California tax attorney Blog

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled yesterday that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

“Today’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve,” said Secretary Jacob J. Lew. “This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

For information on filing an amended return, go to Tax Topic 308, Amended Returns at or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

A check written in 2012 that does not clear until 2013 is at risk of being a 2013 gift, not a 2012 gift, since the donor could have stopped payment in 2013 before it cleared. The issue with using checks to make gifts is that until the check clears the bank, the donor can revoke the gift by issuing a stop payment or by removing adequate funds from the bank account. A gift that can be revoked is not complete until revocability ends. The U.S. Supreme Court said as much in the case of Smith v. Shaughnessy, 318 U.S. 176 (1943).

The Tax Court and the Federal Court of Appeals (of the 4th Circuit) spell out when gifts by check will “good” gifts. Those cases are Gagliardi Est. v. Comr., 89 T.C. 1207 (1987); Metzger Est. v. Comr., 100 T.C. 204 (1993), aff’d 38 F.3d 118 (4th Cir. 1994).

The IRS in 1996 issued Revenue Ruling 96-56, 1996-2 C.B. 161 which provides a safe harbor mechanism to assure last minute 2012 gift tax treatment in the waning days of this year.

Under that ruling a gift by check delivered in 2012 will be a gift as of the date the check is deposited or presented for payment if:

1) the check was deposited, cashed, or presented in 2012 and within a reasonable time of issuance;

2) the donor intended to make a gift;

3) the check was paid by the drawee bank when first presented to the drawee bank for payment;

4) delivery of the check by the donor was unconditional; and

5) the donor was alive when the check was paid by the drawee bank.

So, to be certain your 2012 gift will be treated as made in 2012 and not 2013, you need to (a) deliver the check to the donee in 2012 (with adequate funds in the bank for it to clear), (b) assure the donee deposits it in 2012 and within a reasonable time of issuance, and (c) stay alive at least until after the check clears.

For more information about Death and Taxes, call Mitchell A. Port at 310.559.5259 for a free consultation.

A tax loophole is “something that benefits the other guy. If it benefits you, it is tax reform.”
– Russell B. Long, U.S. Senator
“People who complain about taxes can be divided into two classes: men and women.”
– Unknown
“Like mothers, taxes are often misunderstood, but seldom forgotten.” – Lord Bramwell, 19th Century English jurist
When it comes to taxes, everyone has an opinion. These quotes reflect the opinions of their authors; their inclusion here is not an official IRS endorsement of the sentiments expressed.

“To tax and to please, no more than to love and to be wise, is not given to men.” – Edmund Burke, 18th Century Irish political philosopher and British statesman
“No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.” – Frederick the Great, 18th Century Prussian king
“Taxes are what we pay for civilized society.” – Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice
“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” – Arthur Godfrey, entertainer
“The hardest thing in the world to understand is the income tax.” – Albert Einstein, physicist
“The best measure of a man’s honesty isn’t his income tax return. It’s the zero adjust on his bathroom scale.” – Arthur C. Clarke, author
“The power of taxing people and their property is essential to the very existence of government.” – James Madison, U.S. President
“Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” – F. J. Raymond, humorist
“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” – Plato
“Taxation with representation ain’t so hot either.” – Gerald Barzan, humorist
“Few of us ever test our powers of deduction, except when filling out an income tax form.”
– Laurence J. Peter, author
“Income tax has made more liars out of the American people than golf.” – Will Rogers, humorist

Martindale-Hubbell Peer Review Ratings just came out with it’s rating of me. I have been honored with an “AV Preeminent” rating which is a significant rating accomplishment- a testament to the fact that a lawyer’s peers rank him or her at the highest level of professional excellence. My piers gave me a rating of 5 out of 5 in all possible areas analyzed: Legal Knowledge, Analytical Capabilities, Judgment, Communication Ability, Legal Experience. I’m pleased and honored. The Ratings are an objective indicator of a lawyer’s high ethical standards and professional ability. Attorneys receive a Peer Review Ratings based on evaluations by other members of the bar and the judiciary in the United States.

The following examples of abusive tax scheme investigations are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted.

Californian Sentenced for Evading More Than $150,000 in Taxes

On February 6, 2012, in Los Angeles, Calif., William H. Nurick, of Camarillo, was sentenced to 60 months in prison and ordered to pay $286,443 in restitution. Nurick was convicted in September 2011 of evading the payment of more than $150,000 in taxes. According to evidence presented at trial and court documents, the Genesis Fund was an investment fund that operated from approximately 1994 through 2002. Nurick received approximately $1.1 million in distributions from the Genesis Fund between 1995 and 2002. During this time, he used eight different entities to conceal his control over bank accounts, vehicles and real property. In May 2000, Nurick filed an amended 1995 individual income tax return admitting he owed $106,542 related to his investment in the Genesis Fund. Thereafter, Nurick deliberately and systematically attempted to conceal assets between May 2000 and April 2001 in order to evade payment of the balance owed to the IRS for his 1995 income taxes. Following a notice of balance due from the IRS, Nurick transferred approximately $133,000 from an offshore bank account that he controlled to a witness’s offshore bank account. Nurick also submitted a false “Offer in Compromise” to the IRS, offering to pay less than one tenth of his outstanding debt. Nurick’s Offer in Compromise, signed under penalties of perjury, falsely understated his net worth and income, and failed to indicate a bank account in Costa Rica with a balance in excess of $200,000. Nurick also falsely claimed on this document that he would receive no further distributions from the Genesis Fund, when in fact, he received over $350,000 from it through distributions to multiple entities that he controlled.

Certified Public Accountant Sentenced in Tax Evasion Case

On January 26, 2012, in Omaha, Neb., Lowell Baisden, formerly of Bakersfield, California, was sentenced to 37 months in prison and three years of supervised release for tax evasion. According to court documents, Baisden, as a Certified Public Accountant (CPA), provided accounting, tax preparation and consulting services to clients in California and Nebraska. An investigation by the Internal Revenue Service into various clients for whom Baisden prepared tax returns showed Baisden assisted his clients in setting up corporations in other states for the purpose of evading income and other taxes. These corporations enabled Baisden to prepare income tax returns that avoided the assessment and payment of over $2 million in taxes owed to the United States by Baisden’s clients.

California Return Preparer Sentenced for Promoting a $1.5 Million Fraudulent Tax Loss Scheme

On May 14, 2012, in Los Angeles, Calif., Richard Allen Edgar, owner of a Los Angeles tax preparation service, was sentenced to 15 months in prison. Edgar, a former certified public accountant, pleaded guilty late last year to two counts of aiding and assisting in the preparation of false tax returns. According to the plea agreement, from at least 2004 through 2009, Edgar sold false “tax losses” to his clients to offset his clients’ income, thereby eliminating or drastically reducing taxes otherwise owed by the clients to the IRS. Edgar typically charged clients approximately 12.5 percent of the losses purchased. The losses Edgar sold were purportedly non-passive partnership losses generated by Creative Financial Solutions, LLC and Why Not Entertainment, LLC, both of which Edgar managed and controlled. The clients whose returns included the losses were not partners of any kind in Creative Financial Solutions or Why Not Entertainment and were unaware of what the companies did. To encourage his clients to buy these sham tax losses, Edgar would prepare and send each client two versions of the client’s tax return, one without any claimed tax losses, showing a large tax liability owed to the IRS, and the other with tax losses offsetting all or virtually all of the client’s taxable income, showing either no taxes owed or refund due. After a client purchased the losses, Edgar would have the client execute a backdated “Membership Subscription Agreement,” purporting to show that the client had become a member of Creative Financial Solutions or Why Not Entertainment in the tax year at issue. According to documents filed with the court, for the tax years 2004 through 2007, Edgar sold over $1.5 million in fraudulent “tax losses” to his clients, causing losses to the IRS of $358,274.

North Carolina Business Owner Sentenced for Evading $1.5 Million in Taxes

On February 8, 2012, in Charlotte, N.C., Ricky Dean Hardee was sentenced to 21 months in prison and three years of supervised release. Hardee has made a full payment of $1,525,150 in restitution to the Internal Revenue Service (IRS). In June 2010, Hardee pleaded guilty to tax evasion in connection with his scheme to evade approximately $1.5 million in taxes. According to court documents, from about 1997 to 2007, Hardee operated a successful masonry contracting business in Charlotte. From 2002 to 2007, Hardee earned gross receipts of $4.2 million from his business but failed to file income tax returns and engaged in a sophisticated scheme to conceal his income and assets from the IRS. Specifically, Hardee purchased and utilized a system of nominee entities, sham trusts and related domestic and foreign bank accounts, including a bank account in Panama and ten different domestic bank accounts, to hide money from the IRS.

Three Men Sentenced in Investment/Tax Fraud Scheme

On December 21, 2011, in Newark, N.J., a principal of Mid-Atlantic Trustees and Administrators (MATA) and two of the company’s employees were sentenced to prison terms or home detention for conspiracy to defraud the United States through the marketing of two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. Michael Balice, of Metuchen, N.J., was sentenced to 48 months in prison; Angel Done, of Queens, N.Y., was sentenced to 12 months of home detention; and Wilson Calle, of Queens, was sentenced to three months of home detention. Balice and Done were convicted by a jury on June 20, 2011, of one count each of conspiracy to defraud the United States, mail fraud and wire fraud. Balice was also convicted of one count of tax evasion. Calle had pleaded guilty to one count of mail fraud during the trial. According to court documents and evidence at trial: Balice was a principal of MATA, a company formed in 2005, which marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). From the formation of MATA through July 2010, the defendants established several hundred PTOs for their customers, the express design of which was to conceal income and other assets from the IRS, thereby impeding the IRS in its tax collection efforts. In creating, marketing, and selling PTOs, the defendants made concerted efforts to make it appear that PTO customers had no control over the assets in the account and the trustees had complete control. The customers, however, always maintained unfettered access to their assets. In May 2007, MATA began to market and sell a second product, BIC, as a debt elimination program. For thousands of dollars per customer, MATA, its principals, and its employees manufactured false and fictitious bonds, often with face amounts of tens of millions of dollars, which were sent directly to the United States Treasury Department. According to MATA, once a customer’s bonds were sent to the Treasury Department and accepted, the customer was “bonded,” and, with MATA’s help, could draw down that bond to pay “public” debt, including mortgage debt, credit card debt, and tax obligations. As part of the BIC process, customers paid MATA to send hundreds of bonds to the U.S. Treasury, the IRS, and other government agencies in an attempt to discharge their tax and other debts. In total, MATA flooded the U.S. Treasury, IRS, and other government agencies with hundreds of billions of dollars in worthless paper. Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all.

Self-Proclaimed “Governor” of Alabama Sentenced for Tax Fraud

On May 29, 2012, in Montgomery, Ala., Monty and Patricia Ervin, of Dothan, Ala., were sentenced to prison for conspiring to defraud the United States and tax evasion. Patricia Ervin was also sentenced for structuring transactions to avoid bank reporting requirements. Monty Ervin was sentenced to 120 months in prison. Patricia Ervin was sentenced to five years of probation, with the condition that she spend 40 consecutive weekends in jail. The Ervins were also ordered to pay $1,436,508 in restitution to the IRS. The Ervins owned and managed Southern Realty, a property management company in Dothan, Alabama. Based on the evidence introduced at trial, the Ervins amassed hundreds of investment properties over the last decade, receiving more than $9 million in rental income. Despite receiving this income, the couple paid no federal income taxes. As the evidence showed at trial, the couple concealed their assets from the IRS by placing investment properties into the names of nominees. Patricia Ervin also structured deposits into Southern Realty’s bank account in an effort to evade federal currency reporting requirements.

Former Pennsylvania State Auditor Sentenced for Tax Evasion, Obstructing and Impeding IRS

On April 10, 2012, in Harrisburg, Pa., Troy A. Beam, of Shippensburg, was sentenced to 74 months in prison. Beam was convicted on May 4, 2011, by a federal jury of tax evasion, obstructing and impeding the due administration of the Internal Revenue laws, and willful failure to file federal income tax returns. According to evidence introduced at trial, Beam, a former certified public accountant and former state auditor in the Pennsylvania Auditor General’s Office, operated a home construction business known as “Sunbeam Builders,” as well as owned and operated two real estate businesses that purchased, rented and sold real estate. Despite earning substantial income from these businesses, as well as other activities, Beam failed to file any federal income tax returns since April 1996. In April 1996, Beam filed false amended federal income tax returns for 1992, 1993 and 1994, seeking tax refunds for taxes he previously had paid for those years. The evidence at trial proved that from 1999 to 2007, Beam earned more than $10.3 million in gross income from his various home construction and rental property businesses. Beam obstructed the IRS in its attempt to calculate and collect his taxes by using numerous sham trusts and other entities, including North Star Investment Holdings Ltd. to hide his income and assets. He used North Star to set up a bank account in the Cayman Islands into which he deposited nearly $3 million of income derived from his construction business.

Washington Abusive Trust Promoter Sentenced for Conspiracy and Tax Charges

On November 15, 2011, in Tacoma, Wash., Sharon D. Kukhahn, aka Sharon Stephenson, was sentenced to 84 months in prison, three years of supervised release, and ordered to pay $856,681 in restitution. Kukhahn was convicted by a trial jury in May 2011 on charges of conspiracy, tax evasion and corrupt interference with Internal Revenue Laws. At Kukhahn’s trial, prosecutors detailed the steps she took from 1999 to 2005 as part of a conspiracy to promote an abusive trust scheme designed to hide individual taxpayers’ income and assets from the IRS. Kukhahn and other conspirators referred clients to David Carroll Stephenson, who sold trust packages to more than 400 individuals. Purchasers used the trust packages to conceal income and assets from the IRS, and, as a result, failed to pay in excess of $7 million in income taxes. The jury found that through her own use of the trust packages, Kukhahn evaded paying income taxes in 2003 through 2006. The jury found that Kukhahn engaged in a business that attempted to thwart the efforts of the IRS to collect taxes owed by advising clients that they did not owe taxes. For a fee, Kukhahn helped clients obtain internal records from the IRS, claimed to “decode” them, and then mailed so-called “rebuttal packages” that supposedly would remove clients from the tax system. In reality, the packages were designed to stop audits and collection by harassing IRS employees, as well as to provide clients with a defense to tax evasion charges by creating evidence which the client could later use to dispute his or her criminal intent. Kukhahn also provided a frivolous letter-writing service for clients that was further designed to thwart IRS efforts to collect taxes owed. Kukhahn sold this scheme to more than 1,400 clients, helping them cheat the U.S. out of more than $4 million in income taxes. David Stephenson was sentenced in May 2006 to 96 months in prison and ordered to pay $8.5 million in restitution.

Honolulu Firearms Business Owner Sentenced on Tax Charges

On March 27, 2012, in Honolulu, Hawaii, Arthur Lee Ong was sentenced to 51 months in prison and ordered to pay $1 million in restitution to the Internal Revenue Service (IRS). Ong was convicted by a federal jury on November 7, 2011, of conspiracy to defraud the United States and six counts of tax evasion. According to evidence introduced at trial, Ong, the owner and operator of Thunder Bug Inc., dba Magnum Firearms, failed to report to the IRS millions of dollars of income he earned from the sale of firearms and related products to federal, state, county and military agencies, as well as to the general public. Ong, with the assistance of a Hawaiian attorney, created multiple sham trusts in 1990 to hide his income and assets. He stopped filing personal income tax returns beginning in 1994 and also filed false tax returns on behalf of the sham trusts that fraudulently reported to the IRS that the income from his businesses was attributable to these trusts and not to him. The evidence at trial showed that Ong evaded more than $600,000 in federal income taxes from 2000 to 2006.

Return Preparer and Client Sentenced for Roles in Offshore False Expense Scheme

On April 25, 2012, in Miami, Fla., Tom F. Castellanos, of Coral Gables, was sentenced to 12 months and a day in prison and one year of supervised release. Co-defendant Manuel Rivero, Jr., of Miami, was sentenced on April 20, 2012, to 30 months in prison and one year of supervised release. Each defendant pleaded guilty to conspiring to defraud the Internal Revenue Service. According to court documents, between 2001 and 2007, Castellanos operated a roofing business called East Coast Metals, Inc. (ECM) based in Hialeah, Fla. One of Castellanos’ return preparers arranged for the creation of a Panamanian corporation called National Steel Processors, Inc. (NSP) and arranged the opening of a bank account for that company in Panama. NSP was a shell corporation that provided no services and had no employees. Court documents state that for income tax purposes, Castellanos claimed that ECM purchased materials from NSP. Acting on instructions from Rivero, Castellanos initially created false invoices purporting to represent his company’s purchases from NSP. Later, Castellanos stopped manufacturing false invoices, but continued entering falsified purchases from NSP on the books of ECM. For tax years 2002 to 2007, Castellanos used these fake purchases to claim expenses, or cost of goods sold, that falsely reduced the tax liability of ECM and himself. Rivero prepared tax returns on behalf of ECM and Castellanos with full knowledge that the claims relating to NSP expenses were false. The amount of false purchases claimed during the conspiracy exceeded $10 million. Rivero also knew that Castellanos wrote checks to NSP that were deposited in the Panamanian bank account and that Castellanos had access to these funds. Castellanos used the funds to make loans and to purchase a condominium and boat dock in Bimini.

Defendant Sentenced on Tax Charges; Failed to Report $8.8 Million in Stock Gains

On March 5, 2012, in San Jose, Calif., Gary Linn Packer, currently of Cheyenne, Wyo., was sentenced to 30 months in prison, three years of supervised release and ordered to pay $1,808,079 in restitution. Packer pleaded guilty on November 28, 2011, to one count of tax evasion. According to his plea agreement, between 1994 and 2001, Packer was employed by Network Appliance, Inc. (NA) in Sunnyvale, Calif. He received a portion of his income in NA stock options. In 2000, Packer liquidated his NA stock, which resulted in a taxable gain of $8,844,949. He did not file a tax return for the 2000 tax year and did not pay the IRS the $1,795,740 of income taxes owed. In order to evade the payment of the income taxes, Packer concealed his assets from the IRS by placing them in nominee names, including several trusts, and used false identification numbers.

Promoter of Abusive Trust Arrangements Sentenced on Tax Charges

On January 30, 2012, in Fresno, Calif., Michael S. Ioane, of Atwater, was sentenced to 108 months in prison and three years of supervised release for a tax fraud conspiracy. Ioane was convicted by a jury in October 2011 of conspiring to defraud the United States and four counts of presenting fictitious documents to the United States. According to the evidence presented at trial, Ioane, who operated under the name Acacia Corporate Management and First Amendment Publishers, promoted sham or abusive trusts that purported to allow people to put their assets and income into trusts that would shield them from the Internal Revenue Service (IRS). When the IRS disallowed various trusts set up by Ioane, he would instruct co-defendant Vincent Steven Booth to set up new trusts, file false liens against his own properties and present bogus “Bills of Exchange” to the IRS that Ioane said constituted full payment of Booth’s tax debt. Booth pleaded guilty in September 2010 and is awaiting sentencing. He is currently working to pay more than $1.3 million in back taxes that are owed to the IRS.

Diamond Merchant Sentenced for Conspiring to Hide $7.1 Million in Swiss Bank Accounts

On November 9, 2011, in Manhattan, N.Y., Richard Werdiger, a former client of Swiss bank UBS AG, was sentenced to 12 months and one day in prison, one year of supervised release, fined $50,000 and ordered to pay a $600 special assessment. Werdiger pleaded guilty in March 2011 to conspiring to defraud the Internal Revenue Service (IRS) by hiding more than $7.1 million at UBS, filing false federal income tax returns, and evading nearly $400,000 of taxes. Werdiger agreed to pay a civil penalty of more than $3.8 million for his failure to report his overseas accounts. Restitution will be determined at a later date. According to court documents and statements made in court, from 1986 to 1988, Werdiger opened multiple accounts at UBS under the name of sham Liechtenstein-based foundations in order to evade taxes on money that he had inherited from his father. To further conceal his ownership of these accounts, Werdiger instructed UBS to permit him to communicate with the bank using the code name “Trygon.” In late 2000, Werdiger opened up yet another account at UBS in the name of a sham Panamanian corporation. This allowed him to continue to invest in U.S. securities without having UBS notify the IRS of his identity or withhold taxes on income arising out of his holding U.S. securities. During the conspiracy, Werdiger used the funds hidden offshore to satisfy various business obligations, such as paying off business debts incurred by his companies, Michael Werdiger Inc. and Eloquence Corporation, which sell diamonds and other jewelry.

Promoter of Anti-Tax Scheme Sentenced for Tax Conspiracy

On January 26, 2012, in Erie, Pa., Donald Turner, aka Don Wood, was sentenced to 60 months in prison, three years of supervised release and ordered to pay $408,034 in restitution to the IRS. Turner was convicted following a jury trial of conspiring to defraud the United States. According to evidence at trial, Turner sold a book titled “Tax Free! How the Super Rich Do It,” which introduced readers to his organization, First American Research (FAR). Through FAR, Turner promoted an illegal scheme to reduce or eliminate an individual’s tax liability through the use of purported offshore entities. In 1991, Donald Turner had sold the program to Daniel Leveto, a Meadville, Pa., veterinarian. As part of the program, Leveto utilized various methods to conceal his income and assets from the IRS as directed by Turner. One of these methods included the purported sale of Leveto’s veterinary business to an alleged offshore entity called Center Company. Leveto actually retained dominion and control over the veterinary business. In 2005, a jury convicted Leveto of all counts, and he was subsequently sentenced to 46 months in prison.

Two People Sentenced in Multi-million Dollar Conspiracy to Defraud the Government

On December 15, 2011, Newark, N.J., Ronald Ottaviano, of Lewes, Del., was sentenced to 62 months in prison. Harriet Foster, of Tuckerton, N.J., was sentenced to 13 months in prison. Ottaviano, Foster and two other defendants were convicted by a jury on June 20, 2011, on charges of conspiracy to defraud the United States, mail fraud and wire fraud. Ottaviano was also convicted of two counts of tax evasion and one count of money laundering, and Foster was convicted of two counts of failing to file a tax return and one count of money laundering. The jury also returned a special verdict forfeiting a home in Lewes, which the jury found Ottaviano and Foster had purchased using the proceeds of the fraud. Ottaviano, a principal of Mid-Atlantic Trustees and Administrators (MATA), and one of the firm’s employees perpetrated a conspiracy to defraud the United States by marketing two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. At no time did MATA conduct legitimate business. Instead, MATA marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all. Ottaviano and Foster spent a portion of their illicit proceeds, more than $500,000, to purchase the Lewes home – in cash.

New York Man Sentenced on Money Laundering and Tax Charges

On February 13, 2012, in Syracuse, N.Y., Charles L. Blomquist, of Skaneateles, N.Y., was sentenced to 87 months in prison and three years of supervised release. Blomquist was further ordered to forfeit his lakefront mansion, currently assessed at over $1.4 million, in addition to cash from foreign bank accounts. According to the plea agreement, Blomquist admitted that beginning in the 1980s and continuing up to 2009, he acquired a significant amount of revenue from ‘specified unlawful activity’ and used some of these monies to fund an overseas financial account with Union Bank of Switzerland (UBS) in Switzerland. Blomquist admitted that he had moved these illegal proceeds to an overseas bank account in Switzerland because it would be more difficult for the IRS and other federal law enforcement agencies to locate them. To further conceal his overseas bank accounts and avoid detection, Blomquist also admitted that he willfully failed to report his ownership of interest income earned from that Swiss Bank account.

Niagara Falls Financial Advisor Sentenced for Promoting and Using Abusive Tax Shelters

On October 4, 2011, in Buffalo, N.Y., Richard Muto was sentenced to 36 months in prison and one year of supervised release for corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws. According to court documents, between February 1996 and March 2000, Muto was a financial advisor, owning and operating his own business called Tax and Investment Strategies in Niagara Falls, N.Y. Muto admitted that he sold and promoted multi-layered abusive trust schemes. The scheme required the user to purchase and create a series of domestic and foreign trusts and internal business corporations (IBCs). The user would subsequently divert personal income into, and place assets into, the purported independent trusts and IBCs to create the impression that the user was relinquishing control of the income and assets through a series of sham paper transactions. The trusts and IBCs, however, remained under the complete control of the user. Therefore, the income and assets diverted into the trusts remained the income and assets of the user. Muto admitted that he knew that the use of the multi-layered trust schemes would cause his clients to file false federal income tax returns with the IRS. Muto also admitted that he misrepresented to clients and potential clients that, by using the multi-layered abusive trust scheme the clients could legitimately reduce or eliminate their federal income taxes. Muto also counseled clients to submit frivolous correspondence to the IRS in response to audit notices as a way to intimidate IRS revenue agents and thwart IRS audits. In addition to promoting the trusts, Muto used the abusive trusts himself, which resulted in his filing of false individual income tax returns for the tax years 1996, 1997 and 1998. Muto’s scheme caused a tax loss to the United States of more than $1.7 million.

The following questions and answers provide information to same-sex domestic partners, same-sex individuals in civil unions and same-sex couples whose marriage is recognized by state law.

Publication 555, Community Property, provides general information for taxpayers, including registered domestic partners and same-sex spouses, who reside in community property states.

Q. Can a same-sex partner itemize deductions if his or her partner claims a standard deduction?

A. Yes. A same-sex partner may itemize or claim the standard deduction regardless of whether his or her partner itemizes or claims the standard deduction. Although the law prohibits one spouse from itemizing deductions if the other spouse claims the standard deduction (section 63(c)(6)(A)), same-sex partners are not spouses as defined by federal law, and this provision does not apply to them.

Q. Is a same-sex partner the stepparent of his or her partner’s child?

A. If a same-sex partner is the stepparent of his or her partner’s child under the laws of the state in which the partners reside, then the same-sex partner is the stepparent of the child for federal income tax purposes.

Q. Can same-sex partners who are legally married for state law purposes file federal tax returns using a married filing jointly or married filing separately status?

A. No. Same-sex partners may not file using a married filing separately or jointly filing status because federal law does not treat same-sex partners as married for federal tax purposes.

Q. Can a taxpayer use the head-of-household filing status if the taxpayer’s only dependent is his or her same-sex partner?

A. No. A taxpayer cannot file as head of household if the taxpayer’s only dependent is his or her same-sex partner. A taxpayer’s same-sex partner is not one of the related individuals described in the law that qualifies the taxpayer to file as head of household, even if the same-sex partner is the taxpayer’s dependent.

Q. If a same-sex couple adopts a child together, can one or both of the same-sex partners qualify for the adoption credit?

A. Yes. Each same-sex partner may qualify to claim the adoption credit on the amount of the qualified adoption expenses paid or incurred for the adoption. The same-sex partners may not both claim credit for the same qualified adoption expenses, and neither same-sex partner may claim more than the amount of expenses that he or she paid or incurred. The adoption credit is limited to $13,360 per child in 2011. Thus, if two same-sex partners each paid qualified adoption expenses to adopt the same child, and the total of those expenses exceeds $13,360, the maximum credit available for the adoption is $13,360. The same-sex partners may allocate this maximum between them in any way they agree, but the amount allocated to a same-sex partner may not be more than the amount of expenses he or she paid or incurred. The same rules generally apply in the case of a special needs adoption. The total credit for such an adoption is limited to $13,360, but the amount that each same-sex partner may claim is not limited by the amount of expenses paid or incurred.

Q. If a taxpayer adopts the child of his or her same-sex partner as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A. Yes. The adopting parent may claim an adoption credit to the extent provided under the law. The law does not allow taxpayers to claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse. However, this limitation does not apply to adoptions by same-sex partners because same-sex partners, even if married for state law purposes, are not treated as spouses under federal law.

Q. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) (passive loss rules for rental real estate activities) that apply to married taxpayers apply to same-sex partners?

A. No. Like other provisions of the federal tax law that apply only to spouses or married taxpayers, section 66 and section 469(i)(5) do not apply to same-sex partners because federal law does not treat same-sex partners as married for federal tax purposes.

Q. If a child is a qualifying child under section 152(c) of both parents who are same-sex partners, which parent may claim the child as a dependent?

A. If a child is a qualifying child under section 152(c) of both parents who are same-sex partners, either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.

You are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. Choose your preparer wisely.

As a reminder, the IRS encourages you to use only preparers who sign the tax returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).

Here are a few points to keep in mind when someone else prepares your return:

Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

Check the person’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number (PTIN). In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

Check the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.

Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

Need a referral to a an excellent accountant? Call me for a few names and telephone numbers.

How do I request a copy of my tax return for last year?

It is easy to get a copy of an old tax return.

If you need an exact copy of a previously filed and processed return and all attachments (including Form W-2 (PDF)), you must complete Form 4506 (PDF), Request for Copy of Tax Return, and mail it to the IRS. You will need to include a $57.00 check made payable to “U.S. Treasury”. The fee may be waived if you reside in an official disaster area as declared by the President. It may take the IRS 60 days to process your request and mail your tax return copy or copies.

You can also order a transcript online at this link.

Or, you can simply call the Internal Revenue Service to place your order: 800.908.9946 or at 800-829-1040.

In cases where an exact copy of the return is not needed, tax return and transcripts may be ordered.

A transcript is a computer-generated printout which summarizes your old tax return and includes most of the line items from the return, including any accompanying forms and schedules. The transcript does not show any changes or amendments you or the IRS may have made after your return was accepted by the IRS.

There is no charge for the transcript and you should receive it in 10 business days from the time the Internal Revenue Service receives your request.

Tax return transcripts are generally available for the current and past three years.

In most cases, a tax return transcript will meet the requirements for lending institutions for mortgage verification purposes.

The tax return transcript shows most line items contained on the return as it was originally filed, including any accompanying forms and schedules.

If you need a statement of your tax account which shows changes that you or the IRS made after the original return was filed, you must request a “Tax Account Transcript.”

This transcript shows basic data including marital status, type of return filed, adjusted gross income, taxable income, payments and adjustments made on your account.

As a tax attorney, I often get a copy of a transcript to have what the IRS has for my client. If you have a tax problem and want help fixing it, call Mitchell A. Port at 310.559.5259.

The IRS “Data Book” for the most recent period ending September 30, 2011 is available online at this link.

In that Book is information about the following:

List of Statistical Tables
Statistical Tables
Data Sources, by Subject Area and Table Number
Principal Officers of the Internal Revenue Service
Principal Officers of the Internal Revenue Service
Office of Chief Counsel
Commissioners of Internal Revenue
Chief Counsels for the Internal Revenue Service

One of the more interesting parts of the Book concern:

Enforcement: Collections, Penalties, and Criminal Investigation

Table 16. Delinquent Collection Activities, Fiscal Years 2010 and 2011
Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2011
Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2011
During Fiscal Year (FY) 2011, the IRS collected, net of credit transfers, $31 billion in unpaid assessments on returns filed with additional tax due.

Fifty nine thousand Offers in Compromise were submitted. Only 20,000 were accepted.

Get tax advice and tax help to solve your federal or state tax problem by calling an experienced attorney. Call Mitchell A. Port at (310) 559-5259.

The California Franchise Tax Board says that if you qualify, your delinquent taxes, penalties and interest can be “compromised” so that your payment of an agreed-upon portion will be treated as if you paid the full amount. Here’s what you need to do to pay pennies on the dollar when you owe income taxes in California:

What you should know before preparing an Offer in Compromise

Are you an Offer in Compromise candidate?

If you are an individual or business taxpayer that does not have the income, assets, or means to pay your tax liability now or in the foreseeable future, you may be a candidate. The Offer in Compromise program allows you to offer a lesser amount for payment of a non-disputed final tax liability.

Generally, we approve an Offer in Compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.

Although we evaluate each case based on its own unique set of facts and circumstances, we give the following factors strong consideration:

• The taxpayer’s ability to pay.
• The amount of equity in the taxpayer’s assets.
• The taxpayer’s present and future income.
• The taxpayer’s present and future expenses.
• The potential for changed circumstances.
• Whether the offer is in the best interest of the state.

Can we process your application?

We will only process your Offer in Compromise application if you have done all of the following:

• You have filed all of the required tax returns. If you have no filing requirement, note it on the application.
• You have fully completed the Offer in Compromise application, and provided all supporting documentation.
• You agreed with the Franchise Tax Board on the amount of tax that you owe.
• You authorized the Franchise Tax board to obtain your consumer credit report and to investigate and verify the information you provided on the application.

Will a collateral agreement be required?

Upon approval, we may require you to enter into a collateral agreement for a term of five years. Generally, a collateral agreement will be required if you have significant potential for increased earnings. A collateral agreement requires you to:

• Pay us a percentage of your future earnings that exceed an agreed upon threshold.

Are collections suspended?

Collection activity is not automatically suspended. If delaying collection activity jeopardizes our ability to collect the tax, we may continue with collection efforts. Interest will continue to accrue.

When should offered funds be submitted?

You should not submit the offered funds until we request them. When we do ask for the funds, submit them by cashiers check or money order.

What documentation is required with the application?

For a check list of required items:
• Personal Income Tax – see page 3 of FTB 4905PIT • Business Income Tax – see page 4 of FTB 4905BE
You have questions? The Franchise Tax Board has these answers:

1. What does the Franchise Tax Board consider a fair offer in relation to the amount due?
Generally, an offer will be accepted when the amount offered is the most the Franchise Tax Board can expect to collect within a reasonable period of time.

2. How long will it take to get a decision on my Offer in Compromise?
Generally, if we accept your offer for processing, we will have a decision to you within 90 days after receiving your offer. If your account is more complex, it may take longer than 90 days.

3. Can I make payments on the offered amount?
No. We require a lump sum payment of the offered amount.

4. Can I apply prior payments to the offered amount?
We cannot apply prior payments toward the offered amount. However, we will consider prior payments and the offered amount compared to the total liability when evaluating your offer.

5. My Internal Revenue Service Offer in Compromise has been accepted. Will the Franchise Tax Board automatically approve my offer?
No. We will evaluate your Franchise Tax Board offer separately from your Internal Revenue Service offer.

6. If the Franchise Tax Board determines that my offer is not acceptable, will I be contacted?
Yes. We will contact you to discuss your account and to determine the most appropriate resolution. For example, if it is determined that you will have the ability to make monthly payments that will exceed the amount offered, we will work with you to establish an installment agreement.

7. Will state tax liens be released if the Franchise Tax Board accepts my offer?
Generally, we release state tax liens upon final approval of your Offer in Compromise.

8. Do I need to have someone represent me?
Representation is not required. The Offer in Compromise program is available to all taxpayers, whether or not they are represented.

9. Can I get relief from the tax liability by filing bankruptcy?
Part or all of your taxes may be dischargeable under the bankruptcy code. If this is a consideration, you may want to seek legal advice.

10. Can I apply for an Offer in Compromise if I have no funds to offer?
No. We will not accept a zero dollar offer. Your offer must represent the most the Franchise Tax Board can expect to collect over a reasonable period of time.

11. What is a collateral agreement?
A collateral agreement is a contractual agreement between you and the Franchise Tax Board. By signing the agreement, you agree to pledge to us a percentage of income that exceeds an agreed upon threshold. Generally, the collateral agreement period is five years.

12. If my offer is approved, will I have to sign a collateral agreement?
If you are on a fixed income or have limited potential for increased earnings, a collateral agreement will generally not be required.

13. I am single now. If I marry while the collateral agreement is in effect, how will this affect me?
If you marry or enter into a Registered Domestic Partnership (RDP) while the collateral agreement is in effect, we will review any joint tax returns you are required to file. Generally, we consider your joint annual income in the collateral agreement. If you are married or a RDP filing separately, the evaluation will be based on your separate income.

14. Can I complete one application if I owe the Employment Development Department, the Board of Equalization, or the Franchise Tax Board?
To relieve some of the paperwork burden for taxpayers or their representatives, the State’s three taxing agencies developed a single offer in compromise application. Individual taxpayers can use DE 999CA (OIC Multi-Agency Application) to apply with any or all of the three agencies.

For tax help on obtaining your offer in compromise, contact a tax attorney who has the experience you can rely on – call Mitchell A. Port at 310.559.5259.