Although poor Lawrence Wickersham dies between trial and judgment, his faithful wife (and part-time dancehall operator) Mary J. carries on, in Lawrence L. Wickersham, Deceased, and Mary J. Wickersham, 2011 T.C. Mem. 78, filed 7/28/11. All their property was jointly titled and they filed jointly, so no need for administrators or executors, at least for tax purposes.
The Wickersham holdings included mixed-use residential/commercial property in Iowa, a towing business in Iowa, and the dancehall in Nebraska (Utter Place, which doesn’t figure in the computation of tax liability, but matters when deciding whether the residential property in Iowa qualifies for Section 121 treatment).
In the year at issue, the Wickershams sold their home and business (on the same property) and granted a permanent easement to Polk County to expand the road that ran past the property.
Judge Kroupa parses the transactions. On the business side, the equipment and the wrecker get ordinary income treatment (Sections 1231 and 1245 raise their heads; recapture of depreciation trumps everything else). Judge Kroupa buys the Wickershams’ basis allocation for the land and buildings, not IRS’s, as the geography of the land (which IRS argued), goes for the Wickershams’ analysis. But the basis information the Wickershams had as to the building was inadequate to establish the IRS’s figure was wrong. And of course the commercial building portion of the property gets Section 1250 treatment; more ordinary income. The basis allocation also goes for allocating the gain on the sale of the road-widening easement to Polk County.
Now for the tough question: Does Dancehall Mary get the Section 121 half-million-dollar exclusion for the residential portion?
In the first place, Lawrence and Dancehall Mary fibbed about two tax years during the five years preceding the residential sale. They filed Nebraska income tax returns, claiming residence there. Lawrence and Dancehall Mary’s lawyers, including no less than James Monroe, tried to get Judge Kroupa to disregard the erroneous addresses, but Judge Kroupa didn’t buy it: those returns were signed under penalty of perjury. Dancehall Mary also went to Nebraska monthly to run parties at Utter Place. She even swore she was a Nebraska resident to get and keep the liquor license for Utter Place, without which the dancehall would be utterly worthless (sorry, guys).
On the other hand, poor Lawrence had all his medical treatments for throat cancer, and his hernia operation, in Iowa. He and Dancehall Mary entertained their six children and twenty-two grandchildren in Iowa, the vast majority of whom lived but a few miles from Lawrence and Dancehall Mary. Their professionals were all Iowa-based, their banking and credit card statements were sent to Iowa, all but one of their numerous motor vehicles were Iowa-registered, and they claimed Iowa homestead tax exemptions. Finally, they bought a home a few miles down the road to replace the one they’d sold.
Lawrence and Dancehall Mary were “cavalier”, to use Judge Kroupa’s word, about their primary residence. However, in a “close call”, again to use Judge Kroupa’s phrase, the Iowa residence fit the Section 121 parameters with a wee bit of squeezing. So Dancehall Mary gets the half-million exclusion as to the aliquot portion of the easement sale and the residential property sale.
Finally, Dancehall Mary escapes the negligence penalty. She provided all the information she had to, and relied in good faith upon, a woefully overmatched EA, who prepared the return for the year at issue.
Said Judge Kroupa: “Petitioners hired Ms. …, an enrolled agent, at the recommendation of their longtime attorney. Her firm prepares approximately a thousand income tax returns each year. Petitioners’ return was the most complex that she had ever prepared. Despite this fact, she failed to inform petitioners she was unsure. Ms. … further testified that the IRS audited fewer than 25 of the returns she prepared in 22 years, and changes were required on only two returns after audits. Petitioners’ return was one. Ms. … paid a $1,000 return preparer penalty for errors in petitioners’ return …. This was the only time she had ever been assessed such a penalty. We find that Ms. … had sufficient expertise to justify petitioners’ reliance.” 2011 T.C. Mem. 78, at p. 26. [Name omitted to spare embarrassment.]
The $1,000 penalty was probably a lot more than the EA charged for preparing the return. And she probably lost a client, and suffered a lot more grief than the whole thing was worth.