Some people just don’t have good luck. Charlie Brown kept trying to hit that pitch…but just kept striking out. So it goes for an unlucky couple from California. The wife gets seriously injured when she’s truck by a shopping cart. She wins a judgment against the individual who hit her, but then loses it when that individual declares bankruptcy. She is hurt again in an industrial accident on her job.
Then things get weird. The couple is audited for 2000 and 2001, with that case eventually reaching the Tax Court. They lose, appeal to the 9th Circuit, and lose. They’re audited for 2003, with that case reaching the Tax Court. They lose. And they’re back again for 2004 and 2005.
First, they claim that they can take a Net Operating Loss on the loss of the income that they didn’t receive because of the bankruptcy judgment. Well, since they never declared the income, there’s no loss of income for tax purposes. The couple also received pension income that they didn’t declare. The IRS asserts collateral estoppel–basically, the issue was litigated already, and you lost so you can’t litigate it again. The Court notes that the IRS is correct. This same issue was litigated in the first two court cases, with the facts being identical.
Next, the couple claims a long-term capital loss carryover. But they didn’t have a long-term capital loss in a prior year. They recharacterized some of the “loss” of the income from the shopping cart accident as a capital loss. The Tax Court had none of that.
The couple didn’t include part of the pension income of the husband. “Petitioners offered no evidence that Ms. Green’s pension
income was payment of worker’s compensation. At trial Mr. Green testified that GM was either “ignorant or malicious” in issuing
the Form 1099-R but the record is devoid of anything to corroborate this claim.” The couple wasn’t successful here, either.
The couple claimed significant medical expense deductions, but “…petitioners have failed to provide any records to
substantiate the amounts of those expenses or the dates and times those expenses were incurred.” They didn’t win on this, or trying to deduct the cost of a housekeeper, gas and electricity, and accrued (but unpaid) medical expenses. The latter are never deductible, a housekeeper isn’t deductible, and they didn’t keep records proving the medical necessity for the gas and electricity.
The IRS alleged a fraud penalty. Here, though, the IRS overreached. For there to be fraud, “…petitioners intended
to evade taxes known to be owing by conduct intended to conceal, mislead, or otherwise prevent the collection of taxes.” The petitioners fully cooperated during their audit and did nothing to conceal or mislead the IRS.
On the other hand, the Tax Court did find the couple negligent.
We hold that petitioners are liable for the penalty for negligence in 2004 and substantial understatement of income tax in 2005. Petitioners’ failure to produce records substantiating their medical expenses, NOL deductions, and Social Security disability benefit exclusions supports the imposition of the accuracy-related penalty for negligence for 2004. Petitioners’ understatement of income tax as reflected in the notice of deficiency is greater than $5,000 and 10 percent of the tax required to be shown on the return in 2005. Thus, respondent has met his burden of production under section 7491(c)…The Court sympathizes with petitioners for the injuries that have afflicted them over the years. Unfortunately, given the dearth of evidence to substantiate petitioners’ medical expenses, NOL deductions, and Social Security disability benefit exclusions, we are unable to mitigate the penalties.
I neglected to mention that the husband worked for the IRS for several years; “with this background, he had a wider range of knowledge of tax matters than do members of the general public.” This didn’t help their cause.
In the end, though, the key was the lack of documentation. I tell this to every client: document, document, and document some more. The tax system works based on records. If you’re audited, the IRS will be far more impressed with records than facts.
For our unlucky couple, the third time was anything but the charm. Hopefully, there isn’t a fourth case already on the Tax Court’s docket.