Taxable Talk

The Tax Court also looked at whether an attorney must go to the closest law library for research. In the case, the petitioner lived fairly close to Southwestern Law School in Los Angeles. However, he preferred the law library at Chapman University in Orange, about 25 miles further than Southwestern. Did the petitioner go to Chapman because it had better facilities or because it was close to his family?

The Tax Court ruled for the petitioner on this issue. "Upon the basis of the record in this case, we find that the primary purpose for petitioner’s trips to Chapman Law School Library was to conduct legal research for his business clients, and, therefore, said travel is directly connected to petitioner’s business. Petitioner’s visits to his family, if such visits occurred, were a secondary consideration."

Case: Berge v. Commissioner, T.C. Summary 2006-29

Hat Tip: TaxProf Blog

What happens when you don't file your tax return, the IRS sends you notices to two different addresses (but you've moved), and then the IRS tries to put a lien on you? Today, the Tax Court ruled on such a case.

The petitioner last filed a tax return in 1997. Based on paperwork that the IRS received, the IRS believed that the petitioner owed taxes, mainly from a capital gain. The IRS sent out notices to the petitioner, but he had moved. The IRS then assessed the tax that they thought was owed. After still not being able to reach the petitioner, they put a lien on some of his assets.

The petitioner, in early 1994, finally contacted the IRS. He had never received any of the notices. He requested a hearing with the IRS, and then went to Tax Court. The questions the Tax Court faced were, (1) Since the taxpayer did not notify the IRS of his move, could the taxpayer dispute the tax and lien; (2) If he could, then did the taxpayer owe tax?

The Tax Court ruled that the taxpayer could indeed dispute the lien and tax, because he never received the documents. The taxpayer was also able to prove that he actually had a capital loss rather than a capital gain and did not owe tax.

There's a caution here, though. It's much, much easier to file your taxes on time and not go through the hassles that this taxpayer went through. It's cheaper, too.

Case: Sherer v. Commissioner, T.C. Memo 2006-29

You get what you pay for, or so the cliche goes. The Tax Court today looked at a case where a husband and wife had two "businesses" and used tax software to prepare their returns. As Joe Kristan of Roth Tax Updates reported, the businesses were probably just methods of spending their own money. The Tax Court didn't like that. The Cost of Good Sold that they claimed were for mainly personal expenses. That didn't sit well either. So they lost their case.

But the IRS also asked for a negligence penalty. As the Tax Court noted, "‘Negligence’ includes any failure to make a reasonable attempt to comply with the provisions...[of the Internal Revenue Code], and the term ‘disregard’ includes any careless, reckless, or intentional disregard." So the taxpayers blamed the software they used. The negligence penalty stood up.

There's a lesson here. Tax software does a great job putting what you enter on the correct lines. If you have a simple tax return, say just a W-2, a 1099-INT from your bank, and no other deductions, software will do a great job.

But software doesn't do some things. It doesn't ask you if the deductions you're entering in are reasonable. It doesn't ask you if that medical insurance premium you're entering in as an Insurance expense for your S-Corporation should be entered in on that line. It probably won't tell you where the best place is (on your return) to take a certain deduction, or why it might be better not to take that deduction. As Roth Tax Updates said, garbage in, garbage out.

Case: Maxfield v. Commissioner, T.C. Summary 2006-27

According to this story [paid subscription required] in today's Wall Street Journal, the IRS is targeting a technique used by highly paid individuals to defer capital gains taxes. The strategy is called "prepaid variable forward," and is a hedging strategy that uses derivatives to protect the user who has a stock portfolio concentrated in one stock from a drop in the price of that stock while deferring capital gains. Typically, the firm involved in the transaction shorts some of the stock to protect itself—and that's where the problem comes in.

If the firm borrows the shorted shares from the investor, that's share lending. And the IRS ruled (in a Technical Advice Memorandum that applies to one investor) that when the shares were borrowed, they were effectively "sold," and subject to immediate capital gains tax.

My generic advice about all tax shelters applies: if it sounds too good to be true....