This was originally published on Passive Activities and Other Oxymorons on December 13, 2010.
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One of the more obscure pieces of DC trivia I recall is the legion of superheroes having an auxiliary. It consisted of people who’s super powers were too lame for admittance to the regular legion. Among them were Bouncing Boy and Night Girl. Of course they let Batman in with no super powers, but what of it. Anyway these people with lame super powers got together and they would save the regular legion from disaster without the regular legion realizing it. I’m working on pure memory here so I may have the details wrong. Doesn’t really matter. My memory of the auxiliary legion is what I am invoking.
I look at a lot of material to find things that I feel are blog worthy. Generally I am looking for things that are not noticed by a lot of other people that are either of practical importance or kind of interesting or maybe funny. I look at all federal court tax decisions and a multitude of IRS pronouncements which are a veritable alphabet soup. If something is time sensitive I might put it up right away as a bonus post, but generally I stick with a MWF schedule. If I have the next three complete and scheduled I feel pretty good. Usually I’ll have about 20 or so in some stage on incubation. If they go much more than a month without getting completed, they are probably never going to make it, but I hate to consign them to the abyss without a chance, so here are a couple of developments that will never be complete posts unless I get some comments. Yes, you the reader can promote any member of this sad group of auxiliaries into full membership in the Legion of Super Posts.
Johnny L. Dennis, et ux. v. Commissioner, TC Memo 2010-216
The tentative title was “Not Just Horsing Around”. It is a hobby loss case. Raising horses is probably the poster boy for hobby losses. This couple though was seriously trying to make a living raising horses. Probably the most disturbing part of the case is that the Tax Court thought it was a plus that he did a cost benefit analysis on calling the vet when his horses had colic and determined it was not worth paying for the treatment. They also got credit for not riding the horses that much.
Rick Mahlum, et ux. v. Commissioner, TC Memo 2010-212
This is a collection due process case. The taxpayers owed about $15,000. They claimed the IRS abused its discretion in not considering their alternative. They did not submit financial data or get in current compliance. Their proposal was for the IRS to put their account in non-collectible status. Reading some of these collection cases, I sometimes think Congress created a monster with the Taxpayer Bill of Rights. Once it is determined that you owe the tax you are entitled to a hearing on any collection action the Service makes and you can then appeal the results of that hearing to the Tax Court. I don’t comment on tax policy though, except when I do. Mr. Mahlum lost.
State Farm Mutual Automobile Insurance Company and Subsidiaries v. Commissioner, 135 T.C. 26
Tentative title was “Good Hands”. This concerned section 832. Section 832 falls in Subchapter L, which is the Subchapter I know the least about. The taxation of insurance companies is a field unto itself. It was actually the story behind the tax controversy that was interesting. One of State Farm’s customers was in an accident and found liable. The judgement against them was $185,849 and the limit on the policy was $50,000. State Farm appealed. The customer who had been found liable on the accident then teamed up with the other side, agreeing to give them 90% of his settlement, and sued State Farm for bad faith. They won $1,000,000 in compensatory damages and $145,000,000 in punitive damages. Ultimately State Farm ended up being out a little over $16,000,000. The tax controversy was about what had gone into reserves in one of the years while this was being appealed. Apparently you can’t reserve against punitive damages. It was more the whole business issue that fascinated me about this. Not wanting to cut a check for $50,000 ending up costing them $16,000,000 plus whatever legal fees they spent and their exposure had been much higher.
Phu M. Au, et ux. v. Commissioner, TC Memo 2010-247
Title was “Gambling on Software”. I thought this was pretty interesting, but a couple of other bloggers picked it up first. The first time I read about it, after identifying it myself, was in Rubin on Tax in a post titled Turbotax Defense Rejected. I think I was pointed there, by Robert Flach, who of course delights in more proof of the unreliability of tax software. The taxpayers had deducted gambling losses without having gambling winnings and blamed their software. It reminded me of the time my brother generated himself a return with a large refund that he asked me to review. I was sorry to have to point out that he had entered miles into his software in a field that called for dollars (That would less than double the deduction this year, but this event was quite a while ago.) Now that I think about it that was probably the last time my brother had me check his return. It also reminded me of a case I wrote about in August about taxpayers who were allowed an ordinary deduction for slot machine losses, because they were in the business of gambling.
CICCOLINI v. U.S., Cite as 106 AFTR 2d 2010-7081
Title was “Bless Me Father”. This is another one where the underlying story is more interesting than the tax issue which is pretty mundane. It concerns a Catholic priest who apparently was embezzling from a charity that he ran :
The conduct underlying the charged offenses occurred during 2003 and 2004. From April 2003 to June 2003, the Defendant deposited $1,038,680 in cash into his bank accounts in 139 separate transactions of less than $10,000. The Defendant admitted that he structured the transactions to evade bank reporting requirements. 31 U.S.C. § 5324(a)(3). When asked where the money came from, the Defendant claims that he held more than a million dollars in cash in his room at the Immaculate Conception Church Rectory and that he only decided to deposit this money in 2003 because he was worried that changes to the appearance of U.S. currency would somehow diminish the value of his cash savings. Ciccolini also does not explain why he kept over $1 million in cash in his room during a time when he had other bank and investment accounts with millions of dollars. Nor could the Defendant explain why he structured the transactions to avoid the reporting requirements. Similarly, the Defendant is unable to explain where this large sum of cash came from, other than implausibly claiming he accumulated it through interest and savings.
An approximate calculation of the Defendant Ciccolini’s legitimate after-tax earnings and inheritance to the time of sentencing totals about $1,506,000. By the end of 2003, his total legitimate earnings and inheritance totaled about $1,336,000. These figure fall far short of the $5,590,313 in liquid assets that Ciccolini accumulated by the time of his sentencing. Thus, even under the Court’s generous calculations, it is quite clear that Ciccolini is unable to legitimately account for about $4,500,000.
However, with the exception of the $1,288,683 that he already admitted to embezzling from the Interval Brotherhood Home, Ciccolini denies that any of the money is derived from criminal activity. Instead, says that because he lived at the Immaculate Conception Church rectory he had no personal expenses and was able to save all of his earnings. Additionally, he says that because he was saving all of his money that his savings gained significant compounding interest over a thirty-year period.
Ah yes – the miracle of compound interest.
The case was about what his sentence for tax evasion should be. It ended up pretty mild :
After a thorough consideration of the parties’ arguments, the advisory guidelines range, and the other relevant 18 U.S.C. § 3553(a) factors, the Court choose to fashion a non-guidelines sentence. The Court finds that a sentence of one day imprisonment, a fine of $350,000, and a restitution order of $3,500,000 reflects the seriousness of the offense, promotes respect for the law, provides just punishment for the offense, affords adequate deterrence to criminal conduct, and protects the public from further crimes of the Defendant. See 18 U.S.C. § 3553(a)(2). The Court also orders a three-year term of supervised release and a special assessment of $200.
I wonder if he paid the $200 in cash.
Jack Townsend also picked this up in his federal tax crimes blog and is speculating whether there is a larger trend to call for restitution rather than prison time. As the longest serving member of the board of Just Detention International , I don’t joke about such things, but I have to think that the biggest problem a 68 year old priest would have in prison is convincing the other prisoners he is there for income tax evasion. Maybe that was in the back of the judge’s mind.
Their are more candidates for the legion, but that’s enough for one post.