Some tax items have been around for so long that perhaps
it would be best to leave them alone.
I’ll give you an example: employees deducting business
mileage on their car.
Seems sensible. You tax someone on their work income.
That someone incurs expenses to perform that work. Fairness and equity tell you
that one should be able to offset the expenses of generating the income against
such income.
The Tax Cut and Jobs Act of 2017 (TCJA) did away with
that deduction, however. Mind you, the TCJA itself expires in 2025, so we may
see this deduction return for 2026.
There are reasons why Congress eliminated the
deduction, we are told. They increased the standard deduction, for example, and
one could not claim the mileage anyway if one’s itemized deductions were less
than the standard deduction. True statement.
Still, it seems to me that Congress could have left
the deduction intact. Many if not most would not use it (because of the larger
standard deduction), but the high-mileage warriors would still have the
deduction if they needed it.
Here’s another:
a tree falls on your house. Or you get robbed.
This has been a tax break since Carter had liver pills.
Used to be.
Back to the TCJA. Personal casualty and theft losses
are deductible only if the loss results from a federally declared disaster.
Reread what I just said.
What does theft have to do with a federally declared
disaster?
Nothing, of course.
I would make more sense to simply say that the TCJA
did away with theft loss deductions.
Let’s talk about the Gomas case.
Dennis and Suzanne Gomas were retired and living their
best life in Florida. Mr. G’s brother died, and in 2010 he inherited a business
called Feline’s Pride. The business sold pet food online.
OK.
The business was in New York.
We are now talking about remote management. There are
any numbers of ways this can go south.
His business manager in New York must have binged The
Sopranos, as she was stealing inventory, selling customer lists, not
supervising employees, and on and on.
Mr. G moved the business to Florida. His stepdaughter
(Anderson) started helping him.
Good, it seems.
By 2015 Mr. G was thinking about closing the business
but Anderson persuaded him to keep it open. He turned operations over to
Anderson, although the next year (2016) he formally dissolved the company.
Anderson kept whatever remained of the business.
In 2017 Anderson prevailed on the G’s to give her
$20,000 to (supposedly) better run the business.
I get it. I too am a parent.
Anderson next told the Gs that their crooked New York business
manager and others had opened merchant sub-accounts using Mr. G’s personal
information. These reprobates were defrauding customers, and the bank wanted to
hold the merchant account holder (read: Mr. G) responsible.
COMMENT:
Nope. Sounds wrong. Time to lawyer up.
Anderson convinced the G’s that she had found an
attorney (Rickman), and he needed $125,000 at once to prevent Mr. G’s arrest.
COMMENT: For $125 grand, I am meeting with Rickman.
The G’s gave Anderson the $125,000.
But the story kept on.
There were more business subaccounts. Troubles and
tribulations were afoot and abounding. It was all Rickman could do to keep Mr.
G out of prison. Fortunately, the G’s had Anderson to help sail these
treacherous and deadly shoals.
The G’s never met Rickman. They were tapping all their
assets, however, including retirement accounts. They were going broke.
Anderson was going after that Academy award. She
managed to drag in friends of the family for another $200 grand or so. That
proved to be her downfall, as the friends were not as inclined as her parents
to believe. In fact, they came to disbelieve. She had pushed too far.
The friends reached out to Rickman. Sure enough, there
was an attorney named Rickman, but he did not know and was not representing the
G’s. He had no idea about the made-up e-mail address or merchant bank or legal documents
or other hot air.
Anderson was convicted to 25 years in prison.
Good.
The G’s tried to salvage some tax relief out of this.
For example, in 2017 they had withdrawn almost $1.2 million from their
retirement accounts, paying about $410 grand in tax.
Idea: let’s file an amended return and get that $410
grand back.
Next: we need a tax Code-related reason. How about
this: we send Anderson a 1099 for $1.1 million, saying that the monies were sent
to her for expenses supposedly belonging to a prior business.
I get it. Try to show a business hook. There is a
gigantic problem as the business had been closed, but you have to swing
the bat you are given.
The IRS of course bounced the amended return.
Off to Court they went.
You might be asking: why didn’t the G’s just say what
really happened – that they were robbed?
Because the TCJA had done away with the personal theft
deduction. Unless it was presidentially-declared, I suppose.
So, the G’s were left bobbing in the water with much weaker
and ultimately non-persuasive arguments to power their amended return and its
refund claim.
Even the judge was aghast:
Plaintiffs were
the undisputed victims of a complicated theft spanning around two years,
resulting in the loss of nearly $2 million dollars. The thief — Mrs. Gomas’s
own daughter and Mr. Gomas’s stepdaughter — was rightly convicted and is
serving a lengthy prison sentence. The fact that these elderly Plaintiffs are
now required to pay tax on monies that were stolen from them seems unjust.
Here is Court shade at the IRS:
In view of the
egregious and undisputed facts presented here, it is unfortunate that the IRS
is unwilling — or believes it lacks the authority — to exercise its discretion
and excuse payment of taxes on the stolen funds.
There is even some shade for Congress:
It is highly
unlikely that Congress, when it eliminated the theft loss deduction beginning
in 2018, envisioned injustices like the case before this Court. Be that as it
may, the law is clear here and it favors the IRS. Seeking to avoid an unjust
outcome, Plaintiffs have attempted to recharacterize the facts from what they
really are — a theft loss — to something else. Established law does not support
this effort. The Court is bound to follow the law, even where, as here, the
outcome seems unjust.
To be fair, Congress changed the law. The change was
unfair to the G’s, but the Court could not substitute penumbral law over actual
law.
The G’s were hosed.
Seriously, Congress should have left theft losses alone. The reason is the same as for employee mileage. The Code as revised for TCJA would make most of the provision superfluous, but at least the provision would exist for the most extreme or egregious situations.
COMMENT: I for one am hopeful that the IRS and G's will resolve this matter administratively. This is not a complementary tale for the IRS, and – frankly – they have other potentially disastrous issues at the moment. It is not too late, for example, for the IRS and G’s to work out an offer in compromise, a partial pay or a do-not-collect status. This would allow the IRS to resolve the matter quietly. Truthfully, they should have already done this and avoided the possible shockwaves from this case.
Our case this time was Gomas v United States,
District Court for the Middle District of Florida, Case 8:22-CV-01271.
