Friday, May 13, 2011

If You Kill Your Parents It's Your Own Fault You are an Orphan

Here are a few items that I didn't quite get to in tax season.

CCA 201106015

The law firm provides one of its attorneys to perform legal services for a municipality. It's usually the same attorney every time. The firm sends an invoice to the municipality, and the municipality pays the firm. The municipality does not issue a Form 1099. The attorney is paid by the law firm. Small municipalities essentially contract out for these services when they can't afford their own full time city attorney.

The question is whether the IRS should assert that the attorney is an employee of the municipality, rather than an employee (or partner) of the law firm for purposes of the services provided to the municipality.

My answer is no. The attorney is not an employee of the municipality. ———————————

It is nice to know that sometimes national office will restrain the overzealous.  What they would be accomplishing other than creating aggravation for the small municipality is beyond me.

Roger S. Campbell, et ux. v. Commissioner, TC Memo 2011-42

There were a couple of issues in this case around substatntiation, but the main thing was a hobby loss question on Amway activities.  I remember going to some Amway presentations and it is really shocking to me that people can actually lose money on something that sounds like such a good deal.

Petitioners did not conduct the Amway activity in a businesslike manner. Although they maintained a separate bank account for the activity and maintained records for certain aspects of it, petitioners never used these records as an analytical tool for improving profitability. Mrs. Campbell testified that she did not know whether the Amway activity was profitable in any given year until she completed petitioners' tax return for that year which, for 2 of the taxable years in issue, did not occur until almost 2 years later. It is a fair inference that petitioners' recordkeeping was directed more towards substantiating deductions on a tax return than assessing the profitability of the Amway activity.

Considering all the facts and circumstances, including especially the confusing state of petitioners' Amway records, we conclude that a substantial portion of the costs of goods sold respondent disallowed for 1998 and 1999 represents Amway purchases that petitioners withdrew from inventory for personal use or use in their other businesses. This commingling of the Amway merchandise, resulting in substantial inaccuracies in reported costs of good sold, is further evidence that petitioners' Amway activity was not conducted in a businesslike fashion. It also resulted in petitioners' claiming business deductions for personal expenditures.

Although petitioners have prior entrepreneurial experience and both operated other businesses concurrently, they had no experience with operating a direct marketing distributorship before they were recruited as Amway distributors. Petitioners obtained advice only from their upline distributors and other interested Amway individuals, persons who had a direct financial interest in the maximization of petitioners' sales volume, without regard to petitioners' profitability.

In view of the foregoing, petitioners have failed to prove that they carried on their Amway activity with the requisite objective of making a profit. Consequently, their deductions arising from the Amway activity are limited by section 183.

In the presentations it was always about you recruiting people who recruit people and so on. It always seemed that somebody somewhere had to be selling an awful lot of soap for the thing to work.

U.S. v. THOMAS, Cite as 107 AFTR 2d 2011-1599

This was a protester who was complaining about having to file all his delinquent returns as a condition of his supervised release.  He figures the IRS already did substitute returns and that it was going to be hard to dig up records from that long ago.  The Court had no sympathy as they cited one of my favorite jokes.

We hold that the district court correctly calculated the applicable sentencing range and did not abuse its discretion in imposing an obligation to file all unfiled tax returns and pay all outstanding tax arrears as a condition of supervised release.

We note that any difficulties that may arise from the age of the necessary documents or the passage of time are entirely self-inflicted; had he complied with his duty to file the returns when they were initially due, there would be no such troubles. His contention on appeal that this state of affairs amounts to a “burden” imposed by the district court is absurd, like killing your parents and complaining of being an orphan.

Jeffrey S. Charlton, et ux., et al. v. Commissioner, TC Memo 2011-51

This was a statute of limitations case.  The underlying plan was clearly a loser:

During 1998, Jeffrey and Timothy formed Graphic Connections Group, LLC; Wealth Builders International, LLC; and Golf Links Display Group, LLC (collectively, the partnerships). Pursuant to the partnerships' operating agreements, Jeffrey and Timothy each had a 1-percent interest, and the domestic trusts had a 98- percent interest, in each of the partnerships. The domestic trusts paid the personal expenses of Jeffrey's and Timothy's families and distributed income to the Belize trusts. Jeffrey and Timothy used foreign bank accounts in Belize and Antigua to access the income. On August 1, 1999, Token Trust purchased Titan Trust's and Timothy's interests in the partnerships.

One of my rules is to not get involved in any plan that includes a place I can't easily point out on the map. (Belize is in Central America by the way.  You probably already knew that.)  As it turned out though the Tax Court believed that Mr. Charlton was gullible rather than fraudulent:

Jeffrey, who undoubtedly had a penchant for fast and easy money, foolhardily followed the Aegis system (i.e., structuring the transactions and resisting the IRS audit). See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992); Gajewski v. Commissioner, supra. Nevertheless, Jeffrey maintained adequate records and made all pertinent information available to Mr. Moore, his longtime trusted, yet imprudent, CPA. See Niedringhaus v. Commissioner, supra at 211. To his detriment, Jeffrey relied on the professional judgment of Mr. Moore, who inexplicably believed in and acquiesced to an elaborate scheme designed by con artists. See Estate of Temple v. Commissioner, 67 T.C. 143, 162 (1976) (holding that reliance upon an accountant to prepare accurate returns may negate fraudulent intent if the accountant was supplied with all the information necessary to prepare the returns); Marinzulich v. Commissioner, 31 T.C. 487, 490 (1958) (holding that a taxpayer's reliance upon his accountant to prepare an accurate return may indicate an absence of fraudulent intent).

If you are using Mr. Charlton as a guide to your future plans, I would point out that if you go shopping for a CPA who is as gullible as you are, you might not be able to rely on who ever you end up with.  If you talk to two of them and neither one will drink the Kool-Aid with you, give it up.

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