No Love for Dinosaur Land; the Hovinds Lose Their Appeal

Posted on December 31, 2008 by Russ

I’ve written several times about the saga of Kent and Jo Hovind. The Hovinds are evangelists who formed Dinosaur Adventure Land, a theme park that mixed dinosaurs and the Bible. They also weren’t believers in the IRS, and used a combination of phony trusts, illegal structuring of transactions, and just not paying the IRS to avoid taxes. That led to a verdict against them in Tax Court, and was followed by Kent Hovind being found guilty of all 58 criminal counts he was accused of and Jo Hovind also being found guilty of criminal tax evasion. Mr. Hovind received 10 years at ClubFed while Mrs. Hovind received a year and a day. Additionally, $430,000 was forfeited to the US government.

They appealed their convictions and their sentences, and the 11th Circuit ruled on their appeal yesterday. Like the dinosaurs the Hovinds fared poorly. They lost on every one of their arguments and Mr. Hovind will be serving out his sentence.

As Judge Rogers put it when Mr. Hovind was convicted, “No one can violate the law and then say that they were doing so for the will of God.”

That’s a wrap on 2008. Have a safe and Happy New Year.

Hat Tip: TaxProf Blog

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2008 Tax Offender of the Year

Posted on December 30, 2008 by Russ

There are all sorts of awards given, but the award I give is special. To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.

There were several worthy nominations who just missed the cut. The Orange County Great Park Board for wasting nearly all of the nearly $200 million they received to fund the Great Park. Yet the Great Park Board hasn’t violated any laws; they’re just acting like many governmental entities.

Another government nominee was the legislature and the governor of California. Revenues into the Bronze Golden State have increased since 2000 yet California faces a $15 – $20 billion budget deficit. They have “balanced” recent budgets solely by accounting gimmicks. The day of reckoning has arrived but both the Democrats and Republicans refuse to compromise. This is another deserving nominee yet there’s the same problem as with the Great Park. They’re acting like Bozos, but they haven’t violated any laws.

Coming in just out of the money for this year’s prize is Randy Nowak of Tampa, Florida. Mr. Nowak was facing an IRS audit and it wasn’t going well. So he hired a hit man. Of course, assuming the unlucky IRS auditor died the IRS would just assign another Revenue Agent to the case. Mr. Nowak will likely spend several years at ClubFed (and pay the tax, penalties, and interest). This was truly Bozo.

Yet Mr. Nowak’s case falls just a little short of this year’s winner. For that, we must head to Maple Grove, Minnesota, a suburb of the Twin Cities. Robert Beale founded a company that became Comtrol Corporation in 1982. Comtrol specializes in computer connectivity products. Mr. Beale, as CEO, earned a respectable $700,000 salary. But Mr. Beale had different ideas than most of us about income taxes.

He became a member of the tax protester movement, arguing one of the numerous schemes (all of which have been thrown out by the courts) that you don’t have to pay income taxes. Mr. Beale became a follower of Irwin Schiff. Mr. Schiff claimed that no one had to pay income taxes. Mr. Schiff is now serving a 13-year sentence for following his own advice. (Hint: You do have to pay income taxes.)

Mr. Beale directed the bookkeeper at his company to first not withhold taxes on the $700,000 and then to pay him through an offshore shell company. He began to file statements with the IRS claiming he didn’t have to pay income taxes. In January 2006 he was indicted for tax evasion. Now, if you were indicted for tax evasion you’d get a good attorney, perhaps talk settlement with the IRS, and you’d certainly start planning your defense.

Not Mr. Beale. When his case was called for trial in August 2006 Mr. Beale was nowhere to be found. Mr. Beale told the Minneapolis Star-Tribune that he resided with friends during his fourteen months of being a fugitive. He went to Orlando and made the “dumb mistake” of using the same cellphone for eleven months to call his wife. He was arrested in November 2007 in Orlando.

His case finally came to trial this past April. Again, if you’re facing tax evasion and unlawful flight charges it’s time to hire a good attorney. Not Mr. Beale. He represented himself during his trial. But there’s more, and now we get to the truly Bozo aspect of this case.

Mr. Beale and three confederates decide to arrest the judge. No, I’m not making this up. As Joe Kristan noted (quoting TwinCities.com),

Robert Beale, 65, was charged Monday in federal court with one count of conspiracy to impede an officer and one count of obstruction of justice. Also indicted on the same charges were Frederick Bond, 62, of Champlin; John Pelton, 67, of Stillwater; and Norman Pool, 43, of Blaine.

“God wants me to destroy the judge,” Beale is accused of saying in court records…

The men issued fake warrants for Montgomery’s arrest, filed fraudulent liens, planned to disrupt court proceedings and planned to arrest Montgomery. The plans were concocted at meetings of their “common law court” in Little Canada and in phone calls from Beale, after he was jailed.

Going after a federal judge is an excellent way to make sure that you reside in ClubFed for a long, long time. And using prison telephones to threaten a judge is really Bozo given that calls are routinely monitored.

Meanwhile, the trial of Mr. Beale on tax evasion charges moved forward. The trial took eight days but the jury needed only two hours to convict Mr. Beale on all five tax evasion charges and the count of unlawful flight. Mr. Beale, in closing arguments, apparently recognized the futility of his case, noting, “[the trial was] such a waste of time and resources because of my beliefs.”

Mr. Beale received 11 years at ClubFed for these convictions. When sentenced, he told Judge Ann Montgomery, “I do not consent to incarceration, fine or supervised release…I have not committed a crime.” No matter, he’ll still be spending the time at ClubFed.

In October Mr. Beale was found guilty of conspiracy to impede an officer and obstruction of justice for his attempt to arrest the judge. He’s still awaiting sentencing on those charges.

All-in-all Mr. Beale is a worthy winner. He joins our two prior winners: Sharon Lee Caulder, a voodoo priestess, won in 2005 and Gene Haas, a businessman who decided to get back at the government after he lost a patent case by committing tax fraud, the 2007 winner.

What will 2009 bring? I’m always hopeful that I’ll be able to say that no one rose to the heights necessary to win this award. Based on past history that’s very, very unlikely to be the case.

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IRS Lockbox Changes

Posted on December 30, 2008 by Russ

One major IRS change is happening on January 1st: The IRS is closing its Dallas lockbox. If you currently mail payments to Dallas check the notice as to the new addresses in Charlotte that you will be sending your payments to.

Meanwhile, if you are sending business payments to the Charlotte lockbox those will be sent to Cincinnati. Again, the IRS notice gives the new addresses to use.

Finally, addresses will change for 2009 filing. For example, Washington is moving back to San Francisco, Arizona is moving to Cincinnati, and Illinois is moving to Cincinnati. Those are the lockbox addresses that we’ll be issuing. Just don’t assume the addresses you used for 2008 will be used for 2009. The IRS has published their list here. The IRS makes these changes to equalize the load in their service centers…and perhaps to confuse us tax professionals.

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The Bee Gets It Right

Posted on December 29, 2008 by Russ

I’m annoyed with both sides in the endless budget battle. The Sacramento Bee today points out the Democrats’ intransigence. Will anything come of this?

Probably not.

The Bee thinks that the Democrats’ union contributors don’t want a compromise on cutting state payroll. It’s taken this long for a major newspaper to state the obvious.

Both the Republicans and the Democrats need to compromise. So far, neither side has been willing. One of four things will happen: the Democrats will compromise, the Republicans will compromise, neither side will compromise and California will run out of money, or both sides will compromise. I’m hoping for the last choice but I’m not holding my breath.

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Very Light Week on the Fraud Front

Posted on December 28, 2008 by Russ

It must be the Christmas season; I could only find a couple of stories on tax fraud from the long weekend.

Keith Kuchenbecker of Neenah, Wisconsin was president of his own construction company from 2000 to 2007. He made a mistake that is guaranteed to get you in trouble with the IRS. Mr. Kuchenbecker didn’t forward his trust fund taxes to the IRS. He plead guilty to one count of income tax fraud and has agreed to make restitution of $288,000. He’ll be sentenced in March.

I would love to see all 52 weeks of the year with as little tax crime as this past week. I’d also like to see the Cubs in the World Series. I think the Cubs have the better chance in 2009.

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Not So Fast, New York

Posted on December 28, 2008 by Russ

New York’s attempt to tax cigarettes sold on Indian reservations in the Empire State hit a roadblock last week. Judge Rose Sconiers issued a temporary restraining order against New York and barred collection of the sales tax. A hearing on a permanent injunction will be held in Buffalo on January 27th.

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Let’s Party Like It’s 1999

Posted on December 28, 2008 by Russ

I think that phrase comes from a song by the artist formally known as Prince. It’s also another way of looking at how dysfunctional California’s government has become. Meanwhile, nothing appears to be stopping the budget train from falling over a cliff in two months.

Nothing happened this week in negotiations between Democratic leaders in the legislature and Republican Governor Arnold Schwarzenegger. I suppose that eventually they’ll come up with a way to make the Democrats’ previous User Fee Tax Hike palatable to the Governator. But will happen when a court rules—and this will head to court—that these aren’t user fees, they’re tax hikes, and a 2/3 vote is required. That’s a vote that includes Republicans. There is no doubt in my mind this is how the present scenario will play out.

Someone sent me an email stating that California will go into Chapter 9 Bankruptcy. That’s definitely not going to happen. Only municipalities (and other subdivisions of states) can go into Chapter 9. I don’t know what would happen if California actually runs out of money but that won’t.

Meanwhile, the California Teachers Association has decided that they’ll try for a 1% additional sales tax for education. They need to obtain about 800,000 signatures in the next few months to qualify the initiative (which will take a 2/3 vote to pass) for the next general election (likely in June 2010).

Given that we’re now between Christmas and New Year’s Day nothing is going to happen on the budget front for another week. I’ll keep you advised As the Budget Churns.

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Two Gambling Cases at the Tax Court

Posted on December 23, 2008 by Russ

The Tax Court looked at two gambling related tax cases today. In the first case the petitioners thought there was discrimination; in the second case the question was whether or not the petitioners were professionals or amateurs.

In the first case (Sjoberg v. Commissioner, T.C. Summary Opinion 2008-162), the petitioners knew they were recreational gamblers (they stipulated to that). They had won a $4,000 jackpot; they had gambling losses that would allow them to write off that amount so they didn’t include the income (noted on a W-2G) on their tax return. If they had included the income they would have had an additional $660 in tax (from additional tax on social security benefits). The IRS audited them, assessed the tax and a $132 accuracy-related penalty.

The petitioners didn’t dispute the IRS’ calculations. Instead they,

“…contend that this treatment of gambling winnings and losses is discriminatory against the elderly and should not be enforced. Petitioners note that today’s casinos are like “Disneyland” to the elderly, offering all sorts of freebies to entice the elderly into casinos to gamble. Petitioners contend that respondent needs to update the tax rules to take into account today’s casino operators, casino operations, and customers…Lastly, petitioners allege that some types of gambling winnings are not required to be reported to respondent by the casinos (generally poker and blackjack), and petitioners claim that such differences in the reporting of gambling winnings constitute discrimination.”

But the court doesn’t make policy decisions (Congress does) and they owe the additional tax and the penalty.

In the second case (Freese v. Commissioner, T.C. Summary Opinion 2008-161), petitioners recorded their gambling as a business. Given that they resided in Minnesota that’s a good idea. Under Minnesota’s state income tax AMT the petitioners would likely have faced high taxation. There was a problem, though: Were the petitioners conducting their gambling as a business?

Petitioners were employed and gambled one or two nights a week. They did not keep a log of their gambling, they didn’t keep a separate bank account, and didn’t keep track of their gambling income and expenses. If you’re going to be a professional, you need to treat your business as such. “Petitioners did not maintain any meaningful records relating to their gambling activity.”

Unfortunately for petitioners, their CPA didn’t ask some rather basic questions. Though the CPA asked for any W-2Gs they received, he didn’t ask for the income from their slot play that didn’t cause a W-2G to be issued. (W-2Gs are only issued for slot machine jackpots of $1,200 or more.)

The court concluded,

Petitioners’ gambling activity in 2005 clearly did not qualify as a trade or business. Petitioners did not gamble with continuity and regularity. Petitioners regarded their gambling activity as recreation they shared, and petitioners did not expect to earn a profit from gambling. Petitioners did not maintain books and records relating to their gambling activity. They did not conduct their gambling activity in a businesslike manner. See Commissioner v. Groetzinger, 480 U.S. 23 (1987); sec. 1.183-2(b), Income Tax Regs. Petitioners’ gambling activity did not rise to the level of a trade or business, and petitioners are not allowed to deduct gambling expenses in excess of gambling income.

So if you’re going to be considered a professional gambler, treat your gambling as a business. Keep good records. Know your income and expenses. Consider a separate bank account for your gambling. And keep good records. Yes, I said that twice but the importance of a gambling log cannot be overstated for the professional gambler.

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Not Vital In Vitro

Posted on December 23, 2008 by Russ

The Tax Court today looked at the case of a man who deducted in vitro fertilization (IVF) expenses. There was just a few problems: he wasn’t married, had no medical conditions, and the IRS objected.

So why did the petitioner want to deduct IVF expenses? And why did the IRS object?

“Petitioner argues that it was his civil right to reproduce, that he should have the freedom to choose the method of reproduction, and that it is sex discrimination to allow women but not men to choose how they will reproduce…“Although respondent believes that amounts paid for procedures to mitigate infertility may qualify as deductible medical care”, respondent argues that “Petitioner had no physical or mental defect or illness which prohibited him from procreating naturally”, as he in fact has, and that “the procedures were not medically indicated.” Respondent’s position is that the expenses at issue are nondeductible under section 262 because “Petitioner’s choice to undertake these procedures was an entirely personal/nonmedical decision.”

The court first examined whether the expenses were medical expenses or nondeductible personal expenses.

None of the expenses at issue was “incurred primarily for the prevention or alleviation of a physical or mental defect or illness.” Sec. 1.213-1(e)(1)(ii), Income Tax Regs. In other words, petitioner had no medical condition or defect, such as, for example, infertility, that required treatment or mitigation through IVF procedures.

The petitioner also alleged constitutional questions (discrimination) based on him being a man. He had used IVF to father children through unrelated surrogate mothers and alleged that to not allow him the ‘choice’ of doing so was discriminatory. The court’s conclusion answers that issue:

Although petitioner at times attempts to frame the deductibility of the relevant expenses as an issue of constitutional dimensions, under the facts and circumstances of his case, it does not rise to that level. Petitioner’s gender, marital status, and sexual orientation do not bear on whether he can deduct the expenses at issue. He cannot deduct those expenses because he has no medical condition or defect to which those expenses relate and because they did not affect a structure or function of his body. Expenses incurred in the absence of the requisite underlying medical condition or defect and that do not affect a structure or function of the taxpayer’s body are nondeductible personal expenses within the meaning of section 262.

Can a couple having trouble conceiving use IVF and deduct those expenses? If it’s medically indicated, almost certainly. Can a man deduct IVF just to have more children? No.

Case: Magdalin v. Commissioner, T.C. Memo 2008-293

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Custer’s Last Stand

Posted on December 22, 2008 by Russ

No, not that Custer.

Earlier this month the Tax Court looked at the case of Richard Custer. Mr. Custer, a pilot, hadn’t filed his 2004 tax return. The IRS sent him a notice of deficiency. Mr. Custer then filed a petition with the Tax Court, “…containing numerous frivolous and groundless “tax defier” arguments.” And this wasn’t Mr. Custer’s first appearance before the Tax Court. As the IRS noted, “Petitioner has made frivolous arguments in a past Tax Court case and continues to maintain these arguments in the current case. In his previous Tax Court Case, Docket No. 21335-05L, the Court imposed a § 6673 penalty in the amount of $5,000.”

The Tax Court doesn’t look kindly at “…shopworn arguments characteristic of tax-protester/tax defier rhetoric that has been universally rejected by this and other courts.” And the court has a stick they can use against petitioners who make such arguments. “Section 6673(a)(1) authorizes this Court to penalize up to $25,000 a taxpayer who institutes or maintains a proceeding primarily for delay or pursues a position in this Court which is frivolous or groundless.” Mr. Custer was penalized $10,000 for his frivolity.

So if you think that you don’t have to pay the income tax it’s time to change your view. Those frivolous arguments aren’t worth the paper they’re printed on.

Case: Custer v. Commissioner, T.C. Memo 2008-266

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