Designated Orders: 5/14/18 to 5/18/18 by William Schmidt

Miscellaneous Short Items

• Don’t Forget the Intervenor – Docket No. 4045-16, Amy F. Liesman, Petitioner, and Robert M. Liesman, Intervenor v. C.I.R. (Order here). In what looks to be an innocent spouse case, the petitioner filed a motion to dismiss, stating she understands that dismissal of her case will “effectively sustain Respondent’s Final Appeals Determination” and also states Respondent does not object to the motion. However, the motion does not state whether the Intervenor objects to the granting of the motion so the order gives a deadline for the Intervenor to object.
• Third Party Filings – Docket No. 5092-17, Chad Loube & Dana M. Loube v. C.I.R. (Order here). Counsel for Second Chance, Inc. electronically filed a notice of election to participate and a brief in support of petitioner’s opposition to respondent’s motion for summary judgment. Since third party filings are to be made by paper filing, the document is procedurally improper and is stricken from the record of the case.

Takeaway: Both of these cases illustrate how various parties did not follow proper procedure. In innocent spouse cases in which an intevenor exists, the moving party needs to state in any motion the position of the intervenor as well as the position of the opposite party. Failing to obtain the view of the intervenor prior to filing the motion will delay entry of an order because the court will do exactly what it did here and seek the views of the intervenor. In talking about potential rule changes at the most recent Tax Court judicial conference, the Court noted the absence of rules for amicus briefs. In the absence of a rule permitting a third party to participate in a case, the default rule requires the third party to file any documents by paper. When in doubt, consult the Tax Court Rules of Practice & Procedure, available on their website here.

Time to Provide Financial Information

Docket No. 12192-16 L, Thomas A. Denney v. C.I.R. (Order and Decision here).

The IRS audited petitioner’s 2009 tax return, assessed additional taxes and later seized his state tax refund as payment toward the liability. Petitioner requested a Collection Due Process (CDP) hearing, stating he was attempting to get an installment agreement at his financial level. In response, the IRS sent him a letter in early February 2016 that the CDP request had been forwarded to IRS Appeals and that they could not consider collection alternatives without financial information, so they included a financial information form. The settlement officer sent a letter on March 15, 2016, scheduling the hearing for April 5, and giving Denney 14 days to return the form. Denney had given his accountant power of attorney. The accountant waited to the appointed date to call the settlement officer for the first time, asking for an almost two month extension, citing the busy tax season. The officer noted that the letter already gave 14 days to respond if the hearing date was inconvenient, but agreed to give an additional week for the financial information. The extension passed without the form. In fact, the accountant sent an incomplete form more than a week after the deadline. The officer determined the levy was appropriate and the IRS obeyed their procedure. In Denney’s appeal, he said “A reasonable amount of time was not granted for compiling the requested information required to file a complete and accurate IRS Form 433-A.”

Ultimately, the petitioner was unresponsive, so the Tax Court’s order grants the IRS motion for summary judgment and issued an order permitting the IRS to proceed with collecting on the liability for the 2009 tax year. While the petitioner thought the amount of time was unreasonable, the Court thought that the approximately two months afforded to the petitioner was certainly reasonable to fill out the form.

Takeaway: It is best to be responsive to the IRS when they are requesting financial information. If the petitioner and his accountant had taken the time to fill out the IRS form, they might have been able to set up an installment agreement and been able to avoid litigation or other issues. Even if you fail to respond in the time frame set by Appeals, the failure to respond to the Tax Court’s request will almost always be fatal to the successful outcome of the case.

Keeping Good Business Records

Docket No. 15580-17S, Stephanie Elizabeth Gentry v. C.I.R. (Order here).

This order is a bench opinion with a transcript of the proceedings. The transcript details how petitioner received a notice of deficiency for her 2014 tax return, with disallowed deductions for unreimbursed employee business expenses and a tax preparation fee. Ms. Gentry provided testimony about her employment as an art consultant and in a boat chartering business during that year. The Court notes that the unreimbursed employee expenses were more than half of her total wages and gross unreimbursed expenditures were 64% of her art consultant wages.

The petitioner provided testimony that her records were unavailable because she suffered a medical injury and then her boyfriend prevented her from having access to the records. She tried to reconstruct the business records from her bank accounts, but her business account also included payments for personal expenses. What she did reconstruct was less than half of the expenses claimed.

The Court uses the Cohan rule in its analysis. The Cohan rule is a judge made rule that allows the Tax Court to estimate the allowable deduction amount when a taxpayer establishes a deductible expense was paid but fails to establish the amount of the deduction. The taxpayer may substantiate deductions through secondary evidence only where the underlying documents were not intentionally lost or destroyed and there must be sufficient evidence to permit the Court to conclude a deductible expense was paid or incurred in at least the amount allowed.

However, the Cohan rule has limitations and Code section 274(d) requires higher substantiation with regard to travel, meals and entertainment, and listed property, including passenger automobiles (in other words, expenses claimed by Ms. Gentry). For these expenses, a taxpayer must be able to prove the amount of each separate expenditure, the amount of each business use, and the business purpose for the expenditure with respect to that property.

Even though the Cohan rule and the relaxed evidentiary standard of an S case might have resulted in a ruling at least partially in Ms. Gentry’s favor, section 274(d) overrode each of the potentially relaxed standards for proving expenses resulting in a bench opinion in which the Court sustained the disallowances of the expenses in the notice of deficiency and decided in favor of the IRS.

Takeaways: For one, a taxpayer needs to be able to substantiate deductions claimed on a tax return. Receipts, bank records and other documents can be the evidence that will make or break a petitioner’s case. Keeping good business records and maintaining a separate business account are essentials to prove business deductions are valid.

The other main takeaway is that a petitioner cannot fully rely on the Cohan rule in Tax Court. While the rule allows the judge some leeway when primary evidence (the documents mentioned above) is unavailable because secondary evidence (such as testimony) may be sufficient, Congress has limited the application of the Cohan rule. There are instances such as the case in question where the Internal Revenue Code spells out higher substantiation requirements and the Cohan rule will not apply.