Some Background Noise
Sharp, attentive, long-time followers of this update expressed dismay last year when I declared the 2018 Year-End Tax Update to be my last, at least in its then current format. Many had come to look forward to our caustic, oddball sense of humor, coupled as it was with a dollop of instruction on the important (or bizarre) tax developments of the year, all as set forth in the update and accompanying seminar at the Brindisi Tax Academy. Others, of course, upon learning of my retirement from penning the update, welcomed with relief the freedom from having to be reminded of the tedium of tax law during the holidays.
The best way to teach your kids about taxes is by eating 30 percent of their ice cream.
But, in addition to pleas from many of our loyal followers, my publishers and agents (i.e. the friendly censors in the Marketing Department of Cozen O'Connor who make sure to get this to you in a fancy format cleansed of many of my funniest but perhaps inappropriate observations) also prevailed upon me once again to enter the arena. After all, they said, the masterpiece that was the 2018 Year-End Update was the most widely-read publication of 2018, other than the Bible and the Mueller Report and, Lord knows, there was nothing funny in the Mueller Report. Moreover, they said, it is believed that like the well-known bedding company’s products, at least three U.S. presidents had skimmed the Year-End Update before turning to “Avengers – End Game,” “Spider Man – Far From Home,” and similar, more useful fare.
So, while not nearly so dramatic as Sherlock Holmes’ return from Reichenbach Falls, we mark the return — for one last encore — of this year’s Year-End Update.
With all due respect to the sponsors of The Taxpayer First Act, there was little tax legislation of great importance in 2019. Please forgive our cynicism, but “Taxpayer First” seems to be an oxymoron of the “first” order.
Accordingly, as has been our wont, we note several cases, rulings, and developments that we deem interesting and, hopefully, useful to you in your work as tax practitioners. Attendees at the Brindisi Tax Academy Year-End Update Seminar will also be treated to a discussion of the issues surrounding the president and his tax returns, as well as, if we’re lucky, Christmas carols from the Villanova University School of Nursing Choir, who purely by happenstance often hold their holiday party at the same time and in the same venue as our program. Come on, angels, we’re counting on you.
I again thank my friend and law partner, Tom Gallagher, for his contribution to these materials by pointing out to your author numerous items of interest.
So, finally, this is it. I fully expect this to be the last update I prepare, even if that means missing out on reporting on Senator Warren’s Wealth Tax, the tax aspects of Senator Sanders’ Medicare for All Act, and the similar programs that your elected officials will likely inflict upon you, your families, and your clients in the future. It’s been a lot of fun.
Selected 2019 Tax Developments
Employment Related Matters
Final regulations to § 301.7701-2 reconfirmed the position of the IRS that members in an LLC (or partnership) who own a tax disregarded single member LLC are not “employees” of the disregarded LLC for employment tax purposes. Instead, as members of the parent LLC or partners in the parent partnership, they are subject to self-employment tax. Some taxpayers had taken a contrary position, relying on the requirement that SMLLC’s be treated as a corporation for employment tax purposes.
In Information Letter 2019-0013, the IRS concluded that the death of an ex-spouse is not a “change in status” allowing a change in the election of health care coverage under the cafeteria plan rules of § 125. A former spouse, even one being covered by the other spouse’s medical plan, is not a “dependent” for § 125 purposes. (My censors prohibit me from pointing out that this development was not, perhaps, “a total loss” for the surviving ex-spouse.)
A Tax Court decision, Jacobs, previously held that the provision of pre-game meals to Boston Bruins players and staff at away games was a de minimis fringe benefit under § 132(e). As a result, not only was the meal expense excluded from the recipients’ income, but the team was able to avoid the usual 50 percent deduction limitation of § 274(n). The IRS has now acquiesced, but in result only.
In Burbach, the Tax Court held that director fees paid by a corporation to Mr. Burbach, its president, sole shareholder, and director, were in fact “wages” and, as a result, Mr. Burbach could not make contributions to a Keogh plan based upon those fees. Keogh, or H.R.10 Plans are plans that cover self-employed individuals and although directors, in their capacity as such, are in general deemed to be independent contractors, the court here agreed with IRS that the “fees” were in substance compensation to the taxpayer for his everyday work for his corporation. Penalties were imposed. The case is a somewhat amusing tale of what happens when you combine a greedy entrepreneur with totally incompetent tax “advisers.” Don’t be these guys!
Practitioners are reminded that the recent changes to the “hardship distribution” rules of § 401(k) plans may require plan amendments by the end of this year. Proposed regulations liberalized and expanded the hardship distribution rules of the code. Consult your retirement plan adviser.
Rev. Rul. 2019-19 deals with certain reporting and withholding rules on qualified plan distributions where the participant or beneficiary is slow to cash a distribution check. In short, the distribution is reportable on Form 1099-R when mailed and includible in income in the year the check is received, even if cashed in a later year.
In a technical advice memorandum (PLR 201903017), the Service ruled that benefits such as “promoting collaboration” or “protecting business information” or “concern for employee safety” did not demonstrate a business necessity for giving employees free meals. Free snacks, on the other hand, were found to be de minimis fringe benefits.
Certain State Tax Matters
The Commonwealth Court of Pennsylvania ruled in the Greenwood Gaming case that the three-year statute of limitations for filing a “petition for a refund” applies as well to a petition for crediting of overpaid taxes.
In another casino related case, The Pennsylvania Supreme Court overturned a law that imposed a tax on casinos and redistributed the tax proceeds to underperforming casinos, as an unconstitutional violation of the commonwealth’s uniformity clause. Sands Bethworks Gaming LLC.
Final Regulations disallowed a proposed workaround of the TCJA’s limitation on deductibility of state and local taxes that attempted to provide a charitable contribution deduction in place of the taxes. A safe harbor of state tax credits for no more than 15 percent of the “contribution” is allowed. See Notice 2019-12. Separately, in September, a federal court in New York dismissed a lawsuit by New York, New Jersey, and two other states that had challenged the $10,000 annual limit on SALT deductions, State of New York et al. v. Steven T. Mnuchin et al.
The Court of Common Pleas in Philadelphia ruled that the reassessment of commercial properties in the city violated the uniformity clause of the state’s constitution because residential properties were not reassessed at the same time. Judge Cohen (no relation) concluded that the taxation of one “subclassification” of properties could not differ from that of another. Duffield House et al. v. City of Philadelphia et al.
Following three unanswered requests for financial records, the City of Philadelphia sued Uber to force it to turn over the documents. Channeling Paul Newman in “Cool Hand Luke,” Uber said something to the effect that “what we have here is a failure to communicate.” Separately, Uber is being sued in a number of jurisdictions for the treatment of its drivers as independent contractors, rather than as employees.
The City of Oakland, Calif., has sued the Oakland Raiders and the NFL for alleged antitrust violations that result from lost revenues due to the team’s impending relocation to Las Vegas. In July, the United States intervened in the case, arguing that tax injuries are not properly the subject of antitrust claims. Viva Las Vegas!
In North Carolina Department of Revenue v. Kimberly Rice Kaestner1992 Family Trust, the U.S. Supreme Court unanimously held that North Carolina could not tax an out-of-state trust where the trust’s only connection to North Carolina was that one of the beneficiaries lived in that state. Both the settlor of the trust and the trustee were located in New York. The residence of the beneficiary in North Carolina was insufficient nexus for taxation under the due process clause of the 14th Amendment.
In 1993, Mitchell Medoff of New Jersey won a $7.5 million lottery. He elected to receive annuity payments of $371,000 a year for 20 years. Prior to 2009, New Jersey did not tax lottery winnings (about the only thing New Jersey did not tax, presumably because substantially all New Jersey residents fortunate enough to hit the lottery caught the next thing smoking to Florida or Nevada). A 2009 change in New Jersey law, however, made lottery winnings in excess of $10,000 subject to N.J. taxes, and Medoff dutifully paid taxes on his payments in 2009-2012. In 2017, Mitchell filed refund claims for those four years, following 2016 N.J. Tax Court decisions that held New Jersey could not collect Gross Income Tax on lotteries won prior to 2009. Unfortunately for Mitchell, the N.J. Tax Court held that the refund claims were time barred by NJ’s three-year statute of limitations, proving once again that some days you’re the bird and some days you’re the windshield. The result, although perhaps technically correct, seems particularly unfair, inasmuch as the taxpayer had relied to his detriment on the New Jersey Revenue Department’s interpretation of the 2009 law. Time to drain the swamps.
Long-time readers know that we sample each year a collection of cannabis developments. For the benefit of Boomers like your author, “cannabis” is the modern term for “dope.” What follows is this year’s samplings. Let the circle be unbroken.
Because federal law prohibits the use and distribution of cannabis, IRS has concluded in a private letter ruling that a nonprofit organization formed to help low-income persons afford medical marijuana did not qualify for tax exemption. PLR 201917008. I wish there had been such worthwhile organizations when The Poor Boy was a college kid.
In High Desert Relief, Inc., the 10th Circuit upheld third-party IRS summonses with respect to a cannabis business and determined that a Justice Department memorandum that prosecution of marijuana-related crimes was no longer a priority did not render § 280E unenforceable. Section 280E disallows generally trade or business expenses of a marijuana enterprise.
Because of federal law restrictions, virtually no financial institutions in the United States will provide banking services to cannabis businesses. As a result, most cannabis commerce involves the use of cash that, in turn, creates other problems. Bloomberg Law reported on August 26, for example, that the cash that cannabis companies bring to City Hall in Reno, Nevada to pay their taxes in some instances weighs more than the employees in charge of collecting it. The Safe Banking Act of 2019 has been introduced to address some of the problems created by all of this cash, but its future is uncertain. In the meantime, some states have begun allowing payment in Bitcoin, and certain credit unions have agreed to provide services to marijuana businesses. (More on Bitcoin later.)
Efforts to avoid the proscription of § 280E have, to some extent, centered on the creation of a “management company,” separate from the dispensary company, through which the expenses of the businesses were run. This technique to date has largely been unsuccessful. See, e.g. Alternative Health Care Advocates, a Tax Court case involving this approach.
But all may not yet be lost. In a recent Tax Court decision reviewed by the entire court, three dissenting judges suggested that § 280E might be unconstitutional on the theory that its disallowance of trade or business deductions results in a tax on something other than “income,” in violation of the 16th Amendment. Others have posited that § 280E imposes an excessive fine or penalty in violation of the 8th Amendment. Stayed tuned.
The Raymond Chico case is an otherwise unremarkable unreported income case, except that the unreported income was from the sale of a device known as the “Doob Tube,” which is, I’m told, a container to keep joints from unrolling in a user’s pocket. For those of you looking for holiday gifts, here’s a useful stocking stuffer.
Other Important Developments
In several cases, the IRS successfully attacked what it deemed to be abusive “micro-captive” insurance companies.
The term micro-captive refers generally to captive insurers who qualify for the benefits of Code § 831(b). A captive insurance company is normally formed to insure or reinsure certain risks, typically for a parent or affiliated corporation and their subsidiaries or sister entities. Section 831(b) allows such captives to pay taxes on their investment income only — and not on their premium income — provided that their annual premium income does not exceed $2.2 million. Thus, the operation of § 831(b) potentially provides for significant tax and financial benefits. To wit, the parent deducts the insurance premium it pays to its captive, but the captive — assuming it stays at or below the $2.2 million threshold — does not include the premium in income. Then, if the captive is “fortunate” enough not to have many claims, it can continue to invest and reinvest its increasing capital and surplus.
A number of promoters have designed “techniques” that they have “sold” to taxpayers involving micro-captives. Take an extreme (some might say ridiculous) example. Suppose the parent and affiliates purchase insurance from the captive against risks resulting from the impacts of radiological warfare for an annual premium of $2 million. Although there is probably little available commercial insurance against radiological warfare, what is the risk that a claim on that policy will ever be presented or, in the event of such a catastrophe, that anyone will be around to file the claim? Is that insurance? Now, let’s go one step further. What if the captive “invests” its surplus by lending money to the parent or purchasing its notes or bonds at a favorable rate? In substance, did the parent ever really part with the premium? IRS has attacked certain of these arrangements as tax shelters on a variety of theories. For example, the captive is not an insurance company; its product is not insurance; no realistic risks are being insured; the premiums are too high in relation to the risks being insured, etc.
In particular, the attack has focused on marketed captives that engaged in “risk pooling” with other micro-captives. In 2016, the Service imposed new disclosure requirements on captives and began examining the returns of numerous micro-captives. By August, according to Bloomberg Law, more than 500 micro-captive cases were docketed in the Tax Court awaiting trial. Perhaps thousands more were being audited. In September, IRS offered a settlement initiative to certain taxpayers. Only about 200 taxpayers received settlement offers, which had to be accepted in 30 or 60 days by all persons involved in the captive, which can be many people in the case of cell or series captives. The offer allows a taxpayer to deduct 10 percent of the premiums paid; the other 90 percent will be treated as a capital contribution. No set-up or management fees will be deductible. The treatment of the disallowed 90 percent is viewed as a significant benefit, because at least one Tax Court case not only disallowed a deduction for the premium payments but included those payments in income. The captive must be liquidated. In addition, the accuracy related penalty will be reduced to 10 percent and that number, in turn, can be further reduced on a showing that the taxpayer had not previously undertaken a reportable transaction and had relied on professional tax advice.
Where we go from here is unclear. The IRS offer seems intended as an initiative to measure the level of interest in and the workability of a global settlement offer. What is clear is that a group of outraged clients of the companies that promoted the micro-captives is arbitrating claims against the promoters and that IRS appears to be gearing up to proceed against the promoters. Legitimate captive insurers still can provide an important business function with little or no tax risk but suffice it to say, at least for the moment, great care should be exercised in setting up a micro-captive.
For 2020, the Social Security wage base increases by $4,800, or 3.5 percent, to $137,700. Social Security benefits, on the other hand, only increase by 1.6 percent. To quote Willie Nelson, “don’t you think that’s a little unfair.”
In Other Numbers News
The Treasury Inspector General for Tax Administration found 167 IRS employees doing tax preparation and other prohibited outside work, including five who did work for H&R Block. Another 1,000 or so had outside work that, although not prohibited, could create a conflict of interest, according to TIGTA. Note that the Code does not authorize the Service to examine its employees’ tax returns to check their outside employment.
The D.C. Circuit has upheld the right of IRS to charge a user fee for issuing or renewing a PTIN. Nevertheless, there will be no charge this year.
IRS will not allow the child tax credit to parents who do not obtain a Social Security number for their child, including parents who have religious or conscience -based objections to obtaining a Social Security number.
In Notice 2019-07, IRS provided a safe harbor for rental real estate to qualify as a “trade or business” for purposes of the 20 percent qualified business income deduction of § 199A. (The Regulations to § 199A define trade or business generally by reference to the precedent developed under § 162 of the Code.) The safe harbor requires the maintenance of books and records, the performance of at least 250 hours per year of rental services, and the maintaining of contemporaneous records regarding the services. Importantly, the safe harbor will not apply to triple net-leased property.
LTR 201901005 permits a surviving spouse to rollover tax-free her deceased husband’s IRA into her own, even though the decedent had named a trust as the beneficiary of the IRA and even though qualified disclaimers by the beneficiaries of the trust had to be obtained. We’ve covered this subject before, and IRS continues its taxpayer-friendly approach, but practitioners are advised to remind their clients to insure that their beneficiary designations are appropriate for rollover purposes.
The impacts of the significant rate reductions of the TCJA continue to be felt as The Blackstone Group converts from a publicly traded partnership to a corporation. Other private equity firms, such as Ares Management and KKR, had already done so once the corporate tax rate was lowered to 21 percent. Blackstone said the change would expand its investor base.
Panera Cafes is contesting a determination by the IRS that a foundation it organized, Panera Bread Foundation, was not an exempt organization. The charity operated several cafes that it claimed served an educational purpose of training high-risk individuals and also gave away free food to the poor, but the IRS said the organization had substantial for-profit activities and insubstantial job training. The case is now docketed in the Tax Court.
Also recently docketed in the Tax Court, Whirlpool Financial Corp. et al. v. Commissioner, a case in which IRS maintains that Whirlpool created “stateless income,” through the use of a Luxemburg SARL, which sold to U.S. and Mexico customers appliances that it purchased from a Mexican affiliate. Luxemburg didn’t tax the income because Whirlpool claimed it was sourced to Mexico, and Mexico did not tax it because the SARL was not viewed as having a permanent establishment in Mexico. IRS treats the income as Subpart F income. In addition to developing clever tax structuring, Whirlpool is reputed to make excellent washers and dryers.
We mentioned somewhat jokingly in passing, earlier in these materials, the Taxpayer First Act, which was enacted into law on July 1, 2019. In fact, that Act makes several important and useful changes in IRS practice vis-a-vis taxpayers, including adding restrictions on property seizures and forfeitures; narrowing the scope of John Doe summons; notifying taxpayers in advance that the IRS plans to contact third parties as part of an effort to determine or collect the taxpayer’s tax liability; and requiring IRS to notify taxpayers of suspected identity theft or unauthorized use. These provisions have various effective dates.
Although the TCJA limited § 1031 like-kind exchanges to real estate, IRS announced in April that it would permit professional sports teams to again trade players or player contracts without gain recognition, so long as no cash was received on the trade, citing the difficulty and subjectivity inherent in valuing personnel contracts, draft picks, and the like. This new exception will not apply, said IRS, if an entire team is traded, something that the owner of the Philadelphia Phillies might consider given our depressing year.
The Soltani-Amadi case is a reminder that the exception from the 10 percent early withdrawal penalty of § 72(t) for funds used to buy a first home applies only to IRA’s; the taxpayer here (less than age 55) withdrew funds from her § 401(k) plan for a down payment, resulting in the 10 percent penalty.
In July, IRS began notifying holders of Bitcoin and other cryptocurrencies that they might owe taxes as a result of their use of virtual currencies in transactions. The notices, said IRS, are meant to be educational given the Service’s position that virtual currencies are property for federal income tax purposes. See Notice 2014-21. Thus, for example, the payment of bills with Bitcoin that have appreciated in value is a recognition event, per IRS. The notices, which IRS says have been sent to more than 10,000 taxpayers and are based on information that the Service obtained from financial institutions and John Doe summons, among other sources, also inform taxpayers of possible criminal sanctions for avoiding the rules. “Cryptonite,” you might say, for virtual currency holders.
Facebook’s proposed virtual currency, Libra, has run into a storm of criticism but, if launched, might also be considered property, not a currency.
The Kiplinger Tax Letter of May 3, 2019, reports that The Satanic Temple of Salem, Mass., has obtained a favorable determination letter as a church. Warning to congregants — the worthy citizens of Salem, in the past, have not always turned the other cheek. On the other hand, the 7th Circuit in the Gaylor case, reversed a district court decision that had struck down as unconstitutional Code Section 107(2), which excludes from income “parsonage allowances” (i.e., housing or housing support for a “minister of the Gospel”), finding that § 107(2) violated neither the establishment nor the free exercise clauses of the First Amendment. Your author supposes that these two developments sort of hedge the risks in dealing with deities, fallen or otherwise.
Some Procedural Items of Interest
The 7th Circuit in Z Inv. Properties, LLC upheld a ruling allowing IRS to foreclose on a tax lien against a purchaser of the property who was not aware of the lien because the NFTL had (slightly) misspelled the debtor’s first name and failed to include a legal description or permanent index number for the property. The court found that a search using the seller/taxpayer’s alias and a “sounds like” search using the taxpayer’s last name each disclosed the NFTL. Caveat emptor.
IRS no longer permits an entity to be shown as the “responsible person” on Form SS-4, the application for an EIN. For the time being, a limited exception is allowed for non-U.S. individuals who do not have an ITIN to act as the responsible person.
In Rev. Proc. 2018-38, IRS revoked a rule requiring certain § 501(c) organizations to disclose the names and addresses of their donors on their tax returns, but a Montana District Court this July invalidated IRS’s revocation on the theory that the Rev. Proc. was a “legislative rule” that needed to comply with the processes of the Administrative Procedure Act.
In a factually complex but potentially useful ruling, IRS concluded in CCA 201921013 that Form 4549 (the report of examination changes) was an informal refund claim for purposes of the statute of limitations on bringing refund claims.
In John L. Roth v. Commissioner, a 40 percent penalty against the taxpayers for overstating the value of a donation was upheld by the 10th Circuit. IRS had initially reduced its proposed penalty to 20 percent but increased it to 40 percent when the taxpayers petitioned the Tax Court. IRS said the 20 percent penalty determination was a “clerical error.” For those of you keeping score at home, the claimed deduction for the conservation easement was $970,000; the IRS asserted that the easement was “worthless.”
The potential state tax savings of the president’s move to Florida has been much in the news lately, but your author has a different technique which is “bulletproof.” Section 302 of Title III of the Veterans Benefits and Transition Act of 2018 permits the spouse of a service member to elect to use the same residence as his/her spouse for tax purposes, regardless of the date of the marriage. So if, for example, one of the Khardashians were to marry a G.I. from Florida, she would be a Florida resident as well as for state tax purposes. What a great country!
IRS ruled in PLR 20192703 that the sale of a partnership interest by a grantor trust for husband to a grantor trust for his wife was a nonrecognition event under § 1041, dealing with property transfers between spouses.
The TCJA added § 162(q) which denies a deduction for a settlement or payment related to sexual harassment or abuse if the payment is subject to a nondisclosure agreement. The provision also disallows attorneys’ fees related to the settlement. In an FAQ added to its website, IRS clarified that the attorneys’ fees of the recipient of the settlement payment are not subject to this disallowance.
CCA 201916004 provides additional clarity to those provisions of § 3511 dealing with payments to self-employed individuals, including partners in a partnership, from Certified Professional Employer Organizations (CPEO). Effective for compensation payments for services rendered on or after January 1, 2016, § 3511 provides that only the CPEO — and no other person — will be treated as the “employer” for employment tax purposes. CPEO payments to a self-employed individual are not “wages,” except in the unusual situation in which the self-employed individual is also an employee of another customer of the CPEO. Payments to partners in partnerships (LLCs), however, are always treated as payments to a self-employed individual. A CPEO that makes payments to a self-employed individual must file Form 1099-MISC with respect to those payments.
In a prior Seminar, we covered the principal provisions and tax benefits of the Opportunity Zone rules added by the TCJA. We noted then that a number of activities were ineligible for benefits, including golf courses, liquor stores, country clubs, and massage parlors. But a July article in Bloomberg Law pointed out that the eligibility exclusions in the law produced some odd and arbitrary results. For example, Ms. Lora Haddock, the founder and president of a startup known as “Lora DiCarlo,” asserts that her business qualifies for Opportunity Zone benefits. The company promises “hands-free blended orgasms” from a prize-winning “elongated personal massager” device called “Osé” that employs micro-robotics to make a “come hither” motion and costs a mere $300. So, if Ms. Haddock is correct, a massage parlor won’t qualify for Opportunity Zone benefits, but a personal massager facility would, since there’s no exclusion in the law for “sex toys.” Folks, you can’t make this stuff up. Similarly, Tim McGraw (no, not that Tim McGraw), the CEO of Canna-Hub, which builds facilities for the cannabis industry in California, believes that his facilities qualify for Opportunity Zone benefits, even though liquor stores are excluded. After all, he maintains, cannabis relieves pain and anxiety, unlike liquor, and “if they were going to leave cannabis out of opportunity zones, they’d have to leave out Tylenol.”
Some Nasty Boys and Girls
Continuing the rich tradition of reality stars who don’t file honest tax returns, USA Network reality television stars, Julie and Todd Chrisley of “Chrisley Knows Best” (I have no more idea who these people are than you do!) were indicted for tax fraud by a grand jury.
An IRS special agent, John Fry, was charged with violating federal law by leaking bank account information — including Suspicious Activity Reports — relating to President Trump’s former personal attorney, Michael Cohen (again, no relation). Among the persons to whom the information was disclosed was Stormy Daniels’ attorney, Michael Avenatti.
A return preparer, Donald Iley, pled guilty to wire fraud (for stealing client funds) and preparing false returns. He then violated his probation order by defrauding another 140 or so clients out of $11 million in unpaid taxes. The court was unimpressed by his somewhat unique argument that his probation order did not expressly bar him from committing further fraudulent acts and extended his prison time by 19 to 24 months. In your author’s view, if stupidity were a crime, Mr. Iley would be doing life without parole.
New York accountant Melvyn Komito was sentenced to 41 months in prison for stealing $862,000 in refunds from a client. The theft was discovered when the client went to open an account at Chase Bank and was informed that she was “already a customer” with an account into which Mr. Komito had diverted her refunds; Komito was on a cruise at the time. Komito is 80 years old. Doing the math, that means he gets a month in prison for every $21,000 he stole, which will likely not be nearly as entertaining as the cruise was.
Proving once again that it is far better to be lucky than good, the incredibly lucky taxpayer in Matthews v. Commissioner was found by the Tax Court not to have intended to evade tax, notwithstanding that he (i)significantly understated his income; (ii)was convicted of filing a false return for the year in issue; and (iii)lied to the Revenue Agents during the examination of his return. Intent to evade tax is not an element of the § 7206(1) crime of filing a false return, so the conviction did not establish fraudulent intent to evade tax as a matter of law. The judge concluded that Matthews was “confused” about his tax liability. Sure he was.