In Uncategorized on 02/22/2017 at 16:53

That ancient cry rings no bells with Judge Gale, as he discusses the cleaning of Old Master paintings in Estate of Eva Franzen Kollsman, Deceased, Jeffrey Hyland, Executor, 2017 T. C. Memo. 40, filed 2/22/17.

The late Eva was another art collector with a collection to die for, and she did. She was a heavy smoker, and her Breughels were unclean.

And it is uncertain if Jan Elder or Jan Younger did one of them, and to what extent the studio was involved.

It’s the usual estate valuation mix-and-match.

The estate’s lead witness is a co-chair of Sotheby’s Old Masters squad. He downgrades the paintings’ values, because they are extremely dirty, and the dirt may hide a multitude of sins. But ex’r Jeff goes to a leading cleaner of such works, who makes them come alive with mild cleaning stuff at a cost less than $9K.

Turns out the Sotheby’s squad leader was angling for auction rights, and got them. Art auction commissions make stockbrokers and real estate brokers look charitable.

This is a heavy conflict-of-interest, and makes Judge Gale regard the squad leader as unclean. He wants the auction rights, so he’ll low-ball the valuation.

Insurance policies rarely reflect FMV, unless supported by appraisals, and neither the late Eva’s, nor ex’r Jeff’s, give any basis for a valuation decision.

IRS’ expert has got comparables, which ex’r Jeff’s squad leader does not. So although IRS’ expert doesn’t ding for dirt, Judge Gale cuts 5% because the major painting (Peter the Elder) was dirty, but the cleaning risk was low. The painting cleaned up real nice.

As for the attribution risk on painting number two, Jan Younger is a poor bet; Jan Elder is the real deal. So Judge Gale cuts IRS’ expert by 25%, 10% for attribution, 5% for dirt, and 10% because the Jan, older or younger, painting was “bowed.”

I’ve stated before that Tax Court gets more valuation cases than almost any other court. This case gives a look at how the process works.

Takeaway- If your expert wants any piece of the action, walk away.


In Uncategorized on 02/22/2017 at 14:59

It’s not enough to disqualify a whistleblower if the info provided may be inadmissible on a trial. And if IRS keeps getting info from whistleblower after rejecting earlier info as “tainted”, does that let IRS off the Section 7623 hook?

No, says Judge Lauber. Here’s Whistleblower 23711-15W, filed 2/22/17.

Notwithstanding an initial “extensive and rigorous” grilling by CID after the Ogden Sunseteers scanned and sent them the info he gave, the whistleblower gets bounced, the Sunseteers producing a document from CID that claimed the info was “tainted,” but didn’t say how.

Answering IRS’ summary J motion, whistleblower claims “…’at various dates…, [he] supplied a substantial amount of updated information.’ Petitioners avers, without contradiction by respondent, that the IRS commenced ‘criminal and civil investigations of Target that resulted, ultimately, in the IRS collecting substantial revenue.’” Order, at p. 2.

“For a variety of reasons, we conclude that respondent’s motion for summary judgment must be denied. Respondent does not dispute petitioner’s averment that the IRS proceeded against Target with an administrative or judicial action described in section 7623(a). Assuming satisfaction of the statute’s other requirements, petitioner would thus be entitled to an award if the IRS action against Target was ‘based on information brought to the Secretary’s attention’ by petitioner. Sec. 7623(b)(1). We find that there exist material disputes of fact on this point.

“Respondent asserts that… the IRS did not use petitioner’s information to ‘further develop’ its investigation of Target because it determined that his information was ‘tainted.’ This assertion raises a number of questions, both legal and factual. Petitioner avers that his information was not in fact ‘tainted’; he presents two distinct arguments in support of that averment, neither of which respondent has addressed. Petitioner also avers that he continued to supply the IRS with updated information ‘at various dates…’; this appears to create a factual dispute in light of respondent’s assertion that the IRS did not use petitioner’s information…. And even if the IRS did not use petitioner’s information to ‘further develop’ its investigation…, there is a material dispute of fact as to whether any IRS action against Target was nevertheless ‘based on information’ that petitioner ‘brought to the Secretary’s attention’….” Order, at pp. 2-3.

And Section 7623 says nothing about whether the information was admissible on a trial, privileged or illegally obtained.

“Section 7623(b)(3) provides that the Secretary may reduce or deny an award in certain circumstances, i.e., if the whistleblower ‘planned or initiated the actions’ that led to the tax underpayment or ‘is convicted of criminal conduct arising from’ such activity. The statute does not list the provision of privileged or ‘tainted’ information as a basis for denying an award, and respondent has cited no other authority for denying an award on this basis. It is entirely possible that information which would not constitute admissible evidence at trial–hearsay, for example—may nevertheless be ‘used’ by the Secretary in the course of conducting an investigation. Without a clearer understanding of the legal theory upon which respondent is relying, and the authority for and scope of that theory, we could not find that respondent is entitled to judgment ‘as a matter of law.’ Rule 121(b).” Order, at p. 3.

And the whistleblower gets a break.

“The IRS has not disputed that it took action against and collected proceeds from Target, and we find that there exist material disputes of fact as to whether such action was ‘based on information brought to the Secretary’s attention’ by petitioner. Sec. 7623(b)(1). Given that the very facts that petitioner may need to prove his case are in the sole possession of respondent, petitioner will be entitled to discovery that will aid in resolving these factual disputes. See W.L. Gore & Associates, Inc. v. Commissioner, T.C. Memo. 1995-96; Rule 121(e).” Order, at p. 3.



In Uncategorized on 02/21/2017 at 16:27

That’s Judge Nega’s comeback to Martin S. Azarian P.A., Docket No. 28957-15, filed 2/21/17.

P.A. is Marty’s law firm sub S, of which Marty was sole owner. He was also an officer and director, and always treated himself as an employee.

I’m inferring here, but it sounds like Marty was playing the sub S dodge. That’s where the Sub S employs its owner, pays him some wages (with W-2 and withholding to match), and treats the rest of the earnings as profit (dividend to owner, but no W-2 and no withholding).

IRS stomps these moves by treating the profits as wages and claiming unpaid FICA-FUTA.

But all Judge Nega has to tell us is “… respondent sent petitioner Forms 4668, Employment Tax Examination Changes Report, which (1) concluded that petitioner failed to report reasonable wage compensation paid to Mr. Azarian…, (2) proposed that petitioner should have reported $125,000 in annual wages to Mr. Azarian…, and (3) concluded that petitioner was therefore liable for proposed employment tax increases and additions to tax…. Respondent did not issue petitioner a Letter 3523, Notice of Determination of Worker Classification, with respect to the taxable periods at issue.” Order, at p. 2.

P.A. petitions. IRS says no jurisdiction, because this isn’t a reclassification case. Marty was always an employee, and neither he nor P.A. ever said otherwise.

Section 7436 gives Tax Court jurisdiction when there’s a dispute over IC-vs-EE status in connection with an audit. OK, here there was an audit. And both sides agree that the relief for habitual erroneous EE classifications in Section 530(a) of the 1978 Revenue Act isn’t in play here.

For more about that, see my blogpost “Classified,” 4/3/13.

But there’s no classification issue here.

“Petitioner consistently treated Mr. Azarian as an employee for the taxable periods at issue. Therefore respondent did not make a determination that Mr. Azarian was an employee of petitioner, but rather concluded that petitioner failed to report reasonable wage compensation paid to Mr. Azarian…. Section 7436(a)(1) only confers jurisdiction upon this Court to determine the ‘correct and the proper amount of employment tax’ when respondent makes a worker classification determination, not when respondent concludes that petitioner underreported reasonable wage compensation, as is the case here.” Order, at pp. 2-3 (Footnote omitted, but read it; it discusses the case that was the subject of my blogpost hereinabove referred to).

This one was a loss for Eric William Johnson, Esq., even though as usual he provided “Honest tax representation at reasonable rates.” See my blogpost thus entitled, 8/28/14.