No, this is not a political discourse about proposed immigration legislation. I restrict myself to tax law, and here’s a good one, the story of a hotshot international M&A tax accountant partner in a Big Four firm (in which no relative of mine is employed, by the way) whose non-resident alien wife cannot afford him the tax goal he seeks.

Here now is the tale of Ian D. Hughes and Vanessa S. Hughes, as recounted by Judge Wherry, in 2015 T. C. Memo. 89, filed 5/11/15, the Day of the Palindrome.

Ian’s high-priced firm doubled-down on its consulting arm, spun it off and handed Ian some lovely shares in the spun-off for nothing. Ian, resident in the UK and recently divorced at substantial cost from Alleged Golddigger Brenda (AGB), was afeared that AGB would try to seize the shares, as they were earned while they were married but issued after.

Having some lunchtime gabfests with local UK tax folk, and talking to his UK lawyer (none of whom knew much about US tax or the treaty that separates these two countries with a common language), Ian deeds the shares to current wife Vanessa, abovementioned, she being a UK national and resident, and therefore NRA (non-resident alien).

Ian (or Vanessa) unloads the stock for big numbers, but reports nothing, neither gift, nor income.

Ian and Vanessa bounce from country to country in pursuit of the ultimate tax dodges for multinational corporations; Ian knows little of individual income or gift tax.

Finally returning to the Land of the Free, Vanessa achieves US residency.

Ian gets involved in one of the 2004 blown-up tax dodges. So he files a 1040 and a 709 three years late.

But when IRS issues a notice blowing up the dodge, he files a 1040-X, claiming the gift of the shares to Vanessa was taxable per Section 1041(a), as she was then a NRA and gifts to NRAs are taxable as transfers at FMV. So he owes tax on the sale, but Vanessa has basis in the shares.

The only issue is the 40% chop for substantial overvaluation. IRS claims basis zero, Ian claims then-FMV of shares.

IRS wins.

1041(d) says no recognition of gain or loss on interspousals, or upon divorce, unless another provision requires recognition. It has nothing to do with realization. You can have (realize) income; but must you recognize it?

And though other Code provisions keep transferors from sending assets overseas to escape US taxation, Section 1041(d) can’t be stretched that far.

The one case that talks about it involves a property transfer in settlement of an ongoing property obligation. Transferor husband got something of value from transferee wife: relinquishment of inchoate rights in husband’s property that were not liens but personal obligations. He bought his property out of her clutches.

Ian bought nothing from Vanessa, and Vanessa gave Ian nothing. True, Vanessa’s wealth increased, but Section 102 says a gift, though income, isn’t taxable.

Note Judge Wherry doesn’t talk about gift tax on the gift to Vanessa. IRS isn’t pressing it, and Ian is laying low.

But if Ian had paid gift tax, might the result have been different? Doesn’t the donee get basis based on gift tax donor paid?

Now Ian’s good faith arguments fall flat. He never asked the experts in his firm for a formal review, with all cards on the table. He checked the Master Tax Guide, and had some more gabfests and hallway consultations. But he relied on the wrong tax treaty (it took effect after his transaction), and in any event missed the standard we-tax-our-citizens-how-we-want clause.

Not so great.

40% chop.