In Uncategorized on 07/08/2013 at 16:26

Back to taxes.

Judge Kerrigan has a lesson for practitioners today (and incidentally for Ohan Karagozian, the taxpayer who stars in 2013 T.C. Memo. 164, filed 7/8/13).

Ohan was a computer geek for Coty, the parfumier. The parfumier called him an IC, and gave him 1099-MISCs. So Ohan filed Schedule Cs and Schedule SEs, and thereby overpaid his FICA for numerous years before the year at issue.

In that year, Coty fired Ohan, so he claimed he was an employee all along, and NYS Department of Labor bought his story, whereupon he dropped Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, on IRS, who also bought his story.

Ohan claimed his overpaid FICA from yesteryear should give him a bye on his income tax for the year at issue.

Of course, his FICA wasn’t overpaid. His employer was supposed to withhold their part from his pay, and remit it to IRS (trust funds, y’know). But if the employer didn’t withhold and pay, Ohan was on the hook. See my blogpost “Catch Me If You Can”, 1/4/12.

And the doctrine of equitable recoupment doesn’t help Ohan.

First, some background. Judge Kerrigan: “In order to establish that equitable recoupment applies, a party must prove the following elements: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation; (2) the time barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court; (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes; and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.” 2013 T. C. Memo. 164, at p. 11 (Citations omitted).

Ohan claims his overpayments of FICA in years gone by (now closed years) should offset the current deficiency.

No, because the transaction, item or taxable event did not arise out of one single transaction.

Ohan claims the entire series of misclassifications was a single item; IRS says there was a separate misclassification for each tax year, and each was a separate item. Although each year’s misclassification was the same type of item, each year was a different item. And those are time-barred.

“Although the taxes petitioner paid in the time-barred years were paid on the same type of transaction (i.e., compensation petitioner received from Coty) as in 2008, we follow the Supreme Court’s reasoning in Elec. Storage Battery Co. and find that the overpaid FICA taxes from 2002 through 2007 are separate transactions, separate items, and separate taxable events from petitioner’s 2008 tax deficiency. Income taxes are levied on an annual basis. Each year is the origin of a new liability and of a separate course of action.” 2013 T. C. Memo. 164, at p. 13.

The case cited is Rothensies v. Elec. Storage Battery Co., 329 U. S. 296(1946). And I take it Judge Kerrigan meant “cause of action”, rather than “course of action”; gotta watch those stenographers, Judge.

And Ohan properly filed a Form 1040X, showing the right amounts of income tax and FICA for the year at issue. That the same determination may affect the taxes on two transactions does not make the two transactions into one transaction.

So no equitable recoupment for Ohan.


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