Donald B. Meinhardt and Arvilla Meinhardt occasionally stayed at their Minnesota farmhouse, and let family and friends stay in the place rent-free (or maybe in exchange for services like repairs, but never reported income nor kept records). But they did rent out the 140 acres of farmland for cash, and tried to deduct the farmhouse expenses.

This incurred the ire of IRS, and Judge Kerrigan has no sympathy for Don and Arvy in 2013 T. C. Memo. 85, filed 3/27/13.

Section 280(A) avails them not. Judge Kerrigan: “Although neither petitioners nor respondent discussed sec. 280A, we note that no deduction is allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.  See sec. 280A. A taxpayer is treated as using a dwelling unit as a residence if he used the unit for personal purposes for a certain number of days. Sec. 280A(d)(1). A taxpayer is deemed to have used a dwelling for personal purposes for any day the unit is used by a member of the taxpayer’s family, sec. 280A(d)(2)(A), unless the unit is rented at a fair rental for use as a principal residence. Because the evidence in this case did not establish whether anyone lived in the farmhouse during the years in issue, and because we resolve this case on other issues, we do not resolve the issue of the potential applicability of sec. 280A.” 2013 T. C. Memo. 85, at pp. 7-8, footnote 2.

And of course Don and Arvy have zero records. So we get  INDOPCO and Cohan and New Colonial Ice Co. and, as Bob Fosse would put it,  all that jazz.

The rental of the land is separate from the farmhouse, as Don and Arvy did no farming, so Don and Arvy had to use Schedule E, supplemental income and expense and not Schedule F, farming. Maybe some farming work might have saved Don and Arvy, but the passive loss rules would have rendered same problematic.

However, the forms used to report this sad tale weren’t chosen by Don and Arvy, but apparently by local attorney and tax guru Mr. Tenney, about more of whom see infra, as the high-priced lawyers say.

In any event, Don and Arvy could show no affirmative act whereby they discontinued personal use (including family use) and devoted to farmhouse to use in a trade or business, or for production of income. Judge Kerrigan: “…even if the taxpayer never used the property as a residence there still must be some affirmative act appropriating the property for the production of income.” 2013 T. C. Memo. 85, at p. 10 (Citation omitted).

So game over on the deductions, and we go to the penalty shot. IRS has Don and Arvy looking at the 20% Little Chop, accuracy.

Enter local attorney and tax guru aforesaid: “Petitioners recognized their unfamiliarity with tax law and approached Mr. Tenney, a practicing attorney during the years in issue, to assist in preparing their Forms 1040. Petitioners testified that Mr. Tenney ‘did a high volume of tax returns for the whole community’. Petitioners also testified that Mr. Tenney  ‘asked questions about the farm’. Petitioners gave him ‘all of [the] materials that * * * [they] thought were relevant to * * * [their] taxes’. We conclude that petitioners in good faith took reasonable efforts to assess their proper tax liabilities by seeking advice from a qualified tax return preparer and reasonably relied on Mr. Tenney’s expertise. See Furnish v. Commissioner, T.C. Memo. 2001-286; sec. 1.6664-4(b)(1), Income Tax Regs. Accordingly, petitioners are not liable for the section 6662(a) accuracy-related penalties.” 2013 T. C. Memo. 85, at pp. 16-17.

Wanna bet the returns the aforesaid guru does will get extra helpings of IRS scrutiny?

And speaking of high-priced lawyers, did you see the Victor-DLA Piper story? I don’t know the rights and wrongs, and I won’t hang anybody on the strength of a news article, but e-mails are the plaintiffs’ best friend, and lawyers especially should know this (and that they are discoverable).