Taxable Talk

The Public Company Accounting Oversight Board announced new standards for tax shelters yesterday. The Wall Street Journal reported on this in today's editions.

The rules, which must be approved by the SEC, state that firms will be prohibited from auditing clients to which they sell aggressive tax shelters. Of course, there's an exception to this: if the firms reasonably believe they have at least a 50% chance of prevailing in an audit with the IRS.

This new regulation stems from the continuing KPMG scandal. The US Department of Justice has not yet announced whether they will pursue criminal charges against KPMG.

The Tax Court was in a foul mood today, as they disposed of several frivolous taxpayer cases. In one case, they note, "We advised petitioner at the 2001 trial that his arguments were frivolous, and we admonished him against advancing them again. Our admonition at the 2001 trial was insufficient to deter petitioner from returning to the Court and advancing the same frivolous and groundless position in the instant case." That's one $5,000 penalty (under Section 6673(a)).

Then I read, "Despite warning petitioner at least six times at trial that his arguments were frivolous and groundless, petitioner persisted in making those arguments at trial and on brief." There's another $5,000.

In the third case, the Court stated, "Petitioner has advanced shopworn arguments characteristic of tax-protester rhetoric that has been universally rejected by this and other courts....We shall not painstakingly address petitioner’s assertions “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)." This taxpayer escaped with a warning.

Cases: Leggett v. Commissioner, Rhodes v. Commissioner, and Delgado v. Commissioner

The Fifth Circuit Court of Appeals recently ruled on the appeal of Leonard Gittinger of his case from the US Tax Court. In its' unpublished ruling, the Court noted,

"...his arguments are completely and utterly frivolous, generally relating to the proposition that wage income is not taxable income. See I.R.C. §§ 1(a)(1), 61(a)(1), 7701(a)(1), (14). As we have previously noted, there is no need for us to refute “with somber reasoning and copious citation of precedent” the notion that wages are not income, lest by doing so we suggest that this argument has some colorable merit. Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984)...Because Gittinger did not even allege any irregularity in the assessment procedure and he did not raise a valid defense or offer an alternative means of collection, we have no difficulty whatsoever affirming the tax court’s judgment."

And the petitioner was fined another $6,000 for continuing his frivolous arguments.

...You're stuck, and look fairly stupid.

At least once a week, the Tax Court tells a tax protester that, "Yes, Virginia, there is an income tax, and you must pay it." And your arguments that (a) it's unconstitutional, (b) you don't live in the United States but in the state of [fill in the blank], or (c) it was never approved, etc. (see the Tax Protester FAQ for a complete list of the reasons) won't work.

This week's case is Hodges v. Commissioner, TC Memo 2005-168. We won't bore you with the constitutional issues; rather, there's an interesting issue that develops because of the petitioner's claims regarding the unconstitutionality of the income tax. The amount of tax is dependent on when one of the petitioner's relatives passed away. The Court chooses to not believe the petitioner as to the date of death. As pointed out by the Court, "We need not accept self-serving testimony, even if unopposed." Would the Court have felt this way had their been no constitutional issues raised? We don't know, but making stupid arguments to a court and then trying to get them to rule in your favor isn't a good idea.

Oh, yes; the petitioners also received penalties for failing to file a return, for failing to make estimated payments, and for taking a frivolous petition.

So, Virginia, do you still want to claim there's no income tax?

A Campbell, California attorney who advertises as Mr. Divorce was found guilty of tax evasion according to this story in the San Francisco Chronicle (one-time registration required). Demetrious Eugenios made the mistake of going through a divorce from his ex-wife, Willow Eugenios. Ms. Eugenios alerted the government that Mr. Eugenios hid ownership of automobiles and other assets from the IRS. Sentencing is scheduled for October.

This case does remind us of one fact: ex-spouses are the leading source of tips of tax evasion to the IRS. I guess that's something for Mr. Divorce to ponder....