Attorney-at-Law

ALTER EGO TRIP

In Uncategorized on 05/29/2020 at 07:50

Having wholly-owned or controlled corporate-type entities as placeholders or fronts isn’t necessarily a tax dodge. But IRS is distinctly inhospitable when taxes are on the table.

Ch J Maurice B (“Mighty Mo”) Foley expatiates thereon in River X, Inc., Docket No. 22324-19L, filed 5/29/20.

There’s a bunch of years, taxes, TFRPs and assorted penalties. And IRS claims River X is a nominee or alter ego of the Xaviers.

But missing from this picture is a SNOD or NOD. The case comes up on a motion to restrain or refund.

After the usual “we’re only a little court with limited jurisdiction” patter, Ch J Mighty Mo man-splains the alter ego-nominee story.

“Petitioner’s assertion that as a ‘person liable for the tax’ it is entitled to its own CDP rights is misplaced. Regulations promulgated under sections 6320 and 6330 state that known nominees of, or persons holding property of, the taxpayer are not entitled to a collection due process or equivalent hearing. Secs.301.6320-1(b)(2), Q&A-B5; 301.6330-1(b)(2), Q&A-B5, Proced. & Admin. Regs. The Internal Revenue Manual (IRM) also explains that the ‘terms often interchange or overlap, but “alter egos” are usually corporate and business entities controlled by the taxpayer, whereas “nominees” are usually individuals who clearly have a separate physical identity.’ IRM pt. 5.17.2.5.7(3) (Jan. 8, 2016). The IRM further explains that although a nominee or alter ego is not entitled to CDP rights, the nominee or alter ego may appeal the filing under the Collection Appeals Program (CAP) process. IRM pt. 5.12.6.3.11(2) (Jan. 19, 2018). Any determination resulting from a CAP appeal, however, is not sufficient to invoke this Court’s jurisdiction. See e.g., IRM pt.5.1.9.4(5)(Feb.7.2014).” Order, at p. 3.

Note- A CAP is sort of equivalent hearing lite.

And since there’s no CDP or petition therefrom, Section 6330(e)(1) bars restraining levies. And in any case, even with a CDP or petition therefrom in play, nothing bars or lifts a NFTL.

If the Xaviers think IRS grabbed improperly, “…I.R.C. section 7426 provides that a person, other than the taxpayer, who is subject to a wrongful levy may bring an action in a District Court.” Order, at p. 5. More about that in my blogpost “Whose Money Is It Anyway?” 1/11/12.

 

 

 

“NEVER BORROW MONEY NEEDLESSLY” – PART DEUX

In Uncategorized on 05/28/2020 at 19:15

The slogan of old Household Finance Corp. echoes through our profession. In recent years, I’ve gotten pitches from litigation lending outfits that will lend money against a home run in the courtroom. Those loans were real loans, although nonrecourse. And anyone taking such would be wise to put the proceeds in their escrow account, appropriately labeled and documented, and draw out the funds only to pay expenses and legal fees.

Judge Lauber comes down heavily on David A. Novoselsky and Charmain J. Novoselsky, 2020 T. C. Memo. 68, filed 5/28/20. It’s Dave’s story.

Dave was a Chicago litigator suing the State of IL for allegedly grabbing fees to which it was not entitled. Somehow doctors were among the grabbed, and a couple doctors (hi, Judge Holmes) ponied up better than $1.4 million, nonrecourse, stated interest but no promissory note or periodic payments, payout due only if Dave and co-counsel bring home the cliché.

Dave never reported the loan proceeds as income (or anything else), and also conceded he didn’t report another $253K. 2020 T. C. Memo. 68, at p. 2, footnote 2.

Now loan proceeds aren’t income, but there must be a noncontingent obligation to repay and a reasonable possibility of repayment. For the standard trudge through the factors, see 2020 T. C. Memo. 68, at p. 20, with 7 Cir no-factor-controlling gloss, and the overwhelming question “Was there a genuine attempt to create a debt, with reasonable expectation of repayment?”

Not this time. The contingency kills the loan.

But Dave had a saver. He could have treated the litigation support proceeds as trust funds, to be applied to fees only as earned (with hourly billing records; courts love those), and expenses per vouchers cataloged “through every passion ranging,” as a much finer writer than I put it.

Except he didn’t.

“The agreements stated (for example) that the money was to be ‘used to pay for all time and expenses incurred by NOVOSELSKY in pursuant [sic] of this litigation.’ If the funds had been meant to be held in trust, Mr. Novoselsky would not have been permitted to keep the money in his personal or business account. See Ill. S. Ct. R. Prof’l Conduct 1.15 (requiring that trust funds be kept separate from the lawyer’s own property). Nothing in the record suggests that Mr. Novoselksy held the counter-parties’ funds in a separate trust account.” 2020 T. C. Memo. 68, at p. 27. (Footnote omitted).

I note that the omitted footnote cites an IL case that says advance retainer fees belong to the firm and not the client. But those fees haven’t been earned yet. And in such a case as this, I’d be surprised if an attorney would be faulted for treating those advance payments as the clients’ money until earned, or expended in pursuance (hi, Judge Lauber) of the clients’ litigation. I always do.

 

 

 

 

LIMITS

In Uncategorized on 05/28/2020 at 18:11

I have discomposed numberless electrons praising the obliging nature of Judge David Gustafson. But there are limits, and today he establishes that Daniel E. Larkin and Christine L. Larkin, 2020 T. C. Memo. 70, filed 5/28/20, have stretched his patience to the limit.

Dan is a high-priced colleague in a big-time Cleveland OH firm, to an associate’s berth in which we were taught to aspire in my young day on the Hill Far Above. Needless to say, I never got there. Y’all might recall Dan and Chris from my blogpost “Obliging? He Lets It All In,” 3/14/18.

Well, after the continuances, the lawyer swaps, the trial and the post-trial briefing, Dan does less than brilliantly in USTC, despite his equally high-priced counsel.

“The Larkins did not make a plausible showing of reasonable cause and good faith. Their record-keeping was in disarray; they failed to timely report large amounts of income; they claimed substantial deductions for which they had no proof at all and others for which their proof was insufficient.

“The Larkins are sophisticated business people. Mr. Larkin is a highly educated attorney with more than 20 years’ experience dealing in a variety of complex transactional matters. He was certainly capable of keeping appropriate, contemporaneous records, preparing detailed notes, and distinguishing personal from business expenses, yet the evidence he used to substantiate their deductions shows that he failed to make these efforts. Mr. Larkin disregarded instructions for properly completing his returns, as evidenced by his failure to attach underlying documents and the forms and calculations required to claim certain loss deductions. Such inaccurate and misleading income tax reporting does not reflect a reasonable attempt to comply with the Code.

“There is no evidence besides Mr. Larkin’s testimony that the Larkins sought advice in the preparation of their returns. The evidence shows that Mr. Larkin did little more than briefly consult with individuals at his place of employ; and he did not say who those individuals were, what information the Larkins provided to them, or what specific advice they supposedly gave. Moreover, Mr. Larkin clearly assumed the ultimate responsibility for the preparation of his returns.” 2020 T. C. Memo. 70, at pp. 71-72.

But before I go, there’s one point Judge Gustafson makes that wants repeating. Dan tries three (count ‘em, three) separate tries to reopen the record to put in stuff. At the end of trial, Dan moved to leave the record open yet again.

Judge Gustafson has about lost patience with Dan and his delaying tactics. This is from the bench.

“I’m going to deny your very broad motion to leave the record open so that you can bring in anything that relates to any deduction already at issue in the case.

“However, I am going to do so without prejudice to your renewing that motion when you have specific documents that you wish to offer. * * * You are free to file whatever motion you wish. I will tell you that a motion filed after 45 days…when Respondent [’s counsel] begins to work on her brief and invests time in it, and then you would be changing the ground underneath her, that would not be just.” 2020 T. C. Memo. 70, at p. 16.

My kind of Judge.