf of individual team members and using those donations to pay trip expenses for those team members. Portions of the funds raised by all of the team members were directed to the team leaders, like Mr. Chambers, who were responsible for handling all of the day-to-day expenses the team would encounter on the trip. Before each trip, e 3 Partners deposited funds into a bank account provided by the team leader, who then withdrew the cash needed for the trip. All expenses incurred during the trip had to be documented by receipts, and the team leader was responsible for returning any unused funds to e 3 Partners at the end of the trip. During the years in issue Mr. Chambers received into his personal bank account numerous deposits to cover trip expenses from e 3 Partners, and the parties agree that such funds were properly excluded from petitioners' income.

So apparently if the Reverend Chambers had followed his first impulse and devoted all his time to foreign missions under the supervision of e3 Partners, he wouldn't have had any tax problems or at least not ones of the magnitude that he encountered.

During both 2005 and 2006 petitioners maintained a personal checking account at M and T Bank (M and T account). Petitioners also maintained checking accounts for Biblical Church at National Penn Bank (National Penn account) and the Bank of Lancaster County (Lancaster account) (collectively, the Biblical Church bank accounts or the church bank accounts). Petitioners were the only authorized signatories for the Biblical Church bank accounts. The name listed on the church bank accounts was “Biblical Church and Global Ministries”, but petitioners usually deposited checks made payable to “Biblical Church” into the National Penn account and checks made payable to “Global Ministries” into the Lancaster account. Biblical Church had two bank accounts because Mr. Chambers was trying to separate funds for the church itself from funds that were intended to support its overseas mission trips. He had originally planned to save some of the church funds to purchase a building; but because he was very passionate about the mission work, he put most of the money toward missions.


Petitioners opened the Lancaster account before they had obtained an employment identification number (EIN) from the Internal Revenue Service (IRS). They told the bank representative that they had applied for an EIN but had not yet received it. The bank representative nonetheless allowed them to open a bank account, and she typed all of the information required on the new deposit account coversheet but left blank the space for the EIN. She then printed out the new deposit account coversheet, had petitioners sign it, and instructed them to inform the bank as soon as they received the EIN from the IRS. The bank representative's actions in setting up the account, printing out the new account coversheet, and leaving blank the space for the EIN were consistent with protocol established by the Bank of Lancaster County at that time.

We have a saying that it is better to be lucky than good.  A corollary of that might be that it is worse to be unlucky than bad.  I suspect Reverend Chambers piece of bad luck with the EIN  might have been what really got the IRS swat team that was working him over excited.

At some point, a nine-digit number was handwritten in the space for the tax identification number on the new account coversheet. The nine-digit number written on the new account coversheet and subsequently associated with the Lancaster account is the Social Security number of a minor child unrelated to petitioners, not the EIN assigned to Biblical Church. The minor child who was assigned the Social Security number was not an account holder at the Bank of Lancaster County when petitioners created the Lancaster account.

His next misstep would appear to many of us to be the act of a godly man, who is also humble.

During the years in issue petitioners performed part-time janitorial work for Superior Walls of America, Ltd. (Superior Walls). Petitioners were paid $13 per hour for performing cleaning services about 15 hours each week. Mr. Chambers intended the compensation from Superior Walls as a fundraiser for his mission trips and for Biblical Church. He spoke with the financial controller at Superior Walls and explained his desire to perform janitorial services as a fundraiser for Biblical Church. Pursuant to an agreement with Superior Walls, instead of paying petitioners themselves for the work, Superior Walls paid Biblical Church directly. Mr. Chambers executed a Form W-9, Request for Taxpayer Identification Number and Certification, on behalf of Biblical Church, which he submitted to Superior Walls, claiming to be exempt from Federal tax withholding.

Unfortunately one of the things that scamsters do with phony churches is assign their income to them.  This would probably be the first instance of somebody doing it with the $13 per hour he was getting for mopping floors.  And lets not forget that Reverend Chambers actually did spread the Gospel in foreign places.  On the other hand by assigning his income, modest as it was, to the "corporation sole", Reverend Chambers was walking like a duck.

Petitioners later learned that the law required them to report the compensation from Superior Walls as taxable income, and they began to report the compensation as income during 2006.  Petitioners reported their income from Superior Walls during 2006 on a Schedule C attached to their Form 1040, U.S. Individual Income Tax Return.

That was a bit of unducklike behaviour that the Tax Court noted with approval.

Then there is the matter of the language in the governing document that to the IRS indicated  a “tax-hostile” entity

This Corporation Sole is a full-time Ministry and Spiritual Order which *** is mandatorily excepted by an “unrestricted” right, as referenced in United States law Title 26, §§ 6033(a)(2)(A)(i) and (iii), § 1341(a)(1) and § 508(c)(1)(A), from any form of taxation and from filing any returns or reports/documents ***

Although the Tax Court noted that the objectionable language was "largely a recitation of the tax law applicable to all churches", that is part of the style of tax protester rhetoric which frequently includes quotations from valid authority, ofter wildly out of context.  So Reverend Chambers with that governing document was talking like a duck.  (Although there is nothing to indicate that Reverend Chambers was constantly seen in the company of ducks, there is a chance that he purchased his paper work from one).  It is interesting to note that in the entire body of tax authority the term "tax-hostile" entity only appears in this case.  I wonder if it is a coinage by the agents who have to deal with this stuff. I used to have a third shift job in a hotel where a lot of cops would stop by to take their breaks.  They often referred to a crime that was not in the statute books called B and A, which stood for "being an asshole"

During the years in issue, the deposits into the Biblical Church bank accounts primarily consisted of numerous small checks written by individuals. Members and regular attendees of Biblical Church wrote checks that accounted for the largest number of deposits. Many of those individuals contributed a regular tithe or offering. Other checks were written by individuals who made only a few donations during the years in issue. Some checks were written by other churches. In total, about 50 individuals and three churches wrote at least one check to Biblical Church during the years in issue

The Tax Court was able to get Reverend Chambers out of a significant part of the trouble he had gotten into, primarily it appears from naivete.  First of all they determined that the Biblical Church was a church.

Biblical Church satisfies many of the criteria. Mr. Chambers is an ordained minister, the church has a distinct legal existence as a corporation sole, the church has been meeting regularly on Sundays since 2003, its worship services include a core group of 15 to 25 attendees who exclusively attend Biblical Church, its worship services are consistently held at the same place, and Mr. Chambers teaches recognized Christian doctrine. On the basis of the foregoing, we conclude that Biblical Church is a church.

That did not solve the problems entirely. Reverend Thomas had unfettered control of the various accounts.  Some of the expenditures went for personal purposes


The IRS reconstructed petitioners' income for the years in issue by examining the deposits to the M and T account, the Lancaster account, and the National Penn account. The IRS did not include deposits into the Northwest account when it reconstructed petitioners' income. However, the parties have included bank statements and canceled checks from the Northwest account among the stipulated exhibits before the Court. Those records show that petitioners used the debit card from the Northwest account to pay for numerous purchases at Wal-Mart, K-Mart, Staples, Dollar General, and a variety of other retailers, as well as many purchases at gas stations and restaurants. Petitioners wrote checks on the Northwest account to pay for many household expenses, including their gas bills, cable bills, and sewer bills. They also wrote checks to a tile company, a chimney sweep, a mattress store, a dentist, a newspaper, a mechanic, and a cement company.


Petitioners contend that even if some of the expenses paid from the Northwest account were personal, those amounts are not includable in petitioners' income because they were for the purpose of providing a home for Mr. Chambers, a minister of the gospel, and therefore are exempt from taxation under section 107. However, in order for a minister's housing allowance to be exempt from taxation under section 107, it must be designated as a housing allowance by an official action of the church in accordance with section 1.107-1(b), Income Tax Regs.

I think the Tax Court may have missed a chance to cut Reverend Chambers a break here.  They had recognized that the church was a church and he had transferred ownership of the house to the entity so this was arguably not a rental allowance situation.  They did prevent the IRS from piling it on to some extent.

The deposited checks in 2005 include federal income tax refund checks. In light of the circumstances and facts of this case, respondent is unwilling to concede that those refunds were correctly and properly made to petitioners. Therefore, respondent does not concede that those refunds are non-taxable in 2005. It appears that respondent is contending that petitioners are liable for deficiencies in income taxes from prior years and is attempting to recover some of those deficiencies by including petitioners' tax refunds from 2004 in their income for 2005. Respondent cites no authority that would permit such a determination, and we find none. Accordingly, we conclude that petitioners' Federal tax refunds should not be included in their income for 2005.

But there was only so much they could do.  The Chambers had sold gold coins inherited from Mrs. Chambers father to help with church expenses.  In their reconstruction of income the IRS treated these amounts as income and the Chambers did not have sufficient evidence to refute the presumption of correctness.


Respondent's contention is based on the premise that Mr. Chambers stated that Mrs. Chambers inherited the gold coins directly from her parents, which would contradict Mrs. Chambers' testimony that petitioners used cash they inherited from Mrs. Chambers' parents to purchase the coins. However, Mr. Chambers never clearly explained where the gold coins originated. In addition, he separately testified that petitioners had received cash from the inheritance. Although petitioners' testimony regarding the gold coins was somewhat difficult to follow, we do not find it contradictory. Nonetheless, because petitioners have the burden of proving that the $30,281 should not be included in their income and because petitioners failed to provide any evidence to corroborate their testimony, we conclude that petitioners have failed to carry their burden of proof that the income from the Surgical Resources Business Trust checks should be excluded from petitioners' gross income.

The big thing that the Tax Court did do for Reverend Chambers was making the 75% fraud penalty go away.  Acknowledging all the various things that Reverend Chambers had done to make himself appear like a duck, they could clearly see that he wasn't one.  Most important was the determination that there was an actual church there.

There are some other interesting aspects of the case that I have glossed over.  I recommend it as a good read.  I think it is worth commenting on how Reverend Chambers might have avoided these problems short of just working for organizations like e3 Partners, that have good infrastructure in place.  He might have looked at the ECFA Standards and Best Practices for Churches.  In the interest of full disclosure, I should probably say that the churches I have attended would not qualify for ECFA membership. Most Unitarian Universalists have a different theological perspective than that required by Standard 1.  Our principles do encourage us to heed "Wisdom from the world's religions which inspires us in our ethical and spiritual life" ECFA's standards and best practices clearly fall in that category.  One excerpt from the standards might have been particularly apt for Reverend Chambers Biblical Church:

Every member shall be governed by a responsible board of not less than five individuals, a majority of whom shall be independent, which shall meet at least semiannually to establish policy and review its accomplishments.


If the group of people that asked Reverend Chambers to stay on as their preacher even while working on his evangelical missions did not include five people capable of seeing that mundane matters like setting a salary for him, most if not all of which could have been excluded as parsonage, then he really should have passed.

I have been sparing in my criticism of the IRS in this case.  I have often commented on how ill qualified I am to work for them.  If I was in charge of the team that was working on this I would have said "This guy is a real minister.  Let's leave him alone and go fight crime someplace else."  ignoring the laundry list of duck like characteristics that he was exhibiting.  What would be very sad is if this case ends up being viewed as an instance of the Satanic IRS persecuting the godly.  If you are of the mindset to look at it that way, I'd point you to ECFA who will teach you how to avoid even the appearance of impropriety.


I haven't seen a lot of commentary on this case.  At least one blogger has observed that it was quite a harsh result.  I've seen the identical commentary in more than one place, so I am not sure of the original source.

Wednesday, May 21, 2014

Health Care Reform Constitutional?

This was a originally published on Passive Activities and Other Oxymorons on December 15, 2010.  This issue was resolved by the Supreme Court in June of 2012.  By hovering over Scotusblog I was able to break the story earlier than most.

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COMMONWEALTH OF VIRGINIA v. SEBELIUS, Cite as 106 AFTR 2d 2010-7333

This is barely within the ambit of my blog and also is something that everybody else is going to be discussing, another reason for me to not weigh in, but I will anyway since my brief sampling on the commentary already out indicates that something might be missing.

Commonwealth of Virginia v. Sebelius is on the constitutionality of the portion of the health care bill that calls for a tax or penalty on someone who does not purchase health insurance :


First, the Commonwealth contends that the Minimum Essential Coverage Provision, and affiliated penalty, are beyond the outer limits of the Commerce Clause and associated Necessary and Proper Clause as measured by U.S. Supreme Court precedent. More specifically, the Commonwealth argues that requiring an otherwise unwilling individual to purchase a good or service from a private vendor is beyond the boundaries of congressional Commerce Clause power. The Commonwealth maintains that the failure, or refusal, of its citizens to elect to purchase health insurance is not economic activity historically subject to federal regulation under the Commerce Clause.


Alternatively, the Commonwealth contends that the Minimum Essential Coverage Provision cannot be sustained as a legitimate exercise of the congressional power of taxation under the General Welfare Clause. It argues that the Provision is mischaracterized as a tax and is, in actuality, a penalty untethered to an enumerated power. Congress may not, in the Commonwealth's view, exercise such power to impose a penalty for what amounts to passive inactivity.

Lastly, the Commonwealth asserts that Section 1501 is in direct conflict with the Virginia Health Care Freedom Act. Its Attorney General argues that the enactment of the Minimum Essential Coverage Provision is an unlawful exercise of police power, encroaches on the sovereignty of the Commonwealth, and offends the Tenth Amendment to the U.S. Constitution

The District Court for the Eastern District of Virginia agreed with the Commonwealth

On careful review, this Court must conclude that Section 1501 of the Patient Protection and Affordable Care Act—specifically the Minimum Essential Coverage Provision—exceeds the constitutional boundaries of congressional power.






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COMMONWEALTH OF VIRGINIA v. SEBELIUS, Cite as 106 AFTR 2d 2010-7333

This is barely within the ambit of my blog and also is something that everybody else is going to be discussing, another reason for me to not weigh in, but I will anyway since my brief sampling on the commentary already out indicates that something might be missing.

Commonwealth of Virginia v. Sebelius is on the constitutionality of the portion of the health care bill that calls for a tax or penalty on someone who does not purchase health insurance :


First, the Commonwealth contends that the Minimum Essential Coverage Provision, and affiliated penalty, are beyond the outer limits of the Commerce Clause and associated Necessary and Proper Clause as measured by U.S. Supreme Court precedent. More specifically, the Commonwealth argues that requiring an otherwise unwilling individual to purchase a good or service from a private vendor is beyond the boundaries of congressional Commerce Clause power. The Commonwealth maintains that the failure, or refusal, of its citizens to elect to purchase health insurance is not economic activity historically subject to federal regulation under the Commerce Clause.


Alternatively, the Commonwealth contends that the Minimum Essential Coverage Provision cannot be sustained as a legitimate exercise of the congressional power of taxation under the General Welfare Clause. It argues that the Provision is mischaracterized as a tax and is, in actuality, a penalty untethered to an enumerated power. Congress may not, in the Commonwealth's view, exercise such power to impose a penalty for what amounts to passive inactivity.

Lastly, the Commonwealth asserts that Section 1501 is in direct conflict with the Virginia Health Care Freedom Act. Its Attorney General argues that the enactment of the Minimum Essential Coverage Provision is an unlawful exercise of police power, encroaches on the sovereignty of the Commonwealth, and offends the Tenth Amendment to the U.S. Constitution

The District Court for the Eastern District of Virginia agreed with the Commonwealth

On careful review, this Court must conclude that Section 1501 of the Patient Protection and Affordable Care Act—specifically the Minimum Essential Coverage Provision—exceeds the constitutional boundaries of congressional power.


It did not, however, issue an injunction since nothing is really happening with this until 2013, which is why I wouldn't normally pay attention to it.  What I've seen missing from the comments on this is that two other courts have ruled that the act is constitutional:

LIBERTY UNIVERSITY, INC v. GEITHNER, Cite as 106 AFTR 2d 2010-7174, 11/30/2010



The conduct regulated by the individual coverage provision is also within the scope of Congress' powers under the Commerce Clause because it is rational to believe the failure to regulate the uninsured would undercut the Act's larger regulatory scheme for the interstate health care market

These guys also raised religious and free speech arguments all of which went nowhere.  This decision was the by the District Court for the Western Division of Virginia.

THOMAS MORE LAW CENTER v. OBAMA, ET AL., Cite as 106 AFTR 2d 2010-6720, 10/07/2010

In this case the court found that the insurance requirement was within the realm of the Commerce Clause.  I managed to find something amusing so I posted on that decision a while ago.  The Thomas More decision was by the Eastern District of Michigan.
There is also:

STATE OF FLORIDA v. U.S. DEPT. OF HEALTH & HUMAN SERVICES, Cite as 106 AFTR 2d 2010-6761, 10/14/2010

That suit withstood a motion to dismiss.  The latest I see on it is that it will be heard on December 16.

Survey Says - No Discount For Family Limited Partnership

Originally published on Passive Activities and Other Oxyomorons on December 13, 2010

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LEVY v. U.S., Cite as 106 AFTR 2d 2010-7205, 12/01/2010

Sometime in the last millennium there was a TV situation comedy called Angie.  It was about the early days of a marriage between a fellow from a very wealthy Philadelphia family and a waitress from a family of more modest circumstances.  In one of the episodes the two families compete on the game show Family Feud.  Family Feud is a wonderfully egalitarian contest.  Unlike Jeopardy, which requires you to come up with the one correct answer (Expressed in the form of a question)  the questions in Family Feud are matters of opinion.  If you get one of the top five or ten answers (something like that) that were determined by a survey you get some points.  The more common the answer you come up with the more points it is worth.

I forget how the Angie episode worked out in its entirety, but at least early on the husband's wealthy family (including the butler of course) was getting creamed.  People in the survey did not have champagne and caviar for snacks or start the day by checking stock prices.  At one point the host goes up and explains to them that the survey answers come from average people not the ultra wealthy.  They don't get it.  The lawyers for the Estate of Meyer Levy might have learned something from watching that episode, but they were probably studying hard in law school or taking polo lessons, the better to meet wealthy clients, while I was squandering my time learning life's lessons by watching television.

The case was a family limited partnership case.  Family limited partnerships can be a good idea for a multitude of reasons.  They are particularly attractive to people, who not, yet, having come up with a way to take it with them, want to control it all till they draw their final breath without having it all included in their taxable estate.  There's also the asset protection and as they say on Seinfeld yada yada yada.  The thing that people get excited about, though, is the discounts.  That's what the IRS gets excited about too.  Take a bunch of stuff and put it into a family limited partnership.  Say its a million dollars worth of stuff.  Now give 10% of the partnership to your kid.  How much is the gift worth ?  $100,000 ?  Do you think I would pay $100,000 for it ?  Of course not..  As a limited partner I don't get to vote.  On top of that your kid doesn't even have the right to sell it to me.  You have to hire a valuation expert to value the limited partnership interest (I sometimes think the estate tax is, in reality, a white collar jobs program).  She'll tell you its worth something like $65,000, more or less, depending on well yada yada yada. The IRS doesn't like this and is constantly attacking it.

Until recently they focused on poor execution which I discussed at length in one of my early blog posts.  Assets aren't really transferred to the partnerships.  Personal bills are paid directly by the partnership.  Distributions are not made in proportion to partnership ownership.  Tax returns are not filed or not done correctly.  In a more recent case, Fisher, discounts were not allowed for a single asset partnership, because it lacked business characteristics.  There was no discussion of flawed execution.

No discount was allowed to the Estate of Meyer Levy for the sale of its Plano real estate that was in a partnership.  The estate appealed the verdict alleging error on the part of the trial court.

The Estate argues that the trial court erred when it allowed the admission of

 (1) evidence of the ongoing negotiations over the sale of the property, specifically the offers and proposals;
(2) evidence of the listing price of the property, and the ultimate sale price of the property;
 (3) valuation testimony by the Government's expert based on flawed methodology; and
(4) opinion testimony by a lay witness and hearsay testimony.

Wow.  In a valuation case they considered what people were offering for the property and what it actually sold for.  That's pretty outrageous.  You see the problem was it wasn't a judge that had to think about these things.  It was a jury.  Who ends up on a jury ?  I'm not sure exactly. I suspect that they have more in common with the people Family Feud surveys for its answers than the people I run into at tax conferences.


The Estate contends that the jury arbitrarily disregarded unequivocal, uncontradicted, and unimpeached testimony of an expert witness, bearing on technical questions of causation beyond the competence of lay people. The Government counters that the jury had the partnership agreement in evidence from which it could have determined that there was no lack of control or marketability.

The record contains ample evidence to support the jury's verdict valuing the property at $25 million. The Estate listed the property, and eventually sold the property, for $25 million. It was immediately resold for $26.5 million. Sophisticated developers with no stake in the current litigation engaged in ongoing negotiations for the property for prices in the $20–25 million range. The Estate's expert testified that the market in Plano remained relatively flat during the period between Levy's death and the sale of the property. Also Jordan testified regarding the value of the property. Any of these provides sufficient support for the jury's verdict on the property.

The jury verdict regarding the discount also finds support in the record. The partnership agreement itself would be sufficient evidence. The jury could have rationally found that no discounts for lack of control or marketability were merited because the Estate controlled the general partner interest, which had nearly unfettered control over the Partnership's assets. The trial court did not abuse its discretion when it denied the Estate's motion for new trial.

I'm not a lawyer and I don't even play one on TV.  I prepare and review tax returns and do tax planning.  I also represent people who are being audited by the IRS, but there I'm generally dealing with accountants.  If my clients end up in Tax Court and win I'll still think that I lost.  I am fairly certain though, that it was the choice of the estate's lawyers to bring this matter to a jury.  To have that privilege, they had to pay at least part of the tax in order to be able to sue for refund in district court.  They could have instead gone to Tax Court where they would have had people who dealt with "technical questions beyond the competence of lay people" all the time and frequently allow discounts.  Somehow though they thought they would do better with a jury.

Apparently though the government lawyers saw to it that the jury found out that the Estate got $25,000,000 and these simple minded people thought that might be indicative of whatever the estate had was worth.  I suppose there was some sort of trial strategy that would keep this information undisclosed.  In which case the jury would have had to weigh the government's yada, yada, yada against the Estate's yada, yada, yada.  There might have been some logic to that.  If I was playing Family Feud and the question was "Name a class of people that are very popular" I would venture neither multi-millionaires or IRS agents.  If the question was "Name a class of people that are despised"  I think I might score higher with "IRS agents".  I mean no disrespect to IRS agents, their unpopularity is inherent in their jobs.

In  a refund suit in district court either the government or the taxpayer can ask for a jury.  I haven't been able to figure out which it was.  I did find that the executor had been a potential candidate for mayor of Austin Texas and the late Mr. Levy had established a fairly well known charitable foundation.  So there may have been a feeling that there was a home town advantage.  There was also a sense in which the Estate was playing with the house's money if it was the one that gambled on a jury, as is noted in a footnote:

Although we have declined to set aside the jury's verdict of zero discount, we note that the actual discount applied in taxing the Estate was thirty percent. Given the valuation found by the jury, it would have had to find a discount of larger than thirty percent for the verdict to make a difference to the judgment in this case.


I don't know whether this case will have a chilling effect on family limited partnerships or not.  My cumulative sense is that you should only do them if you think they are a good idea anyway.  Oddly enough, that will make it more likely that you will succeed on the discount issue.  I think the key planning point to take away from the case is the Court's comment that it would have been reasonable to find a zero discount because of the Estate's general partnership interest.