Archive for the ‘ Life Lessons ’ Category

A client talked to the IRS about his back payroll tax issue.  The revenue officer said not to worry about it, that the account was not a high priority for the revenue officer and that they had time to work things out.  Two weeks later, the IRS levied on his payroll account, and his business may never recover.

He claims that this is unfair, and he’s right.  But he can’t do anything about it.

That’s because the government – any government, not just the federal government, but your state and local governments too – is generally immune to what lawyers call “estoppel.”  That’s a fancy word meaning “you can’t go back on your word once I rely on it.”

The Supreme Court has declined to say whether “affirmative misconduct” on the government’s part would open it up to estoppel.  In other words, even if my client above could prove that the revenue officer had set a trap for him, the Supreme Court thinks it could be okay.  If the misstatement was due to mere negligence or incompetence, case law at all levels of courts is unanimous: you, a member of the public can’t rely on it.

So, for instance, a Social Security field representative can tell a low-income woman she’s not eligible for insurance benefits, and not to bother filing an application for them.  When she finds out later that she is eligible, she can’t get the benefits retroactively to the date that the field representative told her she didn’t qualify, because the law requires her to file an application.  It doesn’t matter that the field representative was directly contradicting the law and his policy handbook  [Schweiker v. Hansen, 450 U.S. 785 (1981)].

When I was in government service, I used to counsel revenue officers in their function of collecting tax.  They would ask me how to handle tax protestors – those idiots who try to claim that no federal law requires anyone to pay tax.  The tax protestors, of course, love to try to trip up government agents by asking about arcane facts and law that make no difference to the government’s power over the citizenry.  I told the revenue officers that they could say what they wanted to the tax protestors, and that when they were tired of talking, they could close the conversation by saying “I don’t know and I don’t care.”  Is there a law that allows you to seize the cash register at my place of business?  “I don’t know and I don’t care.”

So the law tells us to assume that whatever government agent we deal with is actually incompetent.  In reality, most government employees are actually quite bright and motivated; I know more than a few, and they are wonderful people.  But they are cogs in a machine, and their actions are limited by the law, not by their prior statements.  Don’t trust them with your wallet.

Is it true that there is no law requiring payment of income tax?

My tenure as an IRS attorney caused me to think deeply about taxes, courts, and government. And it helped me see how I can help individuals who face the tax system.

There are people – common in the San Fernando Valley – who believe that the government does not have the right to collect taxes. At the IRS offices, we called them “constitutionally challenged.” We weren’t allowed to call them “tax protestors.” A common assertion they made: there is no law that requires them to pay income tax. Oh, they’ll say that the 16th Amendment wasn’t properly ratified because Ohio wasn’t a state in 1916, or that the term “person” in I.R.C. § 6012 isn’t defined, therefore doesn’t include them, or that receiving “cash” isn’t “income.” Debating them made me think about the IRS’s mission. It also made me think about what a mentally healthy person does.

Someone recently showed me a case involving a bankruptcy debtor who filed Uniform Commercial Code Financing Statements against federal employees because he didn’t like the way the federal employees were doing their jobs. It brought me back five years, to a case where the taxpayer didn’t like the IRS collecting taxes from him, and didn’t like that I was helping the IRS collect taxes from him. He filed a UCC-1 financing statement against me in the amount of $41 million (or was it billion?). I wasn’t alone; the statement also named 10 other IRS personnel and a Tax Court judge. It’s a good thing I had already gotten a home loan.

That particular taxpayer had used a novel argument against the IRS: he was not only a “natural-born, 13th Amendment citizen,” but also a “U.S. Vessel.” As such, he had a prior lien against his earnings under the Tax Court’s maritime jurisdiction that trumped the federal government’s contractual right to payment from him.

This argument, of course, was not seaworthy, and the judge did not even dignify it with comment beyond the word “frivolous.” (The IRS has identified a host of other arguments that are “frivolous;” the kindest word I can use is “creative.”)

My sometime-vessel taxpayer left the bounds of mental health when he adopted an extravagantly unrealistic statement: “I am a U.S. vessel.” Yes, there are legal fictions (corporations are persons), but they are few and widely-accepted.

More importantly: the taxpayer made a grave mistake when he said that the government had a contractual right to taxes.

Attorneys and the general public must be clear about this. There is nothing “contractual” about taxes. Taxation is extortion. It is only legal because all three branches of the government, which controls the legitimate use of power and violence, say it is legal. Regardless of its morality and justice, the income tax exists. It’s mentally healthy to recognize this and deal with it, rather than claiming that some tortured loophole rescues me from its obligations.

Because I know the way the IRS works, and the workings of the income tax, I can help most people live with and, sometimes, even defeat the IRS. But not if that person also thinks he’s a boat.

It happens to the best of us

My mother-in-law, Margret, is in a nursing home. She knows who she is, but not much more than that. My wife does her taxes every year. And it’s usually pretty simple to do, because Margret’s income is fixed: some social security, some pension money from Mercedes-Benz, where her husband had worked for 40 years. I have to believe that our family prepares a good tax return.

But the IRS doesn’t believe that. Our house received some correspondence, a “CP2000” letter, saying that Margret had not reported a payment of $49,490 (in addition to her normal pension) from Mercedes on her 2012 tax return. Mercedes had apparently sent the IRS a Form 1099-R showing a distribution in this amount on February 28, 2012.

Whipped into a frenzy of righteousness, and knowing exactly how to deal with this after more than 15 years of experience with the IRS, I went into action. I sent a letter to the Fresno Service Center saying that the IRS was wrong, that Margret did not receive this money, and asking that the IRS provide both a copy of the 1099-R and any other evidence showing the receipt of this income.

The IRS surprised me. It answered by issuing a statutory notice of deficiency (SND). This letter means that the IRS is done with the taxpayer, and has determined that the taxpayer owes the money. The only recourse for the taxpayer is to bring the issue before the Tax Court, where the taxpayer usually has to prove the IRS is wrong.

It is very hard to prove a negative. Here, however, there is a wrinkle for the IRS: IRC § 6201(d) puts the burden of proof on the IRS when it is relying on an information return. Put simply, the IRS must find other evidence of the payment than the Form 1099-R. The taxpayer does not have to prove that she didn’t get the money; that would be impossible.

The SND surprised me because the IRS knows it cannot assess this tax unless Mercedes-Benz sends it some further information.

It occurs to me that most relatively well-educated individuals would not know what to do in this situation. The IRS probably collects a great deal of tax it isn’t actually owed by sending out these kinds of letters. Here, the tax is approximately $13,000; I can see a lot of people giving up and just agreeing with it because they don’t know how to fight it.

If you get a similar notice, call me. I can help you make sense of this and walk you through the process. I will help you analyze whether it makes sense to hire me: for a $13,000 tax bill, it may not.

Nothing left to lose and loving it

I had a client come to me a few years ago to file bankruptcy.  He owned two office buildings with mortgages totaling more than the buildings’ values. They were going to be foreclosed, triggering personal guarantees, and the client would owe millions of dollars to the lender.  If he somehow got out of the personal guarantees, he would owe hundreds of thousands of dollars of tax on the imputed income from canceling his debt.

My client was 75 years old and suffering from Parkinson’s Disease. He had $100,000 in a bank account, and was living off of his social security checks – $10,000 per year.  Though he was married, his prenuptial agreement said the money and income were his separate property.

I advised him against filing bankruptcy.  “Give the money to your wife,” I said, “in return for her promise to feed and shelter you for the rest of your life. The social security income will be exempt from attachment in California; you are effectively judgment-proof.  And you won’t owe tax, because cancelation of debt isn’t income when you are insolvent.”

He followed that advice.  The wife spent the money caring for him; the foreclosures still haven’t occurred, so there is no judgment against him yet.

I saw him recently.  He said he had never felt happier in his life – not when he was a physics professor, nor when he was raking in money as a commercial landlord in good times.  He was surrounded and cared for by people he loved, had no worries about losing anything, and was satisfied with the life he had led.

I’m in a different place.  I work hard to provide my clients the best in service and expertise.  I have bills to pay, mouths to feed, obligations to others.  I enjoy it; I feel a satisfaction in achieving goals and being recognized by my peers.

In looking at this client, however, I felt more than the usual amount of satisfaction.  I did nothing superhuman; the work wasn’t particularly demanding.  But I made a difference in his life, a difference for the better, and I feel deeply satisfied about that.  Such experiences make my work very rewarding.

Does bankruptcy even have a negative side?

Not all effects of bankruptcy are negative. Certainly getting rid of your debt and starting fresh is a positive effect of filing.

Your name won’t be published in the newspaper (unless you’re famous). However, anyone who has access to your credit report will find out about the bankruptcy. This can make it more difficult to find an apartment, get a credit card, and get any credit in general.

Most people will say “I can’t live without credit.” Of course, this isn’t true. It may feel like it because you’re so used to living with credit (and consequently debt). But the goal is to get rid of all the debt so you can work on building a healthy reserve to deal with life’s unexpected “gifts” and to plan for the future.

Second, if you are in an industry where employers regularly checks your credit report, your job may be impacted. This typically applies for people that work in the financial industry or have security clearance.

Third, bankruptcy will be reported on your credit report for up to 10 years for Chapter 7 and 7 years for Chapter 13. This does not mean you can’t get new credit until the bankruptcy is removed. Most clients report being able to qualify for a credit card within a year or two of filing.

Lastly, filing for bankruptcy can have an impact on your self esteem. I frequently have clients tell me “I wasn’t raised this way.” “I can’t believe I’m in this situation.” No one wants to file for bankruptcy. You do so because it’s in you (and your family’s) best interest. What do you want your life to look like in 10 years? Do you still want to be struggling with debt or do you want to have a healthy savings/retirement and working towards a successful future? I encourage people to think long term when contemplating bankruptcy.

Credit: Jeena Cho, San Francisco Bankruptcy Lawyer

A couple recently asked me how to rebuild their credit after filing bankruptcy and I would like to share some of the information that I gave them as it may be helpful to you in improving your credit score after bankruptcy.

First, for those who are worried about a bankruptcy being on your credit report for at least 7 years, please realize high debt and failure to make your monthly payments on time is already hurting your credit score.  Although bankruptcy is not for everyone, for those who do file, bankruptcy is meant to give you a “fresh start” by discharging debt and high balances.

Here are 5 simple things you can to help rebuild your credit after bankruptcy.

1.       Get a secured card.  A secured card works essentially the same as a debit card, you pay the bank a security deposit before using it, but all the payments made will be reported as credit.

a.       Make sure the transactions are reported to the three major credit bureaus.

b.      Try to get the card at a bank you would want to continue using, as you can eventually inquire about an unsecured card.  After several months of managing the secured card, you should inquire about switching to an unsecured card.

c.       Stay away from cards with high “start-up” fees so that you do not go back into debt again.

2.       Build a budget. As obvious as it may sound, it is important to make a conscious effort to stay within your budget so you can make your monthly payments without a hitch.

a.       Make notes of your essential expenses so you can get an idea of where you are financially.

b.      Make cuts where you can.  For instance, downgrade your cell phone plan, eat out less often, or try to find alternate, less expensive means of transportation etc.

3.       Get a gas or retail credit card. These cards give the opportunity to report good credit at places where you would normally be spending money.

a.       Once again, make sure the transactions are reported to the three major credit bureaus.

b.      Make sure you are responsible with your retail card and only spend what you can pay off each month.

4.       Pay off your balance every month…. ON TIME. By paying your balance on time at the end of each month, you are proving to the bureaus that you are a responsible spender and in control of your finances.

a.       Try to keep your balances low and manageable so you can pay them off in full, on time, by the end of the month.

b.      Avoid charging up to the limit.

c.       DO NOT pay the minimum monthly payment.

5.       Check your credit report from the three major bureaus. It may seem like the last thing you want to do, but this is an important step. Each of the nationwide credit reporting companies [Equifax, Experian, and TransUnion] is required to provide you with a free copy of your credit report once every 12 months, if you ask for it.

a.        To order, click on or call 1-877-322-8228[1].

b.      It is important to see where you stand, and what you need to do to get to your goal.

c.       Notify the credit-reporting agency of any inaccurate or incomplete information. It is their responsibility to correct any mistakes, which may lead to an improved credit score.

The road to rebuilding your credit after bankruptcy takes some discipline.  Although the list is not exhaustive, following these simple steps will help you on that road. Remember that after discharging debt and high balances through bankruptcy, improved credit is a real possibility.

Credit: Daniela Romero, bankruptcy attorney in Pasadena

Living in semi-arid California, I’ve gotten used to seeing large columns of smoke on hot, windy days.  Most recently, I could see the Springs Fire burning between Camarillo and Malibu from a distance; happily, it did little damage to structures, and no one died from it.  This one was not caused by arson, but it sparked my curiosity: if authorities determined that someone was responsible for the fire, and fined him, could he discharge that fine in bankruptcy?

I am honestly a little surprised at the lack of hot air that has been expended on this topic elsewhere.  At the risk of fanning controversy, I think that a careless arsonist would probably be able to discharge his debt relating to a wildfire.

Dischargeability of debt depends on its nature.  The bankruptcy code assumes that debts are dischargeable; a nondischargeable debt is the exception, not the rule.

We saw the extreme in punishment for an act of wildfire arson in January this year: a state judge sentenced a methamphetamine addict to death for setting the Old Fire in San Bernardino County back in 2003.  That debt won’t be discharged by a bankruptcy; it will only be extinguished at the same time as the criminal’s life.

California does have provisions for fining arsonists: Cal. Penal Codes 452 and 456 prescribe a fine of up to $50,000 for arson, “unless a greater amount is provided by law.”  Where the arson is done for pecuniary gain, the court may impose a fine of up to twice the amount of the gain expected.  This would handle cases like the guy who made $80,000 renting equipment to the Forest Service to put out the fire he had paid $2,000 to have set ((I’m betting that he wasn’t able to report the $2,000 as a business expense on his Schedule C, either).

These fines are not dischargeable in bankruptcy: you can’t discharge a debt for a “fine, penalty, or forfeiture payable to and for the benefit of a governmental unit” that is not compensation for actual pecuniary loss.  11 U.S.C. § 523(a)(7).

But the big bucks in fire bills come from judgments for fire suppression.  Cal. Health and Safety Code 13009 provides for payment of the full amount of fire suppression by anyone who sets a fire, negligently or otherwise, or doesn’t clean up a fire hazard in a reasonable time.  Huffington Post reports that the Springs Fire cost $10 million to fight.  The state was awarded $7.6 million from a construction company in fire suppression costs for a 2002 fire in the Angeles National Forest.

These judgments are dischargeable in bankruptcy: the Health and Safety Code section says that they are to be treated as a contractual liability.  They are for pecuniary losses, therefore not subject to the “governmental fines” exception to discharge.

Who knew?  And now we do.

Trader Joe’s

My client had been an executive with an ad agency.  He had put a daughter through college, then lost his retirement nest egg in the real estate crash.  He now lives with his wife in a rental in the Valley.  Stretched beyond his means, he was having his wages garnished because of a credit card judgment entered against him a year earlier.

He came by my office to sign his bankruptcy petition.  He made the appointment, then called to say he was running 15 minutes late.  When he showed up, he was a bit out of breath.  He explained that he had just walked there, because he had given up his car.  I don’t have an office that one just walks to – it took him a half hour to trek the two miles from his previous appointment.

I asked about his life.  He works at Trader Joe’s for $11.50 an hour.  I said I was always impressed at the workers at Trader Joe’s – many are tattooed, some of them look pretty rough, but they are invariably kind and helpful, and appear to be pretty competent.

His eyes lit up.  “I just love working at Trader Joe’s,” he said.  He talked about his best friend at the store – a former marine in his 30s with tattoos up and down his arms. “I’d never have anything to do with him in any other situation, but we got along great and accomplished some pretty big jobs together,” he said.

He said he would love to keep working at Trader Joe’s because it’s so much fun.  But people are calling him now for consulting on advertising projects, at pay rates of $50 an hour and up.  He’ll do that, but he’ll always miss Trader Joe’s.

After he was done, I had no more appointments, so was going to go home.  I offered him a ride to the nearest bus stop; he gladly took it.

What does it take to be happy?  David Allen talks about a former Navy aircraft carrier captain who went to work at UPS as a delivery man, and a corporate CFO who became a duck at Disneyland.  All these people – my client, the former high-powered execs – found meaning in relatively low-level stress-free jobs.  I’m honored to know people like this, and humbled that I can help them out.

My calling isn’t nearly so stress-free, but I find great meaning in it as well.

It used to be that a medical degree was a ticket to a relatively secure life: in exchange for spending years achieving at school and amassing formidable learning, and just showing up at your practice for 50 or more hours a week, a doctor could be guaranteed a comfortable income, if not outright wealth.  No longer.

On the left, regulation hampers their free exercise of their business and practice.  On the right, insurance companies lower their income by cutting benefits. The general practitioner, like Marcus Welby, is a relic from another time and place: fierce competition among medical providers leads to ever-narrower specializations, while some segments of society become more skeptical about the benefits of empirically-based western medicine.  Medical professionals who focus only on the practice of medicine, and ignore the business climate, get trampled by more nimble actors.  And they are filing for bankruptcy protection.

I enjoy helping doctors and medical professionals to wind down their practices, file for bankruptcy, or otherwise handle their crushing debts.  I feel a kinship, because there are a lot of similarities to a law practice and a medical practice: lots of education, a profession focused on helping people, and a changing economic scene that requires thinking outside the boxes we learned in graduate school for a successful practice.

Bankruptcy: Redemption, not Failure

I like to say that I am involved in “capitalist recycling.” In a capitalist, free-market society, there are people who win and there are people who lose. Those people who do not win and cannot function economically because of crushing debt need to come back into the system and function again. By helping them through bankruptcy, I provide redemption; I like to say that capitalism without bankruptcy is like Christianity without forgiveness.
I recently read “The Antidote: Happiness for People Who Can’t Stand Positive Thinking,” by Oliver Burkeman. He devotes a chapter to embracing failure as a way to live a fuller and ultimately happier life. And he ties our current notion of failure to our ties to the economic system (at page 176, quoting from “Born Losers”, by Scott Sandage):

“ . . . the idea that a person could be ‘a failure’ [sprang] directly from the growth of entrepreneurial capitalism . . . One crucial development was the emergence of credit rating agencies, whose role was to sit in judgment upon individuals seeking loans from banks, helping the banks determine the risk they would be taking by making a loan. In a society increasingly dominated by business, a bad credit rating could all too easily come to be seen as a verdict condemning a whole person – and it is from the language of credit rating that we take several modern idioms for describing someone’s moral worth, such as ‘good-for-nothing’ and ‘first-rate.’ . . . From the middle of the nineteenth century onwards, failure started to be thought of ‘not merely as a cataclysm that adds to the plot of your life, but as something that stops your life cold . . . Failure, in short, came to be seen as a kind of death.”

I try to encourage my clients to see their identity as being more than their level of functionality in the economic system, and I try to redeem their status so that they may function in that system. I think the Stoics, Buddhists, and others quoted by Burkeman would do the same in my shoes.