Court Dismisses Suit Against Government From IRS Search That Led To Suicide

This post was originally published on Forbes Mar 17, 2015

The decision by the US District Court for the Northern District of Indiana in the case of James Simon et. al. v Special Agent Paul Muschell et. al. brings back a tragic story.  On November 6, 2007, IRS special agents, led by Paul Muschell searched the home of James and Denise Simon.  Three days later, Denise committed suicide.  She left several notes.  The note to her husband read:

Dear Jim,

I want to know that I have always totally loved you.  I know you are the most trustworthy person I have ever met.  I wish I had strength to stay by your side and fight these terrible accusations, but I am not strong like you.  I know you believe in the legal system, but I do not.  If there is any afterlife, you can be sure I will be watching over you.

I love you from the bottom of my heart.  I would have enjoyed growing old with you, but that is not to be my journey.  Please take care of the children.  They will need you.

James Simon filed a lawsuit about the raid in 2010.

As a result of defendant's investigation into the Simons and the subsequent search of the Simons' home, plaintiff filed the current suit against defendant, alleging intentional infliction of emotional distress, negligent infliction of emotional distress, negligence in obtaining the search warrant, negligence in executing the search warrant, trespass, invasion of privacy, and wrongful death.

Another Angle

Framing this story as the IRS acting with reckless abandon is complicated by one detail.  James Simon ended up being found guilty of filing false income tax returns, failing to file reports of foreign bank accounts, mail fraud and financial aid fraud.  He was sentenced to 6 years in prison and three years of supervised release.  He currently resides at the Rochester Federal Medical Center with a projected release date of September 2, 2016.  His appeal to the Seventh Circuit was turned down.  The argument in the appeal was actually rather interesting.

The IRS apparently became interested in Mr. Simon because there was a discrepancy between his lifestyle and his reported income.  From 2003 to 2006 his family apparently spent about $1.8 million and paid $328 in income tax.  Mr. Simon explained that by indicating that he had been borrowing all that money from various foreign entities that he was involved in.  One of the things that he was appealing was the trial court's dismissal of one of his back up arguments.  That was that even if they treated money he took from partnerships as distributions instead of loans, he still would not be taxable, because the partnerships had borrowed the money which would increase his basis.  That had me wondering, because that is the way it is.  That's one of the main things that cause you to prefer partnerships.

The Seventh Circuit saw that part of the confusion was sorted out.

The government does not now disagree with the general proposition that a partner is taxed on distributions removed from a partnership only to the extent that the distributions exceed the partner’s adjustedbasis inthepartnership. 26U.S.C. §731(a). In reviewing the written and oral exchanges at trial surrounding this issue, it is apparent that the district court (against all odds, given the manner in which it was argued) also understood this general legal proposition but simply did not agree that the evidence Simon sought to introduce was relevant to demonstrating his adjusted basis in the partnership.

Jack Townsend provided quite a bit of coverage to the appeal.  Besides the "loan issue" there was also a lot of discussion as to whether Simon was entitled to the regulatory relief that other taxpayers had received relative to FBAR non-compliance.

So in the wrongful death case, it would seem that it is tough to argue that the IRS had no reason to be looking into him.

The Decision

The government was seeking to have itself dismissed as a defendant. The basis was an exception to the Federal Tort Claims Act for claims arising out of the collection or assessment of tax. (Remember the government has sovereign immunity, but FTCA allows it to be sued under certain circumstances) The discussion was pretty lawyerly.

In response, plaintiffs argue that § 2680(c) does not apply in this case because the investigation into plaintiffs' finances and the IRS agents' search of plaintiffs' home was “purely criminal in nature, and, on its face, devoid of intent or effort to ultimately assess or collect taxes from Mr. Simon.”  Plaintiffs go on to argue that § 2680(c) does not apply in this case because the search of plaintiffs' home violated internal IRS policies, and therefore, was not for the purpose of assessing or collecting taxes. Finally, plaintiffs argue that the tort claims brought by R.S. and the Estate of Denise Simon do not arise from the collection or assessment of any taxes.

That argument didn't fly.

In this case, the court has no trouble concluding that § 2680(c) bars plaintiffs' claims. Although it is undisputed that the primary focus of defendant's investigation into plaintiffs was criminal in nature (DE # 49 at 2), several aspects of the IRS's investigation into plaintiffs' taxes reveal that the investigation and search of plaintiffs' home, which gave rise to plaintiffs' current claims, arose out of “the assessment or collection of” plaintiffs' taxes. 28 U.S.C. § 2680(c).

First, as plaintiffs' complaint and the affidavit in support of the search warrant issued for plaintiffs' home make clear, the search of plaintiffs' home and the investigation leading up to the search were conducted because the IRS believed that the Simons were evading taxes that plaintiffs owed to the United States government. .....

Furthermore, the investigation into plaintiffs' taxes, the search of plaintiffs' home, and the subsequent prosecution of plaintiff James Simon show that this entire process involved the assessment and collection of plaintiffs' taxes. As noted earlier, as a result of the investigation and search of plaintiffs' home, plaintiff James Simon was convicted of 19 federal offenses, ranging from filing a false federal income tax return to fraud involving federal financial aid. The sentence plaintiff James Simon received at trial was based, in part, on the amount of unpaid taxes that Simon owed to the IRS......

In sum, the court concludes that the investigation into plaintiffs' taxes and the search of plaintiffs' home arose out of “the assessment or collection of” the Simons' taxes. 28 U.S.C. § 2680(c).

As best as I could determine it was only the United States that was dismissed as a defendant, so there may be more on this case down the road.

Other Coverage

There was quite a bit of coverage of this case when it was filed and some on Mr. Simon's conviction.  This article by Rebecca Green goes pretty deeply into the background of James Simon, which is rather colorful.  There was also a good bit of coverage when the case was filed with stories like this.  As noted Jack Townsend covered the appeal of the criminal conviction.  I have not been able to find any coverage of the most recent decision, even though I am late getting to it.  I find that a little curious.

Don't Sic IRS On Racist Frat Boys

This post was originally published on Forbes Mar 16, 2015
It is amazing the amount of angst that nine seconds of video can create in this age of going viral.  I'm referring of course to the stories about the Oklahoma University members of Sigma Alpha Epsilon singing an extremely racist song.  There are of course a large number of angles from which to view this.  Probably the most important is the way it reflects on the persistence of racism.  The song includes a favorable reference to lynching, which is one of my interests as  an amateur historian.

The amateur choirmaster turned out to be the graduate of a Jesuit high school, a painful revelation to this graduate Xavier High School.  There are the issues about free speech, fraternities and what idiots we are when we are eighteen or nineteen.  One thing that did not cross my mind was that there was a tax angle.  Silly me.  Paul Caron, who as the Tax Prof is the undisputed dean of the tax blogosphere, highlighted a story about the tax angle to the tale of painfully recorded adolescent idiocy.

The Tax Professors Weigh In

The  Tax Prof featured a Slate article titled Subsidized Injustice - Racist fraternities and sororities should have their tax-exempt status revoked -  by law professors Daniel J. Herzig and Samuel D. Brunson. I count  Professor Brunson as part of my brain trust as we both share an interest in the intersection of taxation and religion.  He commented extensively on one of my Kent Hovind stories perhaps dashing the hope of some Hovindicators that the "enemy camp" might have found an indictment flaw that would free Doctor Dino. The gist of the article is that even thought there was swift reaction on the part of both the University

and the national office of ΣAE, the problem of racism in fraternities runs much deeper and requires a response from another institution - the Internal Revenue Service.

As tax law professors, we naturally see solutions through the prism of the tax law. Policymakers often use the tax law to provide both carrots and sticks, encouraging certain societally beneficial behavior while deterring behavior we deem detrimental. With apparently endemic discrimination bubbling to the surface of Greek organizations, the tax law may be able to help nudge these organizations to either integrate or clearly signal their discriminatory tendency.

Some Numbers

I suppose I should put aside my perhaps unconventional view that if fraternities are excluding members of minority groups, they may well be doing them a favor.  I would often tell my kids that they are probably not going to be able to do every smart thing I ever did, so if they insist on doing every stupid thing I ever did they will be starting out behind, because they will do some stupid things I didn't do.  Maybe I'm wrong, but I have yet to discern anything smart about fraternities, but of course they didn't have them at the College of the Holy Cross and we found other ways to be stupid.

So what can the Internal Revenue Service do about racist fraternities? It can revoke their exempt status. The professors cite the Bob Jones University case.  That university lost its exempt status for its racist policies even though, in its view, they were biblically sanctioned.  Sigma Alpha Epsilon Fraternity is exempt under 501(c)(7).  That means that it does not get tax deductible donations, but its profits are generally not subject to tax.  In its year ended  June 30, 2013 revenue exceeded expenses by over $1.2 million, so loss of exemption would be quite a blow.   There is also a companion 501(c)(3) which received, presumably tax-deductible, donations of around $2 million and had over $1 million in investment income.

Even fraternities that are not as well endowed as ΣAE and operate at a break-even would be hurt by losing exempt status.  501(c) status tends to give organizations an entirely undeserved credibility boost and can provide other benefits both tax and non tax under state and local law and in relation to the colleges

How can the tax law operate, then, to effect structural change? It can dangle the carrot of their tax exemption in front of them while, at the same time, threatening them with its loss if they do not eliminate discriminatory behavior. We would propose that the IRS begin sending letters to all Greek organizations putting them on notice that if they discriminate, their tax-exempt status will be revoked. They can retain their tax exemption if they demonstrate that they do not discriminate based on race. This provides Greek organizations with a choice. If they are willing to comply with the norms of society, then they can enjoy the benefit of their tax exemption. If they do not wish to conform, they can explicitly signal that desire by forgoing the public subsidy implicit in being exempt from taxation.

This Is A Really Bad Idea

The Internal Revenue Service has about 90,000 people working for it.  Around 20,000 or so are actual enforcement people.  Those revenue agents and revenue officers are mostly trained as accountants.  They are tasked with collecting over two trillion dollars.  There are signs that they don't have the resources do that job well enough.  TIGTA recently reported that the collections division which has over eleven million delinquent accounts in its inventory hesitates to take automated collection actions, since they are unable to handle the resulting phone calls.  In hundreds of thousands of cases, they know that alimony deductions do not match the income recorded by the recipients (You can guess which way that usually goes) but they can only investigate a small number of the discrepancies. 

 Nobody ever suggests that the Equal Employment Opportunity Commission or the Department of Education should pitch in and help collect taxes, but for some reason the IRS is seen as the Swiss army knife of social policy, ready to further shred its tattered reputation addressing issues that stump other institutions.

Thought leaders like Professor Brunson should really know better.  And actually I think he does.  I contacted him to give him a hard time and here is how he responded.

I'm not sure if I can legitimately debate you--I totally agree that this isn't the kind of thing that I really want the IRS to spend its resources on. Better would be the threat of IRS actions nudging frats out of their current inertia of only addressing racism when it becomes public. So my goal is self-regulation, under threat of IRS regulation.

Maybe ten or twenty years ago, I could buy that.  Since the Lois Lerner debacle though IRS addressing anything other than revenue issues, particularly in the tax exempt area is not going to end well.  Or if the Lois Lerner Teapartygate thing is any indication ever end at all.

Better To Be Lucky Than Good

On a final note, I can't help but be grateful that there were not ubiquitous video recording devices and the concept of images "going viral" when I was going to college.  Sharing with you the various things that I am grateful were not taped would be TMI.  I will mention that I graduated from college in 1974 when this Ray Stevens song was released.

Looks Like No Charitable Deduction For Gifts To Steak And You Know Day

This post was originally published on Forbes Mar 14, 2015

This is an emergency tax caution.  Like most geeky people I have been focused on today being π Day - 3/14/15 like 3.1415.  Never mind.  If I have to explain it to you, you will never get it.  It turns out however that this day has been also been proclaimed to be Steak and ________ Day.  Here is the link, but don't go there if you have not been entirely purged of residual Puritanism or self identify as a radical feminist.  I'll explain as best I can within the parameters of a respectable tax blog.

Everybody knows about Valentine's Day February 14.  We celebrate romance - flowers and candy - and the like by commemorating somebody who might have existed who became a martyr.  Also there was this unfortunate incident in Chicago.

Anyway there is kind of a consensus that on Saint Valentines Day with the flowers and candy and dinner out, men are performing for women. March 14 is, I suppose, recompense for February 14th. No need to go out.  Just cook your man a steak and, well.

  The female member of the partnership (BTW this event seems to be tinged with heterosexualism) does something that most men are very enthusiastic about, while female enthusiasm runs the gamut.  If you can't figure it out, you were probably more focused on it being π Day and don't have to worry about the rest.

Anyway when the site came up on my facebook feed, I thought it was satirical.  Having an inquiring mind I felt bound to investigate.  It turns out that as I dug down all indications to the contrary notwithstanding, it is not satire.  Besides explaining the rationale, there is quite a bit of advice about how to cook a steak and you know.

The serious part of the site is what is causing me to issue the emergency tax caution.  There is a charitable component to this.  If you send in a donation they will send an invitation to your partner.  Guys, think real hard before you do that.  They will keep 20% and 80% will go to a charity that is dedicated to raising breast cancer awareness.  That of course sends my BS detector into high gear.

You will probably not be shocked to find out that Steak and ______ Day does not show up on guidestar.org.  Digging a little further in the site you will find that the donation actually goes to, forgive me, I am not making this up, an organization called Coppafeel.  It turns out that Coppafeel actually is a legitimate charitable organization.

COPPAFEEL! AIMS IS TO STAMP OUT LATE DETECTION AND MISDIAGNOSIS OF BREAST CANCER BY ENSURING THAT PEOPLE KNOW THE SIGNS AND SYMPTOMS OF BREAST CANCER, KNOW WHAT THEIR BREASTS LOOK AND FEEL LIKE NORMALLY, CHECK THEIR BREASTS REGULARLY THROUGHOUT THEIR LIFETIME AND HAVE THE CONFIDENCE TO SEEK MEDICAL REFERRAL WHEN THEY DETECT ABNORMALITIES.

The problem is that Coppafeel is a UK registered charity not a United States organization exempt under 501(c)(3).  So your donation to Steak and _____ Day would not be deductible at all, as best as I could determine.  I did not do deep research so I'm appealing to other tax experts to weigh in.

If you really want to get behind the spirit of this whole thing your best bet would probably be to send 20% of your donation directly to the sponsor or maybe just buy some of their tchotchkes and donate the balance to a qualified US charity with similar purposes.

I'm wondering if this odd holiday thing is a sign of Spring favor.  Personally, if you are looking for an alternative holiday view that is a bit more salubrious I suggest you get behind Sober St. Patrick's Day on March 17.

By the way Steak and _______Day's website has many videos, none of which I would dare to embed here.  They are not that graphic, but not nearly wholesome enough for my blog.

Jury Finds Kent Hovind Guilty Of Contempt Of Court No Verdict On Fraud Charges

This post was originally published on Forbes Mar 12, 2015

Kent Hovind, Independent Baptist minister and proponent of Young Earth Creationism, has been on trial in the federal district court in Pensacola.  The charges relate to actions taken in response to government seizure of property.  The seizure was a result of his conviction in 2006 for structuring, the systematic withdrawal of amounts somewhat less than $10,000 to avoid currency reporting requirements.  His codefendant Paul John Hansen was the trustee of Creation Science Evangelism which held title to the seized property.

The indictment  charged them with fraud and contempt of court for the filing of a lis pendens, a notice of pending litigation, to warn buyers of Hovind and CSE's continuing claim on the seized property.  Hovind was pursuing a lawsuit against prison official who he claimed had interfered with his appeal of the original conviction.  Hovind hoped, probably still hopes, to have the original conviction reversed and the property returned to him.

The government presented its case last week and this Monday.  It was largely based on documents.  The most dramatic moments last week were when Hovind's son Eric was called by the prosecution to testify and a person who bought one of the properties from the federal government testified about harassment.  Hansen gave extensive testimony Monday and Hovind on Tuesday.  The government and defense gave their summaries yesterday and the jury began deliberating early yesterday afternoon.  The jury was unable to reach a verdict yesterday and was sent home and told by the judge to get a good night's sleep.

I just heard from Jonathan Schwartz of Interlock Media and freelance journalist Ben Sheffler that the jury has reached a verdict.  On the six count indictment, Hovind was found guilty on count three, which only applied to him - violating a court order to not interfere with title to the property.

 Hansen was found guilty on counts five and six, which only related to him - violating a court order to Creation Science Evangelism to refrain from further filings in relation the property and resisting a grand jury subpoena.  The jury was unable to reach a verdict on the more serious fraud charges against Hovind .  Hansen was found not guilty on one of the fraud charges (count two) with the jury not reaching a verdict on the other fraud charge (Counts 1 and 4).

Here is Rudy Davis, one of the most zealous of Hovind's supporters reacting to the verdict.

Sentencing is scheduled for June 12.

Ben Sheffler was in the courtroom when the verdict was announced and reported on the reaction.

The sentiment from Hovind's supporters, who one last time filled the courtroom, was that while the guilty verdict for count three is disappointing, the rest of the outcome was a victory.

One of Hovind's more dedicated supporters, Rudy Davis, also said it was a miraculous victory.

"I think the Lord God Almighty worked in a mighty way here," he said. "They threw their best lawyers, they had five days of prosecution, they read hundreds of documents, hundreds of emails, voicemails they had sequestered, everything they could throw at the man."

While Davis said the court was against Hovind, he maintained that the fight to correct the perceived injustice against Hovind will continue.
"I believe this entire court was slanted against Kent Hovind, and I don't think anything's going to stick that happened today," he said. "We're never going to give this up; we're going to keep making noise and shining light."

More extensive coverage of the trial can be found on Your Tax Matters Partner.

Correction

An earlier version misstated the charge in Count 4, on which the jury failed to reach a verdict for either Hovind or Hansen.

 Clarification

Kent Hovind and Jo Hovind v USA - IRS has a copy of the final order from the trial.  On count three of the indictment the jury was to separately find whether Kent had violated each of two court orders, one issued in 2007 and the other in 2012.  The jury found that Kent had violated the earlier order, but not the later.  Here is a link to the order.

Did Eighth Circuit Bulldoze Caterpillar Dealer's Like Kind Exchanges?

This post was originally published on Forbes Mar 11, 2015

If it were not for all the blood Fargo would be about my favorite movie.  Part of the attraction is the detailed way it goes about portraying the relationships people have as they go about their work regardless of whether the work is selling cars, making duck portraits, investigating crimes or kidnapping. One of the most brilliant performances is that of Larry Brandenburg who plays Stan Grossman, accountant to the hapless Jerry's curmudgeonly father-in-law.  Brandenburg captures perfectly the consigliere that accountants so often end up playing for their successful clients.  Here it us up to Stan to explain the facts of business life to the inept son-in-law.

So when I get a case on one of my favorite Code sections and it is about a company in Fargo, how can I resist?

North Central Rental and Leasing LLC just received a decision from the Eighth Circuit in its appeal of a 2013 district court decision.  The case was about like kind exchanges.

A Section Lots Of People Know About

Code Section 1031 is one of the few code sections, along with 501(c)(3) and 401(k) that has worked itself into the vocabulary of many people.  As far as I know it is the only code section that is frequently used as a verb.  A real estate guy might say "I'm going to 1031 that property".  The application of 1031 is much broader than real estate.  It applies to assets used in a trade or business or held for the production of income making it relevant to companies renting heavy equipment.

Renting heavy equipment is North Central's business.  NC is related by common ownership and apparently somewhat integrated operationally with Butler Machinery Company which is a major Caterpillar dealer.  Butler is a closely held family business now with the third generation. Butler is celebrating its 60th anniversary this year.

CEO Dan Butler majored in accounting and is quite generous with the University of Mary in Fargo, which introduced him to the mysteries of debits and credits.

North Central was appealing a notice of final partnership administrative adjustments that denied 1031 treatment on 398 like kind exchanges that occurred from 2004 to 2007.

The Transactions

The IRS and North Central agreed that all 398 transactions could rise or fall based on two typical transactions.  The Eighth Circuit cut that down to one.  Here it is.

In the representative transaction, North Central agreed on or before June 30, 2004, to sell Truck 1 to a third party for $756,500. North Central's adjusted tax basis in Truck 1 was $129,372.70 at the time. The third party paid Accruit the $756,500 in sales proceeds, and North Central transferred to the third party legal ownership of Truck 1.

On or about August 13, 2004, Butler Machinery identified and purchased the replacement Caterpillar equipment, Truck 2 and Skid Steers 1 and 2. Butler Machinery's total acquisition price for this new property was $761,065.60. Butler Machinery then transferred legal ownership of the replacement property to North Central through Accruit on August 27, 2004.

On September 10, 2004, Accruit transferred the $756,500 in proceeds from the sale of Truck 1 to Butler Machinery. North Central and Butler Machinery then adjusted a note between the two companies to compensate Butler Machinery for the $4,565.60 difference between the $756,500 in sale proceeds and the $761,065.60 that Butler Machinery paid for the replacement equipment.

I've got a little bit of a problem there which I'm sure all the rest of you 1031 junkies must have notice it.  In paragraph three it seems like it is North Central is the one that should be making the identification.  Butler is the Caterpillar dealer from which North Central was buying the replacement property.  As noted above the two companies are very similar in ownership and somewhat integrated in operations.

FILE - In this June 20, 2012 file photo, earth-moving tractors and equipment made by Peoria, Ill.-based Caterpillar Inc. are seen in Clinton, Ill. Caterpillar Inc. announced Friday, Feb. 20, 2015, that it is keeping its global headquarters in downtown Peoria and expanding its corporate campus in what it called a re-commitment to the central Illinois city. (AP Photo/Seth Perlman, File)

If we imagine a sort of tax geek Rip Van Winkle who went to sleep in 1980 and on first awakening picks up this decision, he would be curious as to what Accruit was needed for in this transaction.  According to its website Accruit is the leading "qualified intermediary" for personal property exchanges.  Old Rip CPA there would be amazed to learn about the "qualified intermediary" concept which is a mini-industry that grew out of limitations put on like-kind exchanges in the eighties.  He would immediately grasp that Accruit was playing the role of the middleman in a three corner exchange, but be puzzled by why it was needed since, clearly North Central and Butler did business with one another regularly.  Which brings us to Reilly's laws.

Reilly's Third Law Of Tax Planning

Reilly's Third Law is "Any clever idea that pops into your head probably has a corresponding rule that makes it not work".  Here is a clever idea.  You have low basis property that you want to sell and there is nothing that you want to buy.  So why not buy some high basis property from a related entity? 1031(f)  "Special rules for exchanges between related persons" is why not.  OK. So let's put one of the exchange facilitators between us and the related person. For that they have 1031(f)(4) which somewhat cryptically says

This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.

"This section" is 1031 which allows exclusion of the gain. "This subsection" is 1031(f) which triggers the gain if a related party disposes of the relinquished property within two years.  Of course, the argument is that Butler did not dispose of the relinquished property it was Accruit, the intermediary that did that.  Butler just provided the equipment, at dealer cost.

Why Is Butler Involved?

Apparently the transaction could have been done without involving Butler, which would have avoided a 1031(f) issue.  NC could have notified Accruit of what it wanted for replacement property and Accruit could have forwarded the order to Caterpillar and used the cash from the relinquished property to pay Caterpillar. There was a business reason to not do it that way, though.  When Butler orders equipment from Caterpillar, it gets six months to pay with no interest charged.  I've been giving myself a headache trying to decide how to lay out determining which is worth more - the 1031 deferral or the favorable financing from Caterpillar, which apparently was not available if Butler was not involved.

In the sample transaction, there is a gain of about $630,000 being deferred.  That deferral will, in effect, be paid back over five years with lower depreciation deductions.  The tax being deferred is at the individual partner level, so you don't know what it is.  So you would have to think about what the individual partners  have going on in the current year and what is likely to be happening to the  partners over the next five years.

It is a really interesting problem.  Deferring the tax is like getting an interest free loan of as much as $200,000 come next April which will be repaid over 5 years more or less depending on circumstance in those years.  Who knows? Maybe rates will be higher.  The financing from Caterpillar is equivalent to an immediate interest free $750,000 loan for six months.

Of course, NC tried to get both.  It is interesting to wonder what they would have chosen if they knew they could only get one.  I'd probably take the $750,000 bird in the hand in which case the aggressive position they took ends up being nothing ventured nothing gained if you ignore the mountain of work that somebody is going to have amending returns.

Is The Decision Right?

Here is the rationale.

Butler Machinery attempts to downplay the benefit it derived from these de facto interest-free loans by asserting that North Central would have received the same financing terms if it had ordered directly from Caterpillar. The President and CEO of Accruit, however, testified at trial that Accruit would have paid the sales proceeds from the relinquished property directly to Caterpillar if the new equipment were not purchased via Butler Machinery. In other words, if Butler Machinery was not involved in these transactions, neither Butler Machinery nor North Central would have received the de facto interest-free loans.

In sum, Butler Machinery was not necessary to the transactions at issue yet possessed significant, unearmarked cash proceeds as a result of the transactions. Both the Eleventh Circuit and the Ninth Circuit have affirmed determinations that transactions were structured to avoid the purposes of § 1031(f) when unnecessary parties participated in the transactions and when a related party ended up receiving cash proceeds.

As I understood it the purpose of 1031(f) was to prevent a group of related taxpayers from using the basis in high basis property that they would continue to own to shelter the gain from the sale of low basis property.  Inserting a qualified intermediary between the two of them should not change things.  That was what Ocmulgee Fields Inc was about.  In this case the replacement property is ultimately being acquired from Caterpillar.  If the only players were NC, Accruit and Caterpillar, there would not have been a problem.  Pulling Butler into the mix did not add an additional tax advantage, it added a business advantage.  That's why I think this decision is wrong.  Lot of good that is going to do the taxpayers.

I'd hate to have to be the tax preparer who has to unscramble this egg.

   The disallowed exchanges from 2004 to 2007 will affect depreciation deductions through 2013 which then have to be flowed through to individual returns.

Other Coverage

Ed Zollars took note of this case in a CPE presentation.  That was fast work. Todd Keator also noted it.  Neither seems to have the same sympathy for the taxpayer that I  have.

IRS Busts In Las Vegas Tip Case

This post was originally published on Forbes Mar 10, 2015

I'm loving it as I get to do two posts in a short time about taxpayers winning pro se (without attorneys) in Tax Court.  Last week was Suzanne Bacon who beat an out of the blue 1099-C from a long ago debt.  This week we have Alan Sabolic, a bartender who decided that he wanted to keep track of his own tips rather than rely on an IRS formula.  MGM and the IRS had entered into a Gaming Industry Tax Compliance Agreement .  By opting out Mr. Sabolic was required to substantiate that his tips were lower than expected.

Mr. Sabolic had opted out of the program after 20 years because he thought the automatic rates were too high given the economic conditions.  I have another theory.  Mr. Sabolic is a person who managed to keep very meticulous records and go through the process of winning a Tax Court decision without the assistance of counsel.  That indicates certain qualities of character that are admirable, but problematical in some environments.  His job was to provide people with alcohol while they gambled and his earnings were based in part by how well he ingratiated himself with them.  Possibly a less than optimal fit there, but I'm speculating. At any rate, you can understand why both the IRS and MGM would rather have tipped employees just live by a formula.  Much more complicated otherwise.  It probably would have been smarter for the IRS to settle with Mr. Sabolic at appellate.  Here are some of the highlights.

Petitioner had a set routine of how he recorded his tips at the end of each shift. MGM Grand's point-of-sales system would generate a receipt that stated how much he had earned in tips from credit cards and room charges (charged tips). He would cash out his charged tips receipt daily. Cash tips were not internally controlled by MGM Grand's system, and so petitioner would personally keep track of his cash tips for each shift. Petitioner would put any change from cash tips that he received in a glass jar. He would add together his cash tips and his charged tips and enter the total into the system when he punched out. He would tip the cashier any leftover change that he received. This amount would then be automatically reported to MGM Grand's payroll department. He also kept daily a personal tip diary by recording the total on a slip of paper. His daily totals were recorded in whole numbers. Petitioner kept both the receipts from his charged tips and his contemporaneously recorded slips of paper for 2010 and 2011. For 2009 he kept only the contemporaneously recorded slips of paper. After he submitted his tip information to MGM Grand's system, petitioner would “tip out”, or give a portion of his tips to, the barback who had helped him that shift.

He did not keep a contemporaneous log detailing how much he paid out to the barbacks. Petitioner gave the barbacks 10% to 20% of his total tips. Petitioner's tip diaries show that petitioner received tips of $21,849, $24,212, and $22,950 for tax years 2009-11, respectively. These amounts include the tips he gave to the barbacks but do not include the change tips he gave to the cashiers when he cashed out his charge tip receipts.  Tax Returns Petitioner filed timely tax returns for all three years at issue. He hired a tax return preparer to aid him in this process. Each year he would provide his return preparer with the Form W-2 generated by MGM Grand. The Form W-2 showed how much he had earned in tips for that year on the basis of the amounts that he reported to MGM Grand at the end of each shift. The return preparer used that information to complete petitioner's Form 1040, U.S. Individual Income Tax Return. Each year petitioner reduced the total tips that he received by approximately 10% to account for the tip outs to the barback at the end of each shift. In accordance with his Forms W-2 petitioner reported income from tips of $18,110, $23,941, and $21,926 for tax years 2009-11, respectively. He claimed deductions for the tip outs of $1,811, $2,394 and $2,193 for tax years 2009-11, respectively.

The IRS was dissatisfied with Mr. Sabolic's records, so they did a computation.  Essentially they project the known tip rate on drinks charged to credit cards and rooms to drinks paid for with cash or comped (which MGM tracks in its system).  There are some adjustments for stiffs and the like.  Round numbers they practically doubled Mr. Sabolic's tip income from what he reported  yielding a tax deficiency of about $15,000 for the three years. Mr. Sabolic had an explanation for why his tips did not measure up to IRS expectations.

Petitioner also testified about the typical tipping behavior of his patrons. Most of his drinks served were comps, and he testified that customers rarely tipped on comp drinks and that if they did they might “throw [him] a buck or two” after several hours of sitting at his bar receiving the comped drinks. Petitioner additionally testified that college kids and foreigners rarely tipped.

Goddamn college kids. The case was about the adequacy of his records though.  If the Tax Court finds them adequate and credible, he wins.  The IRS had a number of objections to Mr. Sabolic's fairly meticulous record keeping.  The Service kept hitting and kept busting.  Recording the daily amounts in whole dollars and using a conservative estimate for the share of his tips that went to barbacks did not cancel out his meticulous work.  Discrepancies with the MGM reporting were accounted for by timing and glitches in the MGM system.

On the basis of all the evidence presented, and on this record, we find that petitioner has met his burden of proof. He has satisfied the requirement of section 31.6053-4(a)(1), Employment Tax Regs., by keeping a daily record and has reported amounts substantially the same as recorded therein. We find petitioner's [*16] figures accurately reflect the tip income he earned during the years at issue.

I really think the Service would have been better off if they had settled with Mr. Sabolic rather than setting this precedent and encouraging more tipped employees to drop out of the program.

Other Coverage

Joe Kristan covered the case noting how keeping meticulous records can make you winner. Lew Taishoff, who like me does not seem to envy Mr. Sabolic's position wrote:

But if a cruel fate should land you behind a six-stool Las Vegas bar jammed with sullen slotmachinists who guzzle and don’t tip, or, even worse, give you, the in-the-trenches tax preparer, a platoon of clients so situated, read Judge Kerrigan’s tip to Al, who gets the deficiency bounced based upon his well-kept records and truthful testimony.

Pensacola Shows Little Interest In Kent Hovind Trial

This post was originally published on Forbes Mar 9, 2015

The United States will most likely rest its case in the prosecution of Young Earth Creationist Kent Hovind today and the defense may begin.  It was expected that the government would be done Friday, but apparently they have a bit more to add.

What This Trial Is About

Kent Hovind was convicted in 2006 on a 58 count indictment, which included 45 counts of structuring - the systematic withdrawal (in his case) of amounts somewhat less than $10,000 to avoid currency reporting requirements.  In addition to his long prison sentence he also forfeited  "structured" funds  in the amount of $430,400.  Real property attributed to Hovind was substituted for the funds and seized by the government and sold, much of it to Hovind's family members.  Even after losing his appeal in the Eleventh Circuit and being turned down by the Supreme Court Kent Hovind continued to believe that his conviction could be overturned.

One of the ways that Kent Hovind and Paul John Hansen, his codefendant  and trustee of Creation Science Evangelism, sought to warn off buyers of the seizeed property was by filing a "lis pendens" which alerts potential purchasers that there is litigation affecting the title to the property.  Hovind explained to his daughter that the lis pendens would become the equivalent of dog crap that the government would find hard to scrape from its shoes.

The filing of the "lis pendens" is at the heart of the current trial in which Hovind and Hansen are charged with contempt of court and mail fraud.  Kent Hovind's supporters, Hovindicators as I call them, frame the issue as Kent Hovind having spent eight years in prison for taking his own money out of the bank now being prosecuted for mailing a letter.

The Trial So Far

Much of the government's case has been a parade of documents and experts authenticating the document.  I have heard it said that much time and expense might have been avoided if Paul John Hansen had been willing to stipulate that documents signed and mailed by him, had been signed and mailed by him.  Instead the jury got to hear from a notary flown in from the Midwest and a fingerprint expert who apparently enthralled reporters Abigal Megginson and Ben Sheffler with his discussion of loops, swirls and whorls.  Abigal and Ben have been helping cover the case on my alternate tax blog Your Tax Matters Partner , which has pretty much been All Doc Dino all the time for the last few weeks.

On Friday two key witnesses were called by the prosecution, one was Kent's son Eric, who was interviewed by Abigal on Thursday.  Jonathan Schwartz of Interlock Media, whom I am supporting in his coverage of the trial and the surrounding drama, gave this impression of Eric's testimony

 Getting back to Eric Hovind’s testimony, it was delivered by the perfect picture of a loving son who is athletic, handsome, and connected. Every bit the instantly likable Christian hipster businessman, The kind of guy you want to go play golf with even if you don’t play golf. Still following a spiritual beacon while shrewd enough to keep the ministry going, transfer assets without his father knowing for two years, protect the fiscal health of his mom and siblings, and legally extend his occupancy years after the forfeit order so he and his family members might live rent free in various houses. Eric was collecting rent from tenants which he plowed back into renovations and generating savings to buy back the house he and his immediate family had been living in for forty thousand dollar free of any civil or IRS liens.

The other witness, who may be the one most crucial to the prosecution's case, was Anthony Jaworski.  Mr. Jaworski put his life savings into purchasing one of the seized properties from the government.  Abigal and Ben reported on his testimony

Anthony Jaworski, who bought the CSE property at 5720 Palafox St, and had subsequently filed a lawsuit against the United States in March 2013 asking for the more than $100,000 he paid for the property to be returned, also testified Friday. In his lawsuit, which was dismissed, Jaworski said he was subject to “threats, abuse, mail harassment and terror,” including a letter from Hansen regarding the legality of his purchase of the property. Jaworski seemed uncomfortable on the stand and said he just wants to sell the property and move back home to Maryland.

The type of filings that people with beliefs like Paul John Hansen make are sometimes called, perhaps with a bit of hyperbole,  "paper terrorism".   Early on I had quite a bit of sympathy for Hovind thinking that the government might be piling on a bit.  As long as Hansen and Hovind were carrying on a paper war with the United States I thought that going after them criminally was overkill.  But Jaworski is a civilian so to speak and going after him with demands that he pay $100 a day to stay on property that he bought from the United States crosses a line in my mind.

Case Not A Slam Dunk For The Prosecution

An attorney with some expertise about lis pendens, told me that it is a very privileged filing.  All that is required for the filing to be in good faith is that there be some litigation affecting the property that it is reasonable to warn prospective buyers about.  Hovind had a case going in federal district court alleging that prison officials withheld documents from him which caused him to miss deadlines in his criminal appeal.  Arguably, at least in Hovind's mind, a favorable outcome in that case would start a chain of events that would culminate in Hovind's conviction being reversed and the property restored to him.

On Friday Judge Rodgers indicated to the defense that she might not allow them to put on a "Cheek defense" referring to a Supreme Court decision in which it was ruled that a belief does not have to be "objectively reasonable" in order to show lack of "willfulness" .

In his 2006 trial, on advice of counsel, Hovind put on no defense at all.  He has promised his supporters that will not happen this time and that he expects to be on the stand for three days.  Hovind may be hoping that he can put on the sort of Gish Gallop that critics accuse him of using in creation debates.  Judge Rodgers's limitations on the type of defense that can put on may frustrate Hovind's plans.

Unfortunately, my own experience with criminal tax prosecution comes from reading appellate decisions.  None of my team has much experience covering federal trials and Rudy Davis, voice of the Hovindicators, who has been providing multiple reports every day on the proceedings is similarly handicapped.  So I really don't have a sense as to whether there is anything special about what is going it the courtroom.  Here is Rudy discussing the proceedings with Coach Dave Daubenmire.

Jonathan Schwartz' report on the prosecutors's professionalism makes me think it is likely business as usual.

 Watching Prosecutor Tiffany Eggers work, much like a master surgeon, makes you not only want to never cheat on your taxes or fudge a job application.You never even want to walk outside the lines on a cross walk or even think about committing something to paper that might be a slight coloration on the truth.

 And In The Court Of Public Opinion

Hovindicators have been very disappointed in the number of boots that they have been able to put on the ground in Pensacola and have been calling out for a much bigger turnout this week.  Here is Rudy in front of the former Dinosaur Advetntureland seeking to rally the troops.

Steven Gray was in front of the court house filming on Day 1 and you will note in the links in this post that there is not much of a crowd.

A Prophet Hath No Honor In His Own Country

Rudy is very puzzled that in a city with as vibrant a church community as Pensacola - a church community that  Kent Hovind helped make prominent with his world wide video distribution, speaking tours and Dinosaur Advertureland - there is no support for Kent Hovind.  Rudy discusses the phenomenon in this youtube titled "The local churches think Kent Hovind is a tax cheat."

Jonathan Schwartz was puzzled by the same question and came up with an answer by getting Steven Gray to turn the camera on himself.  Steven Gray, who is 25, grew up in Pensacola.  He was home schooled till the age of 17.  The home schooling was supplemented by science and math instruction from Kent Hovind.  He describes a warm and humorous teacher who was quite inspiring.  Steven is active in his church and still holds a young earth creation view, but along with most of the rest of the evangelical community in Pensacola is not warming up to Kent Hovind's anti-government viewpoint.  Apparently the evangelical community in Pensacola might sympathize with Hovind's plight and hope that he is released, but they also find him to be an embarrassment.

A similar perspective might also account for Kent's fairly tepid support from the broader "creation science" community".

Other Coverage

Pensacola New Journal has given the trial some coverage.  Here is the latest story from Kevin Robinson.  PNJ ran an op-ed critical of Hovind by Dee Holmes

Kent appears to have quite a bit of support among podcasters and youtubers.  The flagship website of the Hovindication movement #FreeKent covers that quite well. #FreeKent is also calling for more boots on the ground invoking the spirit of Martin Luther King.

Do you think Martin Luther King Jr. and community said, “Government is right… It’s okay we are treated terribly… Government is correct… Trust Government to do what is best…”?

WAKE UP CHRISTIANS! You are becoming zombies brainwashed by the very Government that treated blacks as if they were trash.

Unlike our colored brothers and sisters of the Civil Rights movement, through sophisticated cathartic movie theaters known as mega-churches, American Christians are being entertained by comedian pastors destroying America. These mega-church comedians are creating docile eunuch men controlled by their wives who ‘abhor manly leadership’.

WAKE UP CHRISTIAN MEN! Stop letting your wives tell you what a man is! Take your ed-hardy shirts and skinny jeans and throw them in the trash! Christ wants you to lead the household! Christ wants you to stand strong in God’s word and LEAD THE COUNTRY!

The Christian Church, like Adolf Hitler’s Third Reich (phase 3 takeover), is being held hostage by Government – force fed communist propaganda.
Do you think our colored brothers and sisters let Government spoon feed them KKK fear propaganda?! I don’t think so!

I don't know what #FreeKent's "colored brothers and sister" will make out of that.

Bob Baty's Kent Hovind and Jo Hovind v USA - IRS is fairly remarkable in its thoroughness.

A site called Fogbow - "Falsehoods unchallenged only fester and grow." -  is dedicated to fighting the "birther movement" (Birthers believe that President Obama is not qualified to be President by reason of not being a natural born citizen of the Untied States).  Fogbow  has a forum dedicated to the Kent Hovind case, because Rudy Davis is a prominent birther, having called for the execution of President Obama as a treasonous usurper.

The Sensuous Curmudgeon - "Conserving the Enlightenment values of reason, liberty, science, and free enterprise" - seems to be dominated by schadenfreude. 

Of course, the coverage by Rudy's LoneStar1776 is a great source for first hand information.  Rudy's wife Erin has been fielding the calls from Doctor Hovind.  He was on last night and indicated that the defense may lead with Paul Hansen's testimony.  Hovind now gives a shorter estimate of his own testimony and is projecting that the trial may wrap by Wednesday.