In Uncategorized on 06/23/2021 at 16:35

I’m adding Sandy Lee Rowe & Sylvia Marie Rowe, Docket No. 6432-20, filed 6/23/21, to my “Don’t Ambush” series, which began with my blogpost “Don’t Ambush the Indians,” 4/7/11. They’re neither accountants nor ranchers nor yet the IRS, but Judge Buch rightly shuts down IRS when they try to wildcard in the “goofy regulation” on the trial of S&S’ unsubstantiated business deductions for their travel agency.

You can read for yourselves Judge Buch’s attempted scrape of S&S’ palimpsest of pieced-together spreadsheets and credit card slips, no two of which seem to jibe. So S&S are out on substantiation, especially since the stuff is travel and therefore Section 274 heavy-duty substantiation is needed.

On the trial, however, Sandy Lee testifies as follows: “‘The income was secondary to us, because we like to see people travel, family and other acquaintances.” He continued, ‘So it’s not to make money; it’s for the pleasure of inspiring people to travel.'” Transcript, at pp. 4-5.

One can only imagine IRS counsel’s feeling when Sandy Lee thus expatiates. Rather like watching one’s foe pause as the front sight blade lines up with the rear sight reticle, and one’s finger slowly eases the trigger back. Sandy Lee is pro se, of course, so we are spared the sweet smile of his attorney watching the case do a Coriolis.

But IRS counsel only adverts to this testimony at the very end of trial.

“Mr. Rowe’s statements suggest that the business losses may be non-deductible hobby losses. However, the Commissioner did not raise this issue in the notice of deficiency, pleadings, or pre-trial memorandum. In his closing, the Commissioner mentioned the nondeductibility of hobby losses in an apparent invitation for the Court to disallow the losses on those grounds.” Transcript, at pp. 12-13.

Tried by consent, per Rule 41? Not with a pro se, who obviously wouldn’t know Section 162 from Section 183.

“We will decline the Commissioner’s invitation.

“Our Rules are designed to give the parties fair notice of the matters in controversy. Rule 31(a). To that end, the Commissioner is required to ‘advise the petitioner * * * fully of the nature of the defense’ and provide a ‘specific admission or denial of each material allegation in the petition.’ Rule 36(b). The Commissioner may raise a new matter provided the taxpayer receives fair warning. If a previously unraised issue is tried ‘by express or implied consent’ of the parties, we will treat it as though it had been raised in the pleadings. Rule 41(b)(1). To determine whether it is appropriate to apply the principle of implied consent, we consider whether sustaining the issue would result in unfair surprise or prejudice to the opposing party and limit the evidence that party might have otherwise introduced if the issue had been timely raised.” Transcript, at p. 13. (Citations omitted.)

Of course it would surprise S&S. Hobby loss might require evidence of profitability in years other than those at issue. And bringing in hobby loss might increase the deficiency above that set forth in the SNOD, with a BoP knock-on.

So don’t ambush the travel agents, either.


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