Year-End Collection: Tax Oddities of 2019

David Stewart:   0:01
Happy holidays from Tax Notes. This week, we're continuing our annual traditionby ending the year with a few short tax stories that may be a little odd or otherwise don't work as a full episode. As our gift to you this holiday season, here's our year-end collection, 2019. Joining me now in the studio is Tax Notes legal reporter William Hoke.  Bill, welcome back to the podcast.

William Hoke:   0:37
Glad to be here, Dave.

David Stewart:   0:38
So what do you have for me?

William Hoke:   0:40
Well, I have a story that I worked on back in September. It's a little bit interesting. There was a woman who has been certified by the Guinness Book of World Records as having been the longest living human. She reportedly died in 1997 at the age of 122 years and 164 days.

David Stewart:   0:58
So all of this sounds a little skeptical.

William Hoke:   1:01
Well, there are two Russian researchers who came to that conclusion. A guy named Valery Novoselov and Nikolay Zak, a mathematician, started to question the fact that this woman Jeanne Calment actually lived as long as she did. And the reason they did was because the next longest living person was only 119 years old when she died. That was Sarah Knauss, who died in 1999 in Allentown, Pennsylvania. So after the reports that Miss Calment died in 1997 again in 122 years and Novoselov, who is a professor of genealogy and geriatrics at the People's Friendship University in Moscow, wrote a paper for the magazine called Rejuvenation Research in December 2018. And he said, effectively, the ages are out of joint. He specifically said, "Whenever a new record is set, a new longevity record, the person dies several days or several weeks later, very rarely several months later. However, we are never speaking about years apart, definitely not several years."

David Stewart:   2:03
So I assume, because you looked into this, that there's a tax angle,

William Hoke:   2:07
Yes, there is. Well, the tax angle was introduced by Novoselov. He said that this woman Jeanne, her father and mother-in-law both died in 1931 and the family had to pay inheritance taxes of up to 35 percent at the time. I'm quoting him: "If Jeanne had actually died, her daughter Yvonne, and her husband would have had to pay a lot of money. But if Yvonne died, the family wouldn't have had to pay." Now this is where the fraud comes in. Yvonne, the daughter, the public records in France indicate that she had died in 1934 at the age of 36. Novoselov is suggesting that the mother, Jeanne, had really died, but that the daughter, Yvonne, assumed her identity and kept on pretending to be her mother until her death in 1997.  

David Stewart:   2:53
That's a pretty extreme measure to go to for tax avoidance.  

William Hoke:   2:56
Yes. Well, again the reasons he said [was] the inheritance tax angle. He said that if Yvonne had died, the family wouldn't have had to pay. Now a group of French researchers quickly jumped in, and they published a paper in The Journals of Gerontology saying that the mathematician Novoselov had hired and sent to France to research the records that he had not done a complete job. He failed to note that Jeanne's father had given all of his property to his children in 1926 in exchange for a life annuity of 5,000 French francs. And Zak, the mathematician, had claimed that Yvonne had additional reasons to assume her mother's identity. There was an annuity contract in the mother's name with Jeanne as the beneficiary that was signed before 1934 and continued in effect until 1997. The annuity would have terminated if she had really died in 1934. They also said that Jeanne, who had made a declaration of assets for tax purposes in 1946, had not reported this annuity on this tax form that she had reported the time. Of course, that begs the question of whether the daughter might have been trying to evade taxes in 1946, just as the researchers claim that she had done in 1934. So the French said that their mathematical models indicated that it was possible for a person to attain the age of 122 by the late 1990s. Of course, the closest was 119, so that's quite a jump from one to another. I talked with Marc Bornhauser, a French tax lawyer, who told me that if there was any identity fraud committed, it was more likely civil fraud rather than tax evasion. Bornhauser told me that Jeanne Calment had sold her house, but kept the right to stay, which meant that she could live there until she died. In a quote, "To die so young would have made the sale of very bad thing for the family and a very good affair for the purchaser," he said. Indeed, the purchaser died before the official Jeanne Calment had done. I got various reactions about this story, one of which I thought was very interesting. This morning, I told a young acquaintance of mine about it, and she replied, "Boy, at 122 who cares if you don't pay your taxes?"

David Stewart:   5:08
Well, it sounds like she had numerous reasons if she actually did this interesting fraud and being the oldest ever living human being was just kind of the icing on the cake.

William Hoke:   5:18
Yes. If indeed, she was the oldest living human being.

David Stewart:   5:22
I suppose we'll never know.  

William Hoke:   5:23
We will never know. The French assessor, he refused to revise the death certificate after reading the French researchers' report on the thing. So, yes, we're not going to know.  

David Stewart:   5:32
All right, Bill. Thanks for being here.  

William Hoke:   5:34
You're welcome.

David Stewart:   5:35
Well looks like Tax Notes legal reporter Nathan Richman has moseyed into the studio, so I think he has another horse story for us. Nate, welcome back.  

Nathan Richman:   5:44
Thanks for having me.  

David Stewart:   5:45
So, what do you have?  

Nathan Richman:   5:46
Well, what I've got for you this time is a case of Denise McMillan, who had herself a nice long career both in the horse business and in computer programming. She was involved in dressage and breeding for something like 50 years. The problem was in 2010 when she's trying to deduct about $5,000 to $6,000 worth of horse-related expenses, her last horse had been dead for two years. In the words of Judge Holmes means that Ms. McMillan didn't own, breed, or show any horses in 2010 "makes it impossible for her to do what a horse breeding and showing business does — breeding and showing horses. These expenses no longer being business expenses are thus not deductible."

David Stewart:   6:28
So would you say that this is a case of the IRS beating a dead horse?  

Nathan Richman:   6:31
Well, this was Ms. McMillan's sixth trip to the Tax Court with regard to a horse breeding business deduction. But then again, horse had only been dead for two years, so at least it was alive for part of it. One other fun part about it is that the horse that died in 2008 hadn't earned any money for her since 1997 and had just been sent to Australia in the hopes of bimonthly $1,500 breeding attempts.  

David Stewart:   6:58
Did Ms. McMillan have any argument in favor of saying that there's still an ongoing business, even though my horse has been dead for several years now?  

Nathan Richman:   7:05
She did have some argument that she was looking into finding a new horse. Of course, that left her in the still-not-yet-in-business stage, so she was in the old-business-dead, new-business-not-yet-born stage.  

David Stewart:   7:18
All right, so you need to have a horse, of course.

Nathan Richman:   7:21
Of course, of course.  

David Stewart:   7:23
Nate, thanks for being here. Joining me now by phone is Tax Notes reporter Paul Jones. Paul, welcome back to the podcast.

Paul Jones:   7:30
Thanks. Good to be here.

David Stewart:   7:31
What do you have for me?

Paul Jones:   7:32
This is sort of an interesting story that occurred in July where in Arizona, Nike had announced its intentions to build a factory in Goodyear, a city in the state, and the state governor, his administration was prepared to give them about $1 million in incentives for moving and setting up a factory there as part of their shoe production line. But then on July 2, the governor tweeted out that actually he felt Arizona was doing just fine without Nike and that he had instructed his administration to withdraw the $1 million grant that they had offered the company as an incentive to move to Goodyear.

David Stewart:   8:06
Why the change of heart?

Paul Jones:   8:07
Well, apparently, Nike had decided to withdraw a sneaker, a shoe that they had already put into production and actually sent to a number of stores. And this shoe had on the heel a circle of 13 stars from the famous Betsy Ross flag from the early days of American history. And the reason that they had decided to withdraw this shoe was because Colin Kaepernick, who is a spokesperson for Nike, had expressed concerns that the flag was used by racist groups and also represented America at a period of time, obviously, where slavery was legal and the company had decided he was going to pull that line of shoes. Well, that didn't play well with conservatives and Arizona's governor, Doug Ducey, is a Republican, so he decided that he was going to announce that the incentives deal was scuttled and add a little insult to injury by saying that Arizona didn't need Nike at all.

David Stewart:   8:57
So how did this then play out?

Paul Jones:   8:59
Well, it doesn't appear that Ducey ever reversed himself regarding the $1 million grant. The town of Goodyear, however, had just approved about $2 million in incentives for Nike to move. And when I reached out to them at the time, they said that they intended to continue to offer that and were a little worried that Ducey's reaction might have scuttled the whole matter. Nike, for its part, both withdrew the shoe, but also decided to go ahead and move into Goodyear, which makes sense because I don't think that the $1 million that the state was offering were probably their primary reason for considering Goodyear. So that would be one thing, but then Governor Ducey was spotted wearing Nike shoes at the Fourth of July celebration two days later, strongly suggesting that this was a bit of a culture war flash in the pan.

David Stewart:   9:43
So what are you hearing from observers about this whole back and forth?

Paul Jones:   9:47
Experts said, actually, that this is hardly unique and that the culture wars have occasionally intruded into tax incentive deals. I was speaking with Michael Lucci of the Tax Foundation, and he said that some of this reminded him of things that were going on with respect to Georgia, which passed a strict anti-abortion bill and had seen a number of entertainment industry bigwigs say that if the bill went through or was upheld, that they would suspend operations in the state, which has gone out of its way to attract the entertainment industry. In fact, a lot of the Marvel films have been shot in Georgia on sound stages there. I also spoke with Greg LeRoy of Good Jobs First, that's a incentives watchdog group, and he said that this reminded him of something that occurred in 1993 in Williamson County, Texas. And that was a situation where the county had rescinded tax breaks to Apple because Apple had said that it was going to provide health benefits to gay couples. And then the county later on approved tax breaks replacing the ones that were withdrawn after a public backlash. So the observers say that this sort of thing happens on occasion, but it sort of seems like the people involved don't necessarily always follow through. It's more making gestures for public consumption. Again, Ducey was angry enough at Nike to say that he was going to withdraw the incentives the state had offered them, but at the same time, he's more than happy to wear their product to the Fourth of July celebration two days after the fact.

David Stewart:   11:12
I guess that just goes to show there are some deals that are too good to walk away from. Paul, thanks for being here.

Paul Jones:   11:17
Always a pleasure. Thanks again.

David Stewart:   11:19
Tax Notes legal reporter Jennifer McLoughlin joins me now. Jennifer, welcome back.

Jennifer McLoughlin:   11:23
Thank you for having me.

Paul Jones:   11:24
So what do you have for me?

Jennifer McLoughlin:   11:25
So this is kind of a non-tax-but-tax-related story. So when it comes to high-profile celebrities who were caught trying to skirt their tax obligations, Leona Helmsley comes to mind for many people.  

David Stewart:   11:39
Absolutely.

Jennifer McLoughlin:   11:40
Although, real quick, I will say I did a very informal poll this weekend. And when I say poll, I spoke to four people randomly while Christmas shopping and Tysons Corner and just asked them, "Do you know who Leona Helmsley is?" And two out of the four did not. So, I'm not quite sure that's a reflection of just how much time has past since she has passed away, but as a quick refresher for the audience: Leona Helmsley was a billionaire hotel magnate that came under investigation in the late 1980s. She was found guilty of several counts, including evading over $1 million in taxes. She did a quick stint in federal prison that lasted less than two years. That's kind of what she's known for.

David Stewart:   12:18
Didn't she one time say "only the little people pay taxes?"

Jennifer McLoughlin:   12:21
Yes, yes.  

David Stewart:   12:22
OK.

Jennifer McLoughlin:   12:22
So, this infamous tax cheat seemingly as well known for a federal crime as she was for a lavish lifestyle and shall we say, haughty reputation. So she was famously callous towards people, including her employees, which earned her that moniker "Queen of Mean." And I believe it was a former housekeeper that testified during her trial that she once said, "We don't pay taxes. Only little people pay taxes." And we reference to her and her former husband. So yes, this kind of followed her throughout her entire life. But it's been a while since she's been with us. She passed away in August of 2007, 12 years ago, and yet her name is still popping up in headlines. And so this story relates to her estate, which exceeded $5 billion, most of which went to a charitable trust that was named after her and her late husband. And in her will, Helmsley provided that her five executors were not going to receive what are called statutory commissions for their work. They were going to receive reasonable compensation for their work. So the question is: What's reasonable compensation? It was not defined in the will, but there are factors in New York law that help guide a determination of what is a reasonable compensation. So what happened was though the New York attorney general took issue with the executors' compensation a few years back, and the reason is the New York AG was the statutory representative of the ultimate beneficiaries of that charitable trust. And so there's a long history and a complicated issue in terms of the methodology to get to what was a reasonable compensation, but long and short of it is just this past August, a New York court found that the five executors were right. The decision favored their determination of what their compensation was and that was collectively more than $106 million.  

David Stewart:   14:11
OK, that's a lot.  

Jennifer McLoughlin:   14:12
There's a lot of money. Two of the executors have passed away. One was Leona Helmsley's brother. His estate got a smaller portion of that compensation than the others. But the remaining amount was divided equally between the three surviving executors and the estate of the other one who passed away. And according to the court's order, this amount was less than 2 percent of Helmsley's total estate. But the amount of compensation reflected the unique and complex nature of handling this estate and the risks that the executors had to take.

David Stewart:   14:45
So I guess this is sort of evidence that tax evaders never go away, their estates just fade into the ...

Jennifer McLoughlin:   14:51
I wouldn't say that Helmsley's case is reflective of the norm.  

David Stewart:   14:55
OK. Well, Jennifer, thank you for being here.

Jennifer McLoughlin:   14:57
Thank you very much for having me.

David Stewart:   14:59
And now, instead of coming attractions, we're joined by Content and Acquisitions Manager Faye McCray with a special announcement.

Faye McCray:   15:07
Thank you, Dave. The submissions period for the Christopher E. Bergin Award for Excellence and Writing is open. This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the 2019 to 2020 academic year. Visit taxnotes.com/students for more details. The year 2020 marks Tax Analysts' 50th anniversary. We will celebrate this milestone at a gala event at the National Portrait Gallery April 29, 2020 in Washington, D.C. We will be honoring former IRS commissioner and longtime leader in the tax world Lawrence Gibbs and discussing the future of tax policy. We hope that you will join us in celebrating our first half century for more information or to purchase tickets, email galainfo@taxanalysts.com.

David Stewart:   16:00
That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us a podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.