In Uncategorized on 10/05/2015 at 16:17

I chose a small-claimer, Richard Irwin Wideman and Kristina Novak, 2015 T. C. Sum. Op. 61, filed 10/5/15, over a T.C. Memo of even date therewith, because of the way STJ Lewis (“Spell It Right”) Carluzzo deals with the Section 6662(a) accuracy penalty.

Here, both sides made substantial concessions post-deficiency and pre-trial, but IRS wanted the 20% chop computed using the entire deficiency (pre-concession).

“In his pretrial memorandum respondent [IRS] argues that petitioners ‘have failed to present respondent with sufficient information or documentation to substantiate reasonable cause or show that the understatement of tax… was not the result of negligence or disregard of rules of regulations.’ Respondent’s pretrial memorandum goes on to acknowledge his burden of production under section 7491(c) and argues that his burden has been satisfied because petitioners ‘have not complied with all substantiation requirements or maintained all records under the Code’.” 2015 T. C. Sum. Op. 61, at p. 14.

And Richard Irwin’s records were scanty at best on the points in dispute, and maybe even not so great on the conceded ones.

But IRS did concede a lot, so on those points how bad could Richard Irwin’s records be? True, Richard Irwin’s telephone deduction is not greater than IRS allowed because of the one-line-for-home-office rule, his miscellaneous expense deduction is shot down as entirely unexplained, and his casualty loss (or as mutated by Richard Irwin, a lawyer not admitted in Tax Court, into a loss of property used in a trade or business) is rejected on the law.

Shouldn’t the items Richard Irwin conceded be the only ones in the base for computing his accuracy (negligence) chop?

STJ Lew agrees.

“We are mindful that the failure to keep adequate records to substantiate expenses underlying claimed deductions can support the imposition of the section 6662(a) accuracy-related penalty on the ground of negligence, see sec. 1.6662- 3(b)(1), Income Tax Regs., but, for the most part, we agree with respondent only with respect to those adjustments petitioners conceded. With the exception of the deduction for miscellaneous expenses, the disallowances of the deductions addressed in this opinion are based upon technical reasons rather than lack of substantiation. We can envision a case where the mere disallowance of a deduction on a technical ground, in and of itself, could give rise to the taxpayer’s liability for a negligence penalty, but this is not that case. Petitioners are liable for a section 6662(a) penalty, but only with respect to the underpayment of tax attributable to: (1) the adjustments they otherwise conceded and (2) the disallowance of the deduction for miscellaneous expenses.” 2015 T. C. Sum. Op. 671, at pp. 14-15.

Takeaway– Concessions can reduce penalties. So can disallowances based upon the law alone.

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