This will be my last new post until January. Next Monday, December 19, my annual Year Of Lessons From The Tax Court will appear in this space. It is a chronological listing of all the Lessons I posted in 2022, with links to each Lesson, the primary case discussed, and the judge who wrote the opinion. You can find last year's edition here.
I will be spending my days (except for Christmas Day) grading exams. Grades are due Monday, January 2 and then I resume teaching on January 11, so you will not likely see my next Lesson From The Tax Court until January 23 (the week after the MLK holiday).
As is now customary, my last new blog of the year is a list of some of the cases I read during the year where something in the facts made me just shake my head (SMH in texting parlance). You can find the previous lists here (for 2018), here (for 2019), here (for 2020), and here (for 2021). This year I have five to share with you. I present them in chronological order. I invite you to consider which of them may be examples of just an empty head and which are examples of something worse.
And again this year I am giving out a Norm Peterson Award. You will find more explanation below the fold.
1. Bad Math
In Shawn Stephen Salter v. Commissioner, T.C. Memo. 2022-29 (Judge Lauber) (Apr. 5, 2022), the taxpayer was employed full time by Home Depot as a district manager in Arizona. He drove extensively throughout the state in performance of his duties. Although entitled to reimbursement for his car mileage, “he declined to seek reimbursement because he believed that claiming such costs on his tax return would give him a bigger refund.” Op. at 2.
Sadly “He produced no evidence (such as logs or odometer readings) to substantiate his work-related travel.”
SMH moment: A tax deduction saves you only a percentage of what you spend to generate the deduction. For example, a deduction of $100 for $100 expense will get you back $25 of that $100 expense if the income sheltered by the deduction would have been taxed at 25%. In contrast a reimbursement saves you 100% of what you spent! So why a taxpayer thinks they are somehow being clever by foregoing a reimbursement for a deduction is just a classic forehead-slap moment.
2. Nice Work If You Can Get It
My wife and I adopted both our children internationally, one from Vietnam and one from India. Adopting from overseas is a process of convincing at least five different governments (your city, state, the U.S., the foreign national government and the foreign local government) that you are qualified to be a parent and are not stealing children. The process brings many of us adopting parents face-to-face with the kind of corruption that citizens of other countries must deal with all the time. For example, friends of ours adopting from Russia were required to make a $20,000 “donation” of cash (and it had to be in new $20 bills) to the director of the Russian orphanage that held the child they had adopted. They carried the cash strapped to their bodies on their journey which included a 20-hour train ride in Russia. Yes, stories like that as well as our own experiences give me a deep-seated appreciation for the honesty and professionalism of U.S. bureaucrats. Sure, they may be slow, or obtuse, but they at least do not see their job as simply an opportunity for personal enrichment from those they are tasked to serve. It may not seem like much, but I am grateful I don’t have to bribe any DMV employee to renew my car registration each year.
So I was really sad to read Michael T. Sestak v. Commissioner, T.C. Memo. 2022-41 (Apr. 25, 2022) (Judge Weiler). The entire case was a SMH moment. There, the taxpayer was a highly educated U.S. Consular office in Vietnam who pulled down a $120,000 salary in 2012. His job was to process non-immigration visas by reviewing applications, conducting interviews and issuing U.S. visas to applicants. He got greedy and his greed begat corruption. He decided to act like a third-world bureaucrat instead of an American. He set up a bribery scheme where he would approve any visa, if the price was right. “From February to September 2012 petitioner approved 410 visa applications directed to him by...others participating in the fraudulent scheme.” Op at 2.
He made good money: “In all petitioner received wire transfers totaling $3,227,501 to his bank account in Thailand during 2012.” Id. That’s just under $8,000 per visa approval. That’s a huge amount for Vietnamese to pay, considering the average annual income is around $2,100. To hide his bribery activity he bought lots of property in Thailand.
Then he got caught, convicted, and ordered to pay restitution. To do that he agreed to forfeit his Thai properties to the government. The government allowed him to sell them and he did so, at a loss.
SMH moment: Mr. Sestak attempted to deduct the real estate losses as a §165(c)(1) loss incurred in a trade or business. He argued that just because his business was illegal did not mean his expenses or losses were non-deductible per se. See Commissioner v. Tellier, 383 U.S. 687 (1966)(taxpayer allowed to deduct legal expenses for defending criminal conviction because legal payments were ordinary and necessary to any business, including illegal ones). The Tax Court easily rejected that argument. You can almost see Judge Weiler sadly shaking his head as he writes: “allowance of a loss deduction in this case would undermine the impact of the sharply defined policy against bribery of a government official. Accordingly, ...Tellier [is] inapposite to the case here.” Op. at 11.
3. Too Much Kool-Aid
The IRS is prohibited from labeling tax protestors “tax protestors.” I’m not. Still, I prefer to call them hobbyists. Everyone needs a hobby and we live in a country where people are free to pursue all kinds of hobbies and beliefs. Do you want to believe that California forest fires were deliberately set by laser canons from space? Go right ahead. Do you want to believe the earth is flat? It’s your constitutional right and you can go build a rocket to prove it.
Do you want to make it your hobby to protest income taxes? You can join up with loads of like-minded folks.
But you still have to accept the consequences of your actions. Some consequences are imposed by the law of physics. A rocket going up must come down. Other consequences are imposed by the laws of Congress.
In Daniel Metz v. Commissioner, T.C. Memo. 2022-33 (Apr. 7, 2022) (Judge Weiler), the taxpayer was a structural engineer who failed to report millions of dollars of unreported income over a nine year period (2000-2008). He justified his non-compliance by what the Court calls “common tax-protester arguments.” Op. at 14. As part of his hobby he created various business entities and used them to write himself bi-weekly checks, then had the entity send in fake 1099’s to hide the non-reporting. It turns out he was really bad at it. He was eventually caught and convicted of tax fraud by a jury.
SMH Moment: Mr. Metz was just as ineffective in Tax Court in arguing about the civil tax liability. The SMH moment for me came when he tried to argue the checks he wrote himself were not wages. He tried to testify in Court that they were dividends. He apparently forgot that he had written these checks to himself regularly every two weeks and “most of the checks referenced pay periods in the memo sections.” Op. at 6. Truly I tell you, that tax protestor Kool-Aid rots the brain.
4. Tibetian Monks Made Me Do It
In Gregory J. Podlucky and Karla S. Podlucky v. Commissioner, T.C. Memo. 2022-45 (May 5, 2022) (Judge Lauber), Mr. Podlucky spent his time between 2003 and 2006 siphoning off more than $30 million from a corporation he controlled. He used the money to indulge his passion for toy trains, to indulge his wife with fancy jewelry—including bracelets, necklaces, diamond rings, and very expensive designer watches—and to indulge both of them with a custom-built six bedroom, nine bath mansion. He stored the illicitly purchased jewelry in a secret room he had constructed inside his corporations headquarters building. To enter the room, one had to “walk through a small metal door, lift a rug, and crawl.” Op at 5.
Yes, he was convicted of tax evasion. And then, unrepentant, he attempted to contest the civil liability in Tax Court. Meanwhile, Ms. Podlucky, apparently indulging in fantasy, attempted to obtain spousal relief under §6015.
SMH Moment. At trial the Podluckys testified that the assets they purchased were not for them, but were for the purpose of “dealing with Tibetan monks in Asia” who, they said, wanted hard assets rather than cash. As Judge Lauber wrote, with admirable restraint: “This testimony was utterly implausible.” Mr. Podlucky was “unable to tell the court where the putative monks resided or... Explain why Buddhist monks would be eager to acquire women’s jewelry, particularly jewelry that was sized to fit [Ms. Podlucky’s] wrist.”
5. “Dammit Jim, I’m a Doctor, Not a Tax Lawyer....”
In Arlin George Hatfield, III et. al. v. Commissioner, T.C. Memo. 2022-59 (June 13, 2022) (Judge Lauber), Dr. Hatfield was a radiologist who decided that he was also a super tax lawyer, no bones about it. He discovered the law did not require him to report wage income in 2013 (of $412,557) and 2014 ($332,745). That’s a lot of unpaid tax. Apparently he and his spouse put those unpaid taxes to good use because they did report investment income in both years, reporting a tax liability of $1,500 for 2013 and a tax liability of $27,000 in 2014, all based solely on investment income.
Their success in the market, however, was not matched by their success with either the IRS or Tax Court. Judge Lauber writes: “In disputing their receipt of gross income, petitioners have submitted more than 450 pages of material posing as legal argument, mostly gibberish downloaded from tax-protester websites.”
I really like how Judge Lauber points out “If these taxes were really unconstitutional, one might have expected some court to have perceived this deficiency during the last 100 years.” But, Judge, this is a medical doctor!
The Judge then turned to whether to impose a §6673 penalty for frivolous litigation:
“Given the magnitude of petitioners' unreported income and the inane character of their arguments, we would be justified in imposing a very substantial penalty. However, because petitioners refrained from advancing frivolous arguments after we warned them that they risked a section 6673 penalty, we will not impose one.”
SMH moment. It was not just these two years. In case you think Judge Lauber is being exceptionally kind to refrain from imposing any penalty, he points out that “Petitioners have a third case pending in our Court, at docket No. 6235-22. They are warned that they should expect no leniency if they continue to advance frivolous arguments in that (or any future) case before this Court.” Looking at that Docket on DAWSON this week, it does not appear that the taxpayers have taken any action since March 16th when they filed their petition and requested trial in Jackson, MS.
The Norm Peterson Award for 2022
Norm Peterson was a character on the sitcom Cheers. In the early years of the show, Norm was a sleazy tax accountant who regularly gave really bad tax advice. In honor of Norm, I give this award to whatever tax position I see reported in any court case (not just Tax Court) or news item that appears to me to be so crazy that it could only have come from Norm. Past winners include the advisor who told Trump to deduct the costs of maintaining his hair and a very smart U. Chicago law school grad who invested in a really stupid solar energy shelter.
This year, the winner is Mr. John Anthony Castro, an enrolled agent apparently working out of Houston ... or maybe Washington D.C. ... or maybe Miami ... or maybe New York ... it’s really just not clear at all to me. Mr. Castro gets the Norm Peterson award for his advice to a bunch of U.S. taxpayers working in Australia. They had all signed closing agreements with the IRS promising not to claim the §911 exclusion for foreign earned income. Mr. Castro convinced at least 20 of them to renege on the closing agreements. Those taxpayers are all in Tax Court now, facing additional taxes and penalties. For details on why that was bad advice you can read Judge Toro’s 43-page precedential opinion in Cory H. Smith v. Commissioner, 159 T.C. No. 3 (Aug. 25, 2022), or read my summary in Lesson From The Tax Court: The Finality Of Closing Agreements, TaxProf Blog (Sept. 12, 2022).
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.