In Uncategorized on 02/08/2012 at 09:08

And, The Best Excuse Yet

Two recent Tax Court cases piqued my interest, picked from among the plethora of levy and lien timewasters. I can’t enjoy my vacation without a small retreat into blogging.

First, Lisa LaFlamme, 2012 T.C. Mem. 36, filed 2/6/12, and not just for the taxpayer’s name.  Lisa was a self-employed, licensed real estate agent in Florida during the year in question, while the boom was still booming and the bubble bubbling. Lisa made a hefty contribution to her pension plan, the Lisa K. LaFlamme Defined Benefit Pension Plan and Trust.

No question the contribution is deductible. But where? Lisa put the magic number on line 19 of her Schedule C, not line 28 of her 1040, and that caused the IRS to fire off a SNOD for tax and accuracy penalty.

Lisa claims she’s entitled because legislation enacted in 1962 allows self-employedniks to deduct pension contributions like corporations. True, but this is a case of “right law, wrong chapter”. Her contribution is not a Section 162 business expense for self-employment tax purposes, but rather an AGI adjustment for income tax purposes.

Thus, she owes self-employment tax on the amount of the contribution, but not income tax. Income tax is a Chapter One tax, SE is a Chapter Two tax, and Section 404(a)(8)(C) doesn’t help Lisa, although the language of the law (which see) looks like it does. Judge Vasquez says the legislative history makes it clear the Section 404(a)(8)(C) deduction is for income tax only, not SE. Judge Vasquez: “The legislative history suggests that the sec. 404(a)(8) rule is limited to the income tax, stating that the 1962 Act ‘allows contributions to retirement plans to be a deduction for income tax purposes’. S. Rept. No. 87-992, supra, 1962-3 C.B. at 310.” 2012 T.C. Mem. 36, footnote 7, at p. 9.

But Lisa acted reasonably and in good faith, obviously not having studied the legislative history of the 1962 statute. Lisa relocated from Connecticut to sunny Naples, FL (not so sunny today, as it’s been raining all night) years ago, and sells waterfront property. Chances are Lisa wasn’t born when Congress enacted the Self-Employed Individuals Retirement Act of 1962, and even I had barely escaped teenagerdom.

So Judge Vasquez gives Lisa a bye: “We find that petitioner had reasonable cause for the position taken on her return regarding the pension contribution and acted in good faith. See sec. 6664(c)(1). Petitioner, knowing that she was entitled to deduct her pension contribution, mistakenly believed she was entitled to deduct it on line 19 of her Schedule C which was labeled as ‘Pension and profit-sharing plans’. See sec. 1.6664-4(b), Income Tax Regs. (stating that a honest mistake of law may indicate reasonable cause and good faith).”

So Lisa, forget the penalty, but recompute your SE and income taxes in a Rule 155 jamboree. And preparers, look out, here be a trap for the unwary.

Now for my personal favorite in The Best Excuse for Late Filing sweepstakes. It comes from Steve and Lori Esrig, and is delivered by none other than the Judge that writes like a human being, The Great Dissenter and Ace Footnoter Judge Holmes. In the immortal and oft-quoted words of the late great Charles Dillon Stengel, “you could look it up”, specifically in 2012 T.C. Mem. 38, filed 2/7/12, under the name and style of Steven A. Esrig and Lori S. Esrig.

There are two cases rolled into one, because once Steve petitioned Case One, IRS fired off some fresh SNODs, so Steve and Lori petitioned Case Two. But you can read the tangled tale of Steve’s trademark dealings and his various unsubstantiated business activities; it’s the usual lack-of-substantiation case.

Until we get to the Section 6651(a)(1) late filing penalty. Steve and Lori were late by anything between one-and-a-half and four-and-a-half years in filing returns over the six-year span at issue. But Judge Holmes throws Steve and Lori a conditional rope: “Section 6651(a)(1) imposes an addition to tax for failing to timely file a tax return. A taxpayer can beat the penalty by showing reasonable cause, id., which here would mean proof that the Esrigs acted with ordinary business care and prudence and nevertheless were still unable to file as required, see United States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.” 2012 T.C. Mem. 38, at p. 17.

But Steve and Lori drop the rope. Judge Holmes: “At trial Steven blamed the couple’s return preparer. He said that he’d asked his accountant to request extensions for all the years at issue, but his accountant missed all the deadlines because she had to serve a very long prison sentence for murdering her husband, and the person in her office who took over their account made a slew of mistakes.” 2012 T. C. Mem. 28, at p. 18.

That beats “the dog ate my homework” and “I was kidnapped by Martians” any day.

But Judge Holmes doesn’t buy this murder mystery. “We aren’t convinced. The Esrigs had no evidence to corroborate this lurid tale, and we therefore find that they had no reasonable cause for failing to timely file. Accordingly, we find Steven liable for the failure-to-timely-file additions to tax for 1998-2000 and both Esrigs liable for the failure-to-timely-file additions for the later years.” 2012 T.C. Mem. 38, at p. 18.

Good try, Steve and Lori.

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