I write on the tax saga of Burt Kroner. The underlying saga goes back many years and has played out in three tax cases.
- Kroner v. Commissioner (Kroner I), T.C. Memo. 2020-73, here, sustaining the substantial penalty but denying the substantial penalty because of failure to obtain written supervisor approval required by § 6751(b)(1).
- Kroner v. Commissioner (Kroner II), 48 F.4th 1272 (11th Cir. 2022), here, reversing Kroner I on the § 6751(b) penalty issue (the Tax Court’s sustaining of the deficiency was not appealed); I previously wrote on Kroner II. Eleventh Circuit Makes Clarity from Confusion as to the Written Supervisor Approval in § 6751(b) (Federal Tax Procedure Blog 9/20/22), here.
- Kroner v. Commissioner (Kroner III), T.C. Memo. 2024-41, TA here and GS here, applying the penalty on the merits on remand and rejecting Kroner’s reasonable cause defense.
The holding in these cases that will likely be cited most in the future is the holding in Kroner II regarding the proper timing of the written supervisor approval requirement as courts further calibrate precisely what the requirement is (perhaps based in part on the Treasury proposed regulations when finalized).
I write today on the merits of the tax deficiency which the recitation of facts in the recent opinion in Kroner III suggested I should take a further look.
The deficiency issue was whether a series of transfers into Kroner’s accounts were gifts from a business associate (also an alleged friend), a David Haring, or taxable income. Kroner claimed the transfers were gifts which IRC § 102 excludes from taxable income; the IRS claimed that they were not gifts (or at least that Kroner had not shown on audit or at trial that they were gifts). The concept is that the Code taxes all income (generally all accretions to wealth presently subject to a realization requirement) unless the income is excluded by some Code section, in this case § 102. The taxpayer bears the burden of persuading the trier of fact that the transfers were gifts.
As an aside, the gift v. income
issue can arise in many settings. See e.g., my trial and appellate war stories
in Justice Thomas and Tax -- The Plot Sickens (Federal Tax Procedure
Blog 10/29/23; 10/31/23), here.
Judge Marvel explains the Code’s gift meaning (Kroner I, slip op. 8):
The United States Supreme Court has defined a gift under section 102 as a transfer that proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses. Commissioner v. Duberstein, 363 U.S. 278, 285 (1960). In so doing, the Supreme Court stated that the most important consideration in ascertaining whether a gift has been made is the intention of the donor. Id. The donor's characterization of his action is not determinative, however, and a court must make an objective inquiry into whether what is characterized as a gift in fact meets the Duberstein definition of a gift under section 102. Id. at 286.
Judge Marvel then says (Kroner I, slip op. 9):
Viewing the Duberstein standard through the prism of the relevant burdens of proof in this case, the ultimate issue for decision is whether petitioner has persuaded this Court that transfers totaling $24,775,000 constituted gifts from Mr. Haring within the meaning of section 102. See id. at 289. If petitioner cannot, he will have failed to meet his burden with regard to the determinations in the notice of deficiency and, conversely, respondent will have met his burden of proof as to the amounts asserted in his amended answer because there is no dispute as to the receipt of those amounts, only whether they are nontaxable gifts. The intention with which Mr. Haring made the transfers is the most critical factor. See id. at 285. Although the Court granted petitioner's motion in limine to preclude the drawing of any adverse inference from Mr. Haring's absence at trial, the Court also warned the parties on multiple occasions of the importance of hearing Mr. Haring's testimony. The Court's ruling on the motion in no way relieved petitioner of his burden of proving Mr. Haring's intention by a preponderance of credible evidence.
Notwithstanding the Court's warnings, Mr. Haring did not testify. Petitioner instead relies primarily on his own testimony, and that of Mr. Mitchell and Mr. Bernstein, to establish Mr. Haring's intent with respect to the transfers. Our decision hinges on the credibility of these witnesses, to which we now turn.
Mr. Bernstein was Kroner’s lawyer and was Mr. Haring’s lawyer as well, although the extent of the relationship between Mr. Haring and Mr. Bernstein is not clear. Mr. Mitchell was an associate of Mr. Haring.
Basically, the Court then finds the testimony by Kroner, Mitchell and Bernstein (who apparently was lawyer for both Kroner and Mr. Haring) not to be credible on Mr. Haring’s intent for making the transfers. As suggested, for some reason Mr. Haring did not testify in the case.
The key point I note is the credibility issue. Credibility is always in play in litigation—credibility of the documentary evidence, credibility of the witnesses, and credibility of the attorneys.
Some further points
1. In discussing the specific credibility issues, the Court noted (Kroner I slip op. 24 n. 13):
n13 The Court granted petitioner's motion in limine, see supra p. 9, to preclude the drawing of any adverse inference from Mr. Haring's absence at trial, see Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158 (1946), aff'd, 162 F.2d 513 (10th Cir. 1947). In reaching our conclusion, we draw no adverse inference against petitioner as a result of Mr. Haring's absence. We conclude, however, that the evidence petitioner presented is insufficient for us to find that Mr. Haring's transfers during the years at issue were gifts. While petitioner could have proved Mr. Haring's intent with indirect, inferential evidence of intent if the evidence was convincing and credible, see Alhadi v. Commissioner, T.C. Memo. 2016-74, the record does not contain sufficient credible evidence for us to conclude that Mr. Haring's transfers were the result of detached and disinterested generosity, see Commissioner v. Duberstein, 363 U.S. at 285.
2, Kroner filed bankruptcy in August 2023 which imposed an automatic stay, but the stay was lifted to permit resolution of the proceeding in Kroner III. (Slip op. 2 n. 3.)
3, In Kroner III (slip op. 3), Judge Marvel summarizes Kroner’s “version of events without making any finding that they actually occurred.”
4. In Kroner III (slip op. 5-6) Judge Marvel makes “Supplemental Findings of Fact” which include:
II. Supplemental Findings of Fact
We now make supplemental findings of fact relevant to the issues remaining for our decision. These findings primarily concern the advice Mr. Bernstein gave Mr. Kroner that the transfers from Mr. Haring were nontaxable gifts under section 102.
Mr. Bernstein became Mr. Kroner’s tax attorney in 1996. Over the course of his representation, Mr. Bernstein provided tax, estate planning, asset protection, and corporate law advice to Mr. Kroner. Mr. Bernstein also represented Mr. Haring at the time of the transfers to Mr. Kroner and provided Mr. Haring with tax advice in connection with those transfers. Nonetheless, Mr. Bernstein did not speak to Mr. Haring personally about his intentions in making the transfers; instead, he conversed only with Mr. Mitchell.
After receiving the January 18, 2005, note from Mr. Haring, Mr. Kroner discussed the tax treatment of the transfers with Mr. Bernstein. Mr. Kroner provided the note to Mr. Bernstein and asked him how the transfers from Mr. Haring would be treated from a legal and tax point of view. Mr. Bernstein advised him that the transfers would be tax free. We reject as not credible Mr. Bernstein’s self-serving testimony that he asked Mr. Kroner “some probing questions,” including whether Mr. Haring held a disguised ownership interest in a company for Mr. Kroner.6
n6 We did not find Mr. Bernstein’s testimony at trial to be credible in general, Kroner I, T.C. Memo. 2020-73, at *19, and there is no documentary evidence concerning the advice he gave to Mr. Kroner or the factual and legal assumptions he made in reaching it. Mr. Kroner’s testimony did not indicate that Mr. Bernstein asked him a series of probing questions. Furthermore, Mr. Bernstein and Mr. Mitchell had already drafted the gift note together before Mr. Kroner approached Mr. Bernstein for advice regarding whether Mr. Haring’s transfers were gifts. Thus, by the time Mr. Kroner asked Mr. Bernstein for advice, Mr. Bernstein was already involved in efforts to document the transfer from Mr. Haring as a gift and likely would not have undertaken a thorough effort to determine whether the transfers qualified as gifts.
5. Judge Marvel then addresses the reasonable reliance defense (Kroner III slip op. 9, footnote omitted)
No party contends that Mr. Bernstein is not a competent professional, but we need not mince words: If Mr. Kroner accurately provided Mr. Bernstein with all of the information needed to determine the taxability of Mr. Haring’s transfers, and Mr. Bernstein determined that the transfers were tax free, then it was remarkably bad advice. At a minimum, if Mr. Bernstein had been apprised of the relevant facts, the Supreme Court’s holding in Commissioner v. Duberstein, 363 U.S. 278 (1960), would likely have put him on notice that there was a serious risk that the transfers would not be treated as gifts for federal income tax purposes.
We think that the better explanation is the one supported by the record: Mr. Kroner did not supply Mr. Bernstein with necessary and accurate information to reach an informed judgment about the taxability of the transfers. Even if he had, we are unconvinced that Mr. Kroner actually relied in good faith on Mr. Bernstein’s advice given that there is no evidence that he informed Mr. DeAquino [return preparer] of the transfers from Mr. Haring, or of Mr. Bernstein’s advice with respect to the transfers, when Mr. DeAquino prepared Mr. Kroner’s income tax returns. In sum, Mr. Kroner has not proven that he had reasonable cause for, or acted in good faith with respect to, the underpayments in this case. We have considered the parties’ other arguments and, to the extent they are not discussed herein, find them to be irrelevant, moot, or without merit.
Added 4/23/24 6:30 pm:
6. On the credibility issue, in the Trump "hush money" trial in NY, the Washington Post and others reported today that in the hearing on whether Trump's bombast violated the gag order, Trump's lawyer [Blanche] made the aggressive claim that (e.g., Perry Stein and Devlin Barrett, The Trump Trials: Day Six gets the tabloid treatment (WAPO 4/23/24):
Trump’s social media posts about potential witnesses and jury selection were protected political speech unrelated to the case. [Judge] Merchan appeared flabbergasted.
“You’re losing all credibility with the court,” he told Blanche.
See also Jonah E. Bromwich, Ben Protess and Maggie Haberman, Judge Questions Credibility of Trump’s Lawyer as Witness Details Coverup Allegations (NYT 4/23/24; updated 4/24/24).
But, then, in this litigation, Trump is not really trying to win the litigation at hand. He is trying to whip up his base, and his lawyer seems to be following suit. I am not saying that Trump would not like to win the litigation with a not-guilty verdict on all counts. The publicly known evidence of which I am aware seems to make that possibility unlikely, with relief for Trump coming only by a hung jury (which is not a not guilty verdict). So, in his bombast even violating the gag order, his goal appears to me to rev up the political base and, maybe, encourage a juror to not agree to a guilty verdict.
In any event, the subject of this blog post was "credibility." Trump's lawyer is not presenting himself as a credible advocate to the judge. But then Judge Merchan does not determine Trump's guilt or not guilt. But, over the course of the proceedings, Judge Merchan's view of Trump's counsel's credibility will likely be discerned by the more astute members of the jury.
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