A sequel of sorts to the 1976 Woody Allen – Zero Mostel movie now generally forgotten is Jason Chai, 2015 T. C. Memo. 42, filed 3/11/15. It’s a reprise for Jason on this blog, as he featured in my blogpost “The Silt We Stir”, 2/13/15, jousting about whether an incomplete TEFRA partnership jumpball knocks out IRS’s tenfold boost in Jason’s deficiency.

Jason won that one, but was it a Pyhrric victory? Stay tuned.

Judge Cohen relegated Jason and IRS to fight about whether the $2 million Jason got from buddy Andrew Beer via Delta Currency Trading, LLC, was nonemployee compensation and subject to SE tax.

Jason was a Harvard MA in architecture. Andrew was a Harvard BA and MBA. You can see what is coming.

Andrew manufactured phony shelters using the marriage of high-gain taxpayers with currency straddles. These are all variations on son-of-BOSS, offsetting huge gains with recognized losses offset by unrecognized gains, without an economic substance in sight.

Andrew married Jason’s cousin, and Jason camped out with Andrew for a while. Andrew needed someone to act as counterparty to his shenanigans, and Jason was his man.

Jason was frequently a visitor to Andrew’s office, signing away his life, fortune and sacred honor as partner in any number of fiddles, and receiving a piece of the bounty bestowed on Andrew by his tax-dodging clientele.

IRS ended the party with Notice 2002-50, 2002-2 C.B. 98, and Notice 2002-65, 2002-2 C.B. 690. These made Andrew’s little fiddles into listed transactions, non-reportage of which invoked monumental penalties, and reportage of which invoked the Audit From Heck.

IRS tried to stick Jason with deficiencies for the monumental phony losses he claimed, but, as shown in my blogpost aforementioned, that was a nonstarter in this case.

Delta Currency Trading, LLC, Andrew’s flagship, told Jason that the $2 million bonus he got was going to be reported on a 1099-MISC. This is the electronic equivalent of having a large bull’s-eye painted on a tender portion of your anatomy.

Jason never bothered to tell his trusty CPA, Stephen Ellspermann, about the 1099-MISC, but instead claimed it was all on the K-1 Jason got from Delta. Except it wasn’t. So it never got reported.

Jason played the Section 6201(d) gambit. When income is reported on a third-party form, a taxpayer may challenge it, and then IRS “bears the burden of producing reasonable and probative evidence, in addition to the information return, concerning the deficiency attributable to that item.” 2015 T. C. Memo. 42, at p. 13.

IRS has the reasonable and probative evidence, because the Delta traders are rolling on Andrew, and spilling every legume they can find. And their hearsay e-mails get admitted, to show Jason knew about the 1099-MISC.

Jason claims return of capital (but can’t show he invested Penny One in Delta or any of its progeny) or gift, because his role in all the goings-on was minimal.

His buddy Andrew nails down that coffin lid. “Although petitioner attempts to minimize his role in the tax shelters and describes his activities as investments, the record reflects that he provided services to Delta to facilitate the tax shelter transactions. Beer testified that petitioner’s role in the tax shelters was a critical component of the transactions and the tax shelters could not have functioned as planned without petitioner’s participation. Delta could not have allocated noneconomic losses to its clients without petitioner’s acting as the accommodating party. The allocation of $3.2 billion of noneconomic income to petitioner enabled Delta’s clients to reap the benefits of an almost equal amount of noneconomic losses to offset their taxable income. Petitioner’s role was far from nominal.” 2105 T. C. Memo. 42, at p. 15.

And that Jason let the captive LLC that Andrew formed do the signing doesn’t take him off the hook, as he was the one providing the front.

Besides, Jason has been getting bonuses and salary from Andrew before this payment.

Jason’s claim that the $2 million was a gift was characterized by his own counsel as “somewhat far-fetched.” 2015 T. C. Memo. 42, at p.15.

Judge Cohen: “We agree with petitioner’s characterization of his suggestion and the necessity of deciding the case on the evidence, but we reject his conclusion. A gift results from a detached and disinterested generosity motivated by affection, respect, admiration, charity, or the like. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). The record is devoid of any evidence suggesting that the payment resulted from detached and disinterested generosity. Rather, the evidence establishes that the payor, Delta, intended the payment as compensation.” 2015 T. C. Memo. 42, at p. 24.

Gotta give Jason’s attorneys credit, they’re trying. They play the Section 6751(b) gambit on the penalties. Who signed off on the penalties? See my blogpost “Penalty Kick”, 7/17/14, for more about this.

Doesn’t help, as they raise this on post-trial brief, ambushing IRS. Too bad, guys, it would have gotten you a Taishoff “good try” if you’d raised it sooner.

Anyway, the penalties are sustained, as Jason didn’t level with his trusty CPA Stephen Ellspermann, so no good-faith reliance.

There’s a problem with being the front man; walking point can be hazardous to your tax health.