In Uncategorized on 05/19/2020 at 18:28

Judge James S (“Big Jim”) Halpern is a stickler. The law is his guiding light, and steadfastly does he steer his course thereby. But today is a rarity. While he doesn’t vacate a stipulation, he pulls up a corner and tweaks it, in George E. Joseph, 2020 T. C. Memo. 65, filed 5/19/20.

George was an eye doctor with his eye on the prize, running Sub Ss and LLCs all over Northern Texas. He was a wee bit casual about filing returns, so IRS did a few for him, at no extra charge. And threw in some heavy duty chops for lagniappe.

George claims that the number to which he and IRS stiped double-counted about $18K in capital gains. He also claims that there is a mistake in the basis he had, because some deductible depreciation he was entitled to didn’t show up in that number either.

IRS agrees about the double counting, not the depreciation. The caselaw is very strict, and I’ve been over this a lot. Absent fraud or mutual mistake of fact, stips don’t get set aside. Even mistakes of law don’t do it, maybe. See my blogpost “The Busted Stipulation,” 1/20/12.

“…the record in the case before us makes clear that the stipulated amounts count the same capital gain twice. The double counting is not an unproven allegation but an established fact. To remedy that obvious error, we will disregard the parties’ stipulation that petitioner recognized $17,998 of capital gain for 2013….” 2020 T. C. Memo. 65, at p. 30.

Both parties agreed the number in the stip was wrong. They also agreed what number was right. No need to do discovery or to retry the case.

Deductible depreciation is another story.

George gave no numbers to support his depreciation claim, although he claims it is a “simple calculation.” And he knew from IRS’ request for admissions that depreciation and the amount of capital gains were on the table before he stiped. So this means “we would have to reopen the record ‘to determine how the gain was computed,’ which would involve ‘the production of additional documents and testimony’ from petitioner’s accountant and perhaps from petitioner himself. 2020 T. C. Memo. 65, at p. 32.

Not after trial.

But Judge Big Jim isn’t through. George has some deductions, defectively documented, that Judge Big Jim might be able to Cohanize, and thereby shave a couple bucks (hi, Judge Holmes) off George’s hefty deficiency.

Except. There’s a splash across the bows that isn’t a porpoise catching its breath.

“But petitioner did not invoke Cohan in his initial brief. And petitioner’s specific circumstances give us grounds to decline to rely on Cohan to estimate the amount of … deductible expenses that he failed to substantiate. As the Court of Appeals for the Second Circuit observed in Cohan v. Commissioner, 39 F.2d at 543, not only did the taxpayer in that case fail to keep account of his travel expenses; he ‘probably could not have done so.’ That observation suggests a limit on Cohan’s scope, under which estimating unsubstantiated expenses would be inappropriate when proper recordkeeping is feasible and can reasonably be expected. In fact, the Court of Appeals for the Seventh Circuit has recognized just such a limitation, identifying a trend under which Cohan, ‘while not * * * repudiate[d] * * * entirely, is * * * not invoke[d] * * * where the claimed but unsubstantiated deductions are of a sort for which the taxpayer could have and should have maintained the necessary records.’ Lerch v. Commissioner, 877 F.2d 624, 628 (7th Cir. 1989), aff’g T.C. Memo. 1987-295. Thus, we might justifiably decline to apply Cohan because petitioner could have kept adequate records. We do not take his failure to do so as the result of inevitable exigencies in the practice of ophthalmology.

“Respondent, however, accepts that we ‘may utilize Cohan to estimate some of petitioner’s expenses’.” 2020 T. C. Memo. 65, at pp. 40-41.

In this Technologic Age, when your FitBit measures how much you breathe each minute, and your smartphone takes your temperature hourly, and these synched-in doodads upload your whole life to the cloud and above, don’t count on the prehistoric technology of Cohan to bail you out. Or the IRS to continue to play nice.





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