Summary Opinions for 9/12/14

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Sum Op for the week of the 12th is running a bit behind schedule because of a really wonderful two part guest post by A. Lavar Taylor on what constitutes an attempt to evade or defeat taxes for Section 523(a)(1)(c) of the Bankruptcy Code, which can be found here and here.  The post generated quite a few strong comments and responses, so I would encourage everyone interested in the topic to review those also.  Here are the other items we didn’t cover two weeks ago:

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  • The Tax Court in Duarte v. Comm’r has remanded an Appeals decision to reject an OIC and proceed with collection action against an immigrant who ran a roofing business.  The Court found it was unclear if the settlement officer abused his discretion in rejecting the OIC when a prior settlement officer had already approved the OIC, but then the Service failed to process the  offer for unexplained reasons for quite a while.  The opinion framed Mr. Duarte as working very hard to solve his tax issues, including making the payment associated with the agreed upon OIC.  The second settlement officer determined there was significantly more collection potential, but the record did not indicate as why various decisions were made, actions were taken or actions were not taken.  It did seem clear, however, that the Tax Court did not like the result, and wanted the Service to, at a minimum, fulfill its obligations fully before implementing such a result.
  •  As Big Dan Teague said, “Yes, the word of God…there’s damn good money during these times of woe and want,” even when you take a vow of poverty.  That can cause an issue when you want to keep that money, so sometimes you need to divert those dollars to a shell entity in order to keep your vow of poverty and minimize taxes…Wait, that seems really shady, which is what the Service thought about the scheme.  On the slightly positive side, the whole thing may have been a tax play, which seems less insulting to the congregation members.  In Cortes v. Comm’r, for 2007 to 2009, the taxpayer, Mr. Cortes, a pastor, signed a “vow of poverty”, and created “A Corporation Sole” that received bi-weekly checks from the church.  Mr. and Mrs. Cortes had unfettered access to the account held by the corporation.  Mr. Cortes argued that his vow of poverty was evidence that he did not have income in the years in question.  The Court found that the signed paper did not change the fact that Mr. Cortes was effectively paid a salary that Mr. Cortes had full control over and used for personal expenses.  Mr. Cortes did highlight a line of cases where someone took a vow of poverty, was paid an income stream, but assigned that stream to a tax exempt organization.  The Court found the cases inapplicable because…Mr. Cortes was just cheating on his taxes (Mr. Cortes alleges that any such failure to pay was inadvertent).   Tony Nitti over at Forbes has more coverage.  The Service, in 2012, flagged the Corporation Sole set up as questionable.
  • It seems so much less offensive when the fraud doesn’t involve a church.  Like in US v. Bennett, where employees of a logistics company fraudulently directed around $600,000 to shell companies for fake expenses to the detriment of their employer and the IRS.  The Service charged the co-conspirators and one of their wives with tax evasion, and all three were convicted.  One of the two employees, Mr. Hogeland, spent months faking an illness to get out of his criminal proceeding by injecting himself with potassium chloride causing his blood to have elevated potassium levels.  Mr. Hogeland’s lawyer claimed Mr. Hogeland’s wife may have been behind the elevated potassium levels to set Mr. Hogeland up because of some tension relating to her having an affair.  Hogeland did end up dying – so perhaps he was actually ill— and at the time both Hogeland and his co-defendant Bennett were both appealing the conviction.  Bennett modified his appeal to take into account Hogeland’s death, arguing that Hogeland’s death abated the entire criminal proceeding ab initio (this was true of Hogeland’s conviction).  The Court was not impressed, holding on the first point that the reasoning for Hogeland’s reversal was that a defendant should not be denied the right to appeal, even by death.  Further, the punitive purpose cannot be served by a dead guy.  Neither applies to Bennett, who was still free to appeal and go to jail.  Bennett did argue other reasons the death should spring him from the slammer, but the court was likewise unimpressed and held Hogeland’s misfortune would not benefit Bennett.
  • The Service has issued Chief Counsel Advice , which is not really procedure related but I found interesting, stating that a controlled foreign corporation that “holds” a debt obligation of its United States sole shareholder  gives rise to taxable interest on the accrued but unpaid interest amount, which is treated as US property under Section 956(c).  This in turn will likely increase the US shareholder’s taxable income under Section 956 relating to US property.  The regulations provide the CFC will “hold” a debt where the CFC is treated as the pledgor or guarantor on the shareholder’s loan from a third party, and the “obligation” amount in question becomes the unpaid principal and accrued but unpaid interest.  Following the mental leap, the interest is payable to the CFC holder of the debt, which then flows through to the US shareholder who owes the interest to a third party.  So, to simplify, I think the CCA states that if a US parent company borrows funds from an unrelated third party and the CFC is guarantor, the accrued but unpaid interest is taxable income to the CFC, which passes back through to the US parent.  I do not profess to be an expert in this area and read the CCA quickly, so I could be wrong, but this seems to be a bad result.
  • The DC Circuit has agreed to an en banc review of Halbig v. Burwell.  We had some prior coverage on the matter here.   As you can imagine, the decision has caused quite a bit of partisan debate.
  • So, SOCTUS is getting an education in hip hop.  This is not tax procedure related, but I thought it was interesting.  The article indicates that while SCOTUS will occasionally reference song lyrics, it has apparently never quoted rap lyrics.  It also implies the Justices don’t know anything about hip hop (and perhaps question the artistic value of rap lyrics).  Although it would have been fun to assist in the drafting of the amicus brief, it might be more efficient and entertaining to just enlist the Roots, Jimmy Fallon and JT  to show up and perform the various songs (there are two others if you are interested and somehow missed this—you should have no trouble finding them on the internet).  A sort of  pop-star chamber, except without the abuse of power.   If you’re looking for rap music about taxes, and who isn’t, check out Slim Thug’s “Still a Boss”, with a solid nod to claiming fake dependents.
About Stephen Olsen

Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.

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