Judge Rips Into The IRS Over Prosecution Of Widow

You may be aware that the IRS has been going after people with overseas accounts. I have little sympathy for deliberate tax evaders, but the IRS approach can be described as erratic. Very ordinary people are terrorized with outrageous penalties while bigger fish are allowed to swim away.

Therefore, I was very glad to see the resolution of the case against Mary Estelle Curran.

Let us start by saying that Mrs. Curran is very wealthy. Her husband inherited money from an aunt who lived in Monte Carlo. He left the money in a Lichtenstein foundation. There were never any additional deposits into this account. Over the years, the account grew into a sizeable sum, which Mrs. Curran inherited after his death. She then had to learn money management, as her husband had done that for more than 40 years.

This was not chump change: she inherited over $40 million.

She is not a natural object for our sympathy, right?

Not so fast. Having money does not make one guilty any more than being left-handed does.

She asked her accountants and lawyers in Europe how to handle and report the money. Unfortunately, she did not inform her U.S. accountants. She kept this up for several years.

The IRS eventually came out with an amnesty program, and Mrs. Curran decided to do the right thing.  She contacted her European bankers, who put her in touch with a U.S. tax lawyer. She gave the attorney all the information for voluntary disclosure with the IRS.

It took about a month to review and assemble the information and contact the IRS. Would you believe that – in that month - UBS had provided approximately 250 names to the IRS? By the time she submitted her disclosure, the IRS had already had her name for approximately 3 weeks.

The IRS had a rule: if they found out about you before you disclosed, you were not eligible for the voluntary disclosure program. There was a glitch, though: Mrs. Curran had submitted her disclosure seven days before the start of the amnesty program. Too bad, screeched the IRS. No amnesty for you!

Mrs. Curran goes to Court on criminal charges. She pleads guilty to tax evasion and filing false tax returns. She was fined over $26 million for failing to remit approximately $670,000 in tax to the IRS over the years.

OBSERVATION: How much Kool-Aid does one have to drink to think that a fine of $26 million is fair balance for $670,000 in unpaid taxes? If the government applied this ratio to all the earned income tax credit cheats and tax refund thieves we could balance the federal budget. The IRS was not interested in just bringing a noncompliant taxpayer into compliance. No, it had an agenda. 

Mrs. Curran could have even have gone to jail. Her niece – who is blind – offered to serve jail time in place of her 79-year old aunt.

Here is her attorney pleading before the Court:

... 38,000 people went through the three offshore voluntary programs after her and received immunity from prosecution. They were also treated and penalized far different than her. They were penalized mainly at the rate of 20 percent for the FBAR violation of the largest amount of money in the account. She was penalized 50 percent.”

She has been prosecuted criminally, indicted and arrested, and those 38,000 were not. And she has been adjudicated a felon, and all those 38,000 people did not suffer that designation.  

Every one of these 38,000 people were given a second chance..., yet Mrs. Curran never received a second chance at all.”

U.S District Court Judge Kenneth Ryskamp was presiding. Here is the Judge and an IRS (i.e., Justice Department) attorney:

JUDGE: Based upon those facts, did it ever occur to the government that this case ought to be dismissed and let this thing go?

IRS: No, your Honor.

IRS: Your Honor, there is a certain level of randomness to the level of government prosecution...

JUDGE: ... (her) lawyer detained it (the disclosure), and she would have qualified under it (the IRS program).

IRS: ... the government has to draw bright lines as to where...

JUDGE: I don’t know if the government has to do anything. It seems to me that the government has a lot of discretion and the government decided to make a felon out of this woman.

IRS: ... there were numerous articles in the Wall Street Journal, in the New York Times about the government’s investigation of foreign bankers.

JUDGE: This case is totally out of scope of all your other cases where people are skimming, were trying to hide funds. I mean, there was an inheritance over there, and al lot of reasonable people would think you don’t have to report this.”

The Court passes sentence:

A term of imprisonment would be unnecessarily harsh.

It is the finding of the Court that the defendant is not able to pay a fine.

It is the judgment of the Court that the defendant, Mary Estelle Curran, is placed on probation for a period of one year.”

The Court was clearly miffed by the IRS’s behavior.

I’m now revoking probation. Probation is terminated. You were on probation for about five seconds there.

The law requires me to put you on – if I don’t put you in jail – I’ve got to put you on probation. It doesn’t say how long you have to stay there.”

Wow!

The Court continued:

I would urge you to file a petition for a pardon with the executive branch. You can tell them the Court thinks this woman’s felony should be removed. And if the government doesn’t join it, then it’s just spiteful.”

Judge Ryskamp is now famous with tax practitioners. He can count me a fan.

Apple Is Borrowing Money Because Of Taxes

Apple is borrowing money.

What beggars disbelief is that Apple has over $140 billion in cash on its balance sheet. Why would it borrow money? It has to do with U.S. international taxation.

The U.S. has a “worldwide” tax system. This means that an American is taxed on worldwide income, irrespective of whether the American lives in the United States. This creates tremendous inefficiencies when an American expatriates – that is, move overseas with no immediate intention of returning. It is more common than you may first think. I for example have family who have expatriated. They have married and have children of their own. It is more likely that I will play in the NFL than they will return to the U.S.

Apply that “worldwide” idea to business taxation and you begin to understand the problem. Take a company with plants, workforces, storefronts and offices around the world – a company like Apple. Tell Apple that it has to pay U.S. tax on monies generated in Australia, South Africa or Japan, and you are motivating Apple to seriously reconsider its reason for being a U.S.–based company.

There are exceptions in the tax code, both delaying and accelerating the general tax treatment discussed above.  Apple has gotten itself caught in one. It has been able to move profits away from the U.S., but it now faces problems returning them to the U.S. Consider also that Apple is facing pressure to share its cash hoard with shareholders. How does it get that overseas cash into the U.S. to pay dividends?

It borrows. A company that is probably on sounder financial footing than the U.S. government is borrowing money because of U.S. taxation.

Brilliant policy there, Washington.

We may return to this topic in a future blog. For now, here is the Reuters video:

Whose Line Is It Anyway

Drew Carey, Colin Mochrie, Ryan Stiles and Wayne Brady take on the greatest songs of accounting.

Remember to laugh when you can.

A Waitress, A Waffle House And A Lottery Ticket

It’s fun to think about winning the lottery

There is a (former) waitress in Grand Bay, Alabama who did. She worked at a Waffle House. Enter Edward Seward, a regular at the restaurant. Seward liked the lottery. As Alabama did not have a lottery, he would travel to Florida to buy tickets. He also liked giving away the lottery tickets to the waitresses at the Waffle House. Our protagonist – Tonda Lynn Dickerson – had an agreement with four other waitresses that – if they ever won – they would share the winnings equally.

Would you know that the lottery ship docked, and Tonda Lynn had the winning ticket? The winnings were more than $9 million if paid out over 30 years, and over $5 million if paid in lump sum. First thing Tonda did was quit her job.

Tonda Lynn took the matter to her dad – Bobby Reece. Turns out her family was quite close and had talked about sharing lottery winnings if ever anyone won. Bobby seemed the most invested in the lottery discussion. Johnny Reece - the brother - was not so much into it.   

Bobby contacted Louisa Warren, the general counsel for the Florida Lottery Commission. Bobby explained the family understanding about the lottery. She told Bobby:

Don’t sign that ticket, period.”

She recommended that they form an entity to claim the winnings.

Enter an attorney and an S Corporation named 9 Mill, Inc.

NOTE: Get it?

Bobby sat down at the table and decided the ownership percentages while Tonda Lynn and her husband went car shopping. Turns out that Tonda and James (the husband) owned 49% of 9 Mill, Inc.

OBSERVATION: Bobby seems to have an intuitive grasp of tax issues.

Bobby and Mrs. Reece and James went to Florida to claim the ticket. They decided to take a 30-year payout of $354,000 per year.

... and they were notified of a competing claim against the winnings.

Remember the other waitresses at the Waffle House? They lawyered up. Their attorney filed suit in the Circuit Court of Mobile County, claiming that his clients were entitled to 80% of the winnings. The waitresses had an agreement. They also had a witness – Mr. Seward – who started the whole thing by giving Tonda Lynn the lottery ticket.

Tonda seemed to have forgotten any agreement, any Waffle House, any other waitresses. She had bought the ticket herself, it seems. There was a small problem with that, however. The tickets were sequentially numbered at the bottom, and her ticket – number 18 – was missing

The Circuit Court entered an order saying that the other four waitresses were right and that Tonda Lynn had to part with 80%.

Well, 9 Mill, Inc was not going to stand for that. They countersued, and the case went to the Alabama Supreme Court. The Supreme Court overturned the Circuit Court.

Tonda Lynn was back in the money, but not for the reason that you may think. The Court agreed that there was an agreement between the five waitresses, but the Court also pointed out that it could not enforce that agreement on public policy grounds. Alabama could not enforce a contract based on gambling. Gambling was not allowed in Alabama.

I suspect that Tonda Lynn can never go back to that Waffle House.

Not too long after, the IRS contacted Tonda Lynn. The IRS wanted its gift tax – approximately $770,000.

Tonda Lynn had a lottery ticket.  The winnings went into an entity of which she and her husband owned 49%. What happened to the other 51%? According to the IRS, Tonda Lynn must have gifted it.

You have to admit, they have a point.

Now Tonda Lynn and the IRS go to Court. She presents two arguments:

(1)     No gift occurred because at the time of transfer there existed an enforceable contract under Alabama law.

(2)     Alternatively, she and her family were all members of an existing partnership that was the true owner of the lottery ticket.

Let’s address this in reverse order.

The Court noted that the partnership, if one existed, was an odd partnership because it did not observe the formalities of a business activity. Ownership had never been spelled out, for example. The members were not required to contribute to the partnership or to buy lottery tickets regularly. A family member did not even know if another member bought a lottery ticket. There may have been an understanding, but that understanding did not rise to the level of an”activity” which could be housed in an entity.

Additionally, Tonda did not buy the ticket. It was given to Tonda, who would still have to explain how the ticket got into the entity.

On the first argument the Court reminded Tonda that there could have been no enforceable contract.  Alabama did not recognize gambling.

NOTE: Odd that Tonda Lynn would forget this, as this is the same reason Tonda won her case against the other waitresses. Short memory, I suppose.

Tonda Lynn owed gift tax.

The story is not done, though. There was one more issue before the court.

It turns out that the delay in cashing the winning ticket was a tax boon to Tonda, as it allowed time for the other waitresses to submit their claim. Had they not, then Tonda would have owed gift tax of approximately $770,000. The claim introduced uncertainty about the value of the gift. What would an independent party pay for that ticket at that moment, knowing there was a cloud, the resolution of which could mean forfeiture of 80% of the winnings?

The Court discounted the gift by more than two-thirds.

It was Tonda Lynn’s only victory with the IRS.

How did it turn out for Tonda Lynn? Her husband divorced her. He then supposedly kidnapped her.  She later declared Chapter 13 bankruptcy.

Do you still want to win the lottery?