Tuesday, April 22, 2014

Crossing the Line in Tax Planning (4/22/14)

I report today on a civil case that shows how a civil dispute can involve a situation that perhaps should have been a criminal case.  In Moreland v. Koskinen, 2014 U.S. Dist. LEXIS 53308 (ND AL 2014), here, the taxpayers, husband and wife, complained that the IRS had denied their first time homebuyer credit.  (The precise procedural posture of the case is unclear, but I assume it was a refund suit; the taxpayers appeared pro se.)  Essentially, the taxpayers created a paperwork façade to give the appearance of qualifying for the credit, but the facts outside the paperwork showed that they did not qualify.

The law requires that property acquired from a related person does not qualify.  The Morelands and Mollie Holland, another otherwise unrelated taxpayer  (unrelated in the sense of the statutory disqualification), wanted to qualify otherwise unqualified properties.  In order to give the appearance that the properties qualified, they created a paperwork façade to make it appear that the Morelands temporarily owned property disqualified as to Ms. Holland so that she could "purchase" the property from the Morelands and vice-versa.

The key part of the decision is (bold-facing by JAT):
In the present case, the paperwork related to all of the real estate conveyances at issue appears to indicate, on its face, that Kevin Moreland purchased the Killen property from Noble and Donna Holland, who are not related to him in any way. If the technical form of that transaction were the only relevant consideration, Kevin and Melissa Moreland might be entitled to the receive the FTHBC. However, when viewed as a whole and in the light of all of the credible evidence, it is clear that the substance of the transaction was very different from its form. In substance, Noble and Donna Holland engaged in a property swap with Janie Moreland for the purpose of making it appear that their respective children qualified for the First Time Home Buyer Credit. There was no actual transfer of the subject properties. Noble and Donna Holland never took possession of the Killen property, and Kevin and Melissa Moreland never vacated it. Kevin and Melissa Moreland paid Noble and Donna Holland only a very small percentage of the money they purportedly owe for the property, and the Hollands never tried to collect from the Morelands. Similarly, Janie Moreland never took possession of the Leighton property, and Mollie Holland did not even move into that property after it had purportedly been transferred to her. Mollie Holland never paid Janie Moreland anything for the Leighton property, and Janie Moreland has never tried to collect anything from Mollie Holland. 
Stated in terms that are most favorable to the parties involved, the only substantive transactions that took place were the transfer of the Killen property from mother (Janie Moreland) to son (Kevin Moreland), and the transfer of the Leighton property from parents (Noble and Donna Holland) to daughter (Mollie Holland). Stated less charitably, each family, in exchange for the sum of $8,000, concocted a scheme to defraud the United States government via the Internal Revenue Service. Under either construction, plaintiffs are not entitled to the First Time Home Buyer Credit.
The case involved only one set of the taxpayers involved, the Morelands.  The other set also claimed the credit.  The Court described their situation as follows:
Mollie Holland claimed a First-Time Home Buyer Credit ("FTHBC") on her Form 1040EZ Income Tax Return for 2010.29 The IRS granted her the credit, but she decided in early 2014 to return all the money she received because, after further consultation with the IRS, she determined she was not entitled to the credit and that "it wasn't right" for her to retain the money.
There is no indication that a civil penalty was asserted against the Morelands.  Independent of this case, I think there was a legal issue of whether the credit could be subject to a civil accuracy related penalty; perhaps a reader can add something on that or, if I get the information, I can update this posting.

Regardless, these taxpayers better be glad that they were not criminally prosecuted.  Note the bold-face language from the opinion which states the elements of tax obstruction, Section 7212(a), here, and the defraud / Klein conspiracy under 18 USC 371, here.

I guess I would ask the question of whether the Morelands' conduct is really different in kind from GE's planning in the TIFD III case.  I have had several posts on that case.  Those posts can be picked up with a search on TIFD here.  Indeed in this sense, the Morelands' transactions may be considered their own homegrown, homebaked bullshit tax shelter.


  1. Your site is very excellent.It is very useful for everyone .I like it very most.
    It is very important for earning money. So earn money by using this Online. You can earn money at stay at home.If you can earn money ,Please visit this site Visit W3Schools,because it's very helpful for your earn money at stay at home,by using this Online.

  2. I see a big difference between creating false documents to deceive the IRS, on the one hand, and engaging in an aggressive shelter which is fully disclosed to the IRS on the other.

  3. The Internal Revenue Service has paid more than $2.8 million in bonuses to employees with recent disciplinary problems, including $1 million to workers who owed back taxes, a government investigator said Tuesday.

    More than 2,800 workers got bonuses despite facing a disciplinary action in the previous year, including 1,150 who owed back taxes, said a report by J. Russell George, the Treasury inspector general for tax administration. The bonuses were awarded from October 2010 through December 2012.

    George's report said the bonus program doesn't violate federal regulations, but it's inconsistent with the IRS mission to enforce tax laws.

    "These awards are designed to recognize and reward IRS employees for a job well done, and that is appropriate, because the IRS should encourage good performance," George said. "However, while not prohibited, providing awards to employees who have been disciplined for failing to pay federal taxes appears to create a conflict with the IRS's charge of ensuring the integrity of the system of tax administration."

  4. Taxpayer Advocate has a twitter account. Search for YourVoiceAtIRS.

    A tweet from the twitter account on Jan 16:

    Did you know the IRS OVD imposes significant penalties on taxpayers who made honest mistakes? Learn more: http://ow.ly/sEqo4

  5. How is calling a lender a partner and hiding the real facts in a morass of paper and words different that what the Morelands did?

    The only difference is that they were not sophisticated enough to do complex planning for the gambit. GE was and got caught anyway.

    Jack Townsend.

  6. GE is, if I am not mistaken, a corporation big enough that it is automatically audited every year, so they weren't trying to play the audit lottery. And the characterization of the counterparty as "lender" rather than "partner" is much more of a legal conclusion than a factual representation. No one is allowed to make a materially false statement of fact to the IRS, but a taxpayer is "not bound to determine a doubtful question against himself." Jemison v. Comm'r, 45 F.2d 4, 6 (5th Cir. 1930).

  7. Elliott,

    Large corporations subject to perpetual audits can still hide aggressive positions, just as can taxpayers subject to low audit rates. Indeed, when large corporations deliberately clothe such transactions in a blizzard of paper seeming related to their business (the underlying plane position was related to the business but the structuring in a way to hide the bank's role as lender in the guise of partner was not related to its business) with an army of in house and out house counsel contributing to the obscurity / bullshit (hence the apropos out house counsel), I suggest that that is probably even worse. These players should have known better.

    And they would have known better if they had gotten a real tax opinion rather than the best money can buy. But we have seen the opinion because GE chose not to rely upon it. One might infer that that was for good reason.

    Jack Townsend


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.