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Catch the Deception if You Can!
Sunish Mehta, CPA, CGMA
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The Art of Controlling: A Controller’s Handbook
Sunish Mehta, CPA, CGMA Webcast
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A&A Update & Beyond: The New Normal – Compilations & Preparation Services
Sunish Mehta, CPA, CGMA Webcast
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A&A Update & Beyond: The New Normal – Reviews – Limited Assurance, Limited Work
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US v Payward Ventures, Inc., 23-mc-80029-JCS
Kraken Must Comply with Summons for Customer Crypto Transactions (US v Payward Ventures, Inc., 23-mc-80029-JCS (ND Cal. (Jun. 30, 2023)) On March 30, 2021, Payward Ventures, Inc., doing business as Kraken.com, was issued a summons for relevant information on cryptocurrency transactions by Kraken’s customers for the years 2016 through 2020. After Kraken failed to comply with the summons, the Government filed a petition to enforce the summons. The Court agreed that parts of the summons were overly broad. The Court ordered Kraken to produce the following documents for Kraken users with any combination of accounts having at least the equivalent …
Debra Jean Blum v. Comm., CA-9, 21-71113
Malpractice Settlement Regarding a Personal Injury Lawsuit was Taxable (Debra Jean Blum v. Comm., CA-9, 21-71113 (Mar. 22, 2022)) Debra Jean Blum received a payment of $125,000 in 2015 in settlement of a lawsuit she had filed against lawyers who had previously represented her in an unsuccessful personal injury lawsuit against a hospital. She did not report this amount on her 2015 federal income tax return. The only question was whether Ms. Blum was entitled to exclude from her gross income the $125,000 settlement payment as damages received “on account of personal physical injuries or physical sickness” under §104(a)(2).Legal malpractice …
Calvin Lim and Helen Chu v. Comm., TCM 2023-11
Purported Appraisal Was Prepared in Exchange for a Prohibited Appraisal Fee (Calvin Lim and Helen Chu v. Comm., TCM 2023-11) On their joint Federal income tax return for 2016 Calvin Lim and Helen Chu reported a noncash charitable contribution deduction of $1,608,808 passed through to them from Integra – a pass-through entity created by Michael Meyer as part of his “Ultimate Tax Plan” scheme. Because the contribution amount exceeded the maximum allowable deduction for 2016, taxpayers claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 forward to their 2017 return. “Prohibited appraisal fee” disqualifies the appraisal. Section …
Janet Braen, et al, v. Comm., TCM 2023-85
Rezoning Is Substantial Benefit to Donor in Purported Bargain Sale (Janet Braen, et al, v. Comm., TCM 2023-85) In 1998, Braen Commercial Holdings Corp. (a family mining company founded in 1904) purchased a 505-acre plot of land in Ramapo, New York, with an eye to developing it into a granite quarry, adding to an existing stable of four quarries. Years of delays and disputes with both the state and town followed, including litigation over a 2004 zoning change made by Ramapo. As part of a 2010 settlement of this lawsuit, Ramapo purchased 425.5 acres of the property for $5,250,000 and …
Frank and Collette McNamara v. Comm., TCS 2023-22
Home Mortgage Interest Deduction Revised by Tax Court (Frank and Collette McNamara v. Comm., TCS 2023-22) In 2019, Frank and Collette McNamara owned two homes, which they acquired after Oct. 1987 and before Dec. 16, 2017. The McNamaras owned the first home in Virginia for the entire year. They owned the second home in Massachusetts until May 10, 2019, when they sold it. On their 2019 Form 1040, the McNamaras claimed a total mortgage interest deduction of $39,226 for their two homes. The IRS disallowed $9,140 of the deduction, asserting that the McNamaras miscalculated the deduction for the Massachusetts home. …
Shawn Steven Salter v. Comm., TCM 2022-29
Itemized Deductions Not Allowed After IRS Prepared Substitute Return (Shawn Steven Salter v. Comm., TCM 2022-29) Shawn Salter failed to file a return for the tax year. Having received no return from Mr. Salter, the IRS prepared a substitute for return based on third-party reporting, allowing the taxpayer the standard deduction. Mr. Salter then prepared a late (by seven years) Form 1040 reporting all items of income as shown on the IRS notice of deficiency, but claiming itemized deductions for medical, state, and local taxes, mortgage interest, charitable deductions, and unreimbursed employee business expenses. Section 63(e)(1) provides that, “[u]nless an …
Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77
Alimony Requirement #7: Child-related Contingency Means Alimony Not Deductible (Alejandro J. and Elena G. Rojas v. Comm., TCM 2022-77) Alejandro and Cristina divorced in 2012. On July 25, 2012, the Los Angeles Superior Court entered a judgment of dissolution, that stated in part: “[F]amily support shall be payable by Respondent [Alejandro] to Petitioner [Cristina] in the monthly amount of $4,500.00 payable on the 1st of each month. . . Such support order commences Aug. 1, 2011, and is continuing until both minor children emancipate or Petitioner remarries. If Petitioner remarries, the family support obligation shall be modified to $2,500.00 per …
Katrina White v. Comm., TCM 2023-77
COD Income Was Not Taxable Because Of Insolvency (Katrina White v. Comm., TCM 2023-77) Katrina White owned and operated a body sugaring place. The business struggled and she fell behind on loan payments. Her bank loan was forgiven and the bank issued a Form 1099-C on the forgiven amount of $14,433. Ms. White did not report the cancellation of debt income on her timely filed 2016 return. The IRS examined Ms. White’s return and determined the COD income to be taxable. At Tax Court, Ms. White argued that the discharge of the debt should be excluded from income because she …
Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168
Alimony Requirement #6: Payments Did Not End at Death of Recipient Spouse (Mark Hexum v. Comm., CA-7, 2018-1 USTC ¶50,168, Feb. 27, 2018) Mark Hexum paid his ex-wife, Sherri, half of the net gain from the sale of their marital home because the Illinois family court ruled payment was required under their divorce agreement. Mark had been responsible for the house’s mortgage and expenses after the divorce, and in his view, the equity accrued before the sale was not “marital property” that he should have been made to split with his ex-wife when the house was sold. He characterized the …
Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224
Alimony Requirement #6: Millions in Payments by Hedge Fund Partner to Ex-wife Did Not Meet Alimony’s Survival Criterion (Andrew Redleaf v. Comm., CA-8, 21-2209, 21-2224, Aug. 5, 2022) Andrew Redleaf is the majority partner at Whitebox Advisors, LLC, a hedge fund asset management firm. The Redleaf’s marriage termination agreement (MTA) required Mr. Redleaf to pay his ex-spouse $140 million including $1,500,000 per month for sixty months. Mr. Redleaf deducted $51 million in payments he made to his ex-spouse in 2012 and 2013 as spousal maintenance (alimony). The issue in the case was whether the alimony payments would stop after payee …
Jerry Vanderhal v. Comm., TCS 2018-411
Alimony Requirement #4: Payment of Sallie Mae Loan of Ex-Spouse Not Alimony Jerry Vanderhal divorced in 2011. The divorce agreement included a reference to a Sallie Mae student loan account that related to his former spouse. That reference was found in the “Division of Community Debts” section of the agreement and obligated Mr. Vanderhal to “assume and hold his former spouse harmless” from that debt. The agreement also included a section titled “Tax Free Transfers” that stated the parties believe and agree that the transfers of property between them required by the agreement were tax-free transfers of property between them …
Cynthia Hailstone and John Linford v. Comm., TCS 2023-17
Disability Payments Taxable if Premiums Paid by Employer (Cynthia Hailstone and John Linford v. Comm., TCS 2023-17) John Linford was provided disability insurance by his employer. Under the terms of the policy, employees were not required to contribute to the policy premiums. Rather, the company was required to pay 100% of the premiums. During 2017, Mr. Linford was approved and he received $105,000 of disability payments and a 2017 Form W-2 reporting the payments. He did not report the payments. Under §105(a) if the amounts of the disability payments were paid under a policy for which the contributions (premiums) were …
Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8
Proof of Insolvency Lacking for Exclusion of Cancelation of Debt Income (Ernesto and Marilyn Patacsil v. Comm., TCM 2023-8) The discharge of indebtedness is income (§61(a)(12)). Section 108(a) provides an exclusion to the extent of the taxpayer’s insolvency (§§108(a)(1)(B) & (3)) and defines an insolvent taxpayer as one who has an “excess of liabilities over the fair market value of assets” (§108(d)(3)). The burden to prove insolvency is on the taxpayer. Because Ernesto and Marilyn Patacsil couldn’t prove the FMV of their assets and the extent of their liabilities, the cancellation of debt due to the foreclosure of their properties …
James H. Kim v. Comm., TCM 2023-91
IRS Summons Nets More than $4 Million of Unreported Cryptocurrency Gains(James H. Kim v. Comm., TCM 2023-91) In response to a summons, the IRS received information reports from Coinbase, Inc. a virtual currency exchange, reporting the proceeds of James Kim’s transactions in Bitcoin and Litecoin (during 2013–2016), and Ethereum (during 2017). For 2013–2016, Mr. Kim reported no cryptocurrency gains or losses. For 2017, he received an information return from Coinbase that reported $18,557,230 of proceeds from virtual currency transactions. On the 2017 Schedule D, Mr. Kim reported gross proceeds in that amount but offset against those proceeds a claimed basis …
Denine and Bryan Kerns, pro sese v. Comm., TCM 2019-14
Failed to Reconcile Advance Premium Tax Credit on Form 8962 (Denine and Bryan Kerns, pro se v. Comm., TCM 2019-14) Denine and Bryan Kerns purchased their health insurance through Covered California. They received an advanced premium tax credit (APTC) of $8,420 in 2014. They timely filed their 2014 return, reporting AGI of $97,061. They claimed personal exemptions for themselves and no exemptions for dependents. The IRS determined that the Kerns were not eligible for any credit because their household income exceeded the maximum allowable under §36B(b) and (c)(1)(A). For 2014, 400% of the FPL was $62,040. The Kerns’ household income …
Chalaundra Sneed v. Comm., TCS 2023-11
Advance Premium Tax Credits Require Taxpayer Attach Form 8962 to Tax Return (Chalaundra Sneed v. Comm., TCS 2023-11) Chalaundra Sneed enrolled in health insurance for herself and her two dependents through the Oklahoma insurance Marketplace. She received Advance Premium Tax Credits (APTC) on the basis of the information she provided in her application. Ms. Sneed did not attach a copy of Form 8962, Premium Tax Credit (PTC), to her income tax return, but later mailed it separately. The notice of deficiency determined that Ms. Sneed was ineligible for the PTC because her MAGI for year at issue exceeded 400% of …
Alice Kimble v. US, (CA-FC), 2021-1 USTC 50,110
FBAR Violation Recklessness and, Thus, Willful (Alice Kimble v. US, (CA-FC), 2021-1 USTC 50,110; (Mar. 25, 2021)) Because the penalty for willfully failing to file FBAR is a maximum penalty of the greater of $100,000 (inflation adjusted to $136,399 for 2021) or 50% of the balance in the account or the amount of the transaction, the determination of willful versus non-willful is meaningful. What’s willfulness? The US Supreme Court in Safeco Ins. Co. of Am. v. Burr, 551 US 47, 57 (2007), defined “recklessness” as “violating an objective standard: action entailing an unjustifiably high risk of harm that is either …
Lindsey Jones v. Comm., CA-9, 2022-1 USTC §50,111
Unsigned Return Was Still a Valid Married Filing Joint Return (Lindsey Jones v. Comm., CA-9, 2022-1 USTC §50,111 (Feb. 3, 2022)) The Ninth Circuit Court of Appeals found that the Tax Court did not err by concluding that Lindsey Jones tacitly consented to the filing of a joint return. A joint tax return signed by one spouse on behalf of the other is valid so long as the non-signing spouse tacitly consented to filing the joint return. See Hennen v. Comm., [CCH Dec. 24,658], 35 T.C. 747, 748–49 (1961). The key question is whether both spouses intended at the time …
Sam Bankman-Fried Sentenced to 25 Years
Sam Bankman-Fried, the former wunderkind of the cryptocurrency world, was sentenced to 25 years in prison on Thursday, March 28th, 2024, for his role in defrauding FTX customers of $8 billion. He was facing a maximum sentence of 110 years, and prosecutors were hoping for 40-50 years. For a deep-dive into the background of the Sam Bankman-Fried fraud case from an accounting point of view, see Jeff Sailor, CPA’s on-demand video course, Focus on Fraud: FTX! What Happened? (1 CPE Credit, Accounting) In a statement from the Department of Justice, U.S. Attorney General Merrick Garland said: “There are serious consequences for …
The 90-Day Clock is Ticking for Beneficial Ownership Reporting
An Alabama Federal District Court found the Corporate Transparency Act and its Beneficial Ownership Interest (BOI) reporting to be unconstitutional (National Small Business United et al v. Yellen et al). The Justice Department on behalf of Treasury filed a Notice of Appeal on March 11, 2024. What happens now? While the litigation is ongoing, FinCEN will continue to implement the Corporate Transparency Act as required by Congress, while complying with the court’s order. Other than the particular individuals and entities subject to the court’s injunction, reporting companies are still required to file beneficial ownership reports as provided in FinCEN’s regulations. …