Friday, April 22, 2011

The Williams Offshore Account Saga Continues - You Win Some, You Lose Some (4/28/11)

I have previously blogged on the saga of Joseph B. Williams who earned income offshore and played the offshore game (offshore financial accounts and entities). Presented chronological key events in his saga are:

1. Williams earlier pled guilty to a Klein conspiracy and one count of tax evasion for the years 1993 through 2000. The conviction related to income rolling through his foreign financial accounts.

2. In the income tax phase of this saga (involving the years 1993-2000), the Tax Court earlier held that he was collaterally estopped by his conviction by plea for tax evasion for those years, so that the statute of limitations was open and he was subject to the fraud penalty. Williams v. Commissioner, T.C. Memo. 2009-81. I previously blogged on this Collateral Estoppel after Tax Evasion Conviction (4/17/09).

3. The United States then sued Williams to obtain judgment on an FBAR penalty assessment, but Williams then pulled off a stunning victory because, the district court found, the IRS had not proved willfulness. United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (ED VA 2010).  See my prior blog Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10).

4. Yesterday, the Tax Court decided the next phase of the Mr. Williams saga -- the income tax phase. Williams v. Commissioner, T.C. Memo. 2011-89.

I write to review yesterday's decision.

The Tax Court first rejected Williams' argument that his consulting service income that he directed into a BVI corporation was not taxable to him until he repatriated it. Applying straightforward tax principles as to who is the earner of the income, the Tax Court held that the consulting service income was taxable to Williams and declined to consider whether the BVI corporation was a sham. If the sham issue were relevant to its decision, the Tax Court might then have had to deal with Williams' technical arguments about when income legitimately earner by an offshore corporation may be taxed to a U.S. taxpayer.

Consistent with its prior holding, the Court held that Williams was subject to the civil fraud penalty for the tax on this income.  The Court found that Mr. Williams had not proven that his failure to report and pay tax on the service income was not due to fraud.  (Readers will recall that, under 6663, once some portion of an underpayment is show to be attributable to fraud (as was established in Williams by estoppel because of the conviction, then all of the understatement is subject to the penalty unless the taxpayer shows otherwise; in practice, the IRS itself may not assert the fraud penalty for some portions of the deficiency, but when the IRS does assert the fraud penalty as to any portion, the burden shifts to the taxpayer to disprove the fraud with with respect to that item.)

Finally, the Court rejected Williams claims for charitable deductions. Here are the relevant facts as provided by the Court in its summary:

In 1996 P signed an agreement purporting to commit to purchasing works of art. The seller, S, ostensibly agreed to hold the art for 1 year before donating it on P's behalf to charity and promised that the art would cost P no more than 24 percent of the final appraised value of the art. S donated works of art on P's behalf in 1997, 1999, and 2000; P paid for the art close in time to the donations (within a year of each donation); and he claimed charitable contribution deductions for the full value determined in appraisals that S arranged.
The Court held as follows:

The evidence does not show that Mr. Williams owned the art as of the date of the initial agreement with Abbey in 1996 or at any other time earlier than a year before the donations. We find that Mr. Williams acquired a present interest in the art only when he agreed to pay Abbey for each batch of appraised art, and this occurred within less than a year of each donation. Thus, we agree with the IRS that because Mr. Williams owned the art for less than one year, he would not have been entitled to long-term capital gain treatment on any gain on the art if he had sold it, and therefore section 170(e)(1) limits his charitable contribution deduction to his basis in the art.
The Court finally held Williams liable for the accuracy related penalty on the tax resulting from denial of the charitable contribution amounts.

Not a good day for Mr. Williams.  On the events in the saga here, he is batting 1 for 4.

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