Friday, March 17, 2017

Out On A Limb

I met a new client recently.

He made me laugh.

Not to his face, though. That would be rude.

He was running me through a series of HSA/single member LLC/loan transactions.  And then the inevitable: will this get me in trouble with the IRS?

This is not as easy a question to answer as it used to be.

The IRS is experiencing a phenomenal brain drain, as its baby boomers are retiring left and right. They are replacing 25-or-more-years of tax experience with … well, let’s just say that they are not comparable. Add in the Congressional budget restrictions. Continue with the new-and-novel political presumption that every known societal problem can be addressed through the tax Code, and the IRS is having issues.

Will he get in trouble? Well, if he is unfortunate enough to be audited, he likely will face an examiner with fewer years of experience than the shoes I am wearing. His or her group manager is unlikely to be much better. This raises our risk profile, as they probably will not (a) understand and/or (b) care for our “novel” tax ideas. Now we go to Appeals. I have to draft the written appeal, with cites and arguments and precedents. It can be a hassle, and I won’t be cheap.

How much money is he saving by climbing-out on a far limb of the tax tree?

My point exactly. I am not a fan of taking nine-standard-deviations-from-the-mean positions on a tax return just to save $50. Folks, the Empire can strike back. I have seen it hit and hit hard.

There was a dentist in 2002 and 2003 that wanted to climb one of those high and far branches. There were several issues in the case, but the one that interests us is the vehicle deduction. It was a husband and wife team, with the husband being a dentist. She might have some argument for business use of the vehicle if she was the office manager, as perhaps she was going to the bank or post office, for example. Still, that is unlikely to amount to much. His argument was much more tentative. Was he visiting patients? Was he running to/from the dental lab(s)? What exactly would a dentist do that would rack up any significant business mileage?

Let’s climb up that tax tree. Let’s edge out on that limb. Let’s gaze into the verdant valley below.

Their argument?

Here is the first: He had applied veneers to his wife’s teeth, so whenever she went somewhere she was …
“… a walking, talking billboard for [the] dental office.”
Alrighty then. There is a journalism career in there for that depth of intellect.

How about a second?
Additionally, each vehicle had a license plate holder that displayed the name of the dental practice.”
Petitioners contend that even when the vehicles were being used for personal reasons they provided a valuable advertising service to the practice.”
These people are like giving a fish a bath.

You can anticipate how this turned out: the Court bounced the entire vehicle deduction, even the part that may have been legitimate.

Was it a novel argument? Yes .... It wasn’t a good one, though.

The case for the home players is Willock v Commissioner.

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