Lydia Ramirez

Lydia Ramirez was an industrious woman who ran two business and managed a large real estate portfolio, but her businesses tended to be profitable while her real estate ventures did not. And in 2008 and 2009, she filed tax returns showing business income that was largely offset by real estate losses.

However, the Internal Revenue Code makes a distinction between “active” and “passive,” and you cannot use passive losses to offset active income. So on these returns, she claimed that she was passive in both ventures, but when she was audited by the IRS, they determined that she was active in her businesses and disallowed the offsetting real estate losses.

As a result, the IRS sent her a deficiency notice for taxes owed and accuracy-related penalties, to which she responded by petitioning the tax court. Unfortunately, Ramirez died before the case went to trial, and the IRS tried to use that to its advantage. In order to successfully uphold the IRC §6662 penalty against an individual, the IRS must prove that it was initially approved by a supervisor.

Apparently, they did not have evidence to support approval, so the IRS tried to claim that it was no longer trying to impose the penalty on an individual since Ramirez’s case was taken up by her estate. That would have been a cute trick, but the tax court didn’t buy it, holding that the estate was not liable for the accuracy-related penalties and proving that even the IRS cannot always reach beyond the grave to collect.

Josh Norris
Youssef Youssefzadeh

On his 2011 tax return, Youssef Youssefzadeh reported interest and dividends on Schedule B of his Form 1040. He did not, however, indicate the source of this income. Instead, he invoked his Fifth Amendment privilege, claiming that provision of this additional information would be self-incriminating.

In response, the IRS issued a penalty for filing a frivolous return under IRC Section 6702. But Youssefzadeh contested the penalty, took his case to Tax Court, and eventually won, claiming that his return while not complete was still substantially correct.

So why would Youssefzadeh not want to reveal the source of his interest and dividend income? It is unlawful to willfully fail to file an FBAR, which discloses ownership of foreign financial accounts. Meanwhile, IRC Section 61 defines gross income as “all income from whatever source derived,” even if it’s illegal.

In other words, he was trying to thread the needle of claiming income to stay out of trouble with the IRS without revealing its source to get in trouble with the Feds. So if Al Capone had claimed his bootlegging income but invoked the Fifth on its source, maybe he would have avoided getting caught for tax evasion.

Josh Norris
Apple Inc.

In 2013, Apple CEO Tim Cook stood in front of a US Senate committee and said, “We pay all the taxes we owe—every single dollar. We not only comply with the laws, but we comply with the spirit of the laws. We don’t depend on tax gimmicks.” Sure, Tim. Sure.

But whether it’s unpatriotic, disingenuous, or fair is irrelevant. The tax strategies Apple uses—primarily shifting income to Ireland—are legal. And as CEO of a public company, Tim Cook has a duty to Apple shareholders, not the US Treasury. So if he can legally save his shareholders money, he has a responsibility to do that.

Judge Learned Hand even notes in the landmark case Helvering v. Gregory that, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Now, ironically, this case created the legal doctrine known as “substance over form,” which means that you cannot just file the right paperwork to make a transaction legitimate if the underlying objective is simply tax avoidance. But so far, Apple’s strategies have held up.

Ultimately, Congress included provisions within the new Tax Cuts and Jobs Act that reduce the effectiveness of such strategies (although their success is debatable). As a result, Apple now has the coveted problem of repatriating over $250 billion in cash overseas.

Josh Norris
Bruno Bruhwiler

Bruhwiler is one of the IRS’s most recent tax protesters. In 2014, he received a notice regarding the 2011 tax year for which he had not filed a return and carried a balance of $3,840. Instead of sending a check, he took umbrage at the assertion that he owed the federal government and sent a colorful response, which listed 27 reasons to defend his position.

Some of the highlights include contentions that: he “is not a US citizen but in fact is a California National,” the IRS dealt with him as is a “fictional entity,” and “the due process of Bruno Bruhwiler has been violated and dishonored.” Obviously, the IRS did not accept his response.

So when the case went to trail in 2015, Bruhwiler got the chance to put his crazy on full display. During the proceedings, the judge asked him about income that was reported for him during the 2011 to which Bruhwiler responded, “I don’t even know what you mean by ‘income.’ I have my own definition of income.,, It’s a cat with a pink bow.” Right.

The tax court judge ruled in favor of the IRS, and although he could have been penalized up to $25,000 for frivolous proceedings, the judge showed restraint and only added a $3,500 fine to the $3,840 already due.

Josh Norris
William Koch

In 1992, when the San Diego Yacht Club won the America’s Cup, team captain Bill Koch said, “This is a triumph for America, for American technology, and American teamwork.” But the real triumph that year appeared on his personal income tax return, which included a $10 million charitable contribution toward that victory.

Funding for the whole team totaled $64 million, so not only did he get a deduction for that $10 million, but he also contributed another $44 million from foundations he controlled, which was presumably also a charitable deduction for him at some point. So why does Koch get to write off his incredibly expensive hobby and you can’t?

Fortunately for him, Section 170(c) of the Internal Revenue Code explicitly defines a charitable contribution to include organizations operated, “to foster national or international amateur sports competition,” which would include yachting. So while it may not seem fair, it’s 100% within the law. So maybe you just need to find a more expensive hobby.

Josh Norris