In Uncategorized on 12/17/2018 at 15:58

No, not a variant on the Adler-Ross 1954 musical comedy tune, rather this is the story of the divorce case between now-or-former attorney Bruce Scholes and Mary Fernando, which ended with Mary splitting some AZ property with Mary Louise Sholes, 2018 T. C. Memo. 203, filed 12/17/18, and Mary Louise’s late husband (who invested therein at Bruce’s behest), and Mary Fernando getting all the NM property.

Mary Fernando claimed Bruce did a fraudulent conveyance to Mary Louise and Mary Louise’s late spouse. The idea was to oust Fernando of her community property interests in the foregoing. In the course of the jurisprudential fracas, there was also a criminal money-laundering case. Mary Louise claims ran up some $1.2 million in legal and professional fees over three (count ‘em, three) years. And collected no rents from any of the properties involved, as son Bruce was living there rent-free.

Note this is a petition from a CDP. Mary Louise never got the SNODs, so she got de novo treatment on liability.

Bruce carries the ball for Mary Louise on the trial, as she is infirm.

Judge Cohen: “Notwithstanding multiple opportunities to provide specific descriptions of the services rendered by various lawyers and firms involved in the various legal battles, petitioner and [Bruce] failed to do so.  Instead, to support their contentions that all of the amounts were properly deducted, they have relied on canceled checks, summaries of those checks, and vague explanations of what particular lawyers did.  The inclusion of payments to caregivers for [Bruce’s] children, by checks clearly marked as for child care, undermines the reliability of their generalizations.  Petitioner belatedly offered to concede those clearly personal amounts, but that concession does not cure the misrepresentation of the nature of the payments in the summary of legal and professional fees petitioner prepared to support the deductions claimed on her tax returns.” 2018 T. C. Memo. 203, at p. 8.

And here’s the kicker.

“Deductibility of legal fees depends on the origin and character of the claim and not on its potential consequences to the taxpayer.  United States v. Gilmore, 372 U.S. 39, 49-52 (1963).  If the origin of the claim is a marital relationship, the legal expenses are nondeductible even if the outcome affects income-producing property of the taxpayer.  Fleischman v. Commissioner, 45 T.C. 439, 446 (1966); Lucas v. Commissioner, T.C. Memo. 2018-80; Barry v. Commissioner, T.C. Memo. 2017-237.” 2018 T. C. Memo. 203, at p. 11.

Even assuming the properties were held for production of income, the paucity of evidence precludes even a Cohan approximation of deductible expenses.

So if “all you see are silhouettes,” it isn’t enough.

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