Attorney-at-Law

THE UNCERTAINTY PRINCIPLE

In Uncategorized on 01/30/2013 at 17:49

No, this blogpost is not about quantum mechanics, about which I understand virtually nothing. It is about avoiding a Section 6662(a) accuracy penalty where the tax incident giving rise to the deficiency was the result of uncertainty.

Special Trial Judge Lewis (right way to spell it, Judge) Carluzzo explains in Elliott Rodney Thomas and Mildred Marie Thomas, 2013 T. C. Sum. Op. 5, filed 1/30/13, a Section 7463 “not for nuthin’”.

There’s a fight about whether Hurricane Katrina relief applies to the Section 6651(a)(1) late filing addition to tax (ElRod and MilMarie lose, even though the property giving rise to the deficiency was in New Orleans and damaged by Katrina; their principal place of business and place of residence was California, and they filed too late even if they’d otherwise be entitled to Katrina relief). There’s a fight about whether the loss from their real estate activities is subject to the Section 469 passive loss rules, but IRS didn’t raise that in the SNOD, fails to sustain its burden of proof on the trial, and ElRod and MilMarie win that one.

But the deficiency arises because ElRod and MilMarie claimed the Katrina casualty loss twice. They claimed the casualty loss in one year, IRS said no, they petitioned Tax Court, and the casualty loss issue was settled pre-trial, with decision for ElRod and MilMarie.

But while the Tax Court proceeding was pending, the next year’s return was due, so ElRod and MilMarie took the loss on that year’s return as well, not knowing which year would be the right year. No way, says IRS, you clearly can’t get the same deduction twice, right? So it’s time for the Section 6662(a) accuracy penalty.

Not exactly, says Judge Lew. “The deficiency, the underpayment of tax required to be shown on petitioners’ 2006 return, and the understatement of income tax all result from the casualty loss deduction claimed on petitioners’ 2006 return and disallowed in the notice. At first glance it would seem that an underpayment of tax that results from the disallowance of a deduction allowed in a previous year would be subject to the penalty. According to petitioners, however, the penalty should not be imposed because they acted reasonably and in good faith with respect to the underpayment of tax that resulted from the disallowance of the casualty loss deduction. Because of the sequence of events, we agree with petitioners.

“The casualty loss deduction claimed on petitioners’ 2005 return and 2006 return relates to the same occurrence, that is, the loss they sustained on account of the damages suffered to the New Orleans house during Hurricane Katrina. They are obviously not entitled to two deductions attributable to the same loss. Their entitlement to the 2005 loss deduction, however, was in question as of the date their 2006 return was filed. Claiming the casualty loss deduction again for 2006 was intended to ensure that the deduction was allowed for one or the other of the years.” 2013 T. C. Sum. Op. 5, at pp. 14-15.

Given the uncertainty when they filed, ElRod and MilMarie acted reasonably and in good faith. No penalty. The uncertainty principle rules.

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