Taxable Talk

After being gone over the weekend, I discover that the World's Greatest Newspaper (the Chicago Tribune) ran a story on the infamous Kanter case. In this case, the US Tax Court's Chief Judge apparently reversed the finding's of the trial court judge—for no apparent reason. Earlier this year the Supreme Court ruled that the trial court's ruling be made public. Under a 1984 Tax Court rule, the trial court's ruling is not made public.

The Tribune has had two articles about this ruling. The first, on June 24th, features the classic line from Julie Roin, a law professor at the University of Chicago, "How could the tax court judges essentially lie about what was in the report?" The second article, on June 25th, has the comment of the current Chief Judge of the Tax Court, Joel Gerber, that no judge on the Tax Court will comment on the case.

You can find the Supreme Court's decision here (the case is Ballard v. Commissioner).

Now, courts are supposed to have transparency in their actions. The Tax Court, today, doesn't. Hopefully this ruling, and the associated publicity, will impact the Tax Court's policies. I'm not holding my breath (again).

Thanks to the TaxProf Blog and Roth and Company's Tax Updates for the heads-up.

When I was in graduate school, and being recruited to the Big Eight (no, not what is now the Big Twelve), I spurned them all. Can anyone name the big eight accounting firms from 1985? [Answer below]

We're currently at a Big Four; however, one of the four, KPMG is in deep trouble. KPMG set up tax shelters in the late 1990's. The IRS didn't think they were legal. KPMG has now acknowledged that they weren't legal. Oops.

I haven't been covering this story, because others are doing a great job. (Why reinvent the wheel?) Most newspapers have had stories, including this story from Reuters and this story from the New York Times. The blogosphere is also delving into this: The Tax Professor Blog has a roundup. Roth Tax Updates is also covering the subject.

I remember when Arthur Andersen went away. While I doubt the government is stupid enough to indict KPMG, it wouldn't surprise me. Is the entire firm guilty? Of course not—just a few partners. But if I were a new college graduate, I wouldn't want to work at KPMG.


Whither the Big Eight:
Arthur Andersen: Dead, 2002 (US "won" in court in a case that was recently overturned).
Arthur Young: Merged with Ernst & Whinney in 1989 to form Ernst & Young.
Coopers & Lybrand: Merged With Price Waterhouse in 1998 to form PriceWaterhouseCoopers.
Deloitte Haskins: Merged with Touche Ross in 1989 to form Deloitte Touche.
Ernst & Whinney: Merged with Arthur Young in 1989 to form Ernst & Young.
Peat, Marwick & Mitchell: Merged with KMG (Klynveld Main Goerdeler) Main Hurdman in 1986 to form KPMG Peat Marwick (since shortened to KPMG).
Price Waterhouse: Merged with Coopers & Lybrand in 1989 to form PriceWaterhouseCoopers.
Touche Ross: Merged with Deloitte Haskins in 1989 to form Deloitte Touche.

Almost everyone knows the text of the Fifth Amendment to the US Constitution:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb, nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.
[emphasis added]

Thus, in a court case (including Tax Court), you cannot be forced to testify and/or incriminate yourself.

Today, the Tax Court released a number of opinions where plaintiff's asserted fifth amendment rights. But this doesn't mean that you can stand mute in Tax Court and win your case. The petitioners lost all the cases.

In a criminal case, the prosecution must prove its' case beyond a reasonable doubt. Tax Court is different. Tax Court has been set up to resolve tax disputes, not criminal matters. And, generally, the petitioner has the burden of proof, not the respondent (the IRS). "Petitioner contends that respondent generally bears the burden of proof. We disagree." There are exceptions to this standard, notably: "If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and the taxpayer has fully cooperated with the Secretary, the Secretary has the burden of producing reasonable and probative information concerning that deficiency in addition to such information return." "Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds is not taxable." But if you don't assert anything, the petitioner (taxpayer) has the burden of proof.

Finally, as the Court notes, "Before trial, petitioner asserted Fifth Amendment rights against self-incrimination. However, even if petitioner’s claim were bona fide (which we need not decide), it would have no effect on petitioner’s burden of proof. See United States v. Rylander, 460 U.S. 752, 758 (1983); Petzoldt v. Commissioner, 92 T.C. 661, 684-685 (1989); Traficant v. Commissioner, 89 T.C. 501, 504 (1987), affd. 884 F.2d 258 (6th Cir. 1989)."

See:
Richardson v. Commissioner (TC Memo 2005-143);
Krohn v. Commissioner (TC Memo 2005-145);
and Howard v. Commissioner (TC Memo 2005-144)

You'll be happy to know that the IRS is closing 68 Taxpayer Assistance Centers (TACs) as "...part of the agency's continuing efforts to create efficiencies, modernize operations, and reduce costs while maintaining [our] commitment to public service."

Of course, as mentioned previously, the real reason is a 1% budget cutback. The IRS's criteria used to choose the 68 TACs to be closed can be found here.

...But the Tax Court does.

In a case released today, a man thinks he has some additional 1099s. He has not received copies of his statements on these accounts (they are education accounts for his children). He calls and writes his bank, and asks for copies. He calls and write his ex-spouse, asking for copies. His bank acknowledges the request, but never sends any 1099s (or statements). His ex won't give him the time of day. He assumes there aren't any additional 1099s and files his return.

However, the IRS examines his return and finds the "missing" 1099s. He immediately pays the additional tax, but he's also assessed an accuracy-related penalty because the amounts were large. He goes to Tax Court and challenges the penalty.

I don't think it's a close case. As the Court notes,

We note at the outset that we found petitioner to be a very conscientious taxpayer. In preparing to file his 2000 return, petitioner made concerted efforts to obtain any statements and Forms 1099 pertaining to the education accounts....Moreover, petitioner specifically requested that First Albany mail him copies of the Forms 1099 pertaining to the education accounts....Petitioner never received any Forms 1099 for 2000 from First Albany pertaining to the education accounts. It was not unreasonable for petitioner to assume that there were no Forms 1099 issued....

Upon a review of the record, we find that petitioner had reasonable cause to believe that there were no Forms 1099 pertaining to him, and that he acted in good faith with respect to the understatement attributable to the income reported on those forms.

One should note, though, that the Court notes, "Although this is a close case...." The taxpayer does all that he can do and it's close? Just a reminder of where the bar is in Tax Court.

Cite: Monte v. Commissioner, 7388-04S