Larry's Tax Law

The Estate of Michael Jackson is battling it out with the IRS in a dispute over the value of the late pop star’s estate.  To borrow the titles from two of Michael Jackson’s hit songs, the Service is alleging the estate is “Bad” in that it substantially understated the value of the decedent’s assets, while the estate is telling the Service that it is wrong and it should simply “Beat It.” 

What is the battle about?  The answer is simple:  Lots of money!  The Service asserts the understatement results in the estate owing taxes of over $500 million more than actually reported on the estate’s tax return, plus almost $200 million in penalties.  If the Service is correct, the State of California will likely have its hand out, asking the estate for a significant amount of additional taxes, plus penalties.

According to the petition filed by the estate in the United States Tax Court, representatives of the estate placed a date of death value on the decedent’s property at a little over $7 million.  The IRS, on the other hand, asserts the value was closer to $1.125 billion dollars.  If the Service is correct, the estate was undervalued by more than 160 times.

On January 27, 2014, Judge Haines of the United States Tax Court issued a decision in Ydney Jay Hall v. Commissioner, TC Memo 2014-6.  This case illustrates that a taxpayer’s failure to retain adequate business records to substantiate income and expenses will lead to disastrous results. 

The taxpayer, Ydney Jay Hall, is a practicing attorney admitted to practice before the United States Tax Court.  His law practice income was reported on Schedule C of his Individual Income Tax Return.  Upon examination of Mr. Hall’s 2008 return, the Service asked to review his books and records relating to the law practice.  The Service, believing Mr. Hall did not fully respond to its request for information, summoned bank records.  With that information, it reconstructed his business income for the tax year.  The results of the audit reconstruction were not pretty. 

The IRS issued a deficiency notice to the taxpayer, asserting he had underreported his income by $76,681 for the tax year.  In addition, the Service disallowed deductions for travel and other expenses listed on Schedule C totaling $63,542 as the taxpayer did not maintain any books or records for his business activities and failed to provide proof he actually paid the expenses (e.g., receipts, invoices, cancelled checks or other evidence of payment).   To put salt on the wound, the Service assessed an accuracy related penalty against the taxpayer.

Mr. Hall filed a petition in the United States Tax Court challenging the notice of deficiency and the assessment of taxes and penalty.  He represented himself in the case.

On December 17, 2013, the United States District Court for the Northern District of Georgia issued its decision in United States v. Morris Legal Group, LLC, 113 AFTR 2d, 2014-XXXX (D.C. Georgia).  Gilbert Greenburg, a disbarred attorney, was employed as the office manager of Morris Legal Group, LLC, a law firm in Atlanta, Georgia.  He helped set up and manage the law firm’s personal injury practice.  Interestingly, Mr. Greenburg had no written agreement with the law firm relative to the amount of compensation he was entitled to receive.  Rather, he wrote himself payroll checks from time to time based upon the level of the firm’s profits.  His compensation generally ranged from $4,000 to $8,000 per month. 

Mr. Greenburg owed the IRS over $100,000 in unpaid income taxes, interest and penalties.  On May 26, 2011, the IRS sent the law firm a Notice of Levy and formally requested it surrender Mr. Greenburg’s wages until the levy was released.  Morris Legal Group, LLC appears to have ignored the levy and continued paying Mr. Greenburg compensation.

On December 10, 2013, the US District Court for the District of New Jersey ended a long and drawn out saga between the IRS, and John and Francis Purciello.  The court’s decision (assuming the government does not appeal) should provide the Purciellos with much needed finality and a sense of vindication to end 2013.

The Purciellos filed their joint 2000 tax return, showing a refund due of about $42,000.  Although they contacted the IRS on several occasions, in writing and by telephone, inquiring about the refund, the Service failed to provide any response.  In late 2002, out of the blue, the IRS notifies the Purciellos that the refund was being applied to civil penalties assessed against Mr. Purciello for tax year 1998.  What civil penalties cried the Purciellos?  

Apparently, on April 3, 2002, the Service assessed Mr. Purciello with trust fund penalties for two quarters of 1998 relating to a company he had worked for in a strictly sales capacity.  The penalties, in the aggregate, amounted to more than $168,000.

Over the next two years, the Purciellos went back and forth with the IRS attempting to resolve the matter.  While they eventually received a small refund, the bulk of their claim appeared to be unsuccessful.  Consequently, the Purciellos were forced to file a claim for refund in the US District Court for the District of New Jersey. 

In Peter Knappe v. U.S., 713 F3d 1164 (9^th Cir., April 4, 2013), the United States Court of Appeals for the Ninth Circuit was presented with the question whether reliance upon a tax professional may excuse the late filing of a tax return.

Peter Knappe was the personal representative of the Estate of Ingborg Pattee.  He was also trustee of her testamentary trust.

Mrs. Pattee died in 2005, leaving a large estate.  Mr. Knappe was her long-time friend.  Although he had business experience, Mr. Knappe had no experience serving as a personal representative or preparing estate tax returns.  So, he engaged the services of Mr. Francis Burns, CPA.  Burns had been his company’s outside accountant for several years.  Mr. Knapp was always satisfied with his work.

Burns told Knappe that a Form 706 for the estate of would need to be filed by August 30, 2006.  Knappe had trouble obtaining the needed appraisals on or before the filing deadline.  Burns advised Knappe that he could obtain an extension of one (1) year for both the filing and the payment of the taxes due.

Burns filed a Form 4786, seeking both an extension for filing and for payment of the taxes due. The extension sought was one year.

As we know, the filing extension, unless the personal representative is out of the country, is only six (6) months.  The payment extension, however, in the discretion of the Service, may be up to one year.  Burns, however, believed both extensions were automatically one (1) year.  OOPS!

The United States Sixth Circuit Court of Appeals was actually presented earlier this year with the “$64,000 Question.”  In Robert W. Stocker, II and Laurel A. Stocker v. U.S., 111 AFTR 2d 2013-556 (705 F3d 225) (6^th Cir., January 17, 2013), the court examined what sort of evidence a taxpayer must introduce in order to support the timely filing of a tax return in which a $64,000 refund was claimed.

In this case, Bob and Laurel Stocker filed an amended 2003 return, seeking a $64,000 refund.  The Service denied the claim on the ground that they did not file the return within the 3-year statutory period.

The Stockers filed suit in District Court.  The court quickly dismissed the case for lack of subject matter jurisdiction—the Stockers could not establish the jurisdictional prerequisite of timely filing the return by methods recognized by the Service or the courts.

The taxpayers argued that testimony and circumstantial evidence may support the timely filing requirement.  Mr. Stocker and his office manager, Karrin Fennell, testified that the return was timely deposited at a United States post office, postage prepaid.  They forgot, however, to attach the registered mail customer return receipt.  The taxpayers were, however, able to produce evidence that the Department of Revenue timely received the amended return.  So, they argued the IRS must have likewise received the federal return on time.  Unfortunately, the IRS’ records showed the return was postmarked 4 days after its due date.

There are rumors circulating in the media that taxpayer filing and payment obligations are currently on hold pending the Federal shutdown.  WRONG!

The IRS announced last week, despite its limited resources during the shutdown, taxpayer obligations continue.  These obligations must be met in a timely manner.  There will be no extensions arising from the shutdown.

Individuals and businesses are required to file returns, pay taxes, make estimate tax payments, and make tax deposits in a timely manner as required by applicable law.  The shutdown does not impact these obligations or the time frame in which to fulfill them.  It does, however, create a few hiccups for tax advisors and their clients, including:

People are often surprised by the long reach of Internal Revenue Service (“Service” or “IRS”) liens.¹  Plains Capital Corporation (“Plains”) recently learned this lesson.  Plains lost a fight with the Service in a case before the United States District Court for the Eastern District of Texas.  It appealed to Fifth Circuit Court of Appeals.  Losing again, Plains proceeded with an appeal to the United States Supreme Court.  Unfortunately, on June 24, 2013, the highest court in the nation refused to hear Plain’s appeal.²  The saga is over for Plains, but the case should be a loud warning to others.

In 2002 and 2003, the Service assessed taxpayer Gregory Rand (“Rand”) for tax liabilities arising from 2000 and 2002.  It eventually filed notices of federal tax liens totaling over $3 million (“Tax Liens”).

In 2005, Rand obtained a $200,000 line of credit from Plains.  Plains was aware of the Tax Liens.  To secure its credit extension, however, it took possession of the title to Rand’s 2005 Ferrari.  Plains thought taking possession of the vehicle title would put it in front of the IRS.  Wrong!

In 2007, Rand agreed with the IRS that he would deliver the Ferrari to Boardwalk Motor Sports, Ltd (“Boardwalk”).  Boardwalk agreed to sell the vehicle on consignment.

The Service and Plains could not agree upon the priority of their respective liens.  So, the IRS served a notice of levy on Boardwalk and instructed Boardwalk to deliver the sale proceeds to it.  Later, an IRS agent instructed Boardwalk not to release the sale proceeds until the IRS and Plains reached agreement on lien priorities.  If it was unsure whether an agreement was reached, Boardwalk was instructed to go to the local court and file an interpleader action.