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Happy Tax Season!
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Sodipo v. IRS, T.C. Memo 2015-31 (Jan. 5, 2015).
On Monday the Tax Court published a case in which the pro se litigant succeeded in convincing the judge that he was a completely unreliable witness when testifying about his own case: "We found Mr. Sodipo's testimony to be in certain material respects general, conclusory, vague, uncorroborated, self-serving, and/or not credible. We shall not rely on the testimony of Mr. Sodipo to establish his position with respect to each of the issues that remain for decision." Id. at p. 11. To make matters worse, the Court found the opposite to be true with respect to the IRS's agent: "We found the testimony of the revenue agent to be trustworthy. We shall rely on that testimony as we deem appropriate." Note, Mr. Sodipo was representing himself, so there was absolutely no one on his side of the case that the Court would believe. This is never a reaction from a Tax Court judge (or any judge for that matter) one hopes to evoke.
Adeyemo v. IRS, T.C. Memo. 2014-1 (Jan. 2, 2014).
The first cases of 2015 are due out today from the Tax Court. The first case of last year, Adeyemo v. IRS, was a good reminder that "Rental activity (including rental real-estate activity) is per se passive unless the taxpayer qualifies as a real-estate professional as defined in section 469(c)(7)(B)." Id. at p. 13. For those of you who moonlight as landlords (less than 750 hours a year), be careful when claiming more deductions than earnings for your realty business activities--your passive activity losses can only be deducted to the extent of your passive activity gains. Generally, IRC Sec. 469.
The Tax Court case of Ferm v. IRS demonstrates the old adage that “timing is everything.” There, the cash-method taxpayer (money is earned as it’s actually received, expended as it’s actually paid) paid tuition for Spring 2011 semester on December 28, 2010. Following this payment, the Ferms attempted to deduct their qualified tuition expenses on their 2011 tax return. Like most lay individuals, these taxpayers probably assumed that the expenses were incurred for 2011, so their deduction should be taken that year. However, cash-method taxpayers (which all of us are) may only take deductions for expenditures in tax years when that money was actually paid. This is true regardless of when the benefits from that debt are actually received. Unfortunately for the Ferms, only about $150 of the qualified expenses were actually paid in 2010. If these expenses had been paid four days later, the deduction would have been proper on the 2011 return. See Ferm at p. 9. This “harsh result” perfectly demonstrates that, when it comes to individual income taxes, “timing is everything.”
Cf. Mottahedeh v. IRS, T.C. Memo. 2014-258 (Dec. 29, 2014).
Yesterday’s Mottahedeh v. IRS, T.C. Memo. 2014-258 (Dec. 29, 2014) perfectly demonstrates the importance of finding a competent, ethical legal advisor. There, the litigants earned a decent living by selling questionable tax planning and reporting advice. That is, they advised dealing in cash, avoiding the paper trail, and refusing to deal with the IRS and California tax authorities. They even offered courses and packages through their “Freedom Law School” in which they taught such strategies.
This factual scenario (in which incompetent tax advisors are facing IRS scrutiny and losing before the Tax Court with their own advice) is actually rather common in Tax Court cases. They illustrate the importance of finding a competent, qualified, and ethical advisor to assist with a taxpayer’s planning and reporting needs. Common indicators include patience, extensive training, a license to practice, and (more than anything else) common sense. No degree certificate or badge of recognition can guarantee such quality, which is why good help is so hard to find. But be sure that if your tax professional’s advice sounds too good to be true, it probably is.
Filzer v. IRS, T.C. Memo. 2014-241 (Nov. 25, 2014).
The taxpayer in this case had a judgment entered against him last week after about 20 years of his failing to pay taxes or participate with the IRS as the Service attempted to collect on his tax debts. Although this is unethical behavior (Mr. Filzer was an attorney) that should never be seriously contemplated by a client, there are advantages when it is viewed as a strategy. That is, Filzer didn't pay taxes or penalties for nearly 20 years while he enjoyed hundreds of thousands of dollars of income a year. Based on his record of absenteeism, my guess is that he and his money are somewhere beyond the reach of federal prosecutors and the IRS. Despite the audacity of such behavior, one must admire the simplicity and effectiveness of his refusal to play the game while possibly escaping with the spoils.
Ferguson Grand Jury Presents an Opportunity
. . . from the perspective of a legal mind, that is. Please excuse this off-topic post, but the Ferguson, Missouri recently decided not to indict. Twitter and other social media are buzzing with commentary about the protesters, opinions about racism, and knee-jerk reactions. All is based on very little evidence.
Fortunately, Margie Freivogel from the local NPR station posted a link on Twitter to the actual transcripts of the Grand Jury itself. http://apps.stlpublicradio.org/ferguson-project/evidence.html.
Irrespective of subject matter, the law should be about an adversarial matching of facts and evidence against the democratically created rules of law. The ultimate conclusion about a case-civil or criminal-ought to be decided by impartial citizens (sometimes a judge) based on the most credible presentation of the case.
The Ferguson grand jury was given the state's strongest case. Police, investigators, and prosecutors presented all that they could. This was done without a defense attorney fighting back. The rules of evidence are much less strict, so more information was presented than that could be presented in a criminal trial. The jury voted against indictment. That is, they found no probable cause for a murder or manslaughter prosecution of Darren Wilson. Prior to this, a prosecutor (likely a whole team of them) also determined that there was no probable cause to indict.
So before you endorse the federal government's promise to investigate or indict for civil rights violations (a third review of Mr. Wilson's fault in the matter), ask yourself whether you support the rule of law and justice based on evidence (please read the transcripts), or a result based on prejudice, hype, and mob mentality.
Last week, the IRS clarified its new position on IRA rollovers. One-a-year Limit on Rollovers, IR 2014-107 (Nov. 10, 2014). In short, the IRS will only allow one rollover per year between a person's IRAs-"An individual could not make an IRA-to-IRA rollover if he or she had made such a rollover involving any of the individual’s IRAs in the preceding 1-year period." Internal Rev. Bulletin 2014-16 (Apr. 14, 2014). The IRS will begin to follow the Tax Court's interpretation of the applicable IRA laws as set out in Bobrow v. IRS, T.C. Memo 2014-21 (Jan. 28, 2014) in January 2015.
Powell v. IRS, T.C. Memo. 2014-235 (Nov. 17, 2014).
Monday’s Powell v. IRS is yet another small business case (S Corporation) in which many tax incentives were at issue. Code sections 162 (trade or business expenses), 166 (bad debt deduction), 1001 (capital gains), 1372(employee benefits in an S Corp), and many more are discussed in the case. As no new legal interpretations are offered in this Memorandum Opinion, it is a good read for any small business owner.
The discussion of 162 trade or business expense deductions (beginning on page 7) is particularly instructive for new business owners. New enterprises cost a lot of time and money in the start-up phase. Code sections 162 and 212 account for the costs of doing business by creating deductions for “ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.” Powell, at p. 7. Most notably, “A taxpayer is not carrying on a trade or business under section 162(a) until the business is functioning as a going concern and performing the activities for which it was organized.” Id. at p. 7. These deductions mean that Congress only taxes the new money-the profit.
In this case, the Powells had a Virginia S Corporation in the petroleum industry. They began a side business in North Carolina for growing and selling beer hops. The Powells purchased some land, unsuccessfully grew and sold hops, and sold the land a substantial loss. Powell, at p. 4. They attempted to deduct (on a 1040 Schedule C) related to their beer hop growing business. Id. at p. 8. The IRS denied that this was a proper use of the 162 deduction because the taxpayers were merely preparing to engage in business, but not actually “carrying on” a business at that time. Although Mr. Powell had purchased realty, incorporated his business for this purpose, planted some hops, and contacted buyers, the Tax Court agreed that he was not actively engaged in a trade or business because it wasn’t conducted with sufficient continuity and regularity. Id. at p. 9.
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