Substantially Disclosing A Gift To The IRS

Take a look at this memorable prose:

         Sec 6501(c) (9) Gift tax on certain gifts not shown on return.

If any gift of property the value of which (or any increase in taxable gifts required under section 2701(d) which) is required to be shown on a return of tax imposed by chapter 12 (without regard to section 2503(b) ), and is not shown on such return, any tax imposed by chapter 12 on such gift may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time. The preceding sentence shall not apply to any item which is disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item.

I get it: if you never disclose the gift, the IRS can come after you until the end of time. The reverse is what concerns us today: if you disclose the gift “in a manner adequate,” then the IRS does not have until the end of time.

Gift tax cases can be … idiosyncratic, to be diplomatic. All tax is personal, but gift tax can be Addams Family idiosyncratic.

Ronald Schlapfer (RS) was a Swiss-born businessman. He had ties to both Switzerland and the United States. He owned a life insurance policy issued in 2006.The policy in turn owned all the stock in EMG, a Panamanian company previously owned by RS.

It was 2006 and RS was a nonresident of the U.S. He gifted his interest in EMG to his mother, aunt and uncle.

He obtained U.S. citizenship in 2008.

Got it: he gifted before he became subject to U.S. gift tax.

In 2013 – and after obtaining his citizenship – RS decided to play it safe and submitted an offshore voluntary disclosure filing with the IRS. It included a gift tax return for 2006, which informed the IRS of the gift to his family. The return included the following:

“A protective filing is being submitted. On July 6, 2006, taxpayer made a gift of controlled foreign company stock valued at $6,056,686 per U.S. Treasury Regulation 25.2501-1(B). The taxpayer is not subject to U.S. gift tax as he did not intend to reside permanently in the United States until citizenship was obtained in 2008.”

COMMENT: In this situation, a protective filing means that the taxpayer is unsure if a filing is even required but is submitting one, nonetheless. It is an attempt to backstop penalties and other bad things that could happen from a failure to file.

COMMENT: International practice has become increasingly paranoid for many years now. The IRS seems convinced that every UBER driver has unreported foreign accounts, and one’s failure to follow arbitrary and obscure rules are a per se admission of culpability. In this case, for example, there was technical doubt whether the gift was reportable as the transfer of a life insurance policy or as the transfer of a company owned by that policy. Why was there doubt? Well, the IRS itself created it. Rest assured, whichever way you chose the IRS would fall the other way.

The IRS disagreed that the gift occurred in 2006. There was a hitch in the transfer, and the attorney did not resolve the matter until 2007. RS in turn argued that 2007 was but a scrivener’s error. According to well-trod ground, a scrivener’s error is considered administrative, not substantive, and does not mark the actual date of the underlying transaction.

Sometime in here RS agreed to extend the limitations period.

In 2019 the IRS issued the statutory notice of deficiency (SNOD). That is also called a 90-day letter, and it meant that the next step was Tax Court - if RS wanted to further pursue the matter.

Off to Tax Court they went.

RS’ argument was simple: the statute of limitations had expired.

The IRS argued that the gift was not adequately disclosed.

The IRS argued that disclosure requires the following:

·       Description of the property gifted, and any consideration received by the donor.

·       The identity and relationship between the parties.

·       There is additional disclosure for property is transferred in trust.

·       A detailed explanation of how one arrived at the fair market value of the property gifted.

·       Whether one has taken a position contrary to any Regulations or rulings

The IRS was trying to catch RS in the first requirement above: a description of the property gifted.

Was it an insurance policy, ownership in a company, or something else?

Here is the Court:

While Schlapfer may have failed to describe the gift in the correct way, he provided enough information to identify the underlying property that was transferred.”

RS won his case. The IRS had blown the statute of limitations.

Our case this time was Schlapfer v Commissioner, T.C. Memo 2023-65.

A Too Rare Taxpayer Win Over Foreign Reporting

I have become cynical about IRS penalties.

Like many accountants, I initially learned that penalties were in the system as a deterrent. If one complies with reporting responsibilities, penalties should not enter the picture. If they do, they surely would be for ministerial causes (think late payment of an estimated tax) and minor, and – if somehow major – waivable upon showing reasonable cause for the mistake.  

Poppycock.

Congress has been raising and creating penalties for decades to “pay for” their tax bills. I would also argue that the IRS has used penalties as a backstop to its funding, especially during Republican budget stringency after the Lois Lerner fiasco.  

The IRS often assesses penalties automatically, without anyone even glancing at your return. This transfers tax administration from the IRS to you – and then by extension – to me. Say that you have a reportable interest in a foreign corporation. The IRS says you must file a certain information report. I get it: the IRS wants to know what is going on. You file the report, but you file it late. Why late? Who knows. Your accountant was on health leave. You were misadvised. You were never advised because you did not recognize it as a tax-sensitive issue. You will – soon enough – get an automatic IRS notice for a $10,000 penalty – or more. You complied, but not fast enough.

Reasonable cause?

Depends on who defines reasonable. As a practicing tax CPA for decades, I am much more open to reasonable cause. Why? I am closer to the day-to-day, so I do not have the anesthesia of distance and disinterest. Things ... just … happen. No one likes paying, but let’s not use that same brush to accuse one of gaming the system.

Let’s take a look at Wrzesinski.

We will call him “W” to keep our sanity.

W was born in Poland. He moved to the United States when he was 19 years old.

A few years later his mom, who still lived in Poland, won the Polish lottery.

Sweet.

Mom gifted him $830,000 over a couple of years.

W knew about U.S. tax. He contacted his tax advisor to ask what the consequences would be. His advisor (G) correctly told him that the gift would not be taxable, but incorrectly told him that no further reporting was required.

I know that G was wrong, but how could the IRS expect W to know that?

Fast forward a few years and W wanted to make a gift to his godson in Poland. He did an internet search, at which time he realized that – while not taxable – reporting was still required. He realized this situation as his own years before, and he contacted an attorney with expertise in foreign tax matters.

W got into an IRS program for late filing of certain foreign-related returns. The IRS would tread lightly if one had reasonable cause, and both W and his attorney thought he had reasonable cause to spare.

I agree.

The IRS came back with its automatic penalties: they wanted $87,500 for one year and $120,000 for the second.

Their reason?

The Notices stated that …

… ignorance of the tax laws was not a basis for penalty abatement under the “reasonable cause” standard and that ordinary business care and prudence require that the taxpayers be aware of their obligations and file or deposit accordingly.”

I would argue the opposite: good faith “ignorance” of tax laws is exactly the basis for the reasonable cause standard. We have more than once huddled here at Galactic Command analyzing tax consequences, especially if planning a transaction. We sometimes disagree. We have run into gaps in tax law, as Congress is churning out this stuff faster than the IRS and the profession can interpret. We have run into contradictions in tax law, especially when the aforesaid gaps are working their way through the courts system. Did I mention that we are all CPAs with varying tax backgrounds? I am, for example, a tax specialist. It is all I do and have done for years.

Consider that there was no tax shelter here, no attempt to avoid reporting income or of claiming bogus deductions. There was a gift from a mother to a son. A gift unfortunately involving some of the most arcane reporting rules embedded in the tax Code. There was no need for the IRS to flog the guy.

W and his attorney protested the penalties.

The IRS lost W’s protest.

Yes, they “lost” his protest.

It took the Taxpayer Advocate to find it.

The IRS abated all but $40 thousand or so of penalties.

W paid it.

And he immediately filed claims for refund.

I like this guy.

The IRS bounced the first claim, saying he did not establish reasonable cause.

You may be figuring out the IRS schtick when in this situation. It is a one-play gamebook: nothing is reasonable. Boyle. Go away.

The IRS bounced the second claim, saying that it was “frivolous.”

Folks, never ever tell a tax practitioner that his/her position is “frivolous.” That is a loaded word in tax practice.

This thing … NO SURPRISE … went to Court.

Let’s fast forward.

In a too-rare taxpayer win, the DOJ conceded the case on February 7, 2023, and requested six to eight weeks to refund W his remaining penalties.

But look at the effort it took.

Our case this time was Krzysztof Wrzesinski v The United States, U.S. District Court, Eastern District of Pennsylvania.

A House And A Specialized Trust

I saw a QPRT here at Galactic Command recently,

It had been a while. These things are not as common in a low interest rate environment.

A QPRT (pronounced “cue-pert”) is a specialized trust. It holds a primary or secondary residence and – usually – that is it.

Why in the world would someone do this?

 I’ll give you a common example: to own a second home.

Let’s say that you have a second home, perhaps a lake or mountain home. The children and grandchildren congregate there every year (say summer for a lake home or the holidays for a mountain home), and you would like for this routine and its memories to continue after you are gone.

A couple of alternatives come immediately to mind:  

(1)  You can bequeath the property under will when you die.

(2)  You can gift the property now.

Each has it pros and cons.

(1) The property could continue to appreciate. If you have significant other assets, this appreciation could cause or exacerbate potential estate taxes down the road.

(2) You enjoy having and using the property and are not quite ready to part with it. You might be ready years from now - you know: when you are “older.”

A QPRT might work. Here is what happens:

(1) You create an irrevocable trust.

a.    Irrevocable means that you cannot undo the trust. There are no backsies.

(2) You transfer a residence to the trust.

a.    The technique works better if there is no mortgage on the property. For one thing, if there is a mortgage, you must get money into the trust to make the mortgage payment. Hint: it can be a mess.

(3) You reserve the right to use the property for a period of years.

a.    This is where the fancy planning comes in.

b.    It starts off with the acknowledgement that a dollar today is more valuable than a dollar a year (or years) from now. This is the “time value of money.”

c.    At some point in time the property is going to the kids and grandkids, but … not … right …now.     

d.    If the property is worth a million dollars today, the time value of money tells us that the gift (that is, when the property goes to the kids and grandkids) must be less than a million dollars.  

e.    There is a calculation here to figure out the amount of the gift. There are three key variables:

                                               i.     The age of the person making the gift

                                             ii.     The trust term

                                           iii.     An interest rate

A critical requirement of a QPRT is that you must outlive the trust term. The world doesn’t end if you do not (well, it does end for you), but the trust itself goes “poof.” Taxwise, it would be as if you never created a trust at all.

(4) There is a mortality consideration implicit here. The math is not the same for someone aged 50 compared to someone aged 90.

(5) Your retained right of use is the same thing as the trust term. You probably lean toward this period being as long as possible (if a dollar a year from now is worth less than a dollar today, imagine a dollar ten years from now!). That reduces the amount of the gift, which is good, but remember that you must outlive the trust term. There is push-and-pull here, and trust terms of 10 to 15 years are common.

We also need an interest rate to pull this sled. The government fortunately provides this rate.

But let’s go sidebar for a moment.

Let’s say you need to put away enough money today to have $5 a year from now. You put it in a bank CD, so the only help coming is the interest the CD will pay. Let’s say the CD pays 2%. How much do you have to put away today?

·      $5 divided by (100% + 2%) = $4.90

OK.

How much do you have to put away if the CD pays 6%?

·      $5 divided by (100% + 6%) = $4.72

It makes sense if you think about it. If the interest rate increases, then it is doing more of the heavy lifting to get you to $5. Another way to say this is that you need to put less away today, because the higher interest is picking up the slack.

Let’s flip this.

Say the money you are putting in the CD constitutes a gift. How much is your gift in the first example?

$4.90

How much is your gift in the second example?

$4.72

Your gift is less in the second example.

The amount of your gift goes down as interest rates go up.

What have interest rates been doing recently?

Rising, of course.

That makes certain interest-sensitive tax strategies more attractive.

Strategies like a QPRT.

Which explains why I had not seen any for a while.

Let me point out something subtle about this type of trust.

·      What did we say was the amount of the gift in the above examples?

·      Either $4.90 or $4.72, depending.

·      When did the gift occur?

·      When the trust was funded.

·      When do the kids and grandkids take over the property?

·      Years down the road.

·      How can you have a gift now when the property doesn’t transfer until years from now?

·      It’s tax magic.

But what it does is freeze the value of that house for purposes of the gift. The house could double or triple in value before it passes to the kids and grandkids without affecting the amount of your gift. That math was done upfront and will not change.

A couple of more nerd notes:

(6) We are also going to make the QPRT a “grantor” trust. This means that we have introduced language somewhere in the trust document so that the IRS does not consider the QPRT to be a “real” trust, at least for income tax purposes. Since it is not a “real” trust, it does not file a “real” income tax return. If so, how and where do the trust numbers get reported to the IRS? They will be reported on the grantor’s tax return (hence “grantor trust”). In this case, the grantor is the person who created the QPRT.

(7)  What happens after 10 (or 15 or whatever) years? Will the trust just kick you out of the house?

Nah, but you will have to pay fair-market rent when you use the place. It is not worst case.

There are other considerations with QPRTs – like selling the place, qualifying for the home sale exclusion, and forfeiting the step-up upon the grantor’s death. We’ll leave those topics for another day, though.

Can A Severance Be A Gift?

I am looking at a case wondering why a tax practitioner would take it to Tax Court.

Then I noticed that it is a pro se case.

We have talked about this before: pro se means that the taxpayer is representing himself/herself. Technically that is not correct (for example, someone could drag me in and still be considered pro se), but it is close enough for our discussion.

Here is the issue:

Can an employer make a nontaxable gift to an employee?

Jennifer Fields thought so.

She worked at Paragon Canada from 2009 to 2017. Apparently, she was on good terms with her boss, as the company …

·      Wired her 35,000 Canadian dollars in 2012

·      Wired her $53,020 in 2014 to help with the down payment on a house in Washington state.

I am somewhat jealous. I am a career CPA, and CPA firms are not known for … well, doing what Paragon did for Jennifer.

She separated from Paragon in 2017.

They discussed a severance package.

Part of the package was forgiveness of the loan arising from those wires.

Forgiveness here does not mean what it means on Sunday. The company may forgive repayment, but the IRS will still consider the amount forgiven to be taxable income. The actual forgiveness is therefore the after-tax amount. If one’s tax rate is 25%, then the actual forgiveness would be 75% of the amount forgiven. It is still a good deal but not free.

Paragon requested and she provided a Form W-9 (the form requesting her social security number).

Well, we know that she will be getting a W-2 or a 1099 for that loan.

A W-2 would be nice. Paragon would pick-up half of the social security and Medicare taxes. If she is really lucky, they might even gross-up her bonus to include the taxes thereon, making the severance as financially painless as possible.

She received a 1099.

Oh well.

She left the 1099 off her tax return.

The IRS computers caught it.

Because … of course.

Off to Tax Court they went.

This is not highbrow tax law, folks. She worked somewhere. She received a paycheck. She left work. She received a final paycheck. What is different about that last one?

·      She tried to get Paragon to consider some of her severance as a gift.

The Court was curt on this point. You can try to be a bird, but you better not be jumping off tall buildings thinking you can fly.

·      She was good friends with her boss. She produced e-mails, text messages and what-not.

That’s nice, said the Court, but this is a job. There is an extremely high presumption in the tax Code that any payment to an employee is compensatory.

But my boss and I were good friends, she pressed. The law allows a gift when the relationship between employer and employee is personal and the payment is unrelated to work.

Huh, I wonder what that means.

Anyway, the Court was not buying:

Paragon’s inclusion of the disputed amount in the signed and executed severance agreement and the subsequent issuance of a Form 1099-MISC indicates that the payments were not intended to be a gift.”

She really did not have a chance.

The IRS also wanted penalties. Not just your average morning-drive-through penalties, no sir. They wanted the Section 6662(a) “accuracy related” penalty. Why? Well, because that penalty is 20%, and it is triggered if the taxpayer omits enough income to underpay tax by the greater of $5 grand or 10% of what the tax should have been.

Think biggie size.

The Court agreed on the penalty.

I was thinking what I would have done if Jennifer had been my client.

First, I would have explained that her chance of winning was almost nonexistent.

COMMENT: She would have fired me then, realistically.

Our best course would be to resolve the matter administratively.

I want the penalties dropped.

That means we are bound for Appeals. There is no chance of getting that penalty dropped before then.

I would argue reasonable cause. I would likely get slapped down, but I would argue. I might get something from the Appeals Officer.

Our case this time was Fields v Commissioner, T.C. Summary Opinion 2022-22.

 

Checks Not Cashed In Time Includible In Taxable Estate

 

Let’s talk about an issue concerning gifts.

We are not talking about contributions – such as to a charity - mind you. We are talking gifts to individuals, as in gift taxation.

The IRS spots you a $16,000 annual gift tax exemption. This means that you can gift anyone you want – family, friend, stranger – up to $16,000 and there is no gift tax involved. Heck, you don’t even have to file a return for such a straightforward transaction, although you can if you want. Say that you give $16,000 to your kid. No return, no tax, nothing. Your spouse can do the same, meaning $32,000 per kid with no return or tax.

That amount covers gifting for the vast majority of us.

What if you gift more than $16,000?

Easy answer: you now have to file a return but it is unlikely there will be any tax due.

Why?

Because the IRS gives you a “spot.”

A key concept in estate and gift taxation is that the gift tax and the estate tax are combined for purposes of the arithmetic.

One adds the following:

·      The gifts you have reported over your lifetime

·      The assets you die with

One subtracts the following:

·      Debts you die with

·      Certain spousal transfers and charitable bequests we will not address here.

If this number is less than $12.06 million, there is no tax – gift or estate.

Folks, it is quite unlikely that the average person will get to $12.06 million. If you do, congrats. Chances are you have been working with a tax advisor for a while, at least for your income taxes. It is also more likely than not that you and your advisor have had conversations involving estate and gift taxes.

Let’s take a look at the Estate of William E. DeMuth, Jr.

In January, 2007 William DeMuth (dad) gave a power of attorney to his son (Donald DeMuth). Donald was given power to make gifts (not exceeding the annual exclusion) on his dad’s behalf. Donald did so from 2007 through 2014.

In summer, 2015, dad’s health began to fail.

Donald starting writing checks for gift in anticipation that his dad would pass away.

Dad did pass away on September 11.

Donald had written eleven checks for $464,000.

QUESTION: Why did Donald do this?

ANSWER: In an attempt to reduce dad’s taxable estate by $464,000.

Problem: Only one of the eleven checks was cashed before dad passed away.

Why is this a problem?

This is an issue where the income tax answer is different from the gift tax answer.

If I write a check to a charity and put it in the mail late December, then income tax allows me to claim a contribution deduction in the year I mailed the check. One could argue that the charity could not receive the check in time to deposit it the same tax year, but that does not matter. I parted with dominion and control when I dropped the check in the mail.

Gift tax wants more from dominion and control. One is likely dealing with family and close friends, so the heightened skepticism makes sense.

When did dad part with dominion and control over the eleven checks?

Gift tax wants to see those checks cashed. Until then, dad had not parted with dominion and control.

Only one of the checks had cleared before dad passed away. That check was allowed as a gift. The other ten checks totaled $436,000 and potentially includible in dad’s estate.

But there was a technicality concern an IRS concession, and the $436,000 was reduced to $366,000.

Still, multiply $366,000 by a 40% tax rate and the issue got expensive.

Our case this time was the Estate of William E DeMuth, Jr., T.C. Memo 2022-72.

The Sum Of The Parts Is Less Than The Whole

 

I am looking at a case involving valuations.

The concept starts easily enough:

·      Let’s say that your family owns a business.  

·      You personally own 20% of the business.

·      The business has shown average profits of $1 million per year for years.

·      Altria is paying dividends of over 7%, which is generous in today’s market. You round that off to 8%, considering that rate fair to both you and me.

·      The multiple would therefore be 100% divided by 8% = 12.5.   

·      You propose a sales price of $1,000,000 times 12.5 times 20% = $2.5 million.  

Would I pay you that?

Doubt it.

Why?

Let’s consider a few things.

·      It depends whether 8 percent is a fair discount rate.  Considering that I could buy Altria and still collect over 7%, I might decide that a skinny extra 1% just isn’t worth the potential headache.

·      I can sell Altria at any time. I cannot sell your stock at any time, as it is not publicly-traded. I may as well buy a timeshare.

·      I am reasonably confident that Altria will pay me quarterly dividends, because they have done so for decades. Has your company ever paid dividends? If so, has it paid dividends reliably? If so, how will the family feel about continuing that dividend policy when a non-family member shows up at the meetings? If the family members work there, they might decide to increase their salaries, stop the dividends (as their bumped-up salaries would replace the lost dividends) and just starve me out.

·      Let’s say that the family in fact wants me gone. What recourse do I – as a 20% owner – have? Not much, truthfully. Own 20% of Apple and you rule the world. Own 20% of a closely-held that wants you gone and you might wish you had never become involved.

This is the thought process that goes into valuations.

What are valuations used for?

A ton of stuff:

·      To buy or sell a company

·      To determine the taxable consequence of nonqualified deferred compensation

·      To determine the amount of certain gifts

·      To value certain assets in an estate

What creates the tension in valuation work is determining what owning a piece of something is worth – especially if that piece does not represent control and cannot be easily sold. Word: reasonable people can reasonably disagree on this number.

Let’s look at the Estate of Miriam M. Warne.

Ms Warne (and hence the estate) owned 100% of Royal Gardens, a mobile home park. Royal Gardens was valued – get this - at $25.6 million on the estate tax return.

Let’s take a moment:

Q: Would our discussion of discounts (that is, the sum of the parts is less than the whole) apply here?

A: No, as the estate owned 100% - that is, it owned the whole.

The estate in turn made two charitable donations of Royal Gardens.

The estate took a charitable deduction of $25.6 million for the two donations.

The IRS said: nay, nay.

Why?

The sum of the parts is less than the whole.

One donation was 75% of Royal Gardens.  

You might say: 50% is enough to control. What is the discount for?

Here’s one reason: how easy would it be to sell less-than-100% of a mobile home park?

The other donation was 25%.

Yea, that one has it all: lack of control, lack of marketability and so on.

The attorneys messed up.

They brought an asset into the estate at $25.6 million.

The estate then gave it away.

But it got a deduction of only $21.4 million.

Seems to me the attorneys stranded $4.2 million in the estate.

Our case this time was the Estate of Miriam M. Warne, T.C. Memo 2021-17.

Income and Credit Card Rebates

I am reading a case so unique that I doubt there is much takeaway taxwise, other than someone beat the IRS.

What gets the story started is automobile rebates back in the mid -70s. The economy was limping along, and car manufacturers wanted to sell cars. Buy a car, get money back from the manufacturer.

To a tax geek, receiving a check in the mail raises the question of whether there is income somewhere.

The overall concept behind taxable income is that one has experienced an accession to wealth. That is how discharge of debt can create income, for example. As one’s debt goes down, one’s wealth increases.

What to do with a car rebate?

The IRS did the obvious thing: it saw a car; it saw payment for a car; and it saw a rebate going back to whoever bought the car. There was no increase in wealth here, it decided. The result was that one paid less for the car.

There are countless variations on the theme. What to do with airline miles, for example?

Our case features Konstantin Anikeev (K). K got himself a Blue Cash American Express credit card. The card had a reward program. American Express would send you money for buying (approved) things with the card.

American Express disallowed certain purchases from the program, however, including:

(1)  Interest charges and fees

(2)  Balance transfers

(3)  Cash advances

(4)  Purchase of traveler’s checks

(5)  Purchase or reloading of prepaid cards

(6)   Purchase of any cash equivalent

I get it. American Express did not want someone to walk the transaction through back to cash.

K noticed something: the program did not address gift cards.

A gift card is just a prepaid card, right? Not quite. A gift card is not redeemable in cash or eligible for deposit into your bank account.

I had not really thought about it.

K did think about.

You know what you can do with a gift card?

You can buy a money order, that’s what. You then deposit the money order in the bank.

Sounds like a lot of work for a couple of bucks.

K went to town. Over the course of a year or so, he and his wife generated rebates of over $300 grand.

K knows how to commit.

Interestingly enough, American Express did not seem to care. 

The IRS however did care. They were going to tax K on his $300 grand. K pointed out that the IRS had provided guidance way back by saying that rebates were not income, and all he received were rebates. Granted, there were more bells and whistles here than a 1978 Chrysler Cordoba, but that did not change anything.

The IRS said nay-nay. The guidance they put out back in the 70s involved a product or service. That product or service had a cost, and that cost could then be reduced to absorb the effect of the rebate. There were no goods and services with K’s scheme. There was nothing to “absorb” the rebate.

Off they went to Tax Court.

There is a tax subtlety that we need to point out.

The IRS could have argued that the exchange of the gift card for a money order was a taxable event. Since the cost of the gift card had been adjusted down by the rebate K received (meaning the cost was less than a dollar-on-a-dollar), there would be a gain upon the exchange.

It is a formidable argument.

That is not what the IRS did. They instead argued that K had an income recognition event when he bought the gift card.

Huh? How?

Because he intended to ….

The Court was having none of this argument.

The Court reminded the IRS that gift cards are a product. The card has a uniform product code that the cashier uses to ring up the cost. It is a product, just like a car. The IRS was upset because it got gamed. It did not like the result, but that did not give the IRS leash to arbitrarily look down the road and back-up the tax truck when it did not like the destination. The IRS should tighten its rules.

Here is the Court:

These holdings are based on the unique circumstances of this case. We hope that respondent polices the IRS policy in the future in regulations or in public pronouncements rather than relying on piecemeal litigation.”

K won. He and his wife had tax-free cash.

BTW, K did all this with a card whose credit limit was $35 grand. I am REALLY curious how much time they put into this.

Our case this time was Anikeev v Commissioner, TC Memo 2012-23.