Archive for September, 2018|Monthly archive page


In Uncategorized on 09/05/2018 at 16:10

Coaches grit their teeth in indefinite-possession games (like soccer or ice hockey) where players must go from offense to defense in a split-second, and fail to transition smartly.

I’ve blogged before the failings of criminal defense counsel in tax evasion cases, where a plea bargain fails to mention tax (other than restitution, a separate matter) and civil penalties.

Today STJ Armen (“The Judge With a Heart”) has a pair of designated hitters, wherein he denies a pair of petitioners summary J. The pair claim their plea bargain was “a final and global bill of peace.”

Nope, says STJ Armen. I’ll cite Krystina L. Szabo, Docket No. 22616-17, filed 9/5/18, although spouse Michael P. Martin, Docket No. 22560-17, filed 9/5/18, was in it with her.

Krys and Mike copped in USDCWDVA to defrauding Medicaid and health insurance benefit programs by phony billing and claiming residence in residential care facilities operated by their outfit Pony Express Services, LLC.

For the nonresidential residence dodge, see my blogpost “A House is not a Home,” 3/13/12. But the taxpayers there weren’t real wiseguys.

STJ Armen goes through the Plea Agreement, and can’t find anything civil therein.

“Petitioner’s Plea Agreement ‘sets forth the entire understanding between the parties’; ‘constitutes the complete Plea Agreement’; and, noticeably, fails to address the civil assessment and collection of taxes, much less bar respondent from proceeding civilly. In short, there is nothing in petitioner’s Plea Agreement that precludes respondent from determining, assessing, and collecting any deficiency in income tax, penalty, and addition to tax for either of the years at issue in the present case.” Order, at pp. 5-6. I’m citing to the 22560-17 Order, but no different result in 22616-17.

Word to criminal tax defense counsel: Get informed written consent from client(s) that plea bargains will not save them from civil tax enforcement. Failure to do so could be hazardous to your wallet.


In Uncategorized on 09/05/2018 at 15:29

Much have I admonished family law practitioners about their casual treatment of alimony and child support in the past. Congress has relieved me of that burden for divorces in years commencing January 1, 2019 and ending at midnight, December 31, 2025, as they’ve cut taxes and created jobs (or so they say…but this is a nonpolitical blog) by making alimony nondeductible and non-recognition for those years.

But here’s a family lawyer who did well, even though his/her client is pro se. So a Taishoff “Good Job” goes to the anonymous attorney for Jeremy Adam Vanderhal, 2018 T. C. Sum. Op. 41, filed 9/5/18.

CSTJ Lewis (“Spell It Again”) Carluzzo has this one, and he delves deeply into the ‘…the division and distribution of assets and debts * * * as set forth in the Exhibit ‘A” (agreement) attached to the divorce decree.” 2018 T. C. Sum. Op. 41, at p. 3.

Here’s where meticulous drafting pays off.

“The agreement includes a reference to a Sallie Mae student loan account that relates to petitioner’s former spouse.  That reference is found in the ‘Division of Community Debts’ section of the agreement and obligates petitioner to ‘assume and hold * * * [his former spouse] harmless’ from that debt.

“The agreement also includes a section titled ‘Tax Free Transfers’ that states

the parties ‘believe and agree that the transfers of property between them required by * * * [the agreement] are tax free transfers of property between them and are therefore tax-free transfers of property made pursuant to Section 1041 of the Internal Revenue Code and are not taxable sales or exchanges of property or payments for alimony, except where this agreement specifically denotes payments as such.’” Order, at p. 3.

The issue is whether Jeremy gets an alimony deduction for the Sallie Mae loan payments he made.

CSTJ Lew blows off IRS’ argument that it’s all property division, thus nondeductible.

“In this case the divorce decree and the agreement frequently distinguish between property and debt.  For example, the divorce decree states that petitioner and his former spouse ‘entered into an equitable agreement settling all issues regarding the division and distribution of assets and debts * * * as set forth in the’ agreement.  The agreement provides separate sections with respect to the division of community property and debt.  Other provisions of the agreement make reference to both community property and debt, in which case it is clear that the provisions apply to both.  Notably, the ‘Tax Free Transfers’  paragraph in the agreement refers only to ‘property’, without including any reference to debt.  As we construe the divorce decree and agreement, the reference to property in the ‘Tax Free Transfers’ section of the agreement does not clearly encompass the division of community debt.  Furthermore, in construing divorce or separation agreements, we can find no authority that suggests that the terms ‘property’ and ‘debt’ are interchangeable.  The divorce decree and the agreement do not otherwise address or ‘specifically denote’ the division of debts as tax-free transfers of property made pursuant to section 1041.” 2018 T. C. Sum. Op. 41, at p. 6.

So payment of loved-once’s debts are concededly alimony, and hence it’s not part of the property division.

Jeremy wins.


In Uncategorized on 09/05/2018 at 15:05

Back a year ago, I almost picked up on John Hawk-Bey, then known as John Hawkbey. See my blogpost “Does IRS Read My Blog?” 10/11/17.

John sorely tempted me, though. You can read about him again if you missed his first appearance in 2017 T. C. Memo. 199, filed 11/10/17. John was a frivolity merchant, and IRS whanged him accordingly.

But nowise deterred, either by his conviction after a jury trial on four counts of tax evasion in USDCEDPA or Judge Lauber’s blow-off of his petitioned SNOD above-referenced, John is back. Here’s John V. Hawk-Bey, Docket No. 10377-17L, filed 9/5/18, with STJ Diana L. (“Sidewalks of New York”) Leyden dealing with IRS’ motion.

Now John has petitioned a NOD from a CDP. IRS wants John’s petition tossed for failure to state a claim. John claims the Section 6702(a) chop he got is a “frivolous penalty.” Order, at p. 3, footnote 2.

After the usual supplementary paper joust, IRS admits it has both burden of production and burden of proof as to the Section 6702(a) frivolous-return chop. But IRS claims John still hasn’t stated a claim upon which relief can be granted.

Remember, STJ Di is the taxpayer’s friend, and even the non-taxpaying-frivolity-merchant’s friend.

“In support of his motion to dismiss respondent points out that much of the petition consists of frivolous materials that give rise to no justiciable issue. For the most part, the Court agrees. However, because the burden of proof with respect to the section 6702(a) penalty is upon respondent, petitioner’s pleading threshold is extremely low. In his Amendment to Amended Petition, petitioner claims he should not have been assessed a section 6702(a) penalty in his Amendment to Amended Petition and, therefore, has stated a claim for which relief can be granted.” Order, at p. 3.

So STJ Di strikes everything in John’s pleadings but the “shouldn’t have” part, and tells IRS to respond.

Takeaway- If IRS has burden of proof, you don’t have to plead much. Practitioner, enGraev that in concrete.


In Uncategorized on 09/04/2018 at 20:08

A client’s niece was in the original NYC cast of Rice-Lloyd Webber’s classic musical, so I saw it. She was splendid, but never did another Broadway (or anywhere else) appearance.

So when I saw today (9/4/18) that my blog had seven (count ‘em, seven) views from Argentina, when over the last seven years only 43 times had my blog caught the attention of the dwellers therein, I was amazed.

Can Bolivia be far behind?

C’mon, Bolivians, take a quick peek. If the Argentinians can do it, so can you.


In Uncategorized on 09/04/2018 at 16:49

As Enacted by Congress

As if more proof of this well-worn cliché were needed, we have Section 1291 (and no, I didn’t know about it before now either) and Roberto Toso and Marcela Salman, 151 T. C. 4, filed 9/4/18, as ex-Ch J Michael B (“Iron Mike”) Thornton really floors it going from the “on” ramp into the flow to start the Fall semester at the Glasshouse.

The question here is whether gain from disposition of PFIC (Passive Foreign Investment Company, like an offshore mutual fund) stock is gross income nor not. Before you quote Section 61 “money or money’s worth from whatever source derived,” take a look at what Congress did in 1986.

“Section 1291(a) provides that gain on the disposition of PFIC stock is allocated ratably to each day in the taxpayer’s holding period for the stock.*** The statute provides that gain allocated to the current year is included in the taxpayer’s gross income as ordinary income. Sec. 1291(a)(1)(B).  We shall refer to any gain that is included in the taxpayer’s gross income for the current year as current-year PFIC gain, and we shall refer to the rest of the gain, i.e., any gain on the sale of PFIC stock other than current-year PFIC gain, as non-current-year PFIC gain.

“Section 1291 treats current-year PFIC gains differently from non-current year PFIC gains.  Section 1291 expressly provides that ‘only’ current-year PFIC gains are included (as ordinary income) in gross income.  Sec. 1291(a)(1)(B) (‘[T]he taxpayer’s gross income for the current year shall include (as ordinary income) only * * * [current-year PFIC gains.]’).  Current-year PFIC gains are therefore taxed under the operation of sections 1, 11, 61, and 63 as ‘gross income’.

“By contrast, non-current-year PFIC gains are not included in gross income for the current year.  Instead, section 1291(a)(1)(C) provides that ‘the tax imposed* * * for the current year shall be increased by the deferred tax amount’.” 151 T. C. 4, at pp. 10-11. (Footnotes omitted.)

Now take a deep breath, and pay attention.

“Section 1291(c) generally provides that the deferred tax amount is calculated by (1) allocating the non-current-year PFIC gains to years in the taxpayer’s holding period (ratably by day pursuant to section 1291(a)(1)(A)), (2) multiplying the amount allocated to each particular year by the highest ordinary income tax rate in effect for that year, (3) computing an interest charge on that multiplicative product, and (4) taking the sum of all the products and interest charges for all years.  This sum, the deferred tax amount, is then added to the taxpayer’s income tax for the current year.” 151 T. C. 4, at pp. 11-12.

So any gain referable to years prior to the current year are not included in gross income for any year, but that gain is computed day-by-day at highest ordinary rate for each segment, and added to tax due for the current year, somehow never figuring in any year’s gross income.

The net result of these arithmetical double-back-jackknives is that Ron and Marcela are off the hook for two of the three years at issue, because their unreported PFIC gains, which are not included as gross income for those years, leave them under the 25% cutoff for 6SOL.

I agree with IRS. This produces a disparate result for onshore investors and offshore types like Rob and Marcela. Even though both are US persons and both invest in mutual funds, the onshore mutualist includes any gain (short or long, capital or ordinary) in gross income for 6 SOL purposes, but the offshore mutualist doesn’t.

Ex-Ch J Iron Mike, never one to shun a dictionary chaw or a duck-dive into the Joint Committee’s labyrinthine explications, finds that, pre-1986 (and also pre-2017 Tax Cuts and Jobs Creation Act), if a foreign corporation (like a mutual fund) had no effectively connected US income, and if antideferral provisions don’t apply, and earnings are retained offshore and not distributed to US onshores, tax is effectively indefinitely deferred. And when the onshore sells its offshore mutual fund shares, the onshore takes capital gains treatment, while the shares are bloated with deferred ordinary income.

So Section 1291 recaptures the ordinary for the years prior to the year of disposition at the highest ordinary rate in effect for those prior years.

A US mutual fund (known as a RIC or regulated investment company), to keep its tax status, has to distribute 90% of current year’s earnings to its shareholders.

So ex-Ch J Iron Mike goes to town.

“Upon close inspection of section 1291 and its legislative history, however, it is not immediately apparent that the PFIC provisions were enacted so that taxpayers investing in PFICs would be treated similarly to taxpayers investing in domestic investment companies in every respect.  We think any correspondence between PFICs and RICs is somewhat more attenuated than respondent would suggest.  For example, the definition of a PFIC (provided in section 1297) differs from the definition of a RIC (provided in section 851) in key respects:  In general, the PFIC provisions apply to a range of international investment companies that is broader than the range of domestic investment companies to which the RIC provisions apply.  As another example, the default rules of section 1291 do not provide for identical treatment of PFICs and RICs.  Among other differences, the entire amount of gain on the sale of PFIC stock is taxed under section 1291 as ordinary income or at the highest ordinary rates, whereas RICs may make capital gain dividends, sec. 852(b)(3), and sales of RIC stocks are generally treated as sales of capital assets, see sec. 852(b)(4).” 151 T. C. 4, at pp. 18-19.

So Section 1291 is an anti-deferral mechanism.

OK, Rob and Marcela are out for two years (3SOL has run and no fraud), but as to the third, they want to offset some PFIC losses against the gains wherewith they are grabbed by 6SOL.

No go.

“We agree with respondent that section 1291 does not provide for the netting of gains and losses on dispositions of PFIC stock.  Section 1291(a)(2) provides that the PFIC tax rules apply ‘to any gain recognized on such disposition [i.e., on a disposition of stock in a PFIC]”.  The use of the singular, ‘any gain recognized on such disposition’ (emphasis added), indicates that section 1291 applies to each disposition of PFIC stock separately, rather than to an annual aggregation of sales of multiple stocks.  Consequently, section 1291 applies to any disposition upon which gain is recognized.  Section 1291 does not address, and therefore does not apply to, dispositions upon which losses are recognized.  Accordingly, we conclude and hold that in applying the provisions of section 1291, petitioners are not entitled to offset gains from sales of PFIC stocks with losses from sales of PFIC stocks.” 151 T. C. 4, at pp. 23-24.

I give Rob’s and Marcela’s attorneys a Taishoff “good try, second class,” as they argue that they should be able to net per Section 165, before Section 1291 kicks in. Nope, says ex-Ch J Iron Mike; two different statutes, two different rules.