The Best of Talking Taxes
YOU HEARD IT HERE FIRST
Remember FUNDING THE GATT, THE WONDERFUL, WONDERFUL GAAT? Series EE savings bonds, favored by those wealthy bondholders, have been modified to remove the 4% interest rate floor (kinda brings back the good ol' days of the S&Ls.) This is down from 6% in January of 1993. Quite a revenue source for the present administration. Worse yet, interest during the first 5 years will credited only semi- annually, rather than the present monthly, and no interest will be posted for redemptions between interest dates! What a sorry scam.
CASE OF THE MONTH: SOUNDS LIKE AIDING AND ABETTING FRAUD
Maraziti v Thorpe, (CA-9). Mssrs. Maraziti and Thorpe were old friends and business associates. Mr. Thorpe got into trouble with the IRS to the tune of $353,327. As part of a purported business transaction, Mr. Thorpe arranged for Mr. Maraziti to deliver $500,000 of cashier's checks payable to Mr. Thorpe to a bank, where Mr. Thorpe, in the company of IRS agents, cashed the checks. The agents split the money with Thorpe, and they all beat a hasty retreat through a back door, leaving Mssr. Maraziti holding the proverbial bag, albeit an empty one. Mr. Maraziti eventually received the $353,000 taken by the agents in an 'interpleader' action, but was denied interest due to failure to file a timely claim for wrongful levy.
BEWARE THE INEXPERIENCED
The new MSSP for wineries urges agents to look for "flags" in tax returns, such as returns prepared by any accounting firm not specializing in wineries! I suppose that this theory will be applied to other venues as well, such as restaurants, car dealers and the traveling circus. Makes one wish for the days of wine and roses ... and generalists. Red, red wine may go to your head, but apparently not to your pocketbook.
ACCOUNTANTS IN COURT: LUCKY BREAK
The District Court for Southern New York found that a tax fraud scheme developed by an accounting firm whereby itemized deductions were created by writing checks to fictitious payees was "relatively unsophisticated." As a result of his lack of sophistication, the taxpayer was spared an "enhanced" jail sentence.
SPIN THE WHEEL, VANNA
In TCM 1995-508, the Court found that the expenses of a Wheel of Fortune contestant to prepare for and attend the program were more likely miscellaneous itemized deductions rather than wagering losses, but they exceeded the 2% threshold.
WHAT BECOMES OF THE BROKEN-HEARTED, WHO ARE etc.
One Maria Lerma was denied a non-business bad debt deduction for $50,000 she gave to a gentlemen (sic) she was dating. Her erstwhile lover repaid the amount with a rubber check and the relationship ended shortly thereafter. The Tax Court apparently did not believe she had an expectation of repayment.
GUESS HE BLEW IT
One Richard Shofer sought the advice of a Hack (Stuart Hack) as to whether he could borrow money from a pension plan. The advice in the instant case proved to be wrong, resulting in taxes and penalties for Mr. Shofer, who then sued Mr. Hack, a pension consultant.
ON WITH THE SHOW
After Exotic Dancer "Chesty Love" wowed the Tax Court (removed by the editor from the APRIL, 1994 TaxTalk Addendum), we thought it couldn't get any better. We were wrong. Not to be outdone, the District Court for Southern New York tried 303 West 42nd Street Enterprises Inc. v US. An adult entertainment facility, located near the infamous Port Authority building in the Big Apple, litigated an assessment of $268,000 for employment taxes. At issue was the employee or independent contractor status of the "visual telephonic communicators" (VTCs) who perform in glass-enclosed booths for customers, based upon the deposit of coins or tokens. Noting that the relationship between 303 and the performers was "unique" and after an exhaustive review of each of the 20 factors, the Court concluded that the VTCs were employees (surprise!). Among the key weights tipping the balance beam in the government's favor was training provided by 303 through permitting experienced performers to be observed by novices. Moral: If the vice squad doesn't get you, the tax man will (Al Capone: You listenin'?)
QUOTE OF THE MONTH
"The OBRA (1993) is consistent with the Due Process Clause. Retroactive application of a tax statute satisfies due process so long as it is rationally related to a legitimate government purpose." (By the Court in a proceeding involving the increase in the estate tax to 55%.) My old friend Machiavelli said it better: The ends justifies the means. I wonder how Sam Adams and Tom Jefferson would have felt about this.SHOULD'A BOUGHT A BEAMER
A Mercedes 500 SEL was purchased by a group of 10 plaintiffs with approximately 10 cashiers checks of $9,900. The government confiscated the car due to "probable cause" that it had been derived from the proceeds of structured financial transactions. The District Court for Southern New York dismissed the plaintiffs complaint seeking return of the vehicle.
DID YOU KNOW?
According to Rep. Dan Rostenkowski, the need for revenue may lead Congress to tax the earnings in pension plans. He added the astute observation that the changes in pension policy aimed at eliminating the bias towards upper income individuals have been offset "... by layering on complexity that intimidates the very people we are trying to induce to save." Meanwhile, a recent survey found that only 25% of people between 18 and 34 believe social security will exist when they retire, while 46% believe in UFOs.
FUNDING FOR GAAT, THE WONDERFUL, WONDERFUL GAAT
My picks for favorite revenue raisers to "fund" the Uruguay Round of the General Agreement on Tariffs and Trade: 1) Recognize gain on the distribution by partnership of marketable securities to a partner to extent partner's adjusted basis is exceeded; 2) Tax ID# required at birth - look for "TELE-TIN" line in delivery room; 3) Repeal floor of 4% on EE savings bond interest - aimed at wealthy bondholders.
HOW TO SUCCEED IN BUSINESS
The forgery conviction of an individual was upheld in a case where he stole a refund check and arranged for a friend to greet him using the name of the payee when he presented it to a drugstore clerk for cashing. (Person CA 4)
(EF)FLUENCY IN THE LANGUAGE OF TAXATION
IRS proposed regulations on the definition of sewage for tax-exempt bond purposes were criticized by the EPA and taxpayers. Frankly, I don't give a xxxx.
NOT SO CERTAIN AFTER ALL
Nothing in life is certain except death and taxes, right? Not so in TAM 9422004. The National Office ruled that a salesman of "pre-need" (you heard it right) cremation contracts on behalf of a firm performing same was an independent contractor, not an employee. The salesman was paid a commission, with no draw against anticipated commissions, and submitted no reports other than signed contracts.
TWICE SWINDLED
The Supreme Court denied review in a case where the Ninth Circuit ruled that the IRS' claim for income taxes on the embezzler's embezzlement took priority over the victim's claim for restitution. The insolvent embezzler had made a voluntary assignment of property to a third party which was overturned due to the government's priority interest. (Peck v. US).
OLD BILLING CONCEPT LEADS TO NEW FELONY
The conviction of a New York attorney for mail fraud and tax fraud in connection with significantly overbilling clients and claiming personal expenses as business expenses was upheld by the Second Circuit Court of Appeals in US v. Meyerson.
YOU DIDN'T HEAR IT HERE FIRST
The Tax Court ruled that "Exotic Dancer" Cynthia Hess, a/k/a Chesty Love, could depreciate her surgically augmented breasts. Ms. Hess-Love strains the tape measure at 56 FF. Query whether a likely back operation to repair spinal cord stress will be deductible under §162 rather than §213 and whether the INDOPCO decision might require such expenses to be capitalized and depreciated? Hopefully, the Court will pursue gender neutrality in these matters.
OOPS, GUESS THERE WAS A MATH ERROR
CBO Director Reischauer, previously a favorite of the Administration, decided that the mandatory premiums in the First Lady's health reform legislation had to be scored 'on budget'. He didn't call it a "tax" but if it quacks like a duck ... CBO also figured the legislation would increase the deficit over 5 years by $74 billion, rather than reduce it by $59 billion. He called this $133 billion difference 'small, compared with the uncertainty in projections.'
UNEVEN PARALLEL BARS
In Retton v. Teicher, the District Court for Southern New York refused to dismiss a complaint by jaunty gymnast Mary Lou Retton against a financial advisor in connection with a tax shelter that did not perform due to TRA '86. Ms. Retton maintained the delay in her suit was due to the fact she did not discover until 1992 that the adviser had received fees and commissions in connection with the 1985 sale, and that this tolled the statute of limitations.
MY DOG ATE IT
The District Court for Southern California found that a corporation could not escape liability for a penalty for late payment of payroll taxes due to embezzlement by its controller (San Diego Drywall v. US, 9/13/93). "Reasonable Cause .... requires more than the exercise of ordinary business care and prudence...". There must be a showing of disability as well, such as where all the officers charged with timely payment are part of the embezzlement. Moral: No excuse is a good excuse.
MY DOG ATE IT, PART DEUX
Mental incompetence from alcoholism was sufficient to toll the statute for a refund claim. Scott v. US, DC for Hawaii, 92-00011.
TAXABLE INCOME FOR ATTORNEY
Moneys expended for the benefit of the grantee attorney's creditors and her relatives under a power of attorney from a terminally ill brain cancer patient were taxable to the lawyer. Additions to tax were also sustained. Wilkinson, TCM 1993.
RED WINE LOVERS: WOE IS ME
In the category "Sad but True", the IRS ruled in TAM 9327007 that a winery must include in its interest capitalization period under section 263A the time that Cabernet Sauvignon ages in the bottle. White wine and Boone's Farm drinkers need not lament since most of that stuff doesn't age for long. Is this Indopco's legacy?
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