Screw up on your tax return that’s due next week, and you may be subject to any number of civil penalties. For example, if you understate your income by more than the greater of $5,000 or 10% of the correct tax liability, and you’ll pay an additional 20% of the liability as penance under Section […]
This one has the potential to be a real gamechanger for college students, homeless alcoholics, and non-smoking 21 – 30 year old intelligent Jewish women everywhere: To Nichelle Perez, the $20,000 she received for donating her eggs for fertility treatments was a tax-exempt payment for pain and suffering. Not so, said the U.S. Internal Revenue […]
In a better world, the daily fraud perpetuated at a strip club wouldn’t go beyond silicone implants and claims of paying law school tuition. But alas, these are dark times we find ourselves in. Squarely within the seamy underbelly of Jackson, Michigan stood Potter’s Pub, a “gentlemen’s club.” Potter’s derived its business entirely from cash […]
Here's the latest post from our new tax guy, Tony Nitti. See his first post on Robinson Cano kicking the New York Yankees to the curb and you can find him tweeting from @NittiGrittyTax. Tony wrote a similar post on this subject last March but current events called for a update. Enjoy. The lending market […]
The Bible says God loves a cheerful giver, and the U.S. Tax Code says a cheerful giver loves the charitable contribution deduction. But according to the outcome of the recent case Durden v. Commissioner, the Tax Court hates both God and cheerful givers. According to an article in The Tax Adviser, here's what happened. In […]
For those of you not familiar, F. Lee Bailey was one of the defense lawyers on O.J. Simpson's dream team of attorneys. His star moment was when he asked the lead detective on the case, Mark Furhman, if he had used the n-word in the last ten years, who said that he had not. When […]
If you can get away with tax cheating, is it malpractice for your CPA to make you stop?
A Massachusetts CPA firm found out a new client was using a lame old trick. The S corporation had paid out $1 million to its owner over the years without putting it on a W-2 or treating it as a distribution from the company. Instead, the company every year booked it as a “loan” to the owners – a loan with no note, no interest rate, no security, and no repayments.
This is a time-dishonored way for people who carelessly suck cash out of a corporation to try to avoid the tax consequences – though it is less common in S corporations. It normally fails if the IRS figures it out.
The CPAs told the client that the “loan” should be reclassed as “wages” on the 2002 return to clean it up. The client owner was not excited, and talked to a lawyer to see if there was another way. After the first lawyer failed to satisfy, she talked to a second lawyer, who agreed with the CPA. The client reluctantly filed an amended return, and the owner found herself with a $500,000 tax lien.
At a national firm where I once worked, an audit partner would go from one tax person to another until he found one who told him what he wanted to hear. The client here took that approach, eventually finding a practitioner willing to prepare the 2002 return the old way. That was enough to get the client to file another amended return claiming a refund and to sue the old CPA for malpractice. That might have been a bad decision, in light of this reaction from the astonished judge:
It is surprising that Plaintiffs had the temerity to bring this lawsuit. The complaint was clearly filed too late. The record, mainly as a result of Plaintiffs’ failure to file long-overdue tax returns, is utterly insufficient to demonstrate damages. Most importantly, it is clear that Plaintiffs for many years enjoyed over $1,000,000 in income without paying any taxes on it, and they accomplished this by filing a tax return that improperly characterized the monies they received as a loan. It is close to ludicrous to claim that, by advising Plaintiffs to amend the 2002 tax return to conform with what the law and good accounting practice required, Defendants were being negligent. On the contrary, they were serving their clients ethically and well.
The judge also implied that the client might have been unwise in calling attention to the matter by filing the suit:
As a result of behaving professionally, Defendants have found themselves slapped with this expensive lawsuit. That undeserved headache, at least, is now over. The court can only hope that the IRS and the state authorities will make sure that Plaintiffs now proceed to do what everyone who enjoys the privilege of living in our beloved country is required to do: pay their fair share of taxes.
In other words: come and get ‘em, IRS!
In a world full of charlatans, it can be tough out there for CPAs who try to do the right thing. When you do, it’s nice to know at least one judge has your back.
It helps to be really smart if you want to talk yourself into something really stupid. That’s how a lot of bad tax shelters happen. Let’s call this one the “Dumb-Ass Deduction Distressed Asset-Debt” (“DAD^2” or “DAD-squared”) shelter.
• A bunch of near-worthless consumer receivables from a struggling Brazilian department store chain.
• A whip-smart Chicago tax lawyer, John E. Rogers.
• A bunch of LLC partnerships for tax-motivated investors.
• Some cash.
The Brazilians contribute their receivables – purportedly with a big built-in loss – to a partnership. This partnership contributes the debt to other LLCs. Shortly afterwards the first LLC buys out the Brazilians, who are desperate for cash, leaving the crappy receivables behind. The investor partnerships then write off the debts as bad debt deductions, giving big tax losses to the investors.
It can’t fail, right? Well, aside from the obvious problems, like:
– The tax law presumes that if a partner (think Brazilians here) contributes stuff to a partnership, and then gets cash back in redemption of the interest within two years, then it wasn’t really a tax-free partnership contribution and distribution. Instead, the tax law presumes that the Brazilian sold the stuff for cash. The partnership was just a place to hide it for awhile.
– If the Brazilians hadn’t sold out, the tax law would have required them to get all of the losses. The tax law doesn’t let taxpayers shift gains or losses to others by joining a partnership. After all, that’s what S corporations are for.
The guy who put this thing together was smart, as people who put together sophisticated tax deals always are. The Tax Court spells it out:
Rogers is a member of the International Fiscal Association, an international tax group. He has also been a trustee of the Tax Foundation, a publicly supported foundation that researches tax policy issues and publishes papers. Rogers has worked with the Governments of Puerto Rico and Romania in developing programs implementing their industrial taxation programs. Rogers has written a number of publications, primarily on international tax matters, transfers of technology, the use of low-tax jurisdictions, and the compensation of executives outside the United States. In 1997 Rogers was invited to testify before the House Ways and Means Committee on fundamental international tax reform.
When a plan by someone who is that smart fails, it fails spectacularly. Tax Court Judge Wherry disallowed all of the bad debt deductions, and imposed penalties, pointing a finger at the lawyer-mastermind:
There has been no showing of reasonable cause or good faith on Rogers’ part in conceptualizing, designing, and executing the transactions. To the contrary, as we have detailed above, Rogers’ knowledge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming…
I’m sure that, over drinks, Mr. Rogers would have me convinced that he was right. That’s why you should never buy a tax shelter until you sober up.
Phil Anschutz, like most multi-billionaires, didn’t get rich being a passive dude. Case in point, Mr Anschutz just lost a battle with the IRS over $143.8 million in capital gains taxes that the Service argues he and his company, Anschutz, Co. owed for for transactions related to Union Pacific and Anadarko Petroleum.
According to Forbes’ latest Billionaire list, Phil is worth $6 billion. Before you reach for your 10-key, we’ll just tell you – this little capital gain issue amounts to less than 2.5% of his net worth.
In a similar vein, these transactions occurred in 2000 and 2001 so this particular battle is entering it’s second decade if you consider the birth of the transaction that gave life to the IRS’ beef.
Yes, he’s appealing ruling. See you in another 10 years.