What caught my eye was the amount of penalties at
issue:
Year Amount
2002 $
100,000
2003 $
105,000
2004 $1,822,000
2005 $1,785,000
2006 $1,355,000
The penalties total over $5.1 million. I had to look this
case over, even though it weighs in at 123 pages.
It involves Martin Knapp, a CPA. He got his license in
1983.
He had worked at the IRS. He also taught accounting
and taxation at Pepperdine and Los Angeles City College.
Not a bad resume, methinks.
He did something I never did: he specialized his
practice. He focused on transportation workers, including airline pilots and
railroad workers. He especially focused on mariners.
As of 2004 he employed 10 people.
Sounds successful to me.
He began his mariner practice around 1993. Two of his
clients wound up in Tax Court, and it is there that our story begins.
The first client was Mr. Johnson, a deep-sea mariner.
He would routinely work for four months and then take a two-month vacation.
The second was Mr. Westling, a tugboat captain in and
around Alaska. He would work 30-day shifts on the tugboat.
Knapp amended Johnson’s return and prepared Mr. Westling’s
return for 1996. He claimed a per diem for every day they were on the boat.
So what, right?
Here is the what: The per diem included a meal
allowance, and their employers provided the meals.
I do not get it. How can someone get a deduction if that
someone did not incur an expense in the first place?
The IRS flagged the returns, and both went to Tax
Court.
Since they presented the same issue, the cases were
consolidated.
In September, 2000 the Tax Court decided that neither
could deduct meal expenses but they could deduct incidental expenses.
COMMENT: The incidental portion of a per diem is for tips and miscellaneous stuff, such as mouthwash. It is only a few bucks per day and nowhere near the amount allowed for meals. In short, there was a (very) minor victory and a very large defeat.
Mr Kapp did not represent in the Tax Court case, but
he did read the decisions. He contacted the attorney who represented the IRS to
request a face-to-face meeting. The attorney could not do this, as Kapp was an “interested”
party. I could (hypothetically) have met with the attorney (as I had nothing to
do with either Johnson or Westling), but Kapp was the CPA and therefore very
much an interested party.
Kapp doubled down. He kept advising his clients that
they could deduct meals even if meals were provided by their employer.
He tripled down. He created websites promoting his
services to mariners and asserting that he could obtain tax refunds for them.
He quadrupled down. He wrote articles for Professional
Mariner and The National Public Accountant. Here is an example:
The exciting news for mariners is that two U.S. Tax Court decisions last year settled the legal issue of allowing mariners to claim an almost unlimited amount of travel deductions while working away from home, without ever having to show the IRS any receipts, just like other transportation workers.”
Enter Examining Officer Tiffany Smith, who informed
Kapp that he was the target of an IRS investigation for tax shelter promotion.
He sent her a 9-page letter detailing the relevant
authority for the mariner deduction and arguing that the IRS does not oppose
his position.
Does not oppose…?
Kapp wrote a letter he titled “Why is IRS Harassing Me
for Twice Winning in U.S. Tax Court?”
This is going south ….
The investigation was transferred to George Campos, a
revenue agent investigating tax promoters and abusive tax return preparers.
There is back and forth with Kapp and his attorney. In
August, 2005 Campos and Kapp meet. Campos points out that there is no deduction
for something one has not paid. Kapp asserts that “it does not matter if ***
receive a meal or not, they’re still entitled to a deduction.”
Campos prepared an injunction.
Kapp’s attorney started to worry. He had an associate research
the issue of mariners and meal deductions and memo the same. The result was
pretty much the same as the IRS position, which was a bad place to be when you represent
Kapp.
In early 2006 the Department of Justice sent Kapp a
letter informing him that it was considering filing a lawsuit and providing him
an opportunity to call and discuss the matter.
For all that is holy, Kapp, please STOP ….
At this point we are on page 55 of a 123-page court decision,
and I am going to end it.
The IRS wanted him to stop. If he stops, he may yet
walk away with all limbs still attached. Continue this quixotic quest, however,
and he might lose it all.
The Court decided he was wrong and hardheaded. Not
being without compassion, however, the Court reduced the penalties to
$3,218,000.
There goes a lifetime of savings.
Oh, why, Kapp, why?
