In Uncategorized on 05/10/2016 at 15:57

Judge Halpern has a rather unusual twist today on the sanctions-for-nonproduction Rule 104(c)(2) move.  “Live Your Dreams Life Coaching and Family Advocacy” operator Lisa A. Nkonoki, 2016 T. C. Memo. 93, filed 5/10/16, doesn’t bother handing over documents substantiating her claimed deductions until fewer than 14 days remained until trial, despite an order from Judge Halpern to hand them over sooner.

She also showed up two hours late for the trial. And didn’t put in an opening brief.

Judge Halpern refused to allow her to put in any documents she hadn’t given IRS. But she does get to testify.

Judge Halpern notes in passing:  “The only example petitioner gave of an amount included in her deduction for dues and subscriptions was an associate membership in the American Bar Association.  Petitioner admitted that she was not an attorney and did not explain how associate membership in a trade association for attorneys served her life coaching and family advocacy business.” 2016 T. C. Memo. 93, at p. 6.

C’mon Judge, “trade association” for attorneys? That’s a wee bit harsh.

Howbeit, you’d doubtless deduced by now where this is going. Section 274 sinks Lisa’s travel, car and cellphone expenses. And her testimony for the rest is not specific.

Now Lisa may be up for the five-and-ten chop (deficiency greater than $5k or 10% of tax due). But the 20% negligence chop for not keeping records is another story.

“Respondent [IRS] argues that petitioner’s failure to substantiate any of the expenses relating to deductions he disallowed establishes her negligence.  We disagree.  Respondent observes that ‘petitioner failed to produce to the Court a single admissible document’.  Petitioner’s failure in that regard, however, resulted from the sanction we imposed for her violation of our order to provide documents to respondent’s counsel by the specified due date.  Thus, petitioner’s failure to introduce documentary evidence to substantiate expenses relating to her claimed deductions does not establish that she lacked adequate substantiation when she filed her Federal income tax return….  Because we did not allow petitioner to introduce documentary evidence, we cannot assess the adequacy of any documentation she may have provided to her return preparer.  Petitioner admitted that she lacked some documents that might have been required to meet the substantiation requirements of section 274(d).  While petitioner’s admissions indicate that she might not have been able to substantiate her disputed expenses with the documents she had available at trial, we are reluctant to uphold a penalty on the basis of speculation about the state of the record had we allowed petitioner to introduce those documents.  On the basis of the record before us, respondent has not convinced us that imposition of a negligence penalty is appropriate.” 2016 T. C. Memo. 93, at pp. 14-15. (Footnote omitted.)

So the parties get a Rule 155 beancount to see if Lisa is in the penalty zone for the five-and-ten.

Takeaway—Might this opinion not encourage game-playing? If the five-and-ten isn’t in play, or isn’t likely to be in play, it might be worth giving IRS nothing, taking the sanction, and not getting the negligence chop.




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