Newport Beach tax attorney Daniel Layton defends Orange County clients in IRS and FTB audits & collections, criminal tax defense, tax fraud & evasion cases, FBAR penalty defense, and foreign account disclosures (e.g., streamlined procedures).
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A Recent Conviction in Hawaii’s U.S. District Court Illustrates How the Use of Nominees Can Put You in the Crosshairs of the IRS and DOJ for […] The post Recent Conviction Illustrates Connection Between Use of Nominees and Tax Evasion appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
In essence, the term nominee, in the tax law world, describes a situation where an asset which belongs to one person (or entity) is placed into the name of a third party, but it is understood between the person and the third party that the third party does not have equitable ownership (i.e., control over its disposition or right to unfettered use). Use of a nominee is not always to commit a fraud (e.g., it can be done for legitimate business reasons), but it can be considered an affirmative act of evasion when done to avoid a known tax liability.
A recent press release illustrates on instance where the alleged use of nominees put a taxpayer and a CPA in the cross-hairs of the IRS.
Per the D.O.J. Press Release (here):
On Nov. 20, 2018, a jury convicted Higa of conspiracy to defraud the United States along with co-conspirator Wagdy Guirguis. In addition to the conspiracy conviction, Higa was also convicted of one count of assisting in the preparation of a false tax return. The convictions arose from a scheme to divert funds from Guirguis’ business entities for his own personal benefit and to avoid the payment of federal employment taxes, corporate and individual income taxes, and Internal Revenue Service (IRS) penalties.
According to the evidence presented at trial, Guirguis operated numerous engineering businesses. Higa, a CPA, was the controller of these businesses. Higa also served as a nominee officer of another entity controlled by Guirguis. When the IRS determined Guirguis’ businesses owed over $800,000 in federal employment taxes and assessed an $812,000 penalty, Guirguis and Higa took steps to place income and assets out of the reach of the IRS. For instance, Guirguis and Higa used a nominee entity to fraudulently convey a condominium to Guirguis’ wife. After an IRS revenue officer began questioning Mrs. Guirguis’ sole ownership of this condominium, Guirguis and Higa instructed a bookkeeper to alter the books and records in an attempt to conceal this transaction from the IRS.
From 2001 through 2012, Guirguis and Higa also used a nominee entity to divert approximately $1.3 million from Guirguis’ businesses for Guirguis’ personal use. As a result of their diversion and concealment efforts, Guirguis’ 2010 through 2012 returns omitted $553,000 in income, resulting in a tax deficiency of $165,000. In addition, Higa prepared a false corporate income tax return for one of Guirguis’ entities that failed to report over $1.3 million in gross receipts.
Guirguis was sentenced to 5 years prison five days earlier.
Posted on 07/11/2019 by Daniel W. Layton.
In Romano-Murphy v Commissioner, 152 T.C. No. 16 (2019), the United States Tax Court held that an IRS assessment of a Trust Fund Recovery Penalty under […] The post Tax Court Holds IRS Assessment of Trust Fund Recovery Penalty Invalid Where No Final Administrative Determination Issued appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
The Trust Fund Recovery Penalty is one of the most notoriously hard penalties to fight once the IRS has made its determination. Nonetheless, the IRS occasionally engages in technical missteps which can save a taxpayer from being personally liable for a business entity’s unpaid employees’ trust fund portion of payroll taxes, like in Romano-Murphy v Commissioner, 152 T.C. No. 16 (2019) (full PDF of the opinion here).
In this case, the taxpayer protested to the Office of Appeals (an internal IRS appeal function) after a preliminary notice and the IRS simply assessed without making the final administrative determination. At the later collections phase, the taxpayer raised the discrepancy in a Collection Due Process (CDP) hearing, but the IRS determined all procedures leading up to the assessment were valid nonetheless. The taxpayer petitioned that CDP determination to Tax Court.
The U.S. Tax Court had initially held that the taxpayer was liable for the penalty. However, the taxpayer appealed to the 11th Circuit U.S. Court of Appeals, which vacated the Tax Court’s opinion and remanded it back for a ruling in an opinion at Romano-Murphy v. Commissioner, 816 F.3d 707 (11th Cir. 2016). On remand, the U.S. Tax Court reiterated the 11th Circuit’s holding that Section 6672(b)(3)(B) “requires the IRS to make a final administrative determination in response to a timely protest before it can assess the penalty.” Accordingly, the IRS violated that section in making its assessment and the Tax Court held that the IRS’s CDP determination was not sustained – meaning that the IRS will have to abate the penalty.
In my opinion, this case not only instructive as to the procedural requirements but also should be a lesson in tenacity. Winning in tax cases is not easy, especially when the IRS does not do its job or tends to affirm its own determinations. In addition, the Tax Court is not always a favorable forum. The taxpayer in this case filed her petition to the United States Tax Court in 2009 and the taxes were first assessed in 2007, and she did so pro se – without counsel (at least not on record). This was a journey that went over at least a dozen years. Kudos to the taxpayer in this case for going the distance.
Posted by Daniel Layton on 06/23/2019.
The post Tax Court Holds IRS Assessment of Trust Fund Recovery Penalty Invalid Where No Final Administrative Determination Issued appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel Layton.
The Supreme Court Issued Its Opinion in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust on June 21, 2019. Click here for […] The post US Supreme Court Holds States Cannot Tax Out-of-State Trust Income if Undistributed to In-State Beneficiaries appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
Per the official syllabus issued by the U.S. Supreme Court with the Kimberly Rice Kaestner 1992 Family Trust opinion, the Supreme Court held that “[t]he presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it.”
The syllabus summarized the background of the case as follows:
Joseph Lee Rice III formed a trust for the benefit of his children in his home State of New York and appointed a fellow New York resident as the trustee. The trust agreement granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee later divided Rice’s initial trust into three separate subtrusts, and North Carolina sought to tax the Kimberley Rice Kaestner 1992 Family Trust (Trust)—formed for the benefit of Kaestner and her three children—under a law authorizing the State to tax any trust income that “is for the benefit of” a state resident, N. C. Gen. Stat. Ann. §105–160.2. The State assessed a tax of more than $1.3 million for tax years 2005 through 2008. During that period, Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the State. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax as applied to the Trust violates the Fourteenth Amendment’s Due Process Clause. The state courts agreed, holding that the Kaestners’ in-state residence was too tenuous a link between the State and the Trust to support the tax. Pp. 5-16.
The case follows many of the same principals as the Wayfair decision issued by the United States Supreme Court Last year, which was not as taxpayer-friendly. A full analysis of the Wayfair opinion is included in the article here.
The syllabus summarized the reasoning of the Supreme Court as follows:
(a) The Due Process Clause limits States to imposing only taxes that “bea[r] fiscal relation to protection, opportunities and benefits given by the state.” Wisconsin v. J. C. Penney Co., 311 U. S. 435, 444. Compliance with the Clause’s demands “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” and that “the ‘income attributed to the State for tax purposes . . . be rationally related to “values connected with the taxing State,” ’ ” Quill Corp. v. North Dakota, 504 U. S. 298, 306. That “minimum connection” inquiry is “flexible” and focuses on the reasonableness of the government’s action. Id., at 307. Pp. 5–6.
(b) In the trust beneficiary context, the Court’s due process analysis of state trust taxes focuses on the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets. Cases such as Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U. S. 83; Brooke v. Norfolk, 277 U. S. 27; and Maguire v. Trefry, 253 U. S. 12, reflect a common principle: When a State seeks to base its tax on the in-state residence of a trust beneficiary, the Due Process Clause demands a pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax. Safe Deposit, 280 U. S., at 91. Similar analysis also appears in the context of taxes premised on the in-state residency of settlors and trustees. See, e.g., Curry v. McCanless, 307 U. S. 357. Pp. 6–10.
(c) Applying these principles here, the residence of the Trust beneficiaries in North Carolina alone does not supply the minimum connection necessary to sustain the State’s tax. First, the beneficiaries did not receive any income from the Trust during the years in question. Second, they had no right to demand Trust income or otherwise control, possess, or enjoy the Trust assets in the tax years at issue. Third, they also could not count on necessarily receiving any specific amount of income from the Trust in the future. Pp. 10–13.
(d) The State’s counterarguments are unconvincing. First the State argues that “a trust and its constituents” are always “inextricably intertwined,” and thus, because trustee residence supports state taxation, so too must beneficiary residence. The State emphasizes that beneficiaries are essential to a trust and have an equitable interest in its assets. Although a beneficiary is central to the trust relationship, the wide variation in beneficiaries’ interests counsels against adopting such a categorical rule. Second, the State argues that ruling in favor of the Trust will undermine numerous state taxation regimes. But only a small handful of States rely on beneficiary residency as a sole basis for trust taxation, and an even smaller number rely on the residency of beneficiaries regardless of whether the beneficiary is certain to receive trust assets. Finally, the State urges that adopting the Trust’s position will lead to opportunistic gaming of state tax systems. There is no certainty, however, that such behavior will regularly come to pass, and in any event, mere speculation about negative consequences cannot conjure the “mini-mum connection” missing between the State and the object of its tax. Pp. 13–16.
For the PDF of the full United States Supreme Court opinion delivered by Justice Sotomayor with the full concurrence of all justices, you can read the original PDF opinion in North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust at this link.
Posted by Daniel Layton on 06/23/2019.
The post US Supreme Court Holds States Cannot Tax Out-of-State Trust Income if Undistributed to In-State Beneficiaries appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel Layton.
Can an Unrecorded Deed Defeat an IRS Federal Tax Lien in California? Yes, an unrecorded deed for California real property can defeat a later-arising IRS federal […] The post Can an Unrecorded Deed Defeat an IRS Federal Tax Lien? appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
Yes, an unrecorded deed for California real property can defeat a later-arising IRS federal tax lien against the prior owner. However, under certain circumstances, the IRS can follow the property for collection purposes if the transfer was not bona fide (e.g. the recipient is a mere nominee) or was done without an exchange of reasonable consideration when the transferor knew or should have known about the tax liability (e.g., a fraudulent conveyance).
A federal tax lien statutorily arises against all property and rights to property owned by the taxpayers as of the assessment date under 26 U.S.C. §§ 6321 and 6322 when notice and demand for payment is made (e.g., a bill is issued) and the tax is not immediately paid. Under 26 U.S.C. § 6323(a) and (f), the lien imposed by Section 6321 is not valid against any purchaser until the notice of federal tax lien is filed in the county where the real property sits. In other words, a federal tax lien only affects a purchaser who acquires the real property after the notice of federal tax lien has been recorded.
Furthermore, because the statutory language of 26 U.S.C. § 6321 only provides for a lien upon “all property and rights to property, whether real or personal, belonging to [the person liable to pay any tax],” the IRS only steps into the shoes of the taxpayer. This means that the IRS has no greater rights to real property following the assessment than the liable taxpayer had as of that date. When the taxpayer is divested of his interest by a transfer (whether by deed or by order-of-court, including a divorce judgment or decree) and has no further right to the property, the IRS’s subsequent lien will give rise to no right to the property. See United States v. Gibbons, 71 F.3d 1496, 1501 (10th Cir. 1995); Thomson v. United States, 66 F.3d 160 (8th Cir. 1995); United States v. V & E Engineering & Construction Co., 819 F.2d 331 (1st Cir. 1987); Filicetti v. United States, Case No. 1:10-cv-00595-EJL (Dist. Idaho, Memorandum Decision and Order dated Feb. 23, 2012). Essentially, if the taxpayer has no interest, the IRS has no interest.
With respect to the effect of failing to record a grant deed, California Civil Code Section 1214 provides:
Every conveyance of real property or an estate for years therein, other than a lease for a term not exceeding one year, is void as against any subsequent purchaser or mortgagee of the same property, or any part thereof, in good faith and for a valuable consideration, whose conveyance is first duly recorded, and as against any judgment affecting the title, unless the conveyance shall have been duly recorded prior to the record of notice of action.
Per this section, an unrecorded deed would only be void against purchasers, mortgagees, judgment creditors. A tax lien, however, is a statutory lien under 26 U.S.C. § 6321 and the IRS has no judgment, is not a mortgagee, and is not a purchaser. See United States v. Gilbert, 345 U.S. 361, 362-365 (1953). In United States v. Gilbert, the U.S. Supreme Court held that a city tax lien was not a “judgment creditor” even though the state statute described the tax lien as “in the nature of a judgment” because a judgment requires a court order. Id. Accordingly, a statutory tax lien is not entitled to greater rights under California law than what is accorded by federal law, merely stepping into the taxpayer’s shoes – meaning that a later-arising tax lien gives the IRS no interest where the taxpayer’s interest was already fully transferred away, whether the transfer is recorded or not. See V & E Engineering & Construction Co., 819 F.3d at 334 (Attachment 8) (distinguishing that case from two reaching a different result on grounds that the Texas statute in the distinguished cases rendered the unrecorded sale “void as to all creditors” where the Puerto Rico recording statute in V & E limited invalidity to good faith purchasers, and further noting that the tax lien failed to attach regardless of that language because the seller/taxpayer was still bound by the transfer).
However, where the transfer is not bona fide or was done for less than reasonably adequate consideration while the tax was known or should have been known to be due, there remains a possibility that the IRS can reach the property. Failure to promptly record a deed could be seen as evidence supporting a determination that the transfer was not in good faith and can be avoided. See Leeds LP v. United States, 807 F. Supp. 2d 946 (S.D. Cal. 2011).
Federal tax liens attach to property held by a taxpayer’s nominee or alter ego, and such property is subject to the collection of the taxpayer’s tax liability. See G.M. Leasing Corp. v. United States, 429 U.S. 338, 350-351, 97 S. Ct. 619, 50 L.Ed.2d 530 (1977) (the IRS “could properly regard petitioner’s assets as [taxpayer’s] property subject to the lien under § 6321”); Wolfe v. United States, 798 F.2d 1241, 1244 n. 3, amended 806 F.2d 1410 (9th Cir. 1986). Property is held by a nominee when someone other than the taxpayer has legal title but, in substance, the taxpayer enjoys the benefits of ownership. Oxford Capital Corp. v. United States, 211 F.3d 280, 284 (5th Cir. 2000); Holman v. United States, 505 F.3d 1060, 1065 (10th Cir. 2007).
California has enacted legislation in accord with the Uniform Voidable Transactions Act, which generally allows creditors, including the government, to avoid a transfer if the transfer was either actually fraudulent with the intent to evade collection by the creditor or if the transferor was insolvent at the time of the transfer and knew or should have known the transfer would render him unable to pay the debt. This statutory scheme, encompassed in Cal. Civ. Code Section 3439 et seq., has lengthy definitions and factors that should be read in full for a more detailed understanding.
The above is not intended to be legal advice. Collections and laws are complicated and the general rules sometimes do not apply or may have exceptions. For your specific situation, an attorney should be consulted.
Posted by Daniel Layton on 06/14/2019.
Author K. Slaughter Found Liable for Employment Taxes, But Not Penalties in U.S. Tax Court Opinion. In K. Slaughter v. Commissioner, T.C. Memo. 2019-65, an opinion […] The post Author K. Slaughter Found Liable for Employment Taxes, But Not Penalties, in Tax Court Opinion appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
In K. Slaughter v. Commissioner, T.C. Memo. 2019-65, an opinion issued by the U.S. Tax Court today, K. Slaughter (aka Karin Slaughter) the author of Snatched, Busted, The Truth About Pretty Girls, Like a Charm, and Necessary Women and The Mean Time (Short Stories), was found liable for employment taxes, but not accuracy-related penalties, for 2010 and 2011. The full PDF opinion can be found here https://taxattorneyoc.com/author-k-slaughter-tax-court-opinion-tc-memo-2019-65/ .
In asserting that a portion of income from her contracts was not subject to self-employment tax, the opinion states that the author made the following argument:
Petitioner contends that the payments for her brand are, contrary to respondent’s contention, separate and distinct from payments for her trade or business of writing. She furthermore contends that this is the case even when they
are made by one payor and that these distinct payments are not trade or business income. Petitioner cites Rev. Rul. 68-499, 1968-2 C.B. 421, in support of both of her contentions. Rev. Rul. 68-499, supra, discusses a company paying royalties to certain individuals who are also employed by the company. On the basis that the licensing contracts are separate and distinct from the employment contracts, the revenue ruling concludes that the royalties are not paid for services performed by the individuals, that they are not “wages”, and that therefore they are not subject to payroll taxes. Id.
Analogizing earned wages to net earnings, and payroll taxes to self-employment tax, petitioner contends that the conclusion in Rev. Rul. 68-499, supra, should be applied to her case. Specifically, she contends that payment for the writing of a manuscript is payment for a service; wages have been defined as payments made in exchange for services, sec. 3121(b); Milligan v. Commissioner, 38 F.3d at 1099 n.7, and therefore, by analogy, payment for such a service should
be subject to self-employment tax just as wages are subject to payroll taxes. In contrast, payment for something other than a service, such as the licensing royalties, is not a wage, see Jones v. Commissioner, T.C. Memo. 1998-354, so the
separate and distinct payment for petitioner’s brand should not be subject to self-employment tax.
However, the court rejected that argument, and found that reliance on Revenue Ruling 68-499 was misplaced, stating:
Petitioner’s analogy fails because it attempts to adapt out-of-context definitions of employment to the definition of trade or business income under section 1402. We are not able to focus solely on the words “net earnings” to the exclusion of the words “trade or business”. The statute provides that “net earnings from self-employment” includes income derived from any trade or business. An allocation within petitioner’s contracts is beside the point if all elements are to be allocated to a trade or business.
The court concluded that K. Slaughter’s brand was part of her trade or business, stating:
We construe “trade or business” broadly, and, examining all of the facts, find that petitioner was engaged in developing her brand with continuity and regularity for the primary purpose of income and profit. See Jones v. Commissioner, T.C. Memo. 1998-354; Dacey v. Commissioner, T.C. Memo. 1992-187; Hittleman v. Commissioner, T.C. Memo. 1990-325.
The court found K. Slaughter liable for self-employment taxes in both years, but found that she was not liable for penalties due to “reasonable cause,” having hired several qualified professionals to prepare her returns, providing them everything they requested.
Posted by Daniel W. Layton on 06/04/2019.
Attorney’s Fees in Interpleader Action? Not If It Impairs Recovery of Federal Tax Lien. Can the party filing an interpleader in California recover the costs and […] The post Attorney’s Fees in Interpleader Action? Not If It Impairs Recovery of Federal Tax Lien. appeared first on Tax Attorney Newport Beach-Manhattan Beach-Fullerton | Daniel...
Can the party filing an interpleader in California recover the costs and fees of filing the interpleader? No…. not if it impairs the recovery of the United States on its federal tax lien.
California Code of Civil Procedure section 386.6, generally, authorizes the court to make an award of attorney’s fees and costs to an interpleading plaintiff. Federal interpleader actions are authorized by 28 U.S.C. § 1335 and Rule 22 of the Federal Rules of Civil Procedure where persons holding funds to property upon which conflicting claims are being made by others may deposit the funds with the District Court and require the other parties to litigate their interests. Libby v. City Nat’l Bank, 592 F.2d 504, 507 (1978). A federal court has the power to award fees through those rules and 28 U.S.C. § 2361, which empowers courts to “make all appropriate orders to enforce its judgment.” “An award of attorney fees and costs to a stakeholder, however, is not automatic. The decision rests within the discretion of the court.” Underwriters Group, Inc. v. Clear Creek Indep. Sch. Dist., G-05-334, 2006 U.S. Dist. LEXIS 47907 (D. Tex. June 30, 2006).
However, as the Ninth Circuit held in Abex Corp. v. Ski’s Enterprises, Inc., 748 F.2d 513, 516 (9th Cir. 1984), courts have clearly held… that the existence of prior federal tax liens gives the government a statutory priority over the interpleader plaintiff’s ability to diminish the fund by an award of fees.” [Internal citations omitted.]
The priority of federal tax liens is governed by Section 6323 of the Internal Revenue Code, 26 U.S.C. Certain subsections in Section 6323 provide for some interests to be “superpriorities,” entitled to priority over the federal tax lien regardless of whether the interest was perfected before the tax lien – for example, mechanic’s liens under $5,000. Paragraph (a)(8) of Section 6323 provides for an exception for attorneys’ liens where the judgment was procured through the attorneys’ work, so long as the lien was not to procure a judgment against the United States, providing:
With respect to a judgment or other amount in settlement of a claim or of a cause of action, as against an attorney who, under local law, holds a lien upon or a contract enforcible against such judgment or amount, to the extent of his reasonable compensation for obtaining such judgment or procuring such settlement, except that this paragraph shall not apply to any judgment or amount in settlement of a claim or of a cause of action against the United States to the extent that the United States offsets such judgment or amount against any liability of the taxpayer to the United States.
26 U.S.C. § 6323(e)(3) provides for the recovery of attorney’s fees by a lien holder when the fees are “actually incurred in collecting or enforcing [a lien] obligation” superior to the lien(s) of the United States (emphasis added).
However, neither of these exceptions apply to an interpleading plaintiff who is not a lienholder. Thus, an innocent third party may be forced to bear the cost of filing an interpleader action. The Seventh Circuit, in Campagna-Turano Bakery, Inc. v. United States, 632 F.2d 39, 44 (7th Cir. 1980), recognized the apparent inequity in this result in some cases, but found that its hands were statutorily tied:
Campagna argues persuasively that the result we reach is inequitable. Although not legally required to bring an interpleader action, it was forced to do so in order to avoid liability exceeding the amount of the debt owed to Yamo. Now, it is unable to recover costs and attorneys’ fees resulting from the initiation of that action. Perhaps § 6323 should contain an exception for plaintiffs in Campagna’s situation. But it is for Congress, not this court, to write that exception.
Despite the potential lack of reimbursement for bringing the interpleader action, incentive to file exists nonetheless because, under Section 2361 of Title 28, U.S.C., the court may “discharge the plaintiff from further liability” where the conditions satisfy the requirements of the Federal Interpleader Act. See also Metropolitan Life Ins. Co. v. Davis, Civil No. JFM-10-2785, 2011 WL 2148714, at *6 (D. Md. May 31, 2011).
See other blog posts on this topic at https://taxattorneyoc.com/blog/2019/03/12/trustees-and-executors-should-worry-when-taxes-are-owed-the-federal-insolvency-statute/ and https://taxattorneyoc.com/blog/2019/05/05/enforcement-of-money-judgments-against-property-in-jurisdiction-of-california-probate-court-the-interaction-between-cal-code-civ-proc-sections-709-030-695-010-and-697-310/.
Posted on 06/01/2019 by Daniel W. Layton.
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