Archive for July, 2012

Back in early June, we discussed the latest in a string of cases in which the IRS successfully attacked a taxpayer’s charitable deduction for failing to properly substantiate the contribution. From our earlier write-up:

During 2004, Steve and Rory Rothman executed a conservation deed of easement to the National Architectural trust, a donee that likely doomed the taxpayers from the start. The Rothmans engaged Mitchell, Maxwell & Jackson, Inc. (MMJ) to perform the qualified appraisal supporting the contribution. (For more on the qualified appraisal rules, see here).

This is where the problem started.

In determining the value of the conservation easement, MMJ set out to perform a “before and after valuation,” a commonly accepted methodology. This required MMJ to first determine the value of the Brooklyn home without the easement, then the value of the home after the easement, with the reduction in value representing the value of the conservation easement.

In attempting to value the home with the easement, MMJ looked to a series of previous court cases that generally valued the loss in value caused by a conservation easement at 10-15% of the total value. MMJ then “backed in” to the loss in value of the Brooklyn property, multiplying the $2.6M “before” value by 11.5% to determine a value for the conservation easement of $290,000.

The IRS denied the charitable contribution deduction, and the Tax Court upheld the deduction. Relying heavily on its 2010 decision in a case with similar facts called Scheidelman – in which MMJ was also the appraiser — the Tax Court held that MMJ merely estimated the value of the conservation easement by applying a set percentage to the property’s “before” value. In both cases, this percentage was not determined through a detailed analysis of the easement’s terms and covenants relative to the specific contribution, but rather on a review of previously approved relative values of conservation easements to gross values. This, the court determined, did not constitute a valuation method approved under I.R.C. § 170 for determining the property’s “after” value, and thus the Tax Court agreed with the IRS that the appraisal failed to contain the required method of valuation.

Similarly, the court sided with the IRS that the appraisal did not include the specific basis for the valuation. While MMJ ‘s appraisal generally cited elements that may affect the value of eased properties, it never expounded upon how, if at all, the factors affected the fair market value of the encumbered Brooklyn property. Thus, the appraisal did not specifically mention what restrictions supported the proffered 11.15% reduction in value.

Four days after the Tax Court published Rothman, the Court of Appeals for the Second Circuit ruled on the taxpayers appeal in Scheidelman, holding that MMJ’s appraisal in that case did indeed satisfy the “method and basis for valuation” requirements of Section 170 [see a great write-up on the appeals court decision here.] The taxpayers in Rothman immediately filed with the Tax Court to vacate its previous decision, since Rothman would also be appealable to the Second Circuit.

In response, the Tax Court agreed to vacate the portion of Rothman concluding that the appraisal was not qualified because it lacked a valuation method and a specific basis for the underlying value. a victory for the taxpayer.

It wasn’t all good news for the Rothman taxpayers, however. Unlike the taxpayer in Scheidelman, there were initial defects in the Rothman appraisal that prevented it from meeting the definition of a qualified appraisal. From our initial post:

Citing numerous other missed appraisal requirements — for example, the appraisal was performed more than 60 days prior to the contribution – the court concluded that the appraisal was not a “qualified appraisal,” and denied the full deduction.

In reconsidering its initial decision in Rothman, the Tax Court remained steadfast in its belief that these deficiencies continue to doom the appraisal:

The cumulative effect of the defects discussed in Rothman… deprives the Internal Revenue Service of sufficient information to evaluate the deductions claimed. The appraisal describes (and values) a property right different from the one petitioners contributed, and in doing so, fails to describe the easement accurately or in sufficient detail for a person unfamiliar with the property to ascertain whether the appraised property and the contributed property were one and the same…Moreover, the appraisal values a property interest greater than the one petitioners contributed, and it applies the wrong measure of value. Against this backdrop, even when we view the appraisal in the light of the Court of Appeals’ decision in Scheidelman, we decline to conclude the appraisal is qualified…[the court originally ruled that] the appraisal failed to satisfy 10 of 15 regulatory requirements, and following reconsideration, we conclude that the appraisal still fails to satisfy 8 of 15 requirements.

So what happens now? The Rothman’s failure to meet the appraisal requirements is not deadly, because the charitable contribution deduction can still be allowed if the failure was due to reasonable cause and not to willful neglect, an issue the Tax Court must now reconsider in a future trial.

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Betty Loren-Maltese was the well-known president of a Chicago suburb before being convicted of attempting to defraud the town out of $10,000,000 in an insurance scheme, which is apparently frowned upon. 

Maltese is a free woman now, having paid her debt to society in a federal corrections facility. But that doesn’t mean the IRS is done with her; to the contrary, after Maltese was released from prison, the Service accused her of underreporting her 1994 taxable income by nearly half a million dollars in misappropriated campaign funds,assessing tax, penalties and interest on the alleged deficiency.

Typically, the IRS would be barred from assessing a deficiency after the expiration of the statute of limitations: normally three years from the due date of the return pursuant to Section 6511. The statute can be extended indefinitely, however, when any portion of the underpayment is the result of fraud. Thus, under Section 6501, if the IRS could establish that Maltese “intentionally evaded a tax that she believed was due,” it would stop the clock on the statute and allow for a collection of taxes nearly twenty years after the return was filed.

While serving as town president, Maltese was also the town’s Republican committeeman, a role that granted her access to certain campaign funds. During 1994, Maltese used the campaign funds to purchase a Cadillac and invest in a luxury golf course, with both assets held in her individual name. It is well established that once Maltese converted the campaign funds for her personal use, they became taxable income to her… but did her actions rise to the level of fraud?

When grilled about the expenditures during trial, Maltese repeatedly sought the shelter of the Fifth Amendment, refusing to testify. Below is a courtroom sketch of the proceedings:

Faced with her silence, the Tax Court was forced to look to the facts and circumstances, keeping a careful eye out for the following  “badges of fraud:”

  • inadequate records,
  • implausible or inconsistent explanations of behavior,
  • concealing assets,
  • engaging in illegal activities, and
  • attempting to conceal activities.

The Tax Court quickly determined that enough of the necessary facts were present to conclude that Maltese had fraudulently evaded her 1994 income tax.

  • She used the campaign funds to hide her expenditures.
  • She falsified campaign disclosures.
  • She tried to hide the Cadillac once she found out she was the subject of a grand jury investigation, and
  • She offered less than credible testimony with regards to the golf course investment.

As a result, Maltese is now on the hook for over $100,000 in tax, a 75% fraud penalty, and twenty years worth of interest.

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Point (Huffington Post): If Kim Kardashian and Chris Humphries– who married in August 2011 before Kim famously filed for divorce after 72 days — have their marriage annulled, they will not be eligible to file a joint return for 2011. If their marriage is upheld but divorce is granted in 2012, they can file jointly in 2011, but not in 2012.

Counterpoint (Double Taxation)  Kim Kardashian is worse than a mouth full of sores.

Winner? Counterpoint.

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A few things you may have missed this weekend while Michael Phelps reminded the world that the path to Olympic gold is not paved with Subway foot-longs and bong rips.

The squabbling in Congress over future tax rates has left Christopher Bergin at Tax.com mad as hell, and he’s not going to take it anymore.

I’ll probably have a more detailed post on this soon, but the Tax Policy Center has published another outstanding analysis, this time assigning a price tag to the Democratic and Republican proposals for addressing the soon-to-expire Bush tax cuts that emerged from the Senate last week.

Senate bill 3412 (Democratic plan that allows Bush tax cuts to expire for those earning > $250,000, assumes a one year patch of AMT exemption, 45% estate tax, and $3.5M estate tax exemption): 

Total cost: $367,000,000,000

Senate Bill 3413 (Republican bill that extends the Bush tax cuts for all taxpayers, patches the AMT, and leaves estate tax at 35% and exemption at $5.1M):

Total cost: $405,000,000,000

Meanwhile, regardless of what happens to the Bush tax cuts, here’s one thing we can count on: With the employees’ share of payroll taxes slated to return to 6.2% in 2013, we’re ALL staring at an additional tax liability of up to $2,200 next year.

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Much ado has been made about the one tax return Mitt Romney has found fit to release to the public, as Democrats quickly made the 13.9% effective rate the Republican presidential candidate paid on $21,000,000 of adjusted gross income in 2010 the symbol of all that is wrong with the current tax regime. As a result, it’s little surprise that Romney has hesitated to release any additional returns, despite mounting pressure to do so. 

According to those geniuses over at The Onion, it’s probably in Romney’s best interest to keep those prior returns buried, as their experts believe his prior filings may contain additional damning revelations, such as the following:  

  • List of residences includes Caribbean property named “Skull Island”
  • Used Obama’s $6,500 homebuyer credit for six different houses in 2010
  • From 2002 to 2006, official occupation was listed as “masseuse”
  • Wrote off $10,000 in aftershave during 2004
  • Really shitty handwriting for someone who expects to be elected president
  • Years of filings in state of Delaware prove definitively that the candidate himself is a corporation
  • In 2009, thanks to clever accounting, the IRS actually paid Romney $25 million in taxes
  • Just doesn’t want people to see so many pages of official documents that list his first name as Willard

And while you’re over at The Onion, read this. It’s got nothing to do with taxes, but damn if it isn’t funny.

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On a busy Wednesday on the floor of Congress, the Senate Democrats and House Republicans engaged in a good ol’ fashion political pissing match, with only the 2013 tax bill of every American taxpayer at stake.

Firing the opening salvo in what is sure to be a long, fruitless battle to determine the fate of the Bush tax cuts, Senate Democrats passed legislation  (Senate bill 3412) that would extend the Bush tax cuts for those earning less than $250,000. Adding salt to the Republican wound, the Senate also voted against a Republican amendment to the plan that would have extended the Bush tax cuts for all taxpayers into 2013.

In response, House Republicans quickly put an end to any Senate celebration by refusing to consider the Senate bill, opting instead to proceed with plans to pass a bill next week  (H.R. 8, which we discussed earlier this week here) that would extend the Bush tax cuts for all taxpayers into 2013, while also keeping the estate tax at its current parameters and increasing the AMT exemption for 2012 and 2013. Of course, if President Obama is re-elected in November — and assuming he doesn’t drastically shift his long-held refusal to extend the Bush tax cuts for America’s wealthiest taxpayers — he will surely veto any bill that comes out of the House.

Call me a cynic, but I’ve got to believe that being in Congress must be a lot like running in deep water: you’re spending a lot of energy, but you’re not actually getting anywhere.

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Let’s say you never got around to filing your 2006 tax return. By 2010, the IRS is likely to get tired of your tax truancy, and may well file a substitute for return (SFR) on your behalf based on information filed with the IRS by third parties: W-2s, 1099s, and the like.

Now, it’s extremely possible the IRS will assess a tax higher than what might have resulted had you filed your own return. Why? Because the IRS will not make the effort to determine what your itemized deductions might have been in 2006. They’re simply going to add up your income, take the standard deduction, and be done with the calculation.

Is it fair? Probably. After all, it’s not the Service’s fault you got so caught up in sprucing up your Myspace page and rocking out to your 1st generation iPod that you failed to file your 2006 tax return. But is it the law? Sure is. The Tax Court has held many times — the most recent being yesterday in Murray v. Commissioner, T.C. Memo 2012-213 — that:

“A taxpayer must file a return to claim an itemized deduction. If a taxpayer does not file a tax return and, as a result, the Commissioner prepares an SFR, then the taxpayer may not claim itemized deductions.”

So be warned: Leave the tax prep to the IRS, and you’re giving up your right to claim itemized deductions.

In other news, Joe Kristan at Roth & Company has an update on the Oregon woman who filed a false tax return claiming a $5.1M tax refund, received it on a prepaid debit card from Turbo Tax, and went on a bit of a spending spree. Spoiler alert: she’s going to jail.

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