Designated Orders: 11/20-11/24

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 Professor Samantha Galvin of University of Denver Sturm College of Law brings us Designated Orders for the week ending November 24. The post looks at an order concerning a request to seal records and two interesting bench opinions. One bench opinion concerns the challenges proving deduction of vehicle expenses when a taxpayer has multiple sources of income and multiple cars. The other shows the dangers of petitioning the Tax Court when the return in question has other questionable items that could lead to a deficiency greater than initially proposed in a notice of deficiency–especially when the taxpayer fails to participate in the case beyond filing the petition. Les

Only five orders were designated for the week ending November 24, and the orders not discussed are here (granting respondent’s motion to dismiss and imposing a 6673 penalty) and here (granting petitioner’s motion for protective order).

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The Penleys’ Privacy

Docket No: 13243-15, Penley v. C.I.R. (Order Here)

The Penleys are back in the designated order spotlight. It’s unclear why Judge Wherry is continuing to highlight their case, but this most recent designated order addresses petitioners’ motion to seal the case pursuant to Rule 103(a) to which respondent objects. This motion comes after petitioners were denied a motion for reconsideration in October.

Petitioners state that respondent failed to redact their social security numbers and other sensitive information from some court filings which resulted in theft of either their or a witness’s identity and a telephone scam. Petitioners did not provide any proof of this which appears to be a recurring theme for them.

The Court agrees that the sensitive information should be redacted. The Court also addresses a specific instance where respondent did not redact the petitioners’ SSNs in accordance to Rule 27(a), but respondent had subsequently corrected the error by substituting the unredacted copy with a redacted copy. The unredacted copy was removed from the public record and sealed.

Some unredacted information, not under seal was submitted by petitioners themselves, which generally means they have waived the protection of the privacy rules. Another order dealt with a similar issue and was highlighted in a previous PT post .

The Court balances the public needs for fairness and truth which are satisfied by making court records publicly available with the need, pursuant to Rule 103(a), to protect petitioners or witnesses from annoyance, embarrassment, oppression, or undue burden or expense.

To balance these competing interests, the Court decides a less drastic alternative to sealing the record using Rule 27(h) should be used and denies petitioners’ motion to seal the entire case. Rule 27(h) permits the petitioners to correct their inadvertent disclosure by submitting a redacted, substitute filing. The Court also allows petitioners to notify respondent of any other unredacted documents, and that may be the last time we will see the Penleys.

Miles and miles

Docket No: 10629-14, Asong-Morfaw v. C.I.R. (Order Here)

This is the first of two designated orders from the week that contained bench opinions. Bench opinions are permitted under I.R.C. 7459(b) and Rule 152(b), and like designated orders cannot be cited as precedent. Not all bench opinions become designated orders, so there is a reason these are being highlighted – perhaps to serve as means of educating the public and pro se petitioners.

The first bench opinion involves whether a petitioner was entitled to take the vehicle expenses he had claimed on his 2010 tax return. Petitioner worked at a translator, tax preparer, and part-time employee at a center for mentally ill individuals in the year at issue.

Petitioner originally claimed $16,251 in vehicle expenses in connection with his translation business and during the audit stage, he was disallowed all but $1,743 of the expenses. Petitioner states that he had driven 3,485 miles but his mileage log only listed 1,416 miles. At trial, he testified that he actually had three cars which he used, along with other members of his family, for mixed business and personal use.

One of those vehicles is a Toyota RAV and petitioner purchased this vehicle in April of 2010. Petitioner alleges that he only used the Toyota RAV for business, so he wants to take actual repair costs and bonus depreciation under section 179. The Court starts chipping away at this argument and petitioner reveals that he also used the Toyota to commute to his part-time employment, so those miles are personal rather than business-related.

As a result of the mixed business and personal use, all of petitioner’s vehicles, including the Toyota, are listed property under section 280F, so if petitioner wishes to take actual expenses rather than mileage, he must determine what percentage of the vehicle use was qualified business use. Petitioner fails to allocate between personal and business miles for his three cars and it was impossible for the Court to determine the use percentage based on the record.

Then the Court analyzes whether petitioner is entitled to bonus depreciation. Section 168(k) allows for 50% depreciation in the year a vehicle is placed in service, or 100% if acquired between 9/8/2010 and 1/1/2012. The Toyota was placed in service on 4/17/2010, so it is not eligible for 100% bonus depreciation. The Toyota is also not eligible for 50% depreciation, because petitioner did not prove that it was predominantly used for business purposes, so it was not qualified property.

The Court allows the amount the auditor originally allowed while acknowledging that the government is being generous. Petitioner is entitled to mileage for 3,485 miles even though his mileage log reflected less.

Respondent Meets Burden without Petitioner Present

Docket No: 16860-16 S, Wallace v. C.I.R. (Order Here)

This second bench opinion may be an example of what can happen when petitioner does not participate in the trial, even when the burden with respect to some items has shifted to respondent. The following issues are before the Court: 1) cancelled debt income, 2) filing status, 3) dependency exemption, 4) earned income tax credit, 5) itemized deductions and 6) education credits.

Only the cancelled debt was raised in the notice of deficiency, but respondent raised the remaining issues in his answer. Respondent has the burden to any new matter or increases in deficiency raised in an answer pursuant to Rule 142(a)(1). Petitioner did not provide evidence on any of the issues, and even though the burden was on respondent for most of the issues, petitioner still did not fair well.

With respect to each issue:

Since petitioner did not appear nor provide any evidence about the cancelled debt, the Court finds for respondent. Cancelled debt is an issue that we see in our clinic often because many taxpayers don’t understand that cancelled debt is taxed as income, unless an exception or exclusion applies.

Petitioner filed as head of household and his wife filed as single. The Court determined petitioner was not entitled to head of household status because he was married during the whole year. The burden is on respondent who offers proof that petitioner had filed a bankruptcy petition with his wife in the year at issue reflecting that they were married, and also used a married filing status on the following year’s return. Head of household status also requires that the petitioner has a qualifying dependent – which is the next issue the Court analyzes.

Again, respondent has the burden and proves that petitioner’s son, who was claimed as a dependent, was 25 years old in the year at issue which makes him too old to be a qualifying child even if he was a student, and there is no evidence that he was disabled. Respondent also proves that petitioner’s son earned more than $8,000 in the year, which is too much income for a qualifying relative.

After finding the petitioner ineligible for head of household status and the dependency exemption for his son, the Court analyzes whether he would qualify for the earned income tax credit (EITC). Respondent proves petitioner’s AGI exceeds the income limitations for taxpayers without qualifying children, so he is not entitled to EITC.

As to the itemized deductions, petitioner claimed tax preparation fees but had not used a paid preparer. He also claimed substantial medical expenses, but the expenses had been discharged in bankruptcy.

Petitioner claimed education credits but the IRS did not receive any information, such as a form 1098-T, from a qualified educational institution reporting that petitioner had paid educational expenses so he is not entitled to the credits.

Respondent met his burden using information available through public records and other means, so the Court disallows all items. Perhaps had the petitioner participated, things would have gone differently for him.

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