Attorney-at-Law

COUNSEL’S DILEMMA

In Uncategorized on 02/13/2015 at 01:21

Cheryl R. Savello, 2015 T. C. Memo. 24, filed 2/12/15, shows able counsel presented with a tough one: client has a deficiency with two separate issues. One is at least a potential winner, and possibly better than even odds; the other is weak at best, and an odds-on loser.

Assume that the only settlement you can get will wipe out the winner, and not get you out of the 20% chop on the loser, although at the end of the day you might save the client a few bucks overall.

Well, informed consent is always a cheap out, but here the client must have elected to go for it. Unfortunately, the weak case was rental real estate. And unless the client is terminally anal-retentive and a compulsive recordkeeper, those cases collapse routinely. So with that bunker looming before him, and the green a very thin green line on the horizon, counsel had no choice but to go for it.

I’m not second-guessing him. Anyone who can say “I still have my hopes that the next big legal show on TV will be named ‘Law and Order : Tax Division’” is my kind of guy.

Judge Kerrigan doesn’t need an exhaustive trudge through the Section 183 laundry list to find for Cheryl on the strong case. She inherited the model airplane business from her late Papa, moved it from his garage to a six-room house, and, although Cheryl didn’t know an aileron from a fuselage, the store had “inventory, cash registers, a telephone, display cases, offices, supplies, and workspace. The store is open every day from 8 a.m. to 5 p.m.” 2015 T. C. Memo. 24, at p. 3.

And even though her only help was an unpaid volunteer retired person she inherited from Papa, Cheryl did help out around the store when she wasn’t out of town with her rental real estate. Cheryl also had some retail sales experience. She claimed her late Papa made money, and she said the store ran at breakeven most years.

“Petitioner does not derive personal pleasure from operating Aero-tronics and does not have substantial income to absorb recurring losses. Although petitioner did not provide evidence of profits for previous years, the tax benefit to her is not significant; and we do not think she would have continued to run the business without an honest expectation of profit. As a result, petitioner is entitled to deduct the properly substantiated expenses that she reported on her Schedules C….” 2015 T. C. Memo. 24, at p. 13.

Cheryl’s problems come with the rental real estate. She lived in one property herself, and rented parts of the others to each of her two daughters. But she had no records of the rents actually collected, although she testified the daughters paid rent only sporadically.

The rents she charged were not below fair market, but her recordkeeping was far below par, and her collection practices were, to put it charitably, casual.

So the Section 280(A) personal use and qualifying relative 10% and 14 day limitations come into play, and Cheryl’s deductions suffer accordingly.

Now Cheryl is up for the 20% negligence chop.

“Petitioner testified that a third party prepared her tax returns. Petitioner did not call the third party to testify, failed to provide evidence that the third party was a competent professional with sufficient expertise, and failed to prove that she provided the third party with necessary and accurate information. Petitioner did not show reasonable cause for failing to keep adequate books and records in order to substantiate her rental real estate loss deductions properly. Petitioner is liable for the accuracy-related penalties…” 2014 T. C. Memo. 24, at pp. 20-21.

Takeaway–You might get away with casual recordkeeping if you’re running a business and your losses aren’t too great, but forget about casual when it comes to rental real estate. Your recordkeeping must be bulletproof.

 

 

 

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