A federal judge may have undermined the old adage that you can't outrun death and taxes.
This month inside the Ronald Reagan Federal Courthouse in Santa Ana, U.S. District Court Judge James V. Selna officially dismissed an Internal Revenue Service (IRS) complaint that demanded a successful Orange County small business return nearly $280,000 in tax refunds.
Four days before Christmas in 2011, the IRS and U.S. Department of Justice sued Timothy J. Dean and his 1984-created Houdini, Inc.–a gift basket business with operations in Fullerton and Buena Park–for improperly receiving refund checks for business deductions from 2005 and 2006 filings.
Get a load of the crux of the dispute: In making its claim, government tax collectors asserted that Houdini “packages” and “repackages” gift baskets and gift towers–and, thus, wasn't entitled to a manufacturing deduction. The business–which has about 300 regular employees and 4,000 seasonal ones–argued that it “manufactures” and “produces” the products.
After noting how Houdini adds items such as chocolates, cheese, cookies, candies, alcohol and packing materials to the baskets, Selna rejected the IRS interpretation of federal tax law and sided with the stance of Nixon Peabody, the law firm that represented the OC business.
“Houdini changes the form and function of the individual items by creating distinct gifts,” the judge, a 2003 President George W. Bush appointee, declared in a 20-page ruling. “Houdini creates a new product with a different demand.”
The business, which operates the nationally-acclaimed Wine Country Gift Baskets, will keep its earned money.