Litigation is About Persuasion Which Requires Credibility (4/12/24; 4/23/24)

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):

Justice Thomas and Tax -- The Plot Sickens (10/29/23; 10/7/24)

Introduction: Today's topic is off-topic to tax procedure, although it does relate to trial of a tax case in problematic circumstances.

Justice Thomas’ most recently revealed conduct raising considerable controversy in ethics, legality (tax), and prudence is the alleged forgiveness in whole or part of a loan made to Justice Thomas by an alleged acquaintance (perhaps hanger-on) to acquire a luxury RV. Some alleged that, if the allegation is true, Justice Thomas had taxable income (lawyers call it cancellation of indebtedness (“COI”) income) or a nontaxable gift. Either characterization can create potential problems for Justice Thomas–if COI income, Justice Thomas might have tax reporting and paying obligations; if a gift, the “donor” would have tax reporting obligations.  I suggest in this post that the allegation it is both more subtle and potentially sinister than those claims.

From my days at DOJ Tax handling two cases, I believe that there is nuance that is missed in the claims discussed in the above paragraph. The two cases are Spartan Petroleum Company v. United States, 437 F. Supp. 733 (D.S.C. 1977) and Cooper v. United States, 1975 U.S. Dist. LEXIS 11633 (S.D. ALA 1975).

Together, those cases held correctly that 

(i) a cancellation of indebtedness is not treated as COI income if the cancellation is a medium to make a transfer with another tax character (in Spartan Petroleum, the cancellation of indebtedness was additional consideration for transfer of property; btw there was a Tax Management portfolio that wrongly recommended that shuffle); and 

(ii) following through on the Spartan Petroleum holding, a cancellation of indebtedness can be a means to benefit the debtor having some tax character other than COI income. Thus, the COI can represent a gift which is not taxable income to the donee (Thomas potentially) but is a reportable gift potentially subject to gift tax to the donor.  Gift tax status requires that the motive for the gift (here, if applicable, by COI) be detached and disinterested generosity which is the debtor’s (Thomas' burden to prove). If it is not detached and disinterested generosity, the teaching of Cooper is that it is taxable income, because the motive is likely expecting some benefit or advantage the debtor could provide. Cooper was a prominent Alabama politician in the Wallace governing circle and in a good position to benefit the Bank of Pineapple and its principals, one of whom by the way at the time had the highest grades ever recorded at University of Alabama and, at a very young age, had been General Stillwell’s top aide in China; and his bank held a large amount of interest free state deposits.)  I took the bank President's deposition in the Eglin Air Force prison (a country club prison); he delivered the goods. In other words, in that case the COI was income for influence–a bribe with an expected or hoped for benefit.