Following on my blogpost “You Didn’t Get It”, 5/31/13, here’s the story of Antonio Lepore, as told by Judge Morrison in 2013 T. C. Memo. 135, filed 5/30/13.

This was a TFRP case (Trust Fund Recovery Penalty, non-remittance of FICA/FUTA and withheld income taxes).

Antonio claimed he never got the Letter 1153, triggering the period wherein Antonio could contest his liability. IRS proves the letter and the mailing thereof by certified mail to Casa Antonio, and shows receipt signed by Antonio’s 23-year-old son.

Should be a slam dunk for IRS. After all, see FRCP 4(e)(2)(B), the so-called SAD service (person of suitable age and discretion at party’s dwelling or usual place of abode).

Antonio testified he never saw the letter. So what? Judge Morrison: “Section 6330(c)(2)(B) provides that the taxpayer ‘may also raise at the hearing challenges to the existence or amount of the underlying tax liability’ if the taxpayer did not receive any statutory notice of deficiency for such liability, or did not otherwise have an opportunity to dispute it.” 2013 T. C. Memo. 135, at p. 7.

Non-receipt trumps SAD in a TFRP. And Judge Morrison believes Antonio. And it doesn’t matter whether this is a de novo review or an abuse-of-discretion review, because Tax Court must “reject erroneous views of the law.” 2013 T. C. Memo. 135, at p. 8. Don’t ask about Judge Holmes’ side-step of this proposition in my blogpost “The Busted Stipulation”, 1/27/12.

Antonio didn’t intentionally duck receipt of the Letter 1153. And Sonny Lepore testified he threw the letter in the basement among his, his brother’s and his father’s miscellaneous business papers. And Papa, Sonny and Bro get lots of mail. And Sonny didn’t live with Papa Antonio; he only showed up a few times a week.

Finally, though FRCP 4(e)(2)(B) says what it says, Section 6330(c)(2)(B) says what it says. “The IRS contends that the merit of its theory is that ‘[r]equiring personal service of Letters 1153 would be costly, time consuming, and inefficient’ and would ‘greatly impair the Service’s ability to assess the trust fund recovery penalty against liable taxpayers.’ But to make the notification required before assessing the trust fund recovery penalty, the IRS need only mail the Letter 1153 to the last known address of the person to be assessed. Sec. 6672(b)(1), (4); Mason v. Commissioner, 132 T.C. at 322-323. The IRS can assess the penalty without making personal service on the person. Id. The receipt requirement applies only to the letter’s function to provide an opportunity to dispute the underlying liability, not its effectiveness as pre-assessment notice of the penalty. The IRS’s imputed-receipt theory (as articulated in this case) is therefore not compelled by the need to facilitate the assessment of trust fund recovery penalties.” 2013 T. C. Memo. 135, at pp. 12-13.

In short, IRS can assess just by mailing, but taxpayer can contest by not actually receiving.

So back to Appeals goes Antonio, to fight over his liability. He didn’t get it.

No, not a joke or a concept, but a SNOD or an 1153. Both are tickets to Tax Court, but the consequences of receipt or non-receipt can change what the taxpayer can do once they get there.

And 5/30 brought us two cases in point. Here’s the first; the second will get its own blogpost.

IRS claimed they mailed the SNOD in June, 2005 to Dominick Galluzzo and Angela Galluzzo, in 2013 T. C. Memo. 136, filed 5/30/13. And Dom and Angie sent in their petition.

Judge Vasquez: “Petitioners filed their petition with the Court on May 21, 2012, which was 2,545 days after the purported mailing of the notices of deficiency.” 2013 T. C. Memo. 136, at p. 3. A wee bit late, ya think?

Yes, says Judge Vasquez, and he’ll dismiss the petition for want of jurisdiction, but why he will do so matters a lot.

Dom and Angie claim there never was a SNOD. IRS claims there was.

Judge Vasquez explains in a footnote: “If respondent’s [IRS’] position is sustained, the petition is untimely, and the deficiencies and additions to tax may be assessed. Petitioners’ recourse then would be to pay the tax, file a claim for refund with the Internal Revenue Service (IRS) and, if the claim is denied, sue for a refund in the appropriate Federal District Court or the Court of Federal Claims. If petitioners’ position is sustained, the notice of deficiency is a nullity, and respondent may not assess the deficiencies or additions to tax, under normal circumstances, unless a valid notice of deficiency is issued.” 2013 T. C. Memo. 136, at p. 2, footnote 3. In the latter case, Dom and Angie get a do-over. See my blogpost “A Do-Over”, 1/11/13.

IRS proffers a USPS Form 3877 proof of mailing and nothing else, saying they lost the administrative file. Dom and Angie swear they don’t remember getting anything from IRS in June, 2005.

OK, “Section 6212(a) expressly authorizes the Commissioner, after determining a deficiency, to send a notice of deficiency to the taxpayer by certified mail or registered mail. It is sufficient for jurisdictional purposes if the Commissioner mails the notice of deficiency to the taxpayer’ ‘last known address’.” 2013 T. C. Memo. 136, at pp. 3-4. (Citations omitted).

Mailing is enough; receipt by taxpayer doesn’t matter. Mailing starts the 90-day in-country clock for filing with Tax Court.

But once Dom and Angie claim they never got the SNOD, IRS has the burden of proving both mailing (which they do) and the validity of the SNOD, which they can’t do.

Judge Vasquez cites a previous Tax Court case, affirmed by Third Circuit, where: “…the Commissioner (1) lost the administrative file, (2) had no copies of a notice of deficiency, (3) did not establish that a final notice of deficiency ever existed, (4) relied on a Form 3877, and (5) did not introduce evidence showing how the Commissioner’s personnel prepare and mail notices of deficiency.” 2013 T. C. Memo. 136, at p. 5 (Citation omitted, but look it up.).

Moreover, in the case cited, IRS “produced a draft copy of the notice of deficiency and supported the draft with affidavits from two IRS employees who stated that they worked on the notice of deficiency at issue. In our case, respondent presented no such evidence; he has not produced a draft copy of the notices of deficiency or any testimony from IRS employees who assisted in the preparation of the notice of deficiency. Thus, there is nothing in the case, apart from the Form 3877 itself, to support a presumption of regularity by the IRS.” 2013 T. C. Memo. 136, at p. 5.

I cannot here quote Mario Puzo’s immortal words to describe IRS’s situation, but fans of “The Godfather” will get it.

Dom and Angie didn’t get it. Case dismissed, but they get the do-over.

We all know Section 7525 gives tax advisers’ clients the same protection as the client of an attorney would have for confidential communications or information obtained in the course of giving the professional advice.

But that privilege can be lost by disclosure to third parties.

And today STJ Lew (Great Name!) Carluzzo shows us how. The  client is Securitas Holdings Inc., and Subsidiaries, and their outside counsel blows it for them and their tax adviser, PriceWaterhouseCoopers. The designated hitter that tells the tale is Docket No. 21206-10, filed 5/29/13.

Believe it or not, for two consecutive days I’m discoursing about Section 501(c)(15), the very existence of which I was happily unaware until last evening. See my blogpost “No Insurance? – Go Pound Sand”, 5/28/13.

As all my readers (those few, those happy few) know, Section 501(c)(15) exempts from tax insurance companies with less than $350K premium (for the years at issue).

Securitas had beneath its wings one such, Centaur, who grappled its exemption to its bosom with hoops of steel and expensive tax advice. But IRS claimed the Section 501(c)(15) aggregation rules bound Centaur to Securitas and its satellites even more firmly, torpedoing Centaur’s tax-free status.

Securitas and its experts engaged in lengthy e-correspondence over the plight of Centaur. IRS hit them with a massive document demand, but was met with the privilege claim.

STJ Lew gives with his right hand but takes with his left.

“According to petitioners, the tax advice included in the protected documents cannot be disclosed without revealing, if only by implication, the confidential communication(s) made to the tax advisors/attorneys for the purpose of receiving such advice. That being so, petitioners resist disclosure of the documents even though with few exceptions the particular document contains no specific or express disclosure of any facts provided in confidence to the tax advisors/attorneys by any one of petitioners’ officers. After an in camera review of the documents, and with one or two exceptions as noted in the transcript of the proceedings, we tend to agree with petitioners. For the following reasons, however, we need not address petitioners’ privilege claims on a document-by-document basis. We proceed as though the documents, or portions of documents, identified on petitioners’ privilege log are protected from disclosure as claimed and turn our attention to respondent’s argument that petitioners have waived any applicable privileges.” Order, p. 1.

OK, so deemed privileged, right?

Well, they were…but… Securitas’ outside counsel wrote to the Illinois Insurance Department seeking exemption from certain rules for all of Securitas’ subs, including but without in any way limiting the generality of the foregoing, as the high-priced lawyers so elegantly put it, Centaur.

Here’s what Securitas’ outside counsel wrote to the Illinois insurance people that sets off STJ Lew and blows up Securitas: “The reason for the transfer of the Centaur stock from BI-Insurance Holding to Securitas Group Re is tax related. At present, the rehabilitation estate of Centaur is exempt from federal income tax (including tax on its investment income) because it has no premium income. (See 26 U.S.C. §501(c)(15), exempting certain insurance companies with annual premium less than $350,000.) However, the U.S. corporate group of which Pinkerton’s is a member is implementing a captive insurance program, which could jeopardize Centaur’s federal tax exemption if Centaur and the new captive insurer are in the same U.S. ‘controlled group’ for tax purposes. (See 26 U.S.C. §501(c)(15)(all insurers and premiums in the same ‘controlled group’ treated in the aggregate for purposes of the $350,000 limitation.) If there were no sale of Centaur stock, and if Centaur were to lose federal tax exemption as a result, a federal income tax liability could arise on Centaur’s investment income. The rehabilitation estate of Centaur, and the common parent of Pinkerton’s U.S. corporate group, would be jointly liable to the federal government for such tax. The proposed sale is intended to prevent this from happening, preserving Centaur’s federal tax exempt status by removing Centaur from the U.S. ‘controlled group’ for federal income tax purposes.” Order, p. 2.

STJ Lew is unimpressed with Securitas’ riposte: “According to respondent [IRS], the letter operates as a waiver of the attorney-client and/or section 7525 privileges asserted by petitioners. Petitioners characterize this letter as nothing more than a routine public filing that reveals neither a confidential communication made to petitioners’ tax advisors by petitioners nor any tax advice given in return. According to petitioners, like any public filing the letter does not result in the waiver of any privilege. For the most part, we agree with petitioners with respect to the consequences of a public filing, but only in principle; we disagree with their characterization of the letter and its consequences. The letter reveals, at least in part, the Federal income tax planning and advice given to petitioners by their tax advisors in ‘implementing a captive insurance program’, which program (1) is the topic of all of the documents identified in petitioners’ privilege log; and (2) presumably gave rise to the disputed deduction. That being so, by revealing the tax advice and, if only by implication, the facts on which the advice is based, the attorney-client privilege as well as the section 7525 privilege are waived. Although the letter reveals only a part of the tax advice given to petitioners in connection with its ‘captive insurance program’ tax planning, the waiver applies to the entire topic and therefore to each document identified on petitioners’ privilege log.” Order, p. 2. (Citation and footnote omitted).

And even though IRS didn’t ask for everything, expansive STJ Lew tells Securitas to cough up, as IRS didn’t know all the documents, but STJ Lew says Securitas waived as to everything.

Moral of the story- Least said, soonest mended.

Full disclosure – A member of my immediate family works for PriceWaterhouseCoopers, but played no part in this matter.

No, this is not yet another diatribe anent the Affordable Health Care Act of 2010; this is not a political blog, and even if it were, I have nothing to say on that score.

But Judge Wherry has 89 pages’ worth of things to say about Chapman Glen Limited, in 140 T. C. 15, filed 5/28/13. Chapman Glen was a foreign insurance corporation, incorporated in the British Virgin islands, that elected to be taxed as a US corporation per Section 953(d), but claimed exemption per Section 501(c)(15) (and I bet you hadn’t heard of that either).

CG’s Section 953(d) election was signed by Ms. Gilpin, who swore therein that she was the corporate secretary and duly empowered to sign same. Though CG later claimed she wasn’t, they were stuck.

CG was bought by the Enniss family, a California real estate and sand-mining clan, as part of an asset-protection plan devised by their accountants and lawyers after an injured sand miner sued the Ennisses. The family’s LLC’s interests were conveyed to CG (although one daughter claimed she hadn’t conveyed hers, Judge Wherry wasn’t buying), which treated the LLC as a disregarded entity. The LLC never filed Forms 1065 or 1120.

CG was supposedly a captive insurer of the Enniss enterprises, although CG’s Section 501(c)(15) said they weren’t a captive.

IRS examined CG, found it wasn’t a true insurer per Section 953 and wasn’t entitled to Section 501(c)(15) exemption, and the Ennisses agreed.

This triggered Section 953(d)(2)(B), deeming that CG sold everything it owned on January 1 of the next calendar year at FMV to a controlled foreign corporation and imposing US corporate income tax accordingly.

Thus, no insurance. But plenty of taxes.

Now, time to value the sand mines, so Judge Wherry, invoking the usual willing-buyer-willing-seller fiction, begins to pound sand. If the ins and outs of California sand mining, with its concomitant environmental restraints, plus a dash of real estate wheeling and dealing, enthralls you, read Judge Wherry’s 89-page exegesis. I have quoted before now the famous New Yorker cartoon, wherein the little girl gives her book review in these terms: “This book told me more about penguins than I wanted to know.” See my blogpost “More About Penguins”, 12/26/11.

After the usual giant slalom through differing appraisals with a mix-and-match to follow, Judge Wherry finds the SOL open because one of CG’s Forms 990 wasn’t signed by a corporate officer, but only by a paid preparer (even though CG claimed the preparer was an officer), and therefore everything was open, notwithstanding that IRS had processed the return minus the signature.

And when CG claims that the Ennisses really owned all the assets and that CG was only a front, Judge Wherry hits them with the alfalfa: “Thus, [CG] and the Enniss family, while they were entitled at the start to structure their affairs so that the Enniss family members owned [LLC] as of the relevant time, must now accept the consequences of instead causing [CG] to be [LLC]’s sole owner (although their actions on this point probably resulted from questionable legal advice). [LLC]’s ownership as structured by its controlling owners must ‘be given its tax effect in accord with what actually occurred and not in accord with what might have occurred.’ Commissioner v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. at 148.” 140 T. C. 15, at p. 46.

And see my blogpost, “You Pick It, It’s Yours”, 7/9/12.

And of course equitable considerations have nothing to do with the consequences of the unwinding of CG per Section 953. Judge Wherry: “[CG] argues from an equitable point of view that sec. 367 should not apply because, [CG] states, it will be taxed on the unrealized gain when it eventually sells the properties. We disagree that equity plays any part in our interpretation and implementation of secs. 367 and 953(d)(5) in the setting at hand.” 140 T. C. 15, at p. 44, footnote 22.

But when IRS attempts to throw in a last-minute argument that money CG got from from the Ennisses was rent and not, as the Ennisses claimed, a capital contribution, Judge Wherry invokes the anti-ambush cases. CG didn’t have a chance to put in evidence to show that the money wasn’t rent, so IRS can’t argue that it was.

Judge Wherry sends CG and IRS off to a Rule 155 sand-pound, armed with his determination of the values of the various sand boxes. Lawyers, sometimes being inventive is really not good.

See my blogpost “Stipulate, Don’t Capitulate”, 9/23/11, for the story of Bernie and Martha Williams. There, Bernie stipulated.

But today, 5/24/13, in a designated hitter from Judge Gale, David Franklin & Ronda Ching Day, Docket No. 1770-12L, filed 5/24/13, don’t even do that. They don’t answer IRS’ Rule 91 motion that proposed facts should be deemed established.

Now the classic rule is that ultimate facts, those which give the other side (in this case IRS) the victory, should only be deemed established if there’s no effective defense to proving such facts if there were to be a trial, and then on a motion for summary judgment (Rule 121). Ordinarily, if there’s a defense to introducing proofs of such facts on a trial, or if one side is jumping the gun and short-circuiting Rule 121, they should not be deemed admitted.

And that’s what Judge Gale does, using Rule 91(f)(4). “Under Rule 91(f)(4), the Court must determine ‘whether in the interests of justice a matter ought not be deemed stipulated.’” Order, p. 1.

Well, IRS wants Dave and Ronda to be deemed to have stipulated to the contents of “Forms 4340, Certificates of Assessments and Payments; to the facts establishing whether respondent effected assessments of their income tax liabilities; or to the Case Activity Record Print purportedly maintained by respondent’s Appeals Office concerning the consideration of petitioners’ request for a hearing with respect to the collection action at issue in this case.” Order, p. 1.

In other words, unconditional surrender.

Nice try, IRS; but that’s a motion for summary judgment, and you’re not there yet.

So in the interests of justice, Judge Gale lets in everything else, but the aforementioned ultimate facts must await further proceedings.

Hint to Dave and Ronda: get a lawyer.

Judge Laro has scant sympathy for James S. Callahan and Carol S. Callahan in 2013 T. C. Memo. 131, filed 5/22/13.

It’s an oft-recurring scenario following the Great Real Estate Debacle of 2007. Carol had two dwellings, the New Jersey home she got from Papa and the FL condo she bought with Mama and inherited as Mama’s demise. They were both mortgaged and both in foreclosure.

Carol fell in with thieves, namely Ronnie (the Ganef–an arcane technical term) Losner, who pulled the now-clichéd home equity theft game on both properties. Carol sells both to Ronnie’s shills, who finagle fresh mortgages to pay off the old defaulted one, and gets a short-term lease from the shills at a ruinous rent, with an option to buy back her properties.

Ronnie the Ganef gets disbarred, and while Judge Laro takes judicial notice of the NY proceeding, he can’t see how that helps Carol.

Carol sues in NJ and the NJ court voids the sale; Carol claims NJ voided it ab initio, and she paid off the fresh mortgage, but Judge Laro says no. The NJ court left the fresh mortgage, which Carol later paid off, in place. “The fact that the Chancery Court voided the transfers subject to Chase’s existing mortgage suggests that the court was mindful that voiding the transactions from the beginning could nullify all transactions that followed the initial transfers, including the mortgaging of the property by Chase as a successor to Washington Mutual. Implicit in the Chancery Court’s order voiding the transfers subject to the existing mortgage was that Chase’s mortgage interest in the property was valid. As a corollary, the Chancery Court did not void the transfers from the beginning.” 2013 T. C. Memo 131, at p. 23.

Anyway, IRS wasn’t a party to the NJ proceeding, IRS isn’t in privity with Carol or the crooks or the banks, so IRS isn’t bound by any of this.

I don’t know what was pleaded or proved in the NJ case, and anyway I’m not admitted in NJ, but shouldn’t Carol have argued that the whole thing should be set aside, Chase could look to its title insurer on the mortgage, and the insurer subrogate and sue Ronnie and the shills?

Howbeit, Carol admits she had capital gains on both mortgage payoffs, even if fraudulently obtained, but not as much as IRS claims.

Judge Laro agrees, up to a point. IRS claimed that Carol recognized income on each sale to the shills at the full stated purchase price. No, said Judge Laro, the shills made sure she got nothing except some cash to prepay the phony rent on her lease from the shills, some expenses like real estate taxes, and the cancellation of her personal liability on the old defaulted mortgage. I respectfully refer the reader to the text of the decision for the arithmetic.

But the gain is ordinary, not capital.

Judge Laro: “In their brief petitioners appear to be claiming that any debt cancellation income is considered capital gain income. The amount realized on the sale of property that secures a recourse liability, however, does not include amounts that are (or would be if realized and recognized) income from the discharge of that liability under section 61(a)(12). Sec. 1.1001-2(a)(2), Income Tax Regs.; see also Commissioner v. Tufts, 461 U.S. 300, 318-320 (1983) (O’Connor, J., concurring) (noting Commissioner’s longstanding position reflected in section 1.1001-2, Income Tax Regs.). Income realized on the discharge of such debt is ordinary income taxed at ordinary rates.” 2013 T. C. Memo. 131, at pp. 28-29.

And Section 108(h), with its relief from relief as to qualified principal residence indebtedness doesn’t help poor Carol. “The record before us does not support such claim. There is no evidence showing any part of Ms. Callahan’s original 1998 purchase price of $437,500 was financed with a mortgage loan that was then refinanced with the Wall Street note in December 2005. The record also does not show Ms. Callahan used any of the proceeds from the Wall Street note to finance the construction or substantial improvement of the New Jersey property or to refinance a debt that she incurred for such construction or improvement. Thus, the record does not support a conclusion that any portion of the Wall Street note was qualified principal residence indebtedness within the meaning of section 108(a)(1)(E). See sec. 108(h)(2).” 2013 T. C. Memo. 131, at p.  30.

Judge Laro cuts Carol some slack, in that some of the debt may be home equity indebtedness, and lets her deduct interest to the extent of the $100K limit (see my blogposts “Sophy’s Choice”, 3/6/12 and “Faina, Meet Sophy”, 5/17/12).

So Carol ends up in much the same straits as an earlier person who fell in with thieves.

The Indians might not be, but their subsidiaries incorporated in Delaware will.

Howbeit, I will spare the reader Obliging Judge Gustafson’s 68-page novelette concerning the Indian Employment Tax Credit as it impacts the Delaware subsidiary corporation of the Turtle Mountain Band of the Chippewa Indians, to be found in Uniband, Inc., 140 T. C. 13, filed 5/22/13.

Judge G.’s disquisition does not explicate an issue that the in-the-trenches preparer is likely to encounter. And if s/he does, my condolences.

Islands, That Is

The last chapter of a Section 932 saga, the unguided Congressional largesse to our bankrupt islands in the sun, brings to a close the unbroken string of IRS losses to Artie Appleton and his legal beagles, in Arthur I. Appleton, Jr., Petitioner, and The Government of The United States Virgin Islands, Intervenor, 140 T. C. 14, filed 5/22/13, Judge Jacobs bringing down the curtain, with twenty-one (count ‘em, 21) lawyers in on the play.

To review, see my blogposts “Statute of Limitations? Maybe Not”, 12/28/10, “Missed It, But Better Late Than Never”, 8/24/11, and finally “Somebody Does Read This Blog”, 12/4/11.

Briefly, Artie fled the North American mainland, settled in the aforesaid impoverished paradise, and got into an employee lease deal whereby he avoided payment of a bushelbasket of income tax. Of course, he sedulously and meticulously filed with Virgin Islands Internal Revenue Service (VIBIR), as directed by the instructions to Form 1040. And if that was his sole obligation, the three-year SOL had long run.

But IRS claimed that, as Artie never filed with them, the SOL was wide open and Artie owed the aforesaid bushelbasket plus interest, additions and penalties.

The VI guvmint leaped into the fray, was denied by Tax Court but let back in by Third Circuit (where VI appeals lie). “Counsel for intervenor stated that the Virgin Islands is involved in this matter because ‘we want the jobs’ and “the IRS’s position is a job killer’.” 40 T. C. 14, at p. 14, footnote 13 cont’d.

IRS’ feeble arguments get longer shrift than they deserve (but 21 lawyers have to bill for something, y’know).

Artie’s returns weren’t returns. Forget it; they were 1040s filed with VIBIR, like the instructions for said forms stated.

Artie should have filed with Bensalem PA as a foreigner, showing zero income and deductions. Nope, not for the years at issue. The Form 1040 instructions for those years said no such thing. And Artie was no foreigner; he was a resident of the VI, and IRS so stipulated.

Artie should have filed with IRS and with VIBIR. No, only if he was a corporation, and he wasn’t.

IRS issued a Notice that would have required Artie to file with IRS, after the years at issue, claiming it was retroactive. “Retroactive notices published by the IRS do not have the force and effect of law, nor are they regulatory. At best these notices can be considered as the IRS’ litigating position.” 140 T. C. 14, at p. 29. (Citations omitted).

So IRS has another bad day (and they have had many lately). And Artie sails off into the sunset, clutching summary judgment in his favor. How many jobs he and his fellow gamesters created for the VI guvmint is nowhere stated.

But this blogger got a lot of mileage out of this saga.

No designated hitters, and no interesting learning, out of Tax Court today, 5/21/13, so I went back to an oldie-but-goodie, Ileana Sonnabend, Docket No. 649-12. See my blogpost “The Eagle Sleeps Tonight?”, 2/13/13.

You remember the kerfuffle about the late Robert Rauchenberg’s 1959 post-modern masterpiece “Canyon”, featuring the famous eagle that set the art world a-twitter when IRS demanded a monumental estate tax deficiency. Ileana’s executors claimed the piece was worth nichts, nada, nothing, as it was a Federal criminal offense to sell or gift or barter or otherwise dispose of same.

IRS claimed the executors could always unload it to some offshorenik who would never come anywhere near The Land of the Free, for $65 million.

Well, you also remember Judge Wells sent the parties off to settle.

They did. Here’s the skinny, in  Ileana Sonnabend, Docket No. 649-12, filed 3/5/13. Ileana’s executors pay IRS $1,321,421.00 plus interest; no penalties.

So the eagle in fact does sleep tonight–probably in an undisclosed location.

And You Might Be An IC

That’s the story of Jonny Ramirez, radio personality and savior of station KXTN in San Antonio, TX. Judge Jacobs tells Jonny’s story in Juan A. Ramirez and Rebecca Ybarra-Ramirez, a “not-for-nuthin’”,  Section 7463, in 2013 T. C. Sum. Op. 38, filed 5/20/13.

Jonny, as Juan A. is known professionally, worked under contract to Univision, owners of KXTN, and toiled five hours per day, six days a week, at the mike, made personal appearances, and promoted KXTN, for a salary, benefits and stock options.

But it looked like the stock options, Jonny’s employment, and KXTN, were all about to go south, never to return, as Univision claimed the station was a loser.

Jonny, in his own words, “hit the bricks”, running from advertiser to advertiser, glad-handing, cajoling, charming and enticing, until he saved the station by hauling in a netful of new fish.

Judge Jacobs: “Mr. Ramirez established a direct, personal relationship with his sponsors, working hand-in-hand with them from the start of the advertising campaign to its end. They had no written contracts, just handshake agreements. Mr. Ramirez set the amount to be paid to him for his promotional services without input from Univision or KXTN. The amounts he received for these services varied from year to year depending on how hard he ‘hit the bricks’, i.e., the amount of effort Mr.Ramirez exerted in working with his sponsors.” 2013 T. C. Sum. Op. 38, at p. 4.

“Indeed, Univision’s and KXTN’s only involvement was to ensure that (1) the script did not contain fraudulent material, and (2) Mr. Ramirez did not use language that would jeopardize the radio station’s broadcasting license.” 2013 T. C. Memo. 38, at p. 5

Jonny got $82K for his troubles, but Univision treated him as an employee for everything, and gave him a W-2, as the IRS had “whanged their pates”, as the late Mike Berger put it, for treating other employees as ICs. Jonny’s CPA’s protests went nowhere.

Jonny’s work was outside the scope of his employment as an on-air personality. He worked with his sponsors, and his name and persona were what brought them in and kept them in the KXTN corral. True, KXTN monitored Jonny’s language and any larcenous tendencies on the part of his sponsors’ radio ads, but that’s not enough. Jonny had to maintain his good standing with KXTN to maintain his value to his sponsors, but that’s not enough either.

As for the classic test of “profit or loss from the activity”, Judge Jacobs buys Jonny’s testimony that what he makes depends upon how hard he “hits the bricks”. And Jonny hit ‘em hard.

IRS’ argument that advertising is an integral part of the radio broadcasting business fares no better. “Selling and broadcasting advertising is the manner by which a radio station earns a profit; it is an integral part (i.e., the so-called mother’s milk) of the station’s business. But Mr. Ramirez was not employed by Univision to sell on-air advertising; rather, he was employed to create on-air content (i.e., his radio program). Univision hired him to be a radio personality, not a salesperson.” 2013 T. C. Sum. Op. 38, at p. 16.

Jonny hit Tax Court as hard as he hit the bricks. And it pays off.