Taxable Talk

Sometimes I have to be careful about jumping to conclusions. When I first looked at Charlton v. Commissioner I expected the taxpayer to lose. It wasn’t hard to jump to that conclusion when I read,

Throughout his career, Jeffrey pursued a myriad of income producing opportunities. His desire to earn large amounts of income with minimal effort led him to become involved with Amway, Herbalife, and numerous other multilevel marketing businesses (MLM). These endeavors were unsuccessful.

Next, I read that the petitioner learned about Trusts that magically made income tax disappear. In a footnote, Judge Foley notes,

Representatives of ProTec routinely told potential clients that the Internal Revenue Service had verified that the ProTec plan complied with tax laws. In 2004, certain representatives of ProTec pleaded guilty to a charge of conspiracy to defraud the United States in connection with their activities related to the promotion and marketing of fraudulent trust schemes.

But the petitioner missed out on that entity (whew) as it went out of business before he could invest. Unfortunately, he discovered Aegis. I’ve reported on Aegis in the past; suffice to say many of the principals ended up at ClubFed. With their CPA they attended an Aegis presentation and, “…[they] left the Aegis seminar convinced that the Aegis system was a legitimate tax minimization and asset protection plan.”

From 2002 – 2003 the IRS attempted to obtain records, but the petitioner fought the IRS, even suing employees. Eventually, a District Court ordered the petitioner to comply with an IRS summons (which he did). Finally, in 2007, the IRS issued deficiency notices for tax years 1999 and 2000. The IRS alleged that the petitioner, his partnerships, and his trusts engaged in fraud, so the normal 3-year statute of limitations wouldn’t apply. (In cases of fraud, the tax can be assessed at any time.)

Unlike in most Tax Court cases, the burden of proof is on the IRS in a fraud case. “Respondent must establish by clear and convincing evidence that Jeffrey and Mary filed false or fraudulent returns with the intent to evade tax.”

Simply put, respondent has failed to meet his burden…To the contrary, Jeffrey did not intend to evade tax but wrongfully believed that the ProTec plan and the Aegis system were legitimate tax avoidance techniques. Indeed, Jeffrey, Timothy, and Mr. Moore [the CPA] all believed that the Aegis system was legitimate and that the returns were accurate.

Mr. Moore, respondent’s primary witness, provided convincing testimony regarding the perceived legitimacy of the techniques and accuracy of the returns. His testimony relating to his advice to Jeffrey and Timothy, however, was inconsistent, incoherent, and at times incomprehensible. Nevertheless, Jeffrey, through his credible testimony, established that Mr. Moore did not express any doubt regarding the legitimacy of the tax planning arrangements. In fact, Mr. Moore was so comfortable with the tax planning arrangements that, after preparing the domestic trusts’ returns relating to the years in issue, he became a trustee of Jeffrey’s domestic trust.

Luckily for the petitioner, there are cases where “reliance upon an accountant to prepare accurate returns may negate fraudulent intent if the accountant was supplied with all the information necessary to prepare the returns.” Mr. Moore may have been “imprudent,” but the petitioner supplied him with all of his records. They may have “believed in and acquiesced to an elaborate scheme designed by con artists,” but the petitioner didn’t intend to commit fraud. Thus, the IRS is time-barred from redress.

Still, this case is a reminder that if it sounds too good to be true, it probably is. There is no magical trust that makes the income tax disappear.

Case: Charlton v. Commissioner, T.C. Memo 2011-51

Back in 2009, I reported on what I called, “One of the worst cases I’ve read about.” I like putting humor in posts, but that post was just matter of fact. I had not read before of such horrendous corruption by a judge.

At the time, Judge Mark A. Ciavarella had pleaded guilty. However, sometime between then and now he changed his plea. He was tried on 39 counts (including filing a materially false tax return); last week he was found guilty of 12 of those 39 counts.

Interestingly, the US Attorney’s office focused on the financial crimes rather than the stories of juveniles who were, in some cases, wrongly put away. Yes, if you rob a bank you do need to report that income; Mr. Ciavarella appears to have forgotten about Al Capone.

In any event, a man who it appears deserves to head to federal prison will likely soon be doing so.

If I were a business owner, wouldn’t I want this wonderful pension plan? Under this plan, I’d (a) be able to turn personal expenses into deductible pension contributions; (b) the pension plan would only cover me (and my family), not those pesky employees; (c) I’d be able to change (through alchemy, perhaps) my salary into a pension plan contribution, and then get this back through a phony loan; and (d) even the down-payment on my condominium could be considered a deductible pension plan contribution.

The only thing missing is the snake oil.

Last week, the US Department of Justice sued a Pasadena (California) man who allegedly promoted this scheme. The DOJ sued William Alexander, and his two businesses, Retirement Plan Services Inc. and Lyons Pensions Inc. The government is asking that they be barred from promoting such pension schemes. The government estimates they’ve lost $30 million in tax revenue from Mr. Alexander’s pension plans.

There are many good choices for retirment plans. However, if someone comes to you and tries to sell you on such a wonderful scheme like Mr. Alexander’s, run (don’t walk) in the other direction.

We the People, the tax protester organization headed by Robert Schulz, has been on the wrong ends of various court rulings. We the People believed that you could voluntarily stop withholding. The IRS and the Department of Justice didn’t like the idea of a $39.95 kit that allowed one to not pay taxes. So last year the IRS got a permanent injunction to stop the distribution of the packets. The IRS also asked PayPal for a list of who bought the packets (We the People accepted PayPal for payments) and last year won an appeal in the 8th Circuit: “[W]e conclude that Schulz’s constitutional arguments challenging the IRS’s authority to enforce the tax laws are without merit.”

The IRS also asked We the People for a list of who bought their packets. We the People refused, an the injunction was stayed pending an appeal to the 2nd Circuit. Today that Court said basically the same thing as the 8th Circuit: “We have considered all of defendants’ arguments and find them to be without merit. We affirm the judgment for substantially the reasons set forth in the district court’s decision. See United States v. Schulz, __ F. Supp. 2d __, 2007 U.S. Dist. LEXIS 58271 (N.D.N.Y. Aug. 9, 2007).”

As for the stay, that’s gone.

“The district court found that defendants’ illegal activities were harming individuals, who were exposing themselves to criminal liability by following the defendants’ ill-conceived instructions. Requiring defendants to provide the identity and contact information of the recipients of the tax materials enables the government to monitor the defendants’ obligation under the injunction to provide a copy of the district court’s order to recipients of the tax materials. Moreover, the district court found that the defendants’ illegal actions were harming the government, which was not receiving required tax payments and was forced to expend resources to collect the unpaid taxes. Requiring defendants to provide the identity and contact information of the recipients of the tax materials enables the government to monitor whether the recipients of defendants’ materials are violating the tax laws. Thus, we find no abuse of discretion with respect to the district court’s imposition of the reporting requirements in Paragraph C of the injunction.” [citations omitted]

So if you were one of those gullible enough to purchase a $39.95 package that would terminate your taxes you may soon receive a “Dear Valued Taxpayer” letter. In the end, we all have to pay our taxes.

Hat Tip: How Appealing

One of my clients today asked me about reporting of offshore (foreign) bank accounts. I reminded him that if you have $10,000 or more at any time in a foreign bank account or accounts, they must be reported by checking the boxes on Schedule B and by completing Form TD F 90-22.1 and mailing that form to the Department of the Treasury. The penalty for not reporting starts at $25,000. You can find yourself serving hard jail time if you don’t report them. The anti-money laundering statute has real teeth.

My client wisely agreed that reporting his foreign bank account was the right thing to do.

Of course, when I get home and check my email, I see this:

Dear ColleagueGullible Victim,

Thank you for your interest in our offshore fund products. The [deleted] Fund (Cayman) is a product that is attracting attention worldwide.

Offshore advisers and consultants are attracted to the product because it offers their clients exposure to private equity and because it pays significant cash commissions and the opportunity to participate in the profits of the fund manager.

Scam Highlights
Class A private equity shares target 20% to 25% annual returns
Class B shares provide a guarantee of principal by a financial institution rated AA by Standard and Poor’s with a term of five years and a target return of 12% to 15% per annum
Commissions paid to consultants and advisers are from 4% to 6%
Trailer allows you to participate in the profits of the manager for five to ten years
Class “A” Private Equity Shares are designed to provide sophisticated investors the opportunity to invest in a private fund that invests in some of the most promising alternative asset managers using a high growth strategy. The minimum initial purchase for Class A Shares is US$50,000 with a target return of 20% to 25% per annum.

Class “B” Capital Guarantee Shares are designed to provide investors with exposure to private equity without risk to capital. The Class B Shares also have a defined redemption date with a specified return rate. The minimum initial purchase for Class B Shares is US$50,000. Class B Shares shall be redeemed by the Fund in year five at a redemption price of 175% (75% over the original price).

If offering this product is of interest to you, please review the materials that can be found on the following link: [deleted]

We believe once you have read our materials and understand our fund model you will see the economic possibilities are substantial.

We look forward to your response.

Sincerely, [deleted]

In case you’re wondering, I didn’t request information on these offshore funds. I love how they say they’re targeting a 20% to 25% return. We all want a 20% to 25% annual ROR on our investments. The lack of comments such as, “Our Scam1 Fund returned 38% last year,” shows that the operators are becoming more sophisticated.

Now, it’s always possible that this fund is legitimate. Really….

My corporation’s annual renewal fee (mandatory fee of $25 to the Secretary of State of California) is due in September. So what comes in my mail today? A request from “State Corporate Compliance” so that I can pay an additional $100 (if I’m a fool) so that they will type out what the Secretary of State’s office has already printed on my renewal form!

Hopefully, there won’t be too many gullible victims out there. This year’s forms prominently state, “Not a government Document.” Still, we all know that one’s born every minute….

Having returned from four days in computer netherworld, I ventured to get the mail from my PO Box and found a letter from the “Board of Minutes and Resolutions, Compliance Division.” For just $175, this “Board” promises to do your annual compliance filing (in California, that’s with the Secretary of State’s office; in other states, the Board of Corporations handles this function). If you do it yourself, it costs $25.

It’s a scam, of course, in probable violation of several California statutes — The fraudulent use of corporate ID numbers; Language designed to frighten recipients into acting quickly; Language designed to convince recipients that their service is necessary to maintain compliance with state regulations when it is not; Lack of a true physical address where the business is located on the solicitation form; and
Fraudulent use of multiple private mail box drops to make it appear that they are a government agency.

When you receive an invoice that you aren’t expecting, make sure it’s real. In this case, the envelope noted it was mailed “Standard” rate (formerly bulk rate).

Incidentally, I found lots of information on scam.com — a good source for future reference.

– Russ