Incorrect Submission Leads to Dismissal of Refund Claim

 

You should be able to talk with someone at the IRS and work it out over the phone.”

I have lost track of how many times I have heard that over the years.

I do not disagree, and sometimes it works out. Many times it does not, and we recently went through a multi-year period when the IRS was barely working at all.

There are areas of tax practice that are riddled with landmines. Procedure - when certain things have to be done in a certain way or within a certain timeframe – is one of them. Ignore those letters long enough and you have an invitation to Tax Court. You do not have to go, but the IRS will – and automatically win.

I was looking at a case recently involving a claim.

Tax practitioners generally know claims under a different term – an amended return. If you amend your individual tax return for a refund, you use Form 1040X, for example.

There are certain taxes, including penalties and interest, however, for which you will use a different form. 

Frankly, one can have a lengthy career and rarely use this form. It depends – of course – on one’s clients and their tax situations.

And yes, there is a serious procedural trap here – two, in fact. If you use this form but the IRS has instructed use of a different form, the 843 claim will be invalid. You will be requested to resubmit the claim using the correct form. By itself it is little more than an annoyance, unless one is close to the expiration of the statute of limitations. If that statute expires before you file the correct form, you are out of luck.

There is another trap.

Let’s look at the Vensure case.

Vensure is a professional employer organization, or PEO. This means that they perform HR, including payroll responsibilities, for their clients. They will, for example, issue your paycheck and send you a W-2 at the end of the tax year.

Vensure had a client that stiffed them for approximately $4 million. As you can imagine, this put Vensure in a precarious financial situation, and they had trouble making timely payroll tax deposits in later quarters.

I bet.

Vensure did two things:

(1)  They filed amended payroll tax returns (Forms 941X) for refund of payroll taxes remitted to the IRS on behalf of their deadbeat client.

(2)  They submitted Forms 843 for refund of penalties paid over the span of six quarters (payroll taxes are filed quarterly).

Notice two things:

(1)  The claim for refund of the payroll taxes themselves was filed on Form 941X, as the IRS has said that is the proper form to use.

(2)  The claim for refund of the penalties on those taxes was filed on Form 843, as the IRS has said that is the proper form for the refund or abatement of penalties, interest, and other additions to tax.

Vensure’s attorney prepared the 843s. Having a power of attorney on file with the IRS, the attorney signed the forms on behalf of the taxpayer, as well as signing as the paid preparer. He did not attach a copy of the power to the 843, however, figuring that the IRS already had it on file.

Makes sense.

But procedure sometimes makes no sense.

Take a look at the following instructions to Form 843:

You can file Form 843 or your authorized representative can file it for you. If your authorized representative files Form 843, the original or copy of Form 2848, Power of Attorney and Declaration of Representative, must be attached. You must sign Form 2848 and authorize the representative to act on your behalf for the purposes of the request.” 

The IRS bounced the claims.

The taxpayer took the IRS to court.

The IRS had a two-step argument:

(1) For a refund claim to be duly filed, the claim’s statement of the facts and grounds for refund must be verified by a written declaration that it is made under penalties of perjury. A claim which does not comply with this requirement will not be considered for any purpose as a claim for refund or credit. 

(2)  Next take a look at Reg 301.6402-2(c):  

Form for filing claim. If a particular form is prescribed on which the claim must be made, then the claim must be made on the form so prescribed. For special rules applicable to refunds of income taxes, see §301.6402-3. For provisions relating to credits and refunds of taxes other than income tax, see the regulations relating to the particular tax. All claims by taxpayers for the refund of taxes, interest, penalties, and additions to tax that are not otherwise provided for must be made on Form 843, "Claim for Refund and Request for Abatement."

Cutting through the legalese, claims made on Form 843 must follow the instructions for Form 843, one of which is the requirement for an original or copy of Form 2848 to be attached.

Vensure of course argued that it substantially complied, as a copy of the power was on file with the IRS.

Not good enough, said the Court:

The court agrees with the defendant that the signature and verification requirements for Form 843 claims for refund are statutory.”

Vensure lost on grounds of procedure.

Is it fair?

There are areas in tax practice where things must be done in a certain way, in a certain order and within a certain time.

Fair has nothing to do with it.

Our case this time was Vensure HR, Inc v The United States, No 20-728T, 2023 U.S. Claims.

Penalties, Boyle and “Reductio Ad Absurdum.”

 

In logic there is an argument referred to as “reductio ad absurdum.” Its classic presentation is to pursue an assertion or position until it – despite one progressing logically – results in an absurd conclusion. An example would be the argument that the more sleep one gets, the healthier one is. It does not take long to get to the conclusion that someone who sleeps 24 hours a day – in a coma, perhaps – is in peak physical condition.

I am looking at a tax case that fits this description.

What sets it up is our old nemesis – the Boyle decision. Boyle hired an attorney to take care of an estate tax return. The attorney unfortunately filed the return a few months late, and the IRS came with penalties a-flying. Boyle requested penalty abatement for reasonable cause. The Court asked for the grounds constituting reasonable cause. Boyle responded:

                  I hired an ATTORNEY.”

Personally, I agree with Boyle.

The Court however did not. The Court subdivided tax practice in a Camusian manner by holding that:

·      Tax advice can constitute reasonable cause, as the advice can be wrong;

·      Relying on someone to file an extension or return for you cannot constitute reasonable cause, as even a monkey or U.S. Representative could google and find out when the filing is due.

 Here is an exercise for the tax nerd.

(1)  Go to the internet.

(2)  Tell me when a regular vanilla C corporation tax return is due.

(3)  Change the corporate year-end to June 30.

a.    When is that return due?

Yes, the due dates are different. I know because of what I do. Would you have gone to step (3) if I had not pushed you?

Jeffery Lindsay was in prison from 2013 to 2015. He gave his attorney a power of attorney over everything – bank accounts, filing taxes and so on. Lindsay requested the attorney to file and pay his taxes. The attorney assured him he was taking care of it.

He was taking care of Lindsay, all right. He was busy embezzling hundreds of thousands of dollars is what he was doing. Lindsay got wind, sued and won over $700 grand in actual damages and $1 million in punitive damages.

The IRS came in. Why? Because the last thing that the attorney cared about was filing Lindsay’s taxes, paying estimates, any of that. It turns out that Lindsay had filed nothing for years. Lindsay of course owed back taxes. He owed interest on the tax, as he did not pay on time. What stung is that the IRS wanted over $425 grand in penalties.

He did what you or I would do: request that the penalties be abated.

The Court wanted to know the grounds constituting reasonable cause.

Are you kidding me?

Lindsay pointed out the obvious:

         I was in PRISON.”

Here is the Court:

One does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due.”

The Court agreed with the IRS and denied reasonable cause.

Lindsay was out hundreds of thousand of dollars in penalties.

I consider the decision the logical conclusion of Boyle. I also think it is a bad decision, and it encapsulates, highlights and magnifies the absurdity of Boyle using the logic of “reductio ad absurdum.”

Our case this time was Lindsay v United States, USDC No 4:19-CV-65.

Are You Insolvent Or Not?

There is a case called Hamilton v Commissioner. It was recently decided in the 10^th Circuit, and it caught my eye.

Since it went to a Circuit court, you may correctly assume that this case was on appeal.

Frankly, I do not see a win condition for the taxpayer here. It does, however, give us an opportunity to discuss the concept of a tax nominee.

The patriarch of our story – Mr Hamilton – borrowed over $150,000 to send his son to medical school.

Mr Hamilton injured his back in 2008 – and badly.

I presume that translated into loss of income and a difficult time servicing debt.

Mrs Hamilton finally got the student loan discharged in 2011.

A key point is that the student loan belonged to Mr Hamilton – not the son. When the loan was discharged, the tax effect is therefore analyzed at Mr Hamilton’s level, as he was the debtor.

Before the discharge, Mrs Hamilton transferred approximately $300 grand into a rarely used savings account owned by her son. He in turn gave her the username and password so she could access the account. Throughout 2011, for example, she withdrew close to $120,000 from the account.

COMMENT: There you have the issue of a nominee: whose account is it: Mrs Hamilton’s, the son’s, or both? Granted, it the son’s name is on the account, but is he acting as the face man – that is, a nominee – for someone else?

The issue in the case is whether the discharged debt of $150 grand was taxable to the Hamiltons in 2011.

In general, if your recourse debt is discharged, you have taxable income. There are several exceptions, of which one of the better known is bankruptcy. File for bankruptcy and the tax Code allows you to exclude the debt from taxable income.

But … it requires you to file bankruptcy.

There is a similar – but not quite the same – exception that has to do with insolvency. For tax purposes, one is insolvent if one’s debts exceeds one’s assets.

EXAMPLE: You have assets (house, car, savings, etc.) of $400,000. You owe $500,000. You are insolvent to the extent that your debts exceed your assets ($500,000 – 400,000 = $100,000).

Mind you, you are not filing for bankruptcy. I suppose it is possible that you could power through this stretch, cutting back personal expenditures to a minimum and applying everything else to debt. Still, you are technically insolvent.

The tax Code lets you exclude debt forgiveness from taxable income to the extent that you are insolvent.

EXAMPLE: Let’s continue with the above example. Say that $50,000 is forgiven. You are $100,000 insolvent. $50 grand is less than $100 grand, so $50 grand would be excluded under the insolvency exception.

NEXT EXAMPLE: What if $125 grand was forgiven? You could exclude $100 grand and no more. That last $25,000 would be taxable, as you are no longer insolvent.

The insolvency calculation puts a lot of pressure on what to include and what to exclude in the calculation. Do you include a 401(k) account, for example? Do you include someone else’s loan on which you cosigned?

In the Hamilton case, do you include that savings account?

Under state law, the son did own the account. Tax law however will rarely allow itself to be trapped by mere formality. This judicial doctrine is referred as “substance over form,” and it means what it says: tax law will generally look at the players and on-field performance and resist being distracted by the school band and T-shirt cannons.

The Court made short work of this case.

The taxpayers argued, for example, that the son could change the username and password at any time, so it would be a leap to call him an agent or nominee for his parents.

Yep, and a delivery spaceship for intergalactic deep-dish pizza could land on Spaghetti Junction in Atlanta during rush hour.

If you can log-in with impunity and move $120,000 grand, then you have effective control over the bank account. The mother’s name was not on the account, but it may as well have been because the son was his mother’s agent – that is, her nominee.

I have no problem with that. I would have done the same for my mother, without hesitation.

What the Hamiltons could not do, however, was leave-out that bank account when they were counting assets for purposes of the insolvency calculation. It was, after all, around $300 hundred – less than a Bezos but a lot more than a smidgeon.

Did it affect the insolvency calculation?

Of course it did. That is why the case went to Court.

The Hamiltons were not insolvent. They had income from the debt discharge.

They had to try, I guess, but I doubt whether they ever had a win condition.

Can You Get Penalty Abatement If Your Accountant Dies?

What if you give your tax documents to your CPA and your CPA dies before preparing your return?

I am reading a case where that happened.

I will lead with this: the IRS assessed almost $41,000 in penalties.

The Willetts had a longstanding relationship with their CPA (Goode). In August, 2015 they gave her all the tax documents to prepare their 2014 tax return.

Time passed and the Willetts attempted to reach Goode, but without success. In October, she finally responded, explaining she had been ill and in a nursing home. She would cover any penalties and interest associated with their return.

In November, 2015 (mind you, the return was due October 15) Mrs Willett visited Goode at her home. Ms Goode assured her she would bounce back and finish their return.

That was the last time the Willetts spoke with Goode, who passed away in February, 2017.

The Willetts had some foreboding, however, as they contacted other CPA firms to address their 2014 return. There were obstacles – Goode had original documents, for example – but they were trying. The Willetts were told that the firms were already too busy with individual returns or that their return was too complex.

COMMENT: Folks, that sounds odd to this practitioner. Methinks there is more to the story.

They finally found and hired a CPA in June, 2016. They filed their 2014 return in September, 2016 – eleven months late.

You already know the IRS came back hot with penalties and interest.

The Willetts took the case to a District Court in California.

COMMENT: That means that they had to pay the penalties and then litigate for a refund. Had they gone to Tax Court, they would not have had to pay the penalties and interest before bringing suit. That would be the upside. The downside to the Tax Court is that the judges are tax specialists. It is a little harder to spin a tale to a specialist, as opposed to a district judge who is a generalist and hears a spectrum of cases.

Penalties can be abated for reasonable cause, but there is a case out there – Boyle – that greatly circumscribes a taxpayer’s ability to rely on an accountant in order to abate penalties. The Boyle decision (sort of) divided tax practice into two categories for purpose of penalty abatement:

(1) The first category is “routine” compliance, such as looking up when a tax return is due and making sure it gets filed by then.

(2) The second category includes professional advice, such as whether a Code section affects a taxpayer or what certain provisions from the 2017 Tax Cut and Jobs Act even mean.

The Boyle court acknowledged that one could rely on an accountant for column two issues, but one probably could not rely for purposes of column one.  The IRS has subsequently interpreted Boyle aggressively, arguing that the qualifier “probably” is not even required in the preceding sentence.

So how does Boyle work when your CPA dies? Is it more like column one or more like column two?

The Court discussed issues surrounding taxpayer reliance on an agent, but at heart the Court was looking at someone who relied on an accountant – apparently a sole practitioner – who was quite ill, in and out of nursing facilities and incapable of producing timely work.

Question: what would a reasonable person do?

After all, the concept is reasonable cause.

The Court was not at all persuaded that reasonable people would wait endlessly for their accountant to recover from a nursing home stay before preparing their return. A reasonable person would seek-out another accountant – even if it was a one-off engagement - in order to meet their tax responsibilities.

There was no reasonable cause.

I admire the Willetts’ loyalty to their practitioner, but their delay cost them $41 grand.

How Often Can The IRS Audit You For The Same Thing?

How often can the IRS audit you for the same thing?

I would have to ask two more questions before answering:

(1) Is the IRS auditing the same year?

(2) Is the IRS auditing the same issue?

Here is the relevant Code section:

            IRC Section 7605(b):

No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

Focus in on the lawyered wording:

            “unnecessary examination or investigations”

            “an additional inspection is necessary”

If I were the IRS, I would argue that all examinations and inspections are “necessary” and be done with the matter.

Fortunately, it does not work that way.

Let say that you are self-employed and deducted a bad debt – a sizeable one – in 2014. The IRS takes a look at it and raises some questions, as bad debts are a notorious area of contention with the IRS. After some back and forth the IRS agrees to the deduction.

Question: Can the IRS audit your 2014 tax return again?

Answer: Of course it can, at least until the statute of limitations expires. What it cannot do is audit your 2014 bad debt again. It already looked at that issue and did not propose an audit adjustment. There is only one bite at the apple.

This does not mean that you are untouchable, however.

Let’s say that you incur a huge net operating loss in 2016. You decide, after meeting with your tax advisor, to carryback the loss to 2014 and get a tax refund. You could really use the cash, with that loss and all.

Question: Can the IRS audit your 2014 bad debt again?

The answer may surprise you: Yes.

Here is the Court:

This is not a case where the IRS is subjecting the Taxpayer to onerous and unnecessarily frequent examinations and investigations. The reexamination of Year 1 is not a unilateral action on the part of the IRS, but in response to the Taxpayer’s election to carry back net operating losses and claim a refund.”

In other words, you started it.

Let me give you a second scenario: 

You have a large donation in 2014 and another large donation in 2015. You were audited for 2014. The IRS made no change to your return.

Question: Can the IRS audit your 2015 for the donation? 

Here is Internal Revenue Manual 4.10.2.13:

(1) Repetitive audit procedures apply to individual tax returns without a Schedule C or Schedule F, when the following criteria are met:

·        a. An examination of one or both of the two preceding tax years resulted in a no change or a small tax change (deficiency or overassessment), and

·        b. The issues examined in either of the two preceding tax years are the same as the issues selected for examination in the current year.  

Answer: You should be able to stop this audit. The IRS looked at the same issue in the preceding year and found nothing.

BTW, note the references to Schedule “C” and “F” in para 1 above. Schedule C means that someone is self-employed, and Schedule F means that someone is a farmer. Those are two situations where a tax advisor would love to have this IRM protection. The IRS knows that too, which is why the IRS left out self-employeds and farmers.  

Question: What if the IRS audits you in 2014 for mileage and in 2015 for office-in-home expenses?  

Answer: You being are audited for two different things. What we are talking about is the IRS looking at the same thing, either more than once for the same year or more than once over a three-year period.

Let’s clarify a crucial point: what halts the second audit is NOT that you were previously audited on the same issue. What halts it is that you were audited and there was no change or an insignificant change. If you owed big bucks on the audit then you are fair game. 

A word of advice: you will have to let the examiner know. My experience is that he/she will be unaware until you bring it up. Address this issue early – for example, when the examiner is trying to schedule the visit – and you can stop the audit altogether. 

A Baseball Player Gets Hit By A Penalty

I have a question for you: let’s say you are a professional athlete. You have hired a financial advisor and an accountant. You give the financial advisor a durable power of attorney, allowing him/her to pay your bills, manage your money and grow your investments. You ask your accountant to prepare tax returns as necessary keep you out of trouble.

These services are not cheap. They cost you an upfront fee of $150,000 and an ongoing $360,000 annually.

            COMMENT: I am available and open to relocation.

You get robbed for millions of dollars. Tax returns do not get filed.

The IRS now wants big penalties from you.

QUESTION: Do you have “reasonable cause” to have the IRS remove those penalties?

We are talking about Mo Vaughn, who played baseball with the Red Sox, the Anaheim Angels and the New York Mets in the nineties and aughts.  He was the American League MVP in 1995.

In 2004 he hired Ra Shonda Kay Marshall to handle his money matters. She wound up leaving her employer, Omni Elite, and set up her own company, RKM Business Services, Inc. He also hired David Krebs with CPA Advisory Group, Inc. for the preparation of his tax returns.

Something happened, and in 2008 he fired both of them. Vaughn was going through his bank statements when he realized that Marshall had been embezzling. He hired forensic accountants, who determined that from 2004 to 2008 she had embezzled more than $2.7 million.

He then learned that his 2006 taxes were not paid.

Even that was better news than 2007, when his taxes were not even filed, much less paid.

He sued Marshall and RKM Business Services.

He hired new CPAs to get him caught up. The IRS – in that show of neighborliness that we have come to expect – hit him with penalties of $1,037,158 for 2006 and $102,106 for 2007. He had filed and/or paid late, and there were penalties for both.

He owed the tax, of course, but he had to contest the penalties. He went the administrative route – meaning appealing and working within the IRS itself. Striking out, he then took his case to court. He went to district court and then to appeals.

His main argument was simple: he was paying people to keep him out of tax problems. There was a lot of money leaving his account, so he had every reason to believe that a good chunk of it was going to the IRS. He was robbed. The IRS was robbed. Surely robbery is reasonable cause.

The IRS and the court pretty much knew his story at this point, and they knew that he was suing to get his millions back. The court however decided the government was due its money. There was no reasonable cause.

How is this possible?

There is a tax case (Boyle) where the Supreme Court addressed the issue of penalties assessed a taxpayer for his/her agent’s failure to file and pay taxes. The Court stated:

“It requires no special training or effort to ascertain a deadline and make sure that it is met. The failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing under [Section] 6651(a)(1).”

The Court was addressing deadlines, and it set a fairly high standard. The Court distinguished relying on an attorney or accountant for advice from relying on an attorney or accountant to actually file the return itself. Reliance on an agent did not relieve the principal of compliance with statutory deadlines, except in extremely limited circumstances.

Vaughn could not clear this standard. He had delegated too much when he turned over responsibility for both preparing and filing his taxes to Marshall and Krebs.

Vaughn had a backup argument: the malfeasance of his agents rendered him unable to pay. He did not have enough money left to pay taxes by the time Marshall was done with him.

He was referring to a tax case (American Biomaterials Corp) where two corporate officers defrauded their corporation, including failing to file and pay taxes. Those two were the only officers with the responsibility to file returns and make payment. The Court held that the corporation was not vicariously liable for the acts of its officers and therefore was not liable for penalties.

There is a limit on American Biomaterials, though: a corporation is not entitled to relief if – by act or omission – its internal controls are so lax that that there was no reasonable expectation that malfeasance would be detected in the ordinary course of business. In other words, the corporation cannot willfully neglect normal checks and balances and expect to be relieved of penalties.

Vaughn got smacked on his second argument. The Court noted the obvious: in American Biomaterials there was no one left in the company to file and pay the taxes. This was not Vaughn’s situation. While he had delegated responsibility, there was someone left who could and should have stepped in: Mo Vaughn himself. He did not. That was his decision and provided both reason and cause to impose penalties.

And so Vaughn lost both in the district and the appeals courts. He owed the IRS enough penalties to allow either you or me to retire. He lost because he delegated the one thing the tax Code does not allow one to delegate, except in the most extreme cases: the duty to file the return itself.

When Can You Take That Deduction?

Sometimes the most mundane things can cause a tax issue. For example, an asset must be “placed in service” before one can claim depreciation. Consider that 2013 was the last year one could claim 50% bonus depreciation, and you can see how someone would want that big-dollar asset in service by year-end.

But what does “place in service” mean?

Let us go through a couple of examples.

Let’s say that you purchase a single-family home. You know someone who wants to rent. With that in mind you purchase the property, incur approximately $10 thousand in repairs and then verify the credit worthiness of the potential renter. You are surprised and disappointed with the result, and decide not to rent to that individual.

It is now the following year. The next applicant is eligible for Section 8 assistance. HUD sends an inspector, who unfortunately wants additional repairs before approving the application. You do the repairs. HUD approves. You have a renter.

The issue here is that expenses must be associated with a trade or business (or an income-producing activity) that is up and running in order to be deductible. Prior to then, the expenses are likely “start up” expenses, which are not immediately deductible. The classic example is a restaurant “dry run,” which occur before the restaurant opens to the public. Family and friends are invited to put the kitchen and service through its paces.

Most accountants would take the position that the house was placed in service (that is, its “activity” as a rental had started) when it was available to be rented. You had a renter lined up. Granted the renter did not pass the credit test, but there was a house, you were willing to rent the house and someone wanted to rent the house. Unfortunately, you did not otherwise try to “market” the house, perhaps by listing it on Craig’s List or advertising in the newspaper.

Oh, by the way, you did not start depreciation until the HUD renter moved in, which is year two in our example.

     Question: Can you deduct the $10 thousand in repairs?

Let’s go on to example #2.

There is a life insurance salesman who specializes in the uber-wealthy. He generally sells life policies of $10 million or more. He has developed quite the network of CPAS and other insurance agents. When prospective clients appear he will charter planes rather than rely on commercial flights. He had a bad experience when a commercial flight ran late, causing him to miss an important meeting and costing him a possible $8 million commission.

He decides to purchase his own plane. He needs to fly nonstop from cost-to-coast, as many of his clients are on the west coast. He eventually finds a $22 million Bombardier Challenger 604 that fits the bill. Unfortunately it is closing in on December 31, and he needs that bonus depreciation deduction. Problem is he also wants to customize the plane. He wants a conference table, for example. He wants to be able to work while he is flying coast-to-coast.

What to do? He tells the company that he absolutely positively needs the plane before year-end. On December 30, he gets the plane. He makes a trip to Seattle for a business lunch, then to Chicago to meet with another insurance agent. He gets in that business use.

He then returns the plane so the modifications can be made. He wants that conference table. He also wants 20-inch display screens rather than the standard 17-inch screens. Who wouldn’t?

     Question: When would you start depreciating the plane?

How would I have handled these two cases? In the first example I am inclined to start depreciation on the house in year one, the same year that the potential renter flubbed his credit check. The house was ready for rent, evidenced by have a potential renter wanting to rent.

And I would have been wrong. The Court decided that the house was not ready for rent in year one. It needed repairs, for example. The Court also observed that the potential renter was lined-up before the purchase of the house. After the credit check, the landlord did not resort to referrals and other means to rent the house. Instead she applied for Section 8 approval. Since HUD would not approve the house until repairs were made, the house could not be placed-in-service before then.

I understand the Court’s position, and I disagree with the Court. Unless the landlord bought the house specifically for Section 8, then HUD’s approval or disapproval sways me very little. Having a potential renter sways me a lot. Were the repairs substantial enough to prevent a renter from moving in? We do not know.

The Court also observed that the landlord did not try “other” means to rent the house, such as newspapers or Craig’s List. That bothers me. Just about every small landlord I know rents exclusively by word of mouth and referral. The idea of “advertising” their duplex or fourplex would be unimaginable, especially given today’s litigious environment. I have run into this position before on audit, so it does represent the IRS party line.  Can you rebut the position? You can, but it may require documentation of one’s efforts to rent the property. In my case, the IRS wanted my client’s referral sources to document her efforts to obtain a tenant.

And I suspect that the taxpayer’s decision to delay depreciation until year two may have been fatal.

What about the plane? It seems to me that the purpose of a plane is to fly, and that plane flew by December 31. Unless the flights were not really business-related and constituted only smoke and mirrors, I would say that plane was placed in service by December 31.

And I would have been wrong. The Court decided that the plane was not placed-in-service until the modifications were made, and the modifications were not made until the following year.

The Court is not without basis. IF those modifications were really THAT IMPORTANT to the insurance salesman, then one could reason that the plane was not ready for use in his trade or business as an insurance salesman. It was not enough to fly. It was necessary that he fly with a conference table. I get the nuance.

I do not think that was it, though. The Court went on to talk about how the salesman had understated his income by tens of millions of dollars and how he used nominees to conceal ownership and control of entities from the IRS. He had created false paperwork to support illegitimate deductions. Me thinks that he had hacked off the Court, and the Court – seeing an opportunity to disallow millions of dollars of depreciation – took the opportunity.

I tell you what I would have recommended to the salesman: do not give the plane back immediately. Wait three or four months. Use the plane extensively. Then install the conference table. Tax accountants refer to this as “cool down.”

Yes, sometimes tax planning is that simple.