Whole Ball of Tax 2003
CCH’s Annual Picks for
Quirky Court Cases
FROM HOGS
TO WIGGLERS, TAXPAYERS AND IRS
TELL ODD TALES IN COURT
(RIVERWOODS, ILL., January,
2003) – The nation’s tax code hardly reads like a novel, yet interesting
stories come out of it every year, according to CCH INCORPORATED (CCH),
a leading provider of tax law information and software. Once again
as gleaned from court cases decided in 2002, taxpayers put their own
distinctive spin on the complex rules of federal tax law, and then
had to explain themselves to the judge.
Kay Harris, an analyst
who monitors court opinions for CCH Tax Day, a daily compilation
of tax developments, noted that a wide variety of factors can set
a case aside from the routine run of tax litigation – a prickly defendant,
an outrageous IRS position, a historical sidelight or a deal just
a little too good to be true.
"What’s truly odd
is that some people never seem to learn. They lose to the IRS but
keep coming back for more."
Here’s a look at some of
the more interesting tax cases that passed through the nation’s courts
during 2002.
This Transaction Didn’t
Smell Right
A farmer who pays a farm
laborer with a bushel of tomatoes in addition to cash doesn’t have
to count the tomatoes as "wages" paid and doesn’t have to
pay FICA withholding tax on their value.
A large Iowa hog operation
tried to take that principle to extremes by paying "bonuses"
in the form of hogs. Applying the payment-in-kind rule, the farm corporation
excluded the value of the hogs from its FICA computations.
The farm claimed that the
hog transfers were intended to motivate its employees, but two officers
– brothers who ran the family corporation – were the only employees
to actually receive the hog payments.
Also, the "bonuses"
were put into the brothers’ names within days of when the hogs would
have been sold in the ordinary course of business. The "bonus"
hogs and other market-ready hogs "were loaded into the same truck
and sold to the same hog buyer on the same terms," the U.S. District
Court for the Southern District of Iowa noted.
The court concluded that
the hog bonuses were actually disguised cash transfers "whose
sole purpose was tax avoidance."
(Highway Farms, Inc., DC
Iowa, 2002-1 USTC ¶50,281)
Why Can’t He Just Take
Up Golf?
A former Air Force major
is leading an active retirement – entirely too active for the taste
of some judges. He spends much of it in Tax Court arguing that his
wages, Social Security benefits and military pension aren’t subject
to tax.
He claims that attempts
to tax his military retirement pay constitute a "fraudulent claim
for federal pension benefits," that the pay is "governed
and disciplined under Title 10 of the Uniform Code of Military Justice"
and that "the IRS can’t tax the Armed Forces."
Similarly, he maintains
that Social Security benefits "can’t be the subject of a legal
process" and, therefore, aren’t taxable.
In the latest incident,
he sent in a "protest" tax return, showing no liability,
even though he claimed it was not legally necessary. "I was being
nice and submitting one anyway, even though I didn’t have to."
The protest return was
sent back to him. "I may have thrown it in the wastebasket,"
he testified at his trial. When asked whether he kept a copy, he answered
"Maybe, maybe not."
The Tax Court has heard
this all before, several times. After making it clear that the positions
he was putting forward were frivolous and discredited, the court held
him liable for over $600 in penalties for his failure to timely pay
his taxes and $5,000 in damages for maintaining a frivolous position
in his case. The tax liability he was trying to avoid paying was $2,500.
Since 1986, the major has
taken five other trips to Tax Court, all of which were dismissed,
and this is the third time he has been held liable for a $5,000 damage
award for making frivolous claims.
(J.E. Simanonok, Dec. 54,676(M))
A Kinder, Gentler IRS?
Sometimes you wonder whether
if everyone at the IRS has gotten the message.
IRS lawyers argued to the
Tax Court that a 68-year-old woman should be required to pay income
taxes on almost $400,000 that her husband had embezzled 20 years ago.
The court analyzed several
factors in reaching its decision. One deciding factor was the question
of economic hardship. The IRS argued that the woman would suffer no
economic hardship if forced to pay a huge tax bill, even though her
current income was $430 per month in Social Security benefits.
Why not?
The IRS implied that she
would suffer no hardship because her children would step in to pay
the taxes.
The court saw things a
bit differently.
It concluded that she would
suffer one hardship if she were to be held liable for the taxes, and
then she’d suffer a second hardship if she had to ask her children
to bail her out of the mess, especially since there was no evidence
that they could or would do it.
(R. Ferrarese, Dec. 54,894(M))
The Real Enron Didn’t Fare
So Well, Either
A former stockbroker who
claimed he conducted a "health, wealth and healing ministry"
was not considered by the court to have conducted that activity for
profit.
That meant he was not entitled
to deduct losses in excess of the income generated by the activity
– losses that had offset a healthy stream of income from investments
and reduced his tax liability to less than $1,000 a year.
The minister – a "bishop"
according to his mail-order ordination – described the activity of
his ministry to the Tax Court by saying, "people need to be understood
in terms of the fact that they have a body…" and that his approach
centered on "helping people learn how to make money" through
his own participation in a broad range of marketing schemes.
He described one of them
to the court:
And the first business
I got into, in multi-level marketing, was marketing electricity.
I paid $1,250 for the worldwide rights for the Los Angeles – well,
the United States rights. And … it all went down the drain. They
could never deliver electricity.
A wondering court asked:
"You were going to be kind of like your own Enron Corporation?"
To which he replied, "Well, something like that."
Not only did this ministry
never make a profit or seem likely to, but its business records left
much to be desired. The former broker never maintained a separate
checking account for the ministry, and categorized almost all his
checks – including all of the ones written to grocery stores – as
"unreimbursed business expenses."
On his tax return, the
broker-turned-minister deducted "business storage/rental"
fees of $1,000 a month that he paid to his mother for space to keep
various products, including "wigglers…heat-type things"
and "ozone machines."
In the end, the court was
not convinced that the ministry was much more than a strategy designed
generally to lower, if not virtually eliminate, the would-be minister's
federal income tax liability by converting personal living expenses
into deductible business expenses. It also disallowed a large portion
of his claimed charitable contributions and imposed a negligence penalty.
(H.D. Singer, T.C. Summary
Opinion 2002-48)
This Nurse Needed More
Education – About Taxes
As she described it to
the Tax Court, the taxpayer, in 1998, a registered nurse in Roseville,
California, heard something on a television show about early withdrawals
from retirement plans not being subject to the normal 10-percent penalty
when the money is used to pay for educational expenses.
She proceeded to withdraw
over $41,000 from her retirement plan. She enrolled for two nursing
courses – which meant she did not meet the law’s requirement that
she be enrolled as at least a half-time student in order to avoid
the penalty.
During 1998, she paid $261
toward the courses. She paid an additional $2,076 for her 1998 courses
in 1999.
Then, the IRS imposed a
penalty on her withdrawal, based on the fact that only a tiny fraction
had gone to pay for education in 1998 and even that amount didn’t
qualify because of her light academic schedule.
The nurse asked the court
to rule in her favor, since it was "unrealistic" of the
IRS to expect anyone to complete all their education in a single year.
Her argument was "misguided,"
the court patiently explained. No one was demanding that students
cram an entire degree program into 12 months. A taxpayer-student could
avoid the penalty "simply by withdrawing during the year an amount
less than or equal to the amount the taxpayer pays for higher education
expenses."
And, by the way, what happened
to the rest of the money?
The court noted that the
nurse said she made the withdrawal "because she needed funds
to buy a car and pay off bills" in addition to paying for her
courses. So the bulk of the funds went to pay purely personal expenses
and the court concluded that the penalty was in order.
(C.J. Dunn, T.C. Summary
Opinion 2002-108)
Taxpayer and Court Were
Safe with this Late Petition
A Syracuse New York taxpayer
received a notice of deficiency from the IRS dated September 4, 2001.
The notice said that the taxpayer would have to petition the Tax Court
in Washington, D.C., within 90 days to contest the deficiency. In
practical terms, this meant that the petition had to be postmarked
no later than December 3, 2001.
The taxpayer claimed he
met the deadline, sending in his petition in late November.
But his petition arrived
at the Tax Court on January 2, 2002. There was no legible postmark
on the envelope. Counsel for the IRS argued that the petition should
be thrown out because it wasn’t timely filed.
The court chose instead
to believe the "forthright" and "candid" testimony
of the taxpayer and accepted the petition, despite the obvious fact
that it did not arrive on time and there was no evidence on the envelope
as to the date it was mailed.
Why such an exception to
the usual rules? Because it was an unusual time.
Following the discovery
of anthrax in Washington mail facilities, the post office serving
the Tax Court was closed. Vast quantities of mail were set aside and
irradiated to kill any possible biological agents. The court noted
that, in January 2002, it was still receiving mail from November and
December 2001. It was this irradiation that obliterated the postmark
on the petition’s envelope.
(L. Gibson, Dec. 54,858(M))
Tax Court Gives Musician
the Homesick Blues
From 1990 to 1995, a musician
would ride a bus nearly every Thursday or Friday from his parents’
home in Stoughton, Wisconsin, where he lived, to Chicago. There, he
would perform over the weekend as part of a band known as Dr. Bop
and the Headliners. He earned anywhere between $11,000 and $18,000
a year doing this, although he never bothered to file a tax return
during those performing years. Eventually, though, he gave up the
band. He stopped riding the bus and started driving one, for the city
of Madison.
A few years later, the
IRS came calling, asking about all the unreported income from his
Dr. Bop years. Then, the former Headliner had to apply his artistry
in a new form – Form 1040.
In giving a financial account
of his musical career and trying to lessen his potential obligation
to the U.S. Treasury, the musician deducted all the bus fares on his
old Stoughton-to-Chicago run as business travel expenses.
Not so fast, the Tax Court
said. When it comes to taxes, home is where you earn your bread, not
necessarily where you lay your head. Most of Dr. Bop’s gigs were in
the Windy City, so as far as taxes were concerned, the band members’
tax home was Sweet Home Chicago. Only travel away from Chicago
to perform at other venues counted as business travel for any of the
musicians – and, like the rest of the Dr. Bop organization, this one
was reimbursed for those trips.
But why had a member of
a Chicago-based band been living with his parents in Wisconsin the
first place? He had been trying to save money so he could pay off
a debt to the IRS.
(L.A. Bjornsted, Dec. 54,657(M))
About CCH INCORPORATED
CCH INCORPORATED,
headquartered in Riverwoods, Ill., was founded in 1913 and has served
four generations of business professionals and their clients. The
company produces more than 700 electronic and print products for the
tax, legal, securities, insurance, human resources, health care and
small business markets. CCH is a wholly owned subsidiary of Wolters
Kluwer North America. The CCH web site can be accessed at cch.com.
The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.
-- # # #
--
nb-03-09
|