Posts Tagged ‘simpsons’

A few things you may have missed this weekend while watching Manchester City score twice in stoppage time to stun QPR and claim the Premiership.

In the biggest news of the weekend, it was revealed that Eduardo Saverin — co-founder and current 4% shareholder of Facebook and one of the countless insufferable characters depicted in the Social Network — renounced his U.S. citizenship in advance of the tech giant’s IPO. The reason is obvious: while Saverin will still have to pay an “exit tax” as if he sold his stock prior to departing the U.S., the gain will be determined at a pre-IPO valuation, and Saverin will reduce his future tax burden by relocating to Singapore.

There are various levels of evil in the world. There’s “taking too many items into the express lane” evil,  “dog fighting ringmaster” evil, and of course, there’s  the “Mr. Burns, impossibly devious super-villain” evil. But just when you think you’ve seen it all, people set a whole new standard by trolling public lists of dead children, stealing the identities of their parents, and filing a false tax return claiming the children as a dependent. There’s a special place in hell for those guys.

Some advice for recent graduates on managing money and student loan debt. Lesson #1: While putting a $2,000 surround sound system in your $500-a-month studio apartment may seem cool, it’s probably not a wise investment.

It’s only been done 15 times in major league baseball history, but that didn’t stop this 6-year old from pulling off an unassisted triple play.

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While F. Lee Bailey is widely considered one of the greatest defense attorneys to ever grace the inside of a courtroom, his body of work has more in common with that of  Lionel Hutz — the dimwitted lawyer from The Simpsons — than Bailey would ever care to admit. Think about it:

High profile victories:

Bailey: A successful defense of accused murderer Sam Sheppard, and of course, the O.J. debacle;

Hutz: Earned redemption for Homer in his false advertising suit against the all-you-can-eat seafood buffet, The Frying Dutchman.

Devastating defeats:

Bailey: Unable to free Patty Hearst from charges of armed robbery;

Hutz: Couldn’t garner justice for Marge in her sexual harassment suit against Mr. Burns.

 Questionable ethics:

 Bailey: Jailed for contempt (see below) and disbarred in Florida and Massachusetts;

Hutz: Set fire to all his records; changed his name to Miguel Sanchez.

Memorable quote:

Bailey: I use the rules to frustrate the law. But I didn’t set up the ground rules.

Hutz: Judge Snyder has had it in for me ever since I kinda ran over his dog… Well, replace the word ‘kinda’ with ‘repeatedly’ and the word ‘dog’ with ‘son’.

Despite this less than flattering comparison, it’s a must-read opinion when a lawyer of  Bailey’s caliber defends himself in front of the Tax Court, particularly when the transactions at issue are the very same that gave rise to Bailey’s incarceration and disbarment.

Facts in Bailey:

While there were other tax issues decided — the court held that Bailey’s yacht refurbishing activity was a “hobby” under the meaning of I.R.C. § 183, while his airplane manufacturing activity was a trade or business — the majority of the case was devoted to whether Bailey recognized taxable income during various stages of a rather unique relationship he entered into with a client at the behest of the government, so that’s where we’ll spend our time.

In 1994 Claude Duboc, who was accused of importing copious amounts of marijuana into the U.S., retained Bailey to negotiate a plea arrangement. As part of the agreement, Bailey would assist Duboc in cooperating with the federal government’s seizure of his many foreign assets, including multiple pieces of high-value residential real estate.

To facilitate restitution from Duboc, the government entered into a vague and unusual agreement with Bailey, under which Bailey would perform services to facilitate Duboc’s forfeiture of his assets, and Duboc would transfer 602,000 shares of Biochem stock to Bailey. This stock would provide funds that Bailey could use to maintain and transfer Duboc’s foreign assets, as well as to cover both Bailey’s fees and the other expenses generated by his work.

For receiving and holding the Biochem stock, Bailey did not open a new account. Rather, the government attorneys understood that Bailey possessed a Swiss bank account, and by agreement it was Bailey’s own account at Credit Suisse that was used. In 1994, 602,000 shares of Biochem stock, then worth $5,891,352, were transferred to Bailey’s Credit Suisse account. Bailey did not report income from his receipt of that stock on any income tax return for any year.

In 1994 and 1995, funds came into Bailey’s Credit Suisse account from three sources–(1) sales of Biochem stock for $2,400,855, (2) loans collateralized by Biochem stock of $3,013,463, and (3) sales of other stock owned by Duboc of $700,000.

From these proceeds, Bailey made further transfers to his personal money market account of stock sale and loan proceeds totaling $3,475,327, of which $425,056 represented stock sale proceeds and $3,013,463 constituted loan proceeds.

In late 1995 or early 1996, Duboc replaced Bailey with another lawyer. At the government’s request, the District Court ordered Bailey to transfer the 400,000 unsold Biochem shares to the federal government. At that time, however, Bailey owed $2,332,743 for loans that had been made against the unsold shares (and he had spent the proceeds); and Credit Suisse would not make any transfer of the shares until the loans were repaid. Bailey therefore did not immediately comply with the District Court’s order, and the court found him in contempt in March 1996 and ordered him incarcerated.

Bailey eventually repaid the full amount of the Credit Suisse loans.

Issue 1:Value of Biochem Stock Transferred to Bailey’s Credit Suisse Account Was Taxable Income:

Tax Court Position: The stock was not taxable income. The stock was not Baileys and was held merely in trust, and in light of the fact that the government persuaded the District Court to stick Bailey in jail until he lived up to the terms of that trust and turn the stock over, the value of the stock was not taxable income when received.

Issue 2: Stock Sale Proceeds and Loan Proceeds Received By Bailey’s Credit Suisse Account Represented Taxable Income:  

Tax Court Position: The stock sale and loan proceeds did not constitute taxable income:

Bailey’s agreement with the Government explicitly contemplated that he would use his existing Credit Suisse account for the Biochem stock. Consequently, the transfer of the shares to his Credit Suisse investment account and of the loan and sale proceeds to his Credit Suisse advance account did not constitute an appropriation of those proceeds.

Issue 3: Loan Proceeds Further Transferred From Bailey’s Credit Suisse Account to His Personal Money Market Represented Taxable Income:  

Tax Court Position: The loan proceeds were not income:

Bailey denied that the loans he received in his Credit Suisse account that were collateralized by the Biochem stock constituted income. He personally guaranteed the loans, and with great difficulty he borrowed from others and repaid the loans in 1996. He therefore invokes a basic tax principle: “[I]t is settled that receipt of a loan is not income to the borrower.” The receipt of a loan is not income to the borrower where the borrower uses another person’s property as collateral to obtain that loan–even where the collateral is obtained under false pretenses or is otherwise misappropriated–as long as there is a “consensual recognition” that the borrower will repay the loan.

Issue 4: Stock Sale Proceeds Further Transferred From Bailey’s Credit Suisse Account to His Personal Money Market Represented Taxable Income:  

Tax Court Position : Since Bailey was not required to repay the stock sale proceeds he appropriated, they represented taxable income.

Bailey bore the burden to prove that in transferring the funds to his money market  account he did not depart from his fiduciary role, and he did not carry that burden. The record does not show that he regarded the funds in the money market account as subject to restrictions on their use. We therefore hold that Bailey wrongly appropriated Biochem stock sale proceeds when he made transfers thereof to his Barnett money market account in the amounts of $175,037 in 1994 and $250,019 in 1995 (totaling $425,056) and that he received income for those amounts in those years.

Joe Kristan at Roth & Company has much more on the hobby loss aspects of the case.

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Benny Nipps was named the beneficiary of his cousin’s IRA.  (Ed note: While the court did not disclose the cousin’s name, let’s all just agree it was Seymour so we can giggle through the remainder of the post)

Unfortunately for Nipps — or fortunately, depending on his financial circumstances -his cousin died in 2007, leaving Nipps approximately $45,000 in inherited IRA moneys.

Upon receipt of the distribution from his cousin’s IRA, Nipps received a “Beneficiary’s Distribution Notice and Certification Form and Payment Instruction,” which stated that by signing, Nipps certified that he was aware that the distribution was subject to Federal income tax.

The Notice also stated that Federal income tax would be withheld by the distributor unless an election was made otherwise. Nipps signed and returned the notice but did not elect out of any withholding.

Nipps then deposited the funds into a newly established IRA account. Though on the surface this may constitute a successful “rollover” of the IRA distribution, the funds were taxable to Nipps in 2007 for two reasons:

 1. While an IRA distribution is not includable in gross income if the entire amount received is paid into a qualified IRA within 60 days of the distribution, rollover contributions from inherited IRAs are specifically excluded from tax-free rollover treatment under Section 408(d)(3)(C). An individual can still avoid being taxed on the inherited IRA if the funds in the IRA are transferred from one account trustee to another account trustee without the IRA owner or beneficiary ever gaining control of the funds, but that was not the case here, as Nipps temporarily had control of the funds before depositing them in his own IRA.

 2. On the same day he received the rollover contribution and deposited them in his IRA, Nipps inexplicably withdrew the $45,000, thereby defeating the purpose of establishing the IRA in the first place and rendering the entire previous paragraph moot, as IRA distributions are generally taxable.

 Despite these two rather important pieces of information, Nipps failed to report the $45,000 as income on his 2007 tax return. The IRS predictably assessed a tax deficiency as well as an accuracy-related penalty under section 6662(a) and (b)(2) for a substantial understatement of income tax.

This is where the case took a rather unexpected turn, as the Tax Court sustained the deficiency assessment, but held that Nipps had reasonable cause for not reporting the income, despite the fact that he..you know…signed an affidavit certifying that he understood that the IRA distribution was included in taxable income. Thus, Nipps was not subject to the underpayment penalty.

 The court explained its rather bizarre decision as follows:

Petitioner, who lacked knowledge and experience in tax law,reasonably believed that the correct Federal income tax would be withheld by Landmark Bank. He reasonably relied on Landmark Bank’s lack of withholding of Federal income tax as basis for his position that the distribution was not taxable…the Court finds that he had a reasonable basis to believe that the correct withholding would occur and that absent that withholding, the amount was not taxable.

So to summarize, Nipps’ inability to comprehend a one-page document that expressly provided that the funds he was receiving were taxable spared him from being assessed an understatement penalty. While this isn’t exactly groundbreaking, as taxpayer stupidity has always supported a reasonable cause defense to some degree, this would seem to establish a new low in what can best be described as the “slack-jawed yokel defense.”

Nipps v. Commissioner, TC Memo 2011- 267

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Reaffirming my long-held belief that everything in life can be related back to The Simpsons, there’s an episode in which Homer is investigated by the IRS for tax fraud. In lieu of prosecution, Homer is told that he will “work for the IRS” to help the Service bring down Homer’s boss, Mr. Burns. Homer’s reply to the proposed arrangement?

“Sure, but can you pay me under the table?….I’ve got a little tax problem.”

As you might imagine, the government is not in the habit of showing sympathy for one’s self-imposed tax mess, a fact we were reminded of earlier this week with the Tax Court’s decision in May v. Commissioner, 137 T.C. 11 (2011). In May, the IRS refused to show leniency when an individual argued that his tax liability was created as a result of being ripped off. By himself.  

Mark May (May) was the CEO and sole shareholder of Marantha Financial Group (Marantha), a corporation with 100 employees. May controlled the finances of Maranatha; he had sole check signature authority on the corporate bank account and was the sole signatory on payroll checks issued by Paychex on Maranatha’s behalf.

During 1994 through 1996, Maranatha withheld all of the proper taxes from employee paychecks (including May’s) but failed to remit these withholdings to the Federal, State, or local governments. Though Marantha was the employer, May was the person responsible for remittance of these withholdings; a point driven home by the U.S. District Court, which had earlier convicted May on six counts of tax evasion charges related to Marantha’s payroll tax indiscretions.

The case in front of the Tax Court, however, focused on the individual income tax aspects of Marantha’s failure to remit employee withholdings. On May’s 1994, 1995, and 1996 tax returns, May attached his W-2 and claimed the full amount of federal withholding each year as an offset to his tax liability despite his knowledge that the government had never received the funds. Compounding his transgressions, May also claimed federal tax deductions each year for the “withheld” state income taxes that were never actually paid to the state.

The IRS denied both the federal credit for withholding and the federal deduction for the state withholding, assessing an underpayment of tax and fraud penalties averaging nearly $80,000 for each year from 1994 through 1996.

To May’s credit, he came up with a rather compelling argument to support his position that there could be no fraud penalty because there was no underpayment of tax. May contended that because taxes were actually withheld from his paychecks, he was entitled to the withholding credits even though the tax withholdings were never paid to the government. As support, May pointed to Treas. Reg. Section 1.31-1(a), which states in part that “If the tax has actually been withheld at the source, credit or refund shall be made to the recipient of the income even though such tax has not been paid over to the Government by the employer.”

Compelling as this argument may have been, for obvious reasons the Tax Court was not persuaded. The regulations cited under Section 31 contemplate a scenario where an employer fails to remit the withholdings of an employee without that employees knowledge; without some type of relief, the employee would unwittingly be subjected to underpayment penalties through no wrongdoing of their own.

In the instant case, however, it was May who ripped off May.  The Tax Court explained it this way:

May was not only an employee of Maranatha; he was also president and CEO. He was the person responsible for Maranatha’s failure to remit tax withholdings(including his own) to the Government and knew that those withholdings were not being remitted. Mr. May had sole check signature authority on Maranatha’s corporate bank account, giving him full control of its finances.

Because Mr. May was responsible for the nonremittance and fully controlled the corporate finances, we conclude that the funds never left Mr. May’s functional control and were therefore  not “actually withheld at the source” from his wages for purposes of section 1.31-1(a), Income Tax Regs. Section 1.31-1(a), Income Tax Regs., is therefore inapplicable, and petitioners’ reliance on it is misplaced.

Thus, the Tax Court upheld the fraud penalties assessed by the IRS, and Mr. May will now be asked to cut several very large checks from the comfort of his jail cell.

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