In Uncategorized on 02/11/2015 at 17:39

No, not the 1948 Dick Blakeslee come-all-ye that every four-chord campus guitarist campaigned in the days of my youth, so long ago.

No, this is the story of Susan Na, a/k/a Sung Hwa Na, 2015 T. C. Memo. 21, filed 2/11/15, wherein Judge Wherry gives us a refresher on conduits.

Once again, our story leads through The Land of the Morning Quiet (or Calm). An issue of translation here echoes one in the opinion, as whether Susan said “we” or “he” makes a difference in seven figures’ worth of gambling winnings and losses. See Footnote 15 at pp. 27-28.

Korea seems to be the Land of Conduits. See my blogpost “A Bad Day For Lawyers”, 12/11/14, the story of Larry J. Austin, Esq., enmeshed in the Korean banking system, but IRS declassified some of his unreported income because he acted as a conduit.

Judge Wherry does the same for Susan. Susan’s records are somewhat haphazard, but there’s enough to show that she received money from her (potentially tax-dodging) offshore boss Mr Choi and used it to pay his debts and buy various baubles. Susan’s English is rudimentary, so translation plays a major role.

But the issue is did the money (over $1 million) stick to Susan’s fingers, or was it really just passin’ through?

“Section 61 defines gross income as ‘all income from whatever source derived’. Exclusions from this sweeping definition must be narrowly construed but ‘[i]t is well settled that the mere receipt and possession of money does not by itself constitute taxable income.’ In particular, the realization requirement circumscribes the broad scope of section 61 to ‘undeniable accessions to wealth * * * over which the taxpayer[]ha[s] complete dominion.’

“Hence, if a taxpayer receives funds (1) subject to a ‘consensual recognition, express or implied, of an obligation to repay’ them, or (2) subject to ‘restriction[s] as to their disposition”, the funds may not constitute income to the taxpayer. In such cases, the taxpayer lacks ‘actual command over the property taxed–the actual benefit for which the tax is paid.’” 2015 T. C. Memo. 21, at pp. 20-21. (Citations omitted).

Judge Wherry cites two old favorites from my co-op/condo capital reserve fund days, Seven-up Bottling, 14 T. C. 965 (1950) and Ford Dealers Advertising Fund, 55 T.C. 761 (1971), aff’d, 456 F.2d 255 (5th Cir. 1972). Substantial restrictions and no (or minimal) accretion to conduit’s wealth means the money is only passin’ through.

And here the ins-and-outs from Susan’s two bank accounts, and the less-than-piercing cross-examination of Susan both by the RA who audited her and IRS’s counsel at trial, get Susan off the hook for all but about $78K in unreported income, plus hitting Susan with the 20% negligence chop, as she apparently never discussed the conduit thing with her CPA.

Susan’s job description, not adequately explicated at the trial (perhaps because it would have sunk her even worse) lands Susan with SE tax, as her employee status is up in the air.

Takeaway– Susan might have done better with accurate records. Go and do thou likewise.

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