And Hope for the Computer Semi-Literate
Two useful “Just Sayin’” 7463s from the flood of good Tax Court cases filed 11/23/11.
First, continuing the popular “For Dummies” series, Judge Holmes writes a useful and practical guide to basis, which the in-the-trenches practitioner can use to explain this essential concept to clients in more-or-less English, free of what Judge Holmes calls “taxspeak”. This can be found in Robert L. Willson, Sr., 2011 T.C. Sum. Op. 132, filed 11/23/11.
I can’t set the scene better than Judge Holmes: “Robert Willson opened a bar in 1986, and it gave him nothing but trouble. He’s seen lawsuits, endless repairs, and even a catastrophic fire. One might say the City of Des Moines did him a favor when it finally condemned the land in 2000 to expand its airport–right around the time Willson began serving a federal prison term. But the Commissioner wouldn’t let things be and says that the condemnation triggered a large capital gain that Willson didn’t correctly report. This meant the bar would give him one more headache–because, though Willson represented himself at trial, the facts as he described them would be worthy of an advanced exam problem in tax accounting.” 2011 T.C. Sum. Op. 132, at pp. 1-2 [footnote omitted].
Willie was an auto mechanic who opened a rock bar after burglar shot him in the arm. He had to rebuild the place, repair, refurbish and remodel it extensively, contend with the change from hair bands to grunge rock, but in Des Moines, Iowa, hair bands were still big until one of his artists-in-residence set off a smoke machine and burned the whole place down. Then the City of Des Moines condemned the whole shebang for an extension to the striving, thriving Des Moines International Airport, triggering a big award.
Willie’s lawyer took custody of the award, because the U.S. of A. took custody of Willie, over something to do with drugs, guns and money–Judge Holmes isn’t quite clear about that, and apparently Willie glossed over that at trial.
Notwithstanding the foregoing, as my high-priced colleagues say, Willie had managed, from Uncle Sam’s Stony Lonesome, to file his tax return timely for the year of the condemnation.
Although they claimed Willie underreported the gain on the condemnation, IRS, gracious as always, waited until Willie was restored to society before trying the case.
Willie chose S case treatment, with its looser evidentiary rules. Willie conducted the trial his own self, as they say in the Des Moines rock bars, and he and his barfly friends made out a reasonable case. But the numbers were flying in all directions, and Judge Holmes had to sift through them.
Again, Judge Holmes does such a good job that I’m not going to excerpt or paraphrase his decision. Just read it, and even copy it for your clients. Willie’s story is the stuff reality shows wish they were made of, so your clients might actually read something you give them (for once), and even more astonishingly remember some of it (maybe). Judge Holmes’ prose is crystal clear.
Second, Kurt Olsen may have misled the shrink-wrapped guru, but it was an accident, so Special Trial Judge Armen, a judge with a heart (cf. Timothy John Karlen and Jennifer Karlen, 2011 T.C. Sum. Op. 129, filed 11/10/11, and my blogpost “Ignorance Is Bliss? And ‘gude faith, he maunna’ fa’ that’”, 11/10/11), lets Kurt off the penalty hook in Kurt C. Olsen, 2011 T.C. Sum. Op. 131, filed 11/23/11.
Mrs. Kurt got a distribution of interest from Mrs. Momma’s trust fund after a lawsuit, with a K-1 to match. Neither Mrs. Kurt nor Kurt had ever gotten a K-1 from anybody before that.
Now Kurt is an attorney, so that is strike one; except STJ Armen is at pains to point out that Kurt is a patent attorney with the US Energy Administration, with all kinds of security clearances and good conduct badges, so tax evasion where less than ten grand of tax is involved doesn’t really fit Kurt’s lifestyle.
Kurt was a roll-your-own taxpayer, so he rolled up his sleeves and trundled out the software.
STJ Armen tells the tale: “Because he had never dealt with a Schedule K-1 in the past, petitioner upgraded his tax preparation software to a more sophisticated version as a precaution to ensure proper treatment of the unfamiliar form.
“Using the upgraded software’s interview process, petitioner correctly entered the name and tax identification number of the trust, properly reporting the source of income. While transcribing the remaining information, however, he made a data entry error that prevented the amount of interest income from being correctly displayed on Schedule E, Supplemental Income and Loss, of his Federal tax return. Petitioner reviewed the Federal tax return before filing, including using the verification features in his tax preparation software, but did not discover the error.” 2011 T.C. Sum. Op. 131, at p. 3.
The result was the substantial underreporting penalty. Clearly Kurt blew the five-and-ten ($5 K or 10% of tax due) test, but Kurt acted in good faith. He upgraded his software, and put in all the correct info, barring only the single transcription error. “He did not bury his head in the sand and ignore his obligation to check the accuracy of his tax return. Instead, petitioner reviewed the information he entered using his tax preparation software upon completion of the software’s interview process. Despite his best efforts, however, petitioner failed to discover that the amount of the interest income did not appear on the final version of his tax return that was filed.” 2011 T.C. Sum. Op. 131, at p. 7.
So STJ Armen lets Kurt off the substantial underreporting hook. He tried, he really did–energetically.