Court to planners: No documentation, no deductions

The U.S. Tax Court recently denied an income tax deduction for rental payments associated with taxpayers’ financial planning business.

The taxpayers produced no evidence that the costs were incurred. In fact, the Tax Court could not even apply the “Cohan rule” (whereby the Internal Revenue Service estimates expenses in the absence of receipts) because the taxpayers presented no evidence or testimony to show that some seminars leading to the rental payments ever took place.

The taxpayers involved with the planning business were also denied tax deductions for depreciation on computers because they failed to produce proof that the equipment was used exclusively in their business.

Little `01 effect seen from IRS overhaul

The Joint Committee on Taxation has issued a report on the effects of the IRS Restructuring and Reform Act of 1998.

According to the committee’s report, the IRS’ oversight board has raised questions about the decline of traditional enforcement activities. In fiscal 2000, the audit rate dropped to less than 0.05%.

“The IRS oversight board has noted that the decline in enforcement activities raises questions about tax compliance and fairness to the vast majority of citizens who pay their taxes,” the report says.

As for the 2001 filing season, according to the joint committee, the General Accounting Office notes:

* The IRS’ reorganization has had “little effect” on the 2001 filing season.

* The IRS has processed returns and refunds without significant problems, and it has received a larger percentage of returns electronically. Many taxpayers, however, have had difficulty using their personal identification numbers.

* There are concerns about the productivity of IRS phone help lines and the quality of assistance provided by IRS walk-in sites.

Register tax shelters or face penalties

The IRS’ office of chief counsel recently addressed penalties for promoters who fail to register a tax shelter under the tax code’s Section 6111, “Tax Shelter Registration.”

The IRS examined a case in which it had knowledge of the shelter, the promoter’s activity and the identity of the investor through previous proceedings. The shelter was not registered.

The chief counsel advisory addresses four specific issues:

* There is no statute of limitations for assessing the penalty for failing to register a tax shelter.

* The fact that the IRS obtained information regarding the shelter and promotion activity through previous proceedings against the promoter did not absolve the promoter’s obligations under tax laws. Therefore, the issue is whether a promoter properly registers a shelter, not how long it takes the IRS to assess the penalty.

* The penalty is based on 1% of the amount invested. The amount is not limited to what the investors pay for a shelter plan, but also includes amounts the investors contribute to the shelter.

* If a penalty is assessed, the taxpayer can request it be removed. If the taxpayer wants to challenge the issue in court, it must pay and start refund proceedings.

Cite: ILM 200112003

Temper tantrum proves costly

A federal court recently awarded lawyers’ fees to be paid by a tax protester who filed a frivolous suit against his co-workers. The workers had, through their employer, garnisheed his wages to collect taxes.

Robert Taylor filed an unsuccessful lawsuit to stop the IRS and his employer, Petroleum Helicopters Inc., from garnisheeing his wages to collect his tax liability.

Mr. Taylor then filed a lawsuit against two judges in the case, against the IRS agents and also against two Petroleum Helicopters employees responsible for carrying out the garnishment order.

The suit alleged conspiracy violations among the defendants. The employees moved for dismissal as well as seeking legal fees from Mr. Taylor for frivolous prosecution.

Judge Myron H. Thompson of the U.S. District Court for the Southern District of Alabama ordered Mr. Taylor to pay attorneys’ fees to the employees. The court ruled that Mr. Taylor’s suit against the employees was frivolous, and although Mr. Taylor represented himself, he should have known that the action was frivolous.

After adjusting the lawyers’ hourly rates, the court ordered Mr. Taylor to pay $2,971 in lawyers’ fees and costs to the employees.

Cite: Robert H. Taylor v. James E. Gaither, et al., Civil Action No. 00-360-AH-C [S.D. Ala. Mar. 22, 2001]