Friday, December 17, 2010

Making Room for the New

I explained my blogging method in a recent post and that wasn't even the first time.  One of the byproducts of the method is a host of items that deserve mention, but not perhaps an entire post.  Things had been pretty quiet on the fronts that I observe. Yesterday and today though produced a flurry of interesting items.  Before I get to them though I will pass on the developments that are starting to get stale and will not get a lengthy treatment.

Private Letter Ruling 201044019, 11/05/2010

This ruling is an adverse determination on exempt status.  They were seeking to be recognized as a church.  The church had one minister, its founder:

She was ordained by B. B is not a tax-exempt organization under section 501(c)(3). You operate out of your founder's personal residence.

As of yet it did not have a lot going on :

You state that your regularly scheduled religious services will consist of a weekly online discussion centered on a topic that will be posted by your minister. Visitors to your website will be able to discuss the topic by posting comments. To date, you have not posted any topics or engaged in activities using your website. Based on your representations, your only activity thus far, except for establishing your website, has been to distribute funds to individuals

With respect to your program of distributing funds to the needy, neither your application nor your subsequent submissions describe this program, specify the criteria you will use to determine whether an individual is needy or indicate how individuals are referred to you.

With respect to the operation of a church, you describe your creed or statement of faith as follows, "We are all sons and daughters of the same universe. Our doors are open to all. We make no demands of our members. We offer freedom of faith. We seek to unite and instill the truth that everyone is equal." You describe your formal code of doctrine and discipline as follows, "Do unto others as you would have them do unto you." You indicate that your form of worship consists of meditation and communication.

It is troubling that we have the IRS saying what is or is not a church.  It seems to be problematic with the establishment clause of the First Amendment.  You need however to look at the whole sentence:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;

In order to not interfere with "free exercise", you have to define when it is that people are exercising religion.  It is still disturbing.  As I mentioned in a previous post on The Foundation for Human Understanding, Jesus and his apostles would not easily fit into the IRS definition of a church.

FlextronicsAmerica, LLC v. Commissioner, TC Memo 2010-245

I did a few posts on Fidelity International Currency, one of which, is one of my all time greatest hits.  That was a partnership designed by KPMG which went spectacularly bad.  In this one a KPMG design that the IRS did not like was blessed by the Tax Court.  It was fiendishly complicated and due to legislative changes probably doesn't work anymore so I won't go into it.  There was, however, a significant quote in it:

Respondent emphasizes KPMG's role with respect to the inventory transactions. Certainly Canadian Parent and KPMG contemplated different ways to bolster the appearance of a business purpose relating to the inventory transactions. There is no doubt KPMG fervently encouraged the use of the planning technique. Receiving KPMG's advice did not, however, nullify petitioner's bona fide business purposes for the transactions. KPMG was simply advising a client on different ways to minimize the tax consequences of a proposed transaction—precisely what tax accountants are paid to do.

The difference between this case and Fidelity International is the KPMG was figuring out the most tax efficient way to execute a legitimate business transaction rather than creating entities to engage in transactions to shelter unrelated income.

Gregory Q. Teeters v. Commissioner, TC Memo 2010-244

This was pretty much a run of the mill protester case.  I've studied this topic quite a bit, having once found myself between a protester and the IRS, resulting in 12 years of torture in the probate court.  Some of the arguments are fairly well crafted in that all the citations will check out (You just have to ignore that they are taken wildly out of context).  I have trouble believing that the people who craft them think that they are valid.

To support his objection to the deficiencies and additions to tax, petitioner relies predominantly on a single frivolous legal argument; viz, that he did not receive wages under section 3401(a). Petitioner is wrong. The companies that issued him Forms W-2 were his employers under section 3401(d) and he was their employee under section 3401(c). Thus, the remuneration those companies paid him for his services was wages under section 3401(a). Those provisions are clear on their face. See, e.g., United States v. Latham, 754 F.2d 747, 750 [55 AFTR 2d 85-846] (7th Cir. 1985) (the argument that “under 26 U.S.C. § 3401(c) the category of `employee' does not include privately employed wage earners is a preposterous reading of the statute”). Moreover, petitioner received several letters from respondent explaining that his position was frivolous and suggesting that he seek advice. At trial, although petitioner acknowledged that seeking advice would have been reasonable, he conceded that he did not do so. Instead, petitioner persisted in advancing the same frivolous argument. We find that petitioner did not have a good faith misunderstanding of the law. Petitioner timely filed Federal income tax returns for 1990, 1991, 1992, 1993, 1994, 1995, 1997, and 1998. Petitioner knew of his legal duty and sought to avoid it.


This was a case of someone suing an insurance company because they had unexpected income when they cashed in an annuity.  They thought they had basis in it, but it turned out there had been a previous roll overs that confused matters.  The insurance agents advising them had not been aware of it.  The insurance company was granted summary judgement.

CCA 201045023

Individual wrongfully convicted and incarcerated for crime who served several years in prison before being exonerated, may exclude from gross income, under IRC Sec(s). 104(a)(2) , compensation received as result of state-enacted legislation for wrongful conviction and physical injuries and sickness suffered while unjustly incarcerated. But, if individual receives title to/constructive or economic receipt of corpus or assets used to fund future periodic payments, then some portion of future periodic payments may not be excludable. And, punitive damages and interest are included in gross income.

I had once looked at this issue for somebody and had concluded that incarceration, in and of itself, is not a physical injury under 104 (Don't yell at me that that doesn't make sense.  It's not a requirement).  The facts here are just a little different.  Human rights attorneys should pay attention to this.

Gail P. Drayer v. Commissioner, TC Memo 2010-257

I write a lot about taxpayers not being able to prevail on innocent spouse status.  There are two reasons for this.  One is that there seem to be more cases in Tax Court where the taxpayer loses.  The other is that those cases reinforce my advice to be cautious in signing joint returns.  Don't just think about the tax savings.  Consider the implications of joint and several liability.  This does not mean that seeking innocent spouse relief is not worth doing.  I'm sure it is frequently granted by the IRS, which is not going to show up in Tax Court.  Also sometimes taxpayers do win in Tax Court.

Mrs. Drayer had 5 of the eight factors in her favor, one against and two neutral as determined by the Tax Court.  Mrs. Drayer was under the mistaken assumption that she was legally required to file a joint return, which is not one of the factors.  Most dramatic was the abuse factor:

Times were tough for the Drayers, and their marriage became increasingly rocky. Mr. Drayer would often get very angry and had frequent outbursts, particularly in the context of discussions about finances and taxes. Petitioner worried about unpaid tax liabilities, but Mr. Drayer would furiously insist that he would handle the problem and would submit another offer- in-compromise to the Internal Revenue Service. Petitioner provided specific examples of angry outbursts, including a time when Mr. Drayer threatened to hit her and broke specific items. He also, after one such incident, told petitioner that he had intended to commit suicide. Mr. Drayer called petitioner derogatory names and publicly humiliated her. He also regularly drank a lot of alcohol and often smoked marijuana.

Realistically I know that I will probably never run out of material.  It feels good to have a backlog, although I may feel obligated to do some bonus posts for the sake of timeliness.

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

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