Larry's Tax Law

In the case of John D. Moore, et al. v. Commissioner, TC Memo 2013-249 (October 30, 2013), the US Tax Court was presented with the saga of John Moore.

Mr. Moore was a CPA.  He left the world of public accounting to embark on a career in a new industry.  In 1992, he became the Operations Manager of the Dallas, Texas Peterbilt truck distributor.  By 1995, Mr. Moore had climbed the corporate ladder and was appointed president of the company.

In 1992, the company granted Mr. Moore an option, good through December 31, 1999, to purchase five percent (5%) of the shares of the company, an S corporation.  In 1997, the company merged with another company.  As a result of the merger, Mr. Gary Baker entered the picture.  Mr. Baker ended up with 1,477,859 shares of the merged entity.  On December 30, 1999, Mr. Moore entered into an agreement to purchase all of Mr. Baker’s shares for $5,842,606.  The next day, on December 31, 1999, Mr. Moore timely exercised his option and purchased 500,000 shares of the company for $212,334.

As part of the purchase of the Baker shares, Mr. Moore signed a promissory note for the full purchase price of an amount just shy of $6,000,000.  It was all due and payable on May 5, 2000.  After signing the note, however, the parties revised it so that $3,000,000 would be due on June 14, 2000, and the balance would be paid in three equal annual installments.

In Peter Knappe v. U.S., 713 F3d 1164 (9^th Cir., April 4, 2013), the United States Court of Appeals for the Ninth Circuit was presented with the question whether reliance upon a tax professional may excuse the late filing of a tax return.

Peter Knappe was the personal representative of the Estate of Ingborg Pattee.  He was also trustee of her testamentary trust.

Mrs. Pattee died in 2005, leaving a large estate.  Mr. Knappe was her long-time friend.  Although he had business experience, Mr. Knappe had no experience serving as a personal representative or preparing estate tax returns.  So, he engaged the services of Mr. Francis Burns, CPA.  Burns had been his company’s outside accountant for several years.  Mr. Knapp was always satisfied with his work.

Burns told Knappe that a Form 706 for the estate of would need to be filed by August 30, 2006.  Knappe had trouble obtaining the needed appraisals on or before the filing deadline.  Burns advised Knappe that he could obtain an extension of one (1) year for both the filing and the payment of the taxes due.

Burns filed a Form 4786, seeking both an extension for filing and for payment of the taxes due. The extension sought was one year.

As we know, the filing extension, unless the personal representative is out of the country, is only six (6) months.  The payment extension, however, in the discretion of the Service, may be up to one year.  Burns, however, believed both extensions were automatically one (1) year.  OOPS!

The United States Sixth Circuit Court of Appeals was actually presented earlier this year with the “$64,000 Question.”  In Robert W. Stocker, II and Laurel A. Stocker v. U.S., 111 AFTR 2d 2013-556 (705 F3d 225) (6^th Cir., January 17, 2013), the court examined what sort of evidence a taxpayer must introduce in order to support the timely filing of a tax return in which a $64,000 refund was claimed.

In this case, Bob and Laurel Stocker filed an amended 2003 return, seeking a $64,000 refund.  The Service denied the claim on the ground that they did not file the return within the 3-year statutory period.

The Stockers filed suit in District Court.  The court quickly dismissed the case for lack of subject matter jurisdiction—the Stockers could not establish the jurisdictional prerequisite of timely filing the return by methods recognized by the Service or the courts.

The taxpayers argued that testimony and circumstantial evidence may support the timely filing requirement.  Mr. Stocker and his office manager, Karrin Fennell, testified that the return was timely deposited at a United States post office, postage prepaid.  They forgot, however, to attach the registered mail customer return receipt.  The taxpayers were, however, able to produce evidence that the Department of Revenue timely received the amended return.  So, they argued the IRS must have likewise received the federal return on time.  Unfortunately, the IRS’ records showed the return was postmarked 4 days after its due date.

Thank you for your support and friendship.  I wish you a wonderful holiday season and terrific 2014.

- Larry

Earlier this year, the First Circuit United States Court of Appeals issued its decision in United States v. Albania Deleon, 704 F.3d 189 (1st Cir., January 11, 2013).   This case illustrates that worker misclassification may, in addition to the imposition of taxes and civil penalties, lead to criminal sanctions, including imprisonment.

Albania Deleon owned and operated two businesses:  an asbestos abatement training school (“ECT”) and a temporary employment agency (“MSI”).  This case focuses on Ms. Deleon and MSI.  MSI supplied temporary workers to asbestos abatement contractors. 

MSI maintained two separate payrolls for its workforce.  One payroll reported a minority of the workers as employees, proper withholding of payroll and income taxes was done, and Form W-2s were issued to the employees.  MSI reported in writing to both its customers (including governmental entities) and the occupational safety division of local government that it was responsible for and was complying with all employee withholding tax obligations. 

The second payroll, which encompassed most of MSI’s workers, treated the workers as independent contractors—no withholding was done.  Rather, IRS Form 1099s were issued to the workers.  MSI told its accountants that these workers were independent contractors.  Evidence in the trial record indicated Ms. Deleon had absolutely no factual basis for that conclusion.

In late 2006, as a result of an anonymous tip to the government that MSI was violating immigration laws and was involved in fraudulent payroll activity, state and federal investigators raided the offices of both companies.  Based upon the information gathered in the raid, including computer records, the IRS concluded MSI had fraudulently avoided paying over $1,000,000 in payroll taxes.

In the circumstance where substantially all of the assets of a closely-held C corporation are being sold, the shareholder of the seller may desire to receive part of the purchase price directly from the buyer for his or her personal goodwill. The result is beneficial to both the buyer and the selling shareholder. The buyer gets to amortize the amount paid for the goodwill ratably over fifteen (15) years, and the shareholder enjoys two tax advantages, namely he or she gets capital gain treatment on the amount received for the goodwill and he or she avoids the corporate level tax. This approach works provided certain facts exist:

• • The selling shareholder has created personal goodwill;

• • The selling shareholder has the ability to take the personal goodwill with him or her to another company and has the ability to compete with the corporation;

• • There is no contractual arrangement limiting the selling shareholder’s ability to use the personal goodwill in the pursuit of work for a business competitor or the ability to sell it to a business competitor; and

• • The amount of the sale proceeds allocated to the personal goodwill is reasonable.