In Uncategorized on 09/20/2018 at 17:06

Jonathan Zuhovitzky and Esther Zuhovitzky, 2018 T. C. Memo. 158, filed 9/20/18 are with us again, but it’s neither reality tv nor the Hague Convention on Evidence.

For the story on the tv show, see my blogpost “Come From Away – Part Deux,” 11/17/17.

This time, the question is Esther.

Esther is a citizen both of Israel and Austria, but not the US. Jonathan is a citizen both of Israel and the US. Esther never resided in the US. Esther and Jonathan both reside in Germany, you’ll remember.

Esther and Jonathan filed MFJ for the eight (count ‘em, eight) years at issue, and plenty more years before. But Esther failed or forgot to mention her Swiss bank account to the extent of $2.2 million, with 75% fraud chops to match.

The only question is whether Esther is to be treated as a US taxpayer. The NRA spouse (no, that’s not a pistol-packin’ momma, that’s a Non-Resident Alien) of a US person cannot file MFJ unless election is made per Section 6013(g). And everyone agrees she never made such election.

Judge Vasquez: “As the election treats the nonresident spouse as a U.S. resident for purposes of chapters 1 and 24 of the Code, it also subjects that spouse’s foreign-source income to U.S. taxation.  See secs. 1, 61; sec. 1.6013-(6(a), Income Tax Regs.” 2018 T. C. Memo. 158, at pp. 4-5.

IRS wants summary J nailing Esther’s Swiss hoard on two grounds: substantial compliance and duty of consistency (quasi-estoppel).

IRS says “Y’all filed MFJ for years, thereby manifesting intent to elect 6013(g) treatment.” Esther and Jonathan say “No, we didn’t intend nothing.” Judge Vasquez says that’s an issue of fact.

The duty of consistency means a taxpayer can’t take a position in a closed year, and once IRS has gone along with that position based on incomplete information, take another in an open year.

IRS claims that Esther could have satisfied the substantial presence test unbeknownst to IRS, and therefore didn’t need to make the election, because a NRA who is “substantially present” in the US don’t need no stinkin’ Section 6013(g) election. And Esther and Jonathan had been filing MFJ for years before the eight years in question, but those returns were accepted and the SOL has run.

IRS surmises that the reason they filed MFJ was to give them favorable treatment on their US taxes and Jonathan’s world-wides, while Esther concealed the Swiss hoard and taxes thereon. I’ve been tough on judicial surmises before now (see my blogpost “Deal(er) or No Deal(er)?” 8/28/12), but IRS’s surmise looks pretty good to me.

Esther and Jonathan’s legal team say IRS well knew Esther never filed a Section 6013(g) election, and that she needed to do so, before processing the returns. So Esther didn’t draw IRS offside.

But something never made it into the summary J motion papers.

Like Jonathan’s and Esther’s tax returns for the years at issue.

“Like the substantial compliance analysis, the duty of consistency analysis requires factual determinations.  Without access to petitioners’ returns for the years at issue, we cannot discern what facts petitioners provided to respondent about Esther’s residency.  Accordingly, we are not able to determine the nature of petitioners’ representation or whether respondent had actual or constructive knowledge that petitioners erroneously filed joint returns.  Therefore, matters of material fact are in dispute, and this issue is inappropriate for summary judgment.  As we cannot proceed with our analysis under either the duty of consistency or substantial compliance, we will deny respondent’s motion for partial summary judgment as a whole.” 2018 T. C. Memo. 158, at p. 10.

So it looks like the reality tv show live from Berlin is back on track.

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