In Shea Homes, Inc. v. Commissioner, the Tax Court allowed a homebuilder to defer the recognition of income, using the completed contract method under IRC § 460(e)(1)(A), from home sales in a newly constructed development until the entire development was nearly complete.
The specific facts and contracts in Shea were crucial to the court’s determination.
Read the entire opinion here:
Shea Homes, Inc. v. Commissioner, 142 T.C. No. 3 (2014).
The D.C. Circuit Court of Appeals has affirmed the ruling of the lower court and held that the IRS does not have the statutory authority to regulate tax return preparers.
In a unanimous and rather direct opinion, the Court of Appeals listed six reasons why the 130 year old statute, 31 U.S.C. § 330, relied upon by the IRS was insufficient to authorize regulation of non-accountant and non-attorney tax return preparers.
The court summarized its view: “the traditional tools of statutory interpretation – including the statute’s text, history, structure, and context – foreclose and render unreasonable the IRS’s interpretation of Section 330.” It also advised the IRS that if it wishes to regulate tax return preparers it should introduce and pass new legislation.
Despite the resounding defeat, the IRS may still petition the appellate court a for rehearing en banc, which would presumably include the three recently appointed members of the D.C. Circuit. The deadline for that motion is March 28.
If the IRS seeks a writ for certiorari with the U.S. Supreme Court, it must file a petition by May 12.
Read the entire opinion here:
Loving v. IRS, No. 13-5061 (D.C. Cir. Feb. 11, 2014)
Lauryn Hill is a popular hip-hop and soul musician who rose to fame as the lead singer of The Fugees in the mid-1990s. The Fugees’ second album, The Score, sold over six million copies in the U.S. and more than 17 million copies worldwide. The band split up soon thereafter and Hill released a solo album, The Miseducation of Lauryn Hill to even greater acclaim and success. “Miseducation” won five Grammy Awards, spent 81 weeks in the Billboard 200, and topped out at 18 million in worldwide sales.
Following its release, Ms. Hill largely disappeared from the public eye to raise her six children, five of whom she had with Rohan Marley, the son of reggae legend Bob Marley. Despite her low profile, Ms. Hill earned over $1.8 million between 2005 and 2007, mostly from recording and film royalties.
In June 2012, Ms. Hill was charged with tax evasion for failing to file income tax returns for the years 2005 through 2007. She faced a prison sentence of up to three years (one per unfiled return). Ms. Hill pled guilty to the charges and promised to pay back the taxes she owed. During her trial she criticized the over-commercialization of the music industry and cited the safety of herself and her family as reasons for stepping back from her career.
Ms. Hill signed a recording contract with Sony to help pay her tax liabilities of over $900,000 but her sentencing hearing was delayed for two weeks because she had still not paid the back taxes. At sentencing the judge also considered Ms. Hill’s failure to pay her 2008 and 2009 tax liabilities and sentenced her to three months in prison with a $60,000 fine. A day before entering prison, Hill released a long letter addressing racism, slavery and the IRS.
Ms. Hill was released from prison last fall and is currently on tour across the U.S. She will be in Washington, D.C. on February 9 and Atlanta on Feb. 13
The IRS recently released Schedule UTP filing statistics for the 2012 tax year. The statistics are not complete as returns from some late fiscal year filers and others still have not been processed. The Schedule UTP filing statistics include updated totals for the 2011 tax year, originally reported here.
As of December 2013, the IRS was able to report the following:
Here are the 2012 IRS UTP Filing Statistics 2012
Read more about Schedule UTP here.
Pete Rose has faced his fair share of criticism for his gambling problems. He was banned from Major League Baseball for betting on games while he was a manager. He also underreported income from gambling, personal appearances, autograph signings, and memorabilia sales between 1984-1987.
During his playing career, Rose earned the nickname “Charlie Hustle” for his fierce competitiveness. He finished his major league career as the all-time hits leader with 4,256. Rose also won three World Series, including two as a member of the Big Red Machine, three batting titles, one MVP, and made 17 All-Star appearances. He managed the Cincinnati Reds from 1984 until 1989, when the 225-page Dowd Report was released to MLB Commissioner Bart Giamatti.
The infamous Dowd Report contained banking records, betting records, and witness testimony indicating that Rose bet on baseball while managing the Reds. Rose originally denied the allegations, but agreed to a ban from Major League Baseball in 1989. Rose is still banned from Major League Baseball and has admitted on betting on games he managed.
Shortly after his ban from baseball, Rose was charged with failure to report over $350,000 in income from memorabilia sales, autograph signings, personal appearances, and gambling winnings from 1984 through 1987. In 1990, Rose pled guilty to two felony charges of filing false tax returns. As part of the plea agreement, prosecutors agreed not to charge Rose with the more serious crime of tax evasion. He was sentenced to five months in prison and fined $50,000.
Rose continues to make money with appearances and memorabilia sales, presumably reporting all of it as income on his tax returns.
Willie Nelson may be most famous for his longevity in the music industry. He’s been making music since 1956 and has recorded over 70 albums during his career. Nelson has also participated in countless compilations and collaborations with other artists. He’s well known as a longhaired, liberal activist owning a biodiesel brand and serving on the advisory board of the National Organization for the Reform of Marijuana Laws.
In the late 1970’s and early 1980’s Nelson, along with over 4,000 other wealthy individuals, participated in a widely promoted tax shelter. The shelter, operated by First Western Securities of San Francisco, allowed investors to deduct as much as $8 on their tax returns for every $1 invested. After an investigation, Nelson was hit with taxes, penalties, and interest of over $30 million.
In 1990, Nelson’s lawyer negotiated to have the bill reduced to just over $16 million to cover tax, penalties, and interest, but Nelson did not have the money to pay his bill. The IRS executed a raid and seized most of Nelson’s assets including musical instruments, platinum records, posters and his recording studio. Nelson was able to save his guitar, Trigger, by having his daughter ship it to him in Hawaii before the raid. After hearing about his problems, fans started a number of charity drives to help pay Nelson’s tax bills. Many of Nelson’s sentimental items were saved when the IRS accepted less than full value from charity groups, who then returned them to Nelson.
The auctions and donations were not able to make any substantial progress towards resolving Nelson’s tax bill. In an unusual attempt to collect as much as it could, the IRS agreed to allow Nelson to produce a compilation album with a portion of the proceeds going to the IRS. By this time, Nelson’s lawyer had renegotiated the bill to $6 million. Nelson’s album, The IRS Tapes: Who’ll Buy My Memories?, sold for $19.95 with $9.95 going to the telemarketing company promoting the album, $3 to the IRS, $2.40 to Sony Corporation, $2 to pay the tax generated by sale of the album, $1.60 to album-related expenses, and $1 going to fund Nelson’s lawsuit against the promoter.
The album wasn’t a huge success, though the IRS collected about $3.6 million. Nelson’s settlement from his lawsuit against the promoter and his money from other projects was enough to cover the remainder of his tax bill.
Leona Helmsley became a household name in the 1970’s for her lavish lifestyle and marriage to billionaire hotelier Harry Helmsley. Perhaps she is best known for disinheriting two grandchildren and leaving $12 million to her Maltese, Trouble, after her death in 2007. During her lifetime Helmsley was known for her harsh treatment of Helmsley Hotel employees and appearing in ads as the perfectionist “queen” wanting nothing but the best for her guests. She didn’t just get the “Queen of Mean” nickname by treating her employees poorly; she also sued her son’s estate after his death evicting her daughter-in-law shortly after the funeral.
The Helmsley’s were once among the largest property holders in the United States. Their property portfolio included the Empire State Building, Helmsley Palace, Hotel St. Moritz and many other hotels and buildings across the world. Despite their tremendous wealth, the Helmsley’s constantly fought with contractors and vendors over payments. Their mistreatment of employees and squabbles over bills are the stuff of legend and left prosecutors rife with eager witnesses when it came time for trial.
Helmsley was just as arrogant about her taxes, famously telling her housekeeper: “We don’t pay taxes, only the little people pay taxes.” Helmsley participated in several schemes to avoid paying millions of dollar in income and sales taxes.
In 1985, Helmsley testified in front of a grand jury about her elaborate sales tax avoidance scheme with jewelry store, Van Cleef & Arpels. Attempting to avoid New York sales tax, she worked with Van Cleef & Arpels employees to purchase millions of dollars in jewelry and have it shipped to another state. Helmsley was granted immunity in exchange for her testimony.
The Helmsley’s also were creative with their approach to income taxes. In 1983, they purchased Dunnellen Hall, a mansion in Greenwich, Connecticut for $11 million, and proceeded to spend over $8 million remodeling the home. The renovations included a marble dance floor, a swimming pool enclosure, and a $130,000 sound system. When they refused to pay for the renovations, the contractors reported Helmsley and testified that she instructed them to bill the renovations to Helmsley Hotels so that she could treat them as business expenses. In 1988, Rudy Giuliani, then U.S. Attorney, indicted Leona and her husband on 188 counts of sales tax fraud, state and federal tax evasion, and extortion.
Helmsley was convicted and sentenced to 16 years in prison. On appeal, 180 counts of the charges were dismissed and her sentence was reduced. She ended up spending 18 months in federal prison and paid an $8 million fine.
In Rent-A-Center, Inc. v. Commissioner, the majority court affirmed deductions for premiums paid to the taxpayer’s Bermuda captive insurance subsidiary, finding that the captive was adequately capitalized with qualified assets that meaningfully shifted risk. The dissenting judges disagreed with the majority’s conclusions on the facts and the law finding that Rent-A-Center’s captive arrangement did not constitute insurance for tax purposes. Split decisions in the Tax Court are infrequent and an appeal may be in store.
Read the full opinion here:
Rent-A-Center, Inc. v. Commissioner, 142 T.C. No. 1 (2014)
On January 10, 2014, the U.S. Supreme Court granted a writ of certiorari to hear arguments in a IRS Summons enforcement proceeding that originated in the 11th Circuit Court of Appeals. At issue is whether a taxpayer is entitled to an evidentiary hearing to determine whether an IRS Summons was issued for an improper purpose.
An IRS Summons is issued in good faith when it meets the four part test set forth in United States v. Powell, 379 U.S. 48, 57-58 (1964), to wit: (1) “the investigation will be conducted pursuant to a legitimate purpose”; (2) “the inquiry may be relevant to the purpose”; (3) “the information sought is not already within the Commissioner’s possession”; and (4) “the administrative steps required by the [Internal Revenue] Code have been followed.”
Respondents (taxpayers) argued that IRS issued the Summons for an improper purpose and requested discovery and an evidentiary hearing. The District Court found that respondents made no meaningful allegation of improper purpose and ordered enforcement. The taxpayers appealed.
In an unpublished, per curium opinion, the 11th Circuit reversed the trial court holding that it had abused its discretion when it declined to hold an evidentiary hearing. The appellate court relied on its prior decision in Nero Trading, LLC v. U.S. Dep’t of Treasury, 570 F.3d 1244, 1248 (11th Cir. 2009) quoting from that opinion: “in situations such as this, requiring the taxpayer to provide factual support for an allegation of an improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden, creating an impermissible ‘Catch 22.’”
While the unpublished opinion which prompted the petition for certiorari was of no precedential value (only published opinions may be relied upon in the 11th Circuit), the government argued that the decision created a split in the Circuits. The high court may be in agreement because it granted the petition for certiorari.
Read the Government’s Petition for Certiorari: Government’s Petition for Writ of Certiorari
Read the Respondents’ Brief in Opposition: Respondent’s Brief in Opposition to Writ of Certiorari
Wesley Snipes was at the center of one of the most publicized tax trials of the last twenty years. Snipes got his start on the small screen with appearances on Miami Vice and in Michael Jackson’s “Bad” music video. His star rose quickly after he appeared as Willie Mays Hayes in the baseball spoof, Major League. He was probably best known for playing the comic book action hero Blade.
Snipes was indicted in 2006 for tax fraud and failure to file returns. His tax problems traced back to the advice of his accountants/tax advisors, Eddie Ray Kahn and Douglas Rosile, who came up with an argument that most of Snipes’ income was exempt from tax. Kahn and Rosile claimed that U.S. citizens could only be taxed on income earned from certain foreign-based activities and not on money made in the U.S. They relied upon a facetious argument which cited IRC § 861 to exclude income earned in the United States by U.S. citizens. This well worn tax protester argument wasn’t new to the courts having been struck down by the Tax Court as early as 1993. See, Solomon v. Commissioner, TC Memo. 1993-509.
Ignoring IRC § 61, and most of the rest of the Internal Revenue Code, Snipes’ advisors argued that only income derived from “taxable activities” is taxable income. They looked to Treas. Reg. § 1.861-8T(d)(2)(iii) to define taxable activities and maintained that, as a United States citizen, Snipes and other clients were not subject to tax on wages derived from sources within the United States. Snipes and his advisors faced a difficult battle given the large volume of Court cases rejecting the IRC § 861 argument and the identification of the argument as a legally frivolous tax return position under IRC § 6702(a).
Snipes pursued his argument in a big way. Snipes filed tax returns though 1999, when presumably he was approached by Kahn and Rosile. He filed amended tax returns seeking $12 million in refunds on taxes he paid in 1996 and 1997. Claiming he had no wages, Snipes stopped filing altogether from 1999 through 2004 – tallying over $15 million in back taxes.
The Department of Justice already had a line on Snipes advisors, having issued a restraining order against Rosile in 2002 for promoting this scheme. After gathering evidence on Snipes, Rosile, and Kahn, the Department of Justice indicted Snipes in 2006. He pleaded not guilty to all counts.
The case went to trial in 2008 with Snipes facing over 16 years in prison. Confident in their case, the defense team did not call any witnesses and rested after less than an hour. Snipes was found not guilty of felony tax fraud, but was convicted of three misdemeanor counts of failing to file tax returns.
In a gesture of good will, Snipes wrote three checks amounting to $5 million to the U.S. Treasury prior to his sentencing. The payments were accepted, but Snipes was still sentenced to three years in prison – the maximum sentence requested by federal prosecutors. He began serving his sentence in 2010 after his appeal requesting a new trial was denied. Kahn and Rosile were not as fortunate. They were sentenced to 10 and 4.5 years, respectively.
Snipes was released from prison in April 2013 to serve the remainder of his three year sentence under house arrest. It looks like he landed on his feet, as he’ll have a role in the movie Expendables 3 slated for release in 2014. Hopefully, he’ll look to § 61 to report his income moving forward.
