The reason for IRS audits

How does the IRS select who is going to be audited?  Typically it comes down to the taxpayer making up outlandish figures and thinking the IRS it too dumb to know the difference.

A very public case on point would be the Michael Jackson estate.  The US not only has an income tax, but also taxes the value of people’s estates when they die, the proverbial “death tax”.  As a general rule, if you have built up greater than 5 million in assets, upon your death, the IRS wants some of that money.

The estate tax, just like the income tax is a voluntary tax.  That is to say it is up to the estate to file an estate tax return, listing the value of the assets, and then pay the IRS what is owed to the IRS. As you can no doubt imagine, sometimes estates error on the low side when valuing the assets of the estate.

It seems the Michael Jackson estate might have erred on the low side.  According to the article in Billboard, his estate valued the rights to his name at a little over two thousand dollars.  (Its kind of hard for me not to laugh even as I type this.)  The IRS on the other hand is saying that particular asset is worth a bit over four hundred million dollars.

Therein lies the reason for an IRS audit.  Taxpayer makes an opening offer, many times outlandish, IRS doesn’t like it, IRS decides to review the return, tax attorneys buy new cars.

When you file your tax return don’t be stupid.  The IRS has millions of other returns to compare yours with and is going to come knocking if things are out of whack.  Sure their might be situations where you did have an incredibly large deduction or a bad year, if so make sure you have plenty of back up.

As always, if you have questions, or are subject to an IRS audit, come visit us.  We are tax lawyers out of La Quinta, Ca, so if you live in Palm Springs, Palm Desert, Indio, Rancho Mirage, Cathedral City, or Indian Wells, we are just down the street.

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Could you lose your license if you are behind in taxes?

The big news in the tax world is that New York just passed a law saying that if you owe the state more than $10,000, you could lose your drivers license.

What a lot of people don’t realize is that if you are behind in your California taxes there is a chance you could lose your driver’s license as well as any professional license you might need to work.

Back in 2011 a law was passed which required the franchise tax board to publish a list of the 500 people who owed the state the most in back taxes.  If you are lucky enough to be on that list, by law you are to lose your driver’s license as well as any professional license.

There is probably a pretty good chance that California is going to imitate New York and say that even if you aren’t on the top 500 list, you lose your license.

If you live in La Quinta, Rancho Mirage, Palm Desert, Cathedral City, Indio, or Palm Springs, and are looking for a tax attorney, tax lawyer, or enrolled agent,  we are just down the street and ready too help you.

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Do you have to pay taxes on your court settlement?

Congratulations, you’ve just settled with a former employer and received a payment of $400,000.  Do you have to pay income taxes on the settlement.

More than likely, yes, you will have to pay taxes on the settlement.

The only type of court awards and settlements the IRS will not subject to income taxes are those that specifically state the payment was made for some sort of physical injury. Below is a case where the individual harmed, Mr. Molina, asserted that he had all sorts of physical ailments due to the way he was treated at work.  While it was a nice try, the Tax Court said that you can’t just allege that you had physical injuries, rather the settlement or award must specifically state that the award is to compensate you for physical injuries. Since Mr. Molina’s settlement didn’t specifically allocate any damages to the physical injuries, the full amount of the award was taxable.

If you are involved in litigation and are expecting a large payout, give us a call to discuss strategies to minimize your taxes.  We’ve been helping taxpayers in Indio, La Quinta, Rancho Mirage, Palm Desert, Indian Wells, Cathedral City, and Palm Springs for over 30 years now.

 

 

 

 

TEXT:

 

 

JOSE B. MOLINA AND VIRNA N. MOLINA,

Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

 

Release Date: SEPTEMBER 23, 2013

 

Published by Tax Analysts(R)

 

UNITED STATES TAX COURT

 

Filed September 23, 2013

 

Jose B. Molina and Virna N. Molina, pro sese.

 

Wendy D. Gardner, for respondent.

 

MEMORANDUM FINDINGS OF FACT AND OPINION

 

WELLS, Judge: Respondent determined a deficiency of $ 155,402 in petitioners’ Federal income tax for their 2007 tax year.  n1 During trial, respondent [*2] conceded that petitioners are entitled to a deduction pursuant to section 62(a)(20) for counsel’s fees of $ 56,179 and that petitioners are entitled to four personal exemptions.  n2 After petitioners’ concessions,  n3 the only issue that we must [*3] decide is whether the $ 450,000 of proceeds petitioner Jose B. Molina received in 2007 from the settlement of his lawsuit against his former employer are excludable from petitioners’ gross income pursuant to section 104(a)(2).

 

FINDINGS OF FACT

 

Some of the facts and certain exhibits have been stipulated. The parties’ stipulations of facts are incorporated in this opinion by reference and are found accordingly. Petitioners are husband and wife who resided in New Jersey at the time they filed their petition.

 

From 1980 until 2007, Mr. Molina was employed by the Clearing House Payments Co., LLC (the Clearing House). Mr. Molina testified that, during 2004 and 2005, he began to suffer from “peptic ulcers, gastric problems, intestinal problems, [and] stomach pain” as a result of being overworked because of the lack of proper staffing and being racially discriminated against by supervisors at the Clearing House. Medical tests administered to Mr. Molina were inconclusive as to any viral infection or peptic ulcers. On July 29, 2005, Mr. Molina notified his supervisors at the Clearing House of insufficient staffing in his department and its [*4] potential detriment to employee morale and health. Mr. Molina never filed a disability claim with the Clearing House or its disability insurance carrier.

 

On May 1, 2007, Mr. Molina filed a complaint with the Superior Court of New Jersey against the Clearing House. In the complaint Mr. Molina alleged, inter alia, that the Clearing House and certain of its employees violated the New Jersey Law Against Discrimination and the Conscientious Employee Protection Act by creating a hostile work environment, discriminating against Mr. Molina because of his race and nationality, and retaliating against Mr. Molina for reporting the alleged discrimination. Mr. Molina also alleged in the complaint that he was the victim of assault and of “serious and significant emotional and physical distress”, but at trial he testified that he did not claim specific physical injuries in the complaint. In his complaint Mr. Molina sought compensatory damages, punitive damages, interest, costs of suit, attorney’s fees, and further relief as the Superior Court of New Jersey saw fit. On May 20, 2007, Mr. Molina amended the complaint to include an additional allegation under the Conscientious Employee Protection Act. On or about June 27, 2007, Mr. Molina’s case was removed to the U.S. District Court for the District of New Jersey.

 

On July 10, 2007, Mr. Molina, represented by his counsel, Paul Weiner, attended a mediation session with the Clearing House. At the conclusion of a [*5] mediation session, Mr. Molina and the Clearing House informally agreed to settle Mr. Molina’s claims against the Clearing House. Before signing an informal settlement document prepared by Mr. Weiner and representatives from the Clearing House, Mr. Molina had an opportunity to review the terms of the informal settlement document and discuss the terms with Mr. Weiner. Pursuant to the terms of the informal settlement document, Mr. Molina and the Clearing House agreed, inter alia, that Mr. Molina’s employment with the Clearing House was terminated effective July 10, 2007, and that the Clearing House would pay Mr. Molina a total of $ 700,000, split as follows: (1) $ 373,000, less applicable withholding, within 10 calendar days of the effective date of a settlement agreement; (2) $ 77,000 within 10 calendar days of the effective date of a settlement agreement; and (3) $ 250,000, less applicable withholding, on January 2, 2008. The Clearing House attributed the $ 77,000 payment to attorney’s fees for Mr. Molina’s counsel and the $ 373,000 and $ 250,000 payments to wages and other taxable benefits for Mr. Molina. The Clearing House did not attribute any of the payments to physical injuries, physical illness, or emotional distress.

 

On July 24, 2007, Mr. Molina and the Clearing House formalized the terms of the informal settlement document by executing the Confidential Settlement Agreement and Release (settlement agreement). The settlement agreement did not [*6] allocate any specific payments from the Clearing House to Mr. Molina on account of claims of physical sickness, physical injuries, physical distress, or emotional distress. Mr. Molina also agreed to a general waiver and release of the Clearing House and the other defendants “from and against any and all manner of actions, causes of actions, suits, proceedings, [and] liabilities”.

 

On July 24, 2007, Mr. Molina and the Clearing House entered a stipulation of dismissal with the U.S. District Court for the District of New Jersey, and on July 30, 2007, the District Court issued an order of dismissal.

 

During 2007, Mr. Molina’s attorneys, acting on behalf of Mr. Molina, received two payments from the Clearing House: a wire transfer of $ 260,988, which was $ 373,000 less applicable withholdings, and $ 77,000. Mr. Molina’s attorneys kept $ 44,800 of the $ 77,000 as attorney’s fees and transferred the remaining $ 293,188 to Mr. Molina. During 2007, petitioners paid total attorney’s fees of $ 56,179 in connection with Mr. Molina’s case against the Clearing House.

 

The Clearing House sent Mr. Molina a Form W-2, Wage and Tax Statement, that reported Mr. Molina received $ 483,535 of wage compensation during 2007.  n4 The Clearing House also sent Mr. Molina a Form 1099-MISC, [*7] Miscellaneous Income, that reported Mr. Molina received $ 77,000 of additional income during 2007. On their 2007 Federal income tax return, petitioners reported wages of $ 534,520  n5 but did not report the additional income of$ 77,000. On line 36 of their 2007 tax return, petitioners adjusted their gross income by $ 450,000. On a statement attached to their 2007 tax return petitioners stated that the $ 450,000 that Mr. Molina received pursuant to the settlement agreement should be excluded from gross income pursuant to section 104(a)(2). During May 2008, petitioners filed an amended tax return for their 2007 tax year, in which they removed the line 36 adjustment of $ 450,000 and added on line 21 other income of $ 450,000 but maintained that the amount should be excluded from gross income pursuant to section 104(a)(2).

 

Respondent sent and petitioners received a notice of deficiency dated June 7, 2011, determining that petitioners owed a deficiency of $ 155,402 for their 2007 tax year. On August 31, 2011, petitioners timely filed a petition in this Court.

 

[*8] On September 27, 2012, Jeffrey Raskin, Mr. Molina’s medical doctor, drafted a letter documenting some of Mr. Molina’s health concerns (Dr. Raskin’s letter). Dr. Raskin’s letter indicated that he had provided medical care for Mr. Molina for eight years, including a meeting on January 3, 2007, when Mr. Molina reported multiple gastrointestinal symptoms. Dr. Raskin stated that at the time of the meeting with Mr. Molina he believed that Mr. Molina’s symptoms “may have been due to his stress at work.” Dr. Raskin was not available to testify at trial.

 

OPINION

 

As a general rule, the Commissioner’s determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

 

Gross income generally includes all income from whatever source derived. Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955). The definition of gross income is broad in scope, while statutory exclusions from income are narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995). Damages (other than punitive) received on account of personal physical injuries or physical sickness may generally be excluded from gross income. Sec. 104(a)(2). The regulations provide that “[t]he term ‘damages’ * * * means an amount received * * * through prosecution of a legal suit or action, or [*9] through a settlement agreement entered into in lieu of such prosecution.” Sec. 1.104-1(c), Income Tax Regs. To exclude damages from gross income pursuant to section 104(a)(2), the taxpayer must establish that (1) the underlying cause of action is based upon tort or tort-type rights  n6 and (2) the damages were received on account of personal injuries or sickness. Commissioner v. Schleier, 515 U.S. at 337.  n7

 

Respondent concedes that petitioners have satisfied the first requirement for exclusion, i.e., that the underlying cause of action for which the settlement proceeds were paid was based upon tort or tort-type rights, because Mr. Molina [*10] sought to recover compensatory and punitive damages authorized by the New Jersey Law Against Discrimination and the Conscientious Employee Protection Act. Accordingly, we consider only the issue of whether the damages were received on account of personal physical injuries or physical sickness.

 

Where damages are received pursuant to a settlement agreement, the nature of the claim that was the actual basis for settlement controls whether the damages are excludable under section 104(a)(2). United States v. Burke, 504 U.S. 229, 237 (1992). Whether the settlement payment is excludable from gross income under section 104(a)(2) depends upon the nature and the character of the claims asserted and not upon the validity of those claims. See Bent v. Commissioner, 87 T.C. 236, 244 (1986), aff’d, 835 F.2d 67 (3d Cir. 1987); Church v. Commissioner, 80 T.C. 1104, 1106-1107 (1983). The crucial question is: “[I]n lieu of what was the settlement amount paid?” Bagley v. Commissioner, 105 T.C. 396, 406 (1995), aff’d, 121 F.3d 393 (8th Cir. 1997). To justify exclusion from income under section 104, the taxpayer must show that his settlement proceeds were in lieu of damages for physical injuries or physical sickness. See Green v. Commissioner, 507 F.3d 857, 867 (5th Cir. 2007), aff’g T.C. Memo. 2005-250; Bagley v. Commissioner, 105 T.C. at 406. The determination of the nature of the underlying claim is factual. Bagley v. Commissioner, 105 T.C. at 406; Robinson v. [*11] Commissioner, 102 T.C. 116, 126 (1994), aff’d in part, rev’d in part and remanded on another issue, 70 F.3d 34 (5th Cir. 1995).

 

Where there is a settlement agreement, the determination of the nature of the claim is usually made by reference to the agreement. See Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1965), aff’g T.C. Memo. 1964-33; Robinson v. Commissioner, 102 T.C. at 126. If the settlement agreement lacks an express statement of what the amount paid pursuant to that agreement was to settle, the intent of the payor is critical to that determination. Knuckles v. Commissioner, 349 F.2d at 613; see also Agar v. Commissioner, 290 F.2d 283, 284 (2d Cir. 1961), aff’g per curiam T.C. Memo. 1960-21. Although the belief of the payee is relevant to that inquiry, the character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment. Agar v. Commissioner, 290 F.2d at 284; Fono v. Commissioner, 79 T.C. 680, 696 (1982), aff’d without published opinion, 749 F.2d 37 (9th Cir. 1984).

 

The settlement agreement did not allocate any specific payments from the Clearing House to Mr. Molina on account of claims of physical sickness, physical injuries, physical distress, or emotional distress. Of the $ 450,000 to be paid to Mr. Molina during 2007 pursuant to the settlement agreement, the Clearing House attributed the $ 77,000 payment to attorney’s fees for Mr. Molina’s counsel and the [*12] $ 373,000 payment to wages and other taxable benefits for Mr. Molina. The Clearing House did not attribute any of the 2007 payments to physical injuries, physical illness, or emotional distress. Moreover, the settlement agreement did include a statement of Mr. Molina’s consent to a general waiver and release of the Clearing House and the other defendants “from and against any and all manner of actions, causes of actions, suits, proceedings, [and] liabilities”. We have held that the nature of underlying claims cannot be determined from a general release that is broad and inclusive, see Connolly v. Commissioner, T.C. Memo. 2007-98, 2007 WL 1201543, at *3, and that all settlement proceeds are included in gross income where there is a general release but no allocation of settlement proceeds among various claims, see Evans v. Commissioner, T.C. Memo. 1980-142. Accordingly, we conclude that petitioners have failed to prove that the Clearing House intended to compensate Mr. Molina for his physical injuries or physical sickness, rather than for a general release of various claims.

 

Petitioners allege that Mr. Molina suffered from “peptic ulcers, gastric problems, intestinal problems, [and] stomach pain” as a result of being overworked because of the lack of proper staffing and being racially discriminated against by supervisors at the Clearing House. Petitioners contend that the payments from the Clearing House should be excluded from gross income [*13] pursuant to section 104(a)(2) because the payments were to compensate Mr. Molina for physical sickness. Petitioners’ contention is without merit.

 

Petitioners cite Domeny v. Commissioner, T.C. Memo. 2010-9, 2010 WL 114287, in support of their contention that payments may be excluded from income if in satisfaction of a claim of stress-induced physical sickness. We believe that petitioners’ reliance on Domeny is mistaken. In Domeny, the settlement agreement was silent as to the payor’s intent but still allocated payments as wage compensation, attorney’s fees, and nonemployee compensation. Id., 2010 WL 114287, at *4. The Court concluded that the taxpayer offered credible evidence proving that she was physically ill and that she informed her employer of that fact, and held that the differing treatment of the three types of payments and the negotiations between the taxpayer and the employer suggested that at least a portion of the taxpayer’s recovery was attributable to that physical illness. Id.

 

In contrast, petitioners have not offered credible evidence establishing that Mr. Molina was physically ill or that Mr. Molina even informed the Clearing House of his alleged physical illness,  n8 the settlement agreement does not allocate [*14] payments to specific claims, and the Clearing House clearly intended for all of the payments to be wage compensation and attorney’s fees. Moreover, Mr. Molina’s complaint itself only mentioned a claim for “serious and significant emotional and physical distress”  n9 without elaborating specific physical injuries or [*15] sickness. Neither the complaint nor the amended complaint ever connected Mr. Molina’s alleged gastrointestinal problems with his claims for damages, which were based almost entirely on discrimination and retaliation. At trial, Mr. Molina admitted that he did not claim specific physical injuries or sickness in the complaint. Considering the facts that (1) the complaint placed little emphasis on Mr. Molina’s physical sickness, (2) the settlement agreement did not allocate any amounts specifically to physical sickness, and (3) the Clearing House did not intend for the payments to be in satisfaction of claims of physical sickness, we conclude that petitioners have failed to prove that any portion of the payments received under the settlement agreement was to compensate Mr. Molina for physical sickness.

 

Petitioners also contend that Mr. Molina did not have an opportunity to have the allocation of payments set forth in the settlement agreement altered before signing it. Mr. Molina testified that he was under the impression that the allocations (or lack thereof) set forth in the settlement agreement were mandated by the Internal Revenue Service and that he would not be taxed on those payments. We decline to address petitioners’ contentions because we find Mr. [*16] Molina’s testimony to be less than credible. A representative of the Clearing House who was present at the mediation where Mr. Molina and the Clearing House agreed to the terms of the settlement testified that both parties negotiated the terms of the settlement agreement at that mediation session and that Mr. Molina was represented by Mr. Weiner, his attorney, throughout the negotiation of those terms. Additionally, in an email communication to petitioner after the mediation session, Mr. Weiner stated that neither Mr. Weiner nor the Clearing House representatives told Mr. Molina that the allocations were unalterable or taxable. Instead, Mr. Weiner advised Mr. Molina that he was not a tax attorney and could not give Mr. Molina tax advice regarding the settlement proceeds and that Mr. Molina should confer with a tax professional. Accordingly, petitioners have not proved that Mr. Molina did not have an opportunity to have the payments set forth in the settlement agreement allocated.

 

On the basis of the foregoing, we conclude that petitioners have failed to prove that any portion of the payments received under the settlement agreement was to compensate Mr. Molina for personal physical injuries or physical sickness. Consequently, we hold that Mr. Molina’s proceeds of $ 450,000 pursuant to the settlement agreement are not excludable from petitioners’ 2007 gross income pursuant to section 104(a)(2). However, as stated above, respondent concedes that [*17] petitioners are allowed a fourth personal exemption and a deduction of $ 56,179 for counsel’s fees.

 

In reaching these holdings, we have considered all the parties’ arguments, and, to the extent not addressed herein, we conclude that they are moot, irrelevant, or without merit.

 

To reflect the foregoing,

 

Decision will be entered under Rule 155.

 

FOOTNOTES:

 

n1

 

Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended (Code) and in effect for the year in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar.

 

n2

 

Remaining adjustments set forth by respondent in the notice of deficiency depend on a Rule 155 computation, which we order below, and need not be addressed in this opinion.

 

n3

 

Petitioners contend that respondent denied them sufficient time to file their petition because they did not receive the deficiency notice until two months after respondent issued it. However, petitioners concede that they received a notice of deficiency and timely filed a petition. Moreover, petitioners do not contend specific harm caused by the alleged delay or alleged errors by respondent (e.g., that respondent did not send the notice of deficiency to petitioners’ last known address). Because petitioners bear the burden of proof but have failed to set forth clear and concise assignments of error or a clear and concise statement of facts, this issue is deemed conceded. See Rules 142(a), 34(b)(4) and (5); Funk v. Commissioner, 123 T.C. 213, 215 (2004); Jarvis v. Commissioner, 78 T.C. 646, 658 n.19 (1982).

 

 

Petitioners also contend that respondent refused to allow them to be represented by counsel, intimidated them against seeking counsel, misled them regarding the status of their case and a past abatement, and failed to send them a Letter 950. Generally, we will not look behind a notice of deficiency to examine the evidence used, the propriety of the Commissioner’s motives, or administrative policy or procedure used in making the determination. Cadwell v. Commissioner, 136 T.C. 38, 48-49 (2011), aff’d, 483 Fed. Appx. 847 (4th Cir. 2012); Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). Moreover, petitioners did not stipulate facts, present admissible evidence, or otherwise address these issues at trial or on brief. Accordingly, these issues are deemed conceded and we do not address them further. See Rule 149(b); Cadwell v. Commissioner, 136 T.C. at 49.

 

n4

 

Of Mr. Molina’s $ 483,535 of total wage compensation, $ 373,000 was attributable to amounts received under the settlement agreement. The remaining portion of his total wage compensation was attributable to actual wages received from the Clearing House before his termination on July 10, 2007, and is not at issue.

 

n5

 

Of the total wages of $ 534,520 petitioners reported, only $ 483,535 was attributable to Mr. Molina. The remaining $ 50,985 was attributable to wages earned by petitioner Virna N. Molina and reported to her on a Form W-2. Mrs. Molina’s wages are not at issue.

 

n6

 

But see sec. 1.104-1(c), Income Tax Regs. (as amended by T.D. 9573, 2012-12 I.R.B. 498). However the parties do not raise this regulation and, therefore, we do not address it.

 

n7

 

When the Supreme Court issued its opinion in Commissioner v. Schleier, 515 U.S. 323 (1995), sec. 104(a)(2), as in effect for the year at issue in that case, required, inter alia, that in order to be excluded from gross income an amount of damages had to be received “on account of personal injuries or sickness”. After the Supreme Court issued its opinion in Schleier, Congress amended (1996 amendment) sec. 104(a)(2), effective for amounts received after August 20, 1996, by adding the requirement that, in order to be excluded from gross income, any amount received must be on account of personal injuries that are physical or sickness that is physical. Small Business Job Protection Act of 1996, Pub. L. No. 104-188, sec. 1605, 110 Stat. at 1838. The 1996 amendment does not otherwise change the requirements of sec. 104(a)(2) or the analysis set forth in Schleier; it imposes an additional requirement in order for an amount to qualify for exclusion from gross income under that section. Hansen v. Commissioner, T.C. Memo. 2009-87, 2009 WL 1139469, at *5.

 

n8

 

At trial, petitioners offered Dr. Raskin’s letter as evidence that Mr. Molina suffered gastrointestinal symptoms as a result of stress at work. However, Dr. Rakin’s letter (1) was not admitted as evidence at trial, (2) was not considered by the Internal Revenue Service Office of Appeals, and (3) was not contemporaneously drafted at the time of the alleged physical symptoms but rather just days before trial. Additionally, Dr. Raskin was unable to testify at trial to verify the contents of the letter or to give testimony. Lab tests and other medical examinations ordered by Dr. Raskin were inconclusive as to any physical injuries or physical sickness, and Mr. Molina never filed a disability claim with the Clearing House or its disability insurance carrier. Therefore, the only evidence to support petitioners’ claims of physical sickness and physical injuries is Mr. Molina’s self-serving testimony, which we do not deem credible in the light of the foregoing.

 

n9

 

Although petitioners do not in their petition or brief explicitly claim that proceeds from the settlement agreement were in satisfaction of Mr. Molina’s claims for emotional distress, emotional distress is a listed claim in Mr. Molina’s complaint. However, sec. 104(a) provides that emotional distress is not to be treated as a physical injury or physical sickness for purposes of excluding damages from gross income pursuant to sec. 104(a)(2), except for damages not in excess of the amount paid for medical care attributable to emotional distress. See Blackwood v. Commissioner, T.C. Memo. 2012-190, 2012 WL 2848677, at *5; see also Hansen v. Commissioner, T.C. Memo. 2009-87. Additionally, the legislative history of the 1996 amendment states: “[I]t is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.” H.R. Conf. Rept. No. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041. Because petitioners have not alleged that Mr. Molina incurred medical costs or offered evidence in support thereof, we conclude that no portion of the proceeds paid to Mr. Molina under the settlement agreement may be excluded from gross income pursuant to sec. 104(a)(2) on account of emotional distress.

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Received a bad 1099?

Have your received a 1099 with bad information?  A 1099 that had an incorrect amount?  It certainly wouldn’t be the first time that someone issued a bad 1099.

Think about it, millions of 1099s are issued each year, there are going to be mistakes.  If memory serves me correctly a recent report said something like 50% of the information returns associated with IRAs were filled out incorrect.

If you did receive a 1099 with the wrong amount on it, don’t freak out.  The general rule is that if you have cooperated with the IRS, the burden is on the IRS to prove that the amount on the 1099 is incorrect.  To put it differently if you tell the IRS the amount is incorrect the IRS has to provide evidence the amount is correct.  That probably isn’t going to happen.

Below is the relevant language from a recent court case where the taxpayer who saved himself over $22,000 by contesting the 1099.

If you receive an incorrect 1099, don’t just accept it and pay the taxes.  Give us a call and see what your options are.  If you live in Palm Desert, Palm Springs, La Quinta, Rancho Mirage, Indio, Cathedral City, Indian Wells, or the entire Coachella Valley we are just a short drive away.

 

 

The term “gross income” is broadly defined in the Code to include all income from whatever source derived. Sec. 61(a). An amount received in connection with a life insurance contract which is not received as an annuity generally constitutes gross income to the extent that the amount received exceeds the investment in the insurance contract. Sec. 72(e)(1)(A), (5)(A), (C); Brown v. Commissioner, 693 F.3d 765, 768 (7th Cir. 2012), aff’g T.C. Memo. 2011-83; Sanders v. Commissioner, T.C. Memo. 2010-279. The investment in the contract is defined as the aggregate amount of premiums or other consideration paid for the contract less aggregate amounts previously received under the contract to the extent they were excludable from gross income. Sec. 72(e)(6).

 

When NML determined that petitioner’s insurance policies had lapsed, it applied the cash values of the policies to the outstanding balances on petitioner’s loans. As we have explained in numerous cases, the act of applying the cash value of a life insurance policy against an outstanding loan is not different from distributing the proceeds to the taxpayer (including the untaxed inside buildup) to permit the taxpayer to use the proceeds to pay off the loan. See Feder v. Commissioner, T.C. Memo. 2012-10, 2012 WL 75114, at *4 (and cases cited thereat).

 

A preliminary issue in this case, however, is whether NML correctly determined that petitioner’s insurance policies had lapsed in 2009. As a general rule, the taxpayer bears the burden of showing that the Commissioner’s determination is in error. Rule 142(a). As an exception to this general rule, if a taxpayer raises a reasonable dispute with respect to a third-party information return (such as the Form 1099-R in dispute) and has otherwise fully cooperated with the Commissioner, the burden of production may shift to the Commissioner to present reasonable and probative evidence to verify the information return. Sec. 6201(d).  n5

 

Petitioner contends that he fully cooperated with respondent, that there are legitimate questions regarding the accuracy of NML’s determination that his insurance policies lapsed in 2009, and that he tried but failed to persuade NML to produce the records necessary to verify and substantiate the information reported in the Form 1099-R. Petitioner asserts that he cannot be certain that his insurance policies actually lapsed in 2009 without detailed records showing the amounts of premium loans, the interest computations related to those loans, and NML’s dividend distributions over the life of the policies — yet NML refused to produce those records. Petitioner further contends that NML’s letters and annual policy statements raise more questions than they answer. Specifically, petitioner notes that (1) NML’s annual policy statements for the 1972 policy make reference to basic insurance coverage of $ 22,000, in contradiction of the 1972 policy which provides for basic insurance of $ 20,000, (2) there is no explanation for the seemingly anomalous decrease in the net cash value of the 1972 policy from $ 3,331.75 in 2006 to $ 1,481.09 in 2008, and (3) NML’s letter to him dated November 8, 2010, erroneously stated that his insurance policies “lapsed to Extended Term Insurance in 1999″.  n6 Petitioner maintains that, considering all the circumstances, the burden of production shifted to respondent under section 6201(d), and respondent failed to meet his burden under that provision of law.

 

Respondent contends that petitioner has not raised a reasonable dispute in respect of the accuracy of the Form 1099-R. Specifically, respondent asserts that “[b]y petitioner’s own admission, long-term computations such as these can be complex and difficult to verify in exacting detail without access to copious records. However, taken on the whole, the computations provided by * * * [NML] follow a logical pattern explaining petitioner’s situation.”

 

Contrary to respondent’s position, petitioner raised a reasonable dispute regarding the accuracy of the Form 1099-R. Although petitioner points to relatively minor discrepancies in NML’s records, we agree with petitioner that the discrepancies are of such a nature that their cumulative effect, compounded over the extended terms of the policies in question, would likely be significant and could very well alter the dates that the insurance policies lapsed.

 

Respondent also avers that petitioner “did not bring these alleged errors to respondent’s attention until the day of the trial.” The burden of production shifts to the Commissioner under section 6201(d) only if the taxpayer fully cooperates with the Commissioner by providing, within a reasonable period, access to and inspection of all witnesses, information, and documents within the control of the taxpayer as reasonably requested. Respondent did not present any evidence that petitioner failed to respond to reasonable requests for information. Considering petitioner’s detailed communications with IRS personnel before and after the notice of deficiency was issued and the fact that he apparently was not given the opportunity to discuss the matter with the Appeals Office, we conclude that petitioner fully cooperated with respondent within the meaning of section 6201(d).

 

As a final matter, respondent contends that he produced “reasonable and probative information” in support of the Form 1099-R. We disagree. Aside from the documents that the parties agreed to submit to the Court by way of stipulation, most of which came from petitioner, the only information that respondent offered was Ms. Stilwell’s declaration. That declaration merely restates the summary information that NML provided to petitioner in its letters dated November 1 and 8, 2010. The declaration does nothing to assuage doubts surrounding the accuracy of the Form 1099-R.

 

In sum, on the record presented, we conclude that the burden of production shifted to respondent under section 6201(d), and respondent failed to produce reasonable and probative information regarding the accuracy of the Form 1099-R in dispute. Unlike his approach in similar cases, see Feder v. Commissioner, T.C. Memo. 2012-10; Sanders v. Commissioner, T.C. Memo. 2010-279, respondent did not obtain detailed records of petitioner’s premium payments and loan history to corroborate NML’s Form 1099-R in the face of legitimate questions as to its accuracy. Absent such information, there is insufficient evidence to verify that petitioner received the constructive distribution of $ 49,255.24 that NML reported to respondent or to otherwise sustain the deficiency in dispute.

 

To reflect the foregoing,

 

Decision will be entered under Rule 155.

 

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Missed Checkbox is probably going to cost millions in taxes

Worried that if you forgot to check a box the IRS or Franchise Tax Board can hit you with a bunch of penalties?

Unfortunately it seems your fear is justified.

A San Francisco judge recently determined that Sprint (yes, that Sprint) lost an appeal because Sprint forgot to check a box on a form.  By the way that form has been subsequently changed to make it more apparent the box needs to be checked.

It’s really too bad that a judge let strict compliance over ride common sense and fairness, but that is the decision she made.

I’ve said it hundreds of times.  Tax returns and litigation are not something the average person should be doing.  Hundreds, if not thousands of dollars, are on the line with the decisions you make.  Many times those decisions have nothing to do with common sense and everything to do with knowledge or stupid, arcane laws.

If you live in Indio, Cathedral City, Palm Springs, Palm Desert, Rancho Mirage, La Quinta, or Indian Wells, give us a call.  We would love to sit down and discuss your situation with you.

 

SPRINT TELEPHONY PCS, L.P., ET AL,

Plaintiff(s),

v.

STATE BOARD OF EQUALIZATION, ET AL,

Defendant(s).

 

Release Date: OCTOBER 01, 2013

 

Published by Tax Analysts(R)

 

SUPERIOR COURT OF CALIFORNIA

COUNTY OF SAN FRANCISCO

DEPARTMENT NO. 613

 

ORDER GRANTING DEFENDANT

STATE BOARD OF EQUALIZATION’S

MOTION FOR SUMMARY JUDGMENT

 

Defendant State Board of Equalization’s motion for summary judgment came on regularly for hearing on July 2, 2013 in Department 302 of the above-entitled Court. On September 9, 2013 the Court issued a minute order requiring supplemental briefing and continuing the hearing to September 20, 2013 in Department 613. The matter was deemed submitted on that date. Having reviewed all papers submitted by the parties and heard oral argument, the Court rules as follows:

 

After full consideration of the evidence, and the written and oral submissions by the parties, the Court finds that there is no triable issue of material fact, and that the Board is entitled to judgment as a matter of law.

 

Under Revenue and Taxation Code section 5148, subdivisions (f) and (g), a taxpayer must file a petition for reassessment or petition for correction of allocated assessment that states that the petition is intended to serve as a claim for refund as a prerequisite to maintaining a suit for recovery of state-assessed property taxes. Revenue and Taxation Code section 5148, subdivision (f) provides that a timely filed petition for reassessment constitutes a claim for refund “if the petitioner states in the petition it is intended to serve.”

 

Plaintiffs’ petition for reassessment included a form petition, BOE Form 529-A, in which Item 4 provides: “This is a request refund according to Revenue and Taxation Code section 5148(f).” Plaintiffs failed to check either the “Yes” or the “No” box next to this statement in the form petition. Plaintiffs also did not include any statement in their petition for reassessment that the petition was intended to serve as a claim for refund. (Board’s Request for Judicial Notice, Exhibit A.) Therefore, the petition for reassessment filed by Plaintiffs did not constitute a claim for refund. By failing to file a petition that constituted a claim for refund, Plaintiffs failed to exhaust their administrative remedies. Plaintiffs thus are barred from maintaining this suit for refund from Revenue and Taxation Code section 5148, as a matter of law.

 

“After payment of a tax claimed to be illegal, an action may be maintained to recover the tax paid, with interest, in such manner as may be provided by the Legislature.” (Cal. Const. art. XIII, section 32.) “[S]tatutes governing administrative tax refund procedures, backed as they are by a plenary constitutional authority, are to be strictly enforced.” (Farrar v. Franchise Tax Bd. (1993) 15 Cal.App.4th 10, 20-21.) “Because article XIII, section 32 vests the Legislature with plenary control over the manner in which tax refunds may be obtained, a party ‘must show strict, rather than substantial, compliance with the administrative procedures established by the Legislature. [Citation.]’ [Citation.]” (IBM Personal Pension Plan v. City and County of San Francisco (2005) 131 Cal.App.4th 1291, 1299.) In this case, neither the hearing on reassessment in 2009 nor the checking of boxes nos. 5a and 5d on the form petition affects the threshold issue of Plaintiffs’ failure to comply with Rev. & Tax. Code 5148(f).

 

Therefore, it is ordered that Defendant State Board of Equalization’s motion for summary judgment is granted, and that judgment in favor of Defendant State Board of Equalization and against Plaintiffs Sprint Telephony PCS, L.P., Sprint Spectrum L.P., Wirelessco, L.P., Nextel of California, Inc. and Nextel Boost of California, LLC shall be entered accordingly. The parties shall jointly submit a proposed form of judgment (or, if they cannot agree, separate proposed forms of judgment) within five (5) court days of this Order.

 

Defendant State Board of Equalization shall serve this Order on all parties not including in this Order’s proof of service.

 

It is so ordered.

 

Dated: October 1, 2013

Hon. Ernest Goldsmith

Judge of the Superior Court

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A 2nd chance with your IRS Audit, aka an audit reconsideration

What would you do if the IRS told you you owed them a few million dollars, and they were wrong?  Wouldn’t you spring a couple thousand dollars for some legal help?

It appears the taxpayer, Mr. Seifert, in a recent court case had the typical response, they ignored the letters from the IRS.  Since he ignored the letters, the IRS won by default and the poor guy ended up owing the IRS millions of dollars that he probably never owed.

Even when he went to tax court, Mr. Seifert still didn’t hire any professional to represent him, guess what, he lost again.  Luckily though for Mr. Seifert the tax court tossed him a life preserver they told Mr. Seifert that he should pursue something called an “audit reconsideration”.

What is an audit reconsideration?

An audit reconsideration is an incredibly powerful tool that few tax advisors actually use. If you can show the IRS the initial audit was incorrect, typically by presenting new evidence, you can request the IRS to reconsider its initial audit.  Amazingly enough this actually works.  If you can show the IRS they were wrong the first time, they will wipe out the tax liability that was generated from the first audit.

The court case is below, and here is a link to the IRS manual on audit reconsiderations.

If you or someone you know was hit with an unjust tax assessment you really need to consider hiring a professional who has experience in this area.  If you don’t fight it you just might be stuck with a tax bill that could literally ruin your life.

We serve Palm Desert, Indio, La Quinta, Palm Springs, Cathedral City, Rancho Mirage, Indian Wells, and the entire Coachella Valley.

 

ALBERT A. SEIFERT,
Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

Release Date: OCTOBER 18, 2013

UNITED STATES TAX COURT

ORDER AND DECISION

 

This is a “collection due process” (“CDP”) case brought under section 6330(d), in which we review a collection determination by the Office of Appeals of the Internal Revenue Service (IRS). Respondent (the Commissioner of Internal Revenue) moved for summary judgment on August 27, 2013; petitioner Albert A. Seifert filed a response on September 13, 2013; and the Commissioner filed a reply on September 30, 2013. We will grant the Commissioner’s motion.

 

BACKGROUND

 

Mr. Seifert’s securities transactions

 

During the year 2007 Mr. Seifert engaged in numerous securities transactions. We assume (without deciding) the facts that he alleges about these transactions — i.e., that he acquired these securities at a cost of over $ 113 million, that they yielded total sale proceeds to him of over $ 114 million, and that his gain from these sales was $ 560,811.

 

Mr. Seifert further alleges (and we asume) that he prepared an income tax return for the year 2007 on which he reported those gross proceeds, that cost, and that gain. Mr. Seifert also alleges (and we assume) that he attempted to file electronically (and believes he did file) such a tax return for 2007; but the IRS’s records show that it received no 2007 return from Mr. Seifert.

 

Issuance and receipt of the IRS’s notice of deficiency

 

The IRS did receive from third parties Forms 1099 reporting the securities transactions-but not reflecting any cost basis for Mr. Seifert. The IRS therefore issued to Mr. Seifert, pursuant to section 6212, a statutory notice of deficiency on which all the gross sale proceeds were reflected as income (with no reduction for any cost), and on which the IRS determined a tax liability of over $ 39.8 million, plus additions to tax, penalties, and interest for which the total now exceeds $ 70 million. We therefore assume (without deciding) that this figure greatly exceeds his actual liability.

 

Mr. Seifert admits in his petition that a notice of deficiency “was indeed mailed to my address which was in a drastically incorrect amount”. See also Ex. 21 (letter of 6/6/2012; “notice of deficiency letters sent to me”); reply filed 2/21/2013, para. 8(c) (“Petitioner received deficiency notice.”). Mr. Seifert thus does not dispute that he received the notice of deficiency. In his request for a CDP hearing discussed below, Mr. Seifert asserted that “no deficiency notice was received”, but in his opposition to the Commissioner’s motion he explains that “his meaning is that ‘no accurate deficiency notice was received.’ Respondent indeed sent Petitioner inaccurate deficiency notice(s) reflecting zero cost basis tax liability for year involved. (2007)”. (Emphasis added.)

 

However, Mr. Seifert did not file a suit in Tax Court challenging that notice of deficiency pursuant to section 6213(a).

 

Levy notice and CDP hearing

 

The IRS therefore assessed the deficiency and issued to him a notice of levy and of his right to a CDP hearing pursuant to section 6330. Mr. Seifert then requested that CDP hearing, which was conducted by the IRS Office of Appeals. His CDP request on Form 12153 asserted that “Balance is drastically incorrect.”

 

On that form Mr. Seifert also checked the box indicating that “I cannot pay balance”; but the IRS’s motion shows-and Mr. Seifert does not dispute-that he did not submit financial information about himself to Appeals on Form 433 to substantiate his inability to pay. Rather, his sole contention in the CDP hearing was his challenge to the 2007 liability. As he explains in his opposition to the IRS’s motion, “the sole subject and entire reason for this case existing is the issue of whether or not the (approximate) $ 70 million intent to levy notice which the Respondent filed against me for tax year 2007 is valid and actual”.

 

(The Commissioner contends that Mr. Seifert did not properly raise during the CDP hearing his cost basis in the securities sales; but Mr. Seifert disputes this contention. For purposes of the pending motion, we assume that Mr. Seifert did raise the issue and did present at least some factual support for his contention that his cost was over $ 113 million.)

 

Notice of determination and petition

 

On September 6, 2012, IRS Appeals issued a notice of determination sustaining the notice of levy, pursuant to section 6330(c)(3). On October 1, 2012, Mr. Seifert then timely mailed a petition to this Court pursuant to section 6330(d), appealing that determination.

 

On August 17, 2013, the Commissioner filed his motion for summary judgment, arguing that Mr. Seifert cannot challenge his liability in this proceeding. However, the Commissioner explains (at pages 2-7 of its reply filed September 30, 2013) that, outside the CDP context, Mr. Seifert may either request audit reconsideration or submit an Offer in Compromise based on Doubt as to Liability.

 

DISCUSSION

 

Prior opportunity for dispute

 

Mr. Seifert asserts that “the sole subject” of this case is his contention that he does not actually owe the tax that the IRS is attempting to collect from him for 2007. That is, he challenges the asserted liability. We observe that it is a very plausible challenge, since gain on a sale must take into account the seller’s cost.

 

When Mr. Seifert received the notice of deficiency, he had an opportunity to challenge that liability in Tax Court. He could have presented evidence of his cost basis in the securities and, depending on his proof, could have seen his liability reduced or eliminated. But he did not do so. Consequently, the IRS’s determination went unchallenged, and the IRS therefore had the right and the responsibility to assess and collect the tax it had determined. When the IRS undertook to collect the tax, then Mr. Seifert attempted for the first time to challenge that liability — in the CDP hearing.

 

However, under section 6330(c)(2)(B), Mr. Seifert may raise a challenge to the underlying liability as part of the CDP hearing only if he “did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability.” But Mr. Seifert does not dispute that he did receive a notice of deficiency with respect to his 2007 liability. As a result, he is not permitted in the agency-level CDP hearing (nor in this judicial review of it) to challenge that liability.

 

Other issues

 

Mr. Seifert does not advance other issues that we might review. He did not propose any installment agreement or offer in compromise; and denial of a collection alternative when none is proposed or requested is not an abuse of discretion. See Kendricks v. Commissioner, 124 T.C. 69, 79 (2005). Mr. Seifert’s initial request for a CDP hearing seemed to indicate that he “cannot pay balance” and that he might therefore request that Appeals put him in “currently not collectible” status. However, he did not substantiate that status by providing his financial information on Form 433, so Appeals did not abuse its discretion by not granting that status. Pitts v. Commissioner, T.C. Memo. 2010-101, slip op. at 17-20. It is therefore

 

ORDERED that the Commissioner’s motion for summary judgment is granted. However, Mr. Seifert is strongly encouraged to consider accepting the invitation of the Commissioner (made at pages 2-7 of his reply filed September 30, 2013) either to request audit reconsideration or to submit an Offer in Compromise based on Doubt as to Liability, outside of the CDP context.

 

It is further

 

ORDERED AND DECIDED that the proposed collection action in the Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330, dated September 6, 2012, for tax year 2007 is sustained.

David Gustafson

Judge

 

ENTERED: OCT 18, 2013

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The FTB knows all

A couple new laws were just implemented that really point out the extent to which the franchise tax board shares information with other agencies, cities, and yes, even Mexico.

Take a look at the amendments to section 19551 of the Revenue and Tax Code:

“19551. (a) The Franchise Tax Board may permit the Commissioner of Internal Revenue of the United States, other tax officials of this state, the Multistate Tax Commission, the proper officer of any state imposing an income tax or a tax measured by income or the authorized representative of that officer, or the tax officials of Mexico, if a reciprocal agreement exists, to inspect the income tax returns of any taxpayer, or may furnish to the commission, or the officer or the authorized representative thereof an abstract of the return or supply thereto information concerning any item of income contained in any return or disclosed by the report of any investigation of the income or return. “

Yep, not only does the IRS and other states get access to your tax return, but Mexico could as well.

But wait, what about your city, shouldn’t they be allowed access as well?

“19551.1. (a) (1) The Franchise Tax Board may permit the tax officials of any city to enter into a reciprocal agreement with the Franchise Tax Board to obtain tax information from the Franchise Tax Board, as specified in subdivision (b).”

How about other agencies, should they be allowed to share their data as well as receive data from the ftb? Well a new law has created something called the, “Revenue Recovery and Collaborative Enforcement Team”.  This team is composed of the California State Board of Equalization (BOE), Franchise Tax Board (FTB), Employment Development Department (EDD), and Department of Justice (DOJ).  Agencies that could also be included are: (1) California Health and Human Services Agency; (2) Department of Consumer Affairs; (3) Department of Industrial Relations; (4) Department of Insurance; and (5) Department of Motor Vehicles.

In short pretty much all your information is now available to the franchise tax board.  How are they going to use it? Check this out, https://www.ftb.ca.gov/aboutFTB/Public_Service_Bulletins/2013/Bulletin_1320.shtml

Its an FTB notice on their program to review owners of luxury cars to see if they have properly filed tax returns.  I’ve read the FTB considers a car that cost over $40,000 as a luxury car.  I’m pretty sure my Uncle spent more than that on his new Nissan 4X4.

If you think you are tricky and can avoid your taxes, think again.  We live in the information age and all your information is going to start being used against you.

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Can the IRS take away your house?

A big fear of people when they receive a notice of intent to levy from the IRS is that they are going to lose their home.  The big question is, “Can the IRS take away our home?”

The simple answer is yes, the IRS can take away your home.  The fancy phrase is the IRS can levy your home.  Having the ability to take away your home and actually doing it are two different things though.  As a general rule you really have to irritate the IRS for them to start an action to take your home, and they have to get special approval to do so.

Below is a case where the IRS did in fact get authority to sell someone’s property.

If you’ve received a levy notice from the IRS or Franchise Tax Board, the worst thing you can do is ignore it.  Give us a call and we can help you find a solution.

We serve Palm Springs, Rancho Mirage, Indio, Cathedral City, Indio, La Quinta, and Palm Desert.

 

 

 

UNITED STATES OF AMERICA,
Plaintiff,
v.
JOHN J. TOLMACHOFF; NINA V. TOLMACHOFF;
LOVE TRUST, BY KENNETH F. BLAKELY, TRUSTEE,
AND BY ELISHA TOLMACHOFF, TRUSTEE; CALIFORNIA FRANCHISE TAX BOARD;
Defendants.

Release Date: OCTOBER 08, 2013

Published by Tax Analysts(R)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF CALIFORNIA

ORDER FOR ENTRY OF JUDGMENT

Pursuant to the agreement of the parties, the Clerk of Court is DIRECTED to enter judgment in this case pursuant to the following terms:

1. John J. Tolmachoff and Nina V. Tolmachoff are jointly and severally indebted to the United States in the amount of $ 50,200.27 for individual income tax for the taxable periods ending for the taxable periods ending December 31, 1997, 1998, 1999, 2007, and 2008 (the “tax years at issue”), plus interest according to 28 U.S.C. section 1961(c) and 26 U.S.C. section 6601, 6621(a)(2), from September 6, 2013, until the judgment is paid.

2. The United States will abate any tax, penalty, and interest assessments for the tax years at issue in excess of the amount set forth in the paragraph above.

3. The real property that is the subject of this action is located at 11911 West Central Avenue (herein referred to as “11911 West Central Avenue”), in the County of Fresno, State of California, and is more particularly described as follows:

THE NORTH 267 FEET OF THE WEST 407.87 FEET OF THE
WEST HALF OF THE NORTHWEST QUARTER OF SECTION 34
T.14 S., R.18 E., M.D.B. & M., IN THE COUNTY OF FRESNO,
STATE OF CALIFORNIA, ACCORDING TO THE OFFICIAL PLAT
THEREOF;

EXCEPTING THEREFROM AN UNDIVIDED / INTEREST IN AND
TO ALL OIL, GAS AND OTHER MINERALS IN AND UNDER THE
SAID LANDS. TOGETHER WITH THE RIGHT TO PROSPECT,
EXPLORE AND DRILL FOR AND TO PRODUCE AND MARKET THE
SAME AND WITH FULL AND FREE RIGHTS OF INGRESS AND
EGRESS AT ANY TIME AND FROM TIME TO TIME FOR ALL
OR ANY OF SAID PURPOSES, AS RESERVED IN THE DEED
FROM THE ANGLO CALIFORNIA NATIONAL BANK OF SAN FRANCISCO,
A NATIONAL BANKING ASSOCIATION, TO J.G. GREGORY AND
HETTA C. GREGORY, HIS WIFE, RECORDED FEBRUARY 7,
1942 IN BOOK 2009 PAGE 383 OF OFFICIAL RECORDS, DOCUMENT
NO. 57994;

ALSO EXCEPTING THEREFROM AN UNDIVIDED / INTEREST
IN ALL OIL, GAS AND MINERAL RIGHTS, AS RESERVED IN
THE DEED FROM J.G. GREGORY AND HETTA C. GREGORY,
HIS WIFE, TO KENNETH E. HANSEN, AND MILDRED ANN HANSEN,
HIS WIFE, RECORDED FEBRUARY 4, 1947 IN BOOK 2492
PAGE 380 OF OFFICIAL RECORDS, DOCUMENT NO. 7145;

AND ALSO EXCEPTING THEREFROM AN UNDIVIDED / INTEREST
IN ALL OIL, GAS, MINERALS AND HYDROCARBON SUBSTANCES
THEREIN AND THEREUNDER, TOGETHER WITH THE RIGHT TO
ENTER UPON SAID LAND TO EXPLORE FOR, DRILL FOR, PRODUCE
AND STORE UPON, AND REMOVE ALL SUCH SUBSTANCES THEREFROM,
AS RESERVED BY MILDRED ANN HANSEN IN THE DEED RECORDED
MAY 20, 1968 IN BOOK 5571 PAGE 506 OF OFFICIAL RECORDS,
DOCUMENT NO. 35481.

CONTAINING 2.50 ACRES, A LITTLE MORE OR LESS.

APN: 025-110-50

4. The Love Trust is the alter ego of defendants John J. Tolmachoff and Nina V. Tolmachoff.

5. Title to 11911 West Central Avenue is hereby transferred from the board of trustees of the Love Trust to “John J. Tolmachoff and Nina V. Tolmachoff, husband and wife, as joint tenants.”

6. The parties have an agreement as to the enforcement of this judgment, one term of which is that 11911 West Central Avenue will not be sold by judicial sale for 180 days from the date of entry of this judgment.

7. After the time set forth above in paragraph 6, the United States will be entitled to foreclose its liens against 11911 West Central Avenue and that property will be sold, if necessary, pursuant to further order of this Court.

8. The California Franchise Tax Board disclaimed any interest in 11911 West Central Avenue on November 21, 2011 (Doc. No. 7); and

9. Each party shall be liable for its own costs of litigation and attorneys’ fees.

IT IS SO ORDERED.

DATED: October 8, 2013.

Sheila K. Oberto
United States Magistrate Judge

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Levied by the IRS, how does the shutdown affect you?

Have you had your wages or bank account garnished by the IRS?  Is the IRS taking away your social security?

That’s exactly what happened to one couple, the IRS started to levy or garnish the couples social security benefits (Yes, the IRS is allowed to take away some of your social security payments).  The couple tried to file for a due process hearing, but the government shutdown got in the way.

Is that a violation of the couple’s rights?  Sure seems so.  They even got a high powered law firm to file a suit about the situation.

If your social security or pension benefits are being taken away by the IRS or franchise tax board, give us a call.  We work with this sort of thing all the time and stand a good chance to get the levy removed.  If you live in Palm Springs, Indio, Cathedral City, Indian Wells, La Quinta, Palm Desert or Rancho Mirage, come visit us in person.  We are just down the street.

 

EARL JOHNSON AND
BETTY JOHNSON,

Plaintiffs,

v.

DANIEL I. WERFEL, ACTING
COMMISSIONER OF INTERNAL
REVENUE OF THE UNITED STATES
OF AMERICA, IN HIS OFFICIAL CAPACITY,

and

INTERNAL REVENUE SERVICE,

A DIVISION OF THE DEPARTMENT OF THE

TREASURY, AN AGENCY OF THE UNITED

STATES OF AMERICA,

Defendants.

 

Release Date:

 

Published by Tax Analysts(R)

 

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF VIRGINIA

Newport News Division

 

VERIFIED COMPLAINT

 

COME NOW Earl Johnson and Betty Johnson, husband and wife (collectively, the “Johnsons”), and for their Verified Complaint against the Commissioner of Internal Revenue of the United States of America (the “Commissioner”) and the Internal Revenue Service (“IRS”), a division of the Department of the Treasury of the United States of America, respectfully state as follows.

 

Introduction

 

1. This is an action for a temporary restraining order, and temporary and permanent injunctive relief, against Daniel I. Werfel, in his official capacity as Acting Commissioner of Internal Revenue of the United States and the Internal Revenue Service (“IRS”), seeking to enjoin the issuance and enforcement of an “automatic” notice of levy by the IRS against the plaintiffs, who are low-income taxpayers suffering extreme financial hardship. Because of the shutdown of most activities of the United States Government as of October 1, 2013, the plaintiffs’ statutory right to a due process hearing on their request for a hardship exclusion to this automatically-issued levy on their Social Security benefits has been rendered meaningless, and plaintiffs have no way to stop a levy that will wreak financial havoc upon them save by action of this Court.

 

Parties, Jurisdiction & Venue

 

2. Earl and Betty Johnson are husband and wife and are residents of the City of Newport News, Virginia.

 

3. The Commissioner is the officer of the United States Government charged with executing the nation’s laws with respect to taxation, and is the chief executive officer of the Internal Revenue Service (“IRS”), a part of the Department of the Treasury.

 

4. This action raises a question of federal law, relating to laws providing for internal revenue, and accordingly this Court enjoys subject matter jurisdiction pursuant to 28 U.S.C. section 1331 and 1340.

 

5. This Court enjoys personal jurisdiction over the Commissioner and the IRS because they are, respectively, an officer and an agency and instrumentality of the United States whose actions have caused and are causing injury to the plaintiffs within this judicial district.

 

6. Venue is proper in this district pursuant to 28 U.S. C. section 1396 because this is a matter relating to internal revenue, the liability for the taxes placed at issue accrued in this district and the residence of the plaintiff-taxpayers is within this district. Divisional venue is proper in this division because the liability for the taxes placed at issue accrued within this division and the residence of the plaintiff-taxpayers is within this division.

 

Factual Background

 

7. Earl Johnson is 77 years old and his only source of income consists of monthly Social Security benefits.

 

8. Betty Johnson is 74 years old and her only source of income consists of monthly Social Security benefits.

 

9. On September 9, 2013, IRS issued a Notice of Intent to Levy (the “Notice of Levy”) informing the Johnsons notice that, after 30 days, unless the Johnsons filed for an administrative hearing, they will be subject to IRS levies. A true and complete copy of the Notice of Levy is appended as Exhibit A.

 

10. The Johnsons contacted The Community Tax Law Project, a low income taxpayer clinic established pursuant to section 7526 of the Internal Revenue Code (26 U.S.C. section 7526) that provides pro bono publico assistance to qualifying taxpayers, for assistance in challenging and/or seeking a hardship exemption to the levy.

 

11. On October 1, 2013, Nancy Porcari, Esquire, an attorney with The Community Tax Law Project, filed properly-executed Powers of Attorney with the IRS (Forms 2848) (the “Powers of Attorney”) on behalf of the Johnsons, and began seeking relief on their behalf. A true and complete copy of the respective Powers of Attorney are appended as Exhibit B.

 

12. On October 7, 2013, on the Johnsons’ behalf, attorney Porcari filed a timely request for a hearing (the “Hearing Request”) with Internal Revenue Service. A true and complete copy of the Hearing Request is appended as Exhibit C.

 

13. As part of the comprehensive shutdown of most activities of the United States Government that occurred on October 1, 2013, as a result of the expiry of appropriations authority and the failure to enact new appropriations authority for the federal fiscal year commencing on October 1, 2013, approximately 90% of the IRS workforce has been furloughed. All of the employees of the Taxpayer Advocate Service, including the National Taxpayer Advocate, are presently furloughed.

 

14. As a result of the furloughs described in the preceding paragraph, there is quite literally no one at the IRS to stop the issuance of the levy against the Johnsons, to schedule a pre-levy hearing for the Johnsons, or to release the levy against the Johnson’s Social Security benefits, and it is likely that, once imposed, there is no one at the Social Security Administration available to process a release of the levy even if such levy were to be released.

 

15. Pursuant to section 7803(c) of the Internal Revenue Code (26 U.S.C. section 7803(c)), the Office of the Taxpayer Advocate (the “Taxpayer Advocate”) was created within the IRS in 1998 to protect taxpayer rights.

 

16. Pursuant to statute and the IRS’s operating procedures, a taxpayer facing economic hardship who cannot get relief through IRS administrative procedures is entitled request help from the Taxpayer Advocate to obtain relief.

 

17. Once a Social Security levy is imposed, substantial time, often measured in months, is required to obtain a release of the levy.

 

18. Notwithstanding the shutdown of most activities of the United States Government, and notwithstanding the absence of any IRS personnel to schedule hearings, hear challenges to such levies, evaluate claims of hardship, or release or modify such levies under appropriate circumstances, automated levies, like those which are threatened with respect to the Johnsons, such automated levies, including those on Social Security benefits, are being issued automatically through the use of various computer programs that operate without any need for human intervention. The Commissioner has knowingly and willfully failed and refused to take any action to stop the issuance of these automatic levies, even though it is beyond dispute that the due process mechanisms established by statute with respect to these levies are, as a practical matter, wholly unavailable to taxpayers.

 

19. Upon information and belief, during the shutdown, the IRS is not processing incoming correspondence, except for remittances, and thus the Johnsons’ Hearing Request is sitting, unacted upon, in an IRS office.  n1 As a result, IRS cannot and will not take any timely action to freeze the levy action and schedule the hearing that the Johnsons have timely and properly requested through counsel.  n2 Instead, the IRS’s computers, with no human intervention, are currently proceeding toward a levy on the Johnsons’ Social Security benefits.

 

20. Issuance of the levy against the Johnsons without any opportunity for hearing is in direct violation of section 6330 of the Internal Revenue Code, which provides that taxpayers must be given notice and an opportunity for a hearing prior to the effective date of any levy, and that any levy as to which a hearing has been requested shall be suspended during the pendency of the hearing and adjudication:

 

26 USC section 6330 — NOTICE AND OPPORTUNITY FOR

  HEARING BEFORE LEVY

 

(a) Requirement of notice before levy

 

(1) In general

No levy may be made on any property or right to property

of any person unless the Secretary has notified such

person in writing of their right to a hearing under

this section before such levy is made. Such notice

shall be required only once for the taxable period

to which the unpaid tax specified in paragraph (3)(A)

relates.

 

(2) Time and method for notice

The notice required under paragraph (1) shall be

 

(A) given in person;

(B) left at the dwelling or usual place of business

of such person; or

(C) sent by certified or registered mail, return

receipt requested, to such person’s last known address;

not less than 30 days before the day of the first

      levy with respect to the amount of the unpaid tax

for the taxable period.

 

(3) Information included with notice

The notice required under paragraph (1) shall include

in simple and nontechnical terms —

 

(A) the amount of unpaid tax;

(B) the right of the person to request a hearing

       during the 30-day period under paragraph (2); and

(C) the proposed action by the Secretary and the

rights of the person with respect to such action,

including a brief statement which sets forth —

(i) the provisions of this title relating to levy

and sale of property;

(ii) the procedures applicable to the levy and sale

of property under this title;

(iii) the administrative appeals available to the

taxpayer with respect to such levy and sale and the

procedures relating to such appeals;

(iv) the alternatives available to taxpayers which

could prevent levy on property (including installment

agreements under section 6159); and

(v) the provisions of this title and procedures relating

to redemption of property and release of liens on

property.

 

* * *

 

(e) Suspension of collections and statute of limitations

 

(1) In general

Except as provided in paragraph (2), if a hearing

is requested under subsection (a)(3)(B), the levy

      actions which are the subject of the requested hearing

and the running of any period of limitations under

section 6502 (relating to collection after assessment),

section 6531 (relating to criminal prosecutions),

or section 6532 (relating to other suits) shall

      be suspended for the period during which such hearing,

      and appeals therein, are pending. In no event shall

any such period expire before the 90th day after

the day on which there is a final determination in

such hearing. Notwithstanding the provisions of section

7421(a), the beginning of a levy or proceeding during

the time the suspension under this paragraph is in

force may be enjoined by a proceeding in the proper

court, including the Tax Court. The Tax Court shall

have no jurisdiction under this paragraph to enjoin

any action or proceeding unless a timely appeal has

been filed under subsection (d)(1) and then only

in respect of the unpaid tax or proposed levy to

which the determination being appealed relates.

 

* * *

 

26 U.S.C. section 6330 (emphasis added).

 

21. The horrific “Catch-22″ described in this Complaint — a computerized levy that, once set into motion, cannot be stopped — will have immediate, and devastating, impacts upon the Johnsons. Already under substantial financial strain, as described in their sworn declaration appended as Exhibit D,  n3 if the Johnsons’ only sources of income are taken away, they will be unable to pay for food, medicine and other necessary living expenses. Because of the Johnsons’ serious medical conditions, including diabetes and glaucoma, this deprivation threatens to have serious, and even life-threatening, negative effects on their health and well-being.

 

22. The injuries suffered and to be suffered by the Johnsons, described herein, will cause irreparable injury to them.

 

23. The Johnsons have no adequate remedy at law for the injury that they are experiencing and will experience. Indeed, given the furlough of the National Taxpayer Advocate and all employees of the National Taxpayer Advocate, the Johnsons have no remedy at law whatsoever, available to them under the present circumstances.

 

COUNT 1

 

TEMPORARY RESTRAINING ORDER AND

INJUNCTIVE RELIEF TO RESTRAIN

VIOLATION OF DUE PROCE

                                                          SS

 

24. The allegations of paragraphs 1 through 23 of this Complaint are incorporated by reference and realleged as if set forth in full.

 

25. The denial of the Johnsons’ statutory right to hearing with respect to the levy, prior to its effective date, and denial of their statutory right to a suspension of the levy during the pendency of the hearing. is a complete deprivation of due process of law in violation of the Fifth Amendment to the Constitution of the United States of America.

 

26. The Anti-Injunction Law (26 U.S.C. section 7421 et seq.) generally bars suits to restrain assessment or collection of federal taxes. However, there are limited circumstances when such a suit may be brought. Among those actions specifically exempted from the Anti-Injunction Law are actions to enforce rights to notice and hearing prior to the implementation of a levies, provided pursuant to 26 U.S.C. section 6330.

 

26 USC section 7421 — PROHIBITION OF SUITS

TO RESTRAIN ASSESSMENT OR COLLECTION

 

(a) Tax

 

Except as provided in sections 6015(e), 6212(a)

and (c), 6213(a), 6225(b), 6246(b), 6330(e)(1),

6331(i), 6672(c), 6694(c), and 7426(a) and (b)(1),

7429(b), and 7436, no suit for the purpose of restraining

the assessment or collection of any tax shall be

maintained in any court by any person, whether or

not such person is the person against whom such tax

was assessed.

 

26 U.S.C. section 7421 (emphasis added).

 

27. On these facts and circumstances, the Johnsons are entitled, as a matter of law, to entry of a temporary restraining order, and to a grant of temporary and permanent injunctive relief that (a) bars the Commissioner and the IRS from placing any levy upon their Social Security benefits until such time as notice and an opportunity to be heard have been afforded, and (b) orders the Commissioner and the IRS to take all such steps as may be necessary to procure an immediate release of any levy that has been placed against the Johnsons’ Social Security benefits during the pendency of this action and the hearing that the Johnsons have demanded pursuant to 26 U.S. C. section 7421

 

Prayer for Relief

 

WHEREFORE Earl and Betty Johnson respectfully pray that this Court enter judgment in its favor, granting to them the following relief:

 

a. Entry of a temporary restraining order that (a)

bars the Commissioner and IRS from placing any levy

upon the Johnsons’ Social Security benefits until

such time as notice and an opportunity to be heard

have been afforded, and (b) orders the Commissioner

and IRS to take all such steps as may be necessary

to procure an immediate release of any levy that

has been placed against the Johnsons’ Social Security

benefits or is placed upon the Johnsons’ Social Security

benefits during the pendency of this case;

 

b. Entry of temporary and permanent injunctions against

the Commissioner and IRS that (a) bar the Commissioner

and IRS from placing any levy upon the Johnsons’

Social Security benefits until such time as notice

and an opportunity to be heard have been afforded

to them in accordance with applicable law, and (b)

order the Commissioner and IRS to take all such steps

as may be necessary to procure an immediate release

of any levy that has been placed against the Johnsons’

Social Security benefits or is placed upon the Johnsons’

Social Security benefits during the pendency of this

case; and

 

c. Such other and further relief as may be appropriate

on the facts and circumstances of this case.

 

Respectfully submitted,

Earl Johnson and

Betty Johnson

By:

Of counsel

 

Alan D. Albert

Virginia Bar Number: 25142

Elizabeth J. Atkinson

Virginia Bar Number: 44783

Attorneys for Earl Johnson and Betty Johnson

LeClairRyan, A Professional Corporation

999 Waterside Dr., Suite 2100

Norfolk, VA 23510

Phone: (757) 441-8914

Fax: (757) 624-3773

E-mail: alan.albert@leclairryan.com

 

FOOTNOTES:

 

n1

 

In the parlance of governmental shutdown, IRS is not processing hearing requests and taking any action with respect to automatic levies because such tasks are not included within the definition of “excepted” work that continues notwithstanding the shutdown.

 

n2

 

Section 5.11.7 of the Internal Revenue Manual establishes the procedures for automatic levies on Social Security benefits. As these procedures make clear, once a Social Security levy is set into motion, human intervention is required to stop it. In particular, a human must input a code into the IRS computer system to block the issuance of the levy. In the absence of such human intervention, the levy is issued automatically and Social Security benefits will be frozen.

 

n3

 

Plaintiffs will submit separately, under seal, or in the alternative seek to present in camera at the hearing on their request for temporary restraining order herein, further details of their personal financial situation.

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Taxes and Ponzi Schemes

What is someone told you they had a “guaranteed” investment that was going to pay you 80% a year?  Yeah, you say that in public, but in private, when you are really desperate for some money would you consider it?

More do than you think.

Just last week we had someone come into the office who was promised such an alluring deal.  Amazingly enough the promoters were stupid enough to put in black and white, “guaranteed returns”.  Just as amazing is that our client was willing to take a 60K penalty plus another 30K or so tax hit on their current 150K investment to get into this astounding deal.  They justified their actions by pointing out that in just 2 years they would be ahead of where they were at now.

Maybe the deal was good, maybe the deal was bad, I don’t know, but we did everything we could to reverse the transactions and penalties for our client.  Timely enough the IRS released a letter they recently issued to a Senator about the tax ramifications of someone investing in a Ponzi scheme.  The letter is printed below.

The big problem people face when they loss money in a Ponzi scheme is they have to show there is practically no chance of getting your money back.  This can delay things for quite a bit.

Serving people in Palm Desert, La Quinta, Indio, Rancho Mirage, Palm Springs, Cathedral City, and the entire Coachella Valley, we are constantly seeing these “fantastic deals” being offered to seniors who have accumulated a lot of money.

Before you make any rash investments, please run it by an independent third party, it could save you tens of thousands of dollars.
Date: July 17, 2013

Refer Reply to: CONEX-118995-13

The Honorable David Vitter
United States Senator
2201 Kaliste Saloom Road, Suite 201
Lafayette, LA 70508

Attention: * * *

Dear Senator Vitter:

I apologize for the delay in responding to your inquiry dated April 19, 2013, on behalf of your constituent, * * *. * * * said he is a victim of a Ponzi scheme and that the IRS had not recognized his theft loss.

An employee in our Small Business/Self Employed Division Counsel’s * * * office (* * *) spoke with * * * and received additional information from him.

* * * invested $ * * * in * * * with * * *. * * * was indicted in federal court in 2009 for various counts of fraud. * * * pled guilty and is currently in prison. None of * * * investment was recovered, although the sentencing court ordered restitution.

Taxpayers can take a deduction for losses, including theft losses, that they sustained during the taxable year and that insurance or other sources did not compensate them for [section 165(a) of the Internal Revenue Code (the Code)]. A taxpayer claiming a theft loss, however, must prove that the loss resulted from a taking of property or cash that was:

º Illegal

º Done with criminal intent

[Revenue Ruling 2009-9, 2009-14 Internal Revenue Bulletin 735 (April 6, 2009)]

A taxpayer can generally deduct a loss from theft or embezzlement for the tax year in which he or she discovers the loss [section 165(e) of the Code], unless a claim for reimbursement exists for which the taxpayer has a reasonable prospect of recovery [section 1.165-8(a)(2) of the Regulations]. Rather, the law treats the theft loss as sustained in the taxable year when the taxpayer can determine with reasonable certainty if he or she will receive reimbursement.

Taxpayers generally report a theft loss on Form 4684. Amounts on Form 4864 are then transferred to Schedule A (Itemized Deductions) of the Form 1040. If a theft loss deduction is so large that it causes your deductions to be more than your income for the year you claim the loss, then you may have a net operating loss, which can be carried back or carried forward to other tax years to lower your tax in those years [section 172(b)(1)(F) of the Code; Revenue Ruling 2009-9 (Issue 5)].

Based on the * * * office’s investigation, * * * filed an amended return to claim a theft loss for his * * * tax return, and applied a carryback of the loss to prior years’ tax returns. He then filed additional amended returns for * * *.

For the * * * and * * * tax years, * * * did not claim a theft loss on his original filed tax returns. However, he later amended both * * * and * * * tax returns, claiming the theft loss, which he already claimed on the * * * amended returns. These amended returns, and the duplicative requests for the theft loss treatment in multiple tax years (* * *, and * * *), likely delayed the IRS in accepting and recognizing * * * theft loss deduction, and resulted in his frustration with the IRS.

The investigation by our * * * office found that * * * received a refund of $ * * * on * * *, for the * * * tax year, associated with his theft loss. He also received refunds for the * * * through * * * tax years that also appear to be attributable to his theft loss deduction.

I hope this information is helpful. Please contact me or * * * at * * * if you need further assistance.

Sincerely,

Thomas D. Moffitt
Chief, Branch 2
(Income Tax and Accounting)

 

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