Truth In Advertising Isn’t Always a Good Idea

July 2nd, 2017

There are laws mandating that advertisements be accurate. Sometimes, though, you can get in trouble for being ‘truthful.’ Michael Raymond Martinez of Fullerton, California did himself no favors by his advertisements.

Mr. Martinez was a tax professional in Fullerton (Orange County), and he advertised, “The Largest Refund…Guaranteed!!!” And he did give his clients very large refunds. It’s how Mr. Martinez operated that was the cause of trouble. Mr. Martinez met with his clients, picked up their documents, received his payment, and then prepared their returns. Nothing out of the ordinary with that.

However, he didn’t have his clients review the returns. So how could clients sign the returns if they hadn’t reviewed them? That was definitely an issue. Of course, given that Mr. Martinez invented false deductions and expenses for his clients (all of which lowered their tax liability), he likely did get his clients “The Largest Refund[s].” Illegal, of course.

Unfortunately, the IRS caught on to the scheme. Indeed, that was inevitable from the start. Sooner or later a client would look at the transcript of his return and see moving expenses when they hadn’t moved, education deductions when they weren’t in college, or phony itemized deductions and wonder what was going on. Given the tax loss to the IRS was $1,155,006, this was going to get some attention. There was one other matter: Mr. Martinez didn’t bother to report his income from preparing those returns for 2011 and 2012; oops.

Mr. Martinez was sentenced last week to 21 months at ClubFed. He’ll also have to make restitution of $205,465 to the IRS.

Boston Bruins 2, IRS 0

June 26th, 2017

Bruins Logo

The United States Tax Court today looked at whether pregame road meals for a National Hockey League (NHL) team are “meals and entertainment” expense (which would be deductible at 50% of cost) or a “de minimis fringe” and deductible at 100% of cost. As you might be able to guess from the title of the post, the Bruins shutout the IRS today.

First, if you’re interested in some of all of the background work that must be done for hockey, the opinion is a must-read. For example, I did not know that the road team in hockey does not receive any of the ticket revenue for regular season games. But I digress….

The IRS allowed pregame home meals but did not allow pregame road meals as a de minimis fringe; the IRS claimed that road (away) meals were a meal and entertainment expense. Of course, the meals must also be business-related but both the IRS and the Bruins agreed on that. As you might imagine, diet matters to NHL players:

Each away city hotel prepares pregame meals (i.e., breakfast, lunch, or brunch) and snacks that meet the players’ specific nutritional guidelines to ensure optimal performance for the upcoming game and throughout the remainder of the season. The Bruins contract in advance with each away city hotel for the provision of pregame meals and snacks, and the food is made available to all traveling hockey employees. The Bruins initiate the meal contracting process by providing a custom meal menu to the prospective away city hotel requesting specific types and quantities of food. The Bruins tend to keep food options consistent at each away city hotel to avoid players’ having gastric problems during the game. The Bruins always order the same quantity of food to feed all traveling hockey employees.

The de minimis fringe exception first requires that the eating facility be available to all, and not discriminate in favor of highly compensated employees. NHL teams bring a lot more than just the players on a road trip:

During the years in issue the Bruins traveled to away games with various personnel, which typically included: between 20 and 24 players, the head coach, assistant coaches, medical personnel, athletic trainers, equipment managers, communications personnel, travel logistics managers, public relations/media personnel, and other employees (traveling hockey employees). During the years in issue the Bruins’ traveling hockey employees traveled to every away game.

The Bruins easily passed this first hurdle because the food was provided to all. The major issue was whether these were a de minimis fringe benefit:

Employee meals provided in a nondiscriminatory manner constitute a de minimis fringe under section 132(e) if: (1) the eating facility is owned or leased by the employer; (2) the facility is operated by the employer; (3) the facility is located on or near the business premises of the employer; (4) the meals furnished at the facility are provided during, or immediately before or after, the employee’s workday; and (5) the annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility (the revenue/operating cost test).

The Bruins lease hotel facilities; that would make it appear that they would pass the first test. “The evidence establishes that the Bruins contract with away city hotels for the right to “use and occupy” meal rooms to conduct team business, and therefore these agreements are substantively leases.” And given that they contract with the hotel to provide the food, they meet the operating test.

It appears (from the opinion) that the IRS vigorously opposed the idea that the Bruins passed the “facility is located near the business premises of the employer” test. But the Court disagreed.

First and foremost, the nature of the Bruins’ business requires the team to travel to various arenas across the United States and Canada, and it is not feasible for the Bruins to be a viable NHL franchise without participating in hockey games outside of Boston. The NHL constitution and bylaws obligate each NHL team to play both home and away games during the regular season and, if the team qualifies, postseason games. Not only does the NHL require teams to participate in away games, but it also requires visiting teams to arrive in an away city at least six hours before the away game commences. The CBA imposes an additional requirement that visiting NHL teams travel to the away city the day before game day, if travel by airplane is greater than 150 minutes. Furthermore, if an NHL team fails to participate in an away game it must forfeit the game, lose playoff points, incur financial penalties imposed by the NHL, and indemnify the home team for loss of revenue and other expenses. Therefore, an integral part of the Bruins’ professional hockey business involves traveling throughout the United States and Canada to play away games as dictated by the NHL schedule. The job of the Bruins’ team includes playing one-half of their regular season games away from their hometown arena, and the financial health of the NHL franchise–not to mention the NHL itself–would be adversely affected if teams refused to play away games.

The Court ruled that staying in away city hotels was essential for the Bruins, and it’s clear that it would be impossible for the Bruins to do all this in Boston. “The evidence at trial also establishes that the Bruins could not perform all these activities at the opponent’s arena because of limited access and insufficient space and facilities.” Thus, the Court held that the road hotels were part of the Bruins’ business premises.

The IRS disagreed:

[T]he traveling hockey employees’ activities at away city hotels are insignificant because: (1) the activities at away city hotels are qualitatively less important than playing in the actual hockey game and (2) the Bruins spend quantitatively less time at each away city hotel than they do at the team’s Boston facilities.

The Court, though, thought that the IRS was offsides on these arguments.

Without the preparatory activities that occur at away city hotels the Bruins’ performance during games would likely be adversely affected. Furthermore, respondent provides no precedent to support the argument that business premises are limited to the location where the most qualitatively significant business activity occurs…Although the Bruins do spend quantitatively less time at each individual away city hotel than they do in Boston, this goes to the unique nature of a professional hockey team that is required to play one-half of its games away from home. It is therefore illogical for respondent to ignore the nature of the Bruins’ business and the NHL and analyze the amount of time spent at each away city hotel in isolation.

The Bruins also passed the revenue/operating cost test. “Meals are excludable to recipient employees under section 119 if they are (1) furnished for the convenience of the employer and (2) furnished on the business premises of the employer.” And the Court agreed with the Bruins here:

The evidence establishes that the pregame meals at away city hotels are provided to the Bruins’ traveling hockey employees for substantial noncompensatory business reasons. The Bruins provide pregame meals to traveling hockey employees at away city hotels first and foremost for nutritional and performance reasons…Providing meals to traveling hockey employees at away city hotels enables the Bruins to effectively manage a hectic schedule by minimizing unproductive time (e.g., finding and obtaining appropriate meals from restaurants in each city) and maximizing time dedicated to activities that help achieve the organization’s goal of winning hockey games. Petitioners have provided credible evidence establishing the business reasons for furnishing pregame meals to traveling hockey employees at away city hotels, and we will not second-guess their business judgment.

The IRS conceded the last part of the test (that the meals were furnished during, before, or after the workday). Thus, it was a shutout: Bruins 2, IRS 0 (the petitioners, the owners of the Bruins, were challenging an IRS audit covering two tax years).

Other professional sports teams may be filing amended returns (if they had only been taking half of the cost of meals) because it’s hard to imagine that the requirements for, say, a traveling NFL or NBA team aren’t similar to those of an NHL team. This is a full decision of the Tax Court, so it is precedential.

Case: Jacobs v. Commissioner, 148 T.C. No. 24

If You Want to Get In Tax Trouble as a Business…

June 25th, 2017

…simply do not deposit your payroll taxes. As best as I can tell, the IRS investigates 100% of such violations. One Missouri business owner pleaded guilty last week to failing to pay the IRS more than $1.4 million in payroll taxes.

Payroll taxes are “trust fund” taxes. If you own a business you are personally liable for making sure those tax deposits end up where they belong. If you use a payroll service subscribe to EFTPS and you can make sure those federal payroll tax deposits are being made.

Consider what happens if you don’t make the deposits. Your employees are issued W-2s and will report the payroll taxes that were withheld. Sooner or later the IRS will wonder why that money isn’t in the system. It is basically certain this crime will be discovered. But I digress….

The Missouri business owner decided that he would throw his business ‘under the bus,’ so to speak. His first business entity accrued a $300,000 employment tax liability; he discontinued that business and started a new one with a new name (doing the same thing). The new business accrued $1 million in employment tax liability, so it was time for business number three. What did the money go for? He used some of it for new buses (the companies all provided school bus services), and he also withdrew over $286,000 for personal use.

The scheme ended (as it was almost guaranteed to be) when IRS Criminal Investigation started investigating. The business owner is looking at up to five years at ClubFed plus must make restitution. A helpful hint to anyone with cash flow problems: Pay your payroll taxes first. Any other choice is fraught with extreme danger.

2016 Tax Offender of the Year Gets 34 Months at ClubFed

June 25th, 2017

Last April, a husband and wife from Minnesota were indicted on tax evasion charges. There wasn’t anything unusual about what they allegedly did; besides lying to their tax professional and the IRS they deducted personal expenses as business expenses. The reason Diane Kroupa won the award was her profession: She was a judge on the United States Tax Court. She knew better.

Last week Ms. Kroupa received 34 months at ClubFed; her husband received 24 months. Acting United States Attorney Gregory Brooker said,

Over a nearly ten-year period, the defendants engaged in a deliberate and brazen tax fraud scheme…Considering Ms. Kroupa’s position of public trust as a US Tax Court Judge, her crime is particularly egregious. Ms. Kroupa used her knowledge of the tax laws to further their fraud scheme, conceal their criminal conduct and maintain their acquisitive lifestyle. The sentences handed down today show that no one is above the law.

There’s not much to add to that statement.

California Single-Payer Health Plan Shelved

June 25th, 2017

As Samuel Johnson said, “Whatever you have, spend less.” Apparently some Democrats in the California legislature have realized the virtue of this quote.

Assembly Speaker Anthony Rendon shelved the single-payer measure, calling it “woefully incomplete.” The California Senate Appropriations Committee estimated that it would cost only $400 Billion; that’s double California’s current total budget. While progressives (aka the far left) in California still support the measure, apparently Speaker Rendon realized that California can’t print money. Additionally, the gasoline tax increase in California is horribly unpopular; adding a new 15% payroll tax and/or a 2.3% gross receipts tax would not help matters.

While the bill has apparently been tabled for 2016, the California legislative session lasts two years; thus, it is possible that the bill could rise like a phoenix next summer.

“celebritytaxguy” Soon to be at ClubFed

June 18th, 2017

Michael Joseph Calalang Cabuhat had been living the good life. He had a nice house in the Hollywood Hills (of Los Angeles) and drove a Ferrari 360 Spider. Mr. Cabuhat owned a tax practice in Glendale (near Los Angeles) and called himself “celebritytaxguy.”

I will be the first to state that you can make a nice living from a tax practice. Mr. Cabuhat’s methods, though, were on the illegal side. He pleaded guilty to defrauding clients of more than $1.2 million, and will have 46 months at ClubFed to think that over. He also must make restitution of $1,496,416 and will be sending the government just over $426,000 from the sale of his home (and the car).

What did Mr. Cabuhat do? He had two methods of bilking clients but they all had a basis in preparing two returns for each client (and I’m not talking about state returns). In some cases Mr. Cabuhat prepared a return showing a small refund, and gave that return to the client. The small refund amount was duly deposited into the client’s account. However, the actual return filed with the IRS showed a larger refund, with that extra amount being deposited into a bank account controlled by Mr. Cabuhat.

His other method was to prepare a return showing an amount due; however, the return filed with the IRS showed a refund (with that refund being deposited into his account). He also had the clients make the tax payment to him, so that those funds, too, would be absconded.

And of course, Mr. Cabuhat didn’t report the $1.2 million he pocketed from the fraud on his own tax return. And, yes, Mr. Cabuhat had a license from the California Tax Education Council (all California tax professionals are required to have a license, either be an EA, CPA, attorney, or obtain the license from CTEC). As I’ve said before, having a license won’t stop tax preparers from committing crimes.

As for the crime itself, it was guaranteed to be discovered in the long run. Sooner or later a client would be audited or obtain a transcript of his return, and it wouldn’t match the return copy that the client had. Or even the IRS might wonder why 150 tax refunds were all deposited into the same bank account.

As noted in the press release from the Department of Justice,

…Judge Walter said Cabuhat’s scheme was “vicious” because it led to both financial and emotional harm to his victim-clients. Judge Walter noted that the stolen money was used simply to enhance Cabuhat’s lifestyle, allowing him to obtain a big house and a fancy car “all on the backs of these individuals who placed their trust” in Cabuhat.

Mr. Cabuhat will have nearly four years to think this all over.

Office Closed on June 16th

June 16th, 2017

Two idiot drivers raced down Jones Blvd in front of our office this morning driving an estimated 80mph in a 35 zone. They hit an innocent SUV which flipped, caught on fire, and landed on top of a transformer. The driver escaped with minor injuries. While power has been restored, it will be late afternoon before phone and internet come up. Thus, our office will be closed today and reopen on Monday, June 19th.

IRS Not Moving e-Services to a New Platform this Week

June 12th, 2017

The IRS had planned on moving e-Services to a new platform on Thursday, June 15th. However, today I received an email stating it has been postponed until later this summer:

The planned move of IRS e-Services to a different platform has been pushed to later this summer. This delay changes previous announcements to e-Services users.

1. The planned e-Services outage for June 15-19 has been cancelled.
2. State users will be able to submit new or update existing state e-file coordinator applications and TDS applications until the upgrade begins later this summer.

IRS will communicate the schedule for the e-Services platform upgrade and provide updates on user impact well in advance of any changes.

IRS Interest Rates Unchanged for Third Quarter 2017

June 9th, 2017

The IRS announced today that third quarter interest rates will remain unchanged:

The Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2017. The rates will be:
• four (4) percent for overpayments (three (3) percent in the case of a corporation);
• 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
• four (4) percent for underpayments; and
• six (6) percent for large corporate underpayments.

I See $25,000 In Your Future

June 8th, 2017

When I start reading a Tax Court decision and see the sentence, “Petitioner and her husband derived considerable income from peddling this scheme to gullible individuals,” you know it’s not going to be a good day for petitioners. But I’m getting ahead of myself.

Three years ago Ms. G had a Tax Court case on their 2004 income taxes which she lost. She appealed that decision and lost. The IRS wanted to collect the money, but the petitioner asked for a Collection Due Process (CDP) hearing with IRS Appeals. She had it, and lost that. She then appealed that result to the Tax Court. Based on income of $235,542 (of which no tax was paid), she owed $99,261 plus penalties and interest.

First, a little background on petitioner:

Petitioner and her husband are well-known tax shelter promoters with a lengthy history of litigation in this and other courts. Their speciality [sic] is the “corporation sole” tax shelter, whereby a taxpayer takes a fictitious “vow of poverty” in connection with a purported “church” and declares herself thenceforth immune from Federal income tax. Petitioner promoted this scheme by writing several books, including How to Protect Everything You Own in This Life and After and Corporation Sole vs. 501(c)(3) Corporation. Petitioner also practiced what she
preached: She and her husband established “Bethel Aram Ministries” in 1993, took fictitious “vows of poverty,” and have not filed a Federal income tax return since. [footnote omitted]

That’s not a good start. I’d like to pay no tax, but you need to be a real minister with a real vow of poverty to do so; imitations don’t work. At the CDP hearing, the IRS Appeals Officer noted that the law had been followed, and shockingly (not) that the taxpayer had still not submitted copies of 2005 to 2014 tax returns.

Well, her streak of non-filing is a bit more lengthy:

Petitioner did not request a collection alternative, and she did not supply the SO with the financial information necessary to enable him to consider one. Far from being in compliance with her ongoing tax filing obligations, she has not filed a Federal income tax return since 1993. The SO did not abuse his discretion in declining to consider a collection alternative under these circumstances…Finding no abuse of discretion in this or in any other respect, we will grant summary judgment for respondent and affirm the proposed collection action.

But the Tax Court wasn’t happy with the petitioner.

It is clear to us that petitioner has maintained this suit “primarily for delay” as part of her 25-year campaign to avoid or defer indefinitely the collection of her Federal income tax liabilities. Because our decision establishing her 2004 income tax liability became final more than three years ago, she had no plausible basis for challenging that liability through the CDP process. Her 30-page response to the motion for summary judgment includes only two paragraphs that bear any rational relationship to the issues this case presents. The vast bulk of that document is directed toward relitigation of the trial court and appellate decisions previously rendered against her. In that connection she advances numerous frivolous arguments, including assertions that the IRS “continues to lie and defame Petitioner” and that the Commissioner and the courts have conspired to deny her First Amendment rights to freedom of speech and religion.

The Tax Court assessed a Frivolous Position Penalty of $10,000.

Petitioner has wasted the resources of respondent’s counsel and this Court. We will accordingly require that she pay to the United States under section 6673(a) a penalty of $10,000. This opinion will serve as a warning that she risks a much larger penalty if she engages in similar tactics in the future.

Tax Court exists so that legitimate disputes between taxpayers and the IRS get resolved. The Tax Court has little sense of humor about frivolity. Given Ms. G’s consistent non-filing and delaying tactics, I suspect we will see her name in a future case with a section 6673(a) penalty of $25,000.

Case: Gardner v. Commissioner, T.C. Memo 2017-107