Attorney-at-Law

ADVANCE AND RETREAT – PART DEUX

In Uncategorized on 07/07/2015 at 16:36

Or, This Hog Don’t Git Et

No, today’s installment doesn’t involve transfer pricing agreements, Section 482 minutiae, or multi-million-dollar deficiencies, like Eaton. Nor yet ammonia-scented Texan Midco deals, like Cullifer.

We’re down on the line with George Lawrence Starke, 2015 T. C. Sum. Op. 40, filed 7/7/15. George is no stranger to Our Nation’s Capital, having been a star lineman for the Washington National Football League team (the Team That Dare Not Speak Its Politically Incorrect Name), and is better known as “Head Hog” to a generation of football fans.

After his playing days, Head Hog started a training school for inner-city youths, a not-for-profit that taught automotive repair skills, using Head Hog’s Ford dealership as a base.

Head Hog shifted from running the show to fundraising, and eventually left.

Before he did, he ran up some impressive numbers on the company AmEx. Management decided to treat all the non-business items as advances to Head Hog, and docked his pay for some years. Head Hog thought the docking had to do with taxes or health insurance. IRS has a letter from the not-for-profit stating the policy of treating the personal plasticity as advances. Head Hog says he never saw that letter.

Now the SNOD here includes a couple years (hi, Judge Holmes) before the letter. And the SNOD is based on a 1099-MISC the not-for-profit sent Head Hog the year he left, which Head Hog never reported. And the year Head Hog left is the year at issue.

Judge Buch dives on the loose ball, and Head Hog is saved.

“Section 61 defines gross income as ‘all income from whatever source derived’. Income can include the forgiveness of indebtedness or compensation for services. In some instances, compensation can be advanced with services to be performed later. The distinction is an important one. An advance on services to be performed in the future is taxed at the time of the advance. In contrast, income from the discharge of indebtedness is taxed at the time ‘it becomes clear that a debt will never have to be paid’.

“Whether an amount is an advance or a loan turns on the question of whether a debtor-creditor relationship was established at the time the funds were disbursed. In the case of a loan, which is not included in income at the time the funds are disbursed, the parties agree that the amount will be repaid and the debtor-creditor relationship is established at the outset. However, an advance that is considered compensation for services, albeit services to be rendered in the future, constitutes taxable income in the year it is received.” 2015 T. C. Sum. Op. 40, at pp. 6-7. (Footnotes, and there are many, omitted).

Even though the not-for-profit docked Head Hog’s pay for the personal plastic, Head Hog claimed he didn’t know why. In any event, there’s no sign a debtor-creditor relationship was intended.

OK, so the plastics are advances?

Judge Buch doesn’t care: “Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by [not-for-profit] as advances or prepaid expenses were recorded for years that are not before the Court. According to [not-for-profit’s] general ledgers, all of the payments were made before [year at issue]. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.” Order, at p. 9.

Therefore, the adjustments in the SNOD are out (wrong year), and Head Hog owes no penalty.

And if the SOL has run on the years when advances were made, Head Hog is in the end zone.

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