Santa Claus May or May Not Be Coming, But Tax Court Has Something

With apologies to John Frederick Coots and Haven Gillespie, the authors of the 1934 classic “Santa Claus is Coming to Town”, I note that, before going off to celebrate, Tax Court plays surrogate Santa Claus, handing out coal to bad boys and girls. On Thursday last, Tax Court gave out five lumps. I’ll summarize them quickly, as (a) they have little instructional or entertainment value, and (b) I am instructed by a certain Director at a major accounting firm to discuss the IRS’ new Cost Sharing Agreement regs. The latter will get separate treatment.

First, Syed A. and Rafiunnisa R. Ahmed, 2011 T.C. Mem. 295, filed 12/22/11. Sy wins religious discrimination suit, footnotes the recovery on his return (because he got a 1099-MISC), but doesn’t pay tax. Although the general release he signs says he is surrendering any claims for “personal injuries”, Judge Wells says personal injuries are greater than physical injuries (my emphasis), and that’s what Section 104(a)(2) requires. Sy had a heart attack, he claims, and was made to work where he got nauseated from malodorous chemicals, but neither the complaint nor the settlement agreement itemized physical illness or injury, and the general release was the usual boilerplate. IRS wins.

Second, Illya Bell, 2011 T.C. Mem. 296, filed 12/22/11. Illya claims he was unemployed for ten years, but before that (the year at issue) he ran a landscaping business; he couldn’t get the records to show income and expense because of the order of protection his ex-wife got against him, and a criminal case he was dealing with. He went to an individual (qualifications unspecified) to have his taxes done. He claims she made up numbers, especially his income, although some (his deductions) were accurate. He claims he sent in the return without reading it, although he signed it under penalty of perjury. Judge Wherry says he must have had some of the expenses his return showed and that he testified to, so giving Illya a 75% Cohan haircut (proved allowable expense but not amount), he nevertheless refuses to abate one penny of Illya’s income as stated, and sticks him with nonpayment and accuracy penalties as well.

Third, John C. Hughes, 2011 T. C. Mem. 294, filed 12/22/11. John protests a notice of lien. He claims he had no equity in his house and moved out anyway. He also claims he has only Social Security to live on, the lien hurts his credit, he sometimes can’t pay his bills and his income is below the median income for his home state of Georgia. Judge Wells gets this prize package, and unwraps it thus. The lien covers all property, real and personal, now owned or hereafter acquired, until tax paid or lien expires as provided by law. If Johnny is broke now, tomorrow is another day, as they say in Georgia. Every tax lien hurts the taxpayer’s credit, but John never claimed he could pay what he owed if the lien were lifted, and even if he could pay if it were lifted, IRS has discretion. And half the population of Georgia has income below the median, cause that’s what the median is, Johnny, half above, half below. Oh yeah, and John hadn’t paid taxes for at least eight years. IRS wins.

Fourth, Wayne Lasier Wilmot, 2011 T. C. Mem. 293, filed 12/22/11. I wanted to give this more space, but on reflection it doesn’t deserve it. Lasier was an oceanographer-turned-photographer, but he still worked for NOAA and taught at Johns Hopkins. He claimed his $50K-plus annual losses from what he called his photography business. But he put no photographs into evidence, he had no business plan or separate business bank account, he turned down work because he didn’t like it, he lost money every year for six years; and even if IRS conceded in one subsequent year he was engaged in business, that doesn’t bind IRS for any other year, especially not the year at issue. Judge Morrison goes through the for-profit laundry list, and washes Lasier out.

Finally, Terry L. and Cheryl A. Wright, 2011 T.C. Mem. 292, filed 12/22/11. We’ve heard this same old song before, the foreign currency Section 1256 shuffle. Ter and Cher need to bury a big gain, so they buy offsetting euro options, like our old pals Ricky and Tari Garcia, 2011 T.C. Mem. 85, filed 4/13/11; see my blogpost “An Option Isn’t a Contract”, 4/14/11. As with Ricky and Tari, Ter and Cher could walk away if the price of the euro didn’t hit the sweet spot, they didn’t have to deliver the currency on the magic date if they didn’t want to, and the options weren’t traded on any exchange. Ter and Cher’s argument when confronted with Garcia? Tax Court was wrong about Garcia. Judge Wells’ reply: No we weren’t wrong, you’re wrong, you flunk the Section 1256(g)(2) tests, and you’re out.

Best wishes to all for a Merry and a Happy. And good health and prosperity.