Divorce Legal Fees/J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator

A recent Tax Court decision was reported dealing with IRS Divorce Legal Fees.  J.  Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator in Raleigh and Wilmington, NC  & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

Legal Fees Relating to Status of Investment Fund Distributions in Divorce Were Not Deductible Business Expenses

The Tax Court held legal fees that a taxpayer incurred in a divorce proceeding to defend his ownership of investment fund distributions, which he received after his former wife had filed for divorce but before the date the divorce was granted, were not deductible as expenses related to a business or income producing activity. The Tax Court applied the “origin of the claim” test under U.S. v. Gilmore, 372 U.S. 39 (1963) and found that the fees were personal and nondeductible because the former wife’s claim to the distributions originated entirely from the marriage. Lucas v. Comm’r, T.C. Memo. 2018-80.

Tax Court’s Decision

The Tax Court held that Mr. Lucas’s legal and professional fees were nondeductible personal expenses. The court reasoned that but for the marriage, Ms. Lucas would have had no claim to Mr. Lucas’s interest in Vicis. The court further found that Hahn did not apply because, while the fees in that case were business connected, Mr. Lucas’s legal fees had no connection to Vicis’s investment advisory business. Rather, they were incurred defending his ownership and distributions from equitable distribution in the divorce.

Mr. Lucas failed to demonstrate that the expenses were otherwise deductible, in the Tax Court’s view. The court concluded that Mr. Lucas was neither pursuing alimony nor resisting an attempt to interfere with his ongoing business activities as in Liberty Vending. The court found that Mr. Lucas engaged in little trade or business activity in 2010 or 2011, as Vicis began liquidating in 2009 and thereafter he engaged in no business activity other than a limited management role with Vicis. Mr. Lucas did not, in the view of the Tax Court, establish that Ms. Lucas’s claim related to the winding down of Vicis, or that the fees incurred to defeat her claim were ordinary and necessary to his trade or business.

Offer in Compromise/J. Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator

A recent Tax Court decision was reported dealing with Offer-in-Compromise and IRS Abuse of Discretion.  J.  Frank Best, Tax Controversy CPA/U. S. Tax Court Litigator in Raleigh and Wilmington, NC  & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

Lawyer’s Failure to Provide Required Info Precludes Offer-in-Compromise: In Solny v. Comm’r, T.C. Memo. 2018-71, the Tax Court sustained a proposed collection action by the IRS against a lawyer who had outstanding tax liabilities of almost $200,000. The court noted that at his collection due process hearing, the lawyer sought a collection alternative but did not supply any of the required forms or necessary financial information and thus it was not an abuse of discretion for the IRS to reject collection alternatives and sustain the collection action.

The Tax Court Concluded: Finding no abuse of discretion in any respect, the Tax Court will granted summary judgment for respondent and affirm the proposed collection action. The Court noted that petitioner is free to submit to the IRS at any time, for its consideration and possible acceptance, a collection alternative in the form of an offer-in compromise or Installment Agreement, supported by the necessary financial information.

Tax Controversy CPA/U.S. Tax Court Litigator

IRS Collection and Tax Litigation-Tax Controversy CPA/U.S. Tax Court Litigator: Raleigh and Wilmington, NC/North Myrtle Beach and Myrtle Beach, SC

United States Tax Court Decision for the Week-Trust Fund Recovery Penalty & IRS Abuse of Discretion

A recent Tax Court decision was reported dealing with Trust Fund Recovery Penalty and IRS Abuse of Discretion.  J.  Frank Best, Certified Public Accountant and United States Tax Court Litigator in Raleigh, Wilmington, NC & North Myrtle Beach and Myrtle Beach, SC works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.  

Hearing Officer Not Required to Substantively Analyze Supervisor’s Approval of Trust Fund Recovery Penalty. No IRS Abuse of Discretion.

The Tax Court held that there was no abuse of discretion by a settlement officer (SO) in a collections due process hearing where the SO determined that a computer-generated IRS record showing a supervisor’s printed name but not the supervisor’s signature was sufficient evidence of IRS supervisory approval. The Tax Court found that the SO was not required to analyze the thought process of the approving supervisor but only to verify that the supervisor approved in writing the initial determination of the penalty. Blackburn v. Comm’r, 150 T.C. No. 9 (2018).

Beginning in 2000, Emergency Response Training, Inc. (ERT) fell behind on its employment tax liabilities. Specifically, ERT failed to file a number of Forms 941, Employer’s Quarterly Federal Tax Return, or satisfy numerous self-reported employment tax liabilities during 2000 through 2011.

In 2012, Scott Blackburn and another individual were determined by the IRS to be responsible persons and an IRS revenue officer asserted trust fund recovery penalties (TFRPs) against them. At the time, Senior Revenue Officer Janet Reed was the manager of the officer who made the initial TFRP determination. Later in 2012, the revenue officer changed her determination regarding the second individual’s TFRP liability and submitted a request for supervisory approval to assert TFRP liabilities against Blackburn. A Form 4183, Recommendation re: Trust Fund Recovery Penalty Assessment, was generated showing Reed’s approval of the TFRP determination against Blackburn. The computer-generated Form 4183 did not contain Reed’s signature but showed her name in the supervisor signature block. In November 2012, the IRS assessed TFRP liabilities against Blackburn for the fourth quarter of 2003 and the fourth quarter of 2004. After a collections due process hearing, a settlement officer (SO) upheld the TFRP assessment.

Blackburn appealed the SO’s decision in the Tax Court. He did not contest his liability for the TFRP, but argued that the SO had failed to fulfill the requirement under Code Sec. 6330(c)(1) to verify that the IRS had fulfilled all of its legal and procedural requirements. Blackburn reasoned that under Code Sec. 6751(b)(1), the IRS may not assess a penalty unless an IRS supervisor has personally approved the determination in writing; supervisory approval is part of the IRS’s burden of production under Graev v. Comm’r, 149 T.C. No. 23 (2017). According to Blackburn, the SO’s verification responsibility required a meaningful review, including a factual analysis of the supervisor’s thought process, and he argued that by relying solely on the Form 4183 to verify that a supervisor approved the TFRP determination, the SO did not fulfill the Code Sec. 6330(c)(1) verification requirement. The IRS filed for summary judgment, arguing that Code Sec. 6751(b)(1) does not apply to a TFRP assessment and that even if it did, the Form 4183 fulfilled that requirement.

The Tax Court ruled in favor of the IRS, finding that the SO properly verified the assessment of the TFRP. The Tax Court held that Code Sec. 6330(c)(1) does not require an analysis of the thought process of the approving supervisor under Code Sec. 6751(b), but rather verification that the supervisor approved in writing the initial determination of the penalty. The Tax Court explained that, because it found no abuse of discretion regarding verification of compliance with Code Sec. 6751(b), it did not need to address the legal question of whether Code Sec. 6751(b) applies to the TFRP.

In the Tax Court’s view, Blackburn was arguing that the SO’s verification responsibility under Code Sec. 6330(c)(1) included making a determination of a meaningful approval of the merits of the liability. The Tax Court found no case law support for requiring a substantive review of the SO’s thought process. Rather, the court found that the SO’s review of the administrative steps taken before assessment is accepted as adequate under Code Sec. 6330 as long as there is supporting documentation in the administrative record. Imposing the requirement of a substantive review on the SO would, in the view of the Tax Court, allow the taxpayer to avoid the limitations of pursuing the underlying liability in a CDP hearing and apply a level of detail in the verification process that had never previously been required.

The Tax Court found that the treatment of Form 4340, Certificate of Assessment and Payments, as presumptive evidence that a tax was validly assessed was an apt parallel to the issue regarding Form 4183. Form 4340 is used to prove that an assessment has been made and is considered presumptive proof of a valid assessment. The Tax Court explained that the IRS may rely on Form 4340 where the taxpayer has not shown any irregularity in the assessment procedure that would raise a question about the validity of an assessment. An assessment requires a signature and is made by an IRS officer’s signing the summary record of assessments; the officer’s signature is not required on the Form 4340. In the court’s view, even though Form 4183 does not have an actual signature, in the context of a review for abuse of discretion, its mere existence in the administrative record supports the SO’s verification.

The Tax Court found that it had consistently held in prior decisions that reliance on standard administrative records was acceptable to verify assessments. The court reasoned that Form 4183 was similar to Form 4340, which had previously been found to be an IRS record that reflected compliance with administrative procedures. Form 4183, in the court’s view, provided a similar mechanism to demonstrate supervisory approval. The Tax Court concluded that, regardless of whether supervisory approval was required before the TFRP assessment, a record of such prior approval was present in this case.

 

United States Tax Court Decision for the Week-Civil Fraud by CPA

A recent Tax Court decision was reported dealing with Civil Fraud by a CPA. J.  Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

UNITED STATES TAX COURT

T.C. Memo. 2018-1

January 8, 2018.

CURTIS EUGENE ANKERBERG, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 21104-16.

Curtis Eugene Ankerberg, pro se.

Jeffery D. Rice and Erik W. Nelson , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge : Respondent determined deficiencies of $13,247, $29,800, and $17,207; accuracy-related penalties under section 6662(a) of $1,029, $646.80, and $1,193.20; and fraud penalties under section 6663 of $6,076.50, $19,699.50, and $8,093.25, for 2012, 2013, and 2014, respectively. In the answer respondent asserts for all three years larger penalties than those determined in the notice of [*2] deficiency. Respondent asserts that the section 6663 fraud penalty should apply to the entire amount of the deficiency determined for each year and, in the alternative, asserts that the section 6662(a) accuracy-related penalty should apply to the entire amount of each deficiency.

The issue for decision is whether petitioner is liable for penalties under either section 6663 or section 6662(a) for the years in issue. He contends that medical problems he suffered constitute reasonable cause for his underpayments under section 6664(c)(1). All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner resided in Oregon when he filed his petition.

Petitioner received a bachelor’s degree in business administration from California State University at Los Angeles. He was licensed as a certified public accountant (C.P.A.) in Oregon in 1994 and practiced continuously through the years in issue. He satisfied continuing education requirements to keep his license active through the years. He worked for various public accounting firms until [*3] 2005, when he started practicing on his own without any employees. During the years in issue petitioner operated his business out of his home.

Through the years in issue, petitioner prepared tax returns, gave tax advice to clients, and represented clients before the Internal Revenue Service (IRS). He prepared over 70 returns for clients in 2012, over 60 in 2013, and over 50 in 2014. He prepared returns for individuals, partnerships, S corporations, and C corporations. He drove a car during each year, and he ran for local office nine times in nine years, including the years in issue.

Petitioner prepared his own individual tax returns for 2012, 2013, and 2014. He underreported gross receipts and claimed excessive deductions on Schedules C, Profit or Loss from Business, in the amounts now stipulated as set forth below. He claimed 50% of his personal residence expenses as deductions on each Schedule C, but he did not attach a Form 8829, Expenses for Business Use of Your Home, to any of his filed returns for 2012, 2013, and 2014.

On his return for 2013 filed in October 2014, petitioner reported gross receipts of $26,150 from his business. The IRS commenced an examination of petitioner’s returns for 2012 and 2013 (and later expanded the examination to include 2014). On October 5, 2015, the IRS sent petitioner a notification of proposed changes proposing additional tax attributable to identified omissions of [*4] $8,850 in income for 2013, which were reported to the IRS on information returns by petitioner’s clients. Petitioner paid the proposed amount of additional tax. However, the amount of unreported gross receipts that petitioner agreed to was less than his actual unreported gross receipts for 2013. Petitioner signed his 2014 return on October 14, 2015.

The examination of petitioner’s returns was conducted at petitioner’s residence, and the examining agent observed and inspected the areas that petitioner claimed were used as his office. Petitioner referred to documents in his possession but failed to turn over documents requested by the examining agent. He gave several alternative explanations for repeated delays and failures to cooperate with the examining agent, including: he was scheduled for cataract surgery (which occurred in July 2015); he wanted to await the outcome of a Treasury Inspector General for Tax Administration (TIGTA) complaint that he had made; records had been lost; and his liability for 2013 had been closed when he accepted the proposed adjustment attributed to the unreported income reported by his clients. He explained that he had not attached the form required to claim business use of the home expenses because that “would be a red flag for an audit.”

Although petitioner claimed to have bank statements when first interviewed, he declined to turn them over, contending that he could not see them. Because [*5] petitioner failed to turn over records, the examining agent summoned petitioner’s bank account records and analyzed deposits into the account for each year. The agent determined unreported income for each year. He also obtained information about the number of filed returns in each year identifying petitioner as the preparer.

Before trial, the parties entered into a stipulation in which petitioner conceded unreported gross receipts of $20,423, $69,960, and $20,983 for 2012, 2013, and 2014, respectively. Petitioner also conceded the disallowance of deductions for unsubstantiated insurance, taxes and licenses, office expenses, repairs and maintenance, utilities, mortgage interest, car and truck expenses, depreciation and business use of the home, and other expenses reported on his returns for the years in issue. The disallowed and conceded deductions exceeded $29,000 for 2012, $14,000 for 2013, and $24,000 for 2014.

The omitted income and disallowed deductions resulted in an underpayment attributable to a substantial understatement of income tax for each year, the precise amounts of which will require computations under Rule 155.

OPINION

The fraud penalty is a civil sanction provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the heavy [*6] expense of investigation and the loss resulting from the taxpayer’s fraud. See Helvering v. Mitchell , 303 U.S. 391, 401 (1938). The Commissioner has the burden of proving fraud by clear and convincing evidence. Sec. 7454(a); Rule 142(b).

To impose the 75% penalty provided by section 6663, the Commissioner has the burden of proving for each relevant year (1) an underpayment of tax and (2) that the underpayment was due to fraud. See, e.g. , May v. Commissioner , 137 T.C. 147 (2011), aff’d per order , 2013 WL 1352477 (6th Cir. Feb. 19, 2013); Sadler v. Commissioner , 113 T.C. 99, 102 (1999); Parks v. Commissioner , 94 T.C. 654, 660-661 (1990). The latter burden is met if it is shown that the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of such taxes. DiLeo v. Commissioner , 96 T.C. 858, 874 (1991), aff’d , 959 F.2d 16 (2d Cir. 1992).

Petitioner has conceded unreported income and the disallowance of substantial Schedule C deductions for each year. Respondent’s burden of proving the underpayments for each year thus has been met.

As to respondent’s second burden, fraud may be proven by circumstantial evidence, and the taxpayer’s entire course of conduct may establish the requisite fraudulent intent. Rowlee v. Commissioner , 80 T.C. 1111, 1123 (1983). In [*7] determining whether petitioner’s underpayment was due to fraud, we apply long-recognized “badges of fraud” evolved from cases analyzing section 6663 or former section 6653(b)(1). See, e.g. , Niedringhaus v. Commissioner , 99 T.C. 202, 211 (1992); see also Bradford v. Commissioner , 796 F.2d 303, 308 (9th Cir. 1986), aff’g T.C. Memo. 1984-601. Badges of fraud include (but are not limited to) a pattern of understated income, inadequate records, implausible or inconsistent explanations of behavior, concealing assets, failure to cooperate with tax authorities, filing of false documents, and lack of credibility. Bradford v. Commissioner , 796 F.2d at 307; Toussaint v. Commissioner , 743 F.2d 309, 312 (5th Cir. 1984), aff’g T.C. Memo. 1984-25. Misstatements during an audit, even by an unsophisticated taxpayer, may support a finding of fraud. See, e.g. , Ruark v. Commissioner , 449 F.2d 311 (9th Cir. 1971), aff’g T.C. Memo. 1969-48. Petitioner’s education and experience may be considered in determining whether he acted with fraudulent intent. See Scallen v. Commissioner , 877 F.2d 1364, 1370-1371 (8th Cir. 1989), aff’g T.C. Memo. 1987-412; Solomon v. Commissioner , 732 F.2d 1459, 1461 (6th Cir. 1984), aff’g T.C. Memo. 1982-603; Wright v. Commissioner , T.C. Memo. 2000-336, slip op. at 14.

The evidence establishes a pattern of unreported income and overstated deductions, failure to keep or produce records, and failure to cooperate with the [*8] IRS. As a C.P.A. and tax professional, petitioner knew what the tax laws required in relation to his tax reporting for the years in issue. Petitioner claims that the understated income, overstated deductions, and loss of records are attributable to his various serious medical problems during the years in issue, which constitute reasonable cause under section 6664(c)(1). However, he has not overcome the clear and convincing evidence of fraud in this case. The most telling additional badge of fraud is the lack of credibility in petitioner’s attribution of the “mistakes” on his returns to medical problems, particularly those affecting his eyesight. During the years in issue, he continued to prepare scores of returns for clients and to prepare his own returns without seeking assistance. He continued to drive a car. He prepared his return for 2014, which continued the pattern of omissions and erroneous deductions, after he had cataract surgery. His admissions and misrepresentations to the examining agent are further evidence of fraud. We do not accept his explanations, and we conclude that respondent has established fraudulent intent for each year by clear and convincing evidence. To allow for necessary computations,

Decision will be entered under Rule 155 .

United States Tax Court Decision for the Week-Legal Fees for Alimony Payments

A recent Tax Court decision was reported dealing with tax litigation and legal fees for alimony payments. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Legal Fees to Recoup Alimony Payments Were Nondeductible Personal Expenses

The Tax Court held that a taxpayer could not deduct legal fees incurred in an action to recover alimony payments that he alleged were made in excess of the amount provided for under a separation agreement with his ex-wife. The Tax Court found that the legal fees were nondeductible personal expenses because the underlying claim did not originate from any profit seeking activity. Barry v. Comm’r, T.C. Memo. 2017-237.

William and Beth Barry were divorced in 2002. The judgment of dissolution ordered Mr. Barry to pay alimony of $2,400 per month. In 2011, Mr. Barry sued Ms. Barry for breach of contract. He alleged that under a separation agreement they had previously signed, Ms. Barry was entitled to total alimony of approximately $45,000 and that he had paid that amount in full. He said that Ms. Barry was in default of the separation agreement when she filed for divorce in 2000 and demanded alimony. Mr. Barry sought a judgment of approximately $201,000 – an amount equal to the excess of the total alimony he paid over the amount he claimed Ms. Barry was entitled to under the separation agreement. Mr. Barry’s lawsuit was dismissed in 2011 as time barred.

On his 2013 tax return, Mr. Barry claimed a deduction of over $34,000 for the legal fees he paid with respect to the action against Ms. Barry. The IRS determined a deficiency of approximately $5,000 and an accuracy-related penalty of $1,000. Mr. Barry petitioned the Tax Court for redetermination of the deficiency.

Personal and family expenses are generally not deductible. However, a deduction is allowed under Code Sec. 212 for ordinary and necessary expenses for (1) the production or collection of income, or (2) the maintenance or conservation of property held for the production of income. In U.S. v. Gilmore, 372 U. S 39 (1963), the Supreme Court held that legal fees incurred by a taxpayer in resisting his wife’s property claims in a divorce were not deductible because the claims that gave rise to the fees stemmed from the marital relationship rather than from any profit seeking activity. The Supreme Court stated that the origin of the claim with respect to which an expense was incurred, rather than its potential consequences, is the controlling test of whether an expense is deductible.

Barry argued that Gilmore was decided based on the language of Code Sec. 212(2), which applies to expenses incurred in the conservation of property held for the production of income, but that his his claim was based on Code Sec. 212(1), which allows a deduction for expenses paid for the production of income. Barry said that the origin of the claim test therefore did not apply. Barry also cited Wild v. Comm’r, 42  T.C. 706 (1964), where the Tax Court held that legal fees paid by a wife in obtaining alimony includible in gross income were deductible under Code Sec. 212(1). Barry argued that his legal expenses should also be deductible because they were incurred for the purpose of collecting money that would be included in his income under the tax benefit rule.

The Tax Court held that Barry’s legal fees were not deductible under Code Sec 212(1). First, it found that, contrary to Barry’s argument, the Gilmore origin of the claim test applied to both paragraphs (1) and (2) of Code Sec.212. According to the Tax Court, Gilmore interpreted the predecessor statute to Code Sec.212, which contained in one paragraph the provisions now codified in Code Sec. 212(1) and Code Sec.212(2). The Tax Court also cited language from the Gilmore opinion stating that the only kind of expenses deductible under the predecessor to Code Sec. 212 were those that related to a profit seeking purpose and did not include personal, living, or family expenses.

Next, the Tax Court cited several of its previous decisions applying the origin of the claim test to deductions for legal fees under Code Sec. 212(1). The Tax Court noted that in Sunderland v. Comm’r, T.C. Memo. 1977-116, it applied the Gilmore test to disallow a deduction claimed under Code Sec.212(1) for legal expenses the taxpayer incurred in a legal action which resulted in a reduction of the alimony paid to his former wife. The Tax Court also cited Favrot v. U.S., 550 F.Supp. 809 (E.D. La. 1982), where a district court applied Gilmore in disallowing a claimed deduction for legal expenses incurred in an attempt to recoup alimony payments. The Tax Court rejected Barry’s assertion that his legal fees should be deductible because any recovered alimony payments would have been includible in his income. In the Tax Court’s view, Barry improperly focused on the potential consequences of his lawsuit rather than on the origin and character of his claim.

The Tax Court also disagreed with Barry’s reading of its decision in Wild, finding that it turned on an exception to the Gilmore rule in the regulations under Code Sec. 262 specifically providing for the deductibility of legal fees of a wife incurred for the collection of alimony and similar amounts received by a wife in connection with a marital relationship. The Tax Court concluded by citing the general rule as stated in the regulations under Code Sec. 262, which is that attorney’s fees and other costs paid in connection with a divorce, separation, or decree for support are not deductible by either the husband or the wife.

Finally, the Tax Court reasoned that if Barry had filed suit in the same year as his divorce to challenge the alimony obligations, his legal expenses would have been nondeductible personal expenses. In seeking to deduct legal expenses incurred in an action to recoup the alimony payments, Barry was seeking to do indirectly what could not have been done directly, according to the Tax Court.

United States Tax Court Decision for the Week and Filing Status

A recent Tax Court decision was reported potentially dealing with tax litigation and filing status of Joint v. Separate returns. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Taxpayer Can File Joint Return After Original Return Erroneously Reported Single Status

The Tax Court held that a return that a taxpayer originally filed, erroneously claiming single status, did not constitute a “separate return” within the meaning of Code Sec. 6013(b) and, thus, the taxpayer and his wife were entitled to file a joint return and pay joint return tax rates for the year at issue. The Tax Court concluded that the term “separate return” means a return on which a married taxpayer has claimed the permissible status of married filing separately, rather than a return on which a married taxpayer has claimed a filing status not properly available to him or her. Camara v. Comm’r, 149 T.C. No. 13 (2017).

Facts

Fansu Camara was married to Aminata Jatta. Nevertheless, on his 2012 Form 1040, which he filed on April 15, 2013, Mr. Camara erroneously checked the box for single filing status. In a notice of deficiency issued to Mr. Camara for his 2012 tax year, the IRS changed his filing status from single to married filing separately. On May 8, 2015, Mr. Camara and Ms. Jatta timely petitioned the Tax Court with respect to that notice of deficiency as well as a notice of deficiency that the IRS issued to them for their 2013 tax year. On May 27, 2016, Mr. Camara and Ms. Jatta filed with the IRS a joint 2012 return, which they had both signed. Ms. Jatta had not previously filed a 2012 return.

The couple and the IRS agreed that if Mr. Camara and Ms. Jatta were entitled to elect joint filing status for 2012, the joint return that they filed on May 27, 2016 – after receiving the notice of deficiency and petitioning the Tax Court – correctly reflected their 2012 tax liability with certain agreed-upon changes. And the IRS conceded that Mr. Camara and Ms. Jatta met the substantive requirements for joint filing status and rates for 2012. However, the IRS contended that Code Sec. 6013(b)(2) barred Mr. Camara and Ms. Jatta from filing a joint return, and consequently, they were procedurally barred from claiming the benefits generally available to married taxpayers who file a joint return.

Code Sec. 6013 governs whether a married couple may file a joint return. Under Code Sec. 6013(a), a married couple can “make a single return jointly of income taxes” subject to three restrictions, which are not applicable in this case. Code Sec. 6013(b) permits married taxpayers to elect in certain circumstances to switch from a separate return to a joint return. Code Sec. 6013(b)(1) provides that if an individual has filed a “separate return” for a tax year for which that individual and his or her spouse could have filed a joint return, that individual and his or her spouse may nevertheless “make a joint return” for that year. Because the Code Sec. 6013(b) election applies only where an individual has filed a separate return, limitation under Code Sec. 6013(b)(2) likewise apply only if the individual has filed a separate return. The term “separate return” in Code Sec. 6013(b)(1) is not defined in the Code or the regulations.

IRS Arguments

The IRS argued that Mr. Camara’s original 2012 return, on which he erroneously claimed single filing status, constituted a “separate return” within the meaning of Code Sec. 6013(b)(1) and, consequently, two limitations under Code Sec. 6013(b)(2) applied to prevent Mr. Camara from making the Code Sec. 6013(b) election to switch to a joint return. The two limitations that the IRS invoked were in Code Sec. 6013(b)(2)(A) and Code Sec. 6013(b)(2)(B). The first limitation bars the Code Sec. 6013(b) election after three years from the filing deadline (without extensions) for filing the return for that year. The second limitation bars the Code Sec. 6013(b) election after there has been mailed to either spouse, with respect to such tax year, a notice of deficiency, if the spouse, as to such notice, files a petition with the Tax Court within 90 days.

According to the IRS, the two limitations were satisfied because: (1) the date on which Mr. Camara and Ms. Jatta filed a joint return – May 27, 2016 – was more than three years after Mr. Camara filed a separate return; and (2) Mr. Camara received a notice of deficiency, and filed a petition with the Tax Court before filing a joint return.

The IRS also cited the Sixth Circuit’s decision in Morgan v. Comm’r, 807 F.2d 81 (6th Cir. 1986), aff’g T.C. Memo. 1984-384, as compelling a decision in its favor. Morgan involved married taxpayers who filed “protest returns” claiming married filing jointly status for some years and married filing separately status for other years. Affirming the Tax Court, the Sixth Circuit in Morgan held that Code Sec. 6013(b)(2) precluded the husband from claiming the benefits of joint return filing status after the IRS issued a notice of deficiency calculating his tax on the basis of married filing separately.

Tax Court Holding

The Tax Court held that the 2012 return that Mr. Camera originally filed, erroneously claiming single status, did not constitute a “separate return” within the meaning of Code Sec. 6013(b). Thus, Mr. Camera and his wife were entitled to file a joint return and pay joint return tax rates for that year.

The Tax Court began its analysis by noting that the issue raised by the IRS has not been formally addressed by the Tax Court in a reported or reviewed opinion. The court also noted that no Court of Appeals has held that a single return or a head of household return is a separate return for the purposes of Code Sec. 6013(b) and the two Appeals Court cases that have considered this issue, Ibrahim v. Comm’r, 788 F.3d 834 (8th Cir. 2015) and Glaze v. Comm’r, 641 F.2d 339 (5th Cir. 1981), have held the opposite. The court also observed that some Memorandum Opinions had interpreted “separate return” to include a single return or a head of household return for this purpose. For the most part, however, those Memorandum Opinions merely accepted the rationale of earlier cases, and the ultimate authority for those Memorandum Opinions appeared to be traceable to earlier cases where the effect of an erroneous claim of filing status was neither addressed nor even presented as an issue.

The Tax Court noted that its decision in the instant case would be appealable to the Sixth Circuit. However, the court rejected the IRS’s argument that the Sixth Circuit’s holding in Morgan compelled it to rule in the IRS’s favor. Morgan, the court said, did not squarely address the issue presented in the instant case because Morgan did not explain the effect under Code Sec. 6013(b) of a married taxpayer’s initial filings of a return erroneously claiming single status.

The court did find, however, that the Fifth Circuit, in Glaze, squarely addressed the issue. In Glaze, the Fifth Circuit held that filing a return with an erroneous claim to an impermissible filing status (i.e., a filing status of single when the taxpayer was married) did not constitute an “election” to file a separate return. The Fifth Circuit in Morgan, the court observed, distinguished Glaze on the grounds that Glaze involved no protest return and the taxpayer had not attempted to file a return as a married taxpayer originally. The Tax Court found that Mr. Camara’s case was distinguishable from Morgan on the same grounds on which Glaze was distinguished in Morgan. Mr. Camara neither filed a protest return nor attempted to file a return as a married taxpayer originally.

Considering the context of Code Sec. 6013(b) as a whole and giving due regard to the Fifth Circuit’s opinion in Glaze, as well as an Eight Circuit’s opinion in Ibrahim, the Tax Court concluded that the term “separate return” means a return on which a married taxpayer has claimed the permissible status of married filing separately, rather than a return on which a married taxpayer has claimed a filing status not properly available to him or her.

Finally, the court also noted that the legislative history showed that Code Sec. 6013(b)(1) was intended only to provide taxpayers flexibility in switching from a proper initial election to file a separate return to an election to file a joint return; it was not intended to foreclose correction of an erroneous initial retur

United States Tax Court Decision for the Week and Gambling Winnings

A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation and gambling winnings and standard deduction v. itemized deductions. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Taxpayers Who Elected Standard Deduction Can’t Deduct Gambling Losses

The Tax Court held that a couple was taxable on gambling winnings shown on their Form W-2G and, because the couple could not substantiate how much was spent in producing the winnings, no reduction was allowed. The court also found that the couple’s election to take the standard deduction precluded them from taking an itemized deduction for their gambling losses. Viso v. Comm’r, T.C. Memo. 2017-154.

During 2013, William Viso engaged in a variety of recreational gambling activities: he bet on college and professional sports, played slot machines, and bought lottery tickets. That year, he won $5,060 on slot machines at three different casinos. The gambling winnings were reported on Forms W-2G, Certain Gambling Winnings. That same year, Viso and his wife sustained approximately $7,000 in gambling losses.

On their joint Form 1040, the Visos did not report any gambling winnings or losses for the 2013 tax year. They claimed a standard deduction of $12,200. The IRS assessed a tax deficiency after including the $5,060 of gambling winnings in the couple’s 2013 income.

The Visos did not challenge the accuracy of the gross gambling winnings included in their income; instead they argued that those amounts should be reduced by the amounts of bets they placed to produce their winnings. Although the couple introduced evidence of losses at another casino (in addition to lottery tickets and sporting bets), they produced no evidence as to how much William bet to produce the winnings reflected on the Forms W-2G.

For tax purposes, gambling losses are treated in one of two ways. Taxpayers engaged in the trade or business of gambling may deduct their gambling losses against their gambling winnings “above the line” as a trade or business expense in arriving at adjusted gross income. In the case of taxpayers not engaged in the trade or business of gambling, gambling losses are allowable as an itemized deduction, but only to the extent of gambling winnings.

The Tax Court held that the couple’s election to take the standard deduction precluded them from taking an itemized deduction for their gambling losses. In addition, because they could not substantiate how much was spent in producing the winnings reflected on Forms W-2G, no reduction was allowed. In reaching its conclusion, the court cited Torpie v. Comm’r, T.C. Memo. 2000-168 which held that, in order to claim any Schedule A itemized deductions, a taxpayer must forgo the standard deduction.

The Tax Court noted that the couple’s standard deduction of $12,200 exceeded their potential itemized deduction for gambling losses of $5,060. Thus, the court said, the couple’s election to take the standard deduction resulted in a larger deduction than if they had taken an itemized deduction for their gambling losses. Since the couple elected to take the standard deduction, the court held they could not take an itemized deduction for their gambling losses to offset their gambling winnings.

United States Tax Court Decision for the Week – You be the Judge

A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Former IRS Agent and Wife Liable for $73,000 in Fraud Penalties:In Langer v. Comm’r, T.C. Memo. 2017-92, the Tax Court held that a couple’s repeated concealment of income by overstating deductions on their 2011-2013 tax returns exemplified a pattern of fraudulent behavior and the couple was thus liable for fraud penalties of approximately $73,000. The court noted that the husband had been an IRS agent for more than 29 years and that the couple’s explanations regarding the deductions taken on their returns were implausible and unpersuasive.

UNITED STATES TAX COURT

T.C. Memo. 2017-92-CIVIL FRAUD

May 30, 2017.

HENRY LANGER AND PATRICIA LANGER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22719-15.

Thomas Edward Brever , for petitioners.

Christina L. Cook and John Schmittdiel , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge : Respondent issued a notice of deficiency to petitioners determining deficiencies in income tax and fraud penalties as follows:1

[*2]

                           Penalty

Year     Deficiency1     sec. 6663(a)

2011       $36,595        $27,446.25

2012        27,386         20,539.50

2013        33,689         25,266.75

__________

1The amounts referred to herein reflect an agreement by the parties to
revised deficiencies in Federal income tax as reflected on Form 5278,
Statement–Income Tax Changes, and are less than respondent’s initial
determinations in the notice of deficiency.

Petitioners conceded in full the deficiencies for tax years 2011-13. The only issue for decision is whether petitioners are liable for fraud penalties under section 6663 for tax years 2011-13.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Minnesota when the petition was timely filed.

Henry Langer was an Internal Revenue Service revenue agent for over 29 years and received training in determining allowable business expense deductions; he was also a certified forensic examiner. Petitioners have a history of claiming [*3] business expense deductions for obvious personal expenses and expenses they could not substantiate. See, e.g. , Langer v. Commissioner (Langer I ), T.C. Memo. 2008-255, 96 T.C.M. (CCH) 334, 339 (2008) (“[P]etitioners claimed as business expense deductions many obviously personal items . A former Internal Revenue Service agent should have known better .” (Emphasis added.)), aff’d without published opinion , 378 F. App’x 598 (8th Cir. 2010); Langer v. Commissioner (Langer II ), T.C. Memo. 1992-46, 63 T.C.M. (CCH) 1900 (1992), aff’d , 989 F.2d 294 (8th Cir. 1993); Langer v. Commissioner (Langer III ), T.C. Memo. 1990-268, 59 T.C.M. (CCH) 740, 746 (1990) (holding petitioners liable for an addition to tax under section 6653(a) for negligence because petitioners’ conduct suggested a “pattern of carelessness” and because petitioners used methods for determining deductions that had “no basis in the law”), aff’d , 980 F.2d 1198 (8th Cir. 1992).

Respondent disallowed $113,194, $67,186, and $84,087 of petitioners’ claimed deductions on Schedules C, Profit or Loss From Business, for 2011-13, respectively, as personal expenses; many of petitioners’ claimed and disallowed expense deductions were identical to those disallowed as personal expenses in Langer I and Langer II , including expenses for parties, gifts, flowers, vases, and holiday decorations, to name a few.

[*4] OPINION

The Commissioner must establish by clear and convincing evidence that, for each year at issue, an underpayment of tax exists and that some portion of the underpayment is due to fraud. Secs. 6663(a), 7454(a); Rule 142(b). The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner , 90 T.C. 1130, 1143 (1988). The taxpayer’s entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner , 56 T.C. 213, 223-224 (1971).

Petitioners conceded in full the deficiencies for 2011-13, and therefore respondent satisfied his burden of proving an underpayment of tax for each year at issue. Respondent established that, for each year at issue, petitioners’ underpayment of tax was fraudulent and that they intended to conceal taxable income and prevent the collection of tax by overstating deductions and claiming nondeductible and obvious personal expenditures as business expenses. See Rahall v. Commissioner , T.C. Memo. 2011-101, 101 T.C.M. (CCH) 1486, 1492 (2011) (“An additional badge of fraud includes a taxpayer disguising nondeductible personal expenditures as business expenses.”). Mr. Langer’s nearly 30 years of experience as a revenue agent and petitioners’ history before this Court for identical issues are relevant considerations in determining whether they had [*5] fraudulent intent. See Beaver v. Commissioner , 55 T.C. 85, 93-94 (1970) (stating that petitioner’s business experience is a relevant consideration in determining whether he had fraudulent intent). Petitioners’ repeated concealment of income by overstating deductions exemplifies a pattern of fraudulent behavior, and their explanations are implausible and unpersuasive. See McGraw v. Commissioner , 384 F.3d 965, 971 (8th Cir. 2004) (“[A] consistent pattern of sizeable underreporting of income * * * and unsatisfactory explanations for such underreporting also can establish fraud.”), aff’g Butler v. Commissioner , T.C. Memo. 2002-314; Sanchez v. Commissioner , T.C. Memo. 2014-174, at *17 (stating that “a pattern of conduct that evidences an intent to mislead” is one of the “badges of fraud” from which fraudulent intent can be inferred), aff’d , ___ F. App’x ___, 2016 WL 7336626 (9th Cir. Dec. 19, 2016); Bruce Goldberg, Inc. v. Commissioner , T.C. Memo. 1989-582, 58 T.C.M. (CCH) 519, 529 (1989) (“[F]raud may sometimes be inferred from a pattern of overstating deductions.”). Accordingly, petitioners are liable for the fraud penalties under section 6663 for all years at issue.

[*6] To reflect the foregoing,

Decision will be entered under Rule 155 .

Footnotes

1Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

[End of Document]

United States Tax Court Decision for the Week – You be the Judge

A recent Tax Court decision was reported that may be of interest to individuals potentially dealing with tax litigation. J. Frank Best, Certified Public Accountant and United States Tax Court Litigator works to stay current on all IRS decisions concerning tax litigation to ensure we are fully informed and prepared for our clients.

Former IRS Agent and Wife Liable for $73,000 in Fraud Penalties:In Langer v. Comm’r, T.C. Memo. 2017-92, the Tax Court held that a couple’s repeated concealment of income by overstating deductions on their 2011-2013 tax returns exemplified a pattern of fraudulent behavior and the couple was thus liable for fraud penalties of approximately $73,000. The court noted that the husband had been an IRS agent for more than 29 years and that the couple’s explanations regarding the deductions taken on their returns were implausible and unpersuasive.

UNITED STATES TAX COURT

T.C. Memo. 2017-92-CIVIL FRAUD

May 30, 2017.

HENRY LANGER AND PATRICIA LANGER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22719-15.

Thomas Edward Brever , for petitioners.

Christina L. Cook and John Schmittdiel , for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

NEGA, Judge : Respondent issued a notice of deficiency to petitioners determining deficiencies in income tax and fraud penalties as follows:1

[*2]

                           Penalty

Year     Deficiency1     sec. 6663(a)

2011       $36,595        $27,446.25

2012        27,386         20,539.50

2013        33,689         25,266.75

__________

1The amounts referred to herein reflect an agreement by the parties to
revised deficiencies in Federal income tax as reflected on Form 5278,
Statement–Income Tax Changes, and are less than respondent’s initial
determinations in the notice of deficiency.

Petitioners conceded in full the deficiencies for tax years 2011-13. The only issue for decision is whether petitioners are liable for fraud penalties under section 6663 for tax years 2011-13.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Minnesota when the petition was timely filed.

Henry Langer was an Internal Revenue Service revenue agent for over 29 years and received training in determining allowable business expense deductions; he was also a certified forensic examiner. Petitioners have a history of claiming [*3] business expense deductions for obvious personal expenses and expenses they could not substantiate. See, e.g. , Langer v. Commissioner (Langer I ), T.C. Memo. 2008-255, 96 T.C.M. (CCH) 334, 339 (2008) (“[P]etitioners claimed as business expense deductions many obviously personal items . A former Internal Revenue Service agent should have known better .” (Emphasis added.)), aff’d without published opinion , 378 F. App’x 598 (8th Cir. 2010); Langer v. Commissioner (Langer II ), T.C. Memo. 1992-46, 63 T.C.M. (CCH) 1900 (1992), aff’d , 989 F.2d 294 (8th Cir. 1993); Langer v. Commissioner (Langer III ), T.C. Memo. 1990-268, 59 T.C.M. (CCH) 740, 746 (1990) (holding petitioners liable for an addition to tax under section 6653(a) for negligence because petitioners’ conduct suggested a “pattern of carelessness” and because petitioners used methods for determining deductions that had “no basis in the law”), aff’d , 980 F.2d 1198 (8th Cir. 1992).

Respondent disallowed $113,194, $67,186, and $84,087 of petitioners’ claimed deductions on Schedules C, Profit or Loss From Business, for 2011-13, respectively, as personal expenses; many of petitioners’ claimed and disallowed expense deductions were identical to those disallowed as personal expenses in Langer I and Langer II , including expenses for parties, gifts, flowers, vases, and holiday decorations, to name a few.

[*4] OPINION

The Commissioner must establish by clear and convincing evidence that, for each year at issue, an underpayment of tax exists and that some portion of the underpayment is due to fraud. Secs. 6663(a), 7454(a); Rule 142(b). The Commissioner must show that the taxpayer intended to conceal, mislead, or otherwise prevent the collection of taxes. Katz v. Commissioner , 90 T.C. 1130, 1143 (1988). The taxpayer’s entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner , 56 T.C. 213, 223-224 (1971).

Petitioners conceded in full the deficiencies for 2011-13, and therefore respondent satisfied his burden of proving an underpayment of tax for each year at issue. Respondent established that, for each year at issue, petitioners’ underpayment of tax was fraudulent and that they intended to conceal taxable income and prevent the collection of tax by overstating deductions and claiming nondeductible and obvious personal expenditures as business expenses. See Rahall v. Commissioner , T.C. Memo. 2011-101, 101 T.C.M. (CCH) 1486, 1492 (2011) (“An additional badge of fraud includes a taxpayer disguising nondeductible personal expenditures as business expenses.”). Mr. Langer’s nearly 30 years of experience as a revenue agent and petitioners’ history before this Court for identical issues are relevant considerations in determining whether they had [*5] fraudulent intent. See Beaver v. Commissioner , 55 T.C. 85, 93-94 (1970) (stating that petitioner’s business experience is a relevant consideration in determining whether he had fraudulent intent). Petitioners’ repeated concealment of income by overstating deductions exemplifies a pattern of fraudulent behavior, and their explanations are implausible and unpersuasive. See McGraw v. Commissioner , 384 F.3d 965, 971 (8th Cir. 2004) (“[A] consistent pattern of sizeable underreporting of income * * * and unsatisfactory explanations for such underreporting also can establish fraud.”), aff’g Butler v. Commissioner , T.C. Memo. 2002-314; Sanchez v. Commissioner , T.C. Memo. 2014-174, at *17 (stating that “a pattern of conduct that evidences an intent to mislead” is one of the “badges of fraud” from which fraudulent intent can be inferred), aff’d , ___ F. App’x ___, 2016 WL 7336626 (9th Cir. Dec. 19, 2016); Bruce Goldberg, Inc. v. Commissioner , T.C. Memo. 1989-582, 58 T.C.M. (CCH) 519, 529 (1989) (“[F]raud may sometimes be inferred from a pattern of overstating deductions.”). Accordingly, petitioners are liable for the fraud penalties under section 6663 for all years at issue.

[*6] To reflect the foregoing,

Decision will be entered under Rule 155 .

Footnotes

1Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

[End of Document]