When It Comes To Taxes, The Courts Heard It All, The Tribulations Of Mobsters, 'Mad' Scientists, Others Have Tried The Patience Of A Few Judges

(RIVERWOODS, ILL., March 22, 1999) – About this time of the year, millions of Americans are hunched over their tax forms, trying to decide how daring they will be on their federal tax returns. However, CCH INCORPORATED, a leading provider of tax and business law information, suggests before you begin rationalizing your decisions, you consider some of the unusual defense arguments and positions heard in the tax courts recently. From mobsters to scientists, from untaxes to the IRS itself, CCH offers its picks for winners of the "1998 Nice Try" award.

Who Says Crime Doesn’t Pay? In J. DiFronzo v. Commissioner of Internal Revenue, it was the ruling, not the complaint, that seemed unusual. The Court ruled in favor of a "crew chief" in a Chicago organized crime family who sought to deduct his legal defense fees – as an "ordinary" business expense. His business was loan sharking, bookmaking, extortion, illegal gambling, trafficking in stolen property and fraud. The IRS argued the letter of the law, saying the gangster had merely conspired to set up a gambling operation, and, therefore, only had an expectancy of a future business for which expenses were not deductible. Reprehensible criminal activity aside, the court determined that his deduction was legitimate.

An Apple a Day Failed to Keep the IRS Away: A holistic dentist tried to convince the federal government that his apple orchard and dentistry practice were one partnership business for income tax purposes. In T.F. and C.J. Zdun v. Commissioner of Internal Revenue, the Court found this a little hard to swallow and concluded that the record was entirely bereft of any evidence of an actual and honest profit objective associated with the orchard. In fact, the dentist’s description of his house nestled among fragrant, flowering apple trees convinced the Court that personal pleasure was the dominant factor for the orchard. The dentist and his wife were found liable for an accuracy-related penalty.

Un-Believable: Individuals (United States of America v. L. Clark, et. al.) who operated an organization that sold "untax" packages that claimed to teach people how to remove themselves from the federal tax system were found guilty of conspiring to defraud the government. The group considered the IRS "domestic enemy number one" and planned to put the IRS out of business.

Benefits of Big Family Backfire: While children can confer many tax benefits on families, some of those benefits can boomerang, especially in the area of the alternative minimum tax (AMT). In David R. and Margaret J. Klaassen v. Commissioner, the couple had 10 children as dependents when they figured their 1994 federal tax, making for a total of 12 personal exemptions worth $29,400 on the return. Taken into account with their itemized deductions, the taxpayers’ return showed a tax owed of $5,111.

The IRS, however, called the return into question, saying the laws require everyone to pay an alternative minimum tax (AMT) if it is higher than their regular tax. The AMT adjustments reduced or eliminated some deductions and threw out their personal exemptions, which increased their taxes an additional $1,085. In short, the taxpayers’ problem with the AMT arose almost solely from the size of their brood; if they had only had seven children, the whole AMT issue would never have come up.

The taxpayers protested the IRS’ finding, arguing that Congress never intended for the AMT to apply in a circumstance such as this, and that the law penalized them for bearing children and violated their right to practice their religion. Unfortunately for the king-sized family, the Tax Court ruled in favor of the IRS. The Klaassens have since appealed.

Don’t Get Mad…Get Even: He thought the IRS did him wrong, so a scientist took it upon himself to even the score. In D.R. Edmons v. Commissioner of Internal Revenue, the Court determined that the scientist was not allowed to claim a deduction for an IRA contribution that he admitted he had not made. The scientist took the deduction in an effort to recoup taxes he believed the IRS improperly collected from him in a previous year.

All in the Family: The Court told a taxpayer - who claimed she was injured by the loss of benefits resulting from the nonpayment of taxes by her father and uncle - that she didn’t have a leg to stand on. An accountant was not allowed to pursue a suit to compel the IRS to investigate and collect taxes from her father and uncle. Although she claimed to have been injured by her relatives’ alleged nonpayment, the court stated that her speculative loss of benefits from those uncollected taxes would have been shared with the entire population of the United States and did not qualify as a concrete injury. The case, J. Lichtman, CPA v. United State of America, was dismissed.

The court called I.R. Banks v. T.M. Barrett a "blunderbuss:" The suit sought to reopen a judgment and to order the IRS to audit businesses the plaintiff believed owed him money, to restore diamonds to himself and his ancestors and to direct a member of Congress to comply with his views on members’ responsibilities to constituents. According to the court, the suit was a waste of everyone’s time and the defendants’ money.

About CCH INCORPORATED

CCH INCORPORATED, Riverwoods, Ill., was founded in 1913 and has served four generations of tax professionals and their clients. CCH is a wholly owned subsidiary of Wolters Kluwer U.S. The CCH web site can be accessed at www.cch.com.

-- ### --

nb-99-04