Originally published on Forbes.com.
So last week was my week for feeling vindicated. First there was President Trump’s return, which showed the New York Times to the contrary notwithstanding, that then developer Donald Trump’s nearly billion dollar loss carryover was not an eighteen year “Get Out Of Tax Free” card. And now we have the Seventh Circuit Court of Appeals in Shiner V Turnoy overturning a District Court decision that I questioned back in 2014. It gets better.
Matthew Stone, attorney for Bernard Turnoy, wrote me that he mentioned my post in the appellate brief and included it in the appendix.
Forbes magazine also published an article about the District Court Opinion, noting with some concern that it made the decision about whether or not to issue a 1099 much more complicated. Peter J. Reilly, Pulling IRS Into Your Business Dispute Might Not Be Such a Good Idea, Forbes (July 25, 2014)
Enough about me. This case was rather curious as it seemed to inspire judicial passion. By way of background Bernard Turnoy sells life insurance and David Shiner is an estate planning attorney. Mr. Turnoy agreed to give Mr. Shiner a share in the commission generated by the sale of a policy to Mr. Shiner’s mother-in-law. As it happens the insurance company pays an expense reimbursement on top the commission and Mr. Shiner thought he was entitled to a share of that also. Mr. Turnoy disagreed. They fought it out in state court where Mr, Turnoy ended up prevailing, but at the same time there was kind of a side action going on in federal court.
How Did They Make A Federal Case Out Of This?
In 2012 Mr. Turnoy sent Mr. Shiner a check for $149,059.91, half the commission. The check indicated that endorsement represented payment in full. There was an enclosed note indicating that a 1099 would be sent. Mr. Shiner neither cashed nor returned the check. Mr. Turnoy filed the 1099 as promised. At about the same time as the 1099 was due, Mr. Turnoy received notice of the state court action. The check was returned several months later.
So Mr. Shiner also sued Mr. Turnoy in federal court for issuing the 1099. Code Section 7434 provides for civil damages in the case of a person willfully filing a fraudulent information return with respect to payments purported to have been made.
Judge Shadur Gets Mad
Mr. Turnoy seems to have caught Senior United States District Judge Milton Shadur on a bad day.
Turnoy is liable under Section 7434 if he intentionally attempted to deceive the IRS by filing the 1099 without believing that it was true. Even when all evidence is construed in the light most favorable to Turnoy, this Court finds no good faith basis on which he could have believed that he had paid Shiner at the time he filed the 1099. ……
There are thus a host of reasons to compel the conclusion that Turnoy violated Section 7434 by willfully filing a false information return when he filed a 1099 reflecting that he had paid $149,059.91 to Shiner in 2012 when payment had not in fact been made and when he had no good-faith basis to believe that it had.
And then there is Footnote 5.
As a corollary of this opinion’s holding, Turnoy necessarily underpaid his own 2012 income taxes. Because the IRS would have no knowledge of that underpayment without being apprised of this opinion, a copy is being transmitted to the Chicago office of that agency.
Judge Posner Tells Him To Calm Down
The appellate decision is that Judge Shadur got it very wrong while noting that he did not have the same benefit of hindsight now available.
The district judge, convinced by this very weak argument and unaccountably hostile to Turnoy, ruled in favor of Shiner and ordered Turnoy to pay Shiner damages of $16,000 for the alleged fraud. That ruling was erroneous, because the state court had rejected Shiner’s breach of contract claim the day before the district court’s decision (though in fairness to the district judge, we point out that he would not yet have been aware of the state court’s decision), thus establishing that Shiner was entitled to no more than the $149,000 that he’d already received from Turnoy.
There’s more. Noting that Mr. Shiner had not filed any motions on the appeal, since he thought the case was moot, Judge Posner indicates why it was not moot.
Shiner’s groundless litigation against Turnoy, culminating in the district judge’s angry unsound judgment in Shiner’s favor, has by branding Turnoy a tax fraud prevented him (he tells us without contradiction from Shiner) from obtaining errors and omissions insurance that he needs as an insurance broker. His continued interest in clearing his name of the judgment prevents the case from being moot even though he has discharged in bankruptcy his liability for the $16,000 of damages imposed on him by the district judge
Wow. “Groundless litigation” that resulted in the district judge’s “angry unsound judgement”. That’s pretty harsh. I had to wonder if there was something else going on there.
Talk About Senior
When they call Judge Shadur senior, they are really not kidding. Judge Shadur after graduating from the University of Chicago served as a lieutenant junior grade in the United States Navy, making him a World War II veteran. He handed down the Shiner v Turnoy decision not long after celebrating his 90th birthday. It seems that Judge Posner has been hinting that maybe it is time for Judge Shadur to retire. In Maura Anne Stuart V Local 727, International Brotherhood of Teamsters, Judge Posner wrote about Judge Shadur’s
unmistakable (and to us incomprehensible) tone of derision that pervades his opinion
In 2010 Judge Posner was reviewing Judge Shadur’s sentencing of a Chicago alderman.
….because of “a cascade of errors and omissions” by Shadur in considering the appropriate sentence for Vrydolyak, a longtime influential Chicago alderman, “in fairness to the government, which is entitled to the same consideration as other litigants, the resentencing should be by a different judge,” Posner says—even though, he notes, the government did not request this
Attorney Stone and his client found the opinion quite gratifying. He wrote me:
It is pretty unusual for the average appellate judge to slam a district judge. Judge Posner has a bit of a reputation for not pulling his punches, and Judge Shadur has a reputation for being a bit of an outlier, so that combination can make for interesting reading. We considered putting more direct language into our brief about what Bernard perceived as bias against him by Shadur, but we opted to stick to the facts and legal issues. It was more than a bit gratifying for Bernard that Judge Posner brought the issue up on his own.
Passing Of An Influence
As I was goofing off while writing this piece, I noted the passing of Jimmy Breslin. Most of the obituaries note his column in November 1963 featuring Clifton Pollard that became an iconic piece of journalism.
Pollard is 42. He is a slim man with a mustache who was born in Pittsburgh and served as a private in the 352nd Engineers battalion in Burma in World War II. He is an equipment operator, grade 10, which means he gets $3.01 an hour. One of the last to serve John Fitzgerald Kennedy, who was the thirty-fifth President of this country, was a working man who earns $3.01 an hour and said it was an honor to dig the grave.
I’m pretty sure I read that column in the Herald Tribune on the day it ran. I was eleven and my father would bring the Herald Tribune home every night. We always read Art Buchwald and Jimmy Breslin.
And, believe it or not, I think I feel Breslin’s influence in many of the tax stories I choose to write about. For whatever it is worth Jimmy Breslin appears in the body of tax authority only once. Not as a litigant, but as a kind of symbol. In Guice v Commissioner TCM 1994-521 we have “The scenario giving rise to the business and capital losses seems to have been scripted by Jimmy Breslin. ”
Actually that is true of most of the family limited partnership, hobby loss, and domicile cases I write about. Here are my candidates for my two posts that would be so much better if Jimmy Breslin had written them – one about a Brooklyn grandmother beating the IRS and the other about a Brooklyn icon who tried to convince the state she was a Floridian. The other definite Breslin influence you can see in my work is my dubbing of the poor schmoes who got the IRS scandal going as the “Cincinnati Gang That Couldn’t Sort Straight“
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