A Ponzi Scheme And Filing Late

I am reading a case involving a late tax return, a Ponzi scheme, and an IRS push for penalties.

It made me think of this form:

It is used for one of two reasons:

(1)  Someone is filing a tax return with numbers different from a Schedule K-1 received from a passthrough entity (such as a partnership).

(2)  Someone is amending a TEFRA partnership return.

That second one is a discussion for another day. Let’s focus instead on the first reason. How could it happen?

Easy. You are a partner in a partnership. You bring me your Schedule K-1 to prepare your personal return. I spot something wrong with the K-1, and the numbers are large enough to matter. We contact that partnership to amend the return and/or your K-1. The partnership refuses.

COMMENT: We would use Form 8082 to inform the IRS that we are not using numbers provided on your K-1.

This is a tough spot to be in. File the form and you are possibly waiving a flag at the IRS. Fail to file it and the IRS has procedural rights, and those include the right to change your numbers back to the original (and disputed) K-1.

There is another situation where you may want to file Form 8082.

Let’s look at the Rosselli case.

Mr. Roselli (Mr. R) was a housing appraiser. Mrs. Rosselli was primarily a homemaker. Together they have five children, three of whom have special needs.

Through his business, Mr. R came to know the founder of a solar energy company (DC Solar). Turns out that DC Solar was looking for additional capital, and Mr. R knew someone looking to invest. The two were introduced and – in gratitude – Mr R became a managing member in DC Solar via his company Halo Management Services LLC.

This part turned out well for the R’s. In 2017 DC Solar paid Halo approximately $300 grand. In 2018 DC Solar paid approximately $414 grand. Considering they had no money invested, this was all gravy for the R's.

COMMENT: Notice that Halo was paid for management services. Halo in turn was Mr. R, so Mr. R got paid over $700 grand over two years for services performed. This was a business, and Mr. R needed to report it on his tax return like any other business.

In late 2018 the FBI raided DC Solar’s offices investigating whether the company was a Ponzi scheme. The owners of DC Solar were eventually indicted and pled guilty, so I guess the company was.

Let’s roll into the next year. It was tax time (April 15, 2019) and there was not a K-1 from DC Solar in sight.

COMMENT: You think?

The accountant filed an extension until October 15. It did not matter, as the R’s did not file a tax return by then either.

The IRS ran a routine check on DC Solar and its partners. It did not take much for the IRS to flag that the R’s had not filed a 2018 return. The IRS contacted the R’s, who contacted their accountant, eventually filing their 2018 return in January 2022.

You know what was on that 2018 return? The $414 grand in management fees.

You know what was not on that 2018 return? A big loss from DC Solar.

Here is Mr. R:

Mr. Carpoff informed me that I was to receive Schedule K-1s showing large ordinary losses for 2018 from DC Solar, and as a result I would not have a tax liability for that year. However, before the K-1s could be issued … DC Solar’s offices were raided by the FBI.”

All of DC Solar’s documents and records were seized by federal authorities in the ensuing investigation. As a result, I was unable to determine any tax implications because I did not receive a K-1 or any other tax reporting information from DC Solar.”

Got it: Mr. R was expecting a big loss to go with that $414 grand. And why not? DC Solar had reported a big loss to him for 2017, the prior year.

But the IRS Collections machinery had started turning. By August 2022, the IRS was moving to levy, and the R’s filed for a Collection Due Process (CDP) hearing.

COMMENT: There is maddening procedure about arguing underlying tax liability in a CDP hearing, which details we will skip. Suffice to say, a taxpayer generally wants to fight any proposed tax liability like the third monkey boarding Noah’s ark BEFORE requesting a CDP hearing.

At the conclusion of the CDP hearing, the IRS decided that they had performed all the required procedural steps to collect the R’s 2018 tax. The R’s disagreed and filed with the Tax Court.

The R’s presented three arguments.

• They reasonably assumed that they would not be required to file or pay tax for 2018 because of an expected loss from the DC Solar K-1.

The Court was not buying this. Not owing any taxes is not the same as not being required to file. This was not a case where someone did not work, meaning they dd not have enough income to trigger a filing requirement. The Rs instead had a more complicated return, with income here and deductions or losses there. Granted, it might compress to no tax due, but they needed to file so one could follow how they got to that answer.

• The R’s reasonably relied on advice from their accountant and others.

The Court did not buy this either. For one thing, the Rs had never informed their accountant about the $414 grand in management fees. If one wants to rely on a professional’s advice, one must provide all available pertinent information to the professional. The Court was not amused that the R’s had not shared the LARGEST number on their return with their accountant.

• The R’s argued that they would experience “undue hardship” from paying the tax on its due date.

The R’s argued that their income died up when DC Solar was raided. Beyond that, though, they had not provided further information on what “drying up” meant. Without information about their assets, liabilities and remaining sources of income, the Court found the R’s argument to be self-serving.

Also, the Court did not ask – but I will – what the R's had done with the $700 grand in management fees they received in 2017 and 2018.

Yeah, no. The Court found for the IRS, penalties and all.

And here is what I am thinking:

What if they had timely filed their 2018 return, showing a loss from DC Solar equal to the management fees?

Problem: there was no K-1 from DC Solar.

Answer: attach the 8082.

I think the tax would eventually have turned out the same.

But I also think they would have had a persuasive case for abatement of penalties for late filing and late payment. The penalty for late file and pay is easily 25%, so that abatement is meaningful.

Our case this time was Rosselli v Commissioner, TC Bench Opinion, October 23, 2023.

Did You Hear That Spain Is Taxing The Sun?

It has been a while since we have played “Are They Smarter Than a Garden Gnome?” Our blog today involves a near-bankrupt government, which pressed the metal to the floor with “renewable energy” and “green” subsidies. It has now taken the preposterous – and possibly first-time-in-human-history- act of taxing the sun.

You think I am kidding. You may also think I am talking about the United States, but I am not. At least, not this time.

We are talking about Spain, one of the sunniest places in all of Europe. It is a likely candidate for photovoltaic and solar-thermal power generation – that is, solar panels. It sounds good on first hearing. That of course is before the government got involved.

In 2007 Spain had 701 megawatts of installed solar panels. I do not know if that is a lot, but I do know that the Spanish government wanted to increase the amount. Not having a Solyndra or Satcon Technology on which to throw away tax money, they decided to push solar power.  That meant that they paid more for solar-produced power than for other power – think coal, hydroelectric, nuclear, air draft from flocks of geese. How much more? Think 12 times more than conventional power. Yipes! The government was unwilling to pass the full cost onto the populace, even though Spanish power producers have some of the highest rates in the EU. The government instead ran up subsidy deficits now totaling 26 billion euros.

Well, they did increase solar power generation. Current production is 4,000MW, which is an impressive increase from 701MW in 2007.  

What could possibly go wrong with subsidizing solar? After all, it is renewable, environmentally sustainable and so forth.  

Well, when you are paying 12 times more than something is worth, you better not buy too much of it. Unfortunately, Spain missed this lecture. The Spanish government has its fingers all into and over its energy industry. There are mandates for clean energy, for idle gas-fired plants, for poor families and for island dwellers. As a consequence, the government is now about 35 billion euro in the hole from its subsidies. To exacerbate matters, Spain is entering its second recession in three years. The government has recently announced spending cuts and tax increases of 100 billion euros. Unemployment has reached 25 percent. Spain, strapped for cash, is now looking to cut back.

What to do, what to do?

Got it! Spain will tax the electricity produced by home solar panels. Homeowners will have to connect their panels to the grid so their production can be metered – and billed back to them, of course. The effect is to make self-generated power more expensive than power purchased from the grid. 

How much more are we talking about for an average Spanish household? Approximately 27 percent more.

Spain’s Industry Ministry justified this action by explaining that – even though you may be self-sufficient – you “benefit” by having the back up provided by the power grid. Not everyone will be affected, however – only those Spaniards living within reach of the power grid. If you live in remote areas, you will be untouched by this.

Oh, well. Maybe you can sell your power back to the grid and offset somewhat this new cost. No can do. Spain will not allow that. You will have to move to Germany if you want to sell your excess power.

What if you refuse to connect to the grid? Spain reserves the right to fine you up to 30 million euros. Yipes! There has been pushback by consumer groups clarifying that this fine was created in 1997 by a law intended for large corporations, not private individuals. Someone will have to take that theory to court, however, to test how sound it is. I can assure you that it would not be me.

The sad part is that there is nothing here that a clear-headed person could not have seen coming from a mile away, or at least since 2007. Every government benefit given in turn is taken from someone else. This is the economics of taxation, and in the end economics won out. The Spanish government is now scrambling to keep all the spinning dishes from hitting the ground.

What do you think: are they smarter than a garden gnome?