In Uncategorized on 10/22/2012 at 16:32

Such is Judge Marvel’s rebuke to John Allen Hatling and Kathleen Ann Hatling, 2012 T. C. Memo. 293, filed 10/22/12. John’s the bad actor here, and Kathleen is along for the ride.

John has been a lawyer in Minnesota for 25 years; he took at least one CLE course in IRS representation, and does estate planning. He got a 45-day license suspension when he pled guilty to felony non-filing of his State income tax return in 2008. For the three years at issue here, he filed returns stating no tax due, attaching Forms 8275 and 8275-R stating he was claiming a “claim of right deduction for white citizens”, although he stipulated he knew the claimed deduction was baseless and he was only stalling paying taxes.

Now this sounds like a run-of-the-mill protester case, which, as Guide Michelin used to say, “need not long detain the tourist”; or anyone else. But John did file the Forms 8275 and 8275-R and said exactly what he was doing; if you disclose what you’re doing, are you defrauding anyone?

While John stipulated that he filed the returns with the intent to delay assessment and payment of tax, Judge Marvel doesn’t rely on that alone. John did overstate his deductions; while his recordkeeping barely passes muster, his guilty plea on State tax counts against him, and he did file a false return. And he’s a lawyer (presumably) and should know better (ditto).

And the “I told you so” defense based on the Forms 8275 and 8275-R deconstructs. As usual, the answer is in the footnotes.

“Petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore Mr. Hatling could not have been attempting to conceal his income. We reject petitioners’ contention for several reasons. First, the Code provides that taxpayers may deduct from income an amount received under a claim of right. See sec. 1341. Petitioners have failed to convince us that simply by including the claim of right deductions on their returns, they disclosed that the deductions they were claiming were clearly improper. Second, while the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer’s disclosure may preclude a finding of fraudulent intent, at least two other Courts of Appeals, as well as this Court, have held that disclosure does not preclude a finding of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir. 1987), aff’g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff’g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo. 1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v. Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) (“Clearly, where the taxpayer has informed the IRS of his refusal to file or to pay, and of the reasons for that refusal, the government has not been deceived. In addition, the disclosure clearly negates any intent to deceive.”), aff’g T.C. Memo. 1984-152; Raley v. Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did not act with fraudulent intent because he “went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes”), rev’g T.C. Memo. 1980-571. Third, petitioners deducted the claim of right deductions with the intent of underreporting their taxable income and evading their obligation to pay their proper income tax liabilities when due.” 2012 T. C. Memo. 293, at p. 14, footnote 13.

So John gets nailed for the 75% fraud penalty.

Not for nuthin’, as they say, but isn’t this a case where John went a bridge too far? He admitted he took a phony deduction to stall the IRS and failed to file his State income tax return. Let’s see if John takes an appeal, so we can see what Eighth Circuit has to say.

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