In Uncategorized on 08/23/2016 at 16:05

If your preparer fails or refuses to give back your records or show up for trial, you may have your deductions scuppered, but still avoid the negligence chop.

That’s the story for Johnnie C. Walker, 2016 T. C. Memo. 159, filed 8/23/16.

Johnnie folded her single-member LLC ambulance company, and stored her records in a storage unit that got opened and dumped for nonpayment of rent. She had given her accountant copies, from which said accountant prepared Johnnie’s timely returns for two years, and late return for a third year.

When IRS socks Johnnie with heavy-duty deficiencies, Johnnie asks for her records back. Getting nothing, her attorney tries, and Judge Pugh even holds up trial for a month to await the outcome of the tug-of-war. Alas for Johnnie, at close of play she is relegated to the Michael Corleone gambit.

The deficiencies arose when IRS disallowed Johnnie’s vehicle expenses and legal and accounting fees. You’re right, Section 274 doesn’t apply to ambulances or to legal and accounting fees.

Judge Pugh: “Ambulances used in a trade or business are excluded from ‘listed property’ as defined in section 280F(d)(5)(B)(i) and thus not subject to the strict substantiation rules.  Similarly, legal and professional services expenses are not subject to the strict substantiation rules.  See sec. 274(d).” 2016 T. C. Memo. 159, at p. 6.

Johnnie loses the vehicle stuff anyway. She has zero records and no reconstruction, so Cohan doesn’t help, and IRS claims whatever it allowed Johnnie for contract help (drivers who drove her ambulances or their own) covers all that and the $400 per week gas money she gave them. Judge Pugh agrees.

Johnnie did OK on the witness stand as to legal and accounting. “Petitioner credibly testified that the deduction for legal and professional services expenses…incurred to hire a consultant and a bookkeeper….  On the basis of her testimony, and considering the nature of these expenses in the context of her business, we hold that her testimony is sufficient to satisfy the requirements of section 162 and to support the claimed deduction.” 2016 T. C. Memo. 159, at p. 8.

IRS wants the chop for the one late year, and Johnnie has nothing except that she thought the missing accountant got an extension, which s/he didn’t, so IRS gets that chop.

But Johnnie escapes the negligence and substantial understatement chops.

“Petitioner credibly testified that she gave [her LLC’s] receipts and other records to her accountant and relied upon her accountant to calculate and report her [years at issue] Federal income tax liabilities properly.  Considering the nature of her business and our observations as to her ‘experience, knowledge, and education’, we conclude that her reliance was reasonable.  Therefore, we hold that petitioner is not liable for the section 6662(a) accuracy-related penalties for the years in issue.” 2016 T. C. Memo. 159, at pp. 11-12 (Citations omitted).

Takeaway- Backup doesn’t only apply to vehicles. It goes double for business records.

  1. […]  THE CASE OF THE RELUCTANT ACCOUNTANT. (Lew Taishoff) “Takeaway- Backup doesn’t only apply to vehicles. It goes double for […]


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: