Taxable Talk

A company called Derivium Capital LLC is under investigation by the IRS and the Franchise Tax Board for making loans that allegedly weren't loans, according to Forbes.

The scheme aided taxpayers who were sitting on large stock gains. According to Forbes, "The Derivium deal called for the customer to get a loan equal to 90% of the value of his shares. If the stock went up, he could get it back by repaying the loan, with interest. If the stock went down, he could walk away and owe nothing. And, supposedly, the initial loan was not a sale and thus not taxable."

But the IRS and the FTB think otherwise, and Derivium sits in bankruptcy. The California Corporations Commission filed suit in 2002 to stop the loans (see this link); it appears Derivium stopped its activity in California soon thereafter. Derivium's bankruptcy filing is noted in this article in the Times-Record of Middletown, NY. The firm either used "unique and proprietary business model for marketing and administering sophisticated loan transactions" or was "a giant Ponzi scheme."

Arbitrators so far have ruled that Derivium owes ex-clients $80 million, with many more claims filed. Of course, the bankruptcy filing may forestall those complaints, along with the problems of Derivium's lender, Bancroft Ventures of the Isle of Man. Forbes reports that Bancroft's directors have quit, and that Bancroft moved to Cyprus and the new directors are from Beirut.

My usual advice applies to "loans" like these: If it sounds too good to be true, it probably is. So now Derivium's clients are looking at both tax troubles and possible loss of their loan capital.

What happens when you battle the IRS in Tax Court, but lose? You have to pay what you owe. If you don't, you can face a lien or levy. Today, the Tax Court stepped in when a one-time loser became a two-time loser.

The petitioner in today's case lost in tax court in 1998 for his 1991 through 1994 taxes (he also received a $500 fine for a frivolous argument). He didn't pay, so the IRS started the levy process. The petitioner again went to Tax Court where he disputed the levy, claiming the income tax is unconstitutional. His argument, according to the Tax Court, did not contain "a scintilla of merit." Further, "Petitioner's groundless arguments and contumacious conduct have wasted the time and resources of respondent and this Court." So the levy was upheld and a $2500 fine added to the bill.

Case: Forrest v. Commissioner, T.C. Memo 2005-228

Survivor Richard Hatch pled not guilty today to charges that he didn't report his $1 million in winnings from the reality television show, and charges of filing a false S-corporation tax return, mail fraud, wire fraud, and bank fraud. Hatch told the Providence Journal that, "I've always, always, always paid my taxes and always will."

However, the government alleges that he didn't. The allegations include that Hatch shopped around for the tax return that had him pay as little as possible to the government. The Journal says that he visited two accountants. The first prepared a return where he would have owed over $400,000 to the IRS; the second prepared a return where he would have paid over $200,000 to the IRS. Both of these returns included the income from Survivor. Neither return was filed. The second accountant then prepared a return that did not include the Survivor income; it showed Hatch receiving a refund from the IRS of $4,483. The accountant noted that it was for informational purposes only and should not be filed. Hatch filed that return.

Hatch is free on $50,000 bond until his trial.

News story (Providence Journal)
The indictment

...so does he know his fate in court?

"Caryville Psychic Accused of Tax Evasion" screams the headline.

Hat tip: Roth Tax Updates

After noting the previous Tax Court Decision, I was a bit surprised to find the final case reported yesterday to be a whopper.

Consider a "professional" tax preparer who doesn't prepare his own tax return. The IRS discovers that the preparer doesn't file tax returns for six years and asks him for records so that they can determine what he owes. He refuses. Then the IRS contacts his customers to determine what he owes; the preparer demands that the IRS stop as their an invasion of his right to privacy. The IRS then send the preparer notices of what he owes. The preparer returns them after marking them, "Refused for Fraud F.R.C.P. 9(b)," and includes an attachment with numerous "frivolous arguments." The IRS sends an official notice of deficiency; the preparer returns it (stamped as above) with a similar attachment. The IRS prepares a lien on the preparer; the preparer then files a case in Tax Court.

In Tax Court, the preparer claimed that he had no taxable income. But, as the Tax Court noted, "A taxpayer may dispute the existence or amount of his or her tax liability at a section 6330(b) hearing if he or she did not receive a notice of deficiency or did not otherwise have an opportunity to dispute the tax liability. Sec. 330(c)(2)(B). [The preparer] received the notice of deficiency for 1994-99. Thus, [the preparer] may not dispute the existence or amount of his tax liabilities for those years under sections 6320 and 6330." The preparer was also hit with a $15,000 penalty for frivolous arguments.

Case: Wetzel v. Commissioner (T.C. Memo 2005-211)

Sometimes one must only look in the mirror to see who is the bozo. Yesterday, a taxpayer who didn't file claimed that the IRS "...prepared only “dummy returns” for 2000 and 2001, and that respondent’s determination of his deficiencies in income tax for 2000 and 2001 is invalid because respondent did not prepare for each year a substitute return that qualified under section 6020(b)." As the Tax Court noted, "Where a taxpayer files no return, [the IRS] may determine the deficiency as if a return had been filed on which the taxpayer reported the amount of tax due was zero; the deficiency is the amount of tax due. Laing v. United States, 423 U.S. 161, 174 (1976); Schiff v. United States, supra; Roat v. Commissioner, supra."

The petitioner also lost on his contention that he can use statistical information on his industry for deductions (you must keep records of your expenses). And he received failure to file penalties.

Case: Stewart v. Commissioner (T.C. Memo 2005-112)