Taxable Talk

Today the Tax Court looked at a casualty loss case. Many times when casualty loss cases make their way to Tax Court, there's a dispute about whether or not there really was a loss. Not today.

A fire destroyed the victim's office on the university campus where he worked as a Professor of Economics. He lost a litany of belongings, which he detailed as follows:

Books on economics $2,000
Books by “famous authors” 1,000
Books on Africa 5,000
African journals & magazines 3,000
Book manuscript 15,000
Memorabilia (awards, plaques, etc.) 3,000
Briefcases, fans, etc. 2,000
Computer printer 250
Labor/inconvenience/distress 2,000

The unlucky victim did receive $12,000 in compensation from the university's insurance company. The IRS denied a portion of his casualty loss.

When you have a casualty loss, such as a fire, your loss for tax purposes is based on the lessor of your basis in the assets you lose, or the fair market value of the assets. As the Tax Court notes,

"Petitioner, however, has not produced any evidence as to what his bases or costs in the various items may have been. Indeed, while they may have had value to petitioner, it is clear that the memorabilia had no costs to petitioner, and petitioner would have no bases in these items. With respect to what petitioner describes as “Labor/Inconvenience/Distress”, as we understand petitioner’s testimony, the deduction was for mental upset, having to prepare new lecture notes, etc., and for teaching. These are not items of property the losses of which are deductible as casualty losses."

One point that the Tax Court made is that the petitioner did not avail himself of any professional advice. As Albert Einstein said, "The hardest thing in the world to understand is the income tax." When in any doubt, get professional tax advice. Any competent tax professional could have set this professor on the right track.

Case: Ayittey v. Commissioner, T.C. Summary 2006-65

Yesterday, there were three interesting Tax Court decisions. Joe Kristan of Roth Tax Updates has an excellent post on the first case. In that case, Merlo v. Commissioner, the unlucky taxpayer found out the "gotcha" of incentive stock options. If you are the recipient of such options, take a look at Joe's post on this case now. ISO's have a wonderful tax advantage...but if the option tanks....

The second case has to do with something quite basic: a change of address. In Pragasm v. Commissioner, the taxpayer wanted to have a hearing on a collection (levy/lien) dispute. The IRS said that they weren't required to hold one because the taxpayer never responded to their notices. The Court sided with the IRS. Just a reminder, if you move, notify the IRS (and your state tax agency, if applicable); you can download Form 8822 here and mail it (certified mail, return receipt requested, of course) to the IRS.

The third case has to do with regulatory requirements. Last May, the Tax Court ruled in Zapara v. Commissioner that the IRS failed to comply with §6335(f) of the I.R.C. That section requires the IRS to sell seized property within sixty days following a request by the taxpayer (and have the proceeds of the sale credited against the tax, penalties, and interest owed). The taxpayers in that case had, the Court ruled, requested such a sale and the IRS did not sell the property (in this case, stock).

The IRS asked the Tax Court to reconsider their May 2005 decision. The IRS claimed that the taxpayers untimely raised a new issue, that the evidence doesn't support the decision, and that the Court doesn't hold the power to make the relief ordered in the earlier decision. The IRS lost on all three counts, and the motion for reconsideration was denied (decision here).

Why is this final case important? The Tax Court usually rules based on regulations and paperwork. If you can show paperwork/backup for your actions, and that you followed the regulations/Tax Code, you will usually win. This holds true for the IRS, too. The IRS's paperwork showed the request to sell the stock, and the stock wasn't sold. The moral is clear: document, document, document; and you have an excellent chance of winning your case.

The scene is the doctor's office, where the doctor is romancing his patient. Just a little problem: the patient is married to a policeman. The policeman finds out and vows to sue the doctor, or get paid a large sum. The doctor doesn't have it, so he makes a counteroffer. And then someone takes out a gun....Well, no, this is a tax blog. But this case does make its way into Tax Court, not a mystery novel.

The salient facts (above) are true (except for the gun). Throw in one more—the doctor eventually pays the policeman $25,000 as "free money" in the hopes that this affair blows over. As the Court noted,

"Petitioner then stated: “Now Doc, this isn’t blackmail money”, to which [the Doctor] replied: “No, I didn’t say it was blackmail money; I said I hope it helps you, both of you.” At the end of the meeting, petitioner warned [the doctor] that he should never again speak to or look at [his wife] or come to their home."

The petitioner and the doctor contacted his state medical board and reported the affair. The doctor apologized. The doctor's accountant then prepared a Form 1099-MISC reporting the $25,000 payment. The question before the court: is the payment a gift or income for the petitioner? The IRS held it was income; the petitioner believed it was a gift. (Gifts are tax-free to the recipient.)

Believe it or not, the Supreme Court has issued an opinion on point. In Commissioner v. Duberstein, 363 U.S. 278, 285-
286 (1960), the Court held, "And, importantly, if the payment proceeds primarily from “the constraining force of any moral or legal duty,” or from “the incentive of anticipated benefit” of an economic nature, Bogardus v. Commissioner, 302 U.S. 34, 41, it is not a gift."

The Tax Court concluded,

"the $25,000 payment by [the doctor] was not the result of detached and disinterested generosity or paid out of affection, respect, admiration, or charity. Instead it was paid to avoid a lawsuit, to avoid public and professional embarrassment, and to assuage his own feelings of guilt or moral obligation. Therefore, the $25,000 payment in 1999 is not a gift and is includable in petitioners’ gross income for that year."

Somehow, a moral for this story seems like an oxymoron.

Case: Peebles v. Commissioner, T.C. Summary 2006-61

Hat Tip: TaxProf Blog

The IRS wants to place a levy or a lien against you. The IRS says they mailed the notice, but it ended up at the wrong prison (you were in Attica, but the letter was sent to Gowanda; both are New York prisons). You request a hearing. The IRS sets a date for a conference (two years later), but the IRS chooses a date while you're in solitary confinement and attending is out of the question. The IRS goes ahead with the levy. You go to Tax Court claiming you never had your fair hearing.

The Tax Court found that the petitioner had vigorously contested all his legal problems and it was likely he never received the original notice (it did, after all, go to the wrong prison). And the IRS should have rescheduled its conference; heading to New York City while you're in solitary confinement just isn't possible. The Tax Court ordered the IRS to give the petitioner a fair hearing.

Case: Butti v. Commissioner, T.C. Memo 2006-66

No joking, that's the argument a taxpayer used in Tax Court. Joe Kristan of Roth Tax Updates has the humorous details here. This Tax Court case is yet another entry in the "Don't Try This Yourself" log. When you're an adult, you get to make your own decisons; blaming your mother and father just doesn't work. Being disowned by your parents is not a valid excuse to not pay your taxes.

Case: Gillings v. Commissioner, T.C. Memo 2006-65