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Showing posts with label settle. Show all posts
Showing posts with label settle. Show all posts

Tuesday, March 23, 2021

When Is Divorce A Tax-Deductible Theft?

 

I am reading a case involving tax consequences from a divorce.

More specifically, the (ex) wife trying to deduct $2.5 million as a theft loss.

That is a little different.

He and she got married in 1987. Husband (Bruno) lifted a successful career in the financial sector, and by 2005 was earning over $2 million annually.

There was an affair.

There was a divorce.

The Court ordered an equitable distribution of marital properties.

That did not seem to impress Bruno, who transferred no marital properties. The court held him in contempt, ordered him to pay interest and yada yada yada.

QUESTION: Can’t a court place someone in jail for contempt?

It appeared that the Court had enough of Bruno, and in 2010 the Court transferred real estate to the (ex) wife, with instructions to sell, keep the first $300 grand and transfer the balance to an escrow account. The property sold for $1.9 million. Th (ex) wife kept all the money, placing nothing in escrow.

Yep, the Court held her in contempt.

By now I am thinking that the contempt of this court is clearly meaningless.

In 2015 our esteemed Bruno filed for bankruptcy. He claimed he was down to his last $2,500.

Which raised the question of where all the money went.

In 2016 the (ex) wife filed suit against Bruno’s new wife and several companies that he, she or both owned.

Methinks we found where the monies went.

She filed a claim against the bankruptcy estate for $3.5 million.

Apparently, there was something to the (ex) wife’s claim, as the bankruptcy trustee filed suit against the new wife, against Bruno’s mother, the Bruno companies previously mentioned and some poor guy Bruno talked to while walking his dog around the neighborhood.

That case was settled in 2019.

Let’s be honest: there is really no likeable character in this story.

The (ex) wife amended her 2015 tax return to report a $2.5 million theft.

That – not surprisingly – created a net operating loss that went springing across tax years like kids at a pre-COVID McDonald’s Playland.

The IRS caught the amended return and said: No way. No theft. No loss. Get outta here.

And that is how we got to the Tax Court.

Establishing the existence of a deductible theft can be tricky in tax law. Yes, one always has the question of what was stolen, how much was it worth and all that. Tax law introduces an additional requirement:

·      One must establish the year in which the loss was sustained.

The blade is in Reg 1.165-1(d):

However, if in the year of discovery there exists a claim for reimbursement to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained  .. until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.”

It is not the “what” that will trip you up; it is the “when.”

There of course some Court guidance over the years, such as:

·      The evaluation should not be made “through the eyes of the ‘incorrigible’ optimist,” or

·      … the “mere possibility or the bare hope of a future development permitting recovery does not bar the deduction of a loss clearly sustained.”

Yep. That is like telling a baseball player to step to the plate against Jacob deGrom and “just swing the bat.”

Thanks for the advice there, pal.

And the Court decided against the (ex) wife.

No one believed Bruno when he filed bankruptcy in 2015 and claimed he was worth only $2,500. The trustee filed suit; the (ex) wife filed suit. Lawsuits were everywhere.

The Court stated that the (ex) wife may well have a theft loss. What she did not have was a theft loss in 2015.

Our case this time for the home gamers was Bruno v Commissioner, T.C. Memo 2020-156.

Sunday, July 28, 2019

Memphian Appeals An Offer In Compromise


I am looking at a case dealing with an offer in compromise.

You know these from the late-night television and radio advertisements to “settle your IRS debts for pennies on the dollar.”

Yeah, right.

If it were so easy, I would use it myself.

Don’t get me wrong, there are fact patterns where you probably could settle for pennies on the dollar. Unfortunately, these fact patterns tend to involve permanent injury, loss of earning power, a debilitating illness or something similar.

I will just pay my dollar on the dollar, thank you.

What caught my attention is that the case involves a Memphian and was tried in Memphis, Tennessee. I have an interest in Memphis these days.

Let’s set it up.

Taxpayer filed tax returns for 2012 through 2014 but did not pay the full amount of tax due, which was about $40 grand. A big chunk of tax was for 2014, when he withdrew almost $90,000 from his retirement account.

Why did he do this?

He was sending his kids to a private high school.

I get it. I cannot tell you how many times I have heard from Memphians that one simply cannot send their kids to a public school, unless one lives in the suburbs.

In December, 2016 he received a letter from the IRS that they were going to lien.

He put the brakes on that by requesting a Collection Due Process (CDP) hearing.

Well done.

In January he sent an installment agreement to the IRS requesting payments of $300 per month until both sides could arrive at a settlement.

The following month (February) he submitted an Offer in Compromise (OIC) for $1,500.

That went to a hearing in April. The IRS transferred the OIC request to the appropriate unit.

In late August the IRS denied the OIC.

Let’s talk about an OIC for a moment. I am thinking about a full post (or two) about OICs in the future, but let’s hit a couple of high spots right now.

The IRS takes a look at a couple of things when reviewing an OIC:

(1)  Your net worth, defined as the value of assets less any liabilities thereon.

There are certain arcane rules. For example, the IRS will probably allow you to use 80% of an asset’s otherwise fair market value. The reason is that it is considered a forced sale, meaning that you might accept a lower price than otherwise.

(2) Your earning power

This is where those late-night IRS settlement mills dwell. Have no earning power and near-zero net worth and you get pennies on the dollar.

There are twists here. For example, the IRS is probably not going to spot you a monthly Lexus payment. That is not how it works. The IRS provides tables for certain categories of living expenses, and that is the number you use when calculating how much you have “left over” to pay the IRS.

Let’s elaborate what the above means. If the IRS spots you a lower amount than you are actually spending, then the IRS sees an ability to pay that you do not have in real life.

You can ask for more than the table amount, but you have to document and advocate your cause. It is far from automatic, and, in fact, I would say that the IRS is more inclined to turn you down than to approve any increase from the table amount. I had a client several years ago who was denied veterinary bills and prescriptions for his dog, for example.

The IRS workup showed that the taxpayer had monthly income of approximately $12,700 and allowable monthly expenses of approximately $11,000. That left approximately $1,700 monthly, and the IRS wanted to get paid.

But there was one expense that made up the largest share of the IRS difference. Can you guess what it was?

It was the private school.

The IRS will not spot you private school tuition, unless there is something about your child’s needs that requires that private school. A special school for the deaf, for example, would likely qualify.

That is not what we have here.

The IRS saw an ability to pay that the taxpayer did not have in real life.

Taxpayer proposed a one-time OIC of $5,000.

The IRS said No.

They went back and forth and agreed to $200 per month, eventually increasing to $700 per month.
COMMENT: This is not uncommon for OICs. The IRS will often give you a year to rework your finances, with the expectation that you will then be able to pay more.
The taxpayer then requested abatement of interest and penalties, which was denied. Generally, those requests require the taxpayer to have a clean filing history, and that was not the case here.

The mess ended up in Tax Court.

Being a court, there are rules. The rule at play here is that the Court was limited to reviewing whether the IRS exercised abuse of discretion.

Folks, that is a nearly impossible standard to meet.

Let me give you one fact: he had net assets worth approximately $43 thousand.

His tax was approximately $40 thousand.

Let’s set aside the 80% thing. It would not take a lot of earning power for the IRS to expect him to be able to repay the full $40 grand.

He lost. There really was no surprise, as least to me.

I do have a question, though.

His monthly income was closer to $13 grand than to $12 grand.

It fair to say that is well above the average American monthly household income.

Private school is expensive, granted.

But where was the money going?

Our case this time was Love v Commissioner, T.C. Memo 2019-92.

Thursday, September 17, 2015

Amos And Rodman



Do you remember Dennis Rodman?

He is more recently associated with traveling to North Korea and functioning as an off-the-record ambassador with Kim Jong-un, the dictator of that country. In the 1990s he was better known for playing with Michael Jordan and Scottie Pippen on the Chicago Bulls.

Early in 1997 the Bulls were playing the Minnesota Timberwolves. Rodman went after a loose ball, falling into a group of photographers on the sidelines. Rodman twisted his ankle. While getting back on his feet he kicked one of the photographers in the groin.


The photographer’s name was Eugene Amos. He went to a hospital, where he had difficulty walking and was in noticeable pain. The doctors offered pain medication but he refused, explaining that he was already taking medications for a preexisting back injury. Some dispute arose, and Amos left the hospital without being discharged.

He hired an attorney immediately upon leaving. 

The next day Amos went to another hospital. He complained about his groin, but the doctors did not notice anything other than the expected swelling. They were concerned about his back, though, and took a round of X-rays.

Before the lawsuit was filed, Rodman paid him $200,000 to go away.

Oh, and Amos had to sign a confidentiality provision to not discuss the matter. Standard stuff, but given that we are talking about it the agreement did not hold up as expected.

There is a Code section that addresses physical injuries:
          § 104 Compensation for injuries or sickness.
(a)  In general.
Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include-
(1)   amounts received under workmen's compensation acts as compensation for personal injuries or sickness;
(2)  the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;

Relying upon Section 104(a)(2), Amos excluded the $200,000 from his 1997 tax return.

Wouldn’t you know the IRS pulled his return for audit?

And they disagreed with his exclusion of the $200,000 from taxable income. Why? As far as they were concerned, Rodman paid Amos all but $1 of the $200,000 to keep his mouth shut. The IRS was, however, willing to exclude the $1 from income.

Amos disagreed. He took one in the orchestra, after all.

Off to Tax Court they went.

The IRS argued that Amos had not proven his physical injuries, and that Mr. Rodman himself was skeptical that Amos sustained any injuries to speak of. The IRS further argued that Amos was required to pay $200,000 in damages to Rodman should he violate the confidentiality agreement, clearly indicating that Rodman did not intend to pay anything for alleged physical injuries.

The Court immediately dismissed the first argument, noting that if an action has its origin in a physical injury, then damages therefrom are treated as payments received on account of the injury.

The Court decided that the “dominant” reason for the settlement was to compensate Amos for his claimed injuries. However, the settlement also indicated that Rodman was paying some portion for Amos not to:

(1)   Defame Rodman
(2)   Disclose either the existence or amount of the settlement
(3)   Publicize facts relating to the incident, and
(4)   Assist in criminal prosecution against Rodman

Problem is, the agreement did not separate how much was paid for what.

The Court did what it had done many times before: it came up with a number.

The Court decided that $120,000 was payable for physical injuries and $80,000 was paid for confidentiality terms. Therefore $120,000 could be excluded under Section 104(a)(2). The $80,000 could not.

The Amos decision changed how personal injury attorneys draft documents. It is now expected that the injured party will not want to sign any confidentiality agreement. If there is one, anticipate the injured party to stipulate a nominal amount to the agreement and to request indemnification for any resulting taxes, penalties, interest, attorney fees and court costs.

And that is how Dennis Rodman contributed to the tax literature.