On Tax Problems, Sexual Assault & Extreme Unpleasantness

Shocking Update: On 10 May 2016 we described the heavy-handed tactics the New York State Tax Department used to battle one of our pro-bono clients. The publication was entitled  “In aDisgraceful Show of Force NYS Tax Dept. Seizes Dying Man’s Meager Savings” and can be seen in its entirety by clicking on the link. While representing his pro bono client, Federal Tax Practitioner David Selig of Selig & Associates, said:  “Our client is a really nice guy. I’ve gotten to know him pretty well, and even though he’s extremely weak, he still has a great sense of humor. He’s also very proud of his Hispanic heritage. He worked construction his entire life, and seems to have a pretty good head on his shoulders. Unfortunately, he’s deathly ill and recently spent 63 days in New York Presbyterian Weill Cornell Medical Center, where he underwent three extremely invasive surgical procedures. He’s incapable of working, and apparently, he was too tired to enroll in any public assistance programs. Accordingly, he has been living-off of his meager savings. Unfortunately the Tax Department took every dime, and the Collection Agent who is assigned to this matter won’t even answer our calls. Our client can’t afford food and other necessities such as adult diapers and toilet paper, it’s heartbreaking to see him humiliated this way.” Selig went on to obtain a full release after contacting the Taxpayer Advocate’s Office.

Regrettably, Selig’s former client has now been charged with a 54-count indictment for allegedly drugging and raping at least four women, and taking explicit videos of them in various unconscious sex acts - "That’s the way the mop flops" says Selig.   

Selig & Associates we represent people with tax problems.

Angelina Jolie & Brad Pitt Divorce – Tax Bill Could Exceed 100 Million Dollars

Angelina Jolie & Brad Pitt Divorce – Tax Bill Could Exceed 100 Million Dollars

Angelina Jolie is kicking Brad Pitt to the Curb! And if her lawyers have their way, says David Selig of Selig & Associates, she’s going to stick her has-been husband with a hefty tax bill. Now that [Brad Pitt’s] legendary looks are fading, and his career is slumping, Angelina is filing for divorce citing (of all things) “irreconcilable differences.” But Brad is still the man, says Selig, and he’s sure-as-hell not going to let anyone push him around. In fact, if anyone’s going to get stuck with a tax bill, it’s going to be her, predicts Selig. 

Divorce and taxes are complicated, as most divorced people can attest. Particularly when taxes are owed to the State Tax Department and Federal Government, and property has to be divided. Nota bene, most transfers between spouses or former spouses are non-taxable. To this end, IRC Section 1041 provides that a transfer between spouses, or former spouses, “incident to divorce” is not immediately taxable in most circumstances, because most transfers are treated gifts (for tax purposes). However, the transferee takes the transferor’s tax basis in the property (and all of the tax consequences associated therewith), In a nutshell, taxable recognition of gain or loss, is deferred until the recipient sells the property. However, there are some notable exceptions, e.g. when recipient spouse is a non-resident alien, etc. Moreover, Treasury Regulation 1.1041-IT(b) states that a transfer is “related to” the cessation of the marriage when the transfer is required under the divorce or separation instrument, and the transfer takes place within six years from the date of the divorce.” If the transfer is not made pursuant to a divorce or separation instrument, or occurs more than six years after cessation of the marriage, it is presumed to be unrelated to cessation of the marriage. See: Treas. Regs. § 1.1041-1T, A-7; see Ltr.Rul. 9306015. This presumption may be rebutted “only by showing that the transfer was made to effect the division of property owned by the former spouses” at the time their marriage ceased. Regs. § 1.1041-1T, A-7. And this presumption may be rebutted by showing that (i) the transfer was not made within the one-and six-year periods described above because of factors which hampered an earlier transfer of the property, such as legal or business impediments to transfer or disputes concerning the value of the property owned at the time of the cessation of the marriage, and (ii) the transfer is effected promptly after the impediment to transfer is removed.”  Complicated stuff, says Attorney Bradley Dorin of Selig & Associates.

But wait, there’s more. For most filthy rich celebrities, moguls and business panjandrums, the distribution of property is the most important aspect of a their divorce – and if they don’t meet the requirements set forth in IRC Sec. 1041 or Sec. 2516, property transfers included in a divorce decree are subject to income taxes or gift taxes, respectively.

Property acquired by the spouses during their marriage, e.g., homes, retirement plans, vineyards, production companies, financial interests in restaurants, etc., generally qualify as marital property with the exception of qualified retirement plan assets covered under ERISA, viz. Employee Retirement Income Security Act, says Bradley Dorin. Ultimately state law governs the division of marital assets in a divorce, and state laws differ drastically as to who gets the Goldmine and who gets the Shaft.

IRS Commissioner Fires Thousands of IRS Employees - Unsympathetic Citizenry says Good-Riddance

John Koskinen [the most controversial IRS Commissioner in recent history] recently toured the immense IRS flagship facility in Fresno California - then vowed to close it down! IRS Fresno, colloquially called Foxconn, opened its doors in 1972, and up until recently was our Nation’s most preeminent tax return processing facility. By putting 6000 people out of work and kicking Fresno’s economy dead in the crotch, Commissioner Koskinen follows our Führer’s orders with alacrity and an eye towards the future, viz., provided our presumptive democratic empress ascends to the purple.

Typical, says David Selig of Selig & Associates, the Administration has been cooking the books by [among other things] creating phony “make-work” jobs, which conceal the truth and cost the taxpayer billions of dollars annually. And now that President Obama is leaving office, his political acolytes are disassembling each Potemkin village, brick by brick. Astonishingly and in sharp contradiction to the facts, the president et al are claiming they created 14 Million jobs and significantly reduced the national deficit (a lie that not even Joseph Goebbels or the most unscrupulous accountant would dare make). 

There’s a real modus operandi at play [says Selig] Point in fact, do you remember when President Obama visited NASA? In 2011 he toured the facility, delivered a magniloquent speech, posed for pictures, squeezed in eighteen holes of golf, and then shuttered the place. So we really can’t blame the Commissioner for emulating the Commander in Chief, particularly if we believe that imitation really is the sincerest form of flattery. The case of the Commissioner is considerably less compelling though, because most people don’t give a tinker’s damn about IRS employees, and may even consider this closing and corresponding loss of jobs to be poetic justice. Anyway, earlier this month, the commissioner visited the IRS processing facility, pressed the flesh, posited a few platitudes [shut the place down] and then flew back to the Beltway in time for postprandial drinks. *On 14 September 2016 the Fresno Bee reported that approximately 3000 IRS employees received Notice of Termination via email. Fresno Bee reports the facility is scheduled to close in 2021 but sources close to the story say closure appears imminent.   

Marijuana Dispensary Takes IRS To Tax Court “Harborside Healthcare Center v. IRS”

BIG NEWS:  Bleary-eyed stoners are anxiously awaiting the fate of IRC Section 280E, viz. born of the seminal USTC decision of 1981, which states “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” 

For better or worse, half of the country has legalized the sweet-leaf in some capacity. That notwithstanding, the dirty old gateway drug a/k/a “marijuana” rightfully remains a Schedule I controlled substance with the federal government, says Federal Tax Practitioner David Selig of Selig & Associates.

Accordingly, the gross income realized from peddling dope is 100% taxable – and in sharp contrast to a legitimate business venture, as provided for in IRC Section 162, only the cost of goods are deductible (and not the normal necessary expenses incurred to produce income, e.g. rent, electricity, legal, advertising, etc.) In a nutshell, disgruntled dope peddlers contend they are paying too much in taxes.

Historical Footnote: The Commissioner determined a deficiency in petitioner's Federal income tax liability for the taxable year 1974 in the amount of $17,303.45 together with an addition to tax under section 6651 (a), Internal Revenue Code of 1954,1 in the amount of $289.87. There are two issues for decision:

(1) whether respondent has properly disallowed portions of petitioner's cost of goods sold and expenses in recomputing petitioner's Federal income tax liability, and

(2) whether the Commissioner's determination of an addition to tax under section 6651 (a) is proper.

Findings of Fact

Some of the facts in this case have been stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference.

Petitioner Jeffrey Edmondson resided in Minneapolis, Minnesota, when he filed his petition in this case. Petitioner's Federal income tax return for the taxable year 1974 was filed on June 24, 1975, at the Internal Revenue Service Center in Ogden, Utah.

During the taxable year 1974, petitioner Jeffrey Edmondson was self-employed in the trade or business of selling amphetamines, cocaine, and marijuana. His primary source of controlled substances was one Jerome Caby, who delivered the goods to petitioner in Minneapolis on consignment. Petitioner paid Caby after the drugs were sold. Petitioner received on consignment 1,100,000 amphetamine tablets, 100 pounds of marijuana, and 13 ounces of cocaine during the taxable year 1974. He had no beginning inventory of any of these goods and had an ending inventory of only 8 ounces of cocaine.

Petitioner did not keep books and records of these transactions because of the illegal nature of his business. Petitioner reconstructed these transactions in February of 1975 for the purpose of filing a Federal income tax return for 1974 in response to a jeopardy assessment made by the Commissioner. He reported on this return that his cost of goods sold for these products was $105,300.

In the taxable year 1974 petitioner incurred various expenses in his business of selling controlled substances. He drove his automobile 29,000 miles, of which two-thirds of such mileage was attributable to business use. Petitioner made a business trip to San Diego, California, in December of 1974 in connection with which he incurred expenses of $250 for air fare and $200 for food and entertainment. The petitioner purchased a scale to be used in his business for $50. Petitioner incurred packaging expenses for the sale of controlled substances of $200. Telephone expenses which were attributable to petitioner's business consisted of $180 of long-distance charges and two-thirds of his base rate charges of $204, or $136. Petitioner paid rent in the amount of $2,360 for his apartment, which was also his only place of business.

In his notice of deficiency, the Commissioner disallowed all of petitioner's miscellaneous business expenses and his vehicle expense and disallowed $30,341.69 of petitioner's claimed cost of goods sold.

Opinion

We will first consider petitioner's cost of goods sold. Petitioner submits that his claimed cost of goods sold and expenses have been established through his testimony at trial and other evidence. Respondent maintains that the petitioner's uncorrobated testimony should not be accepted uncritically by this Court.

Petitioner was one link in a chain from the source of his controlled substances to the ultimate consumer. He was not the source of the drugs, he did not bear the [42 T.C.M. 1535] risk of transporting them from foreign countries or from distant areas of the United States, and did not bear the risk of any financial investment in them. The drugs were "fronted" to him, i.e., he received the goods on consignment and paid his supplier out of funds which he received on sale. At trial in May of 1980 petitioner testified that this consignment price for amphetamine tablets ranged from 7½ cents to 10 cents per tablet, with an average price of 8 cents per tablet. Petitioner further testified that the consignment cost of the marijuana was $110 per pound. Finally, petitioner testified that the 13 ounces of cocaine were acquired in three transactions, the consignment price of which was $1,200 per ounce for the one ounce in the first transaction, $1,500 per ounce for the 4 ounces in the second transaction, and $1,000 per ounce for the 8 ounces in the third transaction. Petitioner asserts by his testimony that he had a cost of goods sold of $106,200. The nature of petitioner's role in the drug market, together with his appearance and candor at trial, cause us to believe that he was honest, forthright, and candid in his reconstruction of the income and expenses from his illegal activities in the taxable year 1974. While petitioner's testimony at trial indicates a larger cost of goods sold than his original reconstruction in February of 1975, we believe that petitioner's first reconstruction, made while the events were clear in his mind, is the most accurate. We, therefore, hold that petitioner's cost of goods sold for the taxable year 1974 was $105,300.

Petitioner's travel and entertainment expenses, consisting of air fare and food and entertainment for a trip to San Diego, California, must be disallowed because the petitioner has not complied with the substantiation requirements of section 274(d).

Petitioner claims that two-thirds of the rental cost of his residence is deductible because he used it as the office for his illegal drug business. While the rental attributable to such use would usually constitute an ordinary and necessary business expense which would be deductible under sections 161 and 162, section 262 disallows any deduction for personal, living, or family expenses, and section 1.262-1(b)(3), Income Tax Regs., provides:

(3) Expenses of maintaining a household, including amounts paid for rent, water, utilities, domestic service, and the like, are not deductible. A taxpayer who rents a property for residential purposes, but incidentally conducts business there (his place of business being elsewhere) shall not deduct any part of the rent. If, however, he uses part of the house as his place of business, such portion of the rent and other similar expenses as is properly attributable to such place of business is deductible as a business expense.

The property which petitioner rented as his residence was also his only place of business. This is in contrast to the facts in Sharon v. Commissioner [Dec. 33,890], 66 T.C. 515 (1976), affd. per curiam [78-2 USTC ¶ 9834] 591 F.2d 1273 (9th Cir. 1978), cert. denied 442 U.S. 941 (1979). In that case we disallowed the home office deduction of an employee who was provided office space at his employer's place of business but chose to also use his residence as an office. We found that under section 1.262-1(b)(3), Income Tax Regs., the expense of maintaining one's residence is a personal expense, and that a taxpayer can take part of his apartment rent out of the nondeductible category only by showing that a portion of his residence constitutes a place of business. We disallowed the petitioner's claimed home office deduction because the petitioner's use of his home failed to meet this requirement; the occasional use of his home, purely as a matter of convenience, did not make his home a place of business.

Petitioner in the present case meets the above requirement that his home be a place of business. His apartment was his only place of business. We are persauded that the petitioner made substantial use of his apartment in his drug business. His testimony, however, did not describe either the specific spatial portion of his apartment which he used as his office or the percentage of such use. Where we are persauded that a taxpayer incurred an expense, we may make an approximation thereof, "bearing heavily * * * upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner [2 USTC ¶ 489], 39 F.2d 540 (2d Cir. 1930). From the record as a whole we find that the appropriate portion of business use of the petitioner's apartment was one-half of the two-thirds asserted by petitioner. This is because the allocation must exclude personal use, both in space and time. We hold that one-third of petitioner's rental expense of $2,360, or $787, constitutes an ordinary and necessary expense of petitioner's trade or business and is to be allowed as a deduction.

Petitioner's remaining claimed business expenses consist of the purchase of a small [42 T.C.M. 1536] scale, packaging expenses, telephone expenses, and automobile expenses. We hold that these expenses were made in connection with petitioner's trade or business and were both ordinary and necessary.

The second issue for decision before this Court is whether the Commissioner's determination of an addition to tax under section 6651(a) is proper. This determination is presumptively correct. Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111 (1933). The record indicates that petitioner's Federal income tax return for the taxable year 1974 was not timely filed. Petitioner has made no effort to show that his failure to timely file this return was the result of reasonable cause. We hold, therefore, that petitioner has failed to sustain his burden and that the Commissioner's determination of addition to tax is upheld.