Court Orders Trial on Amount of Income Taxpayer Received in Counterfeit Check Scheme

(Parker Tax Publishing arch 2020)

A district court denied an IRS motion for summary judgment on the issue of the amount of income a taxpayer, who did not file tax returns, received by buying and short selling stocks he purchased using counterfeit checks. The court rejected the IRS's argument that it was entitled to summary judgment on the amount of the taxpayer's income based on the Forms 1099-B the taxpayer received because, the court said, a genuine dispute was raised by the taxpayer's assertion that the Forms 1099-B showed the sale amounts of the stock, not what the taxpayer actually received, from the sales. U.S. v. Feldman, 2020 PTC 60 (E.D. Mich. 2020).

Background

In 2001 and 2002, Joseph Feldman profited from making and using counterfeit checks. Among other purchases, Feldman also used the fake checks to buy and short sell stocks. Feldman did not file tax returns for 2001 or 2002.

In 2001, Feldman and his wife divorced. Feldman moved from the couple's home in Farmington Hills, Michigan to a new place in Southfield, Michigan. Feldman claimed that, contemporaneous with his divorce in 2001, he filed a change of address form with the post office.

Federal authorities eventually caught on to Feldman's bad-check scheme. In August 2005, the federal government filed a criminal complaint against Feldman. The affidavit supporting the complaint indicated that Feldman was living at the Southfield address. The 2005 case was dismissed without prejudice, but the federal government filed a second criminal case against Feldman in May 2006. Feldman pled guilty to wire fraud in June 2006 and, in March 2007, was sentenced to 27 months in prison and ordered to pay $137,000 in restitution.

Around this time, the IRS was also investigating Feldman. In August 2006, the IRS sent Feldman a Proposed Individual Income Tax Assessment for the 2002 tax year to Feldman's old Farmington Hills address. On the proposed assessment, the IRS listed seven payments from brokerage firms to Feldman and claimed that Feldman owed taxes on these seven payments. However, according to the list, none of the payments were sent to the Farmington Hills address; they were all sent to a W. 12 Mile address, which was a UPS Store that Feldman's former business used for mail. In October 2006, the IRS received notice that documents it had sent to the Farmington Hills address had been returned undelivered. The IRS conducted research into Feldman's current address, which it concluded with "no results."

On December 4, 2006, the IRS sent notices of deficiency to Feldman, again at the Farmington Hills address. The notice for 2001 indicated that Feldman had $174,000 in payments from brokerage firms and owed the IRS $47,000 in taxes for those payments plus another $40,000 in interest and penalties. The 2002 notice indicated that Feldman owed about $19,000 in taxes and $9,000 in interest and penalties. The IRS calculated the $47,000 tax amount for 2001 and the $19,000 tax amount for 2002 using information supplied by brokerage firms to the IRS on Forms 1099-B. The deficiency notices for 2001 and 2002 were returned to the IRS as undeliverable.

The two notices indicated that Feldman had 90 days to file a petition challenging the IRS's claim that he owed the taxes, interest, and penalties. Apparently because Feldman never received the notices, he never filed a petition. The 90-day period expired in March 2007. The IRS filed a lawsuit just over 10 years later, on April 25, 2017. The IRS asserted that Feldman now owed around $200,000 in taxes, interest, and penalties, and filed for summary judgment.

Feldman argued that the IRS should not be entitled to summary judgment because the 1099-Bs did not reflect the amount of income he actually received in 2001 and 2002. According to Feldman, the amounts on the 1099-Bs repesented the total sale price of the securities. Feldman said that the forms did not show the portions of the sale proceeds that were used to reimburse the broker for the counterfeit checks and that he received only the remaining proceeds. Feldman also argued that the IRS did not send the notices of deficiency to his last known address and that the IRS knew or should have known that he was not living at the Farmington Hills address when it sent the notices in 2006. Feldman argued that the IRS was barred by the three-year statute of limitations on assessments and by the 10-year statute of limitations on collections. Feldman also made an equitable argument that the IRS should be barred by laches because it waited so long and allowed interest and penalties to accrue before filing its lawsuit against him. In addition, Feldman claimed that the IRS incorrectly characterized his profits as capital gains because the stocks were not capital assets and, in the context of his larger scheme, the purchases and short sales were not sales or exchanges.

Analysis

The court found that a genuine dispute existed as to the amount of Feldman's income in 2001 and 2002. In the court's view, Feldman's argument regarding the amount reported on the 1099-Bs had some corroboration because before 2011, the forms did not include the cost basis of the stock. Thus, the court thought it was possible that the 1099-Bs merely reflected the sales of stock and not the amount of money Feldman actually received. The court explained that, while IRS assessments are entitled to a presumption of correctness, when the issue is the amount of income a taxpayer earned, the taxpayer's burden to rebut that presumption is not particularly heavy, and a reasonable denial of the assessment's validity is sufficient to shift the burden back to the government. The court therefore denied the IRS's motion for summary judgment and allowed the case to go to trial.

On the issue of whether the IRS sent the notices to Feldman's last known address, the court said that the IRS did enough to determine Feldman's last known address because, after it received notice that mail sent to the Farmington Hills address had been returned undelivered, it conducted a search into Feldman's whereabouts but could not find a better address for him. The court reasoned that, while it was true that the U.S. Attorney for the Eastern District of Michigan knew where to find Feldman in 2006, the many arms of the government sometimes work independently. The court also said that equity favored the IRS, given that Feldman was significantly to blame for the stale address by not filing his tax returns for several years.

The court also rejected Feldman's arguments that the statutes of limitations on assessments and collections barred the IRS's lawsuit. The court found that the three-year statute did not apply because Feldman never filed a return. As for the 10-year period, the court found that Feldman's assertion was factually wrong because the IRS assessed the taxes in 2007. The court acknowledged that the IRS waited five years to assess the taxes and another 10 years to collect them, all the while allowing interest and penalties to accrue. But it found that a laches argument cannot bar the government's efforts to collect taxes and noted that courts usually do not apply laches when there is still time on the statute-of-limitations clock.

Finally, the court rejected Feldman's contention that his profits were not capital gains. The court found that the definition of a capital asset does not depend on legally acquiring the asset and that it is well established that taxes are owed on unlawfully obtained income. The court also was not persuaded that it should overlook Feldman's purchases and sales and focus only his larger scheme; the court said that many people trade stocks as part of a larger income, retirement, or business plan, and have capital gains or losses on these sales or exchanges.

For a discussion of Form 1099-B, see Parker Tax ¶252,525. For a discussion of deficiency assessments, see Parker Tax ¶260,120. For a discussion of gain or loss from sales, exchanges, and dispositions of property, see Parker Tax ¶110,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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