Taxable Talk

Recently I assisted a client in preparing his paperwork to file a petition at the U.S. Tax Court. In my emails and letters to him, I emphasized,

Make sure you mail the petition and accompanying documents by the deadline using certified mail, return receipt requested.

He did, and even if somehow his petition gets lost, he will have a valid Tax Court petition.

The TaxProf Blog has another story of a taxpayers who was a day late and a dollar (or, in this case, potentially $50,000) short. The taxpayer had a deadline for his Tax Court filing of October 5th. He used UPS to send his petition, but the tracking receipt shows he sent it on October 6th. The petition is dated October 6th.

The IRS petitioned the Tax Court to dismiss the case for lack of jurisdiction. The taxpayer contended that he dropped the petition off at a mail store on the evening of October 5th. The Tax Court noted that it doesn’t matter; it didn’t enter the UPS system until the 6th, and the Tax Court no longer has jurisdiction.

So if you’re approaching the deadline and you’re going to be after the post office closing hours, find a post office that’s open late (in the Los Angeles area, the LAX branch is open late) or find a FedEx office that’s open late (various offices are open to 6:30pm in the L.A. area). But whatever you do, make sure it gets picked up by the deadline or you have just lost your case.

Hat Tip: TaxProfBlog

Case: Raczkowski v. Commissioner, T.C. Memo 2007-72

Today is the deadline to make your fourth quarter estimated tax payment. That payment must be postmarked today. It doesn’t have to be received by the IRS today, but you do need it to be postmarked today. The easiest, best, and safest way to ensure compliance is to mail your payment using certified mail. When you do that, your receipt is stamped by the post office with the date it was mailed.

Why do I bring this up? Because yet again a case was decided by the Tax Court dealing with something sent a day late. Today’s petitioner had a deadline of Monday, May 8, 2006, to file a petition with the Tax Court. The petition was received by the Court on May 10th, and showed a handwritten date sent (the petition was sent by FedEx) of May 8th. But the FedEx computer generated receipt showed it was sent on May 9th. Additionally, the tracking documentation showed it entered the FedEx system on the 9th.

The Court does an excellent job of summarizing the issues:

A timely mailed petition may be treated as though it were timely filed. Sec. 7502(a). Thus, if a petition is received by the Court after the expiration of the 90-day period, it is nevertheless deemed to be timely filed if the date of the U.S. Postal Service postmark stamped on the envelope in which the petition was mailed is within the time prescribed for filing. Sec. 7502(a); sec. 301.7502-1, Proced. & Admin. Regs.

The Tax Court takes two pages to note that the rules also apply to private delivery services. Handing the envelope to a hotel worker on the evening of the 8th was not equivalent to handing it to an employee of FedEx on the 8th. Suffice to say, the petitioner was a day late and a dollar (or more) short.

Case: Austin v. Commissioner, T.C. Memo 2007-11

The Tax Court today once again had to look at the case of Raymond Wright. Back in 2002 Mr. Wright’s case had been reviewed by the Tax Court; the case was then appealed to the Second Circuit and remanded back to the Tax Court. Back in 2003 Mr. Wright thought he paid off his tax debt when he sent the IRS $15,550; the payoff amount came from the IRS.

The Appeals Court asked the Tax Court to review:

“(a)Whether petitioner’s 1993 tax refund was sent to him by the Internal Revenue Service (IRS) in 1994; (b) if not, whether petitioner timely received notice from the IRS that his refund had not been applied to his 1987 and 1989 tax deficiencies; (c) if not, whether petitioner’s current tax liability should be consequently adjusted by, inter alia, an abatement of interest pursuant to section 6404(e); and (d) in any case, whether the current interest abatement that petitioner had already received was correct in the light of (1) the IRS’s failure to give petitioner the appropriate withholding credits for 1987 and 1989, and (2) his June 21, 1994, payment of $6,681.22.”

The Tax Court then goes into detail about the actions of the two parties. It’s difficult to fight the government. As I’ve commented on before, the burden of proof in Tax Court is generally with the petitioner, not the IRS. Indeed, Mr. Wright was representing himself.

Yet throughout the discussion of the case, the IRS comes off as inept, deceiving, and potentially, evading the Court. Some examples from the opinion: “On December 6, 2005, despite the Court’s statement in the November 7, 2005, order that we would not be inclined to grant any continuances in this case, respondent filed a motion for continuance of trial.” “The extended proceedings of this case recounted supra have brought to light the numerous misstatements and errors made by respondent through the handling of petitioner’s 1987 and 1989 tax years.” And:

“During the appeal and remand, respondent and respondent’s witnesses recounted numerous errors regarding the handling of petitioner’s 1987 and 1989 tax years–and oftentimes neither respondent nor the witness could account for how those errors occurred. As recently as his August 28, 2006, status report, respondent essentially admitted that the IRS made mistakes regarding the computation of petitioner’s interest, including, but not limited to, quoting petitioner an incorrect payoff figure and sending petitioner an allegedly “erroneous” refund on account of respondent’s erroneous calculations and a keystroke error by an IRS employee.”

There’s plenty more in this opinion that damning towards the IRS. Suffice to say,

“Petitioner’s testimony (at both trials) was credible. He consistently testified and averred that he did not receive his 1993 refund. Respondent contended, however, that petitioner received his 1993 refund in 1995. The documentary and testimonial evidence respondent offered was contradictory, contained numerous errors, and lacked credibility. Furthermore, this contention is a concession by respondent that petitioner was correct and that respondent did not send the 1993 refund to petitioner in 1994.

There’s much, much more in this opinion. Most of the time when I read a Tax Court case, the petitioner comes off as someone who has deliberately evaded the law. In this case it appears that it’s the IRS that has had problems with the truth.

Case: Wright v. Commissioner, T.C. Memo 2006-273

Today, the Tax Court looked at the case of a man who had appeared before the court twice previously. In 2001, “the Court explained to petitioner that taxable income includes money and other goods received in exchange for services and urged petitioner to file returns.” In 2005, he returned to the Court: “[T]he Court again rejected petitioner’s arguments and awarded the United States a penalty pursuant to section 6673 in the amount of $5,000. Leggett v. Commissioner, T.C. Memo. 2005-185.” In this case, the petitioner didn’t file a 2002 tax return but had income from installing air conditioners and from Social Security. Would the third time be the charm?

Hardly.

“The Court shall not further address petitioner’s repeated argument “with somber reasoning and copious citation of precedent; to do so might suggest that these arguments have some colorable merit.” Crain v. Commissioner, 737 F.2d 1417, 1417 (5th Cir. 1984). Therefore, the Court sustains respondent’s determination of petitioner’s 2002 tax deficiency.”

To rub a little salt in his wounds, the petitioner also get penalized three times; a Section 6651(a)(1) penalty for failure to file a return (5% per month up to a 25% penalty); a Section 6654(a) penalty for failure to pay estimated taxes; and a Section 6673(a)(1) penalty for “proceedings instituted primarily for delay or in which the taxpayer’s position is frivolous or groundless. “A petition to the Tax Court, or a tax return, is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law.” Coleman v. Commissioner, 791 F.2d 68, 71 (7th Cir. 1986).”

Actually, the petitioner got lucky. In 2005, the Court gave him a $5,000 penalty. In 2006, he gets $6,000. I suspect that if he has another case in 2007, he’ll get $7,000.

Case: Leggett v. Commissioner, T.C. Memo 2006-253

You think you’re an employee; your “employer” thinks you’re an independent contractor. You decide to ask for a determination of status from the IRS using Form SS-8. Do you need to pay your federal income tax (through estimated payments and/or a payment on or before April 15th) or is your “employer” liable when the IRS determines that you really were an employee, not an independent contractor?

The Tax Court waded into this issue yesterday. There was no dispute that the individual in this situation owed the income tax. The question related to the penalties imposed by the IRS under Section 6651(a) for failure to file and Section 6654(a) for failure to make estimated tax payments: Is the fact that your employer goofed a good enough excuse to not file a tax return and not make estimated tax payments?

The Court dealt first with whether the failure to file penalty was justified. The petitioner noted that he didn’t file because he didn’t receive a W-2. That’s no excuse; indeed, the IRS has a procedure that an employee can follow when he doesn’t receive a W-2. As the Court noted, “On this point, petitioner’s reasoning is without merit…[I]t was petitioner’s obligation to pay the tax when due.”

The Court then looked at the failure to make estimated tax payments. The petitioner felt that he shouldn’t have had to make them, because the IRS ultimately determined that he was an employee and he had to wait until he received his W-2. The Court struck down that line of reasoning.

“During 2001, petitioner was treated by Compliance as an independent contractor. No Federal income tax was withheld from his wages. Accordingly, petitioner was under an obligation to remit estimated payments pursuant to section 6654(c) and (d). The fact that respondent ultimately determined petitioner was a Compliance employee does not negate petitioner’s failure to make these payments when they were due in 2001.”

Thus, the petitioner ended up owing the penalties. So if you ever find yourself wondering whether you need to make a tax payment that your employer should have made but didn’t, you probably do need to make that tax payment.

Case: Erwin v. Commissioner, T.C. Summary 2006-172

The Tax Court was not in a charitable mood today. Five cases dealing with charitable deductions, all from Pennsylvania, were decided. In all of them, the petitioners were unable to provide proof of the donations and they all lost their cases.

As the Court has stated numerous times, “Deductions are strictly a matter of legislative grace and the taxpayer bears the burden of proving entitlement to the claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).” The Court then states the rules for charitable donations:

Deductions for charitable contributions are allowable only if verified under regulations prescribed by the Secretary. Sec. 170(a)(1). In general, the regulations require a taxpayer to maintain for each contribution of money one of the following: (1) A canceled check; (2) a receipt from the donee; or, in the absence of a check or receipt, (3) other reliable written records. Sec. 1.170A-13(a)(1), Income Tax Regs. Where it is impractical to obtain a receipt, taxpayers must maintain other written records indicating the name and address of the donee, the date and location of the donation, a description of the property, and its fair market value at the time the contribution was made. Id.; sec. 1.170A-13(b)(2)(ii), Income Tax Regs.

In all of these cases, the petitioners supposedly made the donations in cash and had no receipts or other written records that the Court would accept. So the donations were disallowed. To add insult to injury, most of the petitioners had to pay an accuracy-related penalty.

Cases:
Lewis v. Commissioner, T.C. Summary 2006-140
Harrell v. Commissioner, T.C. Summary 2006-141
Warren v. Commissioner, T.C. Summary 2006-142
Muhammad v. Commissioner, T.C. Summary 2006-144
Warfield v. Commissioner, T.C. Summary 2006-145