Archive for October, 2012|Monthly archive page


In Uncategorized on 10/11/2012 at 17:57

To quote Paul Simon, while there might be “fifty ways to leave your lover”, as stated in his 1975 hit of that name, there’s only one correct way for an attorney or Tax Court practitioner to be relieved. But neither attorney got it right in this case.

No Tax Court decisions today, 10/11/12, and no really exciting orders either, so here’s the story from a pair of orders from 10/10/12, both from Martin F. and Mary S. Tynan, and both Docket No. 28876-83 (yes, 83; these are remnants of the Kersting tax shelters of infamous memory, Tax Court’s equivalent of Dickens’  Jarndyce v. Jarndyce, or perhaps more precisely, the Night of the Living Dead).

Judge Colvin was really losing patience. I cannot blame him.

And the Tynans did have two attorneys, although which of the petitioners each represented is unclear. Apparently Judge Colvin thinks each attorney represents both petitioners.

I won’t name either attorney here, because, as I’ve said often before, there but for the grace of you-know-Whom goes any or all of us.

Judge Colvin says it all, once in each order: “The motion to withdraw does not comply with Rule 24(c), in that Mr. X did not provide petitioners’ current address (their last known address is not necessarily their current address) or their current phone number, and he did not state that he contacted petitioners and whether or not they objected to his withdrawal from the case.” Order, p. 1. (Names omitted).

It is possible that since 1983 the petitioners may have shuffled off this mortal coil. But as these were partnerships with TEFRA partnership-level FPAAs and affected items, the end is not yet in sight. See my blogpost “Bang – A Warning to Tax Matters Partners (And Their Advisors)”, 1/5/11.

Alternatively, these may be situations like that in the old joke about the continuing legal education ethics class, where the lecturer sternly warned the attendees,  “You may not have sex with your clients”, to which one attorney shouted “Sex with them? I don’t want to talk to them!”

Alas, the two attorneys in the Tynan case are, at least for the moment and in the immortal words of The Platters’ great manager Buck Ram who wrote their 1956 smash hit The Great Pretender,  “still around.”


In Uncategorized on 10/10/2012 at 18:07

 And Privilege is not Unlimited

 Everything has an end, but a sausage, said my old friend Paul V. Olsson, quoting his Swedish grandmother, has two. Proving him (and his grandmother) right is Carpenter Family Investments II LLC, David James, LLC, Tax Matters Partner, Docket No. 30834-08, filed 10/10/12.

You’ll recall that Judge Wherry gave IRS the right-about-face in 43 pages in 136 T. C. 17, filed 4/25/11, as set forth in my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. But I finished my blogpost with my usual prescient comment: “And you may be sure there will be an appeal.”

Well, there was. But IRS moved to dismiss its appeal in the outwash from Home Concrete & Supply v. United States, 132 S. Ct. 1836 (2012), and Ninth Circuit, nowise loath to clear its docket, dismissed.  See my blogpost “Colony Lives”, 4/26/12, one year to the day after Carpenter.

So the Clan Carpenter moves for summary judgment dismissing everything as barred by the 3SOL, and Judge Wherry, although not quite so obliging as his colleague Judge Gustafson, grants Carpenter’s motion.

You can see there was nothing interesting by way of opinions out of Tax Court today, but the orders had something interesting.

We lawyers write tax opinions for clients. At rare intervals, they take our advice; sometimes we even get paid. The protection of client-attorney privilege attends such opinions. Only the client can give up the privilege, although it can be lost through careless disclosure, and there’s bushelbaskets of caselaw on that point.

And there’s been recent discussion of the privilege as pertains to accountants on the LinkedIn Technical Tax Issues Board, which I co-manage with a certain highly-regarded Director at a major accounting firm. See 26USC§7525(a)(1), which puts “any federally authorized tax practitioner” in the position of an attorney. How about Registered Tax Return Preparers?

But Tax Court answers one question today: if taxpayer wants to use reasonable cause (Section 6664(c)), and an expert rendered advice that would be privileged, even if the taxpayer doesn’t want to use that advice on the trial, the taxpayer has to give up the privilege and hand over the opinion.

The Order is Humboldt Shelby Holding Corporation and Subsidiaries, Docket No. 25936-07, Judge Goeke. It’s an economic substance case. IRS moves to compel production of the tax opinions which taxpayer got from well-regarded New York City attorneys. “The law firm of Pryor, Cashman, Sherman, and Flynn LLP rendered two legal opinions (Cashman opinions) to petitioner regarding the federal income tax consequences of the aforementioned transactions. Petitioner refuses to produce the Cashman opinions on the basis that they are protected by the attorney-client privilege and work-product doctrine. On September 14, 2012, respondent filed a Motion to Compel Production of Documents with regards to the Cashman opinions.” Order, p. 1.

Taxpayer claims Section 6664(c) reasonable cause umbrella to ward off penalties, but wants to withhold the opinions. Apparently taxpayer has other grounds for showing reasonable cause, and claims they didn’t rely on the opinions. Haven’t we all heard that old song before? I hope Cashman & Co got paid.

No, says Judge Goeke: “In determining whether petitioner is entitled to the reasonable cause exception of section 6664, we must also decide whether petitioner acted in good faith. A good faith determination requires that we consider all information available to petitioner. Accordingly…we believe the Cashman opinions are relevant to such defense whether relied upon by petitioner or not. Therefore, we agree with respondent (IRS) that the claim of privilege regarding the Cashman opinions has been waived.” Order, p. 1 (Citations and footnote omitted).

“Gude faith, ye maunna’ fa’ that”, as Scotland’s greatest remarked. But hand everything over.


In Uncategorized on 10/09/2012 at 16:43

And Tax Court Can’t Review Why IRS Didn’t Get

Is Section 7623(b) a toothless lion? Unless, of course, you’re a Swiss moneylaunderer and tax evasion facilitator, doing time for your peccadilloes.

Maybe. See Raymond Cohen, 139 T. C. 12, filed 10/9/12, Judge Kroupa laying down the law. And see my blogposts, “Qui Tam?”, 9/12/12, “Whistleblowers, Beware!”, 9/7/11, and “The Whistleblower Blows It”, 6/20/11.

Briefly, a whistleblower gets paid if, and only if, IRS gets paid based on info provided by whistleblower and not publicly available.

If IRS doesn’t get paid for any reason, including but without in any way limiting the generality of the foregoing (as the high-priced lawyers say), IRS doing nothing for any reason or for no reason, whistleblower doesn’t get paid.

IRS can refuse to proceed arbitrarily, capriciously or stupidly, and Tax Court has nothing to say. Tax Court has no jurisdiction to review IRS’ determination to proceed or not to proceed.

Ray blew the whistle on a bunch of uncashed dividend checks his wife found when she was administering a decedent’s estate, claiming they were unreported income. IRS’ Ogden whistleblowing crew looked at it and said “we didn’t get any money, so you’re out”. Ray asked for a reconsideration, and Ogden said “no, but this time we say no because you used publicly available information (like a class-action lawsuit and the State’s unclaimed property website).”

The arguments: “This case presents an issue of first impression in this Court. We are asked to decide whether any relief is available under section 7623(b) when a taxpayer alleges that the Commissioner denied a claim without initiating an administrative or judicial action or collecting proceeds. Petitioner contends that respondent abused his discretion by not acting on his information. Petitioner argues respondent must explain the reason he denied the claim and reopen the claim. Respondent contends we can provide relief under section 7623(b) only after the Commissioner initiates an administrative or judicial action and collects proceeds.” 139 T. C. 12, at p. 5.

Ray argues IRS will bounce his claim, take his info, grab the money and pay him nothing. That’s not fair. Maybe not, says Judge Kroupa, but: “This Court, however, is not a court of equity and section 7623 does not provide for equitable relief. See Commissioner v. McCoy, 484 U.S. 3, 7 (1987); Stovall v. Commissioner, 101 T.C. 140, 149-150 (1993). Section 7623(b) does not provide any relief before whistleblower information leads to an administrative or judicial action and the collection of proceeds.” 139 T. C. 12, at p. 9.

Of course, there is the usual “so sad, too bad” finale: “We can appreciate petitioner’s frustration that information that he believes is actionable was not pursued. Congress, however, has charged the Commissioner with resolving these claims and has not provided any remedies until after an administrative or judicial action and the collection of proceeds.” 139 T. C. 12, at p. 9.

Want to close the tax gap, Congress, without increasing IRS’ budget? How about a more user-friendly whistleblower statute?


In Uncategorized on 10/08/2012 at 17:37

That’s Judge David Gustafson; by way of illustration of the foregoing, as the high-priced lawyers say, see my blogpost “We’ll Come to You”, 9/18/12, where I describe how Judge G offered to conduct John Carter’s trial in the prison where John was a-servin’ of his time.

Tax Court is closed today, 10/8/12, so no decisions or orders issued. I was suffering from Tax Court withdrawal, so I found an order of Judge G’s from 10/5/12, Michael J. Sylvia III, Docket No. 23908-11. Judge G helps Mike out by answering four questions Mike poses in his pre-trial brief, and incidentally showing what frivolous arguments are and the consequences thereof.

Candidates for the RTRP qualification  won’t be asked questions like these on their exam, although maybe they should be.

Judge G: “1. ‘Is the notice of deficiency valid?’ The apparent answer to his question is: yes. Mr. Sylvia’s point seems to be that the notice of deficiency is based on reports from third parties of amounts that they paid to Mr. Sylvia, and he challenges those reports. A taxpayer may indeed raise a ‘reasonable dispute’ about third-party reporting. See section 6201(d). However, it appears (though we cannot yet determine finally) that the nature of the challenge is that Mr. Sylvia contends that the amounts reported to do not constitute taxable income for various frivolous reasons. If, as he seems to admit, the payors on the reports really did pay money to Mr. Sylvia in exchange for his work or property, then the amounts are taxable, and the notices of deficiency would be upheld in that regard.

“2. ‘By what statute, if any, has the petitioner been made liable for a tax?’ The answer is: section 1 of the Internal Revenue Code (26 U.S.C.).

3. ‘Was the petitioner engaged in an activity that is subject to tax?’ The income tax is imposed not on activities but on ‘income from whatever source derived’, including ‘[c]ompensation for services’. I.R.C. sec. 61(a)(1). For example, if Mr. Sylvia was paid compensation for his labor, then that compensation is taxable income.

4. ‘Does the petitioner have zero basis in his labor? Yes. ‘The argument that a taxpayer has a basis in labor equal to its fair market value would effectively eliminate taxes on wages and is frivolous.’ Beard v. United States, 580 F.Supp. 881, 882 (E.D.Mich.1984).” Order, p. 1.

Then Judge G tells Sylvia all about it: “America is a free country, and citizens have the right to advocate for their views, to petition for redress of grievance, and to lobby Congress for the revision of our laws. However, no one has the right to make doomed, frivolous arguments in Tax Court litigation only to delay the inevitable assessment of their obvious tax liability.” Order, p. 2.

And Judge G tells Sylvia to play fair or expect a Section 6673 penalty if he doesn’t.

Can’t wait for the decision.


In Uncategorized on 10/04/2012 at 18:02

And,  “Lift Up Thy Voice”

Twofers from Tax Court today, 10/4/12, the tales of the two Bobbys.

First Bobby is Robert S. Yarish and Marsha M. Yarish, 139 T. C. 11, filed 10/4/12. It’s all Bobby’s problem, as his ESOP craters in 2004 retroactive to Day One (2000). Judge Kroupa, unraveller of tangled webs, has the floor: “Respondent (IRS) determined in the revocation letter that the Yarish ESOP did not meet the requirements under section 401(a) for failing to satisfy section 410(b) and that the trust under the Yarish ESOP was not exempt from tax under section 501(a). This Court sustained respondent’s determination to retroactively disqualify the Yarish ESOP for the 2000 to 2004 taxable years. See Yarish Consulting Inc. v. Commissioner, T.C. Memo. 2010-174.” 139 T. C. 11, at p. 4.

Apparently Bobby’s ESOP was a fable, because it was a Sub S holding corporation ESOP and disqualified. See my blogpost “The Unanswered Question”, 6/13/12, involving a Nonqualified Sub S ESOP that gets by when it dissolves.

So Bobby claims that, since 2004 is the only open year when he gets hit, he only need pay tax on the contributions made to his now-defunct ESOP for that year, relying on the “(other than the employee’s investment in the contract)” parenthetical in Section 402(b)(4)(A). This provision requires the disqualified beneficiary to pay tax on whatever he gets (in this case $2.43 million) less whatever he contributed or his employer, his captive Sub S, contributed for him.

OK, but does he pay tax on the whole enchilada or only what accretions there were in 2004, the only open year? Case of first impression, and no disputed facts, so Judge Kroupa has to parse the statute and grant summary judgment.

IRS argues that the only “employee’s investment in the contract” is what the employee actually paid tax on, and Bobby never paid tax from Dime One until now, so Bobby owes everything, whenever it accrued to his benefit, and as he was fully vested in the exploded ESOP from Day One, he owes tax from Dime One.

Bobby argues that the magic words, not defined in Section 402 but as defined in Section 72, are terms of art but Judge Kroupa isn’t buying: “First, petitioners argue that ‘investment in the contract’ as defined in section 72 is an established term of art that applies universally throughout the Code and thus we should look to section 72 for its definition. We recognize that where Congress uses a term of art that has had an established specific meaning over long periods, Congress presumably incorporates that meaning when it uses the term. We disagree, however, that the phrase ‘investment in the contract’ is an established term of art.

“While section 72 defines the phrase ‘investment in the contract,’ nowhere in that section or its accompanying regulations is there any indication that the definition applies outside the context of section 72. Moreover, the definition of ‘investment in the contract’ in section 72 that petitioners argue applies for purposes of section 402(b)(4)(A) is expressly limited in scope to specific subsections of section 72. See sec. 72(c)(1), (e)(6), (f). Thus, we are not convinced that the phrase ‘investment in the contract’ as defined in section 72 is an established term of art that applies throughout the Code.” 139 T. C. 11, at pp.11-12 (Citation omitted).

Neither is Section 72 of similar purpose and intent to Section 402 so as to make the definition in pari materia (that’s high-priced lawyer babble for “same same”), and thus applicable.

Finally, Bobby argues each year stands on its own, and the closed years are off the table (IRS isn’t arguing nonfiling, fraud or substantial overvaluation, so standard 3SOL applies). No, says Judge Kroupa, there are plenty of places where Congress has moved otherwise taxable events from one year to another, and here the aim is to hit the heavies when their deferral schemes blow up, to the extent they haven’t sooner “given at the office”. And Bobby hasn’t, so the whole nine yards are taxable.

Next is another Bobby, Robert G. Fielder and Deborah R. Fielder, T. C. Memo. 2012-284, filed 10/4/12. Bobby is fighting a levy, and there’s much back-and-forth about whether his 433-A was complete or not, what his farm was worth, and whether he disclosed Debby’s business income, when he offered a collection alternative that Appeals rejected and sustained the levy.

But for sure he never got a SNOD, and he did file the necessary return to be considered timely for collection alternative purposes. IRS wants summary judgment affirming Appeals’ rejection, but Judge Laro says no.

There are questions of fact. First, as Bobby never got a SNOD, he can contest the deficiency, and that includes additions to tax, interest and penalties. “Respondent (IRS) takes the position in his motion that petitioners did not properly assert they are not liable for the additions to tax because they did not raise the dispute in their Form 12153 hearing request. As respondent sees it, the record supports his assertion that petitioners were merely confirming the accuracy of the information given to them by the IRS and were not substantively disputing the existence or amount of the liability.” T. C. Memo. 2012-284, at p. 15.

But the SO’s case activity record says that Bobby said he thought the penalty was unfair, that his return was late because his accountant quit on him and he prepared the return as fast as he could, and the SO tried to explain to Bobby why the penalty was proper. And the SO’s determination didn’t consider Bobby’s objection to the additions and penalty, although Section 6330(c)(3)(B) required him to do so.

“Nor do we accept respondent’s position that petitioners were precluded from challenging the additions to tax because they did not raise the issue in their Form 12153 hearing request. Neither the statute nor our caselaw requires a taxpayer to raise the liability issue in the request for a CDP hearing for it to be considered properly at issue. The statute provides only that a taxpayer may raise the issue of underlying tax liability at the CDP hearing if the taxpayer did not receive a notice of deficiency or did not otherwise have an opportunity to dispute such tax liability, and the determination by an Appeals officer is subject to judicial review under section 6330(d). The statute does not speak to the timing for raising the issue. The issue of underlying liability will be considered properly raised if a taxpayer raises it at any time during a CDP hearing.” T. C. Memo. 2012-284, at pp. 16-17 (Citations omitted).

So Bobby will get a trial.

Takeaway–When at a CDP, if you didn’t get a SNOD, take your text from Isaiah, Ch. 40, verse 9: “Lift up thy voice with strength; lift it up, be not afraid” even if you left it out of your Form 12153.


In Uncategorized on 10/03/2012 at 17:45

OK, But Forget the Ten Dollars

If hypertechnical semantic gymnastics are what does it for you (and if so, only my innate courtesy prevents me from adding “in which event I most respectfully suggest you get a life”), take a peek at RP Golf, LLC, SB Golf, LLC, Tax Matters Partner, T. C. Memo. 2012-288, filed 10/3/12, Judge Paris reaching for her driver on this one.

It’s another scenic easement, involving acres of Platte County, Missouri, which a golf club operator deeded to an appropriate 501(c)(3) to protect, preserve and defend from any development, and incidentally to claim a $16.4 million tax break.

Once again, it all comes down to the famous Section 170(f)(8) substantiation requirement. No letters from the 501(c)(3), so let’s look at the deed.  Describes the property? Yes. Contemporaneous? Yes, both golf clubber and 501(c)(3) signed the deed. But the deed doesn’t say that no (emphasis by the Court) goods or services were furnished by the 501(c)(3) to the cheerful giver, although IRS and golf clubber agree that golf clubber got nothing from the 501(c)(3).

The deed does say “for and in consideration of the covenants and representations contained herein and for other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged, Grantor on behalf of itself and its heirs, successors and assigns, in consideration of the premises contained herein and other valuable consideration paid to its full satisfaction….” T. C. Memo. 2012-288, at p. 4.

Here’s the problem, of course, the boilerplate “other good and valuable consideration”. This is part of what sunk poor ol’ Randy Schrimsher, but its absence saved Gayle and Margaret Averyt and their pals. See my blogpost “Yes In Deed”, 7/16/12.

Randy’s deed had the ten dollar language, and even though in his case  Tax Court agreed it was boilerplate, there was no contemporaneous evidence to show there wasn’t “other good and valuable consideration,” and apparently no one thought to stipulate that there wasn’t. Gayle and Maggie, on the other hand, said nothing about anything but how they loved the environment.

Judge Paris hits the ball squarely between the bunker and the fairway. “Despite the veiled reference to ‘other good and valuable consideration’, neither party alleges that goods or services were exchanged for the easement contribution. In fact, the agreement indicates to the contrary–that there was no consideration exchanged. The most obvious indication is that the agreement does not recite any amount of consideration. Cf. Schrimsher v. Commissioner, T.C. Memo. 2011-71 (the deed conveying a conservation easement recited as consideration ‘the sum of TEN DOLLARS, plus other good and valuable consideration’). The absence of any statement regarding consideration is underscored by the agreement recitals, which state that the easement is ‘freely’ given. Therefore, the Court concludes that the ‘other good and valuable consideration’ recited in the agreement is boilerplate language and has no legal effect for purposes of sec. 170(f)(8).” T. C. Memo. 2012-288, at pp. 10-11, footnote 7.

Note the capital letters, in which are written the fatal sum that scuttled poor Randy Schrimsher. What if he had used lowercase letters instead?

Better still, scrivener, leave out the ten dollars. Whether in upper or lower case.


In Uncategorized on 10/02/2012 at 17:13

World Bank Gets It Right But Employee Gets It Wrong

Yesterday I discussed how an IMF junior staffer was excused the 20% understatement penalty because her bosses didn’t warn her properly of her liability for SE tax; the case, you’ll remember, was Amy Yu-Wen Chien, T. C. Memo. 2012-277, filed 10/1/12.

But the World Bank does it better, so Judge Halpern isn’t in love with Amy or her decision, in Humberto S. Diaz and Clara D. Diaz, T. C. Memo. 2012-280, filed 10/2/12. Hummer is a Chilean ex-flyboy who transitioned to World Bank from the Chilean Air Force, and to US citizenship from Chilean.

But, unlike IMF, World Bank does a proper tax indoctrination when an employee either is, or becomes, a US citizen. “Because he was a U.S. citizen, the World Bank switched from paying him on a net basis (no additional compensation to cover estimated U.S. tax obligations) to paying him on a gross basis (compensation includes additional amounts to cover estimated U.S. tax obligations).”  T. C. Memo. 2012-280, at p. 3 (footnote omitted).

Hummer’s employment agreements (he signed several during his tenure at World Bank) stated: “The fee [compensation] is based on the understanding that you will assume any tax obligation which may be imposed on your the [sic] World Bank income. United States citizens working in the United States with international organizations are covered for Social Security under the U.S. Social Security Act and are liable for Social Security at the “self-employed” rate.” T. C. Memo. 2012-280, at p. 4.

Moreover, for one of the years at issue “…Mr. Diaz received from the World Bank a form (bank form) containing images of his Form W-2, Wage and Tax Statement, for tax year 2006 (2006 Form W-2). The 2006 Form W-2 identified his employer as the World Bank, and it identified him as the employee. Box 1, labeled ‘Wages, tips, other compensation’, showed $53,230; boxes 2 through 6, labeled, respectively, ‘Federal Income tax withheld’, ‘Social Security wages’, ‘Social Security tax withheld’, ‘Medicare wages and tips’, and ‘Medicare tax withheld’, were blank. The bank form, in space outside the images of the 2006 Form W-2, contained the following instruction:

‘Schedule SE (Self-Employment Tax) must be attached to your Form 1040. U.S. Staff must pay social security and medicare tax at the selfemployment rate on wages for services performed inside the U.S. Please refer to Instructions for Schedule SE, “U.S. Citizens Employed by Foreign Governments or International Organizations,” at” T. C. Memo. 2012-280, at p. 5.

And if that wasn’t enough, before Hummer’s tax return was due “… approximately 200 World Bank employees attended a two-hour presentation by the Internal Revenue Service (IRS) concerning World Bank employee tax obligations. The presentation took place in the World Bank’s auditorium, and handouts were provided to attendees. The presentation was simulcast to World Bank employees’ individual desktop computers. At that meeting, the IRS explained that all World Bank employees who are U.S. citizens are required to prepare and submit, with their Federal tax returns, a Schedule SE, Self- Employment Tax, and pay self-employment tax because the World Bank does not withhold the employee’s share and does not pay the employer’s share of Social Security and Medicare taxes.” T. C. Memo. 2012-280, at pp. 5-6.

So after all that, Hummer runs to an AARP volunteer Tax-Aide program, devoted to tax prep for the low-income elderly. Given that Hummer’s pay was $53,320, what by AARP standards is “low income”? Anyway, the AARP volunteers can’t decide if Hummer has to pay SE. That’s easy, because Hummer has carefully cut out of the W-2 he shows the AARP Vols the instructions that say he has to file a 1040-SE and pay the tax. So after a confab, the AARP Vols decide Hummer doesn’t owe SE, and fill out his return accordingly.

Judge Halpern is not amused, even though Hummer shows up with five (count ‘em, five) attorneys to contest the substantial understatement penalty IRS bestows upon him. Hummer of course claims reliance on the AARP Vols, even though he doesn’t know their names, can’t say what expertise they have (if any), and none of them testifies on the trial.

Hummer and IRS did stipulate that the only information necessary to compute Hummer’s taxes accurately was a complete copy of Hummer’s W-2 and the fact that Hummer is a US citizen. Hummer says he gave the AARP Vols the W-2 and told them he was a US citizen.

Now the AARP Vols are trained and IRS certified, but they work mostly with low-income types and are not necessarily experts in the finer points of the taxation of employees of embassies and international organizations.

“Moreover, Mr. Diaz went to some trouble to separate copies of his 2006 Form W-2 from the portion of the bank form including the instructions advising that U.S. citizen employees are required to file a Schedule SE. While we are cognizant of his testimony that he told the volunteer that he worked for the World Bank and paid self-employment tax, we do not dismiss the possibility that he intentionally withheld those instructions from the volunteer.” T. C. Memo. 2012-280, at p. 20.

And Hummer admitted on the trial that he had his doubts about his SE liability, but didn’t have time to check them out. Of course, that didn’t fly, and gave Judge Halpern the hook he needed to distinguish Hummer from Amy Yu-Wen Chien. Amy was an innocent; Hummer was something less.


In Uncategorized on 10/01/2012 at 19:00

My colleague Jean Mammen, EA, has written a book on the US tax posture of foreign embassy and international organization employees, entitled “1040 or 1040NR? International Organization and Foreign Embassy Employees”. I haven’t read it, so I can’t criticize it, but those who represent taxpayer-employees in that area might wish to do so.

See my blogposts ”Not An Employee for Tax Purposes?”, 5/24/11 and “Another Argument”, 6/7/12.

Now Judge Morrison reviews the problems of a rather naïve young employee, fresh out of the Peace Corps and into the International Monetary Fund at the staff assistant level. The case is Amy Yu-Wen Chien, T. C. Memo. 2012-277, filed 10/1/12.

Amy went from college (during which time her papa prepared whatever tax returns she needed) to the Peace Corps (no taxable income) to a temp agency (filled out her returns using IRS online instructions) to the International Monetary Fund as a staff assistant (clearly not top-level managerial).

Judge Morrison: “Shortly after joining the IMF, Chien met with J. Carter Magill, an employee of the IMF who was conversant in taxation. The meeting lasted five minutes. Magill explained to Chien that she had to make an estimated-tax payment every quarter. Shortly after the meeting, Magill emailed Chien a spreadsheet that calculated her next estimated-tax payment. Because an estimated-tax payment is based on the taxpayer’s tax liability for the year, see sec. 6654(b)(1), (d)(1)(A) and (B), (f)(1), the spreadsheet was based on Magill’s calculation of Chien’s tax liability for 2005. The amount of liability, as calculated on the spreadsheet, included the income tax imposed by section 1, see sec. 6654(f)(1), and the selfemployment tax imposed by section 1401, see sec. 6654(f)(2), with Chien’s 2005 IMF wages included in self-employment income. Had Chien understood that her estimated-tax payment was based on her liability for the income tax imposed by section 1 and the self-employment tax imposed by section 1401, she would presumably have inferred from the spreadsheet that she would be liable for the selfemployment tax. However, Chien had no such understanding of the estimated-tax regime. So she made no such inference from the spreadsheet. Other than the spreadsheet, Chien did not receive any other information from the IMF informing her that she was considered self-employed or that she was liable for the selfemployment tax.” T. C. Memo. 2012-277, at pp. 3-4.

If Alex Pope was right, and “a little learning is a dangerous thing”, then Amy had less and that was more dangerous, because she never filed a 1040-SE, paid the SE tax or took the one-half adjustment for SE tax on her 1040, for any of the three years she worked for IMF.

At least she knew she owed some income tax, unlike another employee of an international organization who forgot to pay tax on nearly $80K of salary from the World Bank.

IRS gave a lecture on-site for IMF employees, but attendance wasn’t mandatory, and Amy arrived at the very end. She claims the handout she got, which seems to have been limited to the PowerPoint slides, was unenlightening. She thought she’d be in compliance if she followed the 1040 instructions.

Judge Morrison gives Amy a bye on the substantial understatement penalties. She followed the 1040 instructions, and what guidance she got was less than effective.

Takeaway–International organizations need to provide better intake orientations for their employees. If you’re a US citizen, you owe both income tax and self-employment tax, because the US can’t collect from your exempt employer. Give the new hire a copy of a 1040, a 1040-ES, and something more than a five minute off-the-cuff from your resident tax guru who probably just spouts numbers and letters like the rest of us, and drops an email that only a tax professional would understand.  And if IRS sends somebody around, tell your employees they cut this class at their peril.