Tax Memorandum Case Study
June 13, 2011
TAX FILE MEMORANDUM
FROM Lance Vogt
SUBJECT Cindy and Ralph Edmonds
FACTS Cindy and Ralph Edmonds own TidyCo. Inc. They have a negative accumulated and current E&P and a basis in the stock of $300,000. They have been found to have $200,000 unreported income from the Laundromat they own in cash in their home. The IRS is planning on taking them to criminal court to charge them with evasion.
ISSUE Does any of the information or facts effect on the evasion charges.
CONCLUSION This issue is on the fence. In two separate similar cases, two different conclusions were found.
ANALYSIS On one hand, the IRS has not yet proven that TidyCo., Inc.’s diversion is unlawful or tax deficient required by Code Sec. 7201. Since
the company has a negative E&P the money that was not reported was not constructive dividends. Therefore the company was not withholding from shareholders. Also, since taxes are not yet due, the IRS cannot prove that TidyCo. Inc’s diversion was intended to evade taxes. However, the authorities are split on whether or not these facts are sufficient to provide for an argument against a charge of tax evasion pursuant to Section 7201. In D’Agostino and DiZenzo, the courts held that the diverted income was corporate income received by the shareholders and, as such, are only taxable to the extent that the corporation had E&P. As no taxable income was reported and no tax was due, charges of tax evasion would not stick. However, in Williams, the United States Court of Appeals for the Seventh Circuit held that the government should not be required to prove that the corporate distributions at issue were taxable. Simply demonstrating that the shareholder had control over the corporate funds should be sufficient to allow charges of criminal tax evasion to lie.
TAX FILE MEMORANDUM
FROM Lance Vogt
SUBJECT Cindy and Ralph Edmonds
FACTS Cindy and Ralph Edmonds own TidyCo. Inc. They have a negative accumulated and current E&P and a basis in the stock of $300,000. They have been found to have $200,000 unreported income from the Laundromat they own in cash in their home. The IRS is planning on taking them to criminal court to charge them with evasion.
ISSUE Does any of the information or facts effect on the evasion charges.
CONCLUSION This issue is on the fence. In two separate similar cases, two different conclusions were found.
ANALYSIS On one hand, the IRS has not yet proven that TidyCo., Inc.’s diversion is unlawful or tax deficient required by Code Sec. 7201. Since
the company has a negative E&P the money that was not reported was not constructive dividends. Therefore the company was not withholding from shareholders. Also, since taxes are not yet due, the IRS cannot prove that TidyCo. Inc’s diversion was intended to evade taxes. However, the authorities are split on whether or not these facts are sufficient to provide for an argument against a charge of tax evasion pursuant to Section 7201. In D’Agostino and DiZenzo, the courts held that the diverted income was corporate income received by the shareholders and, as such, are only taxable to the extent that the corporation had E&P. As no taxable income was reported and no tax was due, charges of tax evasion would not stick. However, in Williams, the United States Court of Appeals for the Seventh Circuit held that the government should not be required to prove that the corporate distributions at issue were taxable. Simply demonstrating that the shareholder had control over the corporate funds should be sufficient to allow charges of criminal tax evasion to lie.