This will be my last post until January. I will be spending my days (except for Christmas Day) grading exams. Grades are due Friday January 3rd so I hope to have my next post done for January 6th.
For the second year, my last blog of the year is a roundup of the cases I read during 2019 where something in the facts made me just shake my head (SMH in texting parlance). I present them to you now, in chronological order, and I invite you to consider which of the following cases may be examples of just an empty head and which are examples of something worse. [Lesson From The Tax Court: Taxpayers Behaving Badly (2018)]
1. Some Folks Never Learn
Peter E. Hendrickson and Doreen M. Hendrickson v. Commissioner, T.C. Memo. 2019-10 (Feb.11, 2019) (Judge Buch)
The Hendricksons asked the Court to review deficiencies proposed for their joint 2002 and 2003 returns, and Mr. Hendrickson’s married-filing-separately returns for 2004, 2005 and 2006.
Some time before 2002 Mr. Hendrickson wrote and self-published a book called “Cracking The Code: The Fascinating Truth About Taxation In America.” It is still listed as for sale on Amazon for the low, low price of $94.95. The book advocates a variety of tax protestor positions and instructs readers on how to dispute all W-2’s and 1099’s and get a refund of all withholdings.
Mr. Hendrickson did not just talk the talk. He walked the walk, filing zero-income returns and disputing all amounts reported on his employer’s W-2. And, naturally, he omitted from income all proceeds from the sale of his book! That worked for 2002 and 2003 and he received back all that had been withheld. It did not work for the later tax years.
Mr. Hendrickson took advantage of several opportunities to argue his tax protestor theories in court. He lost every time, including a civil erroneous refund case brought by DOJ and an associated criminal case for the 2002 and 2003 years. In those cases he was unable to convince either a district court or a criminal jury on the rightness of his views. The jury convicted him on 10 counts of filing a false document under §7206(1). He was ordered to make criminal restitution in an amount of the refunds he had fraudulently obtained plus an amount the federal district court thought approximated his liabilities for 2002 and 2003.
In this year’s case, Mr. Hendrickson again tried to convince the Tax Court of his tax protestor arguments. He failed. Judge Buch wrote: “The Hendricksons’ position is frivolous. The Hendricksons continue to offer only “tax protester” or “tax defier” arguments and nothing else.” (p. 19)
SMH Moment: Sadly, Mr. Hendrickson is still making money off of suckers, at least if the most recent Amazon user review, posted June 2019 from one Albert Flores, is to be believed. Writes Mr. Flores: “Excellent book. Can't recommend highly enough. I have filed educated returns last two years running and have received all withholdings back from both the irs and my home state. The information is presented well and thorough.” SMH. Poor Mr. Flores.
2. Christ Could Turn Water Into Wine But Could Not Turn Taxpayer’s Personal Expenses Into Charitable Donations
Robert A. Oliveri v. Commissioner, T.C. Memo. 2019-57 (May 28, 2019)
Mr. Oliveri was an Air Force pilot for 26 years. When he retired, he “dedicate[d] his life to being an evangelist. Petitioner seeks to spread the teachings of the Catholic Church through random interactions with members of the general public. He considers all of his contact with members of the public to be opportunities for evangelism.” (p. 3)
Yep, Mr. Oliveri decided that his love of Christ was so great that he was a living charitable deduction. Accordingly, he decided that expenses you and I might call ordinary personal expenses were, for him, charitable donations. For example, he deducted the costs of restaurant meals whenever he was led to evangelize while eating.
When the IRS audited him for 2012, he was unable to convert Judge Colvin to his (tax) doctrinal faith. For example, Judge Colvin writes: “Petitioner paid $4,196...for legal advice relating to an IRS audit of a prior year’s return and an umbrella liability policy covering petitioner and his former wife. Petitioner testified that the legal fees were paid for the purpose of evangelization because ‘everything * * * [is] tied to evangelization.’ We disagree; these expenses are nondeductible personal expenses.” (p. 37-38)
SMH Moment: Mr. Oliveri deducted over $15,000 for what he reported as “Evangelization: Christian Outreach.” The actual expenses, however, were to rent airplanes and to receive flying lessons. During those events Mr. Oliveri sometimes randomly engaged various folks (airline mechanics or other personnel, or even a passenger) in conversations about religion. Judge Colvin re-labeled the category as “Private Aircraft Rental and Flying Lessons” and denied the deduction. SMH.
3. Just Horsing Around
James P. Donoghue and Elaine S. Donoghue v. Commissioner, T.C. Memo. 2019-71 (June 11, 2019) (Judge Ashford)
The Donoghues loved horses. No, not enough for Mr. Donoghue to quit his day job as a computer programmer for W.B. Mason, an office products supply company. But they loved their horses enough to engage in the breeding and racing of thoroughbred horses from 1985 to 2014, despite reporting a loss for every single one of those years. Yes. Every single year. Such losses almost totally offset their taxable income for the three years before the court, 2010, 2011, 2012. Judge Ashford writes: “It is undisputed that petitioners received a total of over $100,000 in wage and Social Security income in each of the years at issue ($102,376 in 2010, $106,102 in 2011, and $111,374 in 2012). After applying their Schedule E deductions attributable to [the horse activity] petitioners reported total tax due of $538 in 2010 and zero in 2011 and 2012.” (p. 37)
SMH Moment: Judge Ashford's 48 page opinion carefully reviews the 9-factor test in the regulations. She concludes: “Of the nine factors listed in [Treas. Reg. 1.183-2(b)], eight favor respondent and one is neutral.” (p. 39).
At least they did not hire a lawyer to try and defend the case in Tax Court. Speaking of which...
4. The Lawyer Who Couldn’t File Straight
Donald Burden and Mary Torres v. Commissioner, T.C. Summ. Op. 2019-11 (June 24, 2019) (Judge Halpern)
Ms. Torres was a flight attendant for United Airlines. Mr. Burden was a pastor, employed by the Allegheny West Conference of Seventh-Day Adventists (AWC). During year in issue, Mr. Burden traveled twice to the Dominican Republic, where he visited family. On one of those trips, he also conducted a revival ceremony. The couple also traveled to South Africa. They took travel away from home deductions for all these trips. On both the audit and in Tax Court, the taxpayers here had a heckuva substantiation problem.
But that’s not the SMH behavior in this case. What makes me shake my head is their counsel’s actions. First, counsel failed on the briefs. Judge Halpern goes into quite some detail on how he had instructed counsel on how to prepare briefs and the need to learn Tax Court Rules. The basic problem was that the briefs Counsel provided were useless to the Court because they failed to help the Court connect the dots between the claimed deductions and the evidence that substantiated the deductions.
The briefs just made bald assertions that the stipulated facts substantiated the deductions. That’s bizarre. Judge Halpern noted that he had “authority under Rule 123(a) to hold petitioners or any party in default if the party fails to proceed as provided by the Rules or as required by the Court.” (p. 7). He further noted that the Tax Court has “held a party to have waived a substantiation issue that it supported on brief with only vague assertions.” Id.
Nonetheless, Judge Halpern both permitted counsel to present evidence at trial and considered it. Counsel bungled that job as well. For example, counsel introduced a log to prove up car mileage, but Judge Halpern notes that “the travel log also appears to indicate that Pastor Burden drove to and from the Dominican Republic.” Hoo-boy. Then Mr. Burden testified that there was another log that proved the expenses. But counsel failed to provide the log his client testified about. Judge Halpern details the other manifest failures of evidence in his 23 page opinion.
It simply wastes everyone’s time when counsel fails to follow the rules of the Tax Court. It wastes time for counsel not to recognize when the client has zippo chance of substantiating issues like travel, use of listed property, cell phone expenses.
5. ‘Til Fraud Do Us Part?
Samuel Wegbreit and Elizabeth J. Wegbreit v. Commissioner, T.C. Memo. 2019-82 (July 8, 2019)(Judge Cohen)
Mr. and Ms. Wegbreit were a team. Judge Cohen found clear and convincing evidence that together they “(1) significantly understated their income; (2) failed to cooperate with tax authorities by providing evasive and misleading responses to interrogatories and during an investigative interview; (3) conspired ... to produce falsified and back-dated documents to conceal assets and income and to mislead the Government; and (4) filed false Form 1040 for each year 2005 through 2009.” (p. 61). Now, that's a solid marriage.
SMH Moment: The marriage teamwork continued during trial. Writes Judge Cohen: “Both petitioners Wegbreit gave testimony during trial that was implausible and unreliable.” (p. 61). For example, Ms. Wegbreit “testified that she left family finances to her husband. She repeatedly testified that she either was unaware of or did not remember the various SWTF transactions. She testified inconsistently that she read every purported loan request, promissory note, and tax return she signed. She further testified that she would always ask about documents or transactions she did not understand, and that [Mr.] Wegbreit would answer her questions.” (p. 62).
I wonder which Wegbreit, if either, will seek spousal relief.
6. The Devious Dentist
Shahram Kohan and Yonina Kohan v. Commissioner, T.C. Memo. 2019-85 (July 9, 2019) (Judge Lauber)
Dr. Shahram Kohan was a dentist who accepted cash, checks, and credit cards. He did not report those as income. He also received payments from dental insurers. “Unlike payments that patients remitted by cash, check, or credit card, payments remitted by the insurance companies were reported by them to the IRS on Forms 1099-MISC, Miscellaneous Income. Dr. Kohan was aware of this distinction.” (p. 5).
When it came time to file taxes Dr. K. gave his return preparer only the records supporting income from the insurance company payments. When she asked about co-pays, he gave her an absurdly lowball “estimate.” He did not give her any other records showing income from non-insured patients. Even with this absurd omission of income, Dr. K. managed, on his 2008 return, to report zero tax due on gross receipts of $375,669. Similarly, he managed to drop his tax liability to about $700 for 2009.
Who did he think he was, Amazon? On audit, Dr. K. refused to cooperate, forcing the RA to do a bank deposits method. The RA concluded “that petitioners had understated their taxable income by $366,185 for 2008 and by $380,124 for 2009.” (p. 11).
SMH Moment: He blamed his return preparer. Yep, Dr. K. basically argued that she failed in her duty to detect his fraud. Judge Lauber writes that while the return preparer “might have been more aggressive in questioning Dr. Kohan” her timidity did “not immunize Dr. Kohan from his deliberate and intentional failure to report that income to her.” (p. 28).
7. Drunk on His Own Koolaid
Martin A. Kapp v. Commissioner, T.C. Memo. 2019-84 (July 9, 2019) (Judge Panuthos) (123 pages)
Mr. Kapp was a return preparer. Between 2000 and 2007 Mr. Kapp and his employees prepared thousands of tax returns for mariner taxpayers, a/k/a sailors. On those returns Mr. Kapp consistently told his clients to use the total federal per diem rates to determine their deductions for meals and incidental expenses (M&IE) for their travel away from home expenses. However, mariner employers (shipping companies, offshore oil rig companies, tugboat companies) typically furnish meals to their employees on the boats or oil rigs at no cost to the employee. Mr. Kapp apparently thought there was nothing wrong in taking a deduction for a phantom expense.
In Johnson v. Commissioner, 115 T.C. 210 (2000), the Court had held that mariner taxpayers could, actually, use that really tiny part of the federal M&IE allocated to incidental expenses to support a deduction other than for meals. The Court's rationale was that the type of incidental expenses contemplated by the travel-away-from-home rules were not actually reimbursed by shipping companies. So it was appropriate to use the $2 per day amounts without requiring substantiation. But mariner taxpayers could not use the full M&IE rate because----duh---the meals were free. Wrote the Court: “We hold that petitioner's use of the M&IE rates is limited to the incidental expense portions of those rates and that his deductions must be determined accordingly.” Id. at 211.
SMH Moment: After Johnson, Mr. Kapp insisted on telling everyone he had “won” in court and that the Tax Court permitted use of the full M&IE rates. He said so, loudly and repeatedly, on websites and in seminars, for all to hear. He got a lot of business. He also got the attention of the IRS who in 2007 obtained an injunction under §7407 to make him stop preparing returns. Then the IRS finished up a return preparer audit and hit him with over $5 million in §6701 penalties, based on 5,193 returns he prepared between 2000 and 2007 where he had his clients take the bizarre deduction.
Judge Panuthos does a masterful job in patiently and methodically setting out all the relevant background and addressing all Mr. Kapp's multifarious arguments in painstaking detail, covering 123 pages.
8. Having Your Wholly Owned Corporation Pay Your Living Expenses Is Not Good Thinking
Patrick Combs. v. Commissioner, T.C. Memo. 2019-96 (Aug. 5, 2019) (Judge Thornton)
Mr. Combs is a motivational speaker and author with his own website. It says he is “The Chosen Speaker of More than 1,500 Organizations.” That may be. Each of those organizations, however, did not pay him. They paid his personal service corporation “Good Thinking.” His corporation then paid him a small fraction of that amount as salary. He reported and paid tax on that salary. Most of the rest of the money was spent by the corporation for Mr. Combs’ personal expenses, such as fast food, child care, groceries, clothing.
Not good thinking. It is no wonder that Judge Thornton found that "petitioner received and failed to report constructive dividends of $207,707, $72,710, and $39,646 for 2010, 2011, and 2012, respectively." (p. 17)
9. I May Teach Law, But I Am Above The Law
Ronald Sylvester Sullivan v Commissioner, T.C. Memo. 2019-153 (Nov. 19, 2019) (Judge Lauber)
Mr. Sullivan is a law professor employed by Harvard University. He failed to file tax returns in 2012 and 2013. But he did receive wages, presumably reported on a W-2 and he did sell a home for $1.8 million and, presumably, the agent in charge of closing that transaction properly filed a Form 1099-S. I say presumably because the IRS pretty quickly sent out a Substitute For Return (SFR) and sent Mr. Sullivan NODs for both tax years. He did not seek Tax Court review. When the IRS sent him collection notices, however, Mr. Sullivan invoked his CDP rights. But, like so many taxpayers with far less education, time, talents, and money, he simply failed to provide the Office of Appeals Settlement Officer (SO) with the information needed to figure out whether he was eligible for a collection alternative. Naturally, the SO sustained the proposed collection.
Mr. Sullivan did get it together enough to petition the Tax Court for review of the CDP determination. But his only arguments to the Tax Court, as recounted by Judge Lauber, were (1) he received no notice of the CDP hearings; (2) he had no idea “of IRS filed tax returns or opportunity to correct”; and (3) it was impossible that he “owed the amount described given *** [his] salary.” (p. 5). Realizing that the 2013 income might be overstated because it was from the sale of a home, Judge Lauber “directed petitioner to provide to counsel for respondent, on or before June 15, 2019, a statement showing all income he received for tax years 2012 and 2013 and the dollar amount of each deduction to which he believes he is entitled for each year.” (p. 5). In other words: “file your damn returns.”
Mr. Sullivan made no response. It sure seems like Mr. Sullivan was trying to turn Collection Due Process into Collection Delay Process.
SMH Moment: Not only did Mr. Sullivan refuse to submit the information even after Judge Lauber generously gave him yet another opportunity after June 15th, it turns out that Mr. Sullivan had failed to file tax returns in 2012, 2013, 2014, or 2015! I bet your head is now shaking from side to side in utter disbelief that a man who makes his (very good) living teaching law could so carelessly and callously disregard the law. Mr. Sullivan gets my vote for the worst behaving taxpayer of 2019.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech School of Law.