Nigerian Oil And IRS Termination Assessment

I am reading a 34-page case that starts with the following:

During the first quarter of 2015 petitioner received about $750,000 from entities allegedly seeking to purchase Nigerian crude oil. Shortly thereafter he attempted to wire $300,000 to a foreign bank. The U.S. Secret Service flagged the transaction and alerted the Internal Revenue Service.  Believing that petitioner intended ‘quickly to depart from the United States or to remove his property therefrom,’ the IRS made a termination assessment under Section 6851(a).

I have never seen a termination assessment in practice.

It has to do with IRS Collections, and one does not just stumble into this. The IRS discovers (or is otherwise led to believe) that one has concealed assets with no intention of informing the IRS.

COMMENT: BTW a taxpayer has probably crossed the line from civil to criminal here. He/she should see a tax attorney, as matters are going south very soon.  

If dealing with a tax year for which the filing date has passed (for example, your 2018 tax year) then the collection is referred to as a jeopardy assessment.

If dealing with one’s current tax year, then it is a termination assessment. The IRS just closes your tax year (irrespective of what month or day it is), fast-forwards the notice periods and goes after your assets.  Think drug trafficking, for example, and you get the idea.

The other thing that would trigger a termination assessment is suspicion that one is going to flee the country.

Our protagonist is named Ugori Timothy Wilson Onyeani. Nope, I cannot explain how that collection of names came together, but let’s hereafter refer to him as UTWO.

UTWO was born in Nigeria. He moved to the U.K. to practice medicine. There was misconduct and his medical license was revoked. He came to the U.S. and got an MBA from DeVry University.

In the same year as he graduated from DeVry, he incorporated American Hope Petroleum & Energy Corp (AHPE). Mind you, there were no Board of Directors, employees, records, meetings, operations or the glimmer of any.

What it did have was a website.

 COMMENT: You see this coming, don’t you?

UTWO presented AHPE as an “independent crude oil purchasing and selling expert,” alleging it had “a team of experts” and was “securely invested in crude purchasing.”

COMMENT: Did I mention that UTWO had zero background in oil and gas? One would think his father was a politician.

He represented that he was brokering the sale of crude oil owned by the Nigerian National Petroleum Corporation (NNPC).

Mind you, the NNPC had no idea who he was, but let us not interrupt UTWO’s story.

A couple of companies stepped-up and wanted to buy oil from AHPE. There are deposits for such things, so the two advanced $744,895.

COMMENT: Born every minute, it seems.

On or around March 3, 2015 UTWO attempted to wire $300 grand to London. His bank flagged the transaction and starting investigating. He responded by opening accounts at another bank, one in his name and one in AHPE’s name.

UTWO was scrupulous about handling company funds, though, using them for clearly business purposes such as trips to Sea World, purchases from Victoria’s Secret, trips to aquariums and flooring for his house.

Eventually the second bank also got spooked about AHPE/UTWO’s activities and froze his accounts.

The Secret Service informed the IRS, who came in with an audit. They found deposits over $800 grand (income as far as the IRS was concerned), no business expenses and a tax bill of $289,043.

The bank remitted the $289 grand to the IRS. The bank was no fool.

Then came a twist:  AHPE/UTWO returned $400 grand of advance deposits in a private settlement.

All the above took place in the same year - 2015. 

In 2016 UTWO and his wife filed their joint individual income tax return. The return reported his wife’s income of $41,893 and that was about it.

The IRS had a meltdown. It had found $800 grand, and UTWO was reporting none of it. The IRS wanted tax of $273,407, a fraud penalty of $205,055 and a slushee machine.

COMMENT: The fraud penalty is 75%. Never, ever go there.

Off they went to Tax Court.

Let’s go through the numbers again. The IRS found approximately $800 grand. AHPE/UTWO returned $400 grand of it. This leaves $400 grand. The IRS levied a tax payment of $289 grand, representing a tax rate of over 70%.

What about the fraud penalty of $205 grand, asked the IRS.

Where is the evasion - a badge of fraud - asked the Court.

The IRS answered: the fraud occurred when he filed a personal return leaving out the $800 grand.

Disagree, answered the Court. UTWO was preserving the position he was arguing in Court, i.e., that the IRS assessment was improper. It would have been legal suicide for him to report otherwise.

And the funds were held in IRS escrow, pointed out the Court. At that point evasion of tax was impossible.

The Court determined that no penalties were appropriate.

And UTWO got out of this as well as possible.

The key?

That he received $800 grand and repaid $400 grand in the same year. As a cash-basis taxpayer, he could not deduct that $400 grand until he paid it. He paid it in the same year as he received the $800 grand, so he could net the two.

I suspect he will get a refund.