I was looking over a law
review article weighing the pros and cons of different types of Tax Court
decisions.
Nerd train, I admit.
But there is something
here to talk about.
There are several types
of Tax Court opinions. Some have precedential value, and some do not. Precedence
means that a Court applies the law in the same manner to cases with the same
facts.
One type is a Memorandum
opinion. These tend to be heavily factual, and they involve relatively
well-settled law.
Another is the Summary
(or S) opinion. These involve a relatively modest amount of tax (currently $50
grand) and use a streamlined set of procedures.
The reason for different
types of opinion is grounded in practicality. Memo opinions allow the Court to
process more clear-cut cases without worrying about establishing unanticipated precedent.
The S opinions allow taxpayers a forum without having to hire an attorney to
navigate cumbersome Tax Court procedural rules.
I am looking at a case decided
as a bench opinion.
Think about the judge
issuing an oral opinion right there and then and you have a bench opinion.
And these types can be
combined. A judge may, for example, issue a bench opinion in a memo or S case.
I am looking at something
I know all too well.
Mr. Trammer was an IT
consultant.
Mrs. Trammer was a social
worker.
Mr. Trammer worked
primarily from home. Depending upon, he was paid as a W-2 employee or as a 1099
gig worker. He had an office-in-home and all that.
Mrs. Trammer was a W-2
employee. She drove around Michigan visiting childcare and foster care
locations. She at times would purchase gifts for the kids.
She sounds like a good
person.
They reported all kinds
of deductions on their 2019 and 2020 returns: business deductions for the gig,
employee business deductions for the social work, charitable deductions for the
church.
If you recall, many
itemized deductions were reduced or eliminated altogether beginning in 2018.
No surprise, the IRS
disallowed a swath of deductions. Some – like employee business deductions –
simply did not exist for the tax year at issue. Others – like office-in-home
for the gig – had calculation errors.
Got it. They need to dig
up documentation. They should immediately concede on the calculation error and
employee expenses. The matter should be resolved as routine in correspondence exam.
Off to Tax Court they
went.
Huh?
Upon reflection, this
makes sense. The IRS and Covid did not play well together. They were not answering
the phones over there. Faxing supporting documentation to the AUR Unit was often
a joke. I suspect this matter went to Court by default.
Here we go:
The Trammers relied on a paid return preparer to prepare their returns for the years at issue. Although the individual return preparers identified on the 2019 and 2020 returns differed, the Trammers used the same preparation firm for both years.”
That does not sound like
a CPA firm. Granted, I prepare only a fraction of returns I sign - staff accountants
generally prepare - but I do review all returns before signing.
Each year, they brought their records … who decided what items to report on the Trammers’ return and where.”
Yep.
The returns contained obvious errors such as reporting the same expense in multiple places.”
The old
list-the-same-thing-over-and-over routine. Often these returns are not complex,
but the preparer must be diligent when moving numbers. It consequently is common
to give these returns to more experienced staff. Ideal would be to give the
return to the same experienced staff every year.
The Court made short work
of the returns.
Schedule C/Gig work
They failed to demonstrate the amount of expenses that they incurred or the business purposes for those expense, and they did not provide sufficient evidence from which the Court could formulate an estimate.”
Form 2106/employee
business expenses
… the Trammers failed to substantiate the expenses Mrs. Trammer incurred in the conduct of her social work.”
Schedule A/Itemized
Deductions
The Trammers failed to substantiate itemized deductions in excess of the standard deduction amounts that the Commissioner allowed…”
The IRS wanted penalties.
They always do.
Not his time. Here is the
Court:
The Trammers relied on a return preparer to whom they had been referred. They supplied the return preparer with necessary and accurate information each year, and the return preparer decided what to do with that information. The Trammers reasonably relied in good faith on their return preparer’s judgement. Accordingly, the section 6662 accuracy-related penalty does not apply for the years in issue.”
I am impressed, as I was
expecting a rubber stamp.
What was different this
time?
For one thing, Mr. Trammer showed up for the trial, and Mrs. Trammer participated via conference call. This gave them a chance to humanize their situation. While not conceding the errors, the Court did believe them when they said they tried. The Court, however, was not as kind to the preparer.
And remember: the next
person cannot use this case (technically) as precedent in a future penalty. The
Court had room to be lenient.
Our case this time was Trammer
v Commissioner, TC Bench Order March 14, 2023.
