In Uncategorized on 01/31/2019 at 17:57

And IRS Blows the SOL on Mike D’s IRA

Mike D is more properly known as Michael Deluca, the star of Michael Deluca & Elizabeth Deluca, Docket No. 548-18, filed 1/31/19. National Iron is the bank wherein Mike D stashed his Roth IRA, and from which Roth IRA he kept on borrowing from 2011 through 2016 (the dates matter), paying back the loans punctually.

Iron Mike, of course, is that eminent jurist and author of the above-cited designated hitter,  ex-Ch J Michael B (“Iron Mike”) Thornton.

Now my learned readers will exclaim as one, “Section 4975!” And they’re right. Some may even quietly remark “Prohibited Saves the Day, 4/10/18,” recalling my blogpost and the case reported therein, to which both IRS and ex-Ch J Iron Mike continually refer. And even more quietly “Section 408(e)(2)(A)” may be heard.

“On their income tax returns for all relevant years, petitioners treated [Mike’s] IRA as an existing IRA; they did not disclose the loans to Mr. Deluca. Petitioners assert that this was an innocent mistake. In a notice of deficiency dated October 19, 2017, respondent determined in part that during 2014 petitioners had a deemed distribution of $198,048 from their Roth IRA due to prohibited transactions (i.e., the loans from [Mike’s] IRA to Mr. Deluca) under section 4975(c)(1)(B).” Order, at p. 2 (Footnote omitted).

Mike D and Elizabeth want summary J. Mike’s IRA cratered in 2011 when he made the first loan, not 2014.

IRS claims duty of consistency. Mike D and Elizabeth never reported the loans and always treated Mike’s IRA as if Mike D hadn’t cratered it.

Except. The earlier case from my blogpost above referred to is Marks, and ex-Ch J Iron Mike discourses thereon.

“We agree that respondent’s concession in Marks does not necessarily preclude him from invoking the duty of consistency in this case. In making his argument, however, respondent misses the larger point. The issue that the Court raised sua sponte in Marks–the consistent application of the prohibited-transaction rules for earlier years–is the same issue that petitioners have raised to defend against respondent’s determination in the notice of deficiency. In Marks the duty of consistency had no relevance because, if for no other reason, it was the Court, rather than the taxpayers, who raised the issue. In those circumstances there was no issue as to the taxpayer’s taking inconsistent positions, and consequently there was no meaningful basis for the IRS to invoke a duty of consistency defense. In the case presently before us, such a defense takes on no greater relevance by virtue of the fact that it is petitioners, rather than the Court, who have raised the issue. In either circumstance, the question has nothing to do with any inconsistency in the taxpayer’s factual representations and everything to do with the correct application of the law.” Order, at p. 3.

We all know that the duty of consistency means a taxpayer can’t take one position in a year already closed, and a contrary one in another, open year. Pick your position and stay with it. But duty of consistency applies to facts; you can take inconsistent positions on the law. But Mike D did neither; he always maintained his IRA was legit from beginning to end, before he invokes Section 408(e)(2)(A).

And ex-Ch J Iron Mike believes in statutes, specifically the  SOL.

“Respondent’s basic problem, as he acknowledges, is that he has blown the statute of limitations for petitioners’ 2011 tax year. Be that as it may, the judicially crafted doctrine of the duty of consistency cannot displace the detailed statutory rules governing the tax treatment of IRAs. Under the plain terms of the statute [Mike’s] IRA ceased to be a valid IRA as of the first day of 2011, the year in which the prohibited transactions first occurred, and the IRA was treated as distributing all its assets on that same day. See sec. 408(e)(2)(A) and (B). To adopt respondent’s position would essentially mean rewriting the statute to postpone the consequences of prohibited transactions indefinitely into the future, depending upon when the IRS might happen to discover them. The intention and effect of respondent’s position would be to toll the statute of limitations for the collateral tax consequences of a prohibited transaction.” Order, at p. 4.

Mike D wins. Rule 155 beancount for conceded items to follow.

  1. Good for the judge.

    The “duty of consistency” is wayward thinking; a black eye in the nobility of tax case law. See, e.g., Musa v. Commissioner.

    “We all know that the duty of consistency means a taxpayer can’t take one position in a year already closed, and a contrary one in another, open year.” Time to put that notion in the trash heap of judicial buffoonery.


  2. Mr Harris, not quite. What ex-Ch J Iron Mike said was that Mike D had never been inconsistent in reporting facts, which is all to which the duty of consistency relates. And 7 Cir is Musa never suggested the duty of consistency was a mistake. Inconsistency in law is not prohibited, and that was the case in Deluca. There may be a gap caused by want of a requirement that an IRS trustee (Roth or Trad) report prohibited transactions to IRS, to prevent the sort of “honest mistakes” Mike D made. That is up to Congress.


    • I provided Musa as an example of judicial buffoonery. My point on this case is that the judge didn’t go for the misplaced argument to apply or expansion an ill-conceived principle.


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: