In Uncategorized on 02/11/2014 at 00:42

STJ Armen’s comment, which I questioned in my blogpost “Admittedly Close?”, 12/9/13, certainly doesn’t apply to IRS’ attempt to wildcard in a claim that a couple of trusts are shams, or that taxpayer’s previous delictions, for which he did time, prove that he had unreported income. So Judge Marvel, finding IRS didn’t come close, sends Christopher Carl Close and Lisa Marie Close off to a Rule 155 beancount, but strips IRS of most of its claimed deficiencies and nearly all of its asserted penalties.

Read all about it in 2014 T. C. Memo. 25, filed 2/10/14.

Now Chris wasn’t a model citizen. Although he founded a medical equipment company, which he later sold,  “(W)hen they petitioned this Court, Mr. Close was incarcerated in a Federal prison camp in California and Mrs. Close resided in Idaho.” 2014 T. C. Memo. 25, at p. 3.

A jury convicted Chris of “…30 counts of healthcare fraud, 9 counts of money laundering, 1 count of obstructing a Federal audit, and 1 count of obstructing a Federal healthcare fraud investigation.” 2014 T. C. Memo. 25, at p. 4.

IRS now claims Chris failed to report income from various lumbering operations. Chris put the deals into two trusts. IRS raises the sham issue three weeks before trial, never having raised it before.

IRS tries to put into evidence summaries of earnings from the logging operations that they never showed Chris, claiming they didn’t have time, and the evidence itself was too voluminous. This was to show the unreported income.

I remember a similar claim in a non-tax matter where I was of counsel, and it didn’t go over there either. Judge Marvel: “The contents of voluminous writings that cannot conveniently be examined in court may be presented in summary form only if the writings are made available for examination or copying, or both, by other parties at a reasonable time and place. See Fed. R. Evid. 1006. Respondent admits that the underlying documents were not made available to petitioners before trial; respondent contends that this was because we relieved petitioners of their deemed admissions shortly before trial. We reject respondent’s suggestion that there was insufficient time to make the underlying documents available to petitioners. We relieved petitioners from their deemed admissions more than a month before trial, and respondent had more than sufficient time to make the documents available to petitioners. Because respondent failed to make the underlying documents available to petitioners before trial, we reject respondent’s attempt to rely on these exhibits to prove the truth of the matters asserted therein.”  2014 T. C. Memo. 25, at p. 22. (Footnote omitted).

It doesn’t get better for IRS. Though IRS can place the burden of proof concerning unreported income on the taxpayer if it shows connection with an income-producing activity or actual receipt of unreported income, here it’s irrelevant because IRS’ claim is based on the sham trusts, and this is a new claim, at variance with the SNOD and requiring different proof. And the summarized voluminous documents are inadmissible because not properly substantiated by IRS’ witness.

And IRS never called the trustees of the two trusts as witnesses, or showed how they disregarded the terms of the trust instruments. IRS never challenged that trusts were validly created under State law.

There’s a lot more, including how IRS and the US Attorney’s office coerced a trustee into filing an improper tax return by threats of forfeiture, but you can read this for yourselves.

Chris is liable for penalty for nonfiling one year’s return, if he was required to file for that year, but that will come out in the Rule 155 numbers game. As for not paying the tax shown on IRS’s SFR, those never got introduced into evidence, so no penalty there.

As for nonpayment of estimated tax, “(R)espondent [IRS] introduced certified records showing that petitioners did not file Federal income tax returns for 2002 and 2003 and made no estimated tax payments for 2003. However, respondent also introduced certified Forms 4340 for each of petitioners’ individual income tax accounts for 2002 that each show no tax assessed, no payments made, and an account balance of zero. The Forms 4340 further show that respondent filed a substitute for return for Mr. Close but did not file a substitute for return for Mrs. Close for 2002. The Forms 4340 do not show that respondent issued a notice of deficiency to either petitioner for 2002.” 2014 T. C. Memo. 25, at p. 45-46.

But Section 6654(e)(2) says if previous year’s tax was zero, no estimateds due for next year, so Chris is off the hook.

Judge Marvel sums it up: “This case would have benefited from a more fully developed record regarding the creation, funding, and administration of X Trust and Y Trust; the conduct of logging operations on both the A Road and B Road properties; the use and amount of the income generated by the logging activities; and the acquisition of and payment for the two properties. This case would also have benefited from the earlier assertion and development of respondent’s sham trust theories. Unfortunately, respondent chose to rely on actions taken in connection with Mr. Close’s criminal case and particularly the Government’s misguided attempt to position itself for an easy forfeiture of the trusts’ assets. The resulting product was poorly developed and unconvincing.” 2014 T. C. Memo. 25, at p. 46. (Names omitted).

Lest anyone conclude I’m piling on after the whistle here, I repeat yet again that we’ve all blown cases big time, and the bigger the case, the bigger the hurt if you blow it. So I’m not gloating over IRS’ counsel’s discomfiture here, nor encouraging others to do so.

I’m just going back to my blogpost, “Thoroughness”, 10/27/11, wherein I wrote: “‘Thoroughness settles the question in more cases than any other one thing as to whether or not a person will be successful. A lawyer needs to be thorough in the first place because it is only fair to the state which has given him his license to practice.’ Thus spake Adelbert Moot, a leader of the Buffalo (N.Y.) Bar, at the first Irvine Foundation lecture at the Cornell Law School (my alma mater), on May 29, 1914 (and no, I was not in attendance).”

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