Attorney-at-Law

PAYBACK? GO FOR IT – FAST: PART DEUX

In Uncategorized on 10/17/2016 at 17:35

If you steal but want to repent, hand back the boodle in the same tax year.

That’s the lesson for Mark H. Swartz & Karen M. Swartz, Docket No. 3583-10, filed 10/17/16. It’s really Mark’s lesson, as Karen’s only connection is the joint return she and CPA-hubby Mark filed for the year at issue. And Karen still has the innocent spousery bailout.

The teacher? Whom else but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Indefatigable, Illustrious, Incontrovertible, Ineffable, Ineluctable, Intrepid, Insuperable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes?

Mark, a CPA, left private practice to go in-house but wound up in the Big House.

Seduced by wealth and power, Mark became CFO of “…a large and diversified manufacturing and service company. It designs, manufactures, and installs undersea cable-communication systems, conducts auto redistribution services, maintains electronic security systems, and distributes flow-control products. During the year at issue, …did quite well: It had combined net sales of $22.5 billion, assets of $32.4 billion and employed almost 200,000 people worldwide.” Order, at p. 1, footnote 2.

In support of the redistribution activity (although not the one authorized by the company), Mark joined “…a Key Employee Loan Program (KELP) for its executive officers — Mr. Swartz participated in the program for many years, including the … tax year at issue. In [that year], a handwritten journal entry in [the Corp’s] accounting records mysteriously reduced Mr. Swartz’s outstanding loan balance by $12.5 million. Swartz did not make any payments on this loan… during the year at issue. He also did not include the $12.5 million on his Form 1040 (for example, as cancellation-of-debt income), and …did not include the amount on Mr. Swartz’s W-2.” Order, at p. 2.

So Mark redistributed corporate assets, and two years later, Mark joined the Board of Directors.

His fall from the pinnacle came swiftly.  The pinnacle was called Tyco, his überBoss Dennis Kozlowski got nailed for NYS sales tax shenanigans, and the rescue party found Mark’s little entry and made him pay back the $12.5 mil with interest.

As a reward for his belated repentance, Mark got indicted with Dennis, survived a hung jury but got nailed on the retrial and, appeals exhausted, went away for making away with the $12.5 mil.

On his return, IRS nails him for the COD.

Mark claims collateral estoppel (issue preclusion) doesn’t apply, because his payback erased the earlier erasure. Paying back what he took unstole the $12.5 mil, making it “null and void.”

“Mr. Swartz concedes that the Commissioner has shown that several of the requirements for collateral estoppel exist. He argues, however, that the elements of issue identity and actual litigation are not, because he never presented his ‘null and void’ theory in the criminal case.” Order, at p. 3.

But that doesn’t fly with The Great Dissenter.

“The first problem with this is that a party’s failure to make an argument about an issue in the first case doesn’t mean that he gets a do-over in the second. As the Restatement (Second) of Judgments, § 27 cmt. c (Am. Law Inst. 1982), concisely summarizes ‘if the party against whom preclusion is sought did in fact litigate an issue of ultimate fact and suffered an adverse determination, new evidentiary facts may not be brought forward to obtain a different determination of that ultimate fact. . . . And similarly if the issue was one of law, new arguments may not be presented to obtain a different determination of that issue.’

“We recognize the Mr. Swartz may be arguing a subtler point — that, although his distinction between a void theft and a voidable one might not have mattered as a matter of New York criminal law, it should matter under federal income tax law.” Order, at p. 3.

But subtlety fails when tax law is on the playlist, because the Supremes long ago said that Federal tax questions aren’t determined by “attenuated subtleties.”

The jury found Mark knocked the $12.5 mil in the year IRS is claiming he did. He didn’t pay it back that year, but finally disgorged when the forces of truth and righteousness held his paws to the proverbial two years later.

Of course, the tax effect of the belated payback is for another day.

Takeaway—If you grab it, give it back…prontito. sur le champ, mit schnell.

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