Penalties, Boyle and “Reductio Ad Absurdum.”

 

In logic there is an argument referred to as “reductio ad absurdum.” Its classic presentation is to pursue an assertion or position until it – despite one progressing logically – results in an absurd conclusion. An example would be the argument that the more sleep one gets, the healthier one is. It does not take long to get to the conclusion that someone who sleeps 24 hours a day – in a coma, perhaps – is in peak physical condition.

I am looking at a tax case that fits this description.

What sets it up is our old nemesis – the Boyle decision. Boyle hired an attorney to take care of an estate tax return. The attorney unfortunately filed the return a few months late, and the IRS came with penalties a-flying. Boyle requested penalty abatement for reasonable cause. The Court asked for the grounds constituting reasonable cause. Boyle responded:

                  I hired an ATTORNEY.”

Personally, I agree with Boyle.

The Court however did not. The Court subdivided tax practice in a Camusian manner by holding that:

·      Tax advice can constitute reasonable cause, as the advice can be wrong;

·      Relying on someone to file an extension or return for you cannot constitute reasonable cause, as even a monkey or U.S. Representative could google and find out when the filing is due.

 Here is an exercise for the tax nerd.

(1)  Go to the internet.

(2)  Tell me when a regular vanilla C corporation tax return is due.

(3)  Change the corporate year-end to June 30.

a.    When is that return due?

Yes, the due dates are different. I know because of what I do. Would you have gone to step (3) if I had not pushed you?

Jeffery Lindsay was in prison from 2013 to 2015. He gave his attorney a power of attorney over everything – bank accounts, filing taxes and so on. Lindsay requested the attorney to file and pay his taxes. The attorney assured him he was taking care of it.

He was taking care of Lindsay, all right. He was busy embezzling hundreds of thousands of dollars is what he was doing. Lindsay got wind, sued and won over $700 grand in actual damages and $1 million in punitive damages.

The IRS came in. Why? Because the last thing that the attorney cared about was filing Lindsay’s taxes, paying estimates, any of that. It turns out that Lindsay had filed nothing for years. Lindsay of course owed back taxes. He owed interest on the tax, as he did not pay on time. What stung is that the IRS wanted over $425 grand in penalties.

He did what you or I would do: request that the penalties be abated.

The Court wanted to know the grounds constituting reasonable cause.

Are you kidding me?

Lindsay pointed out the obvious:

         I was in PRISON.”

Here is the Court:

One does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due.”

The Court agreed with the IRS and denied reasonable cause.

Lindsay was out hundreds of thousand of dollars in penalties.

I consider the decision the logical conclusion of Boyle. I also think it is a bad decision, and it encapsulates, highlights and magnifies the absurdity of Boyle using the logic of “reductio ad absurdum.”

Our case this time was Lindsay v United States, USDC No 4:19-CV-65.

Blade’s Offer In Compromise

I am enough of a nerd to say that I enjoyed the Blade movies. I am a fan of Wesley Snipes, who played the half-vampire vampire hunter in the series.

You may recall that he got into big-time tax trouble several years ago. He bought into tax protestor arguments, such as being an ambassador from the planet Naboo or some similar nonsense. He spent three years in prison.

When he came out of prison the IRS wanted over $23 million in taxes, penalties and interest.

He went to a Collections Due Process hearing. The purpose of a CDP is to tamp-down IRS aggressiveness in separating you from your money. The CDP has limited range, but sometimes that range makes all the difference.

So he goes and requests collection alternatives.

Perfect. Exactly what a CDP is designed to do.

He proposes an installment agreement.

There are flavors of these, and one of the flavors is called a “partial pay.” For a partial, you have to convince the IRS that you are unable to fully pay your taxes over the period the IRS can collect from you. You almost have to provide photos of Bigfoot to persuade the IRS to go along.

Alternatively, he proposes an offer in compromise (OIC).

In some cases, the difference between a partial pay and an OIC can be slight, except for maybe at the edges. For example, enter a partial pay and the IRS may request payment adjustment if your income goes up. That is a risk you do not have with an OIC.

Right there you can anticipate that an OIC is harder to obtain than a partial pay.

And an OIC for an actor who has made millions from movies is going to be harder still.

OICs are the “pennies on the dollar” tripe you hear on radio or late-night commercials. Those “pennies” OICs are few and far between, and usually involve some or all of the following factors:

·      Someone was injured and will never work again

·      Someone has retired and will never work again

·      Someone owns next to nothing

·      Someone owes the IRS money   

The key theme here is that someone is broke, and there is little likelihood that condition will ever change.

Folks, that is not tax planning. That is bad luck in life, very poor life choices, or both.

Wesley Snipes put in an OIC of $842,061.

Out of $25 million plus.

Heck, even I don’t believe him.

Let’s begin with personal financials. You know the IRS is going to check him out, especially with such a lowball offer.

·      Snipes owns real estate and other assets through a series of related companies.

OK. The IRS is going to have to look at this.

·      Snipes argued that some of this real estate had been sold or went missing.

OK. The IRS is going to have to look at this.

·      Snipes argued that his financial advisor had “diverted” his assets and money without his knowledge or consent.

OK. The IRS is going to have to look at this.

·      Snipes requested that his tax liability be “transferred” to his advisor, as the advisor had conveniently “transferred” Snipe’s assets to himself. This would require an investigation, of course, and perhaps the IRS could place his account in “currently not collectible” status during the investigation.

I suspect there is or will be a lawsuit here. I would have hired an attorney and filed papers already.

The problem is that Appeals (where Snipes was at the moment) is not built for this. Snipes is requesting an audit, and audits are done by Examination. Given what was alleged, this matter could even go to the Criminal Division of the IRS. While Appeals can review the work of the field (Examination) division, they cannot perform the field investigation themselves.

·      He has one more argument: economic hardship.

Problem: the normal indicia of economic hardship include illness, disability, or exhaustion of income or assets providing for oneself or dependents. These do not apply in his case.

That leaves an argument that he is unable to borrow against assets, and the forced sale of said assets would leave him unable to meet basic expenses.

This argument may have traction. He is – after all – asserting that assets have disappeared and he doesn’t know when or where.

But he failed to provide enough financial information to allow the IRS to evaluate the matter. The IRS and the Court kept circling on this point. Could it be that he truly could not sherlock what happened to his money?

However, not providing information in an OIC tends to be fatal.

Still, the IRS was moved. They agreed to reduce the settlement to $9,581,027.

Snipes’ team said: No. It is $842,061 or nothing.

The Court said: Then nothing it is.

I suspect the most interesting part of the story is the part that was not provided: what happened to the real estate and other money?

I also wonder if there is a certain schadenfreude here.

Tax protestors sometimes use unnecessarily complicated structures (trusts, for example) to distance, obscure and possibly hide the ultimate control of money or assets. A protestor would not own real estate directly, for example. Rather an entity would own the real estate and the protestor would control the entity. Or there would be an intermediate entity owned by yet another entity controlled by the protestor.

What if the protestor goes to prison? The protestor might then cede a certain amount of authority over the entity/entities to someone – like an advisor - while incarcerated.

What happens if that advisor does not have the protestor’s best interest at heart?

Might sound a lot like what we read here.

Update on Tiger Zerjav

We recently discussed Tiger Zerjav, who with his father practiced tax in St. Louis, Missouri. Tiger and his dad had attracted IRS attention, and Tiger himself was being pursed for tax fraud. Courthouse News Service (a news service for attorneys and focusing primarily on civil litigation) reported the following this morning:

ST. LOUIS (CN) - A much-sued tax adviser pleaded guilty Thursday to federal tax evasion.  Frank L. "Tiger" Zerjav Jr., 39, of Wildwood, Mo., pleaded guilty to four counts of tax evasion from 2001 to 2004, prosecutors said.

 Zerjav admitted that he funneled his income into several S-corporations and failed to include that income on his tax returns.  

Zerjav admitted that many of the expenses claimed on the S-corporations tax returns were personal and should not have been deducted. Some of the payments were for a condominium at the Lake of the Ozarks, a boat, two Sea-Doo watercrafts and a home entertainment system.

Prosecutors said Zerjav evaded $183,000 in taxes over the four years, though he and the government did not agree on the exact amount of unpaid taxes.

Zerjav faces up to 5 years in prison and a $250,000 fine for each charge. His sentencing is scheduled for March 26, 2013. Twenty-one people, companies or government entities have filed lawsuits against the Zerjavs since 2008, according to the Courthouse News database.

My Take: There is a difference between tax minimization and tax evasion. If you claim accelerated depreciation, or make a stock donation to a charity, or gift part of a business to the children using a family limited partnership, or make a like-kind exchange of real estate, you are still working within the system – albeit working to reduce your taxes. When the conversation includes “omitting income,” one may have crossed the line into fraud.