Paul L. Caron

Wednesday, September 21, 2005

Tax and the Seven Deadly Sins, by Jim Maule (Villanova)

It started simply enough. With these sorts of things, that's often the case. A person who teaches tax, but not in a law school, asked Paul Caron, master of the TaxProfBlog and founder of the TaxProf Listserv, if he would canvass the list members for their suggestions of tax cases that illustrate the seven deadly sins.

What are the seven deadly sins?

  • Pride
  • Envy
  • Gluttony
  • Lust
  • Anger
  • Greed
  • Sloth

Why these? According to this, "The history of this list goes back at least to Pope St. Gregory the Great and St. John Cassian, but while the list itself is not strictly biblical, the Bible proscribes all seven." From here, we learn that Gregory the Great set forth seven deadly sins in XXXI cap. xlv of Moralia in Job, listing pride, envy, anger, avarice, sadness, gluttony, and lust, in latin, superbia, invidia, ira, avaritia, tristia, gula, and luxuria. Luxuria = lust? Hmm. Later, tristia was replaced by accidia, or sloth. Had Evaagrius had his way, we'd be dealing with the eight evil thoughts, and Cassian contended there were eight principal vices. The seven sins are also called capital sins and cardinal sins. Why do I share this? To demonstrate that complexity did not originate with the federal tax law. For those, like many of the tax professors populating the listserve, who cannot resist quizzes, there's even a "Which of the Seven Deadly Sins Are You?" Quiz here.

This sort of challenge was a temptation that the tax professors could not resist. Sin and tax. What a fitting combination. So here are the candidates:


Bryan Camp (Texas Tech) nominated "any tax protestor case, such as Kenneth W.
Guthrie v. Commissioner, T.C. Memo. 2005-196, where the court 'repeatedly warned petitioner
that his arguments repeatedly had been rejected as frivolous by this Court and the U.S. Court of Appeals for the Fifth Circuit and that this Court and U.S. Courts of Appeals have been imposing penalties against taxpayers who pursue these frivolous arguments. Furthermore, petitioner admitted that he was aware that some of the arguments that he raised had been ruled on and rejected by the courts and that the Fifth Amendment 'is not really pertinent to my case'. Despite warning petitioner numerous times at trial that his arguments were frivolous and groundless and that pursuing such arguments might result in the imposition of penalties against him, petitioner persisted in making those arguments (including the Fifth Amendment argument) at trial and on [his 65 page ] brief.'"

Ellen Aprill (Loyola-L.A.) asked if Leona Helmsley's quote to the effect that "only little people pay taxes" was in connection with a tax case? Leona went to jail for tax fraud, and her prideful comment was one reportedly made to one of her servants and not on the record during her legal proceedings. Yet it does show how pride, and as several others pointed out, hubris (or uber-hubris) can steer people
down the wrong path.


Kirk Stark (UCLA) drew our attention to two cases, Allegheny Pittsburgh Coal Co. v. Webster County, W.Va., 488 U.S. 336 (1989), and Nordlinger v. Hahn, 501 U.S. 1 (1992): "Both cases deal with unequal property tax assessments -- Allegheny Pittsburgh involving disparate assessments by a renegade county assessor and Nordlinger involving the same type of disparate assessments but emanating from the California constitution (via Prop 13).  Both cases are 'I want what they got' cases. Because the income tax is so pervasive, and invasive, often we forget that there are dozens of other types of taxes, and there's no reason to let the federal income tax take a monopoly on the seven deadly sins.

Nonetheless, Ellen Aprill dug up a federal income tax case reflecting envy. She did a search and discovered Apache Bend Apartments v. US, 964 F.2dd 1556 (5th Cir. 1992). In this case, the taxpayers sought declaratory and injunctive relief to stop enforcement of transition rules in the 1996 Act. Quoting Ellen, "In an opinon that relies heavily on Larry Zelenak's article 'Are Rifle Shot Transition Rules and Other Ad Hoc Legislation Constitutional,' the dissent (specially concurring in the result), writes: 'The plaintiffs suggest that the noneconomic injury they suffer as members of the disfavored class can be remedied with a judicial order that the Tax Reform Act treat no one better than them. Thus, their only injury is the burden of the knowledge that other people are treated more favorably; in short, suffering envy is their injury.'"

Bryan Camp pointed out that if we were to wander beyond cases, we would find plenty of "tax envy" in the Internal Revenue Code itself. He mentioned the "'me too' provisions for special industry tax breaks, or perhaps the original idea behind the section 280F restriction on depreciation for "luxury" automobiles."

And if we were to look into the world of tax rulings issued by the IRS, we would find more. Elliott Manning (Miami) asked, "Isn't there a case of a corporation that sued because a competitor got a private ruling that was denied to it?" One reason I, and others, enjoy the listserve is demonstrated by what happened next. Within minutes, Larry Lokken (Florida) replied with the cite: IBM Corp. v. US, 343 F2d 914 (Ct. Cl. 1965), cert. denied, 382 US 1028 (1966).

Alice Abreu (Temple) brought us back to case law: "Another angle on envy are the marriage penalty/marriage bonus cases in which two-earner married taxpayers want to use the single rates and single taxpayers in committed relationships with same-sex partners want to use the married rates.  Drucker, 77 TC 867 (1977), aff'd in part and rev'd in part, 697 F.2d 46 (1982), and Mueller, T.C. Memo. 2000-132, are two examples.  Both taxpayer's constitutional arguments failed but the Druckers, who
were so envious of the tax treatment accorded single people that they ended up getting divorced to obtain it, were subjected to the negligence penalty." Gail Richmond (Nova) asked, "Weren't the Boyters (4th Circuit?) government employees who divorced at year-end in the islands and remarried early in the year?  I think they did this more than once."  What Gail didn't point out, perhaps because it goes without saying, is that the Boyters' ploy to have the best of both worlds was rejected by the Courts.


Ted Seto (Loyola-L.A.) nominated Dreicer v. Commissioner, 78 T.C. 642 (1982), as a candidate for the sin of sloth. In Dreicer, the Tax Court upheld the IRS denial of a deduction for travel, food, and lodging expenses claimed by an independently wealthy wanderer. The taxpayer incurred the expenses while working on a book to be called "My 27 Year Search for the Perfect Steak -- Still Looking," but the book was never published. However, I think this case also could qualify under gluttony, as did Roberta Mann (Widener). So, in the absence of any other candidates for gluttony, Dreicer will take this category hands down (or is that hands full?).


A cavalcade of nominees for this category started the moment Paul posted the question, and didn't end until the topic fizzled out.

Louis F. Lobenhofer (Ohio Northern) suggested Farid Es Sultaneh, 160 F.2d 812 (2d Cir. 1947). The case addressed the tax basis of stock received by the taxpayer from her future husband, Sebastian S. Kresge, in contemplation of marriage. At the time of the transfer, Kresge was married to someone else. After his divorce, he transferred additional stock to her. Kresge and the taxpayer did marry, and
perhaps the lust comes from these facts: he was 57 with a life expectancy of 16.5 years and she was 32 with a life expectancy of 33.75 years. Each year by the way, fewer of us remember that Kresge was a prominent national chain of stores, a household word, but now long out of business.

Myron Grauer (Capital) then nominated one of the cases cited by the Es Sultaneh court, namely, Merrill v. Fahs, 324 U.S. 308. In that case, the Supreme Court described the parties as follows: "[P]etitioner made an antenuptial agreement with Kinta Desmare. Taxpayer...had been twice married....He was a man of large resources....Miss Desmare's assets were negligible."  Myron's comment: "Uh-Huh ! :-)"

I stepped in almost immediately, and nominated one of my favorites, a case I use in teaching the basic tax course. It's United States v. Harris & Conley, 942 F.2d 1125 (7th Cir. 1991). The case involves criminal tax fraud charges against two sisters who did not report as gross income money and property received from an older gentleman, by the name of Kritzik, with whom they were "friends." Roberta Mann (Widener) also nominated this case, and Myron Grauer agreed it topped Merrill v. Fahs. He quoted one of the many eye-catching portions of the opinion: "Harris described her relationship with Kritzik as 'a job' and 'just making a living.' She reportedly complained that she 'was laying on her back and her sister was getting all the money.'" There's no way I can do justice to this case in this overview. Read the opinion. Oh, to tempt you, be aware that the two sisters were twin sisters.

But support for Harris was challenged. David Elkins of Southern Methodist University asked, "Why does everyone jump to the conclusion that Harris was a case about lust? Remember the letters the taxpayer received (held admissible because they attested to her state of mind regarding her relationship with the deceased)? Let's give all concerned the benefit of the doubt and say this was love. After all, don't porn stars deserve love, too?"

So I then proposed Reis v. Comr., T.C. Memo. 1974-287, as the winner in this category. Quoting from the Harris case:

[Reis] is a colorful example. The case concerned the tax liability of Lillian Reis, who had her start as a 16 year old nightclub dancer. At 21, she met Clyde "Bing" Miller when he treated the performers in the nightclub show to a steak and champagne dinner. As the Tax Court described it, Bing passed out $50 bills to each person at the table, on the condition that they leave, until he was alone with Reis. Bing then offered to write a check to Reis for any amount she asked. She asked for $1,200 for a mink stole and for another check in the same amount so her sister could have a coat too.

The next day the checks proved good; Bing returned to the club with more gifts; and
"a lasting friendship developed" between Reis and Bing. For the next five years, she
saw Bing "every Tuesday night at the [nightclub] and Wednesday afternoons from
approximately 1:00 p.m. to 3:00 p.m. . . . at various places including . . . a girl
friend's apartment and hotels where [Bing] was staying." He paid all of her living
expenses, plus $200 a week, and provided money for her to invest, decorate her
apartment, buy a car, and so on. The total over the five years was more than
$100,000. The Tax Court held that this money was a gift, not income, despite Reis'
statement that she "earned every penny" of the money. Similarly, in Libby v.
Commissioner, T.C. Memo. 1969-184 (1969), the Tax Court accorded gift treatment to
thousands of dollars in cash and property that a young mistress received from her
older paramour. And in Starks v. Commissioner, T.C. Memo. 1966-134, the Tax Court did
the same for another young woman who received cash and other property from an older,
married man as part of "a very personal relationship."

But Bryan Camp may have found the champion. He nominated Vitale v. Commissioner,
T.C. Memo. 1999-131. He describes the case in words I dare not change:

[T]he TP retired as a budget analyst from the Department of Treasury after 35 years (topping out as a GS-12).  Trying to decide what to do with himself, he decided to become an author.  He penned one collection of short stories titled 'Boys and Girls Together' and then 'petitioner had an idea for another book -- a story about the experiences of two men who travel cross-country to patronize a legal brothel in Nevada. In early 1993, petitioner wrote an 18,000-word draft of this basic story line, which he submitted for copyright protection in June.  In order to authenticate the story and develop characters for the book, petitioner visited numerous legal brothels in Nevada by acting as a customer for prostitutes.'   As to the payments to the prostitutes, the court held 'no deduction is allowed for the interview expenses. We find that the expenditures incurred by petitioner to visit prostitutes are so personal in nature as to preclude their deductibility. In evaluating whether certain expenses are personal or qualify as business expenses under section 162, the Court has found that some expenses are so 'inherently personal' that they almost invariably are held to come within the ambit of section 262.'


Kirk Stark and I almost simultaneously, and independently, nominated Biltmore Blackman v. Commissioner, 88 T.C. 677 (1987), as the candidate for anger. The Tax Court denied a casualty loss deduction for the damage caused by a fire that destroyed the taxpayer's home. The fire was started by the taxpayer, who was so angry with his wife that, to quote the court: "After she left, the petitioner gathered some of Mrs. Blackman's clothes, put them on the stove, and set them on fire."

Donald Tobin (Ohio State) reminded us of Amos v. Commissioner, T.C. Memo. 2003-329, in which the camera operator who was kicked in the groin by Dennis Rodman during an NBA game challenged the IRS assertion that his damages were includible in gross income.


Robert Nassau (Syracuse) explained that for greed, "one of my all-time favorites: Mazzei V. Commissioner, 61 T.C. 497 (1974). The taxpayer husband was involved with others in a scheme to reproduce United States currency. The other parties in the scheme defrauded the taxpayer and stole $20,000 from him. The taxpayer claimed a deduction for the loss under I.R.C. §165(c)(2), (c)(3). The commissioner disallowed the deduction for the loss on the ground that allowance of the deduction would be contrary to public policy. The court entered judgment in favor of the commissioner. The court held that the taxpayer's conduct constituted an attempt to counterfeit an actual start in the counterfeiting activity, and overt acts looking to consummation of the counterfeiting scheme. The court held that to allow the loss deduction would constitute an immediate and severe frustration of the clearly defined policy against counterfeiting obligations of the United States as enunciated by 18 U.S.C.S. §471. The court held that the taxpayer's actions were no less a violation of public policy because there was another scheme involved, namely, that of swindling him."

Gail Richmond, also nominating Mazzei, shared some insights into the facts of the case: "I like Mazzei for greed. That's one of the sting cases-the guy was convinced by a con artist that there was a machine that turned $1 into $100 bills or something similar. Then the police came to raid the place and all the money was confiscated. Only they weren't real police; they were confederates of the con artist. Theft loss deduction disallowed-public policy because the victim was participating in the scheme. There are a few similar cases out there." There must be a movie script in this.

Bryan Camp pointed out that "any Amway case" would fall within the boundaries of greed. He suggested, for example, "Theisen v. Commissioner, T.C. Memo. 1997-539, where "Petitioner candidly admitted in court that one of the major benefits of being an Amway distributor was that such distributors could purchase various products for personal use at a discount of 15 to 50 percent, if not more. He further stated that the opportunity to purchase discounted products was a benefit. His testimony evidenced that petitioners used their Amway distributorship for their own personal financial gain. He stressed this benefit when he made sales pitches in his attempts to recruit potential downliners. When questioned whether his downliners sell the products, petitioner testified: 'Generally, no. The way the plan is written is, you're taught to purchase things from yourself for yourself, and you get other people -- say, Look. Just change your buying habits. Don't go to HEB. Don't go to Eckerd's. Don't go to Sam's. You get access to all these products. Change your buying habits. Buy things for yourself.'"

Ann Murphy (Gonzaga) shared another Amway case, Ransom v. Commissioner, T.C. Memo. 1990-381, proving Bryan's point: "My personal favorite for greed is a little-known case, but dear to my heart because I tried it. An Amway distributor - tried to deduct his dog to guard his Amway products, gave gifts to his employees (who happened to be his girlfriend's small children), and attempted to write off his backyard because he had 'Amway barbeques." I like it because of Judge Jacob's line in the opinion - 'It appears that petitioner's tax philosophy is: if it moves, deduct it; if it is stationary, depreciate it.'" Great line.

Ira Shepard (Houston) wrote, "There is one that comes to mind. This is where an estranged wife turned in her husband for cheating on his taxes, and received a reward from the IRS. Love then reared its ugly head and they reconciled. She did not want her husband to know that she was the one who turned him in to the IRS, so she failed to report the reward on their joint return. She got indicted or penalized; the decision, as I remember it, is that her desire to preserve her marriage was no defense for failure to report the reward. Maybe it was not a decision but just another apocryphal urban tax legend." Now, this, Dr. Elkins, is love!!!


Larry Lokken pointed out that "I guess Cohan v. CIR stands for the proposition that sloth, although perhaps a sin, isn't all that deadly; section 274 for the contrary proposition." This case involved George M. Cohan, the actor who is probably as familiar to our students as is the Kresge name, who didn't bother to keep records to substantiate the deductions he claimed for the expenses of producing his plays. The appellate court instructed trial courts to approximate the expenses. This position led to so much abuse that Congress enacted section 274 to require particular substantiation for what has become a long list of deductions that otherwise tempt taxpayers to "invent" amounts.

Next will be a challenge to find tax cases illustrating the twelve beatitudes, the ten commandments, the four cardinal virtues (prudence, justice, fortitude, and temperance).

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