"Oh what a tangled web we weave, When first we practice to deceive." Sir Walter Scott
Estate of Angle v. Commissioner, T.C. Memo. 2009-227 (T.C. 2009).
Ever been on an airplane? If yes, then you are probably familiar with SkyMall, the mail-order catalog easily found in the pouch behind every airplane seat. But I bet you never knew you could find tax advice in those catalogs did you? Let me introduce Cloyd Angle and his son Tyler.
Cloyd was the founder and sole owner of Cal-Almond, Inc. He started the Company in 1979, and by the mid-90's was one of the top four almond processors in the country. (2). During the 1990's Cloyd transferred both ownership, approximately 51%, and management of the Company to his son Tyler. (2).
Interested in selling his remaining 49% ownership interest for a hefty price tag, Cloyd came upon Morven Partners. (3). Morven had a large presence in the nutmeat industry, but not much in the way of almonds. Cloyd told Morven he would sell the whole business for $20 million, a number he thought they would refuse. To his delight they accepted. After convincing his son Tyler to sell his 51%, Morven signed a letter of intent.
Of course, Cloyd would have to pay taxes on the sale of his stock to Morven. Cloyd's taxable gain would be the sale price of his stock less his cost basis, which appears to be zero. (3). That means Cloyd's taxable gain would be 49% x $20,000,000 minus $-0-, or $9,800,000. The sale was supposed to take place in 1995. At that time capital gains rates were approximately 28% (see table here). Multiplying 28% by Cloyd's share of the sale ($9,800,000) equals $2,744,000 in federal income taxes. The idea of paying $2.7 million in income taxes was too much for Cloyd to bear.
Fortunately, Cloyd came across a copy of SkyMall. While perusing through the myriad of wonderful gifts and gadgets, "he spotted an advertisement for books and tapes on offshore tax planning." Thrilled about the prospect of avoiding income taxes he contacted Jerome Schneider, the man who was selling the books and tapes.
It was not long after meeting Mr. Schneider that Cloyd began setting up offshore business, renouncing his U.S. citizenship, and transferring his stock to companies set up in beautiful places like Turks and Caicos and the British Virgin Islands. When all was said and done there were six different entities. I beg you to go to page 10 of the opinion and view the exquisite picture provided by the Tax Court depicting all the moving parts; it is truly a work of art.
Unfortunately, poor Cloyd dies before he can realize his dream of avoiding federal income taxes. (15). The Tax Court, however, showed no mercy on his estate, and found Cloyd's web of transactions served little to avoid the imposition of federal income taxes on the sale of his stock. (15). The Tax Court also imposed a 20% accuracy-related penalty because Cloyd did not "act with reasonable cause and in good faith by relying on the professional advice of [SkyMall]. (22).
In the end, Cloyd's estate will pay 48% tax (28% plus the 20% penalty) on the $9,800,000. He will also have to pay interest on the tax from 1995 until the tax is paid, presumably sometime in the near future.
"Oh what a tangled web we weave, When first we practice to deceive." Sir Walter Scott
Desperate people who are determined to avoid paying income tax are the easiest people to rip off.
It's no wonder the IRS detests tax protestors who sell material that discusses tax evasion. The demand for the material exceeds the supply if marketed properly.
Posted by: Tax Problems CPA | December 15, 2009 at 07:35 PM