Originally published on Passive Activities and Other Oxymorons on June 8th, 2011.
____________________________________________________________________________
CCA 201116019
One of the great simplifications of income tax law was not done by legislation but rather by regulation. There had been an issue about whether entities that were not legally corporations should be considered "associations taxable as corporations". The controversy involved the analysis of four factors, each of which probably had several books written about them. The simplification was to the effect that if the entity is not a corporation then it won't be considered one for tax purposes unless it wants to be. If it is a business entity with more than one member it will be a partnership. If there is only one member it will be disregarded - for income tax purposes. This simplification really makes the LLC the entity of choice.
Having the entity be disregarded for income tax purposes means that any transactions between the owner and the entity will have no income tax effect and that any transactions of the LLC will be reflected on the owners return. I should clarify that "for income tax purposes". It's really for the "determination of income taxes" as this missive from the chief counsel makes clear. When it comes to collection, the LLC is regarded, which means that the IRS cannot seize assets owned by the LLC to satisfy the tax obligations of its single member:
From: ————————- Sent: Monday, March 21, 2011 12:06:29 PM To: —————————————- Cc: Subject: FW: LLC wrongful levy case ————-, this is to confirm your opinion that the Service can't levy on the property of a disregarded LLC to satisfy the tax liability of the LLC's sole member. As you've noted the sole member has no ownership interest in LLC's property under local law and disregarding the LLC for federal tax purposes doesn't allow the Service to disregard the entity for purposes of collection.
A levy might be made for distributions by the LLC that are based on the sole member's interest in LLC; e.g., if TP is supporting himself from the net income of the LLC the lien attaching to TP's interest in LLC should allow the Service to issue a levy notice to LLC for the distributions of that income. Compare United States v. Moskowitz, Passman and Edelman, 603 F.3d 162 (2d. Cir. 2010) (frequent and regular partnership “draws” which are advances or loans on annual profits are subject to a lien any may be levied as salary or wages).
And as you said, the RO could consider whether an alter ego lien is appropriate. The lien might be based on the common law concept of piercing the corporate veil which courts generally apply to LLCs and which some LLC statute reference. A reverse veil piercing in some states would subject the LLC property to the claims of a member's creditors. Some states set a high standard for piercing; e.g. piercing must be needed to prevent an injustice or acts approaching fraud. In some states an alter ego analysis is used to allow piecing and in others it's a separate approach for disregarding an entity, and the standards vary state by states. In some states a member's control of the LLC might make the two indistinguishable; e.g., the books and records may show the sole member and the LLC don't have a separate economic existence. The Government has argued for the application of a Federal common law of alter ego, but that argument was rejected in Old West Annuity and Life Ins. Co. v. Apollo Group, 605 F3d 856, 861 (11th Cir. 2010).
This ruling makes clearer than ever my observation that the systems for determining tax and actually collecting it are separate and distinct and practitioners must be cautious to not let concepts from one area leak into the other.
Showing posts with label collections. Show all posts
Showing posts with label collections. Show all posts
Thursday, July 10, 2014
Wear That Badge of Fraud Boldly
Originally published on Passive Activities and Other Oxymorons on June 8th, 2011.
____________________________________________________________________________
The last of the tax season developments will be up soon. The purpose of this blog is to provide a little bit of analysis on developments that are otherwise largely ignored. This is by way of apologizing for the fact that these items are over two months old. If I think time is of the essence on a development I will move it to the head of the line and even make a bonus post. If you look at my blog roll you will find other bloggers who get to things more quickly than I do. If you prefer to get things really slow though you should subscribe to AICPA publications as I discussed in this post.
STROM v. U.S., Cite as 107 AFTR 2d 2011-XXXX
This was fairly interesting case about non-qualified stock options. Generally when non-qualified stock options are exercised the holder recognizes income based on the difference between the fair market value of the stock and the exercise price. The income recognition is deferred, though, if the holder is precluded from selling the stock under SEC regulations :
In this opinion, we first interpret the phrase “could subject a person to suit under section 16(b)” and determine what that phrase requires a taxpayer to demonstrate before she can postpone tax consequences under § 83(c)(3). We then hold that the taxpayer here has not demonstrated an entitlement to deferral of tax consequences under § 83(c)(3)
So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person's rights in such property are — (A) subject to a substantial risk of forfeiture, and (B) not transferable.
This particular taxpayer did not qualify for the deferral.
Having established the standard for deferral of tax consequences under § 83(c)(3)—namely, a taxpayer must show that a § 16(b) suit premised on a sale of her stock would have had an objectively reasonable chance of success—we now turn to whether Strom has demonstrated that a sale of her InfoSpace stock could have subjected her to a § 16(b) suit meeting that standard.
To summarize our holdings: Under the SEC's interpretation of its rules, the vesting of Strom's unvested options did not constitute “purchases” under § 16(b). Thus, she is not entitled to defer the tax consequences of her option exercises under IRC § 83(c)(3), because she has not demonstrated that she could have been subject to a § 16(b) suit that had an objectively reasonable chance of success had she sold her stock at a profit in 1999 or 2000. A reasonably prudent and legally sophisticated person in Strom's position would have felt free to sell her property, because, if a § 16(b) suit had been brought against her, she would not have been forced to forfeit the profit obtained by the sale, nor would she have faced substantial legal expenses defending herself in a suit not readily dismissable.
Should any of these holdings appear anomalous, it is because § 83(c)(3)'s incorporation into the tax code of § 16(b) makes for strange bedfellows. The statutory and regulatory structures and purposes of the tax law and the securities law are distinct. In Strom's case, the interaction of the two statutory schemes means that she was not exposed to a realistic threat of forfeiting profits during the period when she was able to exercise options (and thereby incur tax consequences), because the period of concern for § 16(b) purposes had passed by then. There was therefore no overlap between the period of potential § 16(b) liability and the period Strom could incur tax consequences due to the options.
GREEN TREE SERVICING, LLC v. U.S., ET AL., Cite as 107 AFTR 2d 2011-XXXX
This one is interesting more for the light it sheds on the mortgage crisis than anything else. A first mortgage on a property will have priority over subsequently filed federal tax liens. What happened here was that a mortgage discharge was accidentally recorded. Then the federal liens were recorded. The entity wants to reinstate the mortgage and have it be superior to the federal liens. The IRS argued that federal law prohibits that. The Court ruled that federal law does not not necessarily prohibit the restored mortgage gaining priority, but that under state law, New Hampshire, the servicer did not qualify for the relief.
This case raises several questions about the availability of equitable relief to restore a mistakenly discharged mortgage to a position of priority over subsequent federal tax liens. The plaintiff, Green Tree Servicing, LLC, claims that its predecessor erroneously recorded a discharge of its mortgage on a parcel owned by defendants Dana E. and Kristi L. Ricker, and seeks to restore that mortgage to its original priority over intervening liens filed by the Internal Revenue Service.
Green Tree further explains that, because the mortgage securing Conseco's first loan was never recorded, Conseco “inadvertently executed and recorded a satisfaction of the new mortgage” when, presumably, it was intending to record a satisfaction of its first mortgage instead. Curiously, though, this did not happen until May 24, 2002--despite the fact that the first Conseco loan was satisfied as soon as the second Conseco loan was made, on October 9, 2001 (more than 7 months earlier). 2 Furthermore, as the government points out, Green Tree explains the filing of the satisfaction differently in its complaint, which alleges that, after the loan was assigned from Conseco to Green Tree (which would not seem to have been necessary if, as Green Tree says, Conseco simply changed its name to Green Tree) Conseco “executed, in error, a satisfaction of mortgage, rather than an assignment of mortgage and caused [it] to be recorded” (quotation marks and capitalization omitted).
The government objects to this relief on two principal grounds. First, the government maintains that federal law, which, again, controls the priority of its liens here, does not allow the reinstatement of a discharged mortgage to a position of seniority over subsequently filed tax liens, regardless of whether state law would. Second, the government argues that, in any event, Green Tree has not demonstrated its entitlement to the equitable reinstatement of the mortgage under New Hampshire law. The court disagrees with the government's first point but agrees with its second point. As a result, Green Tree's motion for summary judgment must be denied.
IN RE: KRAUSE, Cite as 107 AFTR 2d 2011-XXXX
This was an appeal of a bankruptcy case where IRS liens were allowed against property transferred to a trust. I like some of the language which is why I am sharing some of it.
Can a taxpayer avoid the IRS by moving money to a “diet cookie” company and then destroying records that might show the company to be a sham? Or by transferring assets to his “children's trusts” only to use the trusts to pay for his country club membership, buy cars, and fund his lifestyle? The answer, of course, is no. Why this is so takes a bit more explanation.
To determine whether a conveyance is fraudulent and so void as a matter of state law, Kansas law directs us to look for “six badges or indicia of fraud”: “(1) a relationship between the grantor and grantee; (2) the grantee's knowledge of litigation against the grantor; (3) insolvency of the grantor; (4) a belief on the grantee's part that the contract was the grantor's last asset subject to a Kansas execution; (5) inadequacy of consideration; and (6) consummation of the transaction contrary to normal business procedures.” Koch Eng'g Co. v. Faulconer, 716 P.2d 180, 184 (Kan. 1986) (internal quotation omitted).
Mr. Krause wears these badges boldly. In setting up the “children's trusts,” he transferred money first to his wife who, in turn, transferred them to the trusts, all for no consideration. Mr. Krause also transferred various insurance policies to the trusts, again for no consideration. Each of these transfers took place after Mr. Krause knew the IRS was conducting an audit of his taxes and after the IRS issued a notice disallowing certain of his claimed losses. And while Mr. Krause's brother, Richard, served as trustee for the children's trusts, both he and Mrs. Krause have admitted that Mr. Krause controlled the assets in question at all times. Indeed, Mr. Krause maintained no personal bank account after 2000 but instead used the children's trusts to pay for his country-club memberships, car loans, and other personal expenses. And Mr. Krause did all this without objection from Richard, who candidly described his philosophy toward the trusts as “stick your head in the sand and then you don't know what is going on.” Aplt's App. vol. 1, at 300. In light of these remarkable and undisputed facts, badges of fraud all, it is plain that Mr. Krause remained the owner of the transferred assets; that the children's trusts held those assets simply as his nominees; and that those assets are subject to attachment by Mr. Krause's creditors under Kansas law.See also William D. Elliott, Federal Tax Collections, Liens and Levies ¶ 9.10[1] (2d ed. 2000) (“The subject of nominee liens refers to situations when taxpayer's property or rights to property is held in the name of another or transferred to another party.”).
U.S. v. SIMMONS, Cite as 107 AFTR 2d 2011-XXXX
This one has a really impressive number.
Joyce M. Simmons appeals the sentence imposed following her guilty plea conviction for six counts of preparation of false tax returns. The district court sentenced Simmons to the statutory maximum sentence of three years of imprisonment on each count, and it ordered that the sentences would run consecutively for a total of 216 months. It also ordered Simmons to pay $28,261,295.08 in restitution to the Internal Revenue Service (IRS)
The evidence in the pre-sentence report (PSR) and the testimony of IRS Agent Shannon Dawson established the method by which the estimated tax loss was calculated. While Simmons correctly states that the forty-one tax returns investigated by Agent Dawson were not a completely random sample, the record does not indicate that those returns would have a higher falsity rate than any other returns prepared by Simmons. Moreover, the PSR correctly noted that Agent Dawson's calculation was conservative because she used the lower of two reasonable falsity percentages that she calculated from the investigated sample, and she did not include any tax loss from approximately 3,000 tax returns prepared by Simmons that did not include a Schedule C.
Simmons next argues that the district court erred by applying an enhancement for her utilizing sophisticated means during the offense. She contends that the means she utilized were not sophisticated and that an enhancement for use of a special skill pursuant to U.S.S.G. § 3B1.3 should not have applied because she received an enhancement for being in the business of preparing tax returns. She asserts that the enhancement was not appropriate because a sophisticated means enhancement was not applied in United States v. Poltonowicz, 353 F. App'x 690 [104 AFTR 2d 2009-7564] (3d Cir. 2009), even though the defendant in that tax preparation fraud case had previously worked as an analyst for the IRS criminal investigation division.
Other than that she was appealing the length of her sentence. While I sometimes find that stuff interesting I'm not going into it any further. I was disappointed that there was not more explanation of the scam that she was running.
____________________________________________________________________________
The last of the tax season developments will be up soon. The purpose of this blog is to provide a little bit of analysis on developments that are otherwise largely ignored. This is by way of apologizing for the fact that these items are over two months old. If I think time is of the essence on a development I will move it to the head of the line and even make a bonus post. If you look at my blog roll you will find other bloggers who get to things more quickly than I do. If you prefer to get things really slow though you should subscribe to AICPA publications as I discussed in this post.
STROM v. U.S., Cite as 107 AFTR 2d 2011-XXXX
This was fairly interesting case about non-qualified stock options. Generally when non-qualified stock options are exercised the holder recognizes income based on the difference between the fair market value of the stock and the exercise price. The income recognition is deferred, though, if the holder is precluded from selling the stock under SEC regulations :
In this opinion, we first interpret the phrase “could subject a person to suit under section 16(b)” and determine what that phrase requires a taxpayer to demonstrate before she can postpone tax consequences under § 83(c)(3). We then hold that the taxpayer here has not demonstrated an entitlement to deferral of tax consequences under § 83(c)(3)
So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person's rights in such property are — (A) subject to a substantial risk of forfeiture, and (B) not transferable.
This particular taxpayer did not qualify for the deferral.
Having established the standard for deferral of tax consequences under § 83(c)(3)—namely, a taxpayer must show that a § 16(b) suit premised on a sale of her stock would have had an objectively reasonable chance of success—we now turn to whether Strom has demonstrated that a sale of her InfoSpace stock could have subjected her to a § 16(b) suit meeting that standard.
To summarize our holdings: Under the SEC's interpretation of its rules, the vesting of Strom's unvested options did not constitute “purchases” under § 16(b). Thus, she is not entitled to defer the tax consequences of her option exercises under IRC § 83(c)(3), because she has not demonstrated that she could have been subject to a § 16(b) suit that had an objectively reasonable chance of success had she sold her stock at a profit in 1999 or 2000. A reasonably prudent and legally sophisticated person in Strom's position would have felt free to sell her property, because, if a § 16(b) suit had been brought against her, she would not have been forced to forfeit the profit obtained by the sale, nor would she have faced substantial legal expenses defending herself in a suit not readily dismissable.
Should any of these holdings appear anomalous, it is because § 83(c)(3)'s incorporation into the tax code of § 16(b) makes for strange bedfellows. The statutory and regulatory structures and purposes of the tax law and the securities law are distinct. In Strom's case, the interaction of the two statutory schemes means that she was not exposed to a realistic threat of forfeiting profits during the period when she was able to exercise options (and thereby incur tax consequences), because the period of concern for § 16(b) purposes had passed by then. There was therefore no overlap between the period of potential § 16(b) liability and the period Strom could incur tax consequences due to the options.
GREEN TREE SERVICING, LLC v. U.S., ET AL., Cite as 107 AFTR 2d 2011-XXXX
This one is interesting more for the light it sheds on the mortgage crisis than anything else. A first mortgage on a property will have priority over subsequently filed federal tax liens. What happened here was that a mortgage discharge was accidentally recorded. Then the federal liens were recorded. The entity wants to reinstate the mortgage and have it be superior to the federal liens. The IRS argued that federal law prohibits that. The Court ruled that federal law does not not necessarily prohibit the restored mortgage gaining priority, but that under state law, New Hampshire, the servicer did not qualify for the relief.
This case raises several questions about the availability of equitable relief to restore a mistakenly discharged mortgage to a position of priority over subsequent federal tax liens. The plaintiff, Green Tree Servicing, LLC, claims that its predecessor erroneously recorded a discharge of its mortgage on a parcel owned by defendants Dana E. and Kristi L. Ricker, and seeks to restore that mortgage to its original priority over intervening liens filed by the Internal Revenue Service.
Green Tree further explains that, because the mortgage securing Conseco's first loan was never recorded, Conseco “inadvertently executed and recorded a satisfaction of the new mortgage” when, presumably, it was intending to record a satisfaction of its first mortgage instead. Curiously, though, this did not happen until May 24, 2002--despite the fact that the first Conseco loan was satisfied as soon as the second Conseco loan was made, on October 9, 2001 (more than 7 months earlier). 2 Furthermore, as the government points out, Green Tree explains the filing of the satisfaction differently in its complaint, which alleges that, after the loan was assigned from Conseco to Green Tree (which would not seem to have been necessary if, as Green Tree says, Conseco simply changed its name to Green Tree) Conseco “executed, in error, a satisfaction of mortgage, rather than an assignment of mortgage and caused [it] to be recorded” (quotation marks and capitalization omitted).
The government objects to this relief on two principal grounds. First, the government maintains that federal law, which, again, controls the priority of its liens here, does not allow the reinstatement of a discharged mortgage to a position of seniority over subsequently filed tax liens, regardless of whether state law would. Second, the government argues that, in any event, Green Tree has not demonstrated its entitlement to the equitable reinstatement of the mortgage under New Hampshire law. The court disagrees with the government's first point but agrees with its second point. As a result, Green Tree's motion for summary judgment must be denied.
IN RE: KRAUSE, Cite as 107 AFTR 2d 2011-XXXX
This was an appeal of a bankruptcy case where IRS liens were allowed against property transferred to a trust. I like some of the language which is why I am sharing some of it.
Can a taxpayer avoid the IRS by moving money to a “diet cookie” company and then destroying records that might show the company to be a sham? Or by transferring assets to his “children's trusts” only to use the trusts to pay for his country club membership, buy cars, and fund his lifestyle? The answer, of course, is no. Why this is so takes a bit more explanation.
To determine whether a conveyance is fraudulent and so void as a matter of state law, Kansas law directs us to look for “six badges or indicia of fraud”: “(1) a relationship between the grantor and grantee; (2) the grantee's knowledge of litigation against the grantor; (3) insolvency of the grantor; (4) a belief on the grantee's part that the contract was the grantor's last asset subject to a Kansas execution; (5) inadequacy of consideration; and (6) consummation of the transaction contrary to normal business procedures.” Koch Eng'g Co. v. Faulconer, 716 P.2d 180, 184 (Kan. 1986) (internal quotation omitted).
Mr. Krause wears these badges boldly. In setting up the “children's trusts,” he transferred money first to his wife who, in turn, transferred them to the trusts, all for no consideration. Mr. Krause also transferred various insurance policies to the trusts, again for no consideration. Each of these transfers took place after Mr. Krause knew the IRS was conducting an audit of his taxes and after the IRS issued a notice disallowing certain of his claimed losses. And while Mr. Krause's brother, Richard, served as trustee for the children's trusts, both he and Mrs. Krause have admitted that Mr. Krause controlled the assets in question at all times. Indeed, Mr. Krause maintained no personal bank account after 2000 but instead used the children's trusts to pay for his country-club memberships, car loans, and other personal expenses. And Mr. Krause did all this without objection from Richard, who candidly described his philosophy toward the trusts as “stick your head in the sand and then you don't know what is going on.” Aplt's App. vol. 1, at 300. In light of these remarkable and undisputed facts, badges of fraud all, it is plain that Mr. Krause remained the owner of the transferred assets; that the children's trusts held those assets simply as his nominees; and that those assets are subject to attachment by Mr. Krause's creditors under Kansas law.See also William D. Elliott, Federal Tax Collections, Liens and Levies ¶ 9.10[1] (2d ed. 2000) (“The subject of nominee liens refers to situations when taxpayer's property or rights to property is held in the name of another or transferred to another party.”).
U.S. v. SIMMONS, Cite as 107 AFTR 2d 2011-XXXX
This one has a really impressive number.
Joyce M. Simmons appeals the sentence imposed following her guilty plea conviction for six counts of preparation of false tax returns. The district court sentenced Simmons to the statutory maximum sentence of three years of imprisonment on each count, and it ordered that the sentences would run consecutively for a total of 216 months. It also ordered Simmons to pay $28,261,295.08 in restitution to the Internal Revenue Service (IRS)
The evidence in the pre-sentence report (PSR) and the testimony of IRS Agent Shannon Dawson established the method by which the estimated tax loss was calculated. While Simmons correctly states that the forty-one tax returns investigated by Agent Dawson were not a completely random sample, the record does not indicate that those returns would have a higher falsity rate than any other returns prepared by Simmons. Moreover, the PSR correctly noted that Agent Dawson's calculation was conservative because she used the lower of two reasonable falsity percentages that she calculated from the investigated sample, and she did not include any tax loss from approximately 3,000 tax returns prepared by Simmons that did not include a Schedule C.
Simmons next argues that the district court erred by applying an enhancement for her utilizing sophisticated means during the offense. She contends that the means she utilized were not sophisticated and that an enhancement for use of a special skill pursuant to U.S.S.G. § 3B1.3 should not have applied because she received an enhancement for being in the business of preparing tax returns. She asserts that the enhancement was not appropriate because a sophisticated means enhancement was not applied in United States v. Poltonowicz, 353 F. App'x 690 [104 AFTR 2d 2009-7564] (3d Cir. 2009), even though the defendant in that tax preparation fraud case had previously worked as an analyst for the IRS criminal investigation division.
Other than that she was appealing the length of her sentence. While I sometimes find that stuff interesting I'm not going into it any further. I was disappointed that there was not more explanation of the scam that she was running.
Wednesday, July 9, 2014
Lien Filing Threshold Raised
Originally published on Passive Activities and Other Oxymorons on June 6th, 2011.
____________________________________________________________________________
IRSIG SBSE-05-0311-039
So here is just a little bit of good news that I am putting up as Mondays bonus post.
I have often commented that there are two distinct area of tax practice. (There are actually three but the third which Jack Townsend ably addresses in his aptly named blog, Federal Tax Crimes, is one in which mere accountants should not meddle except when hired and supervised by attorneys. In the other two the point at which attorneys get involved is a matter of judgement.) The first area, with which most adults have some familiarity, is tax determination, which includes return preparation and associated planning to minimize the ultimately determined tax. Some practitioners might argue that the planning and compliance are distinct areas but I believe they need to be very closely integrated. When the preparer doesn't understand the plan, the results are not good. The other area is collections. The IRS recognizes that they can't get blood from a stone. So how much of a properly determined tax will ultimately be collected is less straightforward then people who have spent their lives cutting checks for the balance due realize.
Thankfully, I don't have a lot of experience in the collection area. I do follow developments in it rather closely and this one may be of some significance. One of the tools that collections has is filing a lien. This is something that can make your life pretty miserable as this website explains:
A tax lien makes it very difficult to get any credit to make additional large purchases, such as a boat, car, or house. Having a lien placed on you by the IRS can be financially crippling for the time it is in place, it pretty much means you can't hold any assets in your name and you have to rely on other people for financing (as lien is on your credit too). All creditors would be notified including your mortgage company. A tax lien will stay in place as long as the IRS can legally enforce action against you (typically 10 years statute of limitations), or until your tax liabilities have been paid or settled with the IRS. The IRS becomes the highest of priority of creditors, so if you sold your house, car, or whatever property the lien was one and you had other liens on that property, the IRS would be the first to be paid.
So here is a little good news. The IRS has lifted the threshold for lien filing raising it from $5,000 to $10,000. Note that for an entity that is out of compliance in other areas, there is no threshold.
Interim Guidance for Increase in Lien Filing Threshold
FULL TEXT:
March 28, 2011
Control Number: SBSE-05-0311-039
Expires: March 28, 2012
Impacted: IRM 5.12.2.4.1(1)
IRM 5.12.2.4.2.3(1)
IRM 5.12.2.4.2.3(3)
IRM 5.12.2.4.2.3(6)
IRM 5.4.12.2.1.1
IRM 5.16.1.1(4)
IRM 5.8.4
MEMORANDUM FOR DIRECTOR, ADVISORY, INSOLVENCY AND QUALITY DIRECTORS, COLLECTION AREA OPERATIONS DIRECTOR, CAMPUS FILING AND PAYMENT COMPLIANCE DIRECTOR, CAMPUS COMPLIANCE OPERATIONS (CINCINNATI)
FROM:
Scott D. Reisher /s/ Scott D. Reisher
Acting Director, Collection Policy
SUBJECT:
Interim Guidance for Increase in Lien Filing Threshold
The purpose of this memorandum is to issue interim guidance regarding an increase to the threshold for filing Notices of Federal Tax Lien (NFTL) on field collection cases.
IRM 5.12.2.4.1 provides guidance on filing and withholding the NFTL under various circumstances. The following text will be removed from the current “If and Then” chart:
If
there is an Unpaid Balance of Assessment (UBA) below $5,000 and filing the lien will promote payment compliance.
Then
you may file a NFTL.
Note: This will also apply to additional assessments on currently open cases and those being reported as currently not collectable. You should take into account if assets are owned or the possibility of future assets being acquired during the collection statute period. In the case of accrual only liens, consider the amount of the accruals. (Accrual liens are discussed further in IRM 5.12.2.6(6) .
If there is a UBA of any amount for an entity and the entity is not adhering to compliance requirements such as federal tax deposits, return filings, etc. (i.e. including but not limited to subsequent assessment).
file a NFTL
Other references to $5,000 in the IRM 5.12.2.4.1(1) will be changed to $10,000.
In addition, the following sentence will be added to the end of IRM 5.12.2.4.1(1) :
Generally NFTLs will not be filed when the UBA is less than $10,000, but they may be filed if they will protect the government's interest, such as pending bankruptcy or other exigent circumstances.
IRM 5.12.2.4.2.3 reflects $5,000 in UBA as the dollar threshold for managerial approval of lien deferral and non-filing. This amount is likewise raised to $10,000.
If you have any questions, please contact me, or a member of your staff may contact Matthew Roberts, Senior Program Analyst.
____________________________________________________________________________
IRSIG SBSE-05-0311-039
So here is just a little bit of good news that I am putting up as Mondays bonus post.
I have often commented that there are two distinct area of tax practice. (There are actually three but the third which Jack Townsend ably addresses in his aptly named blog, Federal Tax Crimes, is one in which mere accountants should not meddle except when hired and supervised by attorneys. In the other two the point at which attorneys get involved is a matter of judgement.) The first area, with which most adults have some familiarity, is tax determination, which includes return preparation and associated planning to minimize the ultimately determined tax. Some practitioners might argue that the planning and compliance are distinct areas but I believe they need to be very closely integrated. When the preparer doesn't understand the plan, the results are not good. The other area is collections. The IRS recognizes that they can't get blood from a stone. So how much of a properly determined tax will ultimately be collected is less straightforward then people who have spent their lives cutting checks for the balance due realize.
Thankfully, I don't have a lot of experience in the collection area. I do follow developments in it rather closely and this one may be of some significance. One of the tools that collections has is filing a lien. This is something that can make your life pretty miserable as this website explains:
A tax lien makes it very difficult to get any credit to make additional large purchases, such as a boat, car, or house. Having a lien placed on you by the IRS can be financially crippling for the time it is in place, it pretty much means you can't hold any assets in your name and you have to rely on other people for financing (as lien is on your credit too). All creditors would be notified including your mortgage company. A tax lien will stay in place as long as the IRS can legally enforce action against you (typically 10 years statute of limitations), or until your tax liabilities have been paid or settled with the IRS. The IRS becomes the highest of priority of creditors, so if you sold your house, car, or whatever property the lien was one and you had other liens on that property, the IRS would be the first to be paid.
So here is a little good news. The IRS has lifted the threshold for lien filing raising it from $5,000 to $10,000. Note that for an entity that is out of compliance in other areas, there is no threshold.
Interim Guidance for Increase in Lien Filing Threshold
FULL TEXT:
March 28, 2011
Control Number: SBSE-05-0311-039
Expires: March 28, 2012
Impacted: IRM 5.12.2.4.1(1)
IRM 5.12.2.4.2.3(1)
IRM 5.12.2.4.2.3(3)
IRM 5.12.2.4.2.3(6)
IRM 5.4.12.2.1.1
IRM 5.16.1.1(4)
IRM 5.8.4
MEMORANDUM FOR DIRECTOR, ADVISORY, INSOLVENCY AND QUALITY DIRECTORS, COLLECTION AREA OPERATIONS DIRECTOR, CAMPUS FILING AND PAYMENT COMPLIANCE DIRECTOR, CAMPUS COMPLIANCE OPERATIONS (CINCINNATI)
FROM:
Scott D. Reisher /s/ Scott D. Reisher
Acting Director, Collection Policy
SUBJECT:
Interim Guidance for Increase in Lien Filing Threshold
The purpose of this memorandum is to issue interim guidance regarding an increase to the threshold for filing Notices of Federal Tax Lien (NFTL) on field collection cases.
IRM 5.12.2.4.1 provides guidance on filing and withholding the NFTL under various circumstances. The following text will be removed from the current “If and Then” chart:
If
there is an Unpaid Balance of Assessment (UBA) below $5,000 and filing the lien will promote payment compliance.
Then
you may file a NFTL.
Note: This will also apply to additional assessments on currently open cases and those being reported as currently not collectable. You should take into account if assets are owned or the possibility of future assets being acquired during the collection statute period. In the case of accrual only liens, consider the amount of the accruals. (Accrual liens are discussed further in IRM 5.12.2.6(6) .
If there is a UBA of any amount for an entity and the entity is not adhering to compliance requirements such as federal tax deposits, return filings, etc. (i.e. including but not limited to subsequent assessment).
file a NFTL
Other references to $5,000 in the IRM 5.12.2.4.1(1) will be changed to $10,000.
In addition, the following sentence will be added to the end of IRM 5.12.2.4.1(1) :
Generally NFTLs will not be filed when the UBA is less than $10,000, but they may be filed if they will protect the government's interest, such as pending bankruptcy or other exigent circumstances.
IRM 5.12.2.4.2.3 reflects $5,000 in UBA as the dollar threshold for managerial approval of lien deferral and non-filing. This amount is likewise raised to $10,000.
If you have any questions, please contact me, or a member of your staff may contact Matthew Roberts, Senior Program Analyst.
Monday, July 7, 2014
Seven Year Itch ?
Originally published on Passive Activities and Other Oxymorons on June 1st, 2011.
____________________________________________________________________________
John Adair, et ux. v. Commissioner, TC Memo 2011-75
This was an appeal from a collection due process hearing. Taxpayers had multiple liens on their house for different tax obligations. If all the liens were released they would have been able to borrow enough to pay off one of their obligations. Collections decided not to go for half a loaf. Tax Court indicated that IRS had not abused its discretion:
In his discretion, the Appeals officer decided that the benefits of the Adairs' proposal, i.e. the $58,108 in cash the government would have received, was outweighed by the impairment of the government's ability to collect the much greater total of the amounts as to which the notices of the two tax liens gave the government priority over other claims on their assets. We do not find that the Appeals officer abused his discretion.
Mona L. Herrington v. Commissioner, TC Memo 2011-73
This case was mainly interesting because of the story.
Petitioner's relationship with the boyfriend was marked by intimidation and physical abuse. When she failed to do his bidding or attempted to leave him, he reacted violently. He once threw her from a moving car. Another time when she threatened to leave him, he placed a gun against her forehead and cocked the hammer. On another occasion, in midwinter, he hit her in the head with a beer bottle and threw her from a boat into a lake. On another occasion, she testified credibly, he “gave me a picture of my daughter with her face shot out, and told me that's what would happen to her if I tried to leave.”
At some point after becoming involved with petitioner, the boyfriend obtained a video poker license and opened an establishment in Monroe, Louisiana. After only a few months, he lost his license for misdeeds that included selling liquor to a minor. The boyfriend convinced petitioner to open her own video poker business.
In 1996 petitioner acquired two video poker licenses in her own name. Because, according to petitioner's testimony, the licenses were required “to be run separately”, she opened two sandwich shops next door to each other in Farmerville, Louisiana, each with a video poker machine. Petitioner worked in the shops making sandwiches and dealing with the public. The boyfriend took charge of the finances and the books and had check-signing authority on the business bank accounts. Virtually all the shops' income resulted from video poker revenue.
Taxpayer claimed a compensation deduction for the money that Prince Charming took out of the business. The Tax Court determined that there was no intent to compensate, but despite how tough they can be on innocent spouses, the Tax Court can sometimes recognize a damsel in distress. They allowed the amounts he had taken as theft losses.
On a preponderance of the evidence we find (and respondent does not contend otherwise) that petitioner had no prospect of being reimbursed for any amounts the boyfriend took and that she sustained the losses in the years for which she has claimed the deductions. There is no dispute as to the amounts. On the basis of all the evidence, we hold and conclude that petitioner is entitled to deduct as theft losses incurred in a trade or business the $114,000 that the boyfriend took in 1997 and the $96,000 that he took in 1998.
Jeffrey L. Marchisio v. Commissioner, TC Summary Opinion 2011-39
Sometimes I long to find out the story behind the story knowing that it will forever be a mystery. Mr. Marchisio was married for 15 years (1990-2005). In 1997, his wife forged his signature to a loan document in order to buy a car. Mr. Marchisio found out about the transaction in 2007 when he received a 1099-C from Wells Fargo reflecting the cancelation of a loan in the amount of $5,358.
Petitioner disputes that he borrowed money from Wells Fargo or that he was a signatory to a financing agreement. Petitioner provided a copy of the financing contract to respondent, and the parties provided a copy of the financing contract to the Court. The financing contract includes two signatures, that of petitioner's former spouse and a purported signature of Jeffrey Marchisio. Petitioner asserts that the purported signature is not his. The Court notes that the purported signature on the financing contract does not appear to match petitioner's signature on the petition or on the stipulation of facts.
So the Tax Court went with the taxpayer on this one. In the very unlikely event that Mr. Marchisio was pulling a fast one, I have to give him credit for having the presence of mind to get someone else to sign his name to the stipulation that went to the Tax Court. From reading a lot of decisions I have concluded that there are some really dumb people out there or some otherwise smart people who think Tax Court judges are really dumb. Regardless, I believe that Mr. Marchisio did not know about the loan. What is really intriguing is that he never saw the car. So we are left to wonder who the heck was driving that car. Noting that the former Mrs. Marchisio forged her husbands name to a loan document to purchase the car after she had been married to him for seven years, my imagination becomes inflamed. Why would a married woman buy a car for someone. A little seven year itch maybe.
____________________________________________________________________________
John Adair, et ux. v. Commissioner, TC Memo 2011-75
This was an appeal from a collection due process hearing. Taxpayers had multiple liens on their house for different tax obligations. If all the liens were released they would have been able to borrow enough to pay off one of their obligations. Collections decided not to go for half a loaf. Tax Court indicated that IRS had not abused its discretion:
In his discretion, the Appeals officer decided that the benefits of the Adairs' proposal, i.e. the $58,108 in cash the government would have received, was outweighed by the impairment of the government's ability to collect the much greater total of the amounts as to which the notices of the two tax liens gave the government priority over other claims on their assets. We do not find that the Appeals officer abused his discretion.
Mona L. Herrington v. Commissioner, TC Memo 2011-73
This case was mainly interesting because of the story.
Petitioner's relationship with the boyfriend was marked by intimidation and physical abuse. When she failed to do his bidding or attempted to leave him, he reacted violently. He once threw her from a moving car. Another time when she threatened to leave him, he placed a gun against her forehead and cocked the hammer. On another occasion, in midwinter, he hit her in the head with a beer bottle and threw her from a boat into a lake. On another occasion, she testified credibly, he “gave me a picture of my daughter with her face shot out, and told me that's what would happen to her if I tried to leave.”
At some point after becoming involved with petitioner, the boyfriend obtained a video poker license and opened an establishment in Monroe, Louisiana. After only a few months, he lost his license for misdeeds that included selling liquor to a minor. The boyfriend convinced petitioner to open her own video poker business.
In 1996 petitioner acquired two video poker licenses in her own name. Because, according to petitioner's testimony, the licenses were required “to be run separately”, she opened two sandwich shops next door to each other in Farmerville, Louisiana, each with a video poker machine. Petitioner worked in the shops making sandwiches and dealing with the public. The boyfriend took charge of the finances and the books and had check-signing authority on the business bank accounts. Virtually all the shops' income resulted from video poker revenue.
Taxpayer claimed a compensation deduction for the money that Prince Charming took out of the business. The Tax Court determined that there was no intent to compensate, but despite how tough they can be on innocent spouses, the Tax Court can sometimes recognize a damsel in distress. They allowed the amounts he had taken as theft losses.
On a preponderance of the evidence we find (and respondent does not contend otherwise) that petitioner had no prospect of being reimbursed for any amounts the boyfriend took and that she sustained the losses in the years for which she has claimed the deductions. There is no dispute as to the amounts. On the basis of all the evidence, we hold and conclude that petitioner is entitled to deduct as theft losses incurred in a trade or business the $114,000 that the boyfriend took in 1997 and the $96,000 that he took in 1998.
Jeffrey L. Marchisio v. Commissioner, TC Summary Opinion 2011-39
Sometimes I long to find out the story behind the story knowing that it will forever be a mystery. Mr. Marchisio was married for 15 years (1990-2005). In 1997, his wife forged his signature to a loan document in order to buy a car. Mr. Marchisio found out about the transaction in 2007 when he received a 1099-C from Wells Fargo reflecting the cancelation of a loan in the amount of $5,358.
Petitioner disputes that he borrowed money from Wells Fargo or that he was a signatory to a financing agreement. Petitioner provided a copy of the financing contract to respondent, and the parties provided a copy of the financing contract to the Court. The financing contract includes two signatures, that of petitioner's former spouse and a purported signature of Jeffrey Marchisio. Petitioner asserts that the purported signature is not his. The Court notes that the purported signature on the financing contract does not appear to match petitioner's signature on the petition or on the stipulation of facts.
So the Tax Court went with the taxpayer on this one. In the very unlikely event that Mr. Marchisio was pulling a fast one, I have to give him credit for having the presence of mind to get someone else to sign his name to the stipulation that went to the Tax Court. From reading a lot of decisions I have concluded that there are some really dumb people out there or some otherwise smart people who think Tax Court judges are really dumb. Regardless, I believe that Mr. Marchisio did not know about the loan. What is really intriguing is that he never saw the car. So we are left to wonder who the heck was driving that car. Noting that the former Mrs. Marchisio forged her husbands name to a loan document to purchase the car after she had been married to him for seven years, my imagination becomes inflamed. Why would a married woman buy a car for someone. A little seven year itch maybe.
Sunday, July 6, 2014
Having Your Cake and Eating it Too
Originally published on Passive Activities and Other Oxymorons on May 30th, 2011.
____________________________________________________________________________
Larry E. Tucker v. Commissioner, TC Memo 2011-67
I could probably make a full length post out of this one, but I told a similar story not long ago and that one had much more dramatic numbers. Unlike the attorney who managed to lose over $20,000,000 he had earned before he bothered to pay the taxes on it, Mr. Tucker was dealing with more modest sums:
In January 2003, Mr. Tucker received payment in advance for some independent contractor web design project to be performed by him later in the year. He knew he would need this money to live on during the year, but he also knew he owed taxes and other creditors. In retrospect unwisely, he decided to try to leverage currently-unneeded funds into profits by which he could pay off his back tax debts and other creditors. So, he wire transferred some of the funds from his checking account to a newly-opened E-Trade account between January 10, 2003 and April 3, 2003. During January, he put $23,700 into the E-Trade account. Then, he began day trading. By the end of January, he showed a small profit, since the account was valued at $25,873.16 on January 31, 2003. From there, however, everything went south.
We don't learn from the case what happened to the "web design project". The case is about the IRS "abusing its discretion" in not allowing Mr. Tucker a work-out on his tax debts. The Court went with the IRS on this one:
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker's foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker's circumstances were of his own making. Therefore, we cannot criticize the Office of Appeals' conclusion that Mr. Tucker's losses associated with his day trading were a dissipation of assets that should be considered for inclusion in RCP as contemplated by IRM pt. 5.8.5.4.
John L. Parsley, et ux. v. Commissioner, TC Summary Opinion 2011-35
The decision was about penalties. There was a slightly convoluted fact pattern:
Myrna L. Parsley (petitioner) has been a real estate agent for more that 30 years. Petitioner in 1999 or 2000 took classes to learn about section 1031, involving so-called like-kind exchanges. She takes continuing education courses to maintain her real estate license and is a member of various real estate professional associations. Petitioner married her current husband, petitioner John Parsley, in 2000. He is also in the real estate business.
Petitioner's ex-husband, Joseph Benedict (Benedict), was a real estate broker. While married to petitioner Benedict purchased commercial property on Agler Road (the property) in his name only in June 1990. Petitioner learned of the purchase in 1992. After petitioner confronted Benedict with her discovery, he deeded to her an undivided interest in the property as a tenant in common. At that time petitioner was not engaged in the sale of commercial property. In January 1998 petitioner and Benedict divorced.
As part of the 1998 divorce settlement, Benedict was ordered to deed to petitioner his remaining ownership interest in the property, making her sole owner of the property. In September 2000 the State court caused Benedict to issue a quitclaim deed to petitioner for the property. Petitioners sold the property in February 2006 for $700,000. Petitioners reported a capital gain of $256,272 from the sale on their 2006 Federal income tax return. Petitioners calculated their gain using a basis of $502,205. Benedict purchased the property for $320,000. Respondent computed a capital gain on the sale of $488,071. The record does not reflect the extent to which depreciation affects the parties' calculations of basis and gain.
The taxpayers had told their preparer that their basis in the property was around $500,000. Because of the sparseness of the record the tax court gave them credit for basis of $320,000 (Nobody seems to have given them information on depreciation). Part of the reason for upholding the penalties was that the taxpayers had the professional knowledge to find out what Mrs. Parsley's ex-husband had paid for the property.
Todd A. Dagres, et ux. v. Commissioner, 136 T.C. No. 12
This one had a fairly interesting return presentation problem. Mr. Dagres was a venture capitalist. He loaned $5,000,000 to a business associate, who in addition to paying AFR would provide him leads on profitable investments. Apparently the business associate was not himself such a great investor as he was unable to pay the interest on the loan. Ultimately it was settled with Mr. Dagres taking a loss of $3,635,218 on the transaction. His position was that it was a business bad debt. The IRS said it was a non business bad debt, which would give rise to a capital loss. Alternatively they argued that if it was a business bad debt it was related to his business of being an employee of a venture capital firm, which would subject it to the 2% floor and make it non deductible.
Mr. Dagres, being a venture capitalist, had a pretty good salary $2,640,198. That is, of course, chump change compared to his capital gains of $40,579,41. The capital gain was not mainly from his own investing. It was the "profits interest" or "carry" from being a managing member of a venture capital partnership.
I would have been scratching my head about the return presentation problem. His advisers solved it by creating a Schedule C for his venture capital business and putting the bad debt deduction there. Not elegant, but it worked.
In exchange for this service, the fund manager receives both service fees and a profits interest, but neither the contingent nature of that profits interest nor its treatment as capital gain makes it any less compensation for services.
It looks to me like the Tax Court is letting the venture capitalists have their cake and eat it too. The partnership gets investor treatment which is attributed to the manager, but the manager is allowed trade or business treatment for purposes of taking a deduction.
____________________________________________________________________________
Larry E. Tucker v. Commissioner, TC Memo 2011-67
I could probably make a full length post out of this one, but I told a similar story not long ago and that one had much more dramatic numbers. Unlike the attorney who managed to lose over $20,000,000 he had earned before he bothered to pay the taxes on it, Mr. Tucker was dealing with more modest sums:
In January 2003, Mr. Tucker received payment in advance for some independent contractor web design project to be performed by him later in the year. He knew he would need this money to live on during the year, but he also knew he owed taxes and other creditors. In retrospect unwisely, he decided to try to leverage currently-unneeded funds into profits by which he could pay off his back tax debts and other creditors. So, he wire transferred some of the funds from his checking account to a newly-opened E-Trade account between January 10, 2003 and April 3, 2003. During January, he put $23,700 into the E-Trade account. Then, he began day trading. By the end of January, he showed a small profit, since the account was valued at $25,873.16 on January 31, 2003. From there, however, everything went south.
We don't learn from the case what happened to the "web design project". The case is about the IRS "abusing its discretion" in not allowing Mr. Tucker a work-out on his tax debts. The Court went with the IRS on this one:
The losses that Mr. Tucker sustained were not due to an unforeseeable event but rather were commonplace (especially for a neophyte) in such a highly volatile activity. Mr. Tucker knew he owed outstanding taxes; and he had the cash in hand that would have paid in full the taxes and accruals he owed as of early 2003 (i.e., for tax years 1999, 2000 and 2001); and yet he chose instead to devote that money to a risky investment. Mr. Tucker's foray into day trading was purely speculative, and his already slim chances of success were undermined by his inexperience. In short, Mr. Tucker's circumstances were of his own making. Therefore, we cannot criticize the Office of Appeals' conclusion that Mr. Tucker's losses associated with his day trading were a dissipation of assets that should be considered for inclusion in RCP as contemplated by IRM pt. 5.8.5.4.
John L. Parsley, et ux. v. Commissioner, TC Summary Opinion 2011-35
The decision was about penalties. There was a slightly convoluted fact pattern:
Myrna L. Parsley (petitioner) has been a real estate agent for more that 30 years. Petitioner in 1999 or 2000 took classes to learn about section 1031, involving so-called like-kind exchanges. She takes continuing education courses to maintain her real estate license and is a member of various real estate professional associations. Petitioner married her current husband, petitioner John Parsley, in 2000. He is also in the real estate business.
Petitioner's ex-husband, Joseph Benedict (Benedict), was a real estate broker. While married to petitioner Benedict purchased commercial property on Agler Road (the property) in his name only in June 1990. Petitioner learned of the purchase in 1992. After petitioner confronted Benedict with her discovery, he deeded to her an undivided interest in the property as a tenant in common. At that time petitioner was not engaged in the sale of commercial property. In January 1998 petitioner and Benedict divorced.
As part of the 1998 divorce settlement, Benedict was ordered to deed to petitioner his remaining ownership interest in the property, making her sole owner of the property. In September 2000 the State court caused Benedict to issue a quitclaim deed to petitioner for the property. Petitioners sold the property in February 2006 for $700,000. Petitioners reported a capital gain of $256,272 from the sale on their 2006 Federal income tax return. Petitioners calculated their gain using a basis of $502,205. Benedict purchased the property for $320,000. Respondent computed a capital gain on the sale of $488,071. The record does not reflect the extent to which depreciation affects the parties' calculations of basis and gain.
The taxpayers had told their preparer that their basis in the property was around $500,000. Because of the sparseness of the record the tax court gave them credit for basis of $320,000 (Nobody seems to have given them information on depreciation). Part of the reason for upholding the penalties was that the taxpayers had the professional knowledge to find out what Mrs. Parsley's ex-husband had paid for the property.
Todd A. Dagres, et ux. v. Commissioner, 136 T.C. No. 12
This one had a fairly interesting return presentation problem. Mr. Dagres was a venture capitalist. He loaned $5,000,000 to a business associate, who in addition to paying AFR would provide him leads on profitable investments. Apparently the business associate was not himself such a great investor as he was unable to pay the interest on the loan. Ultimately it was settled with Mr. Dagres taking a loss of $3,635,218 on the transaction. His position was that it was a business bad debt. The IRS said it was a non business bad debt, which would give rise to a capital loss. Alternatively they argued that if it was a business bad debt it was related to his business of being an employee of a venture capital firm, which would subject it to the 2% floor and make it non deductible.
Mr. Dagres, being a venture capitalist, had a pretty good salary $2,640,198. That is, of course, chump change compared to his capital gains of $40,579,41. The capital gain was not mainly from his own investing. It was the "profits interest" or "carry" from being a managing member of a venture capital partnership.
I would have been scratching my head about the return presentation problem. His advisers solved it by creating a Schedule C for his venture capital business and putting the bad debt deduction there. Not elegant, but it worked.
In exchange for this service, the fund manager receives both service fees and a profits interest, but neither the contingent nature of that profits interest nor its treatment as capital gain makes it any less compensation for services.
It looks to me like the Tax Court is letting the venture capitalists have their cake and eat it too. The partnership gets investor treatment which is attributed to the manager, but the manager is allowed trade or business treatment for purposes of taking a deduction.
Monday, June 30, 2014
Threaten to Go Bankrupt - That Will Really Scare Them
Originally published on Passive Activities and Other Oxymorons on May 9th, 2011.
____________________________________________________________________________
IN RE: MITCHELL, Cite as 107 AFTR 2d 2011-979
I sometimes think that many people believe that if you are couple of days late filing your tax return a SWAT team of armed IRS agents will surround your house. The enforcement mechanisms are much more creaky than that. It is possible to slide deeply into non-compliance and continue to live a normal life. After a while, you will just get used to it. You might think about cleaning up your act but you will be in a hole that is way too deep.
That is what happened with Larry Mitchell:
Between 1986 and early 2006, Mitchell was self-employed and worked for Kennon Parker as an independent contractor. Due to Mitchell's status as an independent contractor, Kennon Parker did not withhold payroll taxes from his commission checks, and Mitchell was responsible for remitting his outstanding federal income and employment taxes to the Internal Revenue Service (“IRS”). Until 1998, Mitchell paid all federal taxes owed; however, on multiple occasions he fell behind in payments, which resulted in levy threats and repayment plans with the IRS.
Starting in 1998, Mitchell simply stopped filing tax returns and stopped paying his federal income taxes. Mitchell maintained this pattern of noncompliance for five years, until June 2003, when he filed late returns for 1998 through 2002. At the time Mitchell filed these late tax returns, he did not make any payments toward his past due taxes for 1998 through 2002. At trial, Mitchell testified that he did not pay his taxes from 1998 to 2002 because his living, business, and divorce expenses fully exhausted his income.
You are supposed to organize your life so that you are living on your after tax income. Once you are past a certain income level, though, your taxes may well be your largest expense. If you are going to cut back in that area, why not go all the way ?
Mitchell earned an annual adjusted gross income of over $100,000 from 1998 to 2002, with the exception of 2000 when he earned approximately $88,000. When asked at trial why he had not paid anything towards his past due taxes even though in 2001 he earned over $170,000, 6 Mitchell responded: “[i]t doesn't take a rocket scientist to figure out that I'm going to owe somewhere around [$]300,000 plus interest and penalties. So at that point, I haven't filed anything. I don't have [$]300,000. I don't want to open this up yet.” . Additionally, from 2003 to 2006, despite consistently earning an annual adjusted gross income over $175,000, Mitchell did not pay any amount towards his past due taxes for 1998 to 2002, with the exception of payments made in July and August of 2006 under his installment agreement with the IRS.
I have observed in a couple of posts including this one that there are two distinct areas of tax practice. The first is the determination of the correct tax. As an individual you start that ball rolling when you file form 1040. That is the beginning and the end of that process for most people. The IRS assesses the tax that you computed and you are done. It is possible that you will be audited and not like the result of the audit. You can then appeal within the IRS. If you still don't like the result you can then go to tax court or federal district court or the court of claims. If you don't like what they have to say there are appellate courts in the various "circuits" that the country is divided into. If you don't like what the appellate court has to say there is the US Supreme Court, but they don't hear too many tax cases. Once that determination process is complete what happens if you don't pay ?
Do they throw you in jail ? Well, actually that is possible. There is, in fact, a third area of tax practice, that I don't get involved in at all. Jack Townsend has a very nice blog on the subject with the self-explanatory title of Federal Tax Crimes. Putting that aside, the second area of tax practice is collections. For most people that process begins and ends by them making a timely payment of the assessed tax. Instead you can do nothing and at some point the IRS will start the ball rolling or you can start it yourself by filing an Offer in Compromise. If the IRS has started the ball by sending you a notice of intent to levy your property you can file Request for a Collection Due Process or Equivalent Hearing. Although you can raise "doubt as to liability", generally there is no dispute about the correct tax at this point. It is all about your ability to pay.
Mr. Mitchell and his attorney worked the collection system to the max with three offers in compromise and an installment agreement that was in effect for a while. It is not my normal area of practice but I think they may have pushed it just a little beyond the envelope:
Mitchell's attorney sent a letter on November 12, 2004 to the IRS, which warned:
[I]n determining what is in the best interest of the IRS, the Service should look at reasonable collection potential ... due to the fact that the taxpayer could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could do so against 2002 in April, 2006, and against 2003 in April, 2007).
It reminds me of a story one of my college classmates told me. He and another Air Force attorney were at a base discussing a case with opposing counsel, who was encouraging them to settle because the expenses of the case, which the governent might have to bear depending on the outcome, could be quite high since depositions would have to be taken here there and everywhere. At that moment a fighter jet took off. My friend, who had been an electronics weapons officer before the Air Force sent him to law school, pointed to the quickly receding plane and said:
"You see that plane that just took off. It's going to use $20,000 worth of fuel before it lands. Are you really telling me that your firm is going to outspend the United States Air Force ?"
Threaten bankruptcy. I'm sure that's going to have the IRS collection guys just shaking in their boots. "Bankruptcy - Oh My God. We never thought of that. We could have had an armed escort at this meeting, but bankruptcy never entered our mind. We better settle."
The letter from the attorney did serve a purpose - to the government. It was not picked up by the trial court which discharged his tax indebtedness, but the appellate court took note of it:
Third, in November of 2004 while the third offer in compromise was pending, Mitchell's attorney sent a letter to the IRS warning that Mitchell “could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could so against 2002 in April, 2006, and against 2003 in April, 2007).” In other words, if the IRS refused to accept Mitchell's third offer in compromise of $35,000 for over $200,000 in tax debts, Mitchell would file bankruptcy and discharge his tax debts. Although the bankruptcy court had this letter in its possession, it apparently overlooked the paragraph in which Mitchell's attorney made this threat, and therefore it did not consider the letter as evidence of Mitchell's willfulness.
The appleate court did consider it evidence of willfulness.
So Mr. Mitchell still owes the taxes:
The bankruptcy court clearly erred in its finding that Mitchell did not act with the requisite mental state to satisfy the discharge exception of § 523(a)(1)(C). Accordingly, we REVERSE the decision of the district court and hold that Mitchell's tax debts for 1998 to 2002 fall within the scope of the § 523(a)(1)(C) exception, and therefore, such tax debts are not dischargeable in bankruptcy.
____________________________________________________________________________
IN RE: MITCHELL, Cite as 107 AFTR 2d 2011-979
I sometimes think that many people believe that if you are couple of days late filing your tax return a SWAT team of armed IRS agents will surround your house. The enforcement mechanisms are much more creaky than that. It is possible to slide deeply into non-compliance and continue to live a normal life. After a while, you will just get used to it. You might think about cleaning up your act but you will be in a hole that is way too deep.
That is what happened with Larry Mitchell:
Between 1986 and early 2006, Mitchell was self-employed and worked for Kennon Parker as an independent contractor. Due to Mitchell's status as an independent contractor, Kennon Parker did not withhold payroll taxes from his commission checks, and Mitchell was responsible for remitting his outstanding federal income and employment taxes to the Internal Revenue Service (“IRS”). Until 1998, Mitchell paid all federal taxes owed; however, on multiple occasions he fell behind in payments, which resulted in levy threats and repayment plans with the IRS.
Starting in 1998, Mitchell simply stopped filing tax returns and stopped paying his federal income taxes. Mitchell maintained this pattern of noncompliance for five years, until June 2003, when he filed late returns for 1998 through 2002. At the time Mitchell filed these late tax returns, he did not make any payments toward his past due taxes for 1998 through 2002. At trial, Mitchell testified that he did not pay his taxes from 1998 to 2002 because his living, business, and divorce expenses fully exhausted his income.
You are supposed to organize your life so that you are living on your after tax income. Once you are past a certain income level, though, your taxes may well be your largest expense. If you are going to cut back in that area, why not go all the way ?
Mitchell earned an annual adjusted gross income of over $100,000 from 1998 to 2002, with the exception of 2000 when he earned approximately $88,000. When asked at trial why he had not paid anything towards his past due taxes even though in 2001 he earned over $170,000, 6 Mitchell responded: “[i]t doesn't take a rocket scientist to figure out that I'm going to owe somewhere around [$]300,000 plus interest and penalties. So at that point, I haven't filed anything. I don't have [$]300,000. I don't want to open this up yet.” . Additionally, from 2003 to 2006, despite consistently earning an annual adjusted gross income over $175,000, Mitchell did not pay any amount towards his past due taxes for 1998 to 2002, with the exception of payments made in July and August of 2006 under his installment agreement with the IRS.
I have observed in a couple of posts including this one that there are two distinct areas of tax practice. The first is the determination of the correct tax. As an individual you start that ball rolling when you file form 1040. That is the beginning and the end of that process for most people. The IRS assesses the tax that you computed and you are done. It is possible that you will be audited and not like the result of the audit. You can then appeal within the IRS. If you still don't like the result you can then go to tax court or federal district court or the court of claims. If you don't like what they have to say there are appellate courts in the various "circuits" that the country is divided into. If you don't like what the appellate court has to say there is the US Supreme Court, but they don't hear too many tax cases. Once that determination process is complete what happens if you don't pay ?
Do they throw you in jail ? Well, actually that is possible. There is, in fact, a third area of tax practice, that I don't get involved in at all. Jack Townsend has a very nice blog on the subject with the self-explanatory title of Federal Tax Crimes. Putting that aside, the second area of tax practice is collections. For most people that process begins and ends by them making a timely payment of the assessed tax. Instead you can do nothing and at some point the IRS will start the ball rolling or you can start it yourself by filing an Offer in Compromise. If the IRS has started the ball by sending you a notice of intent to levy your property you can file Request for a Collection Due Process or Equivalent Hearing. Although you can raise "doubt as to liability", generally there is no dispute about the correct tax at this point. It is all about your ability to pay.
Mr. Mitchell and his attorney worked the collection system to the max with three offers in compromise and an installment agreement that was in effect for a while. It is not my normal area of practice but I think they may have pushed it just a little beyond the envelope:
Mitchell's attorney sent a letter on November 12, 2004 to the IRS, which warned:
[I]n determining what is in the best interest of the IRS, the Service should look at reasonable collection potential ... due to the fact that the taxpayer could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could do so against 2002 in April, 2006, and against 2003 in April, 2007).
It reminds me of a story one of my college classmates told me. He and another Air Force attorney were at a base discussing a case with opposing counsel, who was encouraging them to settle because the expenses of the case, which the governent might have to bear depending on the outcome, could be quite high since depositions would have to be taken here there and everywhere. At that moment a fighter jet took off. My friend, who had been an electronics weapons officer before the Air Force sent him to law school, pointed to the quickly receding plane and said:
"You see that plane that just took off. It's going to use $20,000 worth of fuel before it lands. Are you really telling me that your firm is going to outspend the United States Air Force ?"
Threaten bankruptcy. I'm sure that's going to have the IRS collection guys just shaking in their boots. "Bankruptcy - Oh My God. We never thought of that. We could have had an armed escort at this meeting, but bankruptcy never entered our mind. We better settle."
The letter from the attorney did serve a purpose - to the government. It was not picked up by the trial court which discharged his tax indebtedness, but the appellate court took note of it:
Third, in November of 2004 while the third offer in compromise was pending, Mitchell's attorney sent a letter to the IRS warning that Mitchell “could file bankruptcy against all of the non-payroll taxes except 2002 and 2003 (and could so against 2002 in April, 2006, and against 2003 in April, 2007).” In other words, if the IRS refused to accept Mitchell's third offer in compromise of $35,000 for over $200,000 in tax debts, Mitchell would file bankruptcy and discharge his tax debts. Although the bankruptcy court had this letter in its possession, it apparently overlooked the paragraph in which Mitchell's attorney made this threat, and therefore it did not consider the letter as evidence of Mitchell's willfulness.
The appleate court did consider it evidence of willfulness.
So Mr. Mitchell still owes the taxes:
The bankruptcy court clearly erred in its finding that Mitchell did not act with the requisite mental state to satisfy the discharge exception of § 523(a)(1)(C). Accordingly, we REVERSE the decision of the district court and hold that Mitchell's tax debts for 1998 to 2002 fall within the scope of the § 523(a)(1)(C) exception, and therefore, such tax debts are not dischargeable in bankruptcy.
Thursday, June 12, 2014
Another Scoop for PAOO - Short Sale Relocation Assistance Does Not Create Lien Equity
Originally published on Passive Activities and Other Oxymorons on January 24th, 2011.
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CCA 201103045
So here is another bonus post. Last week I did a post on CCA 201102058. It concerns relocation grants under the HAFA program. As I understand the program a senior lien holder can pay an upside down property owner up to $3,000 in relocation assistance to facilitate a short sale. The CCA indicated that the IRS cannot require that this money be turned over to them as a condition of releasing their otherwise worthless lien.
CCA 201103045, which I reproduce in full below explains that the position on relocation assistance is similar to the position that was first enunciated in PMTA 2010-058. In that statement they discussed carve outs for transfer taxes, which also do not create equity.
Over the weekend I received an e-mail from someone whose short sale was being hung up because of this issue. I have yet to see any other commentary on it.
ID: CCA_2010121214444350
Release Date: 1/21/2011 Office: —————
UILC: 6325.00-00
From: ———————————- Sent: Sunday, December 12, 2010 2:44:46 PM To: ———————————- Cc: ———————————- Subject: RE: opinion
It's not really the same situation although the result is the same - i.e., they should not include the payment in computing the Service's interest in the property. The October IG [interim guidance] memo deals with carve-outs to junior lienholders from money that would otherwise go to the senior lienholders. The relocation assistance is not part of the sale proceeds, it's just a payment made directly to the taxpayer and, as such, is not part of the taxpayer's interest in the real property to be discharged from the lien. A new IG memo on this will be coming out soon.
If you have a short sale that is being hung, you may have to wait for the "new IG memo" to percolate through collection, but it might be worth referring to the Chief Counsel Advice. If this ends up being helpful, I'd appreciate you posting a comment on this blog.
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CCA 201103045
So here is another bonus post. Last week I did a post on CCA 201102058. It concerns relocation grants under the HAFA program. As I understand the program a senior lien holder can pay an upside down property owner up to $3,000 in relocation assistance to facilitate a short sale. The CCA indicated that the IRS cannot require that this money be turned over to them as a condition of releasing their otherwise worthless lien.
CCA 201103045, which I reproduce in full below explains that the position on relocation assistance is similar to the position that was first enunciated in PMTA 2010-058. In that statement they discussed carve outs for transfer taxes, which also do not create equity.
Over the weekend I received an e-mail from someone whose short sale was being hung up because of this issue. I have yet to see any other commentary on it.
ID: CCA_2010121214444350
Release Date: 1/21/2011 Office: —————
UILC: 6325.00-00
From: ———————————- Sent: Sunday, December 12, 2010 2:44:46 PM To: ———————————- Cc: ———————————- Subject: RE: opinion
It's not really the same situation although the result is the same - i.e., they should not include the payment in computing the Service's interest in the property. The October IG [interim guidance] memo deals with carve-outs to junior lienholders from money that would otherwise go to the senior lienholders. The relocation assistance is not part of the sale proceeds, it's just a payment made directly to the taxpayer and, as such, is not part of the taxpayer's interest in the real property to be discharged from the lien. A new IG memo on this will be coming out soon.
If you have a short sale that is being hung, you may have to wait for the "new IG memo" to percolate through collection, but it might be worth referring to the Chief Counsel Advice. If this ends up being helpful, I'd appreciate you posting a comment on this blog.
Tuesday, June 10, 2014
More On Short Sales- Relocation Grants are For Relocation
Originally published on Passive Activities and Other Oxymorons on January 18th, 2011.
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CCA 201102058
Last month I wrote a post about IRS allowing that a carve-out by a lender for transfer taxes does not create equity in their lien. That burst of generosity is followed this month by even more beneficence. If under the Home Affordable Foreclosure Alternative program, the senior lender provides a taxpayer with $3,000 in relocation assistance, they can actually use that money to pay relocation expenses. The full text of the ruling is below:
In consultation with the Collection experts in Counsel, below is the answer to your question concerning whether the IRS can require a taxpayer to pay the IRS the amount of relocation expenses as a condition of discharge. Recently, the Treasury Department introduced the Home Affordable Foreclosure Alternatives (HAFA) program. The HAFA program took effect on April 5, 2010. Borrowers who participate in a HAFA transaction are eligible for $3,000 in relocation assistance. If the senior lender provides the taxpayer with the $3,000 relocation assistance required under the HAFA program, the IRS cannot require the taxpayer to turn the $3,000 over in exchange for the lien discharge. The HAFA program payment is a payment directly made to the taxpayer to assist in relocation. As such, the relocation payment has no bearing upon the taxpayer's equity in the property under a discharge analysis. Rather, this is just a payment to the taxpayer. Furthermore, under the terms of this program, since this is a required payment as a condition of participation in the program, it would likely be treated as an ordinary expense of sale to be allowed priority despite being reached by the federal tax lien. If a lender provides relocation assistance because the lender believes it makes good business sense and not because it is required under HAFA, the legal answer is the same. The IRS cannot require the taxpayer to pay the IRS the amount of the relocation expenses as a condition of discharge.
I don't know how we are ever going to solve the deficit if the Chief Counsel keeps giving away the store like this.
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CCA 201102058
Last month I wrote a post about IRS allowing that a carve-out by a lender for transfer taxes does not create equity in their lien. That burst of generosity is followed this month by even more beneficence. If under the Home Affordable Foreclosure Alternative program, the senior lender provides a taxpayer with $3,000 in relocation assistance, they can actually use that money to pay relocation expenses. The full text of the ruling is below:
In consultation with the Collection experts in Counsel, below is the answer to your question concerning whether the IRS can require a taxpayer to pay the IRS the amount of relocation expenses as a condition of discharge. Recently, the Treasury Department introduced the Home Affordable Foreclosure Alternatives (HAFA) program. The HAFA program took effect on April 5, 2010. Borrowers who participate in a HAFA transaction are eligible for $3,000 in relocation assistance. If the senior lender provides the taxpayer with the $3,000 relocation assistance required under the HAFA program, the IRS cannot require the taxpayer to turn the $3,000 over in exchange for the lien discharge. The HAFA program payment is a payment directly made to the taxpayer to assist in relocation. As such, the relocation payment has no bearing upon the taxpayer's equity in the property under a discharge analysis. Rather, this is just a payment to the taxpayer. Furthermore, under the terms of this program, since this is a required payment as a condition of participation in the program, it would likely be treated as an ordinary expense of sale to be allowed priority despite being reached by the federal tax lien. If a lender provides relocation assistance because the lender believes it makes good business sense and not because it is required under HAFA, the legal answer is the same. The IRS cannot require the taxpayer to pay the IRS the amount of the relocation expenses as a condition of discharge.
I don't know how we are ever going to solve the deficit if the Chief Counsel keeps giving away the store like this.
Monday, June 9, 2014
Cleaning Up For the New Year - Thank You Maam
Originally published on Passive Activities and Other Oxymorons on January 3rd, 2011.
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I still have a good backlog of 2010 material, that isn't blossoming into full length posts so here are a few quickies.
CCA 201048042
I'm involved in doing a lot of partnership returns and I think we do a pretty good job. One of the trickier parts is the liabilities section on the K-1. From our individual practice, I get to see a lot of the K-1's that are prepared elsewhere. Often it is pretty clear that they are wrong. Frequently it does not matter, but sometimes it does. A large deficit capital balance with no liability allocation is an example of a likely error. This CCA provides a little bit of a warning in deal with clearly erroneous K-1's.
Section 6222 requires the partners to report the amount and allocation of liabilities consistent with the partnership return unless they file a Notice of Inconsistent Treatment on Form 8082. In the absence of such a filing we are permitted to make an assessment without issuing a FPAA. I.R.C. 6222(c). They filed no such notice here so we do not need to conduct a TEFRA proceeding to make the assessment. Since outside basis is an affected item requiring partner-level determinations, however, we would have to issue an affected item notice of deficiency in order to assess a distribution in excess of basis. In the stat notice proceeding they could arguably rely on Roberts v. Commissioner, 94 T.C. 853, 860 (1990) to allege that the partnership books and records reflect the nonrecourse debt in issue, their reporting is consistent with the actual partnership books and records, and that the Schedule K-1 issued to them was incorrect. Cf. Treas. Reg. 301.6222(b)-3 (incorrect schedule provided to partner).
Private Letter Ruling 201048025, 12/03/2010
Code Sec. 1031(f); won't make benefits of Code Sec. 1031(a); unavailable to corp. under described circumstances provided that taxpayer, related party, and any affiliate undertaking exchange hold their respective replacement property for two years following their respective acquisition of replacement property.
This was a fairly convoluted set of facts. It involves a sequence of related party exchanges. I think the point of it was that since there was no ultimate cash out, nobody was getting away with anything. I'd appreciate any comments that anybody else who has studied this ruling might have.
Lori A. Malchow-Bartlett v. Commissioner, TC Memo 2010-271
Taxpayer was denied deduction for use of home for day care, because she was not properly licensed :
Under section 280A(c)(4)(A), a taxpayer may be allowed business expense deductions relating to use of a residence to conduct child day care services. However, the deductions are allowed only where the taxpayer has obtained, or has applied for and has pending, a license to conduct child daycare services under applicable State law or is exempt from obtaining a license therefor under applicable State law. Sec. 280A(c)(4)(B).
The court concluded that taxpayer acted in good faith so no penalties were assessed.
U.S. v. BEDFORD, Cite as 106 AFTR 2d 2010-7271, 12/09/2010
This case is really outside my area of interest. It is a criminal appeal. The thing that got him in trouble was kind of interesting though.
The genesis of this case involved a business called Tower Executive Resources that billed itself as an executive recruitment business. In fact, Tower promoted to its members the opportunity to protect assets and to enjoy tax deferral through an offshore venture. Tower marketed its asset protection services to select clients through seminars at which Defendant and others spoke.
Essentially, clients learned at these seminars how to create bogus corporate entities called “international business corporations,” referred to as IBC-1s and IBC-2s. IBC-1s were domestic corporations that would hire and pay IBC-2s, foreign corporations, to perform services for the IBC-1s. Those services did not actually occur.
Mohamed M. Magan v. Commissioner, TC Summary Opinion 2010-173
In January 2007, petitioner moved from the State of Minnesota to the State of California in order to be closer to his sister and her family. Throughout 2007 petitioner's sister was married and lived with her husband and five children in a single- family home. Petitioner's sister was a stay-at-home mom and her husband was a full-time student who only started working in late 2007.
From January to August 2007, petitioner worked nights. Although petitioner did not live with his sister and her family during this time, he would spend much of his time at their home helping with childcare and doing the family's errands. In addition to assisting with childcare and errands, petitioner also provided his sister's family with financial assistance.
In August 2007, petitioner obtained a job located far away from where his sister and her family lived. For the remainder of 2007, petitioner was unable to help his sister with child care and errands, but he continued to provide financial assistance.
Petitioner claims that he is entitled to dependency exemption deductions for his two nieces because he provided financial assistance, as well as help with child care and the family's errands. We commend petitioner for contributing to the support of his sister's family. However, he has not demonstrated that he and his nieces shared the same principal place of abode for any portion, much less for more than one-half, of the taxable year in issue.
I thought the commendation from the Tax Court was a nice touch, even thought they couldn't help the poor guy, who seems to have deserved a break.
It looks like January will have a few more post like this as I work through my backlog. If anything really significant develops, I'll be sure to do a bonus post.
____________________________________________________________________________
I still have a good backlog of 2010 material, that isn't blossoming into full length posts so here are a few quickies.
CCA 201048042
I'm involved in doing a lot of partnership returns and I think we do a pretty good job. One of the trickier parts is the liabilities section on the K-1. From our individual practice, I get to see a lot of the K-1's that are prepared elsewhere. Often it is pretty clear that they are wrong. Frequently it does not matter, but sometimes it does. A large deficit capital balance with no liability allocation is an example of a likely error. This CCA provides a little bit of a warning in deal with clearly erroneous K-1's.
Section 6222 requires the partners to report the amount and allocation of liabilities consistent with the partnership return unless they file a Notice of Inconsistent Treatment on Form 8082. In the absence of such a filing we are permitted to make an assessment without issuing a FPAA. I.R.C. 6222(c). They filed no such notice here so we do not need to conduct a TEFRA proceeding to make the assessment. Since outside basis is an affected item requiring partner-level determinations, however, we would have to issue an affected item notice of deficiency in order to assess a distribution in excess of basis. In the stat notice proceeding they could arguably rely on Roberts v. Commissioner, 94 T.C. 853, 860 (1990) to allege that the partnership books and records reflect the nonrecourse debt in issue, their reporting is consistent with the actual partnership books and records, and that the Schedule K-1 issued to them was incorrect. Cf. Treas. Reg. 301.6222(b)-3 (incorrect schedule provided to partner).
Private Letter Ruling 201048025, 12/03/2010
Code Sec. 1031(f); won't make benefits of Code Sec. 1031(a); unavailable to corp. under described circumstances provided that taxpayer, related party, and any affiliate undertaking exchange hold their respective replacement property for two years following their respective acquisition of replacement property.
This was a fairly convoluted set of facts. It involves a sequence of related party exchanges. I think the point of it was that since there was no ultimate cash out, nobody was getting away with anything. I'd appreciate any comments that anybody else who has studied this ruling might have.
Lori A. Malchow-Bartlett v. Commissioner, TC Memo 2010-271
Taxpayer was denied deduction for use of home for day care, because she was not properly licensed :
Under section 280A(c)(4)(A), a taxpayer may be allowed business expense deductions relating to use of a residence to conduct child day care services. However, the deductions are allowed only where the taxpayer has obtained, or has applied for and has pending, a license to conduct child daycare services under applicable State law or is exempt from obtaining a license therefor under applicable State law. Sec. 280A(c)(4)(B).
The court concluded that taxpayer acted in good faith so no penalties were assessed.
U.S. v. BEDFORD, Cite as 106 AFTR 2d 2010-7271, 12/09/2010
This case is really outside my area of interest. It is a criminal appeal. The thing that got him in trouble was kind of interesting though.
The genesis of this case involved a business called Tower Executive Resources that billed itself as an executive recruitment business. In fact, Tower promoted to its members the opportunity to protect assets and to enjoy tax deferral through an offshore venture. Tower marketed its asset protection services to select clients through seminars at which Defendant and others spoke.
Essentially, clients learned at these seminars how to create bogus corporate entities called “international business corporations,” referred to as IBC-1s and IBC-2s. IBC-1s were domestic corporations that would hire and pay IBC-2s, foreign corporations, to perform services for the IBC-1s. Those services did not actually occur.
Mohamed M. Magan v. Commissioner, TC Summary Opinion 2010-173
In January 2007, petitioner moved from the State of Minnesota to the State of California in order to be closer to his sister and her family. Throughout 2007 petitioner's sister was married and lived with her husband and five children in a single- family home. Petitioner's sister was a stay-at-home mom and her husband was a full-time student who only started working in late 2007.
From January to August 2007, petitioner worked nights. Although petitioner did not live with his sister and her family during this time, he would spend much of his time at their home helping with childcare and doing the family's errands. In addition to assisting with childcare and errands, petitioner also provided his sister's family with financial assistance.
In August 2007, petitioner obtained a job located far away from where his sister and her family lived. For the remainder of 2007, petitioner was unable to help his sister with child care and errands, but he continued to provide financial assistance.
Petitioner claims that he is entitled to dependency exemption deductions for his two nieces because he provided financial assistance, as well as help with child care and the family's errands. We commend petitioner for contributing to the support of his sister's family. However, he has not demonstrated that he and his nieces shared the same principal place of abode for any portion, much less for more than one-half, of the taxable year in issue.
I thought the commendation from the Tax Court was a nice touch, even thought they couldn't help the poor guy, who seems to have deserved a break.
It looks like January will have a few more post like this as I work through my backlog. If anything really significant develops, I'll be sure to do a bonus post.
Saturday, June 7, 2014
Evidence of Ferengi Infiltration of IRS
This was originally published in Passive Activities and Other Oxymorons on December 31, 2010.
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CCA 201049034
Once you have their money...never give it back.
Rule 1 - Ferengi Rules of Acquisition
The imagined future of Star Trek is one in which humans have advanced not only technologically, but also morally. They are less greedy and not racist or sexist and trying to be very benign to other cultures they encounter what with the Prime Directive, which Kirk only rationalized violating every other episode. That could have made for really boring stories. The solution was to project the less endearing, though more entertaining character traits of humanity onto alien humanoids.
The Ferengi, although distinguished for their sexism (Rule 139 - Wives serve, brothers inherit.) are best known for their greed which is religious in nature and embodied in the rules of acquisition. There is actually some sound advice (Rule 8- Small print leads to large risk.) mixed in with a commentary on the voracious nature of unrestrained capitalism (Rule 97 - Enough is never enough.) The rules provide significant grist for reflection, the most troubling being perhaps Rule 284 (Deep down everyone's a Ferengi.) CCA 201049034 highlights the Ferengi influence in the office of chief counsel of the IRS.
I am reproducing the CCA almost in full, but for those of you who don't relish the original sources as much as I do here is a plain English transaction:
We levied somebody's wages. After the underlying liability was fully paid the employer kept sending us money. We kept taking it. The taxpayer never noticed. Now so much time has gone by even if they asked for it back we couldn't give it to them. You know how it is statute of limitations and all that yada, yada, yada. Oh darn. Guess we have to keep it.
From: ———————— Sent: Wednesday, October 27, 2010 4:52:12 PM To: ——————————— Cc: —————————————————- Subject: #4741721 - Request for Review of Opinion —————
We have completed our review of the Counsel opinion issued in the above-referenced matter, with which you have expressed disagreement. To summarize the salient facts, the Automated Collection System (“ACS”) issued a continuous wage levy that was served on the taxpayer's employer. The employer remitted levied wages that satisfied each of the several tax year liabilities listed on the levy. However, ACS failed to issue a release of the levy. The employer continued to make remittances and the Service applied such latter remittances to other tax years that were not listed on the levy and for which the taxpayer has not filed any returns. The latest of such latter remittances occurred more than three years ago. The taxpayer has not filed any claims for refund.
Although we might have analyzed the matter differently, our conclusion is the same, to wit, that the Service is now prohibited from returning the latter remittances to the taxpayer. Assuming that the latter remittances resulted in overpayments, the limitation on the allowance of a refund contained in section 6511(b)(2) would prohibit the Service from making a refund, because no amounts were remitted within the last three years. Accordingly, were the taxpayer to timely file a claim for refund today (e.g., a Form 1040 for a year in which no return had yet been filed), the three-year lookback period would not extend back far enough to encompass any (involuntary) payments. As we discussed, our answer might be different if the taxpayer had made an informal claim for refund. In that event, the question would be whether the informal claim was made within two years of any of the latter remittances. However, you indicated that you were not aware of any writing that could be viewed as a request for refund.
We understand that the situation you describe might involve Service actions that would not conform to its policies or procedures. For example, the continuous wage levy likely should have been released after the listed liabilities were satisfied. You also indicated that, according to transcripts, some involuntary payments might have been misapplied. Finally, you questioned whether the Service may apply levied proceeds to tax liabilities for which no notices have been issued (including a CP 504 or a Collection Due Process levy notice described in section 6330). None of these procedural irregularities, if taken at face value, would trump the section 6511(b)(2) statutory limitation. Additionally, note that IRM Part 5.11.2.5 (08-24-2010) accurately describes surplus levy proceeds as subject to offset. Accordingly, section 6330 would not be implicated. This taxpayer should have been aware of the amounts of his tax liabilities that properly were subject to the wage levy. He also presumably was aware that his wages were being levied. Although the Service should have released the levy once the listed liabilities were satisfied, the taxpayer had ample time in which to raise an objection and ask that the Service both stop levying and refund the surplus proceeds. While we do not know what prompted the taxpayer to approach the Taxpayer Advocate Service at such later time, the statute does limit the time in which a taxpayer may request a refund, and more importantly, it places limits on the amounts that the Service is authorized to refund.
Be sure to check out today's edition of The Wandering Tax Pro. Robert Flach has been doing a series of interviews with tax bloggers and I understand this one is something really special.
__________________________________________________________________________
CCA 201049034
Once you have their money...never give it back.
Rule 1 - Ferengi Rules of Acquisition
The imagined future of Star Trek is one in which humans have advanced not only technologically, but also morally. They are less greedy and not racist or sexist and trying to be very benign to other cultures they encounter what with the Prime Directive, which Kirk only rationalized violating every other episode. That could have made for really boring stories. The solution was to project the less endearing, though more entertaining character traits of humanity onto alien humanoids.
The Ferengi, although distinguished for their sexism (Rule 139 - Wives serve, brothers inherit.) are best known for their greed which is religious in nature and embodied in the rules of acquisition. There is actually some sound advice (Rule 8- Small print leads to large risk.) mixed in with a commentary on the voracious nature of unrestrained capitalism (Rule 97 - Enough is never enough.) The rules provide significant grist for reflection, the most troubling being perhaps Rule 284 (Deep down everyone's a Ferengi.) CCA 201049034 highlights the Ferengi influence in the office of chief counsel of the IRS.
I am reproducing the CCA almost in full, but for those of you who don't relish the original sources as much as I do here is a plain English transaction:
We levied somebody's wages. After the underlying liability was fully paid the employer kept sending us money. We kept taking it. The taxpayer never noticed. Now so much time has gone by even if they asked for it back we couldn't give it to them. You know how it is statute of limitations and all that yada, yada, yada. Oh darn. Guess we have to keep it.
From: ———————— Sent: Wednesday, October 27, 2010 4:52:12 PM To: ——————————— Cc: —————————————————- Subject: #4741721 - Request for Review of Opinion —————
We have completed our review of the Counsel opinion issued in the above-referenced matter, with which you have expressed disagreement. To summarize the salient facts, the Automated Collection System (“ACS”) issued a continuous wage levy that was served on the taxpayer's employer. The employer remitted levied wages that satisfied each of the several tax year liabilities listed on the levy. However, ACS failed to issue a release of the levy. The employer continued to make remittances and the Service applied such latter remittances to other tax years that were not listed on the levy and for which the taxpayer has not filed any returns. The latest of such latter remittances occurred more than three years ago. The taxpayer has not filed any claims for refund.
Although we might have analyzed the matter differently, our conclusion is the same, to wit, that the Service is now prohibited from returning the latter remittances to the taxpayer. Assuming that the latter remittances resulted in overpayments, the limitation on the allowance of a refund contained in section 6511(b)(2) would prohibit the Service from making a refund, because no amounts were remitted within the last three years. Accordingly, were the taxpayer to timely file a claim for refund today (e.g., a Form 1040 for a year in which no return had yet been filed), the three-year lookback period would not extend back far enough to encompass any (involuntary) payments. As we discussed, our answer might be different if the taxpayer had made an informal claim for refund. In that event, the question would be whether the informal claim was made within two years of any of the latter remittances. However, you indicated that you were not aware of any writing that could be viewed as a request for refund.
We understand that the situation you describe might involve Service actions that would not conform to its policies or procedures. For example, the continuous wage levy likely should have been released after the listed liabilities were satisfied. You also indicated that, according to transcripts, some involuntary payments might have been misapplied. Finally, you questioned whether the Service may apply levied proceeds to tax liabilities for which no notices have been issued (including a CP 504 or a Collection Due Process levy notice described in section 6330). None of these procedural irregularities, if taken at face value, would trump the section 6511(b)(2) statutory limitation. Additionally, note that IRM Part 5.11.2.5 (08-24-2010) accurately describes surplus levy proceeds as subject to offset. Accordingly, section 6330 would not be implicated. This taxpayer should have been aware of the amounts of his tax liabilities that properly were subject to the wage levy. He also presumably was aware that his wages were being levied. Although the Service should have released the levy once the listed liabilities were satisfied, the taxpayer had ample time in which to raise an objection and ask that the Service both stop levying and refund the surplus proceeds. While we do not know what prompted the taxpayer to approach the Taxpayer Advocate Service at such later time, the statute does limit the time in which a taxpayer may request a refund, and more importantly, it places limits on the amounts that the Service is authorized to refund.
Be sure to check out today's edition of The Wandering Tax Pro. Robert Flach has been doing a series of interviews with tax bloggers and I understand this one is something really special.
Saturday, May 31, 2014
What's New With The Chief Counsel?
Originally published on Passive Activities and Other Oxymorons on December 24, 2010.
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There have been quite a few items of interest from the chief counsel's office. Here is what I think was worth noticing through mid December. I've got next week ready to go and these will start getting stale, so I'll make this a Merry Christmas bonus post.
CCA 201049041
The IRS will not transfer or redesignate a payment that has been applied to a taxpayer's account to satisfy a different liability of the taxpayer if the payment was applied according to the taxpayer's instructions. If the IRS applies a payment contrary to a taxpayer's instructions, the IRS will, upon request by the taxpayer, transfer the payment to the intended tax liability.
A corporation that believes it will have overpaid its estimated tax for the tax year may apply for a quick refund on Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, before the 16th day of the 3rd month after the end of the tax year at issue, but before it files its income tax return, if the overpayment is at least 10% of the expected tax liability and at least $500. A corporation should not file Form 4466 before the end of its tax year.
If you run into cash flow problems it would be nice if you could apply estimated income tax payments to payroll tax deposits, which have much more ferocious penalties. No such luck though. An estimated income tax payment is gone at least until after the end of the year in question.
CCA 201049040
As we discussed, we agree with your conclusion. Lines 3 and 8 of Form 6251 do not apply to taxes incurred in connection with a trade or business. See § 56(b)(1)(A), (b)(1)(D); Reg § 1.62-1T(d)
There is an AMT preference for taxes, but it would not apply, for example, to real estate taxes on Schedule E for a rental property. I don't think the principle extends to state income taxes attributable to a Schedule C activity.
CCA 201049035
The email responds to your request for assistance. You asked for advice regarding whether there is any limitations period applicable to reducing tax liability based on a net operating loss (NOL) carryback.
Section 6511(a) provides that a “[c]laim for credit or refund of an overpayment . . . shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” Section 6511(d)(2) provides an additional special period of limitation with respect to a claim for a refund or credit relating to an overpayment attributable to a NOL carryback. The relevant portion of section 6511(d)(2) provides, in lieu of the 3 year period of limitation prescribed in section 6511(a), the period shall be the period ending 3 years after the due date of the return (plus extensions) for the taxable year of the NOL.
In this case, the Service disallowed the taxpayer's purported claim for credit because it determined that it was untimely. However, you provided that the NOL carryback, if allowed, would not result in an overpayment which would generate a credit or refund but would simply reduce the taxpayer's outstanding tax liability. Even though there are restrictions on the time within which the Service may allow a claim for credit or refund, no such statutory impediments exist to prevent the carryback of an NOL to reduce a taxpayer's outstanding tax liabilities.
This might be of interest to someone dealing with collections who has had things go from bad to worth. Possibly a carryback from a subsequent disastrous year can alleviate an outstanding debt.
CCA 201049030
Subject: Filing joint return after filing of substitute for return ————
You asked whether a taxpayer can elect joint status after the Service has filed a substitute for return under section 6020(b) and has issued a notice of deficiency to the taxpayer. The Tax Court held in Millsap v. Commissioner, 91 T.C. 926, 936-937 (1998), acq. in result, AOD-1992-03, that a taxpayer is not foreclosed from electing joint status after the Service has prepared a return under section 6020(b) because the return does not constitute a “separate return” filed by the individual for purposes of section 6013(b). Because the taxpayer has not previously filed a separate return in this case, section 6013(b) does not apply, therefore, the taxpayer may file a joint return provided that none of the exceptions in section 6013(a) apply.
Section 6013(a)(2) states that “in the case of death of one spouse the joint return may be made by the surviving spouse . . . if no return for the taxable year has been made by the decedent, no executor or administrator has been appointed, and no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse.” The facts that you provided did not state whether an executor or administrator had been appointed. Thus, if an executor or administrator was not appointed, the taxpayer may file a joint return with respect to himself and his deceased spouse. See IRC section 6013(a)(2).
If you are married and he Service does your return for you it will be married filing separately. You may be able to reduce the tax if your spouse will consent to a joint return. If your spouse happens to be dead, you might be able to consent for them. Definitely has the makings of a Law and Order episode.
______________________________________________________________________
There have been quite a few items of interest from the chief counsel's office. Here is what I think was worth noticing through mid December. I've got next week ready to go and these will start getting stale, so I'll make this a Merry Christmas bonus post.
CCA 201049041
The IRS will not transfer or redesignate a payment that has been applied to a taxpayer's account to satisfy a different liability of the taxpayer if the payment was applied according to the taxpayer's instructions. If the IRS applies a payment contrary to a taxpayer's instructions, the IRS will, upon request by the taxpayer, transfer the payment to the intended tax liability.
A corporation that believes it will have overpaid its estimated tax for the tax year may apply for a quick refund on Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, before the 16th day of the 3rd month after the end of the tax year at issue, but before it files its income tax return, if the overpayment is at least 10% of the expected tax liability and at least $500. A corporation should not file Form 4466 before the end of its tax year.
If you run into cash flow problems it would be nice if you could apply estimated income tax payments to payroll tax deposits, which have much more ferocious penalties. No such luck though. An estimated income tax payment is gone at least until after the end of the year in question.
CCA 201049040
As we discussed, we agree with your conclusion. Lines 3 and 8 of Form 6251 do not apply to taxes incurred in connection with a trade or business. See § 56(b)(1)(A), (b)(1)(D); Reg § 1.62-1T(d)
There is an AMT preference for taxes, but it would not apply, for example, to real estate taxes on Schedule E for a rental property. I don't think the principle extends to state income taxes attributable to a Schedule C activity.
CCA 201049035
The email responds to your request for assistance. You asked for advice regarding whether there is any limitations period applicable to reducing tax liability based on a net operating loss (NOL) carryback.
Section 6511(a) provides that a “[c]laim for credit or refund of an overpayment . . . shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later.” Section 6511(d)(2) provides an additional special period of limitation with respect to a claim for a refund or credit relating to an overpayment attributable to a NOL carryback. The relevant portion of section 6511(d)(2) provides, in lieu of the 3 year period of limitation prescribed in section 6511(a), the period shall be the period ending 3 years after the due date of the return (plus extensions) for the taxable year of the NOL.
In this case, the Service disallowed the taxpayer's purported claim for credit because it determined that it was untimely. However, you provided that the NOL carryback, if allowed, would not result in an overpayment which would generate a credit or refund but would simply reduce the taxpayer's outstanding tax liability. Even though there are restrictions on the time within which the Service may allow a claim for credit or refund, no such statutory impediments exist to prevent the carryback of an NOL to reduce a taxpayer's outstanding tax liabilities.
This might be of interest to someone dealing with collections who has had things go from bad to worth. Possibly a carryback from a subsequent disastrous year can alleviate an outstanding debt.
CCA 201049030
Subject: Filing joint return after filing of substitute for return ————
You asked whether a taxpayer can elect joint status after the Service has filed a substitute for return under section 6020(b) and has issued a notice of deficiency to the taxpayer. The Tax Court held in Millsap v. Commissioner, 91 T.C. 926, 936-937 (1998), acq. in result, AOD-1992-03, that a taxpayer is not foreclosed from electing joint status after the Service has prepared a return under section 6020(b) because the return does not constitute a “separate return” filed by the individual for purposes of section 6013(b). Because the taxpayer has not previously filed a separate return in this case, section 6013(b) does not apply, therefore, the taxpayer may file a joint return provided that none of the exceptions in section 6013(a) apply.
Section 6013(a)(2) states that “in the case of death of one spouse the joint return may be made by the surviving spouse . . . if no return for the taxable year has been made by the decedent, no executor or administrator has been appointed, and no executor or administrator is appointed before the last day prescribed by law for filing the return of the surviving spouse.” The facts that you provided did not state whether an executor or administrator had been appointed. Thus, if an executor or administrator was not appointed, the taxpayer may file a joint return with respect to himself and his deceased spouse. See IRC section 6013(a)(2).
If you are married and he Service does your return for you it will be married filing separately. You may be able to reduce the tax if your spouse will consent to a joint return. If your spouse happens to be dead, you might be able to consent for them. Definitely has the makings of a Law and Order episode.
Wednesday, May 28, 2014
How Much Process Do We Really Need?
This was published on Passive Activities and Other Oxymorons on December 24, 2010.
______________________________________________________________________
Susan Fay Mostafa v. Commissioner, TC Memo 2010-277 , Code Sec(s) 6330.
In my professional life, I represent taxpayers. So my general inclination is to root for them. Sometimes, though, I really wonder if we have too much process. Susan Fay Mostafa did not file her 1996 return (Sometimes I have this time warp thing where I will type 1995 where I really mean 2005. That's not the case here. I really mean 1996). The IRS issued a notice of deficiency which Ms. Mostafa appealed to Tax Court.
In her first round in Tax Court (TCM 2006-106) she brought up some unique arguments. She argued that the IRS was barred from assessing her by the statute of limitations (You have to file a return to start the statute). She had blown an IRA rollover by just 4 days but had no explanation. She also asked for attorneys fees. The court indicated that she hadn't made the motion properly. Regardless, you don't get attorney fees when you lose. They didn't even mention that she was representing herself.
Having lost in tax court, she still didn't pay. So the IRS proposed to levy her assets. Of course she got out trusty old form 12153 and requested a collection due process hearing. She also mailed a check to the IRS for $701 with the notation "Endorsing this check accepts 1996 tax return paid in full". (The tax liability was $1,377 with a 25% non-filing penalty tacked on. I don't want to think about how much interest there must be.) The check was processed.
The appeals officer did not buy her argument that processing her check compromised the liability:
The Tp wanted to bring up liability issue but I explained to her that the hearing is to setup a collection alternative, such as a OIC as that is the box she marked on form 12153. TP states she has been to tax court but disagrees with amount owed and stated she was told that if she sent in the payment $701.00 that the account would be full paid and she said she stated that on her check (if check was cashed that would be agreeing account was full paid) On November 19, 2008, the Appeals Office issued a notice of determination sustaining the proposed levy. The notice of determination stated that Mostafa had attempted to raise the issue of her underlying tax liability but that she could not do so because she had received a deficiency notice.
So Ms. Mostafa decided to go to Tax Court, again. And, being experienced now, she represented herself, again.
The Tax Court did not buy her argument, It noted that she did not make her offer in compromise on the approved form and the IRS did not inform her it had been accepted.
There are a couple of practical points here.
If you are anywhere near owing tax you should file a return even if you think you don't owe tax. That will get the statute of limitations working for you in the event you are mistaken. (If you are married and not filing a joint return, you should always file a separate return since you can be deemed to have consented to a joint return you didn't sign.)
A friend of mine who does collections indicates that when he does form 12153, he always checks all the boxes, which includes "Doubt as to Liability". If Ms. Mostafa had done that maybe the Appeals officer would have considered her argument. It's like if you are accused of murdering somebody you say you weren't there and if you were there you didn't do it and if you did it it was self-defense and anyway you're insane.
Finally, the paid in full trick on the check is really clever, but it does not work.
On a policy level, my question is whether somebody should really be entitled to two trips to Tax Court on the same liability which will be almost 14 years old if it finally is collected. It appears to me that for some people, the income tax really is voluntary.
______________________________________________________________________
Susan Fay Mostafa v. Commissioner, TC Memo 2010-277 , Code Sec(s) 6330.
In my professional life, I represent taxpayers. So my general inclination is to root for them. Sometimes, though, I really wonder if we have too much process. Susan Fay Mostafa did not file her 1996 return (Sometimes I have this time warp thing where I will type 1995 where I really mean 2005. That's not the case here. I really mean 1996). The IRS issued a notice of deficiency which Ms. Mostafa appealed to Tax Court.
In her first round in Tax Court (TCM 2006-106) she brought up some unique arguments. She argued that the IRS was barred from assessing her by the statute of limitations (You have to file a return to start the statute). She had blown an IRA rollover by just 4 days but had no explanation. She also asked for attorneys fees. The court indicated that she hadn't made the motion properly. Regardless, you don't get attorney fees when you lose. They didn't even mention that she was representing herself.
Having lost in tax court, she still didn't pay. So the IRS proposed to levy her assets. Of course she got out trusty old form 12153 and requested a collection due process hearing. She also mailed a check to the IRS for $701 with the notation "Endorsing this check accepts 1996 tax return paid in full". (The tax liability was $1,377 with a 25% non-filing penalty tacked on. I don't want to think about how much interest there must be.) The check was processed.
The appeals officer did not buy her argument that processing her check compromised the liability:
The Tp wanted to bring up liability issue but I explained to her that the hearing is to setup a collection alternative, such as a OIC as that is the box she marked on form 12153. TP states she has been to tax court but disagrees with amount owed and stated she was told that if she sent in the payment $701.00 that the account would be full paid and she said she stated that on her check (if check was cashed that would be agreeing account was full paid) On November 19, 2008, the Appeals Office issued a notice of determination sustaining the proposed levy. The notice of determination stated that Mostafa had attempted to raise the issue of her underlying tax liability but that she could not do so because she had received a deficiency notice.
So Ms. Mostafa decided to go to Tax Court, again. And, being experienced now, she represented herself, again.
The Tax Court did not buy her argument, It noted that she did not make her offer in compromise on the approved form and the IRS did not inform her it had been accepted.
There are a couple of practical points here.
If you are anywhere near owing tax you should file a return even if you think you don't owe tax. That will get the statute of limitations working for you in the event you are mistaken. (If you are married and not filing a joint return, you should always file a separate return since you can be deemed to have consented to a joint return you didn't sign.)
A friend of mine who does collections indicates that when he does form 12153, he always checks all the boxes, which includes "Doubt as to Liability". If Ms. Mostafa had done that maybe the Appeals officer would have considered her argument. It's like if you are accused of murdering somebody you say you weren't there and if you were there you didn't do it and if you did it it was self-defense and anyway you're insane.
Finally, the paid in full trick on the check is really clever, but it does not work.
On a policy level, my question is whether somebody should really be entitled to two trips to Tax Court on the same liability which will be almost 14 years old if it finally is collected. It appears to me that for some people, the income tax really is voluntary.
Some Items of Interest
Originally published on Passive Activities and Other Oxymorons on December 22, 2010.
______________________________________________________________________________
I've got quite a few developments that I'd like to share that I can't seem to work into a full length treatment. In rough chronological order they are :
NEW PHOENIX SUNRISE CORP. v. COMM., Cite as 106 AFTR 2d 2010-7116, 11/18/2010
Tentative title was "How Sweet it Is ?". This was similar to the currency swap I wrote about in October. This deal had a business purpose fig leaf. Even though the transaction on which millions of dollars of losses were claimed was almost guaranteed to have a loss of around $100,000 there was a chance of an enormous return :
The fourth possible outcome would occur if the spot rate for one of the option pairs “hit the sweet spot,” meaning that the long option and the short option comprising one of the option pairs expired in the money and out of the money, respectively. This would happen if the spot rate on December 12 were 127.75 or 127.76 yen per dollar, or if the spot rate on December 18 were 128.75 or 128.76 yen per dollar. Then, Capital would earn a profit of $73,500,000 on its net investment of $131,250 because it would have an additional receipt of $73,631,250 on either December 14 or December 20. The final possible outcome would occur if both option pairs hit the sweet spot. Then, Capital would earn a profit of $147,131,250 on its net investment of $131,250 because it would have additional receipts or $73,631,250 on both December 14 and December 20.
According to the IRS expert that the Court accepted there actually was no chance of the sweet spot being hit since the counter party had enough discretion and market clout to prevent it.
CC 2011-004
The following steps should be taken when a taxpayer is alleging, in an appeal to the Tax Court from a notice of determination sustaining a levy action, that the levy should not proceed because it would cause economic hardship: 1) the administrative record should be reviewed to determine whether the taxpayer raised economic hardship and whether the facts support the assertion that the levy would prevent the taxpayer from meeting necessary living expenses; and 2) if a credible argument of economic hardship was raised, but the settlement or appeals officer did not address the issue, a motion should be filed requesting that the case be remanded to Appeals so that the settlement or appeals officer can consider properly whether the levy action is inappropriate because the taxpayer would suffer an economic hardship if a levy is served.
This is a change in IRS policy regarding levies where taxpayers are not in current compliance. Regardless of the current compliance, the appeals officer must consider hardship. A study of collection cases sometimes makes me think that the income tax really is voluntary.
Hardy Ray Murphy, et ux. v. Commissioner, TC Memo 2010-264
Tentative title was "Brother Can You Spare a Deductible Dime". This was a substantiation case. Taxpayer was taking a deduction for lunches that he bought for some homeless men that he befriended. For a period of time he and his wife were regular churchgoers
Mr. Murphy claims he contributed between $100 and $200 each time he went to church for a total of $300 to $500 each week. While Lake Avenue Church did provide envelopes for contributions, petitioners did not use them. In addition to contributions to Lake Avenue Church, petitioners contend they made small contributions to San Gabriel Union Church and St. Mark's Episcopal School. Both Mr. Murphy and his daughter attended St. Mark's Episcopal School. Mr. Murphy asserted that the total amount of tithing to the two churches and the school was approximately $20,000.
The Tax Court pointed Mr. Murphy to the substantiation rules for charitable contribution. I'd like to believe Mr. Murphy, but I don't recall any news reports of church ushers dying from shock when they found portraits of Benjamin Franklin in the collection plate so I'm a little skeptical.
U.S. v. BOWDEN, Cite as 106 AFTR 2d 2010-7195, 11/30/2010
Tentative title for this one was "King David Headed for the Clink".
Wesley David Bowden appeals his conviction on six counts of attempted tax evasion and his six concurrent prison terms of 24 months each. The Government has moved to dismiss the appeal as frivolous or for summary affirmance or, alternatively, for an extension of time.
Bowden asserts that the only issue on appeal is whether the district court had jurisdiction to convict him. He contends that it did not because he is a sovereign and not subject to the laws of the United States.
The Court found his appeal to be frivolous. So maybe he should try jester rather sovereign.
NEVADA PARTNERS FUND, LLC v. U.S, Cite as 105 AFTR 2d 2010-2133, 04/30/2010
At the October 2, 2001, meeting, Williams and his attorneys met with KPMG agent Donna Bruce, who understood that the purpose of the meeting was to alleviate large gains arising from the B.C. Rogers note exchange, having been informed that the gain would amount to nearly $20,000,000.00. She told Williams that KPMG had been recommending to its clients facing the imminent prospect of large ordinary and capital gains a new strategy to be pursued through an investment advisor experienced in financial structure, hedge funds and more exotic forms of investment designed to provide tax benefits. Bruce named several investment advisors to be considered by Williams, including a hedge fund called Bricolage, LLC, in New York City, an entity owned and managed by one Andrew Beer.
Another convoluted KPMG deal that didn't work out as intended. I think I'm going to stop studying these things as I might get confused by them.
CCA 201048043
Tentative title was "Say What ?" I really don't know what they are talking about here. I suppose if I ran down the references I would have a clue, but I don't think I'll bother. Hope it is nothing important.
UIL No. 6227.00-00
Release Date: 12/03/2010
ID: CCA_2010102109152937
Release Date: 12/3/2010 Office: —————
UILC: 6227.00-00
From: —————————- Sent: Thursday, October 21, 2010 9:15:31 AM To: —————————— Cc: —————- Subject: RE: TEFRA question ————-
Correct. If an NBAP has been issued, then any AAR issues would be resolved in the FPAA and no separate petition of the AARs could be filed. I.R.C. 6228(a)(2)(B). In addition, we cannot issue any affected item notices of deficiency until after the partnership proceeding is complete. GAF v. Commissioner.
EMMANUEL OWENS v. COMMISSIONER OF INTERNAL REVENUE, TC Memo 2010-265
Mr. Owens is a corrections officer in a state system. The way the judge in this decision kept emphasizing that he had signed one return under pains and penalties or perjury and then an amended return with a significantly different position also under such pains and penalties, I was thinking the judge was hinting that he could end up in a federal facility in a capacity other than as corrections officer. His original return had $22,921 in unsubstantiated schedule A job related deductions. The amended return moved them to Schedule C. They remained unsubstantiated and thus non-deductible. Fairly typical tax court case, but I found it a little amusing.
Well, I'm back to studying the tax bill. You won't be learning about it here unless there is something quirky that is not being heavily noticed.
______________________________________________________________________________
I've got quite a few developments that I'd like to share that I can't seem to work into a full length treatment. In rough chronological order they are :
NEW PHOENIX SUNRISE CORP. v. COMM., Cite as 106 AFTR 2d 2010-7116, 11/18/2010
Tentative title was "How Sweet it Is ?". This was similar to the currency swap I wrote about in October. This deal had a business purpose fig leaf. Even though the transaction on which millions of dollars of losses were claimed was almost guaranteed to have a loss of around $100,000 there was a chance of an enormous return :
The fourth possible outcome would occur if the spot rate for one of the option pairs “hit the sweet spot,” meaning that the long option and the short option comprising one of the option pairs expired in the money and out of the money, respectively. This would happen if the spot rate on December 12 were 127.75 or 127.76 yen per dollar, or if the spot rate on December 18 were 128.75 or 128.76 yen per dollar. Then, Capital would earn a profit of $73,500,000 on its net investment of $131,250 because it would have an additional receipt of $73,631,250 on either December 14 or December 20. The final possible outcome would occur if both option pairs hit the sweet spot. Then, Capital would earn a profit of $147,131,250 on its net investment of $131,250 because it would have additional receipts or $73,631,250 on both December 14 and December 20.
According to the IRS expert that the Court accepted there actually was no chance of the sweet spot being hit since the counter party had enough discretion and market clout to prevent it.
CC 2011-004
The following steps should be taken when a taxpayer is alleging, in an appeal to the Tax Court from a notice of determination sustaining a levy action, that the levy should not proceed because it would cause economic hardship: 1) the administrative record should be reviewed to determine whether the taxpayer raised economic hardship and whether the facts support the assertion that the levy would prevent the taxpayer from meeting necessary living expenses; and 2) if a credible argument of economic hardship was raised, but the settlement or appeals officer did not address the issue, a motion should be filed requesting that the case be remanded to Appeals so that the settlement or appeals officer can consider properly whether the levy action is inappropriate because the taxpayer would suffer an economic hardship if a levy is served.
This is a change in IRS policy regarding levies where taxpayers are not in current compliance. Regardless of the current compliance, the appeals officer must consider hardship. A study of collection cases sometimes makes me think that the income tax really is voluntary.
Hardy Ray Murphy, et ux. v. Commissioner, TC Memo 2010-264
Tentative title was "Brother Can You Spare a Deductible Dime". This was a substantiation case. Taxpayer was taking a deduction for lunches that he bought for some homeless men that he befriended. For a period of time he and his wife were regular churchgoers
Mr. Murphy claims he contributed between $100 and $200 each time he went to church for a total of $300 to $500 each week. While Lake Avenue Church did provide envelopes for contributions, petitioners did not use them. In addition to contributions to Lake Avenue Church, petitioners contend they made small contributions to San Gabriel Union Church and St. Mark's Episcopal School. Both Mr. Murphy and his daughter attended St. Mark's Episcopal School. Mr. Murphy asserted that the total amount of tithing to the two churches and the school was approximately $20,000.
The Tax Court pointed Mr. Murphy to the substantiation rules for charitable contribution. I'd like to believe Mr. Murphy, but I don't recall any news reports of church ushers dying from shock when they found portraits of Benjamin Franklin in the collection plate so I'm a little skeptical.
U.S. v. BOWDEN, Cite as 106 AFTR 2d 2010-7195, 11/30/2010
Tentative title for this one was "King David Headed for the Clink".
Wesley David Bowden appeals his conviction on six counts of attempted tax evasion and his six concurrent prison terms of 24 months each. The Government has moved to dismiss the appeal as frivolous or for summary affirmance or, alternatively, for an extension of time.
Bowden asserts that the only issue on appeal is whether the district court had jurisdiction to convict him. He contends that it did not because he is a sovereign and not subject to the laws of the United States.
The Court found his appeal to be frivolous. So maybe he should try jester rather sovereign.
NEVADA PARTNERS FUND, LLC v. U.S, Cite as 105 AFTR 2d 2010-2133, 04/30/2010
At the October 2, 2001, meeting, Williams and his attorneys met with KPMG agent Donna Bruce, who understood that the purpose of the meeting was to alleviate large gains arising from the B.C. Rogers note exchange, having been informed that the gain would amount to nearly $20,000,000.00. She told Williams that KPMG had been recommending to its clients facing the imminent prospect of large ordinary and capital gains a new strategy to be pursued through an investment advisor experienced in financial structure, hedge funds and more exotic forms of investment designed to provide tax benefits. Bruce named several investment advisors to be considered by Williams, including a hedge fund called Bricolage, LLC, in New York City, an entity owned and managed by one Andrew Beer.
Another convoluted KPMG deal that didn't work out as intended. I think I'm going to stop studying these things as I might get confused by them.
CCA 201048043
Tentative title was "Say What ?" I really don't know what they are talking about here. I suppose if I ran down the references I would have a clue, but I don't think I'll bother. Hope it is nothing important.
UIL No. 6227.00-00
Release Date: 12/03/2010
ID: CCA_2010102109152937
Release Date: 12/3/2010 Office: —————
UILC: 6227.00-00
From: —————————- Sent: Thursday, October 21, 2010 9:15:31 AM To: —————————— Cc: —————- Subject: RE: TEFRA question ————-
Correct. If an NBAP has been issued, then any AAR issues would be resolved in the FPAA and no separate petition of the AARs could be filed. I.R.C. 6228(a)(2)(B). In addition, we cannot issue any affected item notices of deficiency until after the partnership proceeding is complete. GAF v. Commissioner.
EMMANUEL OWENS v. COMMISSIONER OF INTERNAL REVENUE, TC Memo 2010-265
Mr. Owens is a corrections officer in a state system. The way the judge in this decision kept emphasizing that he had signed one return under pains and penalties or perjury and then an amended return with a significantly different position also under such pains and penalties, I was thinking the judge was hinting that he could end up in a federal facility in a capacity other than as corrections officer. His original return had $22,921 in unsubstantiated schedule A job related deductions. The amended return moved them to Schedule C. They remained unsubstantiated and thus non-deductible. Fairly typical tax court case, but I found it a little amusing.
Well, I'm back to studying the tax bill. You won't be learning about it here unless there is something quirky that is not being heavily noticed.
Tuesday, May 20, 2014
Auxilliary Legion of Super Posts
This was originally published on Passive Activities and Other Oxymorons on December 13, 2010.
_______________________________________________________________________
One of the more obscure pieces of DC trivia I recall is the legion of superheroes having an auxiliary. It consisted of people who's super powers were too lame for admittance to the regular legion. Among them were Bouncing Boy and Night Girl. Of course they let Batman in with no super powers, but what of it. Anyway these people with lame super powers got together and they would save the regular legion from disaster without the regular legion realizing it. I'm working on pure memory here so I may have the details wrong. Doesn't really matter. My memory of the auxiliary legion is what I am invoking.
I look at a lot of material to find things that I feel are blog worthy. Generally I am looking for things that are not noticed by a lot of other people that are either of practical importance or kind of interesting or maybe funny. I look at all federal court tax decisions and a multitude of IRS pronouncements which are a veritable alphabet soup. If something is time sensitive I might put it up right away as a bonus post, but generally I stick with a MWF schedule. If I have the next three complete and scheduled I feel pretty good. Usually I'll have about 20 or so in some stage on incubation. If they go much more than a month without getting completed, they are probably never going to make it, but I hate to consign them to the abyss without a chance, so here are a couple of developments that will never be complete posts unless I get some comments. Yes, you the reader can promote any member of this sad group of auxiliaries into full membership in the Legion of Super Posts.
Johnny L. Dennis, et ux. v. Commissioner, TC Memo 2010-216
The tentative title was "Not Just Horsing Around". It is a hobby loss case. Raising horses is probably the poster boy for hobby losses. This couple though was seriously trying to make a living raising horses. Probably the most disturbing part of the case is that the Tax Court thought it was a plus that he did a cost benefit analysis on calling the vet when his horses had colic and determined it was not worth paying for the treatment. They also got credit for not riding the horses that much.
Rick Mahlum, et ux. v. Commissioner, TC Memo 2010-212
This is a collection due process case. The taxpayers owed about $15,000. They claimed the IRS abused its discretion in not considering their alternative. They did not submit financial data or get in current compliance. Their proposal was for the IRS to put their account in non-collectible status. Reading some of these collection cases, I sometimes think Congress created a monster with the Taxpayer Bill of Rights. Once it is determined that you owe the tax you are entitled to a hearing on any collection action the Service makes and you can then appeal the results of that hearing to the Tax Court. I don't comment on tax policy though, except when I do. Mr. Mahlum lost.
State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner, 135 T.C. 26
Tentative title was "Good Hands". This concerned section 832. Section 832 falls in Subchapter L, which is the Subchapter I know the least about. The taxation of insurance companies is a field unto itself. It was actually the story behind the tax controversy that was interesting. One of State Farm's customers was in an accident and found liable. The judgement against them was $185,849 and the limit on the policy was $50,000. State Farm appealed. The customer who had been found liable on the accident then teamed up with the other side, agreeing to give them 90% of his settlement, and sued State Farm for bad faith. They won $1,000,000 in compensatory damages and $145,000,000 in punitive damages. Ultimately State Farm ended up being out a little over $16,000,000. The tax controversy was about what had gone into reserves in one of the years while this was being appealed. Apparently you can't reserve against punitive damages. It was more the whole business issue that fascinated me about this. Not wanting to cut a check for $50,000 ending up costing them $16,000,000 plus whatever legal fees they spent and their exposure had been much higher.
Phu M. Au, et ux. v. Commissioner, TC Memo 2010-247
Title was "Gambling on Software". I thought this was pretty interesting, but a couple of other bloggers picked it up first. The first time I read about it, after identifying it myself, was in Rubin on Tax in a post titled Turbotax Defense Rejected. I think I was pointed there, by Robert Flach, who of course delights in more proof of the unreliability of tax software. The taxpayers had deducted gambling losses without having gambling winnings and blamed their software. It reminded me of the time my brother generated himself a return with a large refund that he asked me to review. I was sorry to have to point out that he had entered miles into his software in a field that called for dollars (That would less than double the deduction this year, but this event was quite a while ago.) Now that I think about it that was probably the last time my brother had me check his return. It also reminded me of a case I wrote about in August about taxpayers who were allowed an ordinary deduction for slot machine losses, because they were in the business of gambling.
CICCOLINI v. U.S., Cite as 106 AFTR 2d 2010-7081
Title was "Bless Me Father". This is another one where the underlying story is more interesting than the tax issue which is pretty mundane. It concerns a Catholic priest who apparently was embezzling from a charity that he ran :
The conduct underlying the charged offenses occurred during 2003 and 2004. From April 2003 to June 2003, the Defendant deposited $1,038,680 in cash into his bank accounts in 139 separate transactions of less than $10,000. The Defendant admitted that he structured the transactions to evade bank reporting requirements. 31 U.S.C. § 5324(a)(3). When asked where the money came from, the Defendant claims that he held more than a million dollars in cash in his room at the Immaculate Conception Church Rectory and that he only decided to deposit this money in 2003 because he was worried that changes to the appearance of U.S. currency would somehow diminish the value of his cash savings. Ciccolini also does not explain why he kept over $1 million in cash in his room during a time when he had other bank and investment accounts with millions of dollars. Nor could the Defendant explain why he structured the transactions to avoid the reporting requirements. Similarly, the Defendant is unable to explain where this large sum of cash came from, other than implausibly claiming he accumulated it through interest and savings.
An approximate calculation of the Defendant Ciccolini's legitimate after-tax earnings and inheritance to the time of sentencing totals about $1,506,000. By the end of 2003, his total legitimate earnings and inheritance totaled about $1,336,000. These figure fall far short of the $5,590,313 in liquid assets that Ciccolini accumulated by the time of his sentencing. Thus, even under the Court's generous calculations, it is quite clear that Ciccolini is unable to legitimately account for about $4,500,000.
However, with the exception of the $1,288,683 that he already admitted to embezzling from the Interval Brotherhood Home, Ciccolini denies that any of the money is derived from criminal activity. Instead, says that because he lived at the Immaculate Conception Church rectory he had no personal expenses and was able to save all of his earnings. Additionally, he says that because he was saving all of his money that his savings gained significant compounding interest over a thirty-year period.
Ah yes - the miracle of compound interest.
The case was about what his sentence for tax evasion should be. It ended up pretty mild :
After a thorough consideration of the parties' arguments, the advisory guidelines range, and the other relevant 18 U.S.C. § 3553(a) factors, the Court choose to fashion a non-guidelines sentence. The Court finds that a sentence of one day imprisonment, a fine of $350,000, and a restitution order of $3,500,000 reflects the seriousness of the offense, promotes respect for the law, provides just punishment for the offense, affords adequate deterrence to criminal conduct, and protects the public from further crimes of the Defendant. See 18 U.S.C. § 3553(a)(2). The Court also orders a three-year term of supervised release and a special assessment of $200.
I wonder if he paid the $200 in cash.
Jack Townsend also picked this up in his federal tax crimes blog and is speculating whether there is a larger trend to call for restitution rather than prison time. As the longest serving member of the board of Just Detention International , I don't joke about such things, but I have to think that the biggest problem a 68 year old priest would have in prison is convincing the other prisoners he is there for income tax evasion. Maybe that was in the back of the judge's mind.
Their are more candidates for the legion, but that's enough for one post.
_______________________________________________________________________
One of the more obscure pieces of DC trivia I recall is the legion of superheroes having an auxiliary. It consisted of people who's super powers were too lame for admittance to the regular legion. Among them were Bouncing Boy and Night Girl. Of course they let Batman in with no super powers, but what of it. Anyway these people with lame super powers got together and they would save the regular legion from disaster without the regular legion realizing it. I'm working on pure memory here so I may have the details wrong. Doesn't really matter. My memory of the auxiliary legion is what I am invoking.
I look at a lot of material to find things that I feel are blog worthy. Generally I am looking for things that are not noticed by a lot of other people that are either of practical importance or kind of interesting or maybe funny. I look at all federal court tax decisions and a multitude of IRS pronouncements which are a veritable alphabet soup. If something is time sensitive I might put it up right away as a bonus post, but generally I stick with a MWF schedule. If I have the next three complete and scheduled I feel pretty good. Usually I'll have about 20 or so in some stage on incubation. If they go much more than a month without getting completed, they are probably never going to make it, but I hate to consign them to the abyss without a chance, so here are a couple of developments that will never be complete posts unless I get some comments. Yes, you the reader can promote any member of this sad group of auxiliaries into full membership in the Legion of Super Posts.
Johnny L. Dennis, et ux. v. Commissioner, TC Memo 2010-216
The tentative title was "Not Just Horsing Around". It is a hobby loss case. Raising horses is probably the poster boy for hobby losses. This couple though was seriously trying to make a living raising horses. Probably the most disturbing part of the case is that the Tax Court thought it was a plus that he did a cost benefit analysis on calling the vet when his horses had colic and determined it was not worth paying for the treatment. They also got credit for not riding the horses that much.
Rick Mahlum, et ux. v. Commissioner, TC Memo 2010-212
This is a collection due process case. The taxpayers owed about $15,000. They claimed the IRS abused its discretion in not considering their alternative. They did not submit financial data or get in current compliance. Their proposal was for the IRS to put their account in non-collectible status. Reading some of these collection cases, I sometimes think Congress created a monster with the Taxpayer Bill of Rights. Once it is determined that you owe the tax you are entitled to a hearing on any collection action the Service makes and you can then appeal the results of that hearing to the Tax Court. I don't comment on tax policy though, except when I do. Mr. Mahlum lost.
State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner, 135 T.C. 26
Tentative title was "Good Hands". This concerned section 832. Section 832 falls in Subchapter L, which is the Subchapter I know the least about. The taxation of insurance companies is a field unto itself. It was actually the story behind the tax controversy that was interesting. One of State Farm's customers was in an accident and found liable. The judgement against them was $185,849 and the limit on the policy was $50,000. State Farm appealed. The customer who had been found liable on the accident then teamed up with the other side, agreeing to give them 90% of his settlement, and sued State Farm for bad faith. They won $1,000,000 in compensatory damages and $145,000,000 in punitive damages. Ultimately State Farm ended up being out a little over $16,000,000. The tax controversy was about what had gone into reserves in one of the years while this was being appealed. Apparently you can't reserve against punitive damages. It was more the whole business issue that fascinated me about this. Not wanting to cut a check for $50,000 ending up costing them $16,000,000 plus whatever legal fees they spent and their exposure had been much higher.
Phu M. Au, et ux. v. Commissioner, TC Memo 2010-247
Title was "Gambling on Software". I thought this was pretty interesting, but a couple of other bloggers picked it up first. The first time I read about it, after identifying it myself, was in Rubin on Tax in a post titled Turbotax Defense Rejected. I think I was pointed there, by Robert Flach, who of course delights in more proof of the unreliability of tax software. The taxpayers had deducted gambling losses without having gambling winnings and blamed their software. It reminded me of the time my brother generated himself a return with a large refund that he asked me to review. I was sorry to have to point out that he had entered miles into his software in a field that called for dollars (That would less than double the deduction this year, but this event was quite a while ago.) Now that I think about it that was probably the last time my brother had me check his return. It also reminded me of a case I wrote about in August about taxpayers who were allowed an ordinary deduction for slot machine losses, because they were in the business of gambling.
CICCOLINI v. U.S., Cite as 106 AFTR 2d 2010-7081
Title was "Bless Me Father". This is another one where the underlying story is more interesting than the tax issue which is pretty mundane. It concerns a Catholic priest who apparently was embezzling from a charity that he ran :
The conduct underlying the charged offenses occurred during 2003 and 2004. From April 2003 to June 2003, the Defendant deposited $1,038,680 in cash into his bank accounts in 139 separate transactions of less than $10,000. The Defendant admitted that he structured the transactions to evade bank reporting requirements. 31 U.S.C. § 5324(a)(3). When asked where the money came from, the Defendant claims that he held more than a million dollars in cash in his room at the Immaculate Conception Church Rectory and that he only decided to deposit this money in 2003 because he was worried that changes to the appearance of U.S. currency would somehow diminish the value of his cash savings. Ciccolini also does not explain why he kept over $1 million in cash in his room during a time when he had other bank and investment accounts with millions of dollars. Nor could the Defendant explain why he structured the transactions to avoid the reporting requirements. Similarly, the Defendant is unable to explain where this large sum of cash came from, other than implausibly claiming he accumulated it through interest and savings.
An approximate calculation of the Defendant Ciccolini's legitimate after-tax earnings and inheritance to the time of sentencing totals about $1,506,000. By the end of 2003, his total legitimate earnings and inheritance totaled about $1,336,000. These figure fall far short of the $5,590,313 in liquid assets that Ciccolini accumulated by the time of his sentencing. Thus, even under the Court's generous calculations, it is quite clear that Ciccolini is unable to legitimately account for about $4,500,000.
However, with the exception of the $1,288,683 that he already admitted to embezzling from the Interval Brotherhood Home, Ciccolini denies that any of the money is derived from criminal activity. Instead, says that because he lived at the Immaculate Conception Church rectory he had no personal expenses and was able to save all of his earnings. Additionally, he says that because he was saving all of his money that his savings gained significant compounding interest over a thirty-year period.
Ah yes - the miracle of compound interest.
The case was about what his sentence for tax evasion should be. It ended up pretty mild :
After a thorough consideration of the parties' arguments, the advisory guidelines range, and the other relevant 18 U.S.C. § 3553(a) factors, the Court choose to fashion a non-guidelines sentence. The Court finds that a sentence of one day imprisonment, a fine of $350,000, and a restitution order of $3,500,000 reflects the seriousness of the offense, promotes respect for the law, provides just punishment for the offense, affords adequate deterrence to criminal conduct, and protects the public from further crimes of the Defendant. See 18 U.S.C. § 3553(a)(2). The Court also orders a three-year term of supervised release and a special assessment of $200.
I wonder if he paid the $200 in cash.
Jack Townsend also picked this up in his federal tax crimes blog and is speculating whether there is a larger trend to call for restitution rather than prison time. As the longest serving member of the board of Just Detention International , I don't joke about such things, but I have to think that the biggest problem a 68 year old priest would have in prison is convincing the other prisoners he is there for income tax evasion. Maybe that was in the back of the judge's mind.
Their are more candidates for the legion, but that's enough for one post.
Monday, May 19, 2014
IRS Claims Discretion In Minority Discounts In Lien Discharge Cases
CCA 201048036
There are at least two kinds of education.
I've been puzzled by the subject of my Monday post not generating more interest. It concerns the IRS relaxing its position on releasing liens for short sales. The most obvious possible explanation and one that has been given some credence by an e-mail I received from Richard Zaretsky who picked up on my post in his blog on short sales is that IRS liens are not a factor in all that many short sales.
The other possible explanation I have come up with, while possibly less probable, is more entertaining, so I will share it. I have noted here and there, that tax administration and, accordingly, tax practice can be divided into two very broad areas - determination of the correct tax and collection. Hold that thought for a moment while I tell one of my stories.
When I was starting in public accounting one of my college classmates was starting his own law practice. He explained to me that he would do somebody's will for $50 or handle their divorce for $100 if that was all they could afford because "Then I'm their lawyer. And anybody can get hit by a car." He spent more time in court than most lawyers I know, because that made the insurance companies more afraid of him. I get the impression that focusing on collections creates an accounting practice that is more analgous to his practice than that of a larger firm that commands large retainers and has some proportion of its professional staff spending more time in the library (do whatever technological updat you choose on that image) than the courthouse, if they even know where the courthouse is. I further know that there are very few people who comb through the more obscure pronouncements like CCA's and PMTA's so they can blog on them. It's conceivable that none of them have practices that focus on collection. So maybe the whole collection wing of the industry is going to start counting on me.
Doesn't seem very probable, but just in case I'm going to be more sensitive to collection issues.
CCA 201048036, which I have decided to reproduce almost in full is also on the subject a liens. It holds that IRS is not required to consider minority interest discounts in lien discharge cases.
There is nothing in the Code, the regulations, or the IRM that requires the Service to apply a minority interest discount in discharge cases.In fact, there is no reference at all to the discount with regard to valuationfor lien discharge purposes. Your email does not detail the basis of the attorney's conclusion that the discount (as well as force sale value) should apply here. I assume the attorney's reasoning relates to Rev.Rul.93-12 and the use of minority interest discounts in the gift and estate tax context. However, the revenue ruling is, here, not on point factually or with respect to its conclusion.
The regulations under section 6325 do provide some guidance regarding valuation of the government's lien interest for discharge purposes:
Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the appropriate official shall give consideration to the value of the property and the amount of all liens and encumbrances thereon having priority over the Federal tax lien. In determining the value of the property, the appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.
Treas. Reg. 301.6325-1(b)(6). IRM 5.12.3.12 similarly provides for the discretionary use of forced sale value. Note that the application of forced sale valuation is not required-its -use is determined on a case-by-case basis: I had a conversation with a lien analyst in the NO, and she indicated that a lien advisor should determine whether, in a particular case, (and to what extent) forced sale value should be used. Therefore, use force sale value is a determination for the lien advisor to make. You mentioned that the lien advisor had a conversation with a PALS. That is a good starting point. The lien analyst mentioned that there are also Collection personnel in the NO who can be a resource in addressing valuation issues.
You did not raise, but we also note that the coowner of encumbered property can apply -for a discharge under section 6325(b)(4). That provision enables an owner (other than the taxpayer) to make a deposit (or provide a bond)in the amount determined by the Service, then seek judicial review under section 7426(a)(4).Discharge under any other provision is discretionary, andjudicial review under section 7426(a)(4) is available only for discharges issued under section 6325(b)(4).
There are at least two kinds of education.
I've been puzzled by the subject of my Monday post not generating more interest. It concerns the IRS relaxing its position on releasing liens for short sales. The most obvious possible explanation and one that has been given some credence by an e-mail I received from Richard Zaretsky who picked up on my post in his blog on short sales is that IRS liens are not a factor in all that many short sales.
The other possible explanation I have come up with, while possibly less probable, is more entertaining, so I will share it. I have noted here and there, that tax administration and, accordingly, tax practice can be divided into two very broad areas - determination of the correct tax and collection. Hold that thought for a moment while I tell one of my stories.
When I was starting in public accounting one of my college classmates was starting his own law practice. He explained to me that he would do somebody's will for $50 or handle their divorce for $100 if that was all they could afford because "Then I'm their lawyer. And anybody can get hit by a car." He spent more time in court than most lawyers I know, because that made the insurance companies more afraid of him. I get the impression that focusing on collections creates an accounting practice that is more analgous to his practice than that of a larger firm that commands large retainers and has some proportion of its professional staff spending more time in the library (do whatever technological updat you choose on that image) than the courthouse, if they even know where the courthouse is. I further know that there are very few people who comb through the more obscure pronouncements like CCA's and PMTA's so they can blog on them. It's conceivable that none of them have practices that focus on collection. So maybe the whole collection wing of the industry is going to start counting on me.
Doesn't seem very probable, but just in case I'm going to be more sensitive to collection issues.
CCA 201048036, which I have decided to reproduce almost in full is also on the subject a liens. It holds that IRS is not required to consider minority interest discounts in lien discharge cases.
There is nothing in the Code, the regulations, or the IRM that requires the Service to apply a minority interest discount in discharge cases.In fact, there is no reference at all to the discount with regard to valuationfor lien discharge purposes. Your email does not detail the basis of the attorney's conclusion that the discount (as well as force sale value) should apply here. I assume the attorney's reasoning relates to Rev.Rul.93-12 and the use of minority interest discounts in the gift and estate tax context. However, the revenue ruling is, here, not on point factually or with respect to its conclusion.
The regulations under section 6325 do provide some guidance regarding valuation of the government's lien interest for discharge purposes:
Valuation of interest of United States. For purposes of paragraphs (b)(2) and (b)(4) of this section, in determining the value of the interest of the United States in the property, or any part thereof, with respect to which the certificate of discharge is to be issued, the appropriate official shall give consideration to the value of the property and the amount of all liens and encumbrances thereon having priority over the Federal tax lien. In determining the value of the property, the appropriate official may, in his discretion, give consideration to the forced sale value of the property in appropriate cases.
Treas. Reg. 301.6325-1(b)(6). IRM 5.12.3.12 similarly provides for the discretionary use of forced sale value. Note that the application of forced sale valuation is not required-its -use is determined on a case-by-case basis: I had a conversation with a lien analyst in the NO, and she indicated that a lien advisor should determine whether, in a particular case, (and to what extent) forced sale value should be used. Therefore, use force sale value is a determination for the lien advisor to make. You mentioned that the lien advisor had a conversation with a PALS. That is a good starting point. The lien analyst mentioned that there are also Collection personnel in the NO who can be a resource in addressing valuation issues.
You did not raise, but we also note that the coowner of encumbered property can apply -for a discharge under section 6325(b)(4). That provision enables an owner (other than the taxpayer) to make a deposit (or provide a bond)in the amount determined by the Service, then seek judicial review under section 7426(a)(4).Discharge under any other provision is discretionary, andjudicial review under section 7426(a)(4) is available only for discharges issued under section 6325(b)(4).
Sunday, May 18, 2014
Nothing From Nothing Is Nothing
Originally published on Passive Activities and Other Oxymorons on December 6, 2010.
CCA 201047021
This one is of somewhat limited interest and difficult to bring to any length so I'm making it a bonus post. When someone dies their tax carryovers, capital loss carryovers for examples, die with them. If there are assets, a new taxpayer is "born", the decedent's estate. Estates are something of a hybrid between individuals and partnerships. If they retain income the estate pays tax on a compressed version of the individual tax table (same rates, smaller brackets). If income is distributed it is taxed to the beneficiaries. Net capital losses, however, are carried forward. Ultimately estates terminate. When they do carryovers are flowed through to the beneficiaries.
What happens if an estate goes bankrupt and never distributes anything to anybody ? In this particular case the decedent had substantial unpaid income tax liabilities. A settlement was entered into whereby all assets of the estate after administrative expenses went to the United States. The IRS position outlined in CCA 201047021 is that since the United States was the one suffering from the losses in this case, the empty handed beneficiaries don't even get a flow through of the capital losses on the estate's termination.
Section §1.642(h)-3(a) states carryovers and excess deductions pass only to “beneficiaries succeeding to the property of the estate or trust” who are “those beneficiaries upon termination of the estate or trust who bear the burden of any loss for which a carryover is allowed....” In the present case, the individual beneficiaries of the Estate should no longer be considered beneficiaries after the Estate entered into the Settlement Agreement to transfer all the proceeds of the Estate to the United States. This is a distinguishable situation from that set forth in the allocation example. Beneficiaries in that example received a loss carryover despite not receiving any property, but could have received property if the estate had sufficient funds. Here, as a legal matter, the individual beneficiaries could no longer receive anything. Any losses incurred by the Estate were to the detriment of the United States rather than the individual beneficiaries. Therefore, the Estate's beneficiaries should not be entitled to any of the Estate's unused loss carryovers under § 642(h)(1).
It will be interesting to see whether there will be more to read about this in the future. A CCA is not authority, so if the dollars are big enough the beneficiaries may contest it.
CCA 201047021
This one is of somewhat limited interest and difficult to bring to any length so I'm making it a bonus post. When someone dies their tax carryovers, capital loss carryovers for examples, die with them. If there are assets, a new taxpayer is "born", the decedent's estate. Estates are something of a hybrid between individuals and partnerships. If they retain income the estate pays tax on a compressed version of the individual tax table (same rates, smaller brackets). If income is distributed it is taxed to the beneficiaries. Net capital losses, however, are carried forward. Ultimately estates terminate. When they do carryovers are flowed through to the beneficiaries.
What happens if an estate goes bankrupt and never distributes anything to anybody ? In this particular case the decedent had substantial unpaid income tax liabilities. A settlement was entered into whereby all assets of the estate after administrative expenses went to the United States. The IRS position outlined in CCA 201047021 is that since the United States was the one suffering from the losses in this case, the empty handed beneficiaries don't even get a flow through of the capital losses on the estate's termination.
Section §1.642(h)-3(a) states carryovers and excess deductions pass only to “beneficiaries succeeding to the property of the estate or trust” who are “those beneficiaries upon termination of the estate or trust who bear the burden of any loss for which a carryover is allowed....” In the present case, the individual beneficiaries of the Estate should no longer be considered beneficiaries after the Estate entered into the Settlement Agreement to transfer all the proceeds of the Estate to the United States. This is a distinguishable situation from that set forth in the allocation example. Beneficiaries in that example received a loss carryover despite not receiving any property, but could have received property if the estate had sufficient funds. Here, as a legal matter, the individual beneficiaries could no longer receive anything. Any losses incurred by the Estate were to the detriment of the United States rather than the individual beneficiaries. Therefore, the Estate's beneficiaries should not be entitled to any of the Estate's unused loss carryovers under § 642(h)(1).
It will be interesting to see whether there will be more to read about this in the future. A CCA is not authority, so if the dollars are big enough the beneficiaries may contest it.
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