Thursday, January 29, 2015

Kent Hovind - Trial Delayed - Documents Uncovered

I have been following the tax travails of Kent Hovind, Doctor Dino on for over two years. As his trial on new charges approaches he has been rallying supporters to shed light and make noise.  There is more happening than I can make what I consider forbes worthy, so some of the coverage will be on this site.  Here is the latest

Trial Delayed

I got a call this afternoon Kevin Robinson the reporter for the Pensacola News Journal  who is covering the Kent Hovind trial.  He told me that the case has been continued to March 2.  I have to tell you that when I read the Government's third motion for continuance I was really annoyed. A family matter has caused the government attorney assigned to the case to be out of the office for most of January.  I felt like doing a rant like the one Rudy Davis did on me about objecting to the way Kent uses the word "retarded".

What about Kent being separated from his family for another month?  He objected, but apparently the judge went with the Government.  Ernie Land commented

Kent adamantly opposed the new delay. The Public Defender wanted to move ahead, even if they had to separate Paul Hansen from Kent. I will assume that the defense motion was denied and the prosecutions motion for delay was allowed. I think once again they bring the case and the judge favors them. Maybe that why so many Federal Public defenders move on to other assignments so quickly since they can never win anything. I’ve even noted the head of the department who is Kent’s Attorney has expressed his opinion on the unfair system. By the way I have a handwritten letter from Kent asking the judge recluse herself because of her known bias toward Christians, as in the contempt of 2 teachers where Congressional leaders did take action to get those dismissed. We have a tough fight to fight here with her at the bench. I will be most happy to lend any help I can toward reports. I do want to be very clear in my/our opinion of the biased judge, the overreach in sentencing as compared to many other tax evaders or even structuring where the money was not used for crimes and many got very light sentences compared to Kent, and the final statement is that Kent did not set out to evade taxes, he set out to set up a Ministry not controlled by the State which was his resistance to a 501c3 Corporation. Those will be my points along with whatever the daily events bring out.
Documents Come To Light

If there is one person not directly involved in the case that the Hovindicators have issues with it is my friend and best commenter, bane of the basketball ministers, retired IRS Appeals officer Bob Baty, whose facebook page Kent Hovind and Jo Hovind v USA - IRS contains a good chronology of coverage from all angles since late July of 2013.  Bob has a style that can be a little irritating to some.  Hovinidcators tend to be a kind of ambivalent about me, but Bob consistently raises their hackles.

Ironically it was Bob who found the case that calls into question the validity of Kent's 2006 structuring indictment.    Now he has found some more documents.

Kent has maintained that he wrote to and received responses from a lawyer, an enrolled agent and a CPA that told him everything he was doing was OK. Nobody seemed to be able to find them

  Bob has found copies of all four of those letters.  The documents are of uncertain provenance, so I checked with Ernie Land.  He confirmed that he had seen one of them and the names on the others were mentioned  in the sentencing transcript that Rudy read.

The are not in a real convenient form but here are the links

Letter From Kent - Page 1   Page 2

Letter From Fred M Ortiz Tax Consultant September 12, 1996
  - Page 1   Page 2  Page 3 Page 4 Page 5 Page 6 Page 7  Page 8  Page 9

Letter From John J Schlabach EA September 10, 1996 (Confirmed by Ernie Land)

Page 1  Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11

Letter From Guy Curtis August 29, 1996

Page 1 Page 2 Page 3 Page 4 Page 5 

So once again Bob Baty comes through for the Hovindicators.

Do These Letters Line Up With Kent's Statements About Them?

Not really.  Kent has been saying that he had letters from three tax professionals that told him everything he was doing was OK.  As Ernie is wont to point out, despite the large civil liability, Kent was never criminally prosecuted for not filing Form 1040.  That is all the letters are about.  They say nothing about the way the ministry was run including the payroll tax.

A further drawback is that the arguments in the responses are all arguments that the courts have over and over ruled to be frivolous.  Guy Curtis in particular seems to be have been inspired by Irwin Schiff, who like Kent is in federal prison.

In 1999, Ronald McDougle (TCM 1999-264) tried to use letters from Fred Ortiz and Guy Curtis to get out of penalties.  The Tax Court was not having any of it

The main theme of the letters, and petitioner's argument, is that he is not required to file a Federal income tax return because it is a voluntary practice. Paying taxes is not voluntary. See Wilcox v. Commissioner, 848 F.2d 1007, 1008 [61 AFTR 2d 88-1299] (9th Cir. 1988), affg. T.C. Memo. 1987-225 [¶87,225 PH Memo TC]; Carter v. Commissioner, 784 F.2d 1006, 1009 [57 AFTR 2d 86-1009] (9th Cir. 1986); Malone v. Commissioner, T.C. Memo. 1998- 372 [1998 RIA TC Memo ¶98,372]; Liddane v. Commissioner, T.C. Memo. 1998- 259 [1998 RIA TC Memo ¶98,259]; Stonerock v. Commissioner, T.C. Memo. 1986-264 [¶86,264 PH Memo TC]; see also United States v. Bressler, 772 F.2d 287, 292 [56 AFTR 2d 85-5884] (7th Cir. 1985); May v. Commissioner, 752 F.2d 1301, 1304 & n.3 [55 AFTR 2d 85-747] (8th Cir. 1985); United States v. Wilber,  696 F.2d 79, 80 [51 AFTR 2d 83-619] (8th Cir. 1982).

The letters also contain additional hackneyed arguments that have been universally rejected by this and other courts. See Wilcox v. Commissioner, supra; see also Fujita v. Commissioner, T.C. Memo. 19 164 [1999 RIA TC Memo ¶99,164]. We shall not painstakingly address petitioner's assertions “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” See Crain v. Commissioner, 737 F.2d 1417 [54 AFTR 2d 84- 5698] (5th Cir. 1984). No useful purpose would be served by any further explanation. Suffice to say, petitioner is subject to Federal income tax during the relevant years, and we sustain respondent's deficiency determinations.

While reliance on advice as to whether a return must be filed may constitute reasonable cause, the person giving that advice must be competent to render that advice and the reliance on that advice must be reasonable.  (Emphasis added)

So if Kent's reliance on the letters was ever reasonable, it stopped being reasonable in 1999.

It is possible that the letters may have been responsible for Kent not being indicted for income tax evasion, so maybe he did get his money's worth. That is what letters like that were designed for.


I noticed this website which had a post titled It Is Time To Rise Up Together and Demand HOVINDICATION.  I don't know who coined the term, but inspired by it I am going to refer to Kent's most passionate public supporters as Hovindicators. I think they may like it.

Exercise For The Students

I'd be happy to get a guest post from someone who would like to thoroughly deconstruct the arguments in the letters.  I really don't have the patience.

Sunday, January 25, 2015

Latest Hovindication Developments

I have been following the tax controversy surrounding Kent Hovind a/k/a Doctor Dino for over two years.  As he nears the end of a long sentence on a variety of tax related charges, he is now facing a new trial related to the filing of a lis pendens on property that the government had seized.  The new trial has motivated a number of supporters to start a public campaign to free Kent.  Kent is giving numerous telephone interviews.  The effort has not yet really broken into the mainstream, but I think it may soon.  Kent is represented publicly by his old friend Ernie Land.  His most vocal new supporter appears to be Rudy Davis.  I received an email from Rudy that summarizes the most recent efforts.  I'm reproducing it below without further comment.

Hello Mr. Reilly,

FYI below.... I didn't create these but I will be sending them out to as many people as I think can help.

Christian's come together to give counsel on how to FREE KENT HOVIND! Stephen Broden supports FREEDOM for Kent Hovind injustice will not stand.  And God will not let the pooch get screwed whether I do a good job or not.  :)

Becuase of Jesus Christ,


Dear Congressman ______,

I am contacting you with an urgent appeal for a Congressional investigation. As you are well aware, the IRS has recently been under Congressional scrutiny for abuses of their authority in targeting conservatives for audits and denials of benefits. 

What you may be unaware of is a gross injustice in the case of Kent Hovind. Hovind is a conservative, somewhat controversial Christian minister who has served 8-years in jail on trumped up multiple counts of tax-related charges. Hovind, having served his prison time, was scheduled to be released in early 2015. The U.S. government has now brought up additional charges against Hovind while he is still in jail, for mail fraud and contempt, basically for using the prison mail system to appeal his previous convictions.

The lead prosecutor in the original case was arrested for attempted child molestation charges 8-months after Hovind was sentenced. He most certainly targeted Hovind for his creationism beliefs, not because he was a grievous tax cheat. 

The judge in the original case, Judge Margaret Casey Rodgers, made a statement during the trial that what Hovind did was “worse than rape,†according to several eyewitnesses. She has also ruled against Christian causes in other cases. Her biases against all things Christian are not in question. She is scheduled to preside over the next Hovind trial set to begin in February 2015. She has refused to recuse herself from his upcoming trial. 

Hovind is facing an additional 20-years in prison, again for conjured up misapplied charges. He will not be able to receive a fair trial from a judge who is biased against him, due to his unwavering Christian faith. 

I am making this appeal in hopes that the Congress will thoroughly investigate this blatant case of judicial and prosecutorial misconduct. Kent Hovind is eager to testify before Congress against the IRS for their abuse and targeting of himself. 

As a former New York City police officer with over 20-years of service, I have never seen a more egregious case of American persecution against an individual for what I believe are his conservative religious beliefs, using tax code violations as an ruse to keep him incarcerated. Now they are seeking to give Hovind a life sentence. 

I hope and pray that you, through Congress, will thoroughly investigate this case and put an end to this IRS abuse, judicial and prosecutorial misconduct, and obscene injustice case. Kent Hovind needs to be released from jail. He has already served well more than enough time for his alleged tax crimes. 


FREE KENT HOVIND: A Case of U.S. Religious Persecution jailhouse interview with Kent Hovind on the Manning Report Hovind The Real Reason he was sent to jail*****************************************************

Hello Pastor xxxxx,Hebrews 13:3 Remember them that are in bonds, as bound with them; and them which suffer adversity, as being yourselves also in the body.

2 Timothy 1:16 The Lord give mercy unto the house of Onesiphorus; for he oft refreshed me, and was not ashamed of my chain:
God bless you Sir. I pray you take the time to digest the information in this email regarding an innocent baptist minister in prison and under current persecution.

I along with so many others are deeply grieved in our hearts when we hear that they are trying to keep Kent Hovind in prison for the remainder of his life as people were looking forward to him being released in 2015.  I truly believe this is an innocent man in prison and a POW (Prisoner of War) in the spiritual warfare of Good vs Evil.  God will get the glory in Kent's case no matter what.  As you may know, Kent will not compromise with the devil and has maintained his innocence the entire 99 months that he has been incarcerated.

20,000 people have signed a petition to free Dr. Hovind. Below is a form letter we are sending out to anyone and everyone who might be able to help shed some light on the injustice being done to this Christian minister.

We are asking that you educate yourself and take whatever action God leads on behalf of our brother in the Lord, Kent Hovind.

Live jailhouse interview with Kent Hovind on the Manning Report KENT HOVIND: A Case of U.S. Religious Persecution Hovind The Real Reason he was sent to jail****************************************
Hello John Doe,

Can you please review Kent's situation and use your influence to shed additional light on Kent's case?

Al Sharpton owes 4.5 million in back taxes and visits the whitehouse over 80 times and Kent Hovind gets sent to prison as an innocent man.  We need you to expose this injustice.

Kent Hovind has a new scheduled court date on February 9th of 2015. We need a strong influence by that date.
My name is Rudy Davis. I am a follower of the Lord Jesus Christ and a friend of Kent Hovind.  We recently visited this innocent man in Santa Rosa County Jail.

Kent Hovind was talking about the New World Order decades ago.  Four federal agents surrounded his wife in a night raid and took her to prison.

Live jailhouse interview with Kent Hovind on the Manning Report Hovind explains the false charges against him in 8 minutes. Hovind The Real Reason he was sent to jail for Creationist Because of Tax Fraud or His Religion? reasons why evolution is so stupid Hovind speaks from prison, January 9th, 2015 Steve Anderson interviews Kent Hovind.'s prosecuting attorney John David Roy Atchison US Attorney (suicide pedophile)
I am writing to you today, with concerns for the injustices that I perceive have been perpetrated upon one Mr. Kent  Hovind. If you are not currently aware of who this man is, you can do a quick search for him on the internet, as he is a well known Baptist minister who made great strides in promoting Creationism before he was incarcerated for charges of tax fraud, structuring, and threatening an IRS agent. Sir, I will attempt the best I can to show you why I believe these charges are false, and why this man should not be where he has been for the past 8 years of his life.  Please note that they are now trying to throw additional mail fraud charges at the man for another 100 years in prison.

On the issue of tax fraud. First , I would like to make clear that I believe Kent's witness, yet that in itself would not justify any thing. Yet I humbly ask you sir, to research these things, and view the trial transcript, or at least do what you can to bring this to your congregations attention. These are Kent's own words below, and the "she" is Assistant U.S. Attorney Michelle Heldmyer.

"Attached to my third affidavit (Exhibit #2) were letters from three tax professionals whom I had paid to review my ministry to insure I was obeying all tax laws that applied. IRS booklet #517 says I am to ask these three professionals if I have tax questions. Each professional- an IRS enrolled agent, a CPA and an attorney stated clearly that I was violating no law and owed no tax. She withheld these letters from both the Grand Jury and the Petit Jury to deceive them deliberately. I had also attached several letters that I had written to the lead IRS agent who testified against me, Scott Schneider. I sent him the letters from the tax professionals and asked him to please show me if I was violating any law. He had never answered a single letter and admitted so at trial. Attorney Heldmyer had all of this exculpatory evidence a full year before the trial yet she misled the juries and the court by maliciously withholding it. She violated her duty to insure I received procedural justice by not demanding his testimony be stricken from the record and the case be dismissed."

Please note that this man, Kent Hovind, is and never was a tax protester, only a man exercising his religious freedom in running a ministry dedicated to promoting the Biblical account of creation, and preaching the Gospel of Jesus Christ. As such, he was told by the very people that the IRS told him to contact with assistance in regards to his status concerning taxes that he owed none. They assured him, and this man has the letters to prove such,  and that he was violating no tax law. Yet this man is, and has been in prison for the last eight years. This sir, is an outrage and I am doing my best to make this public, because there are three people, and possibly more, that have to be held to account, which you can make happen. Assistant U.S. Attorney Michelle Heldmyer, IRS Agent Scott Schneider, and Judge Margaret Casey Rodgers. I beg of you to consider , just the possibility of Mr. Hovind's allegations being true, in just the section above. That only scratches the surface of the injustices that I have perceived of this case.

Secondly, on the issue of structuring. Sir, do you realize how utterly stupid this law is? It states that if a person makes withdrawals of less than 10000 dollars in order to avoid the bank reporting the transaction to the government (CTR), then that person faces a hefty fine and up to 5 years in prison, without regarding whether that person was actually laundering money, or if the funds were obtained illegally, but only for the fact that the person didn't want the transaction of funds to be reported. I refer you to the 1994 case Ratzlaf v. U.S., in which the defendant was not guilty for the reason that the U.S. Supreme Court sensibly interpreted the word "willfully" in the Bank Secrecy Act to mean that in order to convict someone of structuring, the government had to show that the defendant knew that structuring was illegal. It wasn't enough to show only that the defendant knew about the reporting requirement. Yet why is Mr. Hovind in prison? He was told by his Pastor to not do it, in order to avoid the reporting, yet does this mean Mr. Hovind was laundering money, or that he was stealing from somebody, or that he was drug dealing? Some people, like myself, would rather not be reported to the government for withdrawing my own funds (yet this man was withdrawing ministry funds!), and had no idea that it was illegal to withdraw 9999 instead of 10000 to avoid this (despite the funds being totally legitimate without me having anything to hide). How many Americans do not know this sir, and are being criminalized by this stupid law? You know that they took the word "willingly" out of the Bank Secrecy Act, so that now people can be prosecuted even if they don't know that this action is illegal despite the legitimacy of their funds? This is outrageous, and it is outrageous that Mr. Hovind has given 8 years of his life for this.

Thirdly, we should consider on what grounds they convicted this man of threatening an IRS agent while performing his duties on Mr. Hovind according to his account, can only surmise that since he prayed for that man on his radio show, it was interpreted as a threat against him. Should it matter what we pray to our God or gods for regarding people? Is that not our religious right? Even if I was praying death upon someone (Psalm 109), how is that perceived as a threat to do someone harm, or illegal? Is this the land of the free?

Sir, this man Kent Hovind has many enemies, and few friends, and there are many lies concerning him spread across the internet. My greatest concern is that he is facing another one hundred years in prison for new charges being brought against him at the end of his sentence. Why? Why would they want to keep this man locked up after serving eight years in TWENTY different jails and prisons? It boggles the mind sir, and I am just asking that you review this for yourself, and hear both sides with an objective mind. I don't know whether you are a creationist, or an evolutionist,  I simply ask you as a representative of the American People, to exercise whatever power you have, to see that these questions are answered justly and thoroughly.

Thank you Sir,
Rudy Davis

Below is  a picture of Kent Hovind and his family.


Thursday, January 15, 2015

IRS Revokes Exempt Status Of Faux Veterans Groups

Originally published on on January 2, 2015.

And then they came for the veterans.   On Day 120 of the perennial never ending IRS scandal (September 6, 2013) (As I write this on New Years Eve, we are on Day 601 according to the TaxProf) stories were featured on the IRS investigating veterans groups to determine if the people involved in them were, you know, veterans.  On WND, we could read

The Internal Revenue Service, which has been caught harassing conservative organizations with demands for personal ideological details, such as the content of prayers, now is doing the same to veterans’ groups.

Probably the most moving section of [Irony Alert] Craig Berman's cinematic masterpiece Unfair: Exposing the IRS w as the interview with Russell Montgomery of American Legion Post 447 in Round Rock, Texas.

Dogs That Don't Bark

One of the rather curious things about the IRS scandal narrative is that the investigation of groups causes quite a bit of angst, but when the IRS actually takes action either denying or revoking exempt status, there is hardly a ripple on the tax blogosphere.   There have been a few denials of 501(c)(4) status, that have gone largely unremarked and now we have two revocations of 501(c)(19) status - Veterans Organizations. The rulings Private Letter Ruling 201451042 and Private Letter Ruling 201451041 give a history of the evolution of the tax treatment of Veterans' Organizations and highlight the abuse that the IRS was concerned about in the audits that created the flurry of stories last year and perhaps a chance to reflect on how the road to hellish tax complexity is paved with good intentions .

Why Is There A Special Section For Veterans Organizations?

That may seem like an irreverent question, but it is really not.  The IRS Manual notes

Veterans' organizations may also qualify for exemption under IRC 501(c)(3) as charitable organizations, 501(c)(4) as social welfare organizations, 501(c)(7) as social clubs, or 501(c)(8) or 501(c)(10) as fraternal organizations, if they meet the requirements for exemption under those sections.

So why did we need a special section? One of the rulings explains.

In 1972, Congress enacted I.R.C. § 501(c)(19) and I.R.C. § 512(a)(4) to address the concern that a veterans organization exempt under I.R.C. § 501(c)(4) or (7) may be subject to unrelated business income tax on the provision of insurance to its members. S. Rep. No. 1082, 92d Cong., 2d Sess. 2 (1972) reprinted in 1972-2 C.B. 713.' Section 512(a)(4) excludes amounts attributable to, or set aside by a §501(c)(19) veterans organization for the payment of life, sick, accident, or health insurance benefits for their members and their members' dependents.

The Problem

The way the world looks today, as time goes on, there will be fewer and fewer veterans.  According to this table over half of today's over 22 million veterans are Vietnam Era or earlier.  The VA projects that the number of veterans will decline by about a third between now and 2043.  Organizations exempt under other sections that don't want to dwindle can probably adapt to this by expanding membership to non-veterans sympathetic to the goals of that particular organization.  It is worth noting that the Grand Army of The Republic, an organization of Union veterans that peaked at 400,000 and was quite influential, decided not to take that course and dissolved in 1956 when Albert Woolson, a drummer boy in the First Minnesota Heavy Artillery Regiment, died at the age of 106.

501(c)(19) organizations have a pretty stiff statutory requirement to have a high veteran percentage.  75% of the members must be actual veterans and 90% of the rest have to be cadets or spouses, widows, ancestors or lineal descendants of past or present members of the Armed Forces.  The latter is rather an expansive group when you consider the lineal descendants, but the 75% will be a tougher and tougher standard to meet.

And of course, if there is a statutory requirement, at some point, you expect that there should be some effort to determine that the standard is actually being met.  That was the cause of the controversy noted back on Day 120 of the scandal. Posts were up in arms about IRS auditors who were challenging them to prove that their members were veterans.   There were concerns about privacy since the forms that establish veteran status have other information on them.

The Abuse

I think it is rather unfortunate that we have come to rely on the IRS to bless organizations for purposes that have nothing to do with federal income tax.  Organizations get an undeserved credibility boost from 501(c) status and sometimes state regulatory actions hinge on federal tax exempt status.  In the states where the two revoked organizations, which I will collectively call Have Another Drink (HAD),that includes the right to serve liquor to the public without having a substantial restaurant.  The facts are similar in both cases.  This narrative is drawn From PLR 201451042.

There are eight purposes that a 501(c)(19) organization can serve. It does not have to do all of them, but some of them need to predominate.  The are providing for community social welfare, assisting needy and disabled veterans, providing entertainment, care and assistance to hospitalized service members, ceremonies, programs of a religious, charitable, scientific, literary or educational purpose, patriotic activities, providing insurance benefits for members and their dependents and providing social and recreational activities for members.

What HAD mostly did was run a bar for the general public and members.  Mostly the general public.

The President had purchased the bar from someone else sometime after 2000.  HAD paid mortgage interest and auto expenses on behalf of the President.  As far as HAD being a membership organization:

[HAD] did not charge membership fee to any members. The general membership has little to do with the operations and financial matters. The general membership is not required to attend any membership meetings. The officers were named by rather than voted for. [Somebody or other] has been the president of [HAD] since he bought the business from prior owner. For the years under examination, [HAD] provided ten copies of DD- 214 and other alternative military forms. The [bar] is open to general public. The membership is not required to purchase food and drink from the for consumption on- site or off site. [HAD] does not have adequate records to represent membership sales. It is certain that over 80-90% of sales were from nonmembers.

Section 501(c)(19) of the Code does not define the meaning of member as being an individual who has the right to control the day-to-day operations of the organization, such as having the right to vote. Membership in a section 501(c)(19) organization is based upon analyzing the organization's organizing document, which defines the rights and obligations of membership.

In determining whether an individual is a member of a veterans' organization for purposes of section 501(c)(19) of the Code, such an individual must be involved in the organization in such a manner as to further the organization's exempt purposes, rather than joining to receive a personal benefit, such as the right to receive free food while being a patron at the bar.

So it seems that in order to be able to legally have a bar, somebody got some veterans to sign a membership book and provide a copy of their discharge papers.  Apparently, they get a free hamburger with their beer or something like that.

501(c) Has Way Too Many Flavors

There are 29 different types of 501(c) organizations, each with their own peculiar quirks.  At the heart of the main IRS scandal and the veteran mini-scandal are people exploiting the quirks for reasons that have nothing to do with the federal income tax.  Organizations were seeking 501(c)(4) status so that they could engage in political activity without disclosing donors - the "dark money" groups.  Of course the organizations have to devote 51%of their efforts to "social welfare".  My impression is that the "social welfare" could be educating people about how the Founding Fathers would have hated or perhaps loved Obamacare making it relatively easy to segue seamlessly to the 49% political piece.

Here we have somebody setting up a faux veterans group, because they live in a state that has issues with bars being open to the general public. In both cases we end up with scarce IRS enforcement personnel making intrusive inquiries into groups that are not even trying to avoid federal taxes.  They covet exempt status for other reasons and we are charging the approximately 20,000 people , mostly accountants by training, who should be working on closing a tax gap estimated as being in the $400 billion range with trying to determine  how political groups are or whether the purported veterans group is actually run by veterans.

How To Fix It

In my mind, the solution is to have only two types of not-for-profits.  One would be the traditional 501(c)(3) groups - religious, charitable, scientific, etc- that can receive tax deductible contributions.  The balance would be the rest - social clubs, trade organizations (like the NFL), fraternal organization - basically any group that is not organized to make a profit and that does not have inurement.  Many of those organization operate at break-even and would not be harmed by requiring them to file Form 1120, the corporate income tax form.  Give them a deal similar to what cooperatives have.  If the organization has a profit let it either borrow legitimate expenses from the first six months of the following year or issue a rebate to its members. If the American Institute of Certified Public Accountants or the American Bar Association or the United States Chess Federation want to accumulate reserves beyond six months worth of expenses, let them pay taxes.  In the case of the AICPA, I would hope they would go with the rebate, but that's just me.

Not Going To Happen

If you want to know why a proposal like the one above will never come to pass, take a look at the Comments to the Tax Reform Working Group of the House Ways and Means Committee.  A large number, if not the majority, of the letters take the form of approving of simplification in general while pointing out how that particular group's favorite special provision needs to stay and probably be beefed up a bit, what with all the money that will come in from getting rid of all those other special provisions.  If you scroll down you will find the Knights of Columbus explaining why 501(c)(8), which I bet many of you have never heard of, is so important.

The role we play in the health of our communities is a critical one, and we ask that our lawmakers commit themselves to protecting the 501(c)(8) designation during the ongoing discussions over tax reform.

At any rate, now we know that perhaps the IRS was not actually targeting veterans organizations.  Rather, they were trying to discern which of the purported veterans organizations were actual veterans organizations.   Of course, there is nothing scandalous about that, so why bother mentioning it.  I guess that is what the rest of the tax blogosphere is thinking.

Some Unrelated Notes

Happy New Year, as this turns out to be my first post of 2015. December 2014 was my highest traffic month ever, so I look forward to 2015 being perhaps the breakthrough year in which I become the first tax blogger to give up his day job.

Writing about the veterans groups, reminded me of something else that I see rarely commented on.  That is the effect that having many veterans in a group has on the non-veterans.  Samuel Johnson remarked that "Every man thinks meanly of himself for not having been a soldier or been to sea ".  I expanded on that idea a bit with something of a memoir of my first sort of accounting job which had me hanging around with a veteran heavy group, which included one who was rather inspiring.  It is a pretty meandering story, but if you want to sample my writing when I am entirely off the tax reservation, you might want to check it out. The title is "How I Accidentally Impersonated A Veteran".

Monday, January 12, 2015

Fourth Circuit Holds Former Shareholders Not Liable For Corporate Tax In Midcoast Deal

When the Tax Reform Act of 1986 was enacted, I was all over that thing. One thing that was crystal clear to me was that a private company that had appreciated assets or assets likely to appreciate needed an awful good reason to remain a C corporation. At the time I was a rising star at Joseph B. Cohan and Associates, the top public accounting firm in Worcester Massachusetts. At least that's what I thought and so did my managing partner Herb Cohan, whose eponymous father, with a Massachusetts CPA certificate in the low two hundreds, I used to drive home when I was a junior accountant. I used my vast influence to require that senior accountants give an explanation as to why each C corporation that was not electing S status was not electing it. The issue was framed not as why, but rather as why not. There were some good reasons and there were some dumb reasons, but we looked at it very hard.

I'm sure there were other firms that did almost as good a job as JBC, but subsequent experience showed that there were many that did not. Either that or they had mulishly stubborn clients who liked getting all their income on a W-2, so they could get refunds rather than make estimated tax payments, or some other inane reason. There might also have been insurmountable problems to qualifying the corporation as an S corporation, such as uncooperative non-qualifying shareholders.

Every problem is an opportunity for somebody and the C corporations with appreciated assets were an opportunity for Midcoast Acquistions Corp. Midcoast offered a great deal for private C corporations that had not foreseen that they would someday liquidate their appreciated assets. After the corporation had sold all its assets it would have a pile of cash and the obligation to file a corporate income tax return with a substantial balance due. Tarcon Corporation, which is discussed in the recent Fourth Circuit decision Starnes v. Commissioner had $3.1 million in cash and about $880,000 in liabilities (mainly the expected corporate tax on its gain from selling its warehouse) giving it a net worth of about $2.2 million.  Midcoast paid Albert J. Starnes, Ronald D. Morelli, Sr., Anthony S. Naples and Sallie C. Stroupe, the Tarcon shareholders $2.6 million for their stock in the company.

Not that they thought it was their problem or their business anymore, the former shareholders thought that Midcoast was going to operate Tarcon as a going concern.  They were a little mystified as to how Midcoast would make this all work, but it really was not their problem.  Or so they thought:

The Former Shareholders testified they did not understand what was meant by the “asset recovery business” or what MidCoast planned to do with Tarcon, but they made no inquiries.  Naples thought “it did sound strange,” but he believed that MidCoast bought “bad debts” to “use ... as a write-off against the companies they buy that have money.”  Starnes testified that “[i]t wasn't something I wanted to understand. Once they bought my stock, they could do what they wanted with Tarcon.” 

Midcoast did not operate Tarcon as a going concern.  Here is what happened instead:

If all had gone as the Former Shareholders testified they thought it would, MidCoast would have continued operating Tarcon and in 2004 paid Tarcon's 2003 taxes. That is not what happened. Instead, on November 24, 2003, eleven days after the November 13 closing, MidCoast sold its Tarcon stock to Sequoia Capital, L.L.C., a Bermuda company, for $2,861,465.96. Two days later, all of the funds in Tarcon's SunTrust account were transferred to an account with Deutsche Bank AG, though still under Tarcon's name. Then, on December 1, 2003, $2,960,000 was transferred from the Deutsche Bank account to an account in the Cook Islands in the name of “Delta Trading Partners,” and $126,822 was transferred to a MidCoast bank account. After December 1, 2003, Tarcon never had more than $132,320 in any account.

Tarcon filed its 2003 federal tax return in July 2004, reporting capital gains of $1,009,483 and ordinary income of $1,557,315, principally from the sale of the warehouse and the related grounds. Tarcon also reported, however, two large losses. First, it reported a short-term capital loss of $1,010,000 resulting from a purported December 2003 interest rate swap option. Second, it reported an ordinary loss of $1,950,000 resulting from a transaction involving an asset denominated “DKK/USD BINA,” which was purportedly acquired on December 29, 2003, and purportedly sold on December 31, 2003. Consequently, the 2003 return stated Tarcon's only asset was $132,320 in cash. Thus, the return reported an overall loss and no tax due. In 2005, Tarcon filed its 2004 federal tax return, marked as its final return, reporting no tax due and no assets.

You will probably not be shocked to learn that the IRS disagreed with Tarcon's return nor that they could not collect the deficiency from Tarcon.  Remember how the former shareholders thought thought that none of this was their problem.  Well, they were forced to think again.  The IRS started chasing them for the money under a "transferee liability" theory.  The Service has done this with other Midcoast deals meeting with mixed success.  The heirs of the owner of a corporation that at one time was the largest owner of Boston taxi medallions were succesful at resisting the claim.  The former owners of a dude ranch corporation did not do as well.

The cases turn on fine points of the execution of the transactions and interpertations of state law concerning transferee liability.  The Tax Court had found the former shareholders not liable and the Fourth Circuit upheld the Tax Court's finding.  The legal analysis is rather challenging for a CPA, so I will just give you a taste:

Under North Carolina law, the question of constructive knowledge has two components. As applied to the circumstances here, they are: First, did the Former Shareholders have actual knowledge of facts that would have led a reasonable person concerned about Tarcon's solvency to inquire further into MidCoast's post-closing plans? Second, if the Former Shareholders were thereby on “inquiry notice,” whether the inquiry a reasonably diligent, similarly-situated person would have undertaken revealed MidCoast's plan to leave Tarcon unable to pay its 2003 taxes?

The practical lesson is much clearer.  Even though the Tarcon shareholders prevailed, they still, in effect, paid more than half the amount of the tax to Midcoast and the IRS tenacity in pursuing them must have made for a lot of stress, not to mention legal fees.  A timely S election would have avoided all this.  By timely I mean several years before the sale, ideally more than 10. If you have appreciated assets in a private C corporation, you really need to consider whether you might liquidate in the future and take affirmative steps sooner rather than later.

You can follow me on twitter @peterreillycpa.

Sunday, January 11, 2015

Tax Court Rules 1099-C From Portfolio Recovery Associates Not Valid For Year Issued

I always like it when I can unreservedly cheer a taxpayer win. The Tax Court decision in favor of David and Carla Stewart makes me feel that way.  There are certain tax provisions that I clearly see a need for, but nonetheless have an adverse emotional reaction to.  Taxing people on cancellation of indebtedness (COI) is one of those provisions.  Some commenter will probably explain why we need it and why it is fair, but I still don't like it.  It often seems like kicking people  when they are down.  The principle is that if you borrow money and it is determined that you do not have to pay it back, you have taxable income at the point of that determination.  Various types of financial institutions are required to send people 1099s when debt is discharged.  The 1099 serves as an educational tool to apprise you of your obligation to report COI income.  The 1099 also rats you out to the IRS.

David Stewart defaulted on a credit card obligation to MBNA some time between October 22, 1994, when the debt was incurred, and September 6, 1996, when MBNA wrote the obligation off.  At some point between September 12, 1996 and December 28, 2007 NCO Portfolio Management acquired the defaulted account from MBNA.  On December 28, 2007, Portfolio Recovery Associates LLC (PRA) acquired the account from NCO.

PRA, an LLC, is a subsidiary of Portfolio Recovery Associates, Inc. , whose motto or mission statement or whatever is "We are giving debt collection a good name." According to its 10-K, it has, over 15 years, acquired receivables with a face value of $64.6 billion for $2.1 billion.  The company is number 63 on Forbes list of America's best small companies.

Whether PRA's course of action with respect to David Stewart is helping give debt collection a good name is a matter of judgment:

  PRA was aware that a State statute of limitations period with respect to collection on petitioner's defaulted account expired in February 2001. It appears from the record that PRA attempted to revive the defaulted account in an attempt to coerce petitioner, using automated mailing and automated telephone calls, to make voluntary payments to PRA despite over a decade of nonpayment and an expired limitations period.
If you google PRA, you will find many complaints about this type of activity along with advertisements from attorneys who will help you get them to stop.  In some cases, it appears to not be that hard. Mr. Stewart sent them a letter, which they received on April 14, 2008.  They then ceased collection activity.  Subsequently they issued Form 1099-C to Mr. Stewart in the amount of $8,570.71 for the year 2008.  I'm reasonably certain that they were not being vindictive, but rather just trying to be in compliance with reporting requirements.  Mr. Stewart might have felt differently about the matter.

The Stewarts did not include the $8,570.71 as income on their joint return.  The IRS issued a deficiency notice showing additional tax of $2,139.  The Stewarts appealed to Tax Court.  They disputed the amount of the COI income and asserted that whatever discharge there was did not take place in 2008.  The Tax Court agreed with them on the latter point making dispute about the amount irrelevant.  The discussion of when the discharge might have taken place is a little tedious:

We have acknowledged that it is often impossible to find only one event that clearly establishes the moment at which a debt is discharged, such as pinpointing the moment when property has been abandoned. Instead, there can be a series of identifiable events, any one of which could reasonably indicate that a debt has been discharged.

Even the expiration of the statute of limitations is not necessarily determinative.  There is a 36 month testing period after the last payment.  Regardless, the Tax Court, although it did not specify an exact date of discharge, concluded that it was a long time before 2008.  I should note that if debt is discharged in a year in which you are insolvent, COI is taxable only to the extent that it makes you solvent.

Practice Tip

As the experience of the Stewarts shows you should not take a 1099-C at face value and just report the income and pay the tax with no reflection.  On the other hand, most tax preparers will tell you not to ignore it either.  Most of us would report the income and then put in a negative adjustment for the same amount.  It is possible that the Stewarts did that and still got picked up.  I have to wonder why the IRS was so aggresive in this case.   The debt was ancient history when PRA picked it up.

You can follow me on twitter @peterreillycpa.

Federal Circuit Finds Statute Circular - Invalidates Regulation

It's really too bad. I cannot figure out a way to make the Federal Circuit decision in Dominion Resources interesting to a normal person, but I feel compelled to write about it anyway, because it is so interesting to me.  It is also noteworthy in that it is not all that common for a regulation to be deemed invalid.

Here is the deal.  Suppose you borrow some money and use it to buy some land and then get a construction loan and use that to start building a building.  Any of the interest that you pay on those loans will not be currently deductible.  Instead it will be capitalized as part of the building cost.  The interest will continue to be capitalized until the building is "placed in service".  That's already too complicated for some people, but lets keep going anyway.  You were a real genius when you decided to build this building and it is producing oodles of cash above the debt service.  You build up a pile of cash which you use to buy land and build another building.  Even though you did not borrow any money for the second project, you might have to start capitalizing interest expense again, because you could have used your cash hoard to pay off the debt incurred on the first project.

Actually implementing this rule for a large company with lots of projects going on and many loans at varying interest rates requires fairly complex regulations.  Thanks to this decision a part of those regulations is now invalid.  What part you ask ? 1.263A-11(e)(1)(ii)(B).  Here was the specific issue:
Dominion provides electric power and natural gas to individuals and businesses. In 1996, it replaced coal burners in two of its plants. When making those improvements, it temporarily removed the units from service — one unit for two months, the other for three months. During that time, Dominion incurred interest on debt unrelated to the improvements.

The parties agree that a certain amount of construction-period interest should be capitalized instead of deducted, but the extent of that capitalization requirement is the essence of this dispute. The parties agree that the Treasury regulation plainly defines production expenditures to include not only the amount spent on the improvement but also the adjusted basis of the entire unit being improved. For simplicity, adjusted basis can be considered as the original cost of the unit. The issue on appeal is whether that latter inclusion of the adjusted basis of the unit violates various statutory provisions. Because the regulation requires a larger base amount (by including the adjusted basis amount), it results in a larger amount of interest to be capitalized. Thus, the practical impact determines how much interest Dominion must capitalize instead of deduct from its taxable income as a result of burner improvements in its power plants.

So the IRS position in the regulations is that when the plant goes off line for improvements, interest attributable to the remaining basis of the whole plant, not just the improvements, is capitalized.
In order to analyze the validity of the regulation, the Court goes through a two-step process.  The first step is to determine whether the regulation contradicts the statute.  There was a challenge there:
As to Chevron step one, the CFC [Court of Federal Claims] correctly recognized that the regulation does not contradict the text of the statute but only because the statute is opaque.
Regardless of the definition of “production expenditures,” the statute provides or assumes that sum would have been available to pay down the debt. The conclusion has been assumed in the premises, and therefore the statute is circular.

Subsection (a)(1) refers to (a)(2) refers to (f)(1) refers to (f)(2) refers to (f)(4)(C) refers back to (a).
Since the statute is not clear, the Court moved on to intent and there found that the regulation missed the point.  The amount of interest to be capitalized is supposed to be based on the "avoided cost" principle.  If you had not spent the money on the improvement, you could have paid down debt.  Taking the plant off line does not free up cash to pay down debt.  The Court constructed an illustrative example:

For example, let's say an owner purchased real property for $100,000 by a loan with a 3% interest rate. A few years later, she made an improvement that cost $5,000. If she had used that $5,000 toward the debt instead of the improvement, she would have avoided accruing $150 in interest ($5,000 multiplied by 3%). The avoided-cost rule requires her to capitalize that $150 in interest. The Treasury regulation, however, requires her to capitalize $3,150 in interest ($100,000 + $5,000 then multiplied by 3%). That result makes no sense, because there is no way that she could have avoided accruing $3,150 in interest by not making the improvement, as she did not expend or incur an amount equal to $105,000 when making the improvement.

If you are one of the possibly scores of people who got through this, congratulations.  You may want to read the full text of the case, because there is an interesting dissent.

You can follow me on twitter @peterreillycpa.

Kent Hovind Update

Kent Hovind has quite a social media campaign going on as we approach his February 9, 2015 trial for mail fraud.  I will be covering it tomorrow (January 12 and 13) on  In the meantime I have asked Bob Baty who has follows the Hovind developments on facebook to provide me with some links to current Hovind material.  Bob has also included something of a list of items that he things Kent does not address very well in the interviews.

I get the idea that I have a very limited view of what is really going on with Kent and the people that are supporting him, but here are some of the links I come up with and my comments on the video.  It was hastily put together.  If I think of more I will try to send it. Sorry there is not more details.  I'm spread a little thin and am not particularly efficient regarding such things.  I am expecting any day now to be left in the dust as new developments seem to be multiplying faster than I can keep up with them.

Ernie Land:

Steven Anderson

Rudy Davis/LoneStar1776

"Gea Ambrosia"/Club Creation

Jerry Rose

Dan & Sam: God's Property Radio

Jacob Kachelhofer/Kent Hovind: Political Prisoner


Free Kent Courthouse Prayer Rally

Laura Beth Breaker/Kent's "secretary"
Robert R. Breaker/Laura Beth's husband

Regarding the video you referenced, Peter, I have the following comments which I thought of as I was listening to it again.

Video Link:


1. Kent wants to talk about anything but the merits of the case against him.
2. Kent refuses to take personal responsibility.
3. Kent claims he did nothing wrong; according to him, of course.
4. Kent complains about what he thinks was done wrong with his case, not what he did wrong.
5. Ha, ha!  Kent just wants his damages and to be let go.
6. Kent claims God is going to work it all out; God has been doing that, and Kent keeps defying God.
7. Kent, I showed you and your people what you did wrong; you refuse to deal with it.
8. Kent continues his lame attempt to set up his "Cheek Defense".
9. Kent is trying to mobilize his "sovereign" constituency to bug Government folks.
10. The prior charges and current charges are most reasonable in light of Kent's conduct.
11. Kent is preaching to his choir while refusing to meet and deal with any informed interviewer.
12. No Kent, your paper shuffle did not change your proprietorship into any other business form.
13. Yes, Kent, calling employees contractors does not make them contractors.
14. Kent, you continue to lay off your actions on others.  Accept responsibility like a man, and repent.
15. Kent, at this point, it seems appropriate to say you are lying about the structuring issue.
16. 6 years Kent, and you never got around to publishing the trial transcript you got.
17. Kent, Kent, Kent, you would not, yet, confess the wrong you have been doing for decades.
18. Kent, you did break laws, various laws; you been doing it for decades.
19. Kent, you are, indeed, a tax protestor.
20. Kent, you are part of that crowd, and the sovereign citizen movement as well.
21. Kent, tell us again why you never got around to publishing your trial transcript.
22. Kent, you didn't live in a church parsonage, drive a church van.
23. Kent, you lie when you claim you didn't own anything, and deny having income.
24. Kent, you and your people do, in fact, "glory" in the suicide of one of the prosecuting attorneys.
25. Kent, why don't you tell what you really know about the "whole truth" about filing of the lis pendens?
26. Kent, your narcissism is showing; it's all about you wanting attention!
27. Kent, why not provide the actual prayer text that was treated as threatening?
28. Kent, why not explain the obstruction charge involved so much more than that prayer?
29. Kent, I know what I am talking about, I've heard the other side; you are guilty as charged, and worse.

Saturday, January 10, 2015

Sixty Four Dollar Question - Eleventh Circuit Rules IRS Can Charge Preparers For ID Numbers

Originally published on

 I kind of admire Jesse E. Brannen, III, although I have to say he could have found a better use for his time and that of the Eleventh Circuit in my humble opinion. He was suing the IRS for $64.25. That is an odd amount, but it is not random. Of course, when somebody is suing for a trivial sum like that, it will usually be a class action. Hey, I'm part of the class - Hoorah. $64.25 is what it costs to get a PTIN. A PTIN is a Preparer Tax Identification Number.

I have to make a confession of wild recklessness here. Beginning with the Tax Reform Act of 1976, people who were preparing tax returns for compensation had to put not only their clients identifying numbers on the return, but also their own. For many years that would be your social security number. PTINs were introduced because of concerns about identity theft. You could still use your social security number, but most people got PTINs, which were free. I never bothered. I don't know why - just one more thing, I guess. I had a CAF number from the IRS that I had to use when I got a power of attorney. I also reasoned or, perhaps rationalized, that anybody who got their hands on a return I had signed as preparer would be a lot more interested in stealing the taxpayer's identity than mine. At JBC, we didn't call ourselves the high net worth group for nothing.

That changed recently. Everybody who is a paid preparer has to get a PTIN. Preparers who are not CPAs or attorneys or enrolled agents will have to pass an exam and meet a continuing professional education requirement (15 hours). Robert Flach, The Wandering Tax Pro is fuming about CPAs not having the continuing professional education requirement. Like CPAs who do returns are just dying to have all of the 40 hours required for their license devoted to FASBs and auditing standards. Anyway, I had to finally break down and get a PTIN. I paid the $64.25, which I probably got reimbursed for, if I remembered to put in for it. Maybe that is the other reason I'm not that excited about being in Mr. Brannen's class.

His argument was pretty simple. The IRS does not have any statutory authority to charge for PTINs:
Brannen's sole argument is that the Department of the Treasury exceeded its statutory authority when it began charging fees for issuing and renewing PTINs. He contends that no statute enacted by Congress has provided the Department with that power. According to Brannen, 26 U.S.C. § 6109 provides for PTINs to help the Department identify taxpayers and tax return preparers, and thus helps the Department in its tax collection efforts. He insists that merely issuing a PTIN to a tax return preparer is not enough to justify charging a user fee.

That is not the end of the story, though:

Under the Independent Offices Authorities Act, 31 U.S.C. § 9701, agencies are permitted to promulgate regulations that establish a charge for a service or thing of value that the agency provides.
We readily conclude that, under the plain language of  6109(a)(4), the PTIN is issued to tax return preparers for a special benefit. And we readily conclude that the benefit — the privilege of preparing tax returns for others for compensation — is the kind of “special benefit” that qualifies under New England Power. The user fee here clearly confers a benefit which is not received by the general public.

Mr. Brennen wants me in his class and the Eleventh Circuit thinks I'm special. That's worth sixty four bucks and change even if I did forget to put in for it.

You can follow me on twitter @peterreillycpa.