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Showing posts with label termination. Show all posts
Showing posts with label termination. Show all posts

Sunday, January 19, 2020

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 There was misconduct and his medical license was revoked.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.

Sunday, April 16, 2017

IRA or 401(k): Which Is Better If You Get Fired?

Name me a major difference between an IRA and a 401(k).

I will give you the setup.

After 17 years in the construction industry, Mr C lost his job in 2010. He was unemployed for the next year and a half.

Mrs C was also going through a difficult stretch and lost her job. She was eventually reemployed, but at approximately half of her former salary.

Both Mr and Mrs C were age 56.

He depleted his savings. They then turned to the retirement accounts. You know why: they were trying to survive.

Mrs C took out approximately $4,000 from her retirement.

Mr C told his insurance agent to withhold taxes when he took distributions, as he did not want any surprises come tax time. He took monies out at different times, in different amounts and from different accounts. To add to the confusion, he was also sending money back to the insurance agent, presumably to settle-up on the income taxes withheld on the distributions.

All in all, he took out approximately $28,000.

Mr and Mrs C later received 1099s for approximately $17 thousand, which they reported on their tax return.
Question: what happened to the other $11,000 ($28 - $17)?
Who knows.

Unfortunately, the actual distributions taken from the retirement accounts were closer to $32,000.

Real … bad … accounting … happening … here.

But let’s be chivalrous: Mr and Mrs C did not receive all the 1099s. It happens.

The IRS – of course – did receive all the 1099s. They probably also have all the socks that go missing in clothes dryers, too.

And the IRS wanted tax on the $15,000 that Mr and Mrs C did not report.

No surprise.

And 10% penalties.

Must be that “early” distribution thing.

And more penalties on top of that, because that is the way the IRS rolls these days.

Not OK.

Mr and Mrs C represented themselves (“pro se”) at the Tax Court.

And I love their argument:

They had dutifully paid their taxes for more than 30 years without fault or complaint. Could the Court find it in its heart … you know, this one time?

The Court could not grant their argument, as you probably guessed. Thirty years of safe driving doesn’t mean you can go on a society-threatening tear one sodden Saturday night. It just doesn’t work that way.

The Court decided they owed the tax. They also owed the 10% penalty for early distribution.

What they didn’t owe was another IRS penalty on top of that. The Court found that they did the best they could and genuinely believed that the broker was using the monies Mr C forwarded to cover withholding taxes. They were as surprised as anyone when that wasn’t the case. It created a tax hole they could not climb out of, at least not easily.

Here is my question to you:
Did they take monies from their 401(k)s or from their IRAs?
Whatchu think?

I am thinking their IRAs.

Why?

An early distribution from an IRA is defined as age 59 ½. Unless there is an exception (you know, like, you died), you are going to get tagged with that 10% penalty.

On the other hand, the age test for a 401(k) is 55.

The Cs got tagged, thus I am thinking IRA.

To be fair, there is more to this exception. Here are some technicals:
  •    It applies only to company sponsored plans, like 401(k)s.
  •    It applies only to a plan sponsored by the company that let you go. That 401(k) at a former employer doesn’t qualify.
And here is the biggie:
·       You have to withdraw the money in the same year you are let go. You cannot stagger this over a period of years.
Why that last one?

Seems harsh to me. Isn’t it bad enough to be fired? Why not make it the year of discharge and the year following? Is Congress concerned that getting fired will become the next great tax shelter? How about lifetime pensions for 30+year tax CPAs?

Thought I would slip-in that last one.

Mr and Mrs C were age 56. Old enough for 401(k) relief, but too young for IRA relief.

BTW, if you need money over several years, there may be a way around the “you have to withdraw the money in the year you were let go” requirement.

How?

Roll your 401(k) money into an IRA.

Then start “substantially equal periodic payments” from the IRA. This has its own shortcomings, but it is an option.

And you can withdraw over more than one year without triggering a penalty.

Problem is: you have to withdraw over a minimum number of years and the annual payouts can vary only so much. It is of little help if you need money, lots of it and right now.

I do not believe we have spoken of “substantially equal” payments on this blog before. There is a reason: that is dry country and likely to send both of us into a coma. Let me see if I can find a case that is even remotely interesting. 

Friday, July 4, 2014

How Choosing The Correct Court Made The Difference



I am looking at a District Court case worth discussing, if only for the refresher on how to select a court of venue. Let’s set it up.

ABC Beverage Corporation (ABC) makes and distributes soft drinks and non-alcoholic beverages for the Dr Pepper Snapple Group Inc. Through a subsidiary it acquired a company in Missouri. Shortly afterwards it determined that the lease it acquired was noneconomic. An appraisal determined that the fair market rent for the facility was approximately $356,000 per year, but the lease required annual rent of $1.1 million. The lease had an unexpired term of 40 years, so the total dollars under discussion were considerable.


The first thing you may wonder is why the lease could be so disadvantageous. There are any number of reasons. If one is distributing a high-weight low-value product (such as soft drinks), proximity to customers could be paramount. If one owns a franchise territory, one may be willing to pay a premium for the right road access. Perhaps one’s needs are so specific that the decision process compares the lease cost to the replacement cost of building a facility, which in turn may be even more expensive. There are multiple ways to get into this situation.

ABC obtained three appraisals, each of which valued the property without the lease at $2.75 million. With the lease the property was worth considerably more.

NOTE: Worth more to the landlord, of course. 

ABC approached the landlord and offered to buy the facility for $9 million. The landlord wanted $14.8 million. Eventually they agreed on $11 million. ABC capitalized the property at $2.75 million and deducted the $6.25 million difference.

How? ABC was looking at the Cleveland Allerton Hotel decision, a Sixth Circuit decision from 1948. In that case, a hotel operator had a disastrous lease, which it bought out. The IRS argued that that the entire buyout price should be capitalized and depreciated. The Circuit Court decided that only the fair market value of the property could be capitalized, and the rest could be deducted immediately. Since 1948, other courts have decided differently, including the Tax Court. One of the advantages of taking a case to Tax Court is that one does not have to pay the tax and then sue for refund. A Tax Court filing suspends the IRS’ ability to collect. The Tax Court is therefore the preferred venue for many if not most tax cases.

However and unfortunately for ABC, the Tax Court had decided opposite of Cleveland Allerton (CA), so there was virtually no point in taking the case there. ABC was in Michigan, which is in the Sixth Circuit. CA had been decided in the Sixth Circuit. To get the case into the District Court (and thus the Circuit), ABC would have to pay the tax and sue for refund. It did so.

The IRS came out with guns blazing. It pointed to Code Section 167(c)(2), which reads:

            (2) Special rule for property subject to lease
If any property is acquired subject to a lease—
(A) no portion of the adjusted basis shall be allocated to the leasehold interest, and
(B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.

The IRS argued that the Section meant what it said, and that ABC had to capitalize the entire buyout, not just the fair market value.  It trotted out several cases, including Millinery Center and Woodward v Commissioner. It argued that the CA decision had been modified – to the point of reversal – over time. CA was no longer good precedent.

The IRS had a second argument: Section 167(c)(2) entered the tax Code after CA, with the presumption that it was addressing – and overturning – the CA decision.

The Circuit Court took a look at the cases. In Millinery Center, the Second Circuit refused to allow a deduction for the excess over fair market value. The Sixth Circuit pointed out that the Second Circuit had decided that way because the taxpayer had failed its responsibility of proving that the lease was burdensome. In other words, the taxpayer had not gotten to the evidentiary point where ABC was.

In Woodward the IRS argued that professional fees pursuant to a stockholder buyout had to be capitalized, as the underlying transaction was capital in nature. Any ancillary costs to the transaction (such as attorneys and accountants) likewise had to be capitalized. The Sixth Circuit pointed out the obvious: ABC was not deducting ancillary costs. ABC was deducting the transaction itself, so Woodward did not come into play.

The Court then looked at Section 167(c)(2) – “if property is acquired subject to a lease.” That wording is key, and the question is: when do you look at the property? If the Court looked before ABC bought out the lease, then the property was subject to a lease. If it looked after, then the property was not. The IRS of course argued that the correct time to look was before. The Court agreed that the wording was ambiguous.

The Court reasoned that a third party purchaser looking to acquire a building with an extant lease is different from a lessee purchaser. The third party acquires a building with an income stream – two distinct assets - whereas the lessee purchaser is paying to eliminate a liability – the lease. Had the lessee left the property and bought-out the lease, the buy-out would be deductible.

The Court decided that the time to look was after. There was no lease, as ABC at that point had unified its fee simple interest. Section 167(c)(2) did not apply, and ABC could deduct the $6.25 million. The Court decided that its CA decision from 1948 was still precedent, at least in the Sixth Circuit.

ABC won the case, and kudos to its attorneys. Their decision to take the case to District Court rather than Tax Court made the case appealable to the Sixth Circuit, which venue made all the difference.

Wednesday, March 13, 2013

Killing Off The Tax Code



It will never happen.

Two months ago, Rep Bob Goodlatte (R, VA) sponsored H.R. 352, the “Tax Code Termination Act.” Since then approximately 70 additional Representatives have jumped onboard.

What does the bill propose to do?

Starting in 2018, the bill would eliminate individual, corporate, partnership and estate taxes. Payroll taxes and self-employment taxes would survive.

Congress would have until July 4, 2017 to propose and enact a new tax system to replace the current.

What is the purpose? Here is Representative Goodlatte’s explanation:

It has become abundantly clear that the tax code is no longer working in a fair manner for our nation’s citizens. Many Americans look at the dim state of our economy, and the billions of their tax dollars that are being given to private businesses and they want to know why they cannot keep more of their hard earned tax dollars. The tax code Americans are forced to comply with is unfair, discourages savings and investment, and is impossibly complex. It has become too clear that the current code is broken beyond repair and cannot be fixed, so we must start over.”  

He is not so much proposing the permanent abolition of the tax system as proposing a drop-dead date for its replacement. Why?

Although many questions remain about the best way to reform our tax system, I am certain that if Congress is forced to address the issue we can create a tax code that is simpler, fairer, and better for our economy that the one we are forced to comply with today.”

Congress won’t reach a consensus on such a contentious issue unless it is forced to do so.”

The bill is skeletal, and it does have an odd provision requiring a future Congress to meet a two-thirds majority to delay or repeal the bill.

Predictably, the very act of sponsorship has pushed the usual political suspects into a jeremiad, prophesying the end of the world as we know it.

Still, I can understand Rep Goodlatte’s premise: without prodding, the sinecured political class will not reform the tax system. Why would they? The tax code is just one more weapon they can and do wield to augment and retain power.