Saturday, March 29, 2003
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.