Monday, March 31, 2003
The IRS took inconsistent positions as to whether unallocated payments made to Jane Gilbert by Richard C. Hawley were alimony, and decided to just let them fight it out in Tax Court. The IRS is the government, and they do not even have to pretend to be consistent. The question is whether the any of these unallocated payments would have had to have been made if Gilbert had died, which she did not. The separation instrument did not state the answer, so Tax Court had to look at state law. Although recent legislation has answered that the payments would not continue, at the time the law was vague and their were no court cases on point. After an exhaustive review of Pennsylvania family court procedure, Tax Court ruled that if Gilbert had died during the years in question, the state court had the discretion to continue the payments. This discretion was all that was required for Tax Court to conclude the payments to Gilbert were not income.
Here is an interesting footnote from the Gilbert decision:
Respondent objects on grounds of relevance to stipulations 12, 13, and 23. Both Ms. Gilbert and respondent object on grounds of relevance to stipulation 25. This Court finds these objections to be moot because this Court does not rely upon those stipulations in reaching our decision.
Okay, so if your relevance objection is valid, that is the evidence truly is irrelevant, you lose because it does not affect the outcome, and is therefore moot, and so you lose. But if the objection is not moot, and the evidence could effect the outcome of the case, it is not, by definition, irrelevant, and so you lose. And can you really object to something you stipulated to anyway? Doesn't that defeat the purpose of stipulating, which is to establish what the parties will not be contesting?
The opinion in the case of Mitchell S. Wiest strongly rebukes the IRS�s administration of claims for equitable relief of joint liability under section 6015(f). Two flaws in the way the IRS analyzed the case lead Tax Court to conclude that the IRS abused its discretion and to rule in favor of relief. First, the presence of a valid signature on the tax return lead the IRS to conclude that Wiest did not have reason to know that the liability would not be paid. Tax Court recognizes that there is a big leap from having knowledge of the unpaid tax to knowing that it will be paid. (In fact, Tax Court goes even further than that to question the practice of using valid signatures to establish knowledge of an unpaid tax. Tax Court states disapprovingly in a footnote, �If signing a joint return that reports a liability is sufficient to establish actual or constructive knowledge of an underpayment, then no taxpayer signing such a joint return would ever lack knowledge or reason to know of the underpayment.�)
Second, Tax Court here establishes a method for determining the amount of liability attributable to the petitioner for relief. IRS tried to determine this by calculating what Wiest�s liability would be if he had filed separately and was entitled to none of the couple�s five dependency exemptions. They then subtracted his withholding from that figure, and compared the result to the amount of the unpaid tax to determine that Wiest was responsible for 40% of the liability. Tax Court rejected those obnoxiously aggressive assumptions. They simply took Wiest�s proportion of the total tax liability for the year to be equal his proportion of contribution to the couple�s gross income and then subtracted his withholding to determine the amount of the unpaid tax attributed to him. (Tax Court did imply that this calculation could be different if facts made it necessary to allocate dependency exemptions solely to one taxpayer.) Tax Court than granted Wiest relief of the unpaid tax in excess of the amount they found to be attributable to him.
Tax Court disallowed T.P. AND NAJIEH R. CRIGLER�s claim for a $100,000 deduction under section 1244 for the worthlessness of their stock on FabuGlass. Tax Court laid out in detail the amounts of deductions and gross receipts from operating and nonoperating sources for the 5 tax years prior to the year at issue. They then explain the test that for each of the 5 prior tax years, either the operating receipts must exceed the nonoperating receipts, but that the test does not apply if for the five-year period in question, Chapter 1 deductions exceed the corporation�s gross income. IRS issued valid regs stating that even if the receipts test does not apply, the taxpayer must show that the corporation was �largely an operating company� during the 5 year period. In a fact-based analysis, Tax Court determined that FabuGlass was a nonoperating company. In addition to serious substantive facts, Tax Court was persuaded by FabuGlass tax returns listing its business as an investment company.
Sunday, March 30, 2003
Was Amanda M. Beeghly the custodial parent of her daughter in 1997 and 1998? The original custody agreement from 1996 provided for an absurdly complicated and bizarre custody schedule that left most of the holidays up to informal agreement between the parents. This agreement apparently and unsurprisingly did not seem to work out, and was modified by court order on December 1, 1997 to just exchanging the kid every week, with specific exceptions for certain holidays. Tax Court assumed the agreement and order were controlling except as to the unspecified holidays under the agreement. Tax Court appears to have punished some insolent law clerk by giving them the custody agreement, custody order, calendars of 1996, 1997, and 1998, and a few colored markers, and making them color in which days the papers gave physical custody to the mother, the father, and which were vague, and then making them count it out day by day. What Tax Court found was that in 1998, Beeghly had custody 182 days, the father 183 days, and in 1997, the father had custody 182 days, and Beeghly admitted in testimony the father had custody on at least one of the vague holidays, totaling 183 days for the father and leaving only 182 days for Beeghly. Thus Beeghly was not the �custodial parent� in either year. This caused her to lose the dependency exemption, which in turn caused her to lose the child tax credit, child care expense deductions, Head of Household filing status, and earned income credit.
When explaining the law with regard to the central issue in this case, Tax Court states:
Petitioner claims that she had �physical� custody of Shelby for a greater portion of each year in issue and proceeds (as does respondent for that matter) as though the actual, physical custody of Shelby must be determined on a day-by-day basis for each day of the years in issue. Presumably, petitioner�s position in this case is based upon the reference to �split custody� in the regulation. As petitioner construes the regulation, in a �split�, joint, or shared custody arrangement, the express terms of a custody instrument (written agreement or order) establishing legal and/or physical custody are, in effect, ignored and actual, physical custody must be determined even though the custody instrument specifically allocates physical custody of the child between parents for definite periods. We disagree and consider such a construction to be wholly inconsistent with the underlying rationale for section 152(e). See McClendon v. Commissioner, 74 T.C. 1, 3 (1980); Yancey v. Commissioner, 72 T.C. 37, 40 (1979); Knight v. Commissioner, T.C. Memo. 1992-710, affd. without published opinion 29 F.3d (9th Cir. 1994).
Isn�t amazing that both Beeghly and the IRS can be so confused about the law? They are not the only ones. Beeghly was issued on March 28, 2003. On March 25, 2003, Tax Court issued the Maher decision, in which they stated:
We have repeatedly held that we look to where the child resided to determine which parent had physical custody for purposes of section 152(e)(1). Neal v. Commissioner, T.C. Memo. 1999-97; Otmishi v. Commissioner, T.C. Memo. 1980-472; Dumke v. Commissioner, T.C. Memo. 1975-91, affd. without published opinion 524 F.2d 1230 (5th Cir. 1975); see also Meyer v. Commissioner, T.C. Memo. 2003-12; Horn v. Commissioner, T.C. Memo. 2002-290; Nieto v. Commissioner, T.C. Memo. 1992-296. Even if the custody decree grants physical custody to one parent, we have held that this parent is not entitled to a dependency exemption when the children did not live with this parent for most of the year. Otmishi v. Commissioner, supra; Dumke v. Commissioner, supra.
Okay, this case from the city of my birth is just sad, and the law needs to be changed. Elnora F. Hodnett lives with her daughter and two granddaughters. They pay $89 per month toward the rent, and the rest is paid though government assistance programs. Her wages, which were her entire income, were reported on a timely filed return. �That return was prepared by a paid income tax return Preparer.� Tax Court does not tell us, but I am willing to bet $100 that the return preparer got her good, charging not only for her return, but also for electronic filing and a usury refund anticipation loan. IRS denied Hodnett exemption deductions for her two granddaughters, child tax credit, head of household filing status and earned income credit. Hodnett has three problems.
First, she did not keep records to substantiate amounts spent to support the children. Who keeps receipts from every piece of food or clothing they buy? Second, she is appearing pro se, which I am assuming made the first problem worse. A representative could have helped her gather together appropriate documentation, testimony, and estimates. I know there is a great LITC in Richmond, but Roanoke is in the middle of nowhere. Third, the amounts paid by public assistance count against her for support of the children. So she was denied the exemptions, the child tax credit, and the head of household filing status. It was a good thing she took this to Tax Court, however, because the IRS conceded the earned income credit before it got to trial.
This is bad. Specifically, the law should be changed so that public assistance does not count as �support�, thus denying exemptions from tax to the very people who need them the most. You could argue that the EITC makes up for this, and I am glad that got keep the EITC. (Although the fact that she had to fight for it pro se is very annoying.) But there does not seem to be a coherent theory at work here. We make up increased taxes resulting from public assistance by increasing public assistance (EITC) rather than correcting the tax increase? Of course, I would do both, because I am happy with using wealth redistribution to empower the poor and encouraging them to work through both tax reductions and the EITC. I am just suggesting that this policy makes no sense even from a hard-hearted, conservative point of view.
Jeffrey S. Lindquist wanted to claim his son as a dependant because he was current with his child support and the divorce decree gave him the right to do so, but he did not attach the release from his ex-wife. �He� points out that it is unrealistic for him, as a resident of Pennsylvania, to return to Mower County district court in Minnesota to seek enforcement of the terms of the divorce decree.� Sorry, that�s the rules, and you don�t have the release, you can not claim the exemption. Tax Court is �not unsympathetic� to your plight, but fixing it is Congress�s job, not ours. Oh, and by the way, you can not claim the child tax credit either, because you have be able to claim the exemption to claim the credit.
Irwin and Jeannine Radnitz challenged the IRS�s disallowance of certain deductions for unreimbursed employee expenses relating to home offices. Irwin is a Hollywood script writer for both films and television, and has probably written several episodes of various television shows that you have seen. Home office expenses for two different houses the Radnitz lived in during the tax years at issue were allowed on the facts. Office expenses for two other apartments rented for a couple months each were allowed, and not even considered �home offices�. Although these other apartments were designed for sleeping, the Radnitz did not sleep in them, and thus they did not fall under the home office rules. The deductions for the two home offices are limited to the amount for gross income from writing, with any excess being carried forward to next year.
The Radnitz argued that that this limitation was an unconstitutional denial of equal protection to authors of speculative works, as their income might not be realized until many years in the future. Tax Court responded that this limitation applies to all taxpayers and does not treat speculative authors any different from other taxpayer who maintain offices in their homes. Tax Court does not recite the equal protection test, but what they seem to be saying is that there can be no equal protection violation where the class of speculative authors is treated the same as other home office workers, and what the Radnitz actually want is unequal treatment. The Radnitz were pro se, and I think Tax Court misconstrued their equal protection argument. Tax Court states, �In essence, petitioners contend that section 280A departs from the traditional principle of matching income and expenses and that the application of that section is unconstitutionally unfair to authors of speculative works.� While it is true that speculative authors are treated the same as other home office workers, that is only because the treatment of all home office workers �departs from the traditional principle of matching income and expenses�. Tax Court should not have compared the class of speculative authors to the larger class of home office workers, they should have compared the class of home office workers to the larger class of employees, where there certainly is unequal treatment. Of course, home office workers are not a suspect or quasi-suspect class, and I think a rational basis for the distinction would be easy to find, but that is the analysis that Tax Court should have conducted.
Saturday, March 29, 2003
I have been contemplating the Michael Moore/ Rush Limbaugh mirror image analogy and I think it's basically correct, but let me suggest an important difference: While both are faux populists, claiming to speak for the common majority while really serving the elites, Rush is faux populist for the masses, while Moore is a faux populist for the elites.
Rush is really popular with the masses, or at least the masses of white, working class men, and does his duty for the business elites he serves by convincing his listeners that it is somehow to their advantage to vote for tax cuts for the rich and unrestrained power for multinational corporations. Meanwhile, the actual rich people and business leaders whose interests he actually serves know that he is a court jester and don't listen to him.
Moore's audience is the cultural elites themselves, and he serves them by reinforcing their delusions that they understand the concerns of ordinary people. He tells them what they want to hear, but does so while looking and talking like someone who listens to Rush. Meanwhile, the actual masses that Moore claims he speaks for either do not know who the hell he is, or know him only as someone Rush criticizes as a prime example of the dominate liberal media.
Robert Schwartz and Diane Schwarz owned a racing yacht that lost money for much of the 1990s and which they described as investment. IRS disallowed the losses, but in a fact-based analysis, Tax Court believed they entered the activity with a significant profit motive. Elements that worked in their favor included the way they kept their books, the fact that they had other sailboats primarily for recreation, the changes they made in the boat to accommodate changes in racing rules, and their documented pursuit of multiple streams of possible income. This win for the taxpayers was a departure from a case earlier this year involving a taxpayer who lost money pursuing open-road auto racing, where Tax Court made a snide comment about how anyone who enters racing should expect to lose money. I think the Schwartz did a number of things better than the open-road guy, but I suspect a major difference was that the Schwartz were (originally) part of and influenced by a larger yacht racing association, other of whose members were presumably making money, whereas the open-road guy had gone off and created his own association to pursue his hobby (as Tax Court ruled it). Or maybe the Schwartz just had a better lawyer.
William Maher is an experienced tax professional with an impressive resume who did not turn in a tax return for 1998 until the IRS tried to assess his taxes for him. I can only guess that this case made it to trial because the IRS desperately wanted to bag a tax account, because the Service�s position on what seems to be the major issue makes no sense.
The issues in contention arise out of Maher�s legal separation. The first issue is the amount of alimony adjustment he is allowed, but Tax Court does not address the issue in a way that makes it possible to evaluate its decision. Rather than paying cash alimony, Maher paid the mortgage, taxes and insurance on the jointly owned house, and his wife�s auto insurance and medical expenses. Both sides agreed as to what portion of each of these items Maher would be entitled to an alimony deduction for, but they disagreed over the total amounts for these items. Tax Court announced specific findings on the amounts of each of these items, but other than a general statement that Maher�s testimony was credible, they did not explain what evidence, reasoning or arguments lead them to any of these figures, or what evidence of arguments exist for any other possible figures.
IRS denied both of Maher�s dependency deductions. The separation decree (from an earlier year) had granted the parents joint legal custody of both children, but Maher had physical custody three weekends a month, and Wednesday evenings. In a supplemental decree from 1998 that �painted an extremely unflattering portrait of Mrs. Maher�, the family court granted Maher sole custody of one of his children (his daughter) as of July 12. Finding that both children lived with Maher most of the year, Tax Court cited a line of cases for the proposition that Tax Court looks at with whom the child actually stayed most of the year, and awarded Maher both exemptions. Now, maybe the IRS thought they could argue with regard to the son that Maher only had physical custody by the decree on three weekends per month, and that he was not credible as to where the kids actually stayed. But the decree from family court would seem to be nearly insurmountable evidence in favor of Maher�s credibility versus his wife�s. And with regard to the daughter, sole custody from July 12 plus three weekends a month before that adds up to more than half the year. So I have no idea where IRS thought they had a case with respect to the daughter. Of course, given that Maher is a 15 year tax CPA, and given that the amount of the deficiency claimed by the IRS was over $34K, I�m guessing his AGI was high enough to phase out most, if not all, of his exemptions.
Where the exemptions really mattered was for Head of Household filing status. But the IRS conceded that if Maher was allowed one exemption, he qualified as a Head of Household. Since the IRS had no case as to the daughter, they had no case as to Head of Household. This is why Maher needed an exemption, and I can not believe, given the probable phase-out, that the exemption for his son was worth either side arguing over.
Finally, Tax Court let stand a failure to file penalty against Maher. His marital and custody battles were not reasonable cause for not filing. He is an experienced tax professional, and he knew better. I should insert some snide, preachy commentary on this, but I have to go do my taxes.
Thursday, March 27, 2003
A cartoon about the double taxation of dividend income? Yes, and it makes exactly the point I have been trying to make in an essay, even better than I think an essay coud do. Check it out. (You may have to get a "Day Pass". That means 15 seconds of a click-through ad. Sorry.)
Wednesday, March 26, 2003
If anyone knows Jill Johnson, who once starred in a television pilot called �The Fantasy Sports Zone�, please let her know that her producer claims he owes her $32,500.
Fredrick Smith, Jr. and Vanessa Smith disputed the IRS�s assessment of $27,330 of unreported income, relating to Fred�s Schedule C business of television and web production. IRS assessed the amount by comparing bank deposits to gross reported receipts. Frank�s business records showed 3 payments from Johnson for producing FSZ. He claimed the middle one was a loan, sealed with a hug. She was willing to do this to help him out because he was in bankruptcy at the time. Had the Smiths had an attorney, the attorney might have pointed out that the Smith�s insolvency would make tax Court less likely to view this as a loan. But they probably would have still lost. The Smiths did submit a letter from Johnson from a couple of years after the fact stating that she had loaned him some money to assist his business. But there was no loan agreement, no promissory note, she had never demanded payment of the principal or interest, the Smiths have never paid any principal or interest on the loan, and the Smiths no longer know how to contact Johnson. Tax Court ruled for the IRS, and also allowed penalties for late filing and accuracy-related penalties.
If Johnson does now show up and demand the money, I wonder if judicial estoppel applies if the first court did not believe you?
Cynthia L. Edelen, f.k.a. Cynthia L. Kratz asserted a defense of statute of limitations to her deficiency notices, and this summary opinion results from a trial solely on that issue. She and her (ex)husband had a certified receipt showing when they mailed an envelope to the IRS. The ex-Kratz testified that they signed a stack of returns which they thought included the tax years at issue as well as two prior year. IRS records showed the two prior years� returns processed about a month after the certified mailing, but no record showing the years at issue. Tax Court noted the ex-Kratz had no record of paying the understatement on their copy of the return, but the best evidence was that the amount of postage shown on the certificate of mailing was not enough to mail four returns. Tax Court ruled for the IRS.
Richard H. Frank and Tammy J. Frank are nut-case tax protesters challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $3,500 fine. Again, from Las Vegas. One contention Tax COurt did specifically address was that they did not receive a proper Collection Due Process Hearing. The hearing was held by telephone, and the Franks said they had a right to a face-to-face hearing. Tax Court noted that the hearing was scheduled in advance and there was no indication in the record that the Franks objected to a telephonic hearing.
Daniel E. Duncan is a nut-case tax protester challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $2,500 fine. Again, from Las Vegas.
Tuesday, March 25, 2003
The IRS charged Timothy Dean Strong and Strong Construction Company, Inc. with unreported income resulting from large cash deposits to bank account jointly held by Strong and SCC for several years in the 1990s. Strong claimed these were deposits from a large cash horde he held dating from before 1990. IRS alleged in an Amendment to Answer that Strong and SCC should be judicially estopped from asserting that he had a cash horde in 1990. Seems Strong filed a petition for bankruptcy in 1990, which was granted, where he did not list any cash or his sole ownership of SCC as assets.
Strong and SCC filed a motion for partial summary judgement to eliminate the claim of judicial estoppel. Strong claimed that he had been advised by his bankruptcy attorney, since suspended and retired, not to include the cash in the bankruptcy petition due to confusion over whether the cash belonged to Strong or SCC. IRS responded with a declaration from the bankruptcy attorney that he had not advised Strong to leave the cash off of the petition, and they filed an objection that attorney mistake is not an appropriate defense to judicial estoppel.
Tax Court denied the motion for partial summary judgement because there is a dispute about the factual basis (attorney mistake) of the defense to judicial estoppel. Because they denied the motion, Tax Court did not rule whether or not attorney mistake is a proper defense to judicial estoppel. But why not make such a ruling? By ruling the way they did, Tax Court runs the risk of wasting time by taking evidence on the factual issue, only to believe Strong but rule against him on the legal issue. Why not save the time and expense by ruling on the legal issue now?
My guess is that Tax Court would much rather make a decision based on the facts, rather than the law. If they do not believe Strong, they can dismiss his defense without ruling on the legal issue. Such a decision would be harder to overturn on appeal and does not create potentially bad precedent. And from reading the case, I believe that Tax Court expects that they will not find Strong to be a credible witness.
Free advice to Strong�s attorney: Settle. Now.
The Estate of Dora Halder, Deceased, Anita Halder MacDougall, Executrix, attempted to have Tax Court enforce a settlement agreement based on an offer from an IRS agent that the estate�s accountant acknowledged in writing was �an honest mistake�. The agent notified the estate of the mistake immediately after receipt of the acceptance, and the agreement was never approved by the proper IRS authorities. Tax Court declined the estate�s request.
By the way, go read Stuart Levine's reluctant rant about the White House budget and tax policy. It is the March 16, 2003 post.
Stuart Levine writes:
"As the leading blogger reporting on Tax Court opinions, you would seem to be in the best position to let the Tax Court know that their web site is dreadfully deficient with respect to highlighting recent opinions.
By way of example, on the Tax Court's site, there are only two links that one can click, "Today's Opinions" and "Historical Opinions." Since "Today's Opinions" are only posted after 3:30 Eastern Time and disappear the very next day (in the morning!), the use of the link is extremely limited.
Take a look at the Fourth Circuit's site: They have separate links to "Today's Opinions" "This Week's Opinions" and "Last Week's Opinions" as well as a link to historical opinions. The Tax Court should adopt that approach."
Stuart- I have mixed feelings on this. On the one hand, I think it is great that the opinions are offered on the web this way on the day of issue, and I do not want to discourage this kind of openness by complaining that it could be better. This access allows me to apply myself to become the biggest (okay, only) fish in this puddle.
On the other hand, um, you're right. Since I rarely am able to post comments on a case the same day (despite the cases being released 12:30pm my time), I usually have to go into "Historical Opinions" and enter search criteria just to find a case released a day or two ago. Plus, the links for "Today's Opinions" are even worse than you describe. For some reason, they do not put the PDF files in one directory when the case is released, and then just move the link to Historical Opinions. Instead, they have a "Today's" folder that the case is first put into, then they move it to an "Historical" folder the next morning. This is why, when I am able to post about an opinion the day of release, I do not link to PDF file. When I have done that, the link becomes broken the next morning, and I have to update it. Instead, I just post my comments, and then update with the link the next day.
Thanks for the letter, Stuart.
Has anyone who has subscribed to this blog through the Bloglet post on the left of this page actually recieved any of these posts through their email? Please email me (click on my name at the end of this post) and let me know. I am on my subscription list, and I never have. Now Bloget says there is an error on my page, but the explanation is, "The remote server returned an error: (500) Internal Server Error." That doesn't help me much.
As I have explained before, I am trying to review all of the Tax Court cases without doing research beyond the case itself, based partially on the theory that a court opinion has a duty to cite and explain the authority that logically supports its decision. Well, the decision in ROBERT J. HARTZ & SHARI L. HARTZ, has me utterly confused. In discussing the IRS�s determination that the Hartz� had unreported income in two tax years, Tax Court states, �No party presented reliable evidence concerning the correct amount of wage and business income in 1995 and 1996.� Tax Court then states that Robert testified he relied on 1099s for reporting his income. These forms were not submitted by either party, but the amounts reflected on the forms, for one year at least, were stipulated by the parties. Tax Court then states, �Because petitioners have not introduced any credible evidence regarding the amount of unreported income determined by respondent, petitioners ultimately bear the burden of proof with respect to this issue. Sec. 7491(a)(1);2 Rule 142(a); Ruidoso Racing Association, Inc. v. Commissioner, 476 F.2d 502, 507-508(10th Cir. 1973)�� The conclusion was, �Petitioners have presented no evidence refuting respondent�s determination or
otherwise tending to show it to be arbitrary or erroneous.� The Hartz failed to meet their burden, so they lost. This seems entirely unfair to me to put this burden on the taxpayers, but I was hopeful that maybe this case was decided on old law that has recently been improved. Then I read this footnote:
2 Respondent asserts that the �audit in this case began on April 3, 1998, so the provisions of I.R.C. sec. 7491 do not apply.� Because sec. 7491 does not alter the outcome, however, we need not decide whether its provisions are inapplicable in one or both of these cases.
What the Hell? If sec. 7491 does not alter the outcome, why did Tax Court cite it as the law they were following in making the decision? Maybe Tax Court meant that the Hartz still lose under 7491, so they do not have to decide if actually applies. But then why did they cite both sec. 7491 and a case from 1973? The discussion makes no distinction between old law and new law, so I have no idea which they were applying where. And why exactly does sec. 7491 not shift the burden to the IRS? If I remember other cases correctly, 7491 places a burden of production on taxpayers which must be met before the burden of proof shifts. This is recited by Tax Court, which then claims they presented no evidence. But Tax Court makes it sound like the lack of evidence prevents them from meeting the burden of proof, rather than the burden of production. And didn�t the Hartz provide evidence. The 1099s were not submitted, but shouldn�t a stipulation be enough? And for one year, the IRS determined unreported income by relying on the Hartz business books. Aren�t the business books evidence that should met the burden of production and shift the burden of proof? Maybe the numbers in the books and 1099s add up to support the IRS�s determination, but Tax Court does not say that, and even if they did, that would be evidence that would meet the IRS�s burden of proof if sec. 7491 applies. But Tax Court didn�t say that, they said the Hartz did not meet their burden of proof. Anyway, however I analyze this, Tax Court�s ultimate decision seems correct. Maybe Tax Court realized this and just got sloppy explaining why.
Tax Court disallowed travel deductions because the substantiating documentation was not prepared contemporaneously with the travel and did not document the business purpose.
Most of the legal expenses the Hartz attempted to deduct involved a personal matter, and they could not substantiate the amount of what little legal fees may have been legitimately business related.
Depreciation deductions were disallowed because there was no documentation of when the various items were purchased, what they cost, or what their business purpose was.
The Hartz provided no substantiation supporting the disallowed car and truck, rent expense, interest expense, and contract labor deductions.
Tax Court disallowed a claimed business loss deduction relating to a Winnebago. The purchase contract claimed it was to be used for personal and family purposes, and Tax Court simply did not believe Robert�s testimony that he intended to use it for business.
A late filing penalty was allowed where the IRS met their burden of production and the Hartz did not provide any evidence refuting the claim of late filing. Tax Court also sustained an accuracy related penalty for one of the tax years in question, citing primary a lack of records supporting the Hartz� underpayment.
Monday, March 24, 2003
Arlene Williams is a nut-case tax protester challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $1,600 fine.
Again, Mr. Williams is from Las Vegas. I desperately want to see Penn & Teller, also Las Vegas residents find who ever is instigating all of the Vegas protesters and feature the nut cases on their show Bullshit!
Sunday, March 23, 2003
Peter U. and Mary M. Boehme won the Colorado lottery, which was to be paid over the course of the 25 years. After a few years of borrowing money secured on the lottery payments, they sold the right to 12 years worth of payments for a lump sum. They had used most of the loans to construct and make improvements on their home. They used most of the lump sum to repay the loans.
Tax Court held that the right to receive lottery payments is not a capital asset. Therefore, the proceeds from selling that right are not capital gains, but are instead ordinary income. They explained why last year in Davis v. Commissioner, and they really aren�t inclined to go through all of that again.
Despite most of the loans being used to build or improve their home, none of the interest on the loans was deductible as qualified residence interest because the loans were not secured by mortgages on the residence. Nor was it investment interest or interest properly allocable to a trade or business, as most of it went into their home, and the rest was unaccounted for.
Those here for tax law and uninterested in my Iraq opinions should skip this post.
Matt Welch posted this:
Best Moment on the BBC Tonight: A female guest, I think some Iraqi-Brit student, stormed out of the studio after pressing the other guest, an anti-war Iraqi, on whether he was anti-Saddam or not. �I think Saddam knows his country and has done great things,� the old geezer said, or thereabouts; college gal sputtered something about not believing her ears, and stomped off.
What follows is most, but not all, of the comments:
I heard that too. Her response was powerful, his was chilling. I oppose this Iraq war (that is war without explicit U.N. authorization), but hearing people like that "peace" activist is keeping me away for participating in demonstrations. (Of which there are plenty. Protesters have shut down several intersections around my building. There number is fairly small, but I have never seen protesters shut down streets so effectively and peacefully.)
Those of you who support the war need to find a tape of that BBC broadcast. It will make for a devastating straw man to discredit thoughtful opponents by smearing them with the likes of that Saddam supporter.
Looks like before I wrote the above post, Instapundit had already used Matt's post for the smearing-the-protesters purpose.
Yeah ... I just wish we could all get past those "straw-man" arguments and all the overheated reactions on both sides ... the stuff that always comes up and makes it so difficult to talk reasonably with one another about the steps we're taking and the fate of our nation.
It's so much more American, in my opinion, to actually respect and appreciate the attempts of others to offer an opinion and to discuss what we're doing as a nation.
Posted by William Swann at March 20, 2003 11:22 AM
"I oppose this Iraq war (that is war without explicit U.N. authorization)..."
Can you explain to me why we need non-citizen approval to defend ourselves? And please, don't say it's because it's about international law.
Posted by Cooter at March 20, 2003 01:28 PM
You commit the fallacy of the complex question, and another whose specific name I can not identify, but that I believe is a form of begging the question.
1. No, we do not need outsider approval to defend ourselves. I was glad the Security Council approved our war in Afghanistan, but I would have supported that war without U.N. authorization for exactly the reason you suggest. But, I have not been convinced that Saddam poses any threat to the United States. Links between Saddam and Bin Laden are fewer than links between Bush and Bin Laden, by which I mean both are like linking Kevin Bacon to Bin Laden. If he got the bomb, I believe he would not threaten the U.S. with it, but would use it as a deterrent to prevent us from attacking him, leaving him free to retake Kurdistan and attack his neighbors. But the U.S.? Not bloody likely.
2. "And please, don't say it's because it's about international law." This is asserted without explanation. Why not? You are right, this is not about international law, despite Bush's claims that it is, which have not apparently even convinced you. I want it to be about international law. I do not believe Saddam is a threat to the U.S., but he is as evil as they come, and needs to be wiped out. But he should be wiped out in a way that deters other dictators. I'm looking long term. In game theory, deterrence requires a link between actions and consequences. The Afghan war did that well. The lesson was, "If you attack the U.S., the U.S. will destroy your regime." Good lesson. Attacking Iraq with U.N. authorization would teach the following lesson: "Disobey international law, and the U.N. will destroy your regime." Good lesson. What is the lesson of this attack on Iraq? "If you kind of make the U.S. nervous, they may or may not destroy your regime in a decade or so at their whim." Bad lesson. If you are a rattlesnake and you see an otherwise peaceful gorilla smash another snake that bit him, you might decide not to bite the gorilla. But if the gorilla seems to be hunting snakes regardless of what they do, maybe you should strike first. At the very least, the gorilla is not in a position to stop you from doing anything, since you figure it might try to kill you anyway. This war harms international law and makes the world and the U.S. much more dangerous places to live.
Decnavda's argument would have some merit if Bin Laden and his pals owned a time machine.
Posted by Floyd McWilliams at March 20, 2003 07:18 PM
Decnavda: "Disobey international law, and the U.N. will destroy your regime."
What? When has the U.N. ever destroyed a regime for disobeying international law without the help of the U.S.? Wasn't Saddam disobeying international law? And who's destroying his regime? Not the U.N., unfortunately. Besides, the U.S. and Israel seem to be the only two nations the U.N. ever desires to subject to "international law."
Posted by Joel at March 20, 2003 08:11 PM
Read my post again. Your selective quote was entirely out-of-context. I said that would be the message if we attacked with U.N. authorization. International law exists by custom, but you are right, the U.N. has been bad (okay, virtually non-existent) at enforcing international law. I want it to start doing so. You said its unfortunate that the U.N. is not doing so, so it sounds as if we agree on that point. And the U.S. taking international law into its own hands is counter-productive.
A time machine? Huh? I literally have no idea what point you are trying to make. Please explain.
Decnavda: You claimed that violating international law would make America less safe. Bin Laden and crew attacked us 18 months before the attack on Iraq. Usually causes precede effects.
Anyway, we have not been attacked by Foreign Policy Quarterly. Fundamentalist Muslim terrorists do not care one whit for international law. Bin Laden complained about the loss of Spain and alluded to the failure of the Ottoman siege of Vienna. He doesn't give a damn whether the Great Satan gets a Security council majority.
Posted by Floyd McWilliams at March 21, 2003 03:43 PM
1. Black & White thinking: There are not 2 "safety conditions� in the world, "Safe" and "Dangerous". There are degrees. The world was not perfectly safe before we attacked Iraq, now it will be less safe.
2. Ambiguous Terms: I never claimed that 9/11 was caused by our attacking Iraq. Indeed, I mocked the existence of any "links" between Saddam and Bin Laden.
3."Fundamentalist Muslim terrorists do not care one whit for international law." True. Because it is not enforced. Kidnappers do not care one whit for national law. But there are significantly fewer kidnappings in San Francisco than in Mexico City. That is because we enforce our anti-kidnapping laws better. And to return briefly to point 2, Saddam is not a "Fundamentalist Muslim terrorist". He is a secular Arab dictator. In my comments, I have explicitly supported our self-defense attacks on the Fundamentalist Muslim terrorists in Afghanistan.
Ralph W. Emerson and Suzanne O. Emerson attempted to exclude proceeds from a settlement of a law suit against Ralph�s former
employers clients from their income. Ralph was a biochemical researcher hired by ProGuard to develop safer chemistries to be used on food supplies. In exchange for transferring all intellectual property rights in the results to ProGuard, Ralph was to receive $10,000 per month and 15% of the profits from the patents developed for ProGuard. While Ralph was working with them, ProGuard (or an agent of theirs that Ralph reported to) loaned him $128,424.60.
After several years, the business relationship between ProGuard and Ralph ended, and Ralph filed suit against ProGuard. The complaint and amended complaint described the history of the business relationship between Ralph and ProGuard, and listed as causes of action many claims arising from contract, and several claims arising from tort, such as slander, intentional infliction of emotional distress, and fraud. Of the sixteen causes of action, none involved personal injury or physical sickness. The dispute was taken to mediation. The mediator, retired California State Superior Court Judge Richard Gilbert suggested that Ralph include a personal injury claim to facilitate settlement.
The resultant settlement agreement, stipulation to amend complaint, and stipulation to dismiss were prepared and signed by both sides as a package. The settlement agreement referenced breach of contract and several tort claims, including infliction of emotional distress and personal injury. The second amended complaint included a cause of action for negligence, based on stressful working conditions that exacerbated his diabetes. The request for dismissal was filed four minutes after the amended complaint. Defendants never reported a personal injury claim to their insurers for reimbursement. The terms of settlement included monetary payments and debt relief.
The Emersons left the payments and debt relief off of their tax return. Tax Court referenced in the opinion someone named �Stevenson� whom they do not further identify but who appears to have been the tax preparer. Despite Ralph�s testimony regarding the toxins he worked with while at ProGuard, Tax Court was not convinced that ProGuard intended to compensate for physical injury of sickness in the settlement. Tax Court referenced a letter from Ralph�s attorney to ProGuard�s attorney stating that the second amended complaint had no operable effect on the settlement. Also a representative of ProGuard testified at the trial in Tax Court that the entire mediation discussion revolved around the contractual dispute and there was no mention of a claim for personal injury. ProGuard claimed it wanted to have clear title on the patents to secure marketing opportunities. Therefore, Tax Court ruled that the entire settlement proceeds should be included in taxable income. Tax Court also determined that both the cash payments and the debt forgiveness were compensation for non-employee services, and that the Emersons therefore owe self-employment taxes on the proceeds. Fortunately, however, Tax Court spared the Emersons from the accuracy penalty imposed by the IRS. Tax Court determined that the Emersons had been mislead by Judge Gilbert and their tax advisors.
As a fledgling mediator, I was taken somewhat aback by the description of the testimony regarding the contents of the mediation. Mediations in California are supposed to be confidential. We mediators tell disputants that nothing said in mediation can be brought out in testimony in court. But that is based on the California evidence code. I honestly have not considered the admissibility of mediation discussions in Federal Courts, such as Tax Court. I will obviously have to investigate this, and possibly give considerably more narrow confidentiality assurances to my mediation clients.
I should also point out how this case obviously serves as an example of the dangerousness of directive mediation, where experts invent creative solutions and hand them to the disputants, rather than helping the disputants solve the problem themselves. Judge Gilbert was an expert, he came up with a creative opinion, and he used it notch another settlement on his belt. And his clients got screwed.
JKH Enterprises, Inc., A California Corporation was wholly owned by attorney Jack H. Kaufman, and its business consisted primarily of leasing office space and equipment to Jack H. Kaufman, A Professional Corporation, also wholly owned by Kaufman. Kaufman wrote 43 checks on his business account that were dishonored due to insufficient funds, but it was the dishonored check to Yosemite National Park that got him convicted by the Feds. This led to a ninety day suspension from the Bar. Kaufman sold all of his shares in Jack H. Kaufman APC to another attorney who became its sole employee. Jack H. Kaufman APC took a deduction that year for �equipment retired�, which referred to client files and goodwill. IRS consented to this deduction at the Appeals Office. Certainly no one could easily dispute that Kaufman�s goodwill had been retired. JKH Enterprises also claimed a large loss that year for �abandonment of equipment�. Tax Court ruled first that Kaufman failed to establish that client files and goodwill had been transferred to JKH Enterprises rather than Jack H. Kaufman APC, and ruled he could not take a loss deduction for those assets because he had not established ownership of them. Kaufman also failed to establish that JKH had abandoned any tangible assets since Jack H. Kaufman APC had continued to operate throughout the tax year. Further Kaufman could not establish that his basis in the abandoned assets was greater than zero. Finally, Tax Court asserts that it can read the date stamp showing when the IRS received the return despite Kaufman�s claim that the date was illegible. As a result, Kaufman owed a 15% penalty for filing three months late.
Saturday, March 22, 2003
James Gill and Katie Gill wanted the IRS estopped from collecting on an erroneous refund. The Gills filed their taxes correctly and sent in a check for the amount they owed. The IRS incorrectly recomputed an item on the return and sent a refund. The Gills called the 800 and explained the situation to a Taxpayer Service Representative who agreed the refund was incorrect and told them to return it uncashed, which they did. A couple of months later, they got another refund with a new letter referencing the same item and giving them the name of a person to call. That person insisted the Gills were incorrect. The Gills eventually caved and cashed the check. A year later, the IRS decided the Gills had originally been correct, and demanded the money back. By that time, the Gills� financial situation had worsened, and repayment would be painful.
Held: Ha, ha! You believed the IRS! Don�t you know we can�t overturn legislation just because government agents berate you with lies about the law?
I would be willing to bet that back in 1999, when Sun Microsystems programmer David M. Marx had an AGI of over a million dollars, it would not have been worth his time to argue pro se in Tax Court over $439.45 in AMT. But times change, and now Marx is offering himself as the test case (well, sort of, this is a Summary Opinion) to determine whether a person can use the standard deduction on their 1040 taxes, but itemize on their AMT. Tax Court says no.
Marx had significant itemized deductions, mostly state and local income taxes, but with his AGI so high, his section 68 limitation reduced his allowable itemized deductions below his standard deduction, so he took the standard. When the IRS inquired about AMT, Marx took the position that since section 56(b)(1)(F) states that section 68 does not apply to the AMT, he can now claim his itemized deductions for purposes of the AMT. Tax Court�s denial rests on principals of statutory construction. Marx interpreted 56(b)(1)(F) in isolation for the entirety of section 56. Section 56 does not recompute taxable income, but only makes adjustments to the already determined taxable income. So because he took the standard deduction on the 1040, he could not change it on the AMT. Further, Tax Court reasoned that Marx�s interpretation overlooks 56(b)(1)(E), which states that the standard deduction is not allowed for the purposes of the AMT.
As an attorney, I can see that Tax Court�s reasoning is logical, maybe even obvious. But whether I am being fair to Marx, or stereotyping programmers, it is difficult not to see this as a clash between different ways professionals think. Before interpreting section 56, Tax Court cited authority for the principals of statutory construction, drilled into attorneys� heads in 1L, that the court must interpret the statue so as to give effect to the intent of Congress, and so as to not render portions of the statute inoperative or superfluous. These two concepts might be a bit much to ask a highly intelligent programmer to wrap his mind around. If a computer were to attempt to follow the instructions of line 56.b.1.F of a program, the computer would not look at the program as a whole so as to give effect to the intent of the programmer and not render line 56.b.1.E superfluous. Instead, line 56.b.1.F just means what it means. Despite tax law and programming appearing to occupy similar groung in semi-formal logic, they are really polar opposites. Programming is engineering with words. Tax law is literary criticism with numbers.
Tax Court in this case also found where Marx actually owed another $150 in AMT on a different issue, but did not charge him with it because the IRS missed it.
One question. If taking the standard deduction would have saved Marx less than $439.45, could he have taken the itemized deduction on the 1040 so that he could take it on the AMT? Or are you required to take the standard if it is higher than your allowable itemized deductions?
Friday, March 21, 2003
World events have distracted me. I am currently behind by, I think, 4 opinions. But they are relatively short, and I expect to catch up over the weekend.
Wednesday, March 19, 2003
It appears some Iraqi forces are surrendering before we've even begun the attack, so maybe the conservative conspiracy theorists were right. Maybe they are receiving military assistence from the French.
Luis A. Cortes is a nut-case tax protester challenging liability for taxes at hearing on collection. Mr. Cortes did not receive a notice of deficiency for one of the two tax years at issue, and liability was properly at issue for that one tax year. Tax Court allowed the collection and imposed a $1,000 fine.
Even for a tax protester, Mr. Cortes has real gall. For the tax year in which he did receive a notice of deficiency, he claimed a refund based on the Earned Income Credit. Got that? His �income� was not �income� for purposes of tax liability, but it was �income� for purposes of receiving a subsidy. I am huge fan of the Earned Income Credit, and I hope Mr. Cortes is raked over the coals.
(Um, actually I mean that bit about �raked over the coals� only figuratively. With a Justice Department run by John Ashcroft, I feel it is necessary to point that out.)
Tuesday, March 18, 2003
Decnavda News: I have posted my first update due to reader response. See Precision Pine & Timber, Inc.
Tax Court sustained disallowance of business deductions claimed by Norman J. Suter because he failed to provide any substantiation of these expenses.
Yea! Pro se taxpayer Larry Allen Coats won a claim for earned income credit denied by the IRS! IRS had also denied Head of Household filing status and dependency exemptions for two children. By the time this decision was issued, IRS had admitted that he qualified for the earned income credit for a person with no qualifying children, that he was entitled to the dependency exemption for one child, and that Head of Household filing status has not tax consequences, and is therefore moot.
Mr. Coats claimed two children as qualifying children for the earned income tax credit, one of whom was his biological daughter, the other of whom was neither his biological or adopted daughter. The elementary school that the girls attended listed their address as that of their mutual biological mother, who lived a half mile from the school. Mr. Coats lived 13 miles from the school. IRS considered these facts sufficient to establish that the girls lived with the mother more than half the year, regardless of what Mr. Coats told them. Since a child must live with the taxpayer more than half the year to meet the residency test to be a qualifying child for the earned income credit, the IRS denied that Mr. Coats was entitled to earned income credit for a person with a qualifying child. Tax Court Judge Nims, however, is apparently aware that the poor tend not to lead particularly stable lives, and believed Mr. Coats� testimony that due to volatility in the neighborhood and concern for the children�s well-being, the children stayed with Mr. Coats for 9 months during the year and commuted to school because the parents did not want to disrupt their education.
Unfortunately for Mr. Coats, however, while his biological daughter meets the relationship test to be a qualifying child, a child who his not his biological or adopted child must be and �eligible foster child�, which requires living with the taxpayer the entire year. So Tax Court determined that Mr. Coats is entitled to earned income credit for an individual with one qualifying child.
Mary Ann Whitacre is the second person this year screwed by Congress�s obviously neglectful failure to grant Tax Court jurisdiction to review the IRS�s denials of relief from community property under section 66(c). Tax Court was granted jurisdiction to review denials of every other form of innocent spouse relief. If she had left the community property off the return based on section 66(c) and was issued a notice of deficiency, she could challenge it in Tax Court and rely on section 66(c). If the IRS issues a notice of intent to levy, she can challenge the collection action in Tax Court and advance spousal defenses, including equitable relief under section 66(c). Or, she can pay the money, file a claim for refund of the money, and then if the IRS does not repay it within 6 months, she can take her case to District Court or the U.S. Court of Federal Claims. But to have it decided here and now, when it is much more convenient and efficient for everyone involved, including the IRS, which told her in her denial notice that she could take the case to Tax Court? Sorry, Congress forgot to authorize us to do that.
George A. Robinson is a nut-case tax protester challenging liability for taxes at hearing on collection. I don�t know what he did to piss off Tax Court, but they allowed the collection and imposed an $11,000 fine, more than twice any other protester fine I�ve seen this year. In addition, Tax Court said they lacked jurisdiction over frivolous return penalties. IRS did not give Mr. Robinson a hearing at Appeals, which they acknowledged violated the IRM. But Tax Court agreed that such a hearing would not be necessary or productive. Generally I think the IRS should be held to the IRM, but I suppose the justification for not doing so is similar to the �harmless error� standard of review.
Monday, March 17, 2003
Precision Pine & Timber, Inc. had paid for covenants not to compete for specific periods of years from three other potential timber companies in Arizona. PP&T began amortizing these covenants at based on their duration in years. Afterwards, the Mexican Spotted Owl was placed on the endangered species list, and two years later, in the tax year at issue, the District Court issued an injunction that effectively ended new timber harvesting in Arizona, in an area encompassing the entire geographical reach of the covenants. PP&T deducted as a loss the entire unamortized portions of the covenants, based on the theory that they were now worthless, because the covenantees were prevented from competing because of the owl. IRS disallowed the loss.
In a fact-based analysis, Tax Court found that the covenants were indeed worthless. In a rare display of Shakespearian wit, Tax Court stated, �In short, the covenants were not worth a hoot.� IRS had relied on ABCO Oil Corp. v. Commissioner, where the taxpayer had entered into fixed-year covenants not to compete with three individuals, began amortization, then claimed a loss when two of the individuals died. Tax Court distinguished ABCO Oil because the test for worthlessness requires, among other things, that the taxpayer make a subjective determination that the covenants were now worthless, yet the taxpayers in ABCO Oil had continued to make payments on the noncompetition agreements years after the covenantees deaths. This is good, legally relevant reason for distinguishing ABCO Oil, but it seems somewhat disingenuous. Tax Court notes that they stated in ABCO Oil that the death of the convenantees did not make the covenants worthless, rather the covenantees� �deaths extended forever the duration of noncompetition.� Tax Court in this case fails to explain why this logic does not apply to PP&T. The best explanation is that ABCO Oil�s logic does apply, but Tax Court found a good excuse to distinguish it because it is utterly stupid. How much would you pay a dead guy not to do something you do not want done? Sounds worthless to me.
PP&T also wanted to change the allocation of a contact to one of the covenants not to compete from $200,000 to $0, but Tax Court said they had no reason to change the allocation since PP&T had not filed a new Form 8594.
UPDATE: Stuart Levine writes:
"In your discussion of Precision Pine & Timber, you should have noted that the transactions involved were undertaken before the effective date of Section 197 and that Section 197(f)(1)(B) would, in most cases, obviate the taxpayer's argument and change result."
I would say that Stuart is most likely completely right about the law, and half right about what I should have said. My goal here in Decnavda�s Dialectic to provide summaries of Tax Court opinions and to critique their reasoning and presentation, relying solely on the text of the opinion itself. I really do not have time to go beyond the opinion and determine how the case would have been decided under the new section 197. That said, Tax Court did actually mention in the opinion that section 197 had been updated and implied, without explaining, that it would affect the outcome of the case. I should have mentioned their mentioning of this change as a red flag to send readers interested from a planning perspective back to the Code. In the future, I will try to include this information when it appears that it would have a substantive effect on the decision. If I miss any more, or if you just want to go outside the text of the opinion for me, feel free to email me your comments as Stuart did. Thanks, Stuart!
The IRS issued Paul L. Hickey and Nellida F. Hickey separate Notices of Determination Concerning Collection Action(s) for tax years 1996 and 1997 on July 13. On August 8, IRS issued the Hickeys a Notice of Determination Concerning Collection Action(s) for tax year 1998. On August 9, the Hickeys filed a Complaint with the District Court with regard to the notices dated July 13. On September 10, the Hickeys filed an Amendment to their complaint seeking to add a challenge to the notice dated August 8. On February 15, District Court issued an order dismissing the complaint for lack of subject matter jurisdiction. On March 1, the Hickey filed a timely motion for reconsideration with the District Court. On April 11, District Court entered an order denying the motion for reconsideration. On May 15, the Hickeys filed a petition with the Tax Court challenging all of the notices. IRS moved to dismiss for lack of jurisdiction due to late filing.
Tax Court held that because each tax year is a separate legal issue, the motion to amend the complaint with the District Court did not make the addition of the new tax year effective as of the original date of the return, but as of the date of the motion to amend. Thus the date of filing to challenge the August 8 notice was September 10. This was more than 30 days, and so that notice was not challenged timely. Tax Court dismissed the petition with regards to tax year 1998.
However, Tax Court also ruled that the District Court�s order denying reconsideration changed to date dismissal from District Court to the date of the order denying reconsideration. The petition in Tax Court was filed within 30 days after the order denying reconsideration, therefore Tax Court ruled that subject matter jurisdiction with respect to tax years 1996 and 1997 was proper.
Saturday, March 15, 2003
Everyone knows multinational financial corporations like Merrill Lynch structure every move of their business so as to take advantage of aggressive tax positions. The same is true for the way poor Mexican farm workers structure their family living arrangements. At least, that is what Tax Court Special Trail Judge Powell seems to think.
The Summary: Maria G. Pelayo and Jorge Pelayo �allegedly� (Powell�s word) separated in May. There was no formal separation agreement. Maria stayed in the family home on Fifth Street. Jorge spent a few weeks with his sister, then moved to employer-provided housing near his agricultural work site. When the job ended in July or August, he move back in with his sister. In December, he moved into a new home on Second Street. The whole time, Jorge paid most of the expenses of the Fifth Street house. The two youngest kids stayed with Maria, and the oldest child moved back and forth between households. In January, the Pelayos reconciled and Maria and the kids moved in with Jorge at Second Street. For their taxes, they filed separately, each claiming Head of Household and Earned Income Credit.
Held: Maria could not be Head of Household because she did not pay the expenses of her house, and Jorge could not be Head of Household because his qualifying child only stayed with him a total of approximately 4 months. To claim the Earned Income Credit, married folks must file jointly, which the Pelayos did not. All of which Powell gets right.
So why didn�t the Pelayos file jointly if they had reconciled? If I had guess what was going on, I would say this aggressive of position was cooked up by a sleazy low-rent tax preparer, the only kind people who financially qualify for the Earned Income Credit can afford. The goal was to sell the Pelayos two tax returns, two electronic filings, and two refund anticipation loans at usury rates. The preparer was either too incompetent to know how aggressive this position was, or he didn�t care, because the Pelayos would not be caught for a couple of years, by which time he plans to have a better job. Either is equally likely. At least, that�s how I see it.
Judge Powell suspects differently. At least you can not accuse him of discriminating against poor Mexican farm workers. He treats them exactly the same as he would treat a financially sophisticated business executive who hires creative CPAs. He states of their living arrangements, �While it is not totally clear, we suspect that this structuring was prompted by an attempt to obtain greater earned income credits by a connived separation.�
I could be wrong here. My own in-laws are Mexican former farm workers who are now real estate millionaires, and I suppose it is possible that Jorge had to return to farm work after he lost his fortune in derivatives speculation. But unless Judge Powell has left out a lot of relevant information, my best guess is that he lacks a great deal of familiarity with the lives and motivations of the people who harvest the food he eats.
Friday, March 14, 2003
Green Forest Manufacturing Inc. depreciated several items of equipment located outside of the United States. IRS determined that the items should be reclassified under MACRS, and that this reclassification is a change in GFM�s method of accounting requiring an adjustment pursuant to section 481(a). GFM conceded reclassification under MACRS, but denied that this constituted a change in the method of accounting. Regulations say that a change in method of accounting does not include an adjustment in the useful life of a depreciable asset. IRS said that the MACRS reclassification was a change in �recovery period� and pointed to their interpretations and Rev. Procs. stating that a change in �recovery period� is different from a change in �useful life� and is a change in accounting method. Tax Court said the difference was too minor to meet the low standard of persuasive deference to the Service�s interpretation of its own regulations, and ruled for GFM. Tax Court pointed out that the small difference between these two concepts does not include a change in �recovery period� causing any items to be counted twice or omitted, the policy reason for section 481(a) adjustments. If the IRS did provide any policy rationales for this difference in their briefs, Tax Court did not mention them in this opinion.
Thursday, March 13, 2003
William A. Swann and Judith A. Swann are nut-case tax protesters challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $2,500 fine. These protesters, like all of the others today and a disproportionately high percentage the last couple of months, are from Las Vegas.
Stan D. Kaye is a nut-case tax protester challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $4,000 fine. Here a fine for using Tax Court proceedings primarily for delay is particularly appropriate. One of Mr. Kaye�s quoted arguments was that he is not bound by Tax Court decisions because there is no law stating that U.S. citizens are bound by Tax Court decisions. I wish Tax Court would have provided the authority to refute this, but anyway, if Mr. Kaye rejects the authority of Tax Court, what purpose could he have in bringing a case before it other than delay?
Roger Stoewer is a nut-case tax protester challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $2,000 fine.
Michael D. Keown and Rosann C Keown are nut-case tax protesters challenging liability for taxes at hearing on collection. The only twist here was that the Keowns apparently did not receive a notice of deficiency for the relevant tax year, and so liability was properly at issue. But they lost on the merits, of course. Tax Court allowed the collection and imposed a $3,200 fine.
Jerome Edward Brown and Mary L. Smith Brown provide more evidence of why the working class needs affordable (free) tax assistance beyond merely filing. Jerome was the sole wage earner while his wife took care of their children. He took less than the proper amount of withholding to make ends meet, and filed taxes late, incurring severe interest and penalties. IRS abated some interest and penalties, but at this collection hearing, the Browns requested more be abated because they simply can not pay what is owed. Tax Court, following the law, allowed the collection.
The mechanisms could have helped the Browns exist, but are too complicated for many people in their situation to utilize without professional assistance. The case does not mention if they qualified for, received, or lost due to late filing the EITC. We also do not know if they qualified for Advanced EITC. Tax Court did mention that they did not file an Offer In Compromise, which is what their situation really called for and where a professional could have been most helpful, both in identifying and utilizing the option.
G. Robert Lyman and Shari Lee Wright Lyman are nut-case tax protesters challenging liability for taxes at hearing on collection. Tax Court allowed the collection and imposed a $3,000 fine.
Wednesday, March 12, 2003
Joe D. and Maura F. White were not allowed to deduct home office expenses for Joe�s self-employment as a handyman. He worked primarily at three different sites, and the most that happened at home was that he received work orders, which were not enough to be either important aspects of the job or to be counted as administrative or managerial activity. He would have had better luck with the shed were he kept his tools, but none of his claimed expense came from the shed. Mr. White also could not deduct vehicle expenses for driving to and from work sites, because his contention was that he was driving between work sites. That is, between his home office and the labor sites. Alas, since he lost on the home office issue, he was only driving from home to work, which is not deductible.
Mr. White�s gross income as a handyman was $4,995.03. The white�s AGI was under $26,000. This case well illustrates the need for government-funded low-income tax advisors. Any decent one could probably have instructed Joe as to how to set up his home office to qualify for the deductions.
Pieter Weyts earned a law degree and a couple of months of work as a legal apprentice in Belgium. In Belgium, a law school graduate must work for 3 years as a �studiare� before qualifying for admission to the bar. He came to New York, earned an L.L.M., passed the New York, bar and got a position as a summer associate at a law firm. None of this was enough for Tax Court to consider him a �practicing attorney�, however, and he was therefor denied a deduction for education expenses under section 162 when he returned to school to get a J.D./M.B.A. degree. They figured a �summer associate� is much like a law clerk, and did not interrupt his status as a full time student. Look, I know that whether a person is carrying on a trade or business is a fact-based inquiry, fact-based inquiries are inheritly fuzzy, and just because you have a license to engage in a trade does not mean you doing so. But for the sake of clarity, it is nice to establish a bright-line rule when one makes sense. And stating that you are engaged in a trade or business when you have a license to do so and have held a full-time paid job doing that work would, I think, be a sensible bright-line rule. I fail to see what sensible bright-line rule could be reasonably extracted from this opinion. And what is with Tax Court assuming that summer associates are nothing more than law clerks? Where do they think we are, Belgium?
It seems the tax treaty between the U.S. and Belgium allows an exemption for up to $2,000 of earned income for a student for the first five years in the host country. IRS wanted to deny Mr. Weyts this exemption. Isn�t that rich? No, you can�t deduct your education expenses because you are a full-time student. And no, you can�t exclude your income because you aren�t here to study. Luckily, Tax Court rule correctly on this one, and allowed Mr. Weyts the exclusion.
Mr. Weyts was not allowed a deduction of $680 where he did not obtain a contemporaneous written acknowledgment from the donee. That�s the rules.
Mr. Wyts was also denied an education loan interest deduction where he had insufficient documentation that a loan on his parent�s home was taken out to fund his education.
Monday, March 10, 2003
Substantively, Howard and Everlina Washington is a simple case. The Washingtons stated that the IRS could not collect the taxes due for the years in question be cause those debts had been discharged in bankruptcy. The Washingtons stated, �only if the taxes were filed after 2 years before the date of filing the petition [for bankruptcy] would the years in question be dischargeable [sic]. The tax years in question were filed 17 months before the date of the petition and not after 2 years before the date of the petition.� The majority says this argument �misconstrues and misapplies� the law, but that is only half right. Actually, it states the law almost perfectly with regards to late-filed returns. It also states the facts correctly, in that the returns were actually filed 17 months before the bankruptcy petition. It does obviously misapply the law, in that the Washingtons clearly did not understand the law they stated. One concurrence says their arguments border on the frivolous, but this is unfair, and a result of tax experts not appreciating the complexity of their subject matter for pro se petitioners. While the phase �after 2 years before the date� is simple and straight-forward to a tax expert, most non-tax people will be absolutely convinced that it means one of several different things other than what it actually does. The IRS was also collecting on taxes due for 1998. The Washingtons had asked that an overpayment from 1997 be applied to 1998, but the IRS had applied the overpayment to an amount due for 1990. The Washingtons made no argument regarding this issue, and Tax Court simply stated the IRS�s right to make such applications. The Washingtons also asked for abatement of penalties and interest, which Tax Court said they did not have the jurisdiction to consider in this collection matter because the Washingtons failed to raise the issues in their Appeals Hearing.
The fireworks in this case came over jurisdiction and standard of review. The judges had five different opinions about why they had the power to hear this case, and the proper method for making the decision. But they all agreed that they had the power and their decision was correct. I will discuss the opinions in the order that they should have been presented, as discussed in my prior post about this case.
The Bankruptcy Court had issued a general order dissolving all debts that were dissolvable, but had not made a specific ruling as to whether the debt relating to the tax years involved had been discharged. The majority noted that they had previously ruled that they did not have jurisdiction in a deficiency hearing to determine whether a debt for the years in question was discharged by the Bankruptcy Court because that had nothing to do with the deficiency. However, since whether or not the debt had been discharged was directly relevant to whether or not collection actions should proceed, they had jurisdiction in this case. The majority then discussed the substance of the case without stating the standard of review.
Judge Vasquez is unclear how a challenge to the appropriateness of a collection action includes whether or not the Bankruptcy Court discharged the liability. Vasquez thinks such a challenge should only be about the type and/or method of the collection action. Vasquez would therefore place jurisdiction under the Tax Court�s authority to rule on a challenge to the underlying liability in a collection proceeding where the taxpayer has not otherwise had such an opportunity to make such a challenge. The result is that when viewed as a challenge to the appropriateness of a collection action, the standard of review is abuse of discretion, but when ruling on a challenge to the underlying liability, Tax Court acts de novo. Vasquez stated that although the majority talked as if it was treating this as a challenge to the appropriateness of a collection action, the discussion of substantive issues seemed to apply a de novo standard.
Judge Beghe responds that a challenge to the appropriateness of a collection action includes whether it is appropriate to collect at all, and says that it is not a challenge to the underlying liability because the Bankruptcy Court does not dissolve tax debts, rather it dissolves individual debtors from their tax debts. I am not sure whether that distinction of Judge Beghe�s is best critiqued by a bankruptcy attorney or an analytic philosopher. Anyway Beghe believes that the majority�s analysis is valid under any standard of review, so their lack of stating the standard was no big deal. Judge Beghe also notes that Judge Vasquez has ruled that Tax Court can not rehear a decision as to whether a tax debt was discharged in bankruptcy when Bankruptcy Court has already made that ruling, and states further that when Tax Court hears the issue first, Bankruptcy Court must also abide by their decision.
Judge Halpern makes a distinction between an �underlying tax liability� and an �unpaid tax�, and states that a discharge in bankruptcy creates an affirmative defense to a collection action, citing as authority a New York City Civil Court case. Thus Halpern sides with viewing this case as a challenge to the appropriateness of a collection action. Halpern implies that the correct standard of review is �abuse of discretion� but appears to argue that if Tax Court is reviewing whether an Appeals Officer correctly applied the law, �abuse of discretion� is the same as de novo, apparently because the Appeals Officer has no discretion to misapply the law. That sounds to me like great reasoning to use in court against any administrative agency.
Finally, Chief Judge Wells pipes up to say that this opinion does not preclude taxpayers from seeking review in Bankruptcy Court after they have petitioned Tax Court. If the issues presented are more difficult than those in this case, Tax Court may defer to Bankruptcy Court upon considerations of comity, judicial efficiency, and not
knowing what the hell they're talking about dealing with bankruptcy matters with the expertise of a Bankruptcy Court.
Sunday, March 09, 2003
Decnavda News: By popular demand, (okay, one email) the upgrades have been completed. You can now subscribe to Decnavda's Dialectic. Scroll to the bottom of the left column to enter you email. Also, it is now possible to actually read the left column. It's still not pretty, but neither is tax law.
This site will look a bit weird while I attempt some upgrades. Think of it as the visual representation of what it would be like to hire a web designer to do your taxes.
I will write a longer post about Howard and Everina Washington later, but I just want to quickly say to anyone who might want to read it that the opinions are published in the wrong order. This case has a majority opinion and four concurrences. The second to last opinion by Judge Beghe quotes and responds to the opinion of Judge Vasquez, which is last. Later in Judge Beghe�s opinion, he makes arguments that previous concurrences were obviously responding to. The correct way to read this case is to start with the majority opinion, then read the concurrences in reverse order of that presented. So that would be: Majority opinion, Vasquez, Beghe, Halpern, and then Wells.
Friday, March 07, 2003
Alice M. Beagles and her husband, now deceased, invested in a tax-shelter limited partnership in 1983 and 1984, and claimed losses that were disallowed by the IRS in 2000. The Beagles asked that the interest be abated. The IRS agreed to a partial abatement for 1992 to 1999. Not satisfied, Ms. Beagle took the issue to Tax Court.
Tax Court provides a detailed history in this case of the litigation of tax shelter cases and the strategies adopted by the IRS, Congress, and Tax Court to respond, and why this all took so many years. The use of test cases and the decision to put civil litigation on hold pending criminal investigations is discussed in detail. The destruction of relevant documents in the World Trade Center on 9/11 is mentioned. Tax Court sounds sympathetic to Ms. Beagle, but also sounds a bit as if it is trying to convince itself of its innocence in the delay.
As fascinating as all of this history is however, it is almost all irrelevant. Buried in the opinion, Tax Court mentions that Ms. Beagle�s real beef is that she was never informed of the ongoing litigation, and therefore was unaware of her potential accumulating interest. Unfortunately, that was the Tax Manager Partner�s responsibility, and a code section expressly states that the TMP�s failure to fulfill this responsibility does not affect the applicability of any section of the tax code to the partner. So Ms. Beagle lost. She should sue the TMP. Unless the statute of limitations applies. Or he has declared bankruptcy from all of the litigation. Or he has died. Or... Or... Or...
The Estate of Natalie M. Leichter, Deceased, Steven Leichter, Co-Special Administrator and Jeffrey L. Leichter, Co-Special Administrator claimed on its return that a business that she inherited from her husband a few months before she died was worth $2,091,750. The IRS said it was worth $2,718,358, and assessed a $344,635 deficiency. By the time this case got to court, the IRS admitted the business was worth $2,150,000, and the estate was claiming it was only worth $800,000. Tax Court considered the figure on the return to be an admission by the estate, and stated that while the estate�s attacks on the assessment report that it had relied upon in preparing the return did show that the report �needed proofreading�, it found the report substantively sound. Tax Court was not impressed at all with the estate�s two experts, who, among other sins, included discounts twice (one for the loss of Natalie�s owner-manager husband and one for a decrease in �marketability�), and accounted for �negative goodwill� without explaining why a hypothetical buyer would not simply liquidate the company. Meanwhile, although Tax Court thought the IRS�s expert was more reasonable than the estate�s, it was not impressed with his methodology of projecting future income using guideline companies that, in his own opinion, were not similar to the estate�s business. Result: Tax Court ruled the value of the business was $2,091,750, the amount originally on the return.
At least one of the lawyers in this case was
an ass unreasonably obstinate. It should have been settled.
Again, Tax Court runs faster than I can. I am behind, and hope to catch up this weekend.
Decnavda News: Robert Ambrogi has mentioned me on his blawg about blawgs (and other legal websites), LawSites. For that he has earned a spot on my permanent links. Thanks Robert!
Thursday, March 06, 2003
William J. McNeill is not allowed to deduct business-related travel expenses because his business requires him to travel constantly. I swear that is what this case says.
Wednesday, March 05, 2003
Tax Court�s decision in the case of Ed and Patricia A. Montgomery was mostly correct, but the opinion was a mess. Let me try to parse through this. I will take the issues in the order Tax Court discussed them, even though that order makes no sense. The original deficiency and negligence penalty were based on the IRS�s denial of business losses. The increased deficiency and increased penalty for failure to properly report litigation proceeds was added in the IRS�s response filed in the Tax Court. The logical order is to deal with the original substantive issue, the new issue, the original penalty, and then the increased penalty. Or maybe separate the penalties and discuss each after the issue that caused them. Instead, Tax Court discussed the increases before the original assessments.
First issue: Litigation proceeds. Mr. Montgomery filed suit against a school board that fired him for breach of contract and violation of Constitutional rights. He asked for $250,000 in economic damages and $500,000 in punitive damages. A judgement order awarded $185,000, reduced from $450,000 suggested by the jury, and costs and attorney�s fees of $15,556.70, plus interest on all of these amounts. A couple years later he gets a writ from the district court requiring payment of the judgement, and directing the county to raise taxes if necessary. In each of the tax years at issue, Mr. Montgomery received $30,000. In 1996, this was allocated $21,489 to interest and $8,511 to principal. In 1997, this was allocated $19,966 to interest and $10,034 to principal. Mr. Montgomery claimed the interest but excluded the principal. Under the controlling Supreme Court precedent at the time, litigation proceeds that compensated for �personal injury or sickness� were excluded from income, and the Constitutional claims were considered personal injuries. Economic and punitive damages were not excluded. Tax Court said that the entire principal should have been included in income, because economic and punitive damages were the only damages asked for in the complaint. That is probably correct, but it was also noted in the fact that when the district court granted to writ to compel payment, it cited case law that such measures were appropriate where needed �to vindicate constitutional guarantees�. This would strongly suggest that the district court believed the damages were compensation for constitutional violations as well as economic and punitive damages. There may be authority for ignoring this and sticking to what was asked for in the complaint, but it was not cited or discussed by Tax Court.
Second issue: Business losses. The Montgomerys claimed business losses flowing from an S Corp solely owned by Ed engaged in numerous business activities, most related to several different multi-level marketing schemes. Other than the S Corp�s tax returns, Mr. Montgomery provided no corroborating evidence of income, expenses, or activity, such as a ledger, time log, bank account record, receipt or invoice. Tax Court ruled for IRS, which is correct, but the reasoning was nonsensical. Tax Court said the lack of records was evidence of a lack of a profit motive. Sorry, but no. The lack of records is simply a lack of evidence that any activity actually took place. Taxpayers are required to provide substantiation of their claimed expenses. Mr. Montgomery provided no substantiation, therefor his claimed losses should be disallowed. If you can not prove there was any actual activity, a profit motive is irrelevant. If there were proper substantiation that such activities took place, how could a profit motive be denied? Do people try to sell real estate, pre-paid calling cards, gold coins, �a vitamin-type product that kind of replaces Viagra� or a �program for debt freedom� as a hobby? Most people who get involved in these multi-level marking schemes intend to make money, then end up losing. Selling to their failed independent contractors is how most of these scams actually make their money. The claim that Mr. Montgomery had no profit motive with regard to these activities is unbelievable and irrelevant.
Negligence penalty on litigation proceeds: To me, the fact that the Montgomerys included the bulk of the litigation payments (the interest) and excluded an amount to which there was reasonable disagreement as to whether it was �personal injury� is reason enough to conclude they were not �negligent� in excluding that amount, even if they turned out to be wrong. When you add that there was prior case law which the ruling Supreme Court case had overruled stating that even economic damages are not included in income, the case against the penalty should be solid. Tax Court notes all of this, but then said neither side presented actual evidence, and so they ruled for the Mongomerys because the IRS had the burden of proof on the issue. This suggests that if the IRS had charged this unjust penalty before the case got to Tax Court, it would have been upheld.
Negligence penalty on claimed business losses: Tax Court upheld the penalty because the Montgomerys failed to provide any documentation of their business or expenses. This was done in the last paragraph of the opinion and was concise and logical, unlike most of what preceded it.
Michael S. Norwood and Christine R Norwood claimed exemptions and child tax credits for Christine�s two sons who lived with her ex-husband and her granddaughter, who lived with the Norwoods. The ex-husband had legal custody of the two sons and did not sign a release of the exemption. IRS denied all three exemptions and credits. Prior to trial, the IRS conceded the exemption and credit as to the granddaughter. Tax Court ruled for the IRS as to the two sons. Whatever the divorce decree says, you must attach a signed release of exemption from the custodial parent to claim the exemption. If they won�t sign, take it up with the family court. In order to claim the child credit, you must be entitled to claim the child as an exemption, which the Norwoods could not.
Hazza! I have now caught up! I have blogged every Tax Court opinion released this year.
At least, for the next two hours.
Danvis S. And Sheryl S. Smith were not allowed to deduct contributions to �Alpha Ministries�, where the �contributions� were used almost exclusively for the housing and personal expenses of the Smiths. Assuming there were actual contributions made, which Tax Court rightly seemed suspicious of, contributions cannot be deducted to the extent the contributor receives personal benefits from the contribution, and these contributions were used entirely for the personal benefit of the Smiths. The Smiths were also denied business deductions for which they failed to supply any substantiation. Tax Court particularly noted the expense deduction for a trip to Hawaii, where they provided no receipts for travel and their daily planner showed their only business activity for the day was making phone calls that could have been made from home. Tax Court also allowed accuracy related penalties due to the Smiths�
The Estate of Ralph H. Davis, Deceased, Evelyn Davis, Personal Representative, was charged by the IRS with $220,593 in estate taxes because they claimed that the $564,862 the trust received from the estate did not qualify for the marital deduction. The question hinged on whether Mr. Davis intended to give his wife unrestricted use of the entire income from the trust. To resolve this question of intent, the Internal Revenue Code requires Tax Court to refer to California law, which in turn refers back to the Internal Revenue Code. The upshot is fortunately not an infinite loop, but rather a magical outcome whereby you can get the deduction simply by stating that you intend to get the deduction. You had the power inside of you the whole time. Just click your heels together three times and say, �I want the marital deduction, I want the marital deduction...�
Unfortunately, this power does not belong to Ms. Davis, it belonged to Mr. Davis, and he did not do that, and he is dead now. An unfortunate aspect of will writing is that your mistakes are not uncovered until they are impossible to correct. Rather, Mr. Davis said that the trustee was to provide Ms. Davis with all of the income necessary to live in the manner to which she had been accustomed. Tax Court said this was a severe restriction compared to �all income�, and therefore it was not substantially hers, and therefore the IRS won. Tax Court did not engage into a factual inquiry as to whether Ms. Davis had grown accustomed to treating all of Mr. Davis�s income as being substantially hers.
Tuesday, March 04, 2003
Tax Court denied Stephen P. Pacileo�s claim of theft losses for property �stolen� (probably sold) by his wife when they separated. Tax Court also denied Mr. Pacileo�s claim for losses related to a business he ran out of his garage where the documentation of the business was non-existent and a he claimed in a deposition in his divorce proceedings that he never ran any business out of his garage. Finally, Tax Court allowed an underpayment penalty due to negligence on these two matters. I think Tax Court was wrong regarding the penalty to the extent it resulted from his claimed theft losses. Right or wrong, he probably honestly felt like he was robbed, and I do not think this was �negligence�. Tax Court was probably right about the schedule C deductions, including the resulting penalty, based on the evidence. But I suspect the truth is that he was engaged in a business, but he conducted it entirely in cash and was less than forthcoming about this in his divorce proceedings against a wife who �stole� so much other stuff from him. But even if my suspicions are accurate, the lack of records and his credibility history would lead me to question the accuracy of his claimed income and deductions to the IRS.
Rancho Residential Services Trust, Robert Hogue, Trustee, Sushine Residential Trust, Robert Hogue, Trustee, and Residential Management Services Trust, Robert Hogue, Trustee are clones of Home Health Services Trust, blogged below, and were heard in consolidation with it. The issues and evidence are almost exactly alike, which hurt the credibility of all of them. Residential Management is the case to read, and provides transcript testimony wherein Mr. Hogue claims that trustees have absolute authority to alter trusts as they wish, and using this power, he altered the trust document to include the provision he relies on to claim that the proper person appointed him the trustee. I invite theoretical physicists and science fiction fans reading this to tell me the name of the time-travel paradox Mr. Hogue is invoking.
I still have no clue what the IRS thinks Mr. Hogue wasup to.