MauledAgain

Reader Morris directed my attention to a story about Hunter Biden, his alleged failure to pay rent, and his alleged offer to settle the debt. After reading the story I decided to find the X posting that was the at the heart of the story. I found the posting. In it, Shaun Maguire wrote: “Hunter was our tenant in Venice, CA. Didn't pay rent for over a year. Tried to pay w/ art made from his own feces.” There are three allegations in the posting. There is no easy way at this point to determine if they are true or not, in the absence of evidence such as a lease, rent demands from the landlord, proofs of payment from Biden, and some sort of evidence that Biden made the strange and bizarre offer. But, for purposes of the question raised by reader Morris, let’s assume they are true.

Reader Morris asked, “What are the federal tax consequences of this barter exchange to each party on gross income, capital gains or losses, and ownership of the property?” In other words, reader Morris is asking, if the landlord accepted the offer, what would be the federal income tax consequences? It surely is a hypothetical question because I would be shocked if the landlord accepted the offer that is alleged to have been made.

If the parties went through with the proposed barter, the outcome would depend on the resolution of a fact question. The question is, what is the value of the “art” that is offered in satisfaction of the debt? Though the answer could be anything between $0 and the amount of the back rent, let’s consider two possibilities, one at either end of that spectrum.

If the fact finder determined that the value of the “art” was equal to the back rent, then the landlord, if on the cash method, would have rental gross income. If the landlord were on the accrual method and had already accrued the rental income, then receipt of payment would not have any tax consequences. No matter the outcome to the landlord, the tenant would be treated as having “sold or exchanged” property, which is a realization event. The tenant would have amount realized equal to the amount of the unpaid rent. The tenant’s adjusted basis in the “art” would be zero, a conclusion consistent with case law holding that the basis of blood and other body products sold by a taxpayer is zero. The resulting income would not be a capital gain because body products are not capital assets, a conclusion consistent with that same case law.

If the fact finder determined that the value of the “art” was less than the back rent, say zero or some token several dollars, and that the landlord accepted it in satisfaction of the unpaid rent, the landlord would have rental gross income equal to the value of the “art,” say zero or the token several dollars, unless the landlord was on the accrual method in which case there would be no income. The landlord would be treated as having released the balance of the debt (either the full amount or slightly less than the full amount), and would claim a bad debt deduction if the rent had already been accrued. The consequences to the tenant would be determined by application of the rules applicable to forgiveness of indebtedness. There would be gross income in the amount of the balance of the debt (either the full amount or slightly less than the full amount) unless one of the five exceptions apply. Was the debt discharged in bankruptcy? Under the assumed facts, most likely not. Is the tenant insolvent? We don’t know. The debt is not qualified farm indebtedness or qualified real property business indebtedness. Is the debt qualified principal residence indebtedness? No, because the debt related to rent and not to the acquisition cost of purchasing a residence.

The proposed transaction is about as likely to take place as the payment of a debt in the manner proposed by Shylock in the Merchant of Venice. And if Shylock had succeeded (for those unfamiliar with the story, he ended up with money and not flesh), and if the federal tax system or one identical to it applied, the analysis would be the same as that presented for the situation in the “art” for rent story.

Critics might wonder why invest intellectual capital in analyzing a transaction that did not happen and almost certainly will not happen. The answer is simply that doing this analysis, for example, on a federal income tax exam, strengthens one’s intellectual skill set just as running prepares the runner for an actual race. But to be honest, I analyzed the question posed by reader Morris not so much to strengthen or maintain the strength of my intellectual skill set as to explore a totally bizarre situation. A situation that adds to the long list of proofs that support what I, and other tax law professors, tell students, “We don’t need to invent hypotheticals, they’re out there just waiting for us.”

It’s time to look at another television court show. As readers know, I have addressed tax issues in television court shows many times, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case, Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions?, and Tax Might Be Boring, But the Underlying Facts Often Are Not.

This latest examination of a television court show is happening thanks to reader Morris. He directed me to this Judge Pirro episode from . Most of the facts were very evident despite disagreement on one point, but what wasn’t clear was the basis for the plaintiff’s claim because the case never reached that point.

The plaintiff and defendant knew each other because they had worked together as servers for several catering events. The defendant mentioned to the plaintiff that she, the defendant, was not going to file a federal income tax return because she had earned less than the filing threshold. She had mentioned on more than a few occasions that she had two children, and that her boyfriend/fiancé was not the father of the children. It is at this point that the parties disagreed. The plaintiff testified that the defendant proposed that the plaintiff claim the defendant’s children on the plaintiff’s tax return, causing a tax savings/refund (the facts aren’t clear on that point) that would be shared by the parties. The defendant denied making that proposal but insisted she only told the plaintiff to “check the procedure,” whatever that means. However, the defendant admitted that she provided the plaintiff with her children’s social security numbers.

The plaintiff filed her federal income tax return, claiming the defendant’s children. It appears that the IRS paid the plaintiff a refund and then requested repayment, because at some point it noticed that there was a problem with the return. What is clear is that the IRS asked the plaintiff for corroboration with respect to the children, specifically, birth certificates and school letters. The plaintiff asked the defendant for those items. Though unclear, it appears that the defendant did not provide those items to the plaintiff. The plaintiff sued the defendant for breach of contract, though it isn’t clear what constituted the breach. The case did not get to that point.

Judge Pirro made it clear to the parties that what they did was federal tax fraud. The plaintiff claimed children who were not hers, and the defendant made that possible by providing the plaintiff with the social security numbers of the defendant’s children. When the plaintiff claimed that she did not know it was fraud to claim someone else’s children, and that “people claim other people’s kids all the time.” To that remark, Judge Pirro said, “They do?” and the plaintiff replied, “Well, in New York they do.” Judge Pirro responded, “Really? Who do you know that does that?” and the plaintiff declined to identify anyone due to “privacy.” Judge Pirro rejected that excuse, and said, “Do you know why? Because it’s illegal.” Eventually Judge Pirro threw out the plaintiff’s suit, because courts do not enforce illegal contracts.

There are several lessons to be learned from this case. First, once a person files a federal income tax return, they should continue to file even if their income is below the filing threshold. This lets the IRS know that the person has not died, and also makes it more difficult for identity thieves to file under the person’s name. Of course, it also would have made it even easier for the IRS to notice the fraud committed by the plaintiff in this case. Second, claiming children on a tax return when the requirements of the Internal Revenue Code are not met is wrong. It is fraud. Even if a person doesn’t end up convicted of a crime, it can wreck their credit report, impair their employment prospects, and make their life miserable.

Reader Morris asked, “Does Judge Pirro have a legal obligation to send the video or transcript to the IRS Criminal Division?” That is a great question. For any law faculty reading this who are teaching the Legal Profession course (or its equivalent) and who need exam question ideas, this case and the question posed by reader Morris is worth considering. What is the answer? It depends. On most television court shows, the judges are not acting as judges even though some have been judges in the past. They are acting as arbitrators, dealing with cases that are removed at the parties’ consent from the judicial system to binding arbitration that is marketed as a courtroom proceedings. The judge on the television court show might be a former judge, but also could be a former or active attorney, or law school professor. Several have no legal background. Are these “judges” legally required to report the admitted crime? It depends on the nature of the crime, the existence of statutes requiring mandatory reporting, including mandatory reporting by any person serving in a particular capacity. Beyond the issue of being legally required to report the crime, they may be ethically required to report the crimes, particularly if they are active members of the state bar. Again, it depends on state and federal statutes, ethics codes for active and retired judges, ethics codes for active and retired attorneys, and similar provisions.

If reporting is legally or ethically required, the next question is identifying the person or office to which the information should be reported. Again, it depends on the crime, the jurisdiction, and whether there are in place procedures for reporting that must be followed. In many instances, if the information is reported to the wrong office, that office will forward it to the appropriate authorities or advise the reporting person where the information should be reported.

The interesting twist in this particular Judge Pirro episode is that the IRS already suspected, or knew, that tax fraud had been committed. I am guessing that it figured this out when two children showed up on a tax return that was filed by a taxpayer who was not the taxpayer who had claimed the children for the previous taxable year. Knowing that, the only practical question is whether the existence of the arbitration, as evidenced by the video, must be brought to the attention of the IRS Criminal Division or the US Attorney. Why not? There is downside to not reporting it and no downside to reporting it. It is publicly available, and it would not surprise me if the IRS accessed the video sooner than any reporting information would reach it, thought that is not a reason to not report it.

Does Judge Pirro have an ethical obligation to alert the IRS Criminal Division or the US Attorney? I don’t know. I don’t know if she is still subject to New York’s code of conduct for judges. I don’t know what provisions exist in the contracts that the parties enter into with the show’s producers. I don’t know if any of the staff of the show are active or retired members of the bar who have an obligation to report it. And that raises more interesting questions. Do all of the active and retired attorneys who watched the show when it first aired have an ethical obligation to report the crime? What about those who watch the video at some much later date when the IRS cases against the parties have been closed? What about any viewer who sees reporting the crime as an opportunity to pick up a whistleblower reward? Does the fact that the video is publicly and widely available suggest that the answer is different from what it would be if knowledge of the crime was obtained through channels not open to the public?

Reader Morris also asked, "Why are people so stupid they admit tax fraud on national television? Why would you come to court and admit to a federal crime?" I don't think I need to answer these questions. They answer themselves. Yet I will succumb to the temptation and reply, “It’s another indication of how flawed the American education system has become when it’s a matter of understanding government, public policy, crime, citizenship responsibilities, and critical thinking.”