Tax Trouble Tales: Recent Cases, Big Penalties, and IRS Pitfalls

[MUSIC] >> Hello, everybody, and welcome to this episode of the Meadows Collier podcast, "The Stroll Crouch." Join today by my partner Matt Robertson. Matt, I thought we'd just kind of talk through a few events and then things have been going on at the IRS since the beginning of the year. >> Yeah. >> I guess there's more. We may have something that are prior to the end of the year, but we're going to discover a few things here in the time we have. So, my thought, unless you have other-- Matt always has notes. He's much more organized than I am. I just kind of show up and here and follow his lead, but he's got notes there. What do you think? Should we start with the most recent serious case? >> It's a serious case. >> Let's get started with that. >> We might as well. That's the most interesting one that just did circuit just ruled in a case that we've all been waiting for them to rule on for almost a year. >> Yeah. >> I think it was about a year ago, the ARC-- >> February, February. >> February, or January of last year, or ARC. >> February. >> Or ARC, or ARC, it's in the serious solutions LLP versus Commissioner case. They came out with a decision on January 16th late on the day on January. That was last Friday, wasn't it? Yeah, Friday. >> Yeah, yeah. Came out with the decision on that. Two to one decision in favor of the tax crisis. Why don't you just kind of walk through this? We're putting a little bit of the background out. >> Sure. So, fifth circuit case. Interestingly enough, not unanimous. Two to one decision, one dissent. Backing up a little bit, tax court has historically used what's known as this functional analysis task to determine whether a limited partner exception applies. What the limited partner exception is, is that there's no self-employment taxes on partnership income if there's a limited partner, quote, as such, with some exceptions for guarantee payments. Only what the tax court was looking at in the lower level. And remind me, Joel, the procedural posture here was a little bit different, I guess, than the normal way these get to appeals and stipulation. >> Yeah, yeah. Yeah, mind you. So, there was the original tax court case with Sorobon partners. That's fine. >> Another case. That was being cited. And in that case, the tax court made a determination that it was going to be a factual determination whether the taxpayers were in fact passive investors. But it was. And from a procedural standpoint, what Sirius did with their counselor, which I thought was a really good, good, smart idea, they wanted to get ahead of this. And so they stipulated to the facts here and stipulated that they would be bound by the Sorobon decision, which was still having to go back to the tax court for some factual determinations so that they could get ahead on the appeal. They wanted to get ahead on the appeal. And they were hoping to get a, and they did. They got ahead argued their case early last year and thought they would have a decision by last summer. So, it was an interesting strategy. I think it worked well for them, but they were hoping to get a decision quicker than they did. >> Yeah. No, but a good decision for the taxpayer, at least the majority of decision. Looking at the limited partner exception, the court really focused on, you know, it was interesting to me when courts do this. Pulling out dictionaries from 1977 or something like that. That does limited partner mean. Looking at it through the lens of that in the statutory tax, said limited partner regardless of whether they're passive active investors, if they're actually a limited partner under, I think, state law. >> All, yeah. That's right. >> Then you fall within the exception. Don't need to go further under the-- >> Yeah. I think what the tax court had said was in Sorobon and some of the other cases that are there, because there's a number of these cases now out there on appeal on this exact issue. It's not a question of whether you are a limited partner for state law purposes. It is whether you are actually a passive investor. >> Mm-hm. >> And so they were making that distinction. And then they had to be a factual determination. Are you really a passive investor if you both have a general partner interest and are active inside that-- or somehow, if you're active in the business, what you're listed as a limited partner. >> No. >> And so that's kind of where they-- and the fifth circuit of a rural tax court on it. >> Yep. Until I get this question all the time, curious if you do and what your answer is. But, okay, so this decision's come out. What if you're in exam or appeals and you've got this issue squarely before the auditor or the appeals agent? What do you do? What steps do you take? >> Well, it's funny because we were talking about this because we have-- I have a case right now that has it in there and we were talking today. What are we going to do with this? Let's walk through what I expect to happen here. I expect what's going to happen is the government's now going to ask for an inbox hearing on this. >> Yes. >> Which for those you don't know, that means this was just cited by a three-judge panel. They can now ask for a party can ask for the entire fifth circuit to review this. Basically, you have arguments again and to review it and make a determination. Of course, sometimes grant that. And sometimes-- I don't remember how they do this. Is it-- is it-- can one of the judges ask for an inbox? I can't remember how it works. I don't remember. >> I've done it a while ago. From memory, you fall, you know, emotion. And then the judges poll-- they do a poll. >> Poll? Yeah. >> Does it take just one judge wanting to have the inbox? I can't remember. >> I think it's more than that. >> Okay. >> Yeah. >> So, and they can ask for that. If the judge-- if they do not do an inbox hearing, then I don't know where it goes from here because this case was reversed and remanded, right? Isn't that right? It was reversed and remanded back to the tax court for a determination of whether they really-- I guess the determination where they really have a limited liability for state law purposes. I assume that they're going to-- that the government, if-- procedurally how this is going to work is they can then appeal it to the Supreme Court for it gets reversed and remanded to the tax court. I think that's right. >> Yeah. Yeah. But they don't have a conflict, right? >> Well, and that's what I was going to say. That's a bit of an issue, you know. I know when the solicitor general makes a request for certain tells the Supreme Court, hey, this is a huge issue. A lot of loss of revenue. The Supreme Court tends to take a look, but they want to see the conflict. And the-- >> Yeah, I guess-- >> I guess so. There's two cases still pending. Two cases, one first circuit and second to say, right? I can't remember. >> I think so. >> Sorebons now, somewhere, and there's a couple of other cases out there. So there may be a split in the circuits at some point. One of the strategies that they had in serious was the other cases were lagging way behind. They got out in front to get a decision hoping that they could get through the procedure of the court. So the procedure that the government appeals to the Supreme Court and Supreme Court says, there's no conflict. But by the time they get there, they may have a conflict. >> No. >> So we'll see. But it's a good decision for taxpayers. >> No, you're a good decision for taxpayers. >> Yep. >> So it comes back to your question, which was, well, if you're an exam, what do you do? >> Yeah. >> To me, and maybe you disagree, we're in our case going to go, we're going to call an examiner and go, hey, by the way, did you see this? Did you see that this decision? This is the issue we have. You guys are bound by this because you're in the fifth circuit. I suspect what we're going to get an answer is you have what we're appealing at. So we're not waving at it at this point. >> One thing I can pull back on when it happened to me in the 54-71 moral, the far he case, where the tax work said, the IRS doesn't have the ability to make the assessment. It has to be done in district court. It was a huge win for taxpayers with 54-71 issues. I had a lot of those. I had one in appeal and I sat there, you know, I'm thinking to my head, I've got you. I've got a tax court decision that sits there and says that you can't do this. And it ended up court of, or not court of appeals. The appeals officer came back after talking to Council and said, yeah, we read that decision, but we disagree with it. >> We disagree with it. >> And we're going to follow an appeal, you know, and sure enough, the DC circuit overturned it. And for memory, when that case came out, I think they were all for me like a 20% measure delitigation satellite. I'm going to come on. I bet it has to be higher than 20%, but anyway, that's maybe something like that. >> I think we're going to get the same sort of thing here. >> Yeah. >> So they're going to basically say, we don't believe in that case. >> No. >> So good luck. I think that's what they're going to do. The next case, and I just realized that you bring on my notes with me, that's okay. We're going to do all this from memory at this point then. I have in front of me. I don't know what you have in front of you, but I have my, this is, I think it is a case you sent to me one point. This is the state of Georgia, spend, spend, spend, spend a lot of hours, spend a lot of hours. >> I was hoping you were going to be the one to try to pronounce that. >> I did. >> And I said, I was pretty obviously butchered this name. >> It's, it's an estate tax case. It's, it's a messy case from a tax payer standpoint. It's an example of what not to do. >> Yeah, exactly what not to do exactly. Where the, the, the son was the executor of his mom's estate. He was, I think he was the resiguary beneficiary. He made some distributions to, is, to, to, to various smaller beneficiaries of this. And then basically just distribute everything else to himself. >> Mm-hm. >> Then file a form 706 estate tax return. Just kind of did a few thing, I mean, just kind of played around with it. >> I thought it was interesting on the reason as to why he didn't file the 706. So apparently he talked to his estate planner and, and also the accountant. And they basically kind of both and sineuated that, look, we don't do a lot on the estate tax side. But we're, you know, we don't think so or something along those lines. He was like, you know what, I'm going to run with that. I'm not going to file the 706. Years later, it hints that he was in a bankruptcy case. >> Yeah, what, what makes he, what time is he, man? He spent all the money he got from his mom's estate. >> And the RS funds out about, wait a minute, where's the 706? You know, that you were supposed to file. And then he falls a years later. trying to take, I thought this was even more interesting. The, what is it, the alternative valuation day? - Yes, yes. - And then a conservation easement of lectures, something that you're years after. - After everything gets to wall at this point to see. Yeah, and then this case was they basically took a look at it and said, no, they said your valuations are wrong, you get a penalty for filing late, you don't have an excuse for filing late, because basically what the CPA told him I read was, I have no idea what you should file. - That's what I'm talking about. - I don't, and he goes, okay, good enough for me, I'm gonna file and they said that's not a valid. But it's, and, and, he's a pro-state taxpayer too. - Oh, I didn't see the pro-state. - He was pro-state. And, and he, I know the attorney there, one of the attorneys that was for the government, and she does a lot of state tax cases. He would, he was gonna lose this case. - One other part of this, I thought was funny, dealt with one percent business interest that the mom had, that he got, do you, do you remember this issue? And, and essentially, you know, another company came along and for that one percent interest, it's often 350,000. Well, he didn't take it, he sat there and said now it's worth more than that. Family members came back and said, "We'll buy it from you for five or 750,000." They finally gave up and made him do this cash deal for the courts. He fought it through litigation, and ended up getting like 350,000. Well, you reported it low on the 706. And I can't remember what the number, and even made an argument, it's really not even worth anything. Well, guess what the IRS did? They pointed to his litigation posture, and said, "Well, you were over there saying it was worth millions, and that's the reason you went through the litigation." - I, you know, because he's a bankruptcy, I wonder if there were any assets left here. - Because, not only did, well, there's a couple of things from this. One is, well, he was the executive of the estate, and because he distributed the assets without paying the IRS, he has per sum, so they found two things. One is, the estate is liable for these state tax or the state tax did. I think he paid, little of anything at the time he filed a return. - Correct. - But at the end of the day, the court found two things. One is, that the estate was liable for additional state tax, plus, apparently, it's an interest for final aid. Secondly, they found that he, as the executive, was personally liable for all of this, as the executive, because he distributed assets without, making sure the IRS was paid, and all those kinds of things. So that's the other thing learned from this, to learn is to know if your executive of his state, you can have personal liability for the estate tax that's due when you make distributions without making sure the IRS was, has been paid. - Yeah, no, and that's a big issue. One other thing that pops him on head about this, what was it, the taxable gifts? It's like a million dollars, the like, you know, reported, and he put down like $104,000 his taxable gifts she made. I think she filed 709s, over a million dollars. It's just a mess. I mean, it's just a mess, but it is an example of what, what you don't want to do. - Yeah. - So that's kind of that case. Yeah, I just found it interesting. It's one of those ones where it just, every time you look around, they've just done something wrong. - Yeah. - So it's bad. What do we got next, Matt? What's your next one? - So I've got update on Sagu, and for those that aren't familiar with the Sagu case, that's a Northern District of Texas case, where the court held that under Jarr Casseen, which was a Supreme Court case two terms ago, 2024, that seventh amendment applies to certain penalties. The court used that rationale to hold that the IRS's attempts to collect on F-Bore penalty, willful F-Bore penalties against the taxpayer violated the seventh amendment in the right to a jury trial. It was a big case, came out several months ago. In terms of developments, the government followed an appeal in the fifth circuit. And I was looking through the docket, just to see kind of what was going on with that. There have been other developments, and let me back up, in Sagu, the court relied on this case, FCC, VARSE AT&T, pretty heavily, which is another Jarr Casseen case that came out in the fifth circuit. And what has happened since then is the FCC, so the government has followed for petition for start with the Supreme Court on that case. And then there's been another FCC case, first Verizon, that's in the second circuit, where second circuit held contrary to the fifth circuit. So anyway, the whole point of this is, it's gone up to the Supreme Court, Supreme Court has granted the cert, they're gonna hear this issue. - This is on the AT&T case. - Mm-hmm. - And they've consolidated with the Verizon one that I was mentioning. And essentially the government came in and the fifth circuit case and said, "Hey, this is premature. Let's hold this case in a band until the Supreme Court issues are good." - That's a good thing. - That's good. - That's gonna sit there until the Supreme Court now. - Yep. - Yeah, interesting. Another development, only because I've been following this case for so many years, is that what was announced after the first of the year, which is the robber Brockman settlement, the estate. - No, I'm not familiar with this. - Okay, so Brockman was, Brockman was a billionaire at Houston and was indicted, was a bit of a, I can't remember when he was indicted, but it was, actually it was a number of years ago. And it was considered one of the largest criminal tax cases. Well, Brockman, it was like hiding like $2 billion for the income. Brockman had the ultimate defense and he died before the case went to trial. There were questions about whether he could actually, I mean, he was pretty ill at that time. Obviously, because he died, but they ended up having, so the case got dismissed, but there's a taxable case involving, he has a state whether it owed income, whether the state don't income tax, whether he has wife owning income tax, all sorts of things and wife represent. - What was the executive, well, they, in that case, the executive of the estate, they ended up settling that case for $750 million of taxes and penalties. - Oh well. - Yeah, I mean, it's a big number, but that was, I remember when that case was dited. And, he had the ultimate defense, but it's, yeah, it was called the largest ever tax charge against an individual. It was, it was pretty serious at the time. What, and died in October of '20 and he died in September of '21. So, he didn't make it very long after he got in, he died in, but the interesting thing, I remember that case was he had a business associate, I can't remember what it was, who basically became the, I can't, I don't remember how it was. He kind of deal with the government, to basically settle his case for simply years before that. And he got out pretty, pretty well in that case. So, but that's interesting, 'cause that's been a case that's been around for a while. - Interesting. - So, so be it on that one. The other thing is, I wanted to point this out too, before I let Matt talk anymore, because I'm gonna interrupt him a lot. So, there was, we talked about in our webinar, a couple weeks ago, about, where's my notes on this, I don't know if I can find it or not, but remember we talked about, we started talking about conservation easements. There was, there's been a note that, and I referenced that, I kept hearing that there was gonna be a, now there's settlement proposal of all those conservation easements cases, and sure enough, somewhere here I had an article saying it was coming out. - Oh really? - You're supposed to be another proposal coming out on a settlement for some sort of global settlement of some kind on conservation easements. I can't seem to lay my hands on it, but it looks like an element's coming somewhere. - Interesting. - Because it's so tiny. - Yeah, because we talked about it in our webinar, how many of the other artists just clogging the system up and they're trying to clean them all up. I just, who knows what's gonna happen? They're trying, the taxpayers keep losing. - Oh yeah. - I've got one case that came out December 1st, Myz Form, LLC, Verse, Commissioner, and the reason a lot of people in the audience may not be familiar with it is, it was a bench decision that was issued. So, two week trial, and the court ended up using its bench opinion provisions which they can only use under their rules when, quote, "The law is applied to the facts is clear." So they issued this 30 or 40 page bench opinion and as you can probably guess, partnership had climbed $10 million charitable contribution deductions, court funds, after looking at the experts, et cetera. It was only entitled to about 350 to 400,000 of that. So, very small piece, denied the charitable contribution deduction and then hit them with the gross valuation penalty. So, no reasonable calls, defense. That was another recent one. - Do you have this in this riddle case? Did you have, did you have riddle in this? - No. - The reason I came back to this is because you were talking about 7th Amendment. This is a K tax court case. What's the date on this? - Oh, I'm gonna see if I've got the date on it. - December 15th, 2025. I actually do have a good, good, good, good, good. - Okay, so it was, this was a case, whether the 7th Circuit applies to just accuracy related penalties and the court rule in this case, because you were just talking about D'Arcassi and these others, and again, the court rule again, 7th Circuit does not apply to tax court cases. Saying the court had, what's the right, what am I looking for? What is the longstanding authorities, I'm trying to find a public rights exception to the 7th and then-- - Now, they basically ruled against tax payers in that. - That was a tephro, and that was actually a conservation easement as well. - Oh, was it? - I guess I didn't realize that. - No. - Okay. - My bad. I didn't know that one. - Okay, what do you got next on your list over there? - I've got USB Reyes that come out January 7th, 2026. F-Bore Whelfleness case. Not really a big surprise this is, the 2nd Circuit. Prior to this decision, six other appellate courts have decided that, you know, what does Whelfleness this mean for purposes of imposing a willful FBOR penalty. And when I talk to clients, a lot of people sit there and think, you know, just general usage of the term, well, that means I knew about it and I didn't follow. It was an intentional act. Courts have said, yes, it includes that, but also this component of objective recklessness. We're going to look at what a reasonable person lied to the facts and circumstances, whether they would have actually known that there should have been this FBOR following obligation. So second circuit has adopted that same definition that includes intentional conduct with objective recklessness as well. Some of the same factors that keep popping up in this, what did the taxpayer do with the schedule B where it specifically asks, do you have any foreign accounts? And they checked the boxes as no. Yeah, they checked the box. Now, the court looks at that and says, well, that's objective recklessness. You've got a duty to look at the return, whether you looked at it or not under this objective recklessness standard is relevant. Another one that comes up from time to time, they paid a fee for the foreign bank to hold their mail. I didn't want to come to the US. I saw that. Yeah. They were taking the steps to try to avoid this being discovered. Yeah. And the other one that's never good, I asked the bank not to invest in US securities. And then they also have a credit card that they were using that was a credit card from that was only was spanned Spanish. I might use the wrong word, but I thought it was like a spanned credit card, Spanish credit card or something like that. Yes. And they were using it to pay all their expenses. So and another part of this was 90% of their wealth. This was a surgeon, but 90% of his wealth was in this foreign account. Yeah, I saw that too. That vast majority of us in this account. Yeah. And good factors. No, it's interesting. It's one of those, it's one of those foreign accounts that, if I remember correctly, from the facts, the parents opened in his name, his parents opened in his name and then ultimately transferred it to him. So maybe he had the thought that what didn't he also say he had talked to somebody somewhere that had told him, I'm trying to remember if that was right, that somebody had told him, you didn't have to report it for these purposes. There weren't he, what's the from, what was he from? Nicaragua. Yeah. You didn't have to report it for Nicaragua purposes. Yeah. So that wasn't down. Okay. Yeah. Another thing that came up was the CPA questionnaire, which that always gets asked. Yeah, but they didn't fill out the questionnaire. Right. And the RAS is saying that's fine. Intentional conduct that may come into play objective recklessness. Well, some of us don't fill out the question of the CPA sentence. I guess I'm being reckless at that point. Well, go ahead. No, go ahead. I was going to ask, Joel, if we're ready for every dog has its day or, or maybe not. No, no, no, no. We're going to wait. I just have to come back. I've got a couple more here just to point out. One is, there's a case call. Why don't I pick the cases that have the hardest names to say? Sure. Sure. No, I can't even spell. A C H E R N O M O R D I K O V versus commissioner. Oh, well, this is, this is another case. I'm trying to remember with this case, they were, no, they were represented by council. It's another bad fact of case involving cash that didn't report cash to the IRS. And then that they had in this bit, it was really kind of funny. He said the general client, it was a cash intensive operation business, have been established by a stepfather. And he merely continued it, according to the opinion of what his father, his stepfather had been known for years and not reporting income. And then he said there were costs of good soul that he paid cash for, but they have no records of this. Absolutely. So it's just a bad fact case that you, I'm surprised that it at least give him some benefit. Was that tax court where it was tax court? It was tax court December 15th memorandum opinion. Judge Pugh. Okay. Not surprising with that result. There's a case involving a milk giving charity, the lost tax exempt status because they were, they were going to give milk to these starving children. Well, I saw that one out. And they, and they didn't keep records and then they quit giving milk to the charity. They bought a building or had me running it out to other people making money. And they had a cafe or something. They had all sorts of stuff going on. They lost their exempt status. We're seeing more in the charitable one like this. This is where the IRS lost, where they lost an 11, an 11 collection because of a bad assessment. They failed to follow this is a case called Walker versus Commissioner and the tax pairs, they were, they followed joint return. And then they had to do with a took a credit for health insurance, but it turned out they were non-tality because their AGI was too high. So the IRS made an adjustment to the return. But the IRS never sent them a notice of deficiency. They just assessed it, started to collect, they taxpayers filed a collection due process and said, you didn't go through the proper process procedure doing this and assessing it. You didn't say it's a notice of deficiency. The tax court agreed with them and said, hey, you're out IRS and now the state's limitations is passed on this. I'm curious, would they represent a buy count? They were. They represent a buy count all of them. Yes, they were. So a very, very good argument. Good argument. Result for, they are represented by, I don't know, this person, Woodford G. Rowland of the law office of Woodford G. Rowland. So good, good result for them. Yeah. Everyone's right. You find a case like that. Now, now, this is currently Matt's favorite case. That dog case at this point, which is a funny case, sort of, it's Reynolds versus United States is the December case. Do you have there in front of you? I'm not doing. Yeah, this is somebody who tried to take a deduction. But hers was a refund claim, wasn't it? That's, I think this was what it was. I think it was a refund claim that it is. I know it's a refund claim because this was in the Eastern District of New York. Oh, okay. So she filed a attorney who filed an amended return and tried to take a deduction as a, her dog was her dependent, her dog named Finnegan. It's Golden Retriever. And she was there on behalf of herself, her dog Finnegan and all other dog owners seeking to reclassify domestic pets as dependents. And what were the arguments that was constitutional? She had also constitutional, she says denying her canines, campaigns, dependent status for tax purposes. The government is violating her equal protection rights under the 14th Amendment. She was also a violation of her. It's a wrongful taking a property under the 5th Amendment. I mean, she had all sorts of things. I mean, and she lost. Yeah. She lost on something like this, not surprisingly. What was the line? It's, what's Judge was this? Was this Judge? Oh, this is Judge Wicks. He said, whatever the validity, there may be to the act, at the ancient maxim that a dog's man's best friend, it is all to clear to us that in no circumstances, going to dog qualifies it dependent. I mean, look, the judge listened to her, those kinds of things. I don't think the number of the amount of refund was big. I don't know what she was trying to accomplish, but she didn't win. I read also that maybe she was trying to represent other like class action. Well, that's what it said. It's this here she was, she was representing herself or dog and all other dog owners seeking to reclassify domestic pets as, I guess she, maybe she tried to put together a class action lawsuit. Yeah. Yeah. And failed to something like that. You know, you just can't get dependence for something like that. But you sent me this, which explain, I mean, I'm holding this up. For everybody's listening, of course, you can see this right now, but, but, maybe I'll explain what this is that I'm talking about. Now, when the dog case came out and I read it, it brought me back to some statistics and stuff that happened after the 1986 act that I'd heard about. So essentially before the 86 act, you could claim dependence without having to identify their social security number on the return. And then the 86 act came out. So now you need to start putting, in order to claim someone's dependent, you've got to put the social security number on there. An interesting thing happened after the 86 year, I think it was the 87 year. So the first year after the 86 act, all sudden 7 million dependence just disappeared. The RS is looking through their statistics and also 7 million dependence are just going. So they dug deeper and they try to figure out, okay, what's going on? And essentially they came to the conclusion that all these families were falsely claiming dependence as a means to reduce their tax will income. And as a result of that, one tax change, the treasury are in $2.8 billion more in tax revenue than expected to in 1987. I had never heard this and we were talking about this dog case and he goes, you know, there was a thing back there. And so he found this right. I think that's hilarious that they did that. Some, some criminal too, it said. And one of the originals I had, they opened up some, here we go. Four percent of the cases that the RS studied were referred to criminal investigation. Yeah. So. Well, that's an interesting fact that 7 billion. What did he say 7 million? 7 million, 7 million dependence disappeared at that point. That's kind of some of the cases that there was nothing else we wanted to talk about. No. Okay. So that's some of the cases we just wanted to update people on some things. I guess the biggest one again is the first one we talked about, which is the serious case that one just came out a week ago or so. And that's that's the big thing. But so if you guys have any questions, anybody's listening, feel free to reach out to Matt or me and you can always subscribe to this online. You can also look with your monthly webinars. I think Mike's doing the next one. Mike, those are doing the next monthly webinar. First Tuesday of the month, I think that's right. But you can. we see that I'll saw on our website. So we appreciate you listening today. And again, let us know if you got any questions. Thanks a lot. - Thank you. (upbeat music)