A blog post

The IRS, Layla, Ludwig Drums and Demutualization

Posted on the 27 April, 2012 at 9:04 pm Written by in Taxes

Well, this is not the easiest tax reading I have ever done. I just finished Cadrecha v U.S. The case is like reading a calendar.    

You ever wonder about the difference between a tax attorney and a tax CPA? There are differences in practice. The CPA of course is much more involved with numbers and the attorney is more so with contracts and documents. A big difference is that the attorney can take a case to court. Robert and Cynthia Cadrecha (Cadrecha) could have used an attorney, because the IRS beat on them like a set of Ludwig drums.

This case has to do with a life insurance company demutualization. Demutualization means the life insurance company issues stock. The IRS took the position that any stock received would have a basis of zero; a subsequent sale would therefore be all gain. Sounds like a position the IRS would take. There was a taxpayer who took the IRS to court on this matter (Fischer v U.S.) and won. Cadrecha occurred during this period of time.

Here goes:

4/15/04           Cadrecha files 2003 tax return showing no  basis in the stock.

3/20/07          He learns of the Fischer case. Cadrecha mails amended return showing basis in the stock.

3/22/07          IRS receives amended return.

5/10/07          IRS writes letter asking for more information. Cadrecha provides it.

6/26/07          IRS sends letter that it is researching.

8/6/08             Fischer wins case against IRS.

8/13/07          IRS sends letter it fell asleep and will now really start researching.

8/31/07          IRS sends letter saying “fuhgetaboutit” and disallows the amended return.

The IRS, with all its efficiency, tells Cadrecha that they filed the amended return after three years had expired. This is of course incorrect. What happened is that the IRS got the 3/20/07 filing confused with the additional information provided on 5/10/07. Generally speaking, the additional information will be attributed back to the earlier filing.

OBSERVATION: This is why we recommend using certified mail.

NOTE: Something VERY important happens here. The disallowance is on Letter 105C, which includes the following language concerning an appeals or suit:

 “The law permits you to do this within 2 years from the date of this letter. If you decide to appeal our decision first, the 2-year period still begins from the date of this letter.”

I believe that Cadrecha, and Cadrecha’s accountant, got mislead by the reason given on Form 105C. Granted, the amended return was filed within 3 years, but the claim was DISALLOWED.  This has significance separate and apart from any reason given and will come back to haunt Cadrecha.

 8/31/07         Cadrecha sends a letter to the IRS disagreeing with the “dates” issue.

10/1/08          Cadrecha sends a letter to the IRS asking whether anyone is still alive.

11/3/08          Cadrecha files Form 843 in order to perfect the earlier (3/20/07) claim. (An amended return is a claim).

11/5/08          IRS responds to Cadrecha’s letter of 11/3/08, saying someone is still alive.

12/30/8          IRS – in a blur of motion – responds to the claim filed 11/5/08, saying it will need more time to research and to put the children through middle school.

1/15/09          The IRS writes again, stating that it is forwarding the claim filed 11/3/08 to Austin by the slowest means possible.

6/25/09         Cadrecha’s accountant contacts the Taxpayer Advocate.

12/11/09       Cadrecha’s accountant actually speaks to an IRS employee. She (the employee) explains that the IRS is delaying because it intends to appeal Fischer. She also says that the children are doing well and have started high school.

4/19/10         Cadrecha, in a moment of insanity, writes the IRS.

8/22/10         Cadrecha writes the Taxpayer Advocate imploring it to “PLEASE help.” Johnny Depp is rumored to be in consideration for the movie lead.

4/26/11          Cadrecha receives a letter from the IRS stating that their claim was “being held in suspense” while the IRS was litigating a similar demutualization case in Arizona. The IRS also remarked how the children had grown and were soon to start college.

 Anyway, Cadrecha winds up in court. What did the IRS argue? That Cadrecha’s complaint was not filed timely! Can you believe the gall?

 The court decided against Cadrecha. The case was not filed timely. Look back above and reread my comment on the 8/31/07 entry. Cadrecha had 2 years to file. Not 2 years and a day or 3 years less a week. He was late.

 Is it equitable? Most likely not, but it was the bright-line law.

 Is there a moral? Yes. When this issue got played out like Clapton’s “Layla,” Cadrecha needed an attorney. I know, I know. One does not have unlimited money to throw around, and one has to consider whether the amount of tax at issue is worth the additional cost. But Cadrecha needed something that a CPA could not provide: a court filing before the two years ran out.