Taxable Talk

What happens when you battle the IRS in Tax Court, but lose? You have to pay what you owe. If you don’t, you can face a lien or levy. Today, the Tax Court stepped in when a one-time loser became a two-time loser.

The petitioner in today’s case lost in tax court in 1998 for his 1991 through 1994 taxes (he also received a $500 fine for a frivolous argument). He didn’t pay, so the IRS started the levy process. The petitioner again went to Tax Court where he disputed the levy, claiming the income tax is unconstitutional. His argument, according to the Tax Court, did not contain “a scintilla of merit.” Further, “Petitioner’s groundless arguments and contumacious conduct have wasted the time and resources of respondent and this Court.” So the levy was upheld and a $2500 fine added to the bill.

Case: Forrest v. Commissioner, T.C. Memo 2005-228

When an S corporation has a loss, the loss flows through to its’ shareholders. But shareholders can only take the loss if they have a basis in the corporation; the basis is (in general) the shareholder’s share of the profits (to date), plus his share of the capital and his share of any loans made to the corporation.

In order for a shareholder to increase his basis in an S corporation, the shareholder must make a real outlay; as the Tax Court stated today,

“…to satisfy this requirement, even in circumstances where the taxpayer purports to have made a direct loan to the S corporation, the taxpayer must show that the claimed increase in basis was based on “‘some transaction which when fully consummated left the taxpayer poorer in a material sense.’” Bergman v. United States, 174 F.3d 928, 932 (8th Cir. 1999) (quoting Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971)); see Hitchins v. Commissioner, 103 T.C. 711, 715(1994). This doctrine ensures that the transaction has some economic substance beyond the creation of a tax deduction. Oren v. Commissioner, 357 F.3d 854, 857 (8th Cir. 2004), affg. T.C. Memo. 2002-172.” [Kaplan v. Commissioner, T.C. Memo 2005-218]

In the case decided today, an owner of multiple S corporations took out a bank loan, then “loaned” one of his S corporations money which loaned another S-corporation….The Tax Court decided that there was no economic basis for the transactions and sustained the IRS’ determination of a loss with no basis. Additionally, the petitioner claimed legal fees but had no back-up documentation; he lost that argument, too.

Case: Kaplan v. Commissioner, T.C. Memo 2005-218

Sometimes one must only look in the mirror to see who is the bozo. Yesterday, a taxpayer who didn’t file claimed that the IRS “…prepared only “dummy returns” for 2000 and 2001, and that respondent’s determination of his deficiencies in income tax for 2000 and 2001 is invalid because respondent did not prepare for each year a substitute return that qualified under section 6020(b).” As the Tax Court noted, “Where a taxpayer files no return, [the IRS] may determine the deficiency as if a return had been filed on which the taxpayer reported the amount of tax due was zero; the deficiency is the amount of tax due. Laing v. United States, 423 U.S. 161, 174 (1976); Schiff v. United States, supra; Roat v. Commissioner, supra.”

The petitioner also lost on his contention that he can use statistical information on his industry for deductions (you must keep records of your expenses). And he received failure to file penalties.

Case: Stewart v. Commissioner (T.C. Memo 2005-112)

It’s not a good thing for you when the Tax Court begins its opinion with “…[the petitioner] seeks to deduct expenses by relying mostly — if not quite entirely — on doctored receipts and implausible testimony.” The opinion includes such gems as a flood that didn’t occur, a receipt dated on the top as 1999 but at the bottom 1996 (and the seller says 1996), “…the next two deductions at least sound valid….” Needless to say, the petitioner didn’t do well.

Case: Obot v. Commissioner

The Tax Court was in a foul mood today, as they disposed of several frivolous taxpayer cases. In one case, they note, “We advised petitioner at the 2001 trial that his arguments were frivolous, and we admonished him against advancing them again. Our admonition at the 2001 trial was insufficient to deter petitioner from returning to the Court and advancing the same frivolous and groundless position in the instant case.” That’s one $5,000 penalty (under Section 6673(a)).

Then I read, “Despite warning petitioner at least six times at trial that his arguments were frivolous and groundless, petitioner persisted in making those arguments at trial and on brief.” There’s another $5,000.

In the third case, the Court stated, “Petitioner has advanced shopworn arguments characteristic of tax-protester rhetoric that has been universally rejected by this and other courts….We shall not painstakingly address petitioner’s assertions “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).” This taxpayer escaped with a warning.

Cases: Leggett v. Commissioner, Rhodes v. Commissioner, and Delgado v. Commissioner

…You’re stuck, and look fairly stupid.

At least once a week, the Tax Court tells a tax protester that, “Yes, Virginia, there is an income tax, and you must pay it.” And your arguments that (a) it’s unconstitutional, (b) you don’t live in the United States but in the state of [fill in the blank], or (c) it was never approved, etc. (see the Tax Protester FAQ for a complete list of the reasons) won’t work.

This week’s case is Hodges v. Commissioner, TC Memo 2005-168. We won’t bore you with the constitutional issues; rather, there’s an interesting issue that develops because of the petitioner’s claims regarding the unconstitutionality of the income tax. The amount of tax is dependent on when one of the petitioner’s relatives passed away. The Court chooses to not believe the petitioner as to the date of death. As pointed out by the Court, “We need not accept self-serving testimony, even if unopposed.” Would the Court have felt this way had their been no constitutional issues raised? We don’t know, but making stupid arguments to a court and then trying to get them to rule in your favor isn’t a good idea.

Oh, yes; the petitioners also received penalties for failing to file a return, for failing to make estimated payments, and for taking a frivolous petition.

So, Virginia, do you still want to claim there’s no income tax?

I’m amazed that some of my clients don’t want to spend the $4.42 for certified mail (return receipt requested) when communicating with the IRS. Today the Tax Court released a case where a filing got misplaced in the mails; however, the petitioner’s law firm could show that because the filing was mailed using certified mail, the case will go on.

In the case (Grossman v. Commissioner, T.C. Memo 2005-164) the filing went astray, and instead of arriving at the Tax Court in Washington, ended up in New Jersey. The petition was received late. The IRS argued that it should be disallowed; the petitioner said we can’t be blamed for the Postal Service’s error.

Because the petitioner (really, his attorney) spent the $4.42, the case will go on. So the next time you just mail the filing, think twice.

Almost everyone knows the text of the Fifth Amendment to the US Constitution:

No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offence to be twice put in jeopardy of life or limb, nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use without just compensation.
[emphasis added]

Thus, in a court case (including Tax Court), you cannot be forced to testify and/or incriminate yourself.

Today, the Tax Court released a number of opinions where plaintiff’s asserted fifth amendment rights. But this doesn’t mean that you can stand mute in Tax Court and win your case. The petitioners lost all the cases.

In a criminal case, the prosecution must prove its’ case beyond a reasonable doubt. Tax Court is different. Tax Court has been set up to resolve tax disputes, not criminal matters. And, generally, the petitioner has the burden of proof, not the respondent (the IRS). “Petitioner contends that respondent generally bears the burden of proof. We disagree.” There are exceptions to this standard, notably: “If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and the taxpayer has fully cooperated with the Secretary, the Secretary has the burden of producing reasonable and probative information concerning that deficiency in addition to such information return.” “Once there is evidence of actual receipt of funds by the taxpayer, the taxpayer has the burden of proving that all or part of those funds is not taxable.” But if you don’t assert anything, the petitioner (taxpayer) has the burden of proof.

Finally, as the Court notes, “Before trial, petitioner asserted Fifth Amendment rights against self-incrimination. However, even if petitioner’s claim were bona fide (which we need not decide), it would have no effect on petitioner’s burden of proof. See United States v. Rylander, 460 U.S. 752, 758 (1983); Petzoldt v. Commissioner, 92 T.C. 661, 684-685 (1989); Traficant v. Commissioner, 89 T.C. 501, 504 (1987), affd. 884 F.2d 258 (6th Cir. 1989).”

See:
Richardson v. Commissioner (TC Memo 2005-143);
Krohn v. Commissioner (TC Memo 2005-145);
and Howard v. Commissioner (TC Memo 2005-144)