President Obama and Hillary Clinton say the $400M Iran ‘ransom’ story is old news. Plus, President Obama is adamant that the $400M payment wasn’t ransom. Yes, it is true that the four Americans jailed in Tehran were released, but the timing was a coincidence. The money was delivered to the Iranian government in January. It was coincidence that it was the same time the nuclear deal was settled and the Americans were released.
After decades of silence, the timing means nothing? Most Americans find this a little hard to swallow. We want to believe the best, but this strains credulity. And since we may never know the real secret details, most Americans might find a little comfort from an agency that virtually every American deals with, like it or not: the IRS. Yes, the agency of Lois Lerner. What would the IRS think of the coincidence argument? It isn’t a silly question to ask if the government would believe us if we spun this story.
The tax law tries to get a piece of just about everything. And with a decided lack of symmetry, the IRS likes things to be in its favor. Thus, the IRS considers virtually everything as income, and it construes any exclusion from income very narrowly. Conversely, the IRS scrutinizes every tax deduction and denies them whenever it can. A case in point concerns most legal settlements.
Most are tax deductible by businesses, but not certain fines. So, if a business is just settling a beef, it can usually deduct it all. But not if the case is a criminal fine and the company pays to make the fine go away. The give and take of paying a civil fine versus avoiding a criminal fine or criminal prosecution will sometimes be clear. ‘Coincidences’ are not likely to be believed by the IRS.
For example, one of the seminal cases to discern nondeductible fines or penalties from deductible compensatory damage payments is Allied-Signal Inc. v. Commissioner, 54 F.3d 767 (3d Cir. 1995). The IRS, Tax Court, and Third Circuit all rejected any tax deduction for an $8 million payment AlliedSignal made to eradicate a toxic pesticide from the environment. Why?
Because the payment was made with a virtual guarantee that the court would reduce a criminal fine against AlliedSignal dollar for dollar. It was obvious from the timing and other elements of the case that the money was really to reduce the criminal fine, no matter what they called it. Everyone seemed to know. It was obvious from the context and timing. Sound familiar?
The same kind of coincidence happens with charitable contributions. Any time you give money to a 501(c)(3) charity, you get a tax deduction, right? Not necessarily. If you get something back from the charity, the IRS takes that into account. It is common sense. So if you ‘donate’ $1,000 but the charity gives you back goods worth $500, how much did you donate? $500, of course.
Many people try to disguise the reality. Let’s say a coiffed real estate developer might ‘donate’ a tract of land for a city park. Such a magnanimous gesture! If the park is worth $10M, that’s a $10M tax deduction, right? Not so fast. What if the City accepts the $10M park, and coincidentally awards the developer the right to build a high rise hotel across town. Let’s say the right to develop the hotel might worth $5M, or might even be priceless. But if it is valued at say $5M, the most the park donation should be worth is $5M.
Get the idea? The IRS does not buy the ‘coincidence’ argument. Of course, the IRS did a pretty good job of playing the ‘coincidence’ card during the Lois Lerner days. Maybe it was just coincidence that Tea Party groups were getting hassled and denied tax exemptions? Or it was those rogue IRS employees in Cincinnati. Or maybe it was a spontaneous reaction to a video…
For alerts to future tax articles, email me at Wood@WoodLLP.com. This discussion is not legal advice.
via The Tax Lawyer http://ift.tt/2aNIb3A