The taxpayer did consulting work for the medical practice of a Dr. Quisling. Somehow linked to this, she got payments over an eight-year period from around $25,000 to $56,000 annually. She didn’t file tax returns for any of these years.
The taxpayer took a strange approach to the payments. We’ll let Judge Kerrigan explain (my emphasis):
Petitioner sent Dr. Quisling a memorandum entitled “Memorandum of Understanding on Loan Terms and Conditions”. This memorandum states:
It has been revealed to me that the action of Blue Cross Blue Shield of Tennessee, Inc., * * * has created a financial burden upon your medical practice, because the medical services rendered by your medical practice rely upon payment(s) received by BCBST. Therefore, I am willing to develop a loan package * * * for the short-range and long-range impact upon the delivery of medical services by the “in-network-provider” as well as the “out-of-network provider” * * *.
The memorandum further states “[a] reasonable expectation of this Memorandum of Understanding on Loan Terms and Conditions is that the loan proceedings will be based upon a) your ability to loan and b) the completion of the research which will result in profit to the undersigned in order that the loan can be repaid.”
This memorandum, dated April 1, 2003, includes the signature of petitioner but not the signature of Dr. Quisling. Petitioner sent Dr. Quisling a followup letter to the memorandum requesting a memorandum of acceptance. The memorandum of acceptance includes a signature alleged to be Dr. Quisling’s, but this signature is not his.
Petitioner did not make payments to Dr. Quisling. Neither Dr. Quisling nor Mrs. Quisling demanded payment from petitioner.
Yes, repayment is a key part of a loan agreement. You give me money, I give it back later. Without the second part, it’s either a “gift” or “income.”
The doctor wisely did not play along, but unwisely failed to issue 1099s.. The doctor terminated the consulting relationship in 2011 when she refused belated requests for her Social Security number.
The taxpayer denied performing services. She said the money was given her for other things:
Petitioner contends that payments made by Quisling were loans. Petitioner testified that she needed the money to fund the research for a book that she was writing. However, petitioner produced no evidence of the book including the potential for publishing the book or any other evidence of her ability to repay. Dr. Quisling testified that the payments were not loans and that he did not expect to be repaid.
On February 5, 2011, petitioner faxed Dr. Quisling a letter referencing an alleged purchase of medical equipment that Quisling made from petitioner’s deceased husband. On February 25, 2011, Dr. Quisling’s attorney and the attorney for Quisling, Vincent Zuccaro, sent petitioner a letter stating that Quisling had not purchased any equipment from her husband or received a gift of property from her or her husband.
The Tax Court had little trouble finding that the taxpayer received income, rather than loans, upholding the tax assessment and various penalties.
The Moral? If you get income, calling it a “loan” doesn’t make it one. Especially when the “lender” doesn’t think it’s a loan and never asks for repayment.
Cite: Fisher, T.C. Memo 2014-219.
Amber Athey, Is the IRS Upholding Your Taxpayer Rights? (Tax Policy Blog). Some better than others:
2. The Right to Quality Service:
While the opportunities for outreach seem robust, in 2012, only 66 percent of taxpayers trying to call the IRS reached a representative, and callers waited on average of 17 minutes, up from 12 minutes in 2011. An article from April of 2014 stated the wait time was up to 30 minutes, largely due to budget cuts.
8. The Right to Confidentiality
Any information disclosed to the IRS may not be shared with anyone else unless authorized by the taxpayer or by law. The IRS struggles with protecting the confidentiality of taxpayers. Numerous information scandals have plagued the IRS, including the posting of 100,000 names and social security numbers on their website and an unencrypted thumb drive loaded with social security numbers being taken home by an employee.
In the first six months of 2013, 1.6 million taxpayers were affected by identity theft, compared to 271,000 in 2010. Thefts have resulted in billions of dollars in potentially fraudulent refunds, as the IRS issues refunds before they’re sure the filing was done by the person whose name is on the form. In 2011, fraudulent refunds totaled $3.6 billion. Serious improvements in security measures need to occur in order for taxpayers to feel confident that the IRS can protect their information.
But Amber Athey still thinks the IRS “Taxpayer Bill of Rights” is a good thing:
The IRS has room to improve in protecting the rights of taxpayers, but the implementation of the Taxpayer Bill of Rights is a great first step in this process. A clear outline of rights is also highly beneficial to the IRS and taxpayers as a means setting expectations for the function of the IRS.
I suppose having something to aspire to is a good thing, but it would be a lot better if there was somebody who would actually enforce these rights and impose costs on the IRS for falling short.
Robert D. Flach has a friday “Buzz Light,” linking to tax things.
Jason Dinesen, Updated Wisconsin Tax Guidance for Same-Sex Married Couples
Paul Neiffer invites you to an Ag Summit in Chicago on December 7 with Andy Biebl and Lance Woodbury on “Farm Retirement and Transition Planning.”
Kyle Pomerleau, The Pease Limitation on Itemized Deductions Is Really a Surtax (Tax Policy Blog). It’s also a lie. It works like a rate increase, but more complicated and without the honesty.
Howard Gleckman, Taxes and Spending Return To “Normal”– But Not For Long (TaxVox)
Robert Goulder, Early Results Are In: Inversions Aren’t Going Away (Tax Analysts Blog) “It’s too early to draw a definitive conclusion here, but it seems the world’s multinationals haven’t yet thrown in the towel on inverting to low-tax jurisdictions.”
Richard Phillips, Ireland’s Soft Pedaling Tax Avoidance Crack Down (Tax Justice Blog)
TaxProf, The IRS Scandal, Day 526
Career Corner. A Quick and Dirty Guide to Getting Away With Insider Trading (Leona May, Going Concern)