In Uncategorized on 03/20/2012 at 16:40

But Hold Onto that Withholding Argument

 The only non-protester Tax Court decision today is Donald Carl Barker, 2012 T.C. Mem. 77, filed 3/20/12.  While it starts out interestingly, it turns out to be just another “how to fail in business because you weren’t really trying”, Section 162-meets-Section 183.

Don was a high-powered NASA space ranger, manager of one of the Mars Lander programs. Don had more degrees than Lord Kelvin’s thermometer, and Judge Goeke lists them all.

After nearly 20 years of working on hi-tech gizmos, Don tried to patent a cheap communications system he devised in his spare time, using off-the-shelf, user-friendly components. This was some years before the year at issue, but the Patent Office blasted his device into outer space, claiming someone got there before him. Just a poor working dude, Don says he didn’t have the cash to pursue the patent.

You can guess the rest. Don applied for NASA grants sporadically, ran up travel and entertainment expenses (for which Don claimed Hurricane Ike washed away his records), and never made a cent. But he did take business deductions.

Judge Goeke runs this through the Section 183 spectroscope, and sends Don’s deductions into the void. Not businesslike, too sporadic, no records, deductions for activities in years other than year at issue–the usual.

But yesterday’s orders had an interesting one, Michelle D. Brown, Docket No. 7540-09, Order dated 3/19/12. The point is that a withholding tax credit is not the subject of a deficiency, and therefore Tax Court can’t hear it, but maybe they can, later.

Judge Paris: “During 2003 petitioner was a resident of Texas, a community property state, and filed her 2003 Federal income tax return as married, filing separately without splitting her tax items with her husband. However, if a husband and wife domiciled in a community property State make separate returns, each spouse for Federal income tax purposes, must report half of the community income, such as wages, and half of the credit allowable for taxes withheld on such income. See sec. 66; secs. 1.31-1(a) and 1.66-1(a), Income Tax Regs.’ The Internal Revenue Service audited petitioner’s 2003 return and adjusted petitioner’s tax items accordingly. As a result petitioner did not owe Federal income tax in 2003, but she claimed an excessive withholding credit that created a refund overpayment of $5,067.” Order, p. 1.

Michelle had gotten a SNOD for several previous years, settled those with IRS, but left 2003 open. The SNOD included the 2003 overcredit. But now IRS argues that the overcredit IRS seeks to recoup is not a deficiency permitting Michelle to pass within the Section 6213 strait-and-narrow gate to Tax Court.

Judge Paris again: “Under section 6211(b)(1) a deficiency is determined ‘without regard to the credit under section 31’. Section 31 generally allows the taxpayer to claim a credit for Federal income tax withheld from wages for that taxable year. The amount of an overstated credit may be summarily assessed and is not subject to deficiency procedures. Sec. 6201(a)(3); Breein v. Commissioner, 74 T.C. 1097, 1104-1105 (1980). Since the withholding credit issue is not a factor in determining a tax deficiency, the Court does not have jurisdiction to consider whether petitioner is entitled to the withholding credit that created an excessive refund in 2003. Cf. Whalen v. Commissioner, T.C. Memo. 2009-37 (when determining an overpayment for a related deficiency proceeding or penalties the Court may consider withholding credits).” Order, p. 2.

But Michelle’s fight about the withholding credit is not lost.

Judge Paris gives Michelle the good news: “Although the Court does not have jurisdiction to address petitioner’s 2003 tax year at this time, petitioner has yet to receive an opportunity to dispute the underlying tax liability for that year. In the event of a collection hearing, petitioner may challenge the existence or amount of the underlying tax liability for 2003. See sec. 6330(c)(2)(B); Montgomery v. Commissioner, 122 T.C. 1 (2004).”

Don’t give up, Michelle.


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