Taxable Talk

We're taught that if at first you don't succeed, try, try again. But sometimes it just doesn't work.

Take the example of Warren Follum. Mr. Follum had asked the Tax Court to review the IRS' decision to proceed with collecting tax from him for 1990 through 1993.

In those years the petitioner (Mr. Follum) included losses from sports-fishing. The IRS alleged that the petitioner wasn't in a business but, rather, had non-deductible hobby losses of between $12,000 and $35,000 each year.

Let's add some complicating factors. When the IRS originally sent Mr. Follum notices of deficiency to his (then) post office box, the mail was returned as undeliverable. Back in 1996, the Tax Court ruled that because Mr. Follum didn't timely respond to the notice of deficiency (and the IRS did sent the notice to the petitioner's last known address), the court didn't have jurisdiction in the case. The Second Circuit Court of Appeals upheld the Tax Court's decision.

So in 2003 the petitioner filed yet another Tax Court case. The case was remanded back to the IRS appeals office in 2005 for consideration of potentially more liability. Then Mr. Follum brought suit against the IRS in the Western District of New York, asking that their be an injunction against the collection of his taxes. He lost, as that court held that it lacked jurisdiction (it had jurisdiction for a refund claim, but not an allegation of procedural irregularities).

Petitioner then brought a suit in the Eastern District of North Carolina, claiming that the IRS had not sent the notice and demand to his last known address. He lost that suit, as it was dismissed under the doctrine of "res judicata" (when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound “not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.”).

Eventually, the second Tax Court case made its way back to the Tax Court, and today the decision was rendered. The Court had to decide (1) whether petitioner's claim that the notice and demand were not sent to his last known address is barred by "res judicata"; (2) whether the period of limitations on assessment of the 1990 and 1991 taxes has expired; (3) whether the petitioner engaged in sports fishing for profit; and (4) whether the lien should remain in place.

First, because Mr. Follum had never been able to contest the underlying tax liability, the Court ruled it would look at the tax liability. The Court then upheld the underlying tax (a legal expert would note that "res judicata" appeared to apply; in any event, the Court found petitioner's underlying arguments about owing the tax at issue to be wrong).

The Court then reviewed whether Mr. Follum was sports-fishing in tournaments for fun or profit. Mr. Follum didn't keep separate books; he didn't earn a profit in any year. It didn't look like he had a plan to earn a profit in future years. It gave the appearance of a hobby, and that's how the Court ruled.

Finally, the Court noted, "Having reviewed the underlying liability de novo, we find no error. Additionally, we find no error or abuse of discretion by respondent in determining to uphold the filing of the lien against petitioner."

So the fourth try wasn't any more satisfying than the first for Mr. Follum. The morale of this tale is that sometimes additional bites at the apple are just as unsatisfying as the first. Also, it pays to keep your address current with the IRS.

Case: Follum v. Commissioner, T.C. Memo 2007-164

The Tax Court looked at two cases involving the Alternative Minimum Tax (AMT) today. In both cases, the taxpayers impacted by the AMT protested that they shouldn't have been impacted by the AMT because they either didn't have preference items or that they're the kind of people who shouldn't have to pay AMT.

The Tax Court's response? Tough.

In the first case, the petitioner had just $121,000 of adjusted gross income (AMI), and he ignored the AMT when he completed his tax return. However, the IRS computers found that he owed an additional $4,176 because of AMT. He had no preference items.

However, if you're "lucky" enough to have a high enough level of AGI (typically over $100,000), and enough itemized deductions (and our lucky taxpayer had over $35,000), you can get hit by the AMT. Petitioners arguments were restricted to the fact that he worked two jobs to support his family and shouldn't have to pay AMT because Congress didn't intend for the AMT to impact the nonwealthy working class.

"The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected...Congress enacted the AMT and we have no authority to disregard them."

In the second case, our taxpayers did have a preference item—a $342,000 capital gain. But the AMT was never intended to cover taxpayers in their situation, or so they said.

Wrong.

"We also remind petitioners that this Court has consistently and repeatedly rejected challenges to proposed deficiencies based on the fairness of the alternative minimum tax."

So yet again the Court saw two cases where the AMT was shown to be unfair. The final score? AMT 2, Honest Taxpayers 0.

I wonder if Congress is aware of the storm that will be unleashed next year if they don't stop the AMT monster....

Cases: Kamara v. Commissioner, T.C. Summary 2007-103 and Moore v. Commissioner, T.C. Summary 2007-104

I haven't blogged about a tax protester case at the Tax Court in some time. But one was decided today that had several humorous elements—more than enough to make it ripe for reporting.

Chester Davis didn't file a 2001 tax return. In 2005, he received a notice of a lien from the IRS (based on having income in 2001 but not paying tax). He filed an abuse of discretion petition with the Tax Court. Both sides asked for summary judgment.

Mr. Davis hired a representative, Jeffrey Hubacek, who had been permanently barred from dealing with the IRS. So the IRS wouldn't talk with Mr. Hubacek. "...[I]t was not an abuse of discretion to exclude Mr. Hubacek from representing petitioner...." Strike one.

So what about his arguments? Well, "[T]he record indicates that the only issues petitioner raised throughout the section 6320 administrative process and in his petition to this Court were frivolous and/or tax protester type arguments. We do not address petitioner's frivolous arguments with somber reasoning and copious citations of precedent, as to do so might suggest that these arguments possess some degree of colorable merit." Strike two.

What about the tax liability underlying the case? Well, Mr. Davis never filed a return; he wasn't entitled to contest the liability, and "...he presented nothing more than an income tax return with a zero in each pertinent box." That's three strikes, and Mr. Davis was out. But he did get one of his wishes granted: summary judgment. Except it was summary judgment for the IRS and against Mr. Davis.

But the Court wasn't done. "Respondent has requested that the Court impose a penalty under section 6673 on the ground that the arguments advanced by petitioner to respondent and the Court are frivolous." Yes, if you file a frivolous case in Tax Court, you can be penalized. The Court found Mr. Davis' case thoroughly frivolous, and so he found himself owing an additional $2,000 for the frivolity. And that might not be the last time we see Mr. Davis' name mentioned as there are two other cases working there way through Tax Court brought by Mr. Davis; he was warned (in a footnote) to not be frivolous. Under section 6673 the Court could have penalized Mr. Davis up to $25,000. I expect that if there's a recurrence he'll see a five-digit fine.

So be careful what you ask for as you might just get your wish.

Case: Davis v. Commissioner, T.C. Memo 2007-160