In Uncategorized on 02/19/2020 at 16:50

Grandma’s salty phrase translated as “don’t be a knocker.” But “knocker” here does not mean “one who disparages or denigrates.” Rather it means, “a wit, wag or wiseacre.” In my misspent youth I often heard this rebuke.

Today, Judge Colvin doesn’t use the phrase, but if Grandma were on the bench she would have so addressed Alvin E. Keels, Sr., 2020 T.C. Memo. 25, filed 2/19/20.

“Petitioner’s testimony was sometimes argumentative and was sprinkled with bluster and sarcasm.  For example, when asked how he knows that his OfficeMax expenses were for items used at his State Farm office he stated: ‘The title of OfficeMax is enough to know that it’s something for an office, more than likely.’  Petitioner provided a check made payable to Cape School, but the check does not show the purpose.  When asked if the purpose was for business petitioner stated (addressing respondent’s counsel): ‘If you want to do some research, you can look up Cape School, and they’ll tell you what they do.’  Petitioner stated that he did not bring all of his credit card statements to avoid having a pile of papers at the trial.  When respondent asked why petitioner relied on a bank statement to show he had paid electric bills instead of the electrical bills themselves, petitioner said if requested he can provide the bills.  However, petitioner was unresponsive when respondent requested the underlying bills on August 25, 2017, and again when respondent file a motion on December 29, 2017, seeking the documents.” 2020 T. C. Memo. 25, at pp. 16-17.

Dale Carnegie would face-palm.

But some of Alvin’s testimony does stand up. He gets his payments for what amounts to contract labor.

Judge Colvin has some cogent remarks about parties’ testimony. “Witness testimony could almost always be said to be ‘self-serving’, but that factor alone is not a reason to automatically reject the evidence as unreliable.  We decide whether a witness’ testimony is credible by relying on objective facts, the reasonableness of the testimony, the consistency of the witness’ statements, and the witness’ demeanor.  We may discount testimony which we find to be unworthy of belief, but we may not arbitrarily disregard testimony that is competent, relevant, and uncontradicted….” 2020 T. C. Memo. 25, at pp. 15-16 (Citations omitted, but get them for your trial briefs).

But IRS also stumbles into knockerdom, trying to drag in Section 409A deferred compensation for Alvin’s post-separation payout from State Farm, the insurer for whom he independently contracted, post-SNOD and post-answer. No 1099s from The Good Neighbor, and no copy of the deferred comp agreement, so Alvin is saved from the massive deficiencies with which IRS wanted to slug him (and for which he got no cash).

Here’s the Section 409A skinny.

“To prevail under section 409A, a taxpayer must show all three of the following:  first, that distributions from the plan may not occur before the taxpayer’s separation from service, disability, death, an unforeseen emergency, or a change in ownership of the corporation, sec. 409A(a)(2)(A)(i)-(vi); second, that the plan does not permit acceleration of benefits except to the extent provided by regulations, sec. 409A(a)(3); and third, that the election to deferred compensation must be timely made, sec. 409A(a)(4)(B)(i).  These requirements do not apply if the benefits are subject to substantial risk of forfeiture or were previously taxable. Sec. 409A(a)(1)(A)(i).

“For respondent to meet the burden of proof respondent must show that the plan fails to include any one of the three requirements above, that petitioner does not have a substantial risk of forfeiture, and that petitioner was not previously taxed on the deferred compensation.  The record does not show whether petitioner’s plan with State Farm meets the requirements of section 409A.  The plan document probably provides these details, but it is not in the record; neither is any Form 1099-MISC sent to petitioner by State Farm.  The State Farm letter does not include those details.  Thus, respondent has not shown that the plan fails to meet at least one of the requirements of section 409A or whether there is a substantial risk of forfeiture.  Therefore, respondent did not meet the burden of proving that section 409A applies, and on this record petitioner is not taxable on the yearend balances of his termination and extended termination accounts for the years at issue.” 2020 T. C. Memo. 25, at pp. 21-22.

And for wildcarding in the Section 409A issue, IRS has burden of proof.

Takeaway- Maybe IRS is going after 409As. Read and heed Judge Colvin’s checklist. But more important yet, don’t be a knocker: especially, on the stand.


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