Posts Tagged ‘Judge Vasquez’

Tax Roundup, 8/14/2013: Tax Court Trifecta: IRS agent gets creative on her own 1040, Shareholder stuck, and not quite a real estate pro.

Wednesday, August 14th, 2013 by Joe Kristan

20130121-2More reasons we should trust the IRS to regulate preparers.  The Tax Court yesterday addressed the charitable deductions of a revenue agent with the IRS Manhattan office.   The Tax Court judge found the documentation for the claimed contributions to Living Stone Baptist Church  insufficient (my emphasis):

Petitioner was not a member of LSBC during the years in issue. Pastor Mobley was clear that he knew all his congregants by name and face and that he did not know petitioner. Pastor Mobley apparently first met petitioner in 2011 after the examination of petitioner’s tax returns commenced. It seems improbable that petitioner ever attended LSBC and even less probable that she made donations in any amount. It appears highly probable that petitioner, in concert with her longtime friend and fellow IRS employee, cut and pasted stationery from LSBC and provided the same to the IRS agent examining the returns in an attempt to support the claimed deductions. That attempt failed when the IRS agent attempted to verify the reported contributions with Pastor Mobley. The pastor made clear that he did not authorize the receipts to be prepared or issued on LSBC stationery, nor did he sign any such receipts. Even after these false documents were exposed by the examining revenue agent, petitioner continued to pursue her efforts to obtain documents in support of the reported contributions.

Surely we should all welcome folks like that having the power to control whether we can make a living filing returns.

Cite: Payne, T.C. Summ. OP. 2013-65.


The Tax Court released two other interesting decisions yesterday:

You may still be a shareholder!  In Kumar, a radiologist had a falling out with his fellow shareholders in his medical practice S corporation, and was frozen out of the business.  Yet he still owned shares in the company and still received his K-1, and was eventually redeemed out in a settlement.  He failed to report income from one of his K-1s, claiming he no longer really owned the shares.  The Court ruled otherwise:

Thus, Dr. Kumar retained the beneficial ownership of the PSLV shares. There was no agreement giving Dr. Woody any rights to Dr. Kumar’s stock during the year at issue, and Dr. Woody’s interference with Dr. Kumar’s participation in PSLV did not deprive Dr. Kumar of the economic benefit of his PSLV shares. Thus, we conclude that the beneficial ownership test does not relieve Dr. Kumar  from passthrough of PSLV profits and petitioners must report $215,920 of income and $2,344 of interest income from PSLV. 

If you get the K-1, you probably have to report the income.


If you want to prove your participation, log your time.  In Williamsa taxpayer tried to convince the Tax Court that he met the two tests for being a real estate professional under the passive loss rules, and could therefore deduct his rental losses as non-passive.  To meet the tests, you have to spend at least 750 hours during the tax year participating in a “real property trade or business,” and that has to exceed the time you spend in other activities.  It’s up to the taxpayer to show the time spent, and the judge wasn’t convinced:

Mr. Williams testified he spent over 800 hours and more than one-half of his time performing personal services in the rental property activity for each year at issue. Petitioners failed to introduce documentation or other credible evidence corroborating Mr. Williams’ testimony.

Moreover, respondent’s cross-examination of Mr. Williams revealed that his testimony was inconsistent with other credible evidence and unreliable. 

“Documentation or other credible evidence” means a log, calendar or spreadsheet prepared currently during the tax year.  For an example of a taxpayer who kept records sufficient to win his case, go here.


TaxGrrrl,  IRS Proposes To Permanently Ease Restrictions For Innocent Spouse Relief   

Kay Bell, Social Security same-sex benefits limited (for now)  to states where such marriages are legal. Will IRS follow suit?

TaxProf,  The IRS Scandal, Day 97

Lori Bullock,  Social Media, the Internal Revenue Service and You (Davis Brown Tax Law Blog).  Now IRS has a Tumblr.

Paul Neiffer discusses the legislative progress of  The New Farm Bill.  You’d think that 70 years after the Depression ended, Congress might allow anti-depression measures to expire.


Kyle Pomerleau,  Japan Further Discusses Lowering Their Corporate Rate (Tax Policy Blog)

Roberton Williams, Paying for Corporate Tax Rate Cuts is Hard (TaxVox)

David Brunori, I Like the Internet, Taxed or Not (Tax Analysts Blog). “But come on. We are still trying to give a special tax break to the Internet?”

Tax Justice Blog,  State News Quick Hits: Texas, New York and Hollywood:

Between 2003 and 2012 the average Hollywood movie earned a 452 (!) percent return on investment. Still, 40-some states offer generous film tax credits in a misguided effort to invite productions.

But, parties!


Me, The perils of an unorthodox approach to tax crime explained.


He won’t ride his dinosaur into the sunset.  Doctor Dino – Kent Hovind May Lose In Court But Will Never Give Up (Peter Reilly)

Tax Planning the hard way:  People Are Having Babies Earlier to Max Out Tax Benefits (Going Concern)

Answering the Critical Question:  ‘Little House’ Is Not a Big Libertarian Conspiracy (Megan McArdle)


Note to readers: Tax Update posts are cross-posted to the Tax Update Facebook page, My LinkedIn page, and my GooglePlus feed.  Also on Twitter at @joebwan!



Teaching by bad example, Nebraska-style.

Friday, February 22nd, 2013 by Joe Kristan
Hall County Courthouse, Grand Island, Nebraska (Wikipedia image)

Hall County Courthouse, Grand Island, Nebraska (Wikipedia image)

Sometimes the best role models are those who show us what happens when we do everything wrong.  A lawyer in Grand Island, Nebraska featured yesterday in Tax Court takes up this underappreciated but essential chore for us.  We’ll let the Tax Court take up the story for us (my emphasis):

Petitioner, a self-employed attorney, failed to pay his Federal income tax for 1996 to 2002 after notice and demand for payment. Consequently, liens in favor of the United States arose and attached to all his property, including his personal residence. The Internal Revenue Service (IRS) filed notices of Federal tax lien on March 4, 2003, March 5, 2004, and June 19, 2007, in Hall County, Nebraska, and on December 19, 2006, and June 19, 2007, in Hitchcock County, Nebraska. On June 26, 2008, petitioner made a payment of $132,580 to the IRS, which included interest of $46,308 and penalties of $16,683 with respect to the unpaid tax liabilities.

During 2007 and 2008 petitioner operated a law practice in Nebraska as a sole proprietorship. He drove a BMW in 2007 and the first six months of 2008. On July 1, 2008, he traded in the BMW for a Lexus, which he drove for the second half of the year. He used the automobiles in his law practice and for his personal needs, but he did not keep any records separating the uses.

So in 2008 he finally gets around to paying seven years worth of taxes, and he gets a Lexus.  After paying $16,000 in penalties, he still fails to track his business use.  That plays poorly in Tax Court, where they enforce the strict substantiation rules for business mileage of Sec. 274:

Petitioner claimed deductions of $15,200 and $11,700 for car and truck expenses on Schedule C for 2007 and 2008, respectively. He testified that he incurred expenses each year of approximately $9,000 for depreciation, $3,500 for fuel, $1,200 for insurance, and $1,000 for maintenance. He further testified that he drove approximately 20,000 miles per year and “figured just slightly more than half of * * * [the] miles are driven for * * * work”. The only documents that he introduced into evidence to substantiate the expenses are copies of the sales invoices for the BMW and the Lexus and a sales tax receipt for the Lexus. Except for some vague testimony, he did not introduce any evidence to establish the elements of time and place or business purpose. Furthermore, his testimony as to the mileage is just an approximation and is not corroborated by any other evidence. We do not doubt that petitioner incurred car and truck expenses for the years in issue; however, we find that he has not met the strict substantiation requirements of section 274(d). Accordingly, petitioner is not entitled to deduct the car and truck expenses for 2007 and 2008.

So what should he have done?  He should have kept a log recording his business miles with information showing time, date, and business purpose for the trip, including the persons and places visited.

The attorney also took a creative position with respect to the IRS interest.  Because the IRS had liens against his house, he deducted interest on his late-paid taxes as home mortgage interest.  That didn’t work either.  The judge sums it up:

Petitioner failed to keep adequate records and to properly substantiate the car and truck expenses and the expenses that he conceded. He failed to report income on Schedule F, and he disregarded rules or regulations in claiming a deduction for the interest and penalties with respect to his Federal income tax liabilities for 1996 to 2002. Therefore, we find that respondent has met his burden of production. Petitioner offered no evidence that he acted with reasonable cause and in good faith. Accordingly, we find that petitioner is liable for the 20% accuracy-related penalty for 2007 and 2008.

You can learn a lot from this example, starting with the value of paying your taxes on time.  Skipping payment on the 1996-2002 returns made it a lot more likely that the IRS would look at his later returns, and it cost a bundle in interest and penalties.  Even though he had to have been in regular contact with the IRS by 2007 and 2008, he still didn’t keep track of his business miles or report all of his farm income.  He apparently didn’t hire out his tax work to somebody who actually knows taxes, or he wouldn’t have tried to deduct interest on unpaid taxes as home mortgage interest.

The moral: You might be driving the nicest car in town, but you still have to document your business miles.  File timely, report all of your income, track your mileage, and hire the tax help appropriate to your needs.  The long arm of the tax law reaches even to Grand Island.

Cite: Wagoner, T.C. Summary Opinion 2013-14.


Just a struggling cook with a serious gambling habit

Tuesday, February 15th, 2011 by Joe Kristan

A man who listed his profession as “cook” and reported under $35,000 in income over two years was still a high roller, reports Russ Fox:

Our gambler didn


The Constitution has its uses, but sometimes you really need a receipt

Friday, February 11th, 2011 by Joe Kristan

A California taxpayer faced an IRS exam with a strategy that was as unorthodox as it was unwise. Tax Court Judge Vasquez explains:

Petitioner timely filed Forms 1040, U.S. Individual Income Tax Return, for 2006 and 2007, and attached Schedules C on which he reported gross income of $336,475 and $334,860, respectively, and business expenses of $252,013 and $253,490, respectively.
Respondent audited petitioner’s 2006 and 2007 returns and requested that petitioner substantiate all of his Schedule C business expenses. Petitioner refused to substantiate any of his claimed business expenses, arguing that the substantiation requirement violates his Fifth Amendment rights under the U.S. Constitution. Respondent then issued petitioner a notice of deficiency disallowing petitioner’s deductions for business expenses claimed on his Schedules C.

There are some obvious drawbacks to using your right to avoid incriminating yourself to document your Schedule C expenses. Not only is it useless — they really want to see receipts, cancelled checks, and the like — it pretty much dares the IRS to assign a criminal investigator to your case.
The Tax Court opinion doesn’t say whether the IRS took up the dare, but it does make clear that the Constitution doesn’t serve as expense documentation:

At trial the Court warned petitioner that his Fifth Amendment claim would not excuse him from his burden to substantiate his claimed business expenses and offered petitioner an additional opportunity to introduce evidence to satisfy his burden. However, petitioner continued to assert his Fifth Amendment privilege and offered no further evidence to substantiate his claimed business expenses. Accordingly, we sustain respondent’s disallowance of petitioner’s deductions for business expenses claimed on his Schedules C for 2006 and 2007.

Possible explanations of the taxpayer’s behavior that come to mind:
1. There really is no documentation, and the expenses were made up.
2. There were some real doozies in the expense list.
Any other ideas, dear readers?
Cite: Raeber, T.C. Memo 2011-39