We welcome back regular guest blogger Caleb Smith, the director of the low income taxpayer clinic at the University of Minnesota. This week Caleb brings us news of a dismissal from the Tax Court in the case of a potentially sympathetic innocent spouse claimant as well as what seems like the latest version of the Amway scheme from years gone by. Like the petitioner Caleb describes below, in the 1980s there were a host of taxpayers who went to Amway conventions and were told that they could deduct just about everything in their life as long as they tried to push Amway products on the people they met. Caleb speculates on whether Judge Buch’s opinion will persuade the taxpayer of the error of the theory of deducting all of your personal expenses. I hope he does but can attest that it took many years and many opinions to stamp out this type of activity by individuals “selling” Amway products. Keith
There were quite a few designated orders last week (nine in total), but only a few of which that had much substance. Ones that won’t be discussed include two from Judge Jacobs (here and here), one from Special Trial Judge Carluzzo (here) and one from Judge Gustafson (here). Another designated order that we won’t presently discuss does bring up some very interesting issues about the timeliness of Collection Due Process request when mailed to the wrong IRS address (found here). More on that developing issue to come in the weeks ahead. For now, we’ll focus on slightly more settled “timeliness” issue…
Stop Me If You’ve Heard This One…
Goline v. Commisioner, Dkt. # 20756-16S (order here)
I sometimes tell my Federal Tax Procedure class that a pro se taxpayer could write their petition in crayon on a cocktail napkin and the court would probably find jurisdiction if it was mailed on time -but no matter what you send, if it is a day late you are out of luck. Such is the case in Goline: an all-too-common story where the taxpayer mailed their Innocent Spouse petition a day after the statutory deadline under IRC 6015(e); a statutory deadline that the Tax Court says they are helpless to extend.
The facts of this order paint a potentially sympathetic picture for the taxpayer. Consider the following:
(1) The taxpayer probably filed the petition within 90 days of being made aware of (or receiving) the IRS notice of determination: the notice of determination was properly sent to the last known address by certified mail, but went unclaimed and returned to the IRS. But the date the IRS mails (if to the proper address) is what begins the 90 day period.
(2) Presumably recognizing the tight timeline (it is unclear how the taxpayer became aware of the notice of determination since it went unclaimed), the taxpayer sent the petition by FedEx Express Overnight. But it was sent on the 91st day: thus no mailbox rule and no timeliness. The petition was actually received by the Tax Court on the 92nd day: it isn’t difficult to imagine a petition sent on the 89th day by standard mail and not being received until later than the 92nd day, but still preserving jurisdiction.
(3) The taxpayer apparently received inaccurate advice about the filing deadline from an IRS employee on a phone call.
Read in the light most favorable to the taxpayer you can imagine a taxpayer not receiving their mail, calling the IRS about a filing deadline, receiving erroneous advice about the actual deadline (for example, putting the deadline a day later than it is), and the taxpayer scrambling to meet that deadline… If these were the facts (admittedly, there is speculation on my part), you could envision a fairly strong case for a court to exercise its equitable powers. But these are powers we are told time and time again the Tax Court does not have when it comes to questions of jurisdictional filing deadlines. At least, that is the law as it presently stands. It is no secret that the authors of Procedurally Taxing are doing their best to see that this changes. See posts here, here, and here among others.
Battle-Axes as a Business Expense: Probably Not if it’s a Daycare
Eotvos v. Commissioner, Dkt. # 21450-16S (order here)
There isn’t anything to this order and bench opinion that breaks new ground. However, because I actually watched this trial during calendar call in St. Paul, I have a little insight that goes beyond what is in the bench opinion that may be of interest. This was largely a case of a taxpayer being convinced (maybe without much convincing, because it saved them money to believe it) of something ridiculous in the tax code. It may well be a corollary effect of being told so many times that the tax code is overly-complicated: the belief in form over substance leading to legal (though unreasonable) outcomes. Essentially, the taxpayer was told (or sold) a tax scheme from a “professional” whereby they could deduct pretty much the entire cost of their home and everything in it, so long as it was used for a daycare. During the trial, the taxpayer repeatedly tried to bring up Rev. Procs., and other (I’m confident) dubious sources of law that confirmed this was the proper treatment –if I had to guess, these legal authorities were all prominently cited to by the mastermind that told the taxpayer of this brilliant idea that no one else had yet come across.
It was all a bit painful to watch, as Judge Buch continuously had to steer the taxpayer towards establishing a factual record needed to touch on the issues (largely substantiation and purpose of the expenses), whereas the pro se taxpayer almost always tried to make legal arguments. One very much sympathizes with Judge Buch on this case, and a lot of credit should be given to him: to the extent that facts were put on the record that the petitioner would need for the case, they were almost wholly elicited from the Judge.
Unfortunately, those facts were not good. Among the detailed expenses that the taxpayer claimed for his daycare were a collection of battle axes and swords. Outside of Game of Thrones, it is hard to imagine those items being suitable for children (disclaimer: I don’t actually watch Game of Thrones so I have no idea if that reference works nor do I have children so I may be unaware of the role battle axes play in raising them). Because the entire home (and garage, and sidewalk, apparently) was used for daycare everything in and around those areas should be deductible as business expenses, to the taxpayer’s mind.
To anyone that wasn’t sitting at petitioners table, there was no doubt how this case would turn out. Hopefully, the taxpayer will carefully read the decision as it does a very clear job of laying out when things that are generally considered personal property can be deducted. If this will be enough to convince him that his “expert” was wrong is anyone’s guess.
Odds-and-Ends
A few of the orders that are worth mentioning, but not in great detail, are as follows:
Health Care and Tax Returns (Binyon v. Commissioner, Dkt. # 23656-16S)
It may come as a surprise to some, but even before the Affordable Care Act there was a (very small) interaction of refundable tax credits and health care: the “Health Care Tax Credit” (IRC 35).If you hadn’t heard of this credit, it is probably because its application is fairly limited. The only potential applicants are eligible trade adjustment allowance (TAA) recipients, eligible alternative TAA recipient, or eligible Pension Benefit Guarantee Corporation (PBGC) pension recipients. The petitioner claiming the credit in this case fell into none of those categories. Furthermore, it appears that the petitioner had her insurance premiums paid by her father. It isn’t clear how petitioner came to believe she should get the credit (it doesn’t exactly jump out on Form 1040), but it is clear she wasn’t entitled to it. And so the court easily found.
Limits of Cohan (Martinez v. Commissioner, Dkt. # 22818-16S)
The court also easily came to the conclusion that a self-employed taxpayer was not able to deduct the costs of goods sold and business expenses beyond what the IRS conceded when the taxpayer kept virtually no records. The taxpayer bought and sold automobile parts from junkyards to sell on Ebay. This allowed for a fair estimate of some expenses (shipping costs, commissions to Ebay, and other transactional costs). And the IRS accordingly conceded $15,900 of allowable expenses on $33,361 of proceeds. A taxpayer asking for more, when they keep virtually no records, is unlikely to find charity from the court if the problem is due to their own failures. Cohan, in this context, allows for some expenses (it is clear that the taxpayer had some), but don’t expect to push that number particularly high.