A Tax Shelter In The Making

Have you ever heard of a “captive” insurance company?

They have become quite cachet. They have also drawn the IRS’ attention, as people are using these things for reasons other than insurance and risk management.

Let’s walk through this.  

Let’s say that you and I found a company manufacturing sat-nav athletic shoes

COMMENT: Sat-nav meaning satellite navigation. That’s right: you know you want a pair. More than one.

We make a million of them, and we have back orders for millions more. We are on the cover of Inc. magazine, meet Jim Cramer and get called to the White House to compliment us for employing America again.

Sweet.

Then tax time.

We owe humongous taxes.

Not sweet.

Our tax advisor (I am retired by then) mentions a captive.

LET’S EXPLAIN THIS: The idea here is that we have an insurable risk. Rather than just buying a policy from whoever-is-advertising-during-a-sports-event, we set up our own (small) insurance company. Granted, we are never going to rival the big boys, but it is enough for our needs. If we can leap through selected hoops, we might also get a tax break from the arrangement.

What risks do you and I have to insure?

What is one of those shoes blows out or the satellite-navigation system shorts and electrocutes someone? What if it picks up contact from an alien civilization – or an honest political journalist? We could get sued.

Granted, that is what insurance is for. The advisor says to purchase a policy from one of the big boys with a $1.2 million deductible. We then set up our own insurance company – our “captive” – to cover that $1.2 million.

We are self-insuring.

There is an election in the tax Code (Section 831(b) for the incorrigible) that waives the income tax on the first $1.2 million of premiums to the captive. It does pay tax on its investment income, but that is nickels-to-dollars.

You see that I did not pick the $1.2 million at random.

Can this get even better?

Submitted for your consideration: the You & Me ET Athletic Shoe Company will deduct the $1.2 million as “Insurance Expense” on its business return.

We skip paying tax on $1.2 million AND we deduct it on our tax return?

Easy, partner. We can still be sued. We would go through that $1.2 million in a heartbeat.

Is there a way to MacGyver this?

Got it. Three ways come quickly to mind, in fact:

(1) Let’s make the captive insurance duplicative. We buy a main policy with a reputable insurance company. We then buy a similar – but redundant -  policy from the captive.  We don’t need the captive, truthfully, as Nationwide or Allstate would provide the real insurance. We do get to stuff away $1.2 million, however – per year. We would let it compound. Then we would go swimming in our money, like Scrooge McDuck from the Huey, Dewey and Louie comics.

(2) A variation on (1) is to make the policy language so amorphous and impenetrable that it is nearly impossible to tell whether the captive is insuring whatever it is we would submit a claim for. That would make the captive’s decision to pay discretionary, and we would discrete to not pay.

(3) We could insure crazy stuff. Let’s insure for blizzards in San Diego, for example. 

a.    Alright, we will need an office in San Diego to make this look legitimate. I volunteer to move there. For the team, of course.

The tax advisor has an idea how to push this even further. The captive does not need to have the same owners as the You & Me ET Athletic Shoe Company. Let’s make our kids the shareholders of the captive. As our captive starts hoarding piles of cash, we are simultaneously doing some gifting and estate tax planning with our kids.

Heck, we can probably also put something in there for the grandkids.

To be fair, we have climbed too far out on this limb. These things have quite serious and beneficial uses in the economy. Think agriculture and farmers. There are instances where the only insurance farmers can get is whatever they can figure-out on their own. Perhaps several farms come together to pool risks and costs. This is what Section 831(b) was meant to address, and it is a reason why captives are heavily supported by rural state Senators.

In fact, the senators from Wisconsin, Indiana and Iowa were recently able to increase that $1.2 million to $2.2 million, beginning in 2017.

Then you have those who ruin it for the rest of us. Like the dentist who captived his dental office against terrorist attack.

That nonsense is going to attract the wrong kind of attention.

Sure enough, the IRS stepped in. It wants to look at these things. In November, 2016 the IRS gave notice that (some of) these captive structures are “transactions of interest.” That lingo means that – if you have one – you must file a disclosure (using Form 8886 Reportable Transaction Disclosure Statement) with the IRS by May 1, 2017.

If this describes you, this deadline is only a few months away. Make sure that your attorney and CPA are on this.

Mind you, there will be penalties for not filing these 8886s.

That is how the IRS looks at things. It is good to be king.

The IRS is not saying that captives are bad. Not at all. What it is saying is that some people are using captives for other than their intended purpose. The IRS has a very particular set of skills, skills it has acquired over a very long career. Skills that make the IRS a nightmare for people like this. If these people stop, that will be the end of it. If they do not stop, the IRS will look for them, they will find them, and they will ….

Ahem. Got carried away there.

When this is over, we can reasonably anticipate the IRS to say that certain Section 831(b) structures and uses are OK, while others are … unclear. The IRS will then upgrade the unclear structures and uses to “reportable” or “listed” status, triggering additional tax return disclosures and potential eye-watering penalties.

In the old days, listed transactions were called “tax shelters,” so that will be nothing to fool with.

An Extreme Way To Deduct Expenses Twice

The estate tax is different from the income tax.

The latter is assessed on your income. This puts stress in defining what is income from what is not, but such is the concept.

The estate tax on assessed on what you own when you die, which is why it is also referred to as the “death” tax. If you try to give away your assets to avoid the death tax, the gift tax will step in and probably put you back in the same spot.

Granted, a tax is a tax, meaning that someone is taking your money. To a great extent, the estate tax and income tax stay out of each other’s way.

With some exceptions.

And a recent case reminds us of unexpected outcomes when these two taxes intersect.

Let’s set it up.

You may recall that – upon death – one’s assets pass to one’s beneficiaries at fair market value (FMV). This is also called the “step up,” as the deceased’s cost or basis in the asset goes away and you (as beneficiary) can use FMV as your new “basis” in the asset. There are reasons for this:

(1) The deceased already paid tax on the income used to buy the asset in the first place.

(2) The deceased is paying tax again for having died with “too many” assets, with the government deciding the definition of “too many.” It wasn’t that long ago that the government thought $600,000 was too much. Think about that for a moment.

(3) To continue using the decedent’s back-in-time cost as the beneficiary’s basis is to repetitively tax the same money. To camouflage this by saying that income tax is different from estate tax is farcical: tax is tax.

I personally have one more reason:

(4) Sometimes cost information does not exist, as that knowledge went to the grave with the deceased. Decades go by; no one knows when or how the deceased acquired the asset; government and other records are not updated or transferred to new archive platforms which allow one to research. The politics of envy does not replace the fact that sometimes simply one cannot come up with this number.

Mr. Backemeyer was a farmer. In 2010 he purchased seed, chemicals, fertilizer and fuel and deducted them on his 2010 joint return.

COMMENT: Farmers have some unique tax goodies in the Code. For example, a farmer is allowed to deduct the above expenses, even if he/she buys them at the end of the year with the intent to use them the following year. This is a loosening of the “nonincidental supplies” rule, which generally holds up the tax deduction until one actually uses the supplies.

So Mr. Backemeyer deducted the above. They totaled approximately $235,000.

He died in March, 2011.

Let’s go to our estate tax rule:

His beneficiary (his wife) receives a new basis in the supplies. That basis is fair market value at Mr. Backemeyer’s date of death ($235,000).

What does that mean?

Mr. Backemeyer deducted his year-end farming supplies in 2010. In tax-speak,” his basis was zero (-0-), because he deducted the cost in 2010. Generally speaking, once you deduct something your basis in said something is zero.

Go on.

His basis in the farming supplies was zero. Her basis in the farming supplies was $235,000. Now witness the power of this fully armed and operational step-up.

Is that a Rogue One allusion?

No, it is Return of the Jedi. Shheeessh.

Anyway, with her new basis, Mrs. Backemeyer deducted the same $235,000 again on her 2011 income tax return.

No way. There has to be a rule.

          That is what the IRS thought.

There is a doctrine in the tax Code called “economic benefit.” What sets it up is that you deduct something – say your state taxes. In a later year, you get repaid some of the money that you deducted – say a tax refund. The IRS takes the position – understandably – that some of that refund is income. The amount of income is equal to a corresponding portion of the deduction from the previous year. You received an economic benefit by deducting, and now you have to repay that benefit.

It is a great argument, except for one thing. What happened in Backemeyer was not an income tax deduction bouncing back. No, what set it up was an estate tax bouncing back on an income tax return in a subsequent year.

COMMENT: She received a new basis pursuant to estate tax rules. While there was an income tax consequence, its origin was not in the income tax.

The Court reminded the IRS of this distinction. The economic benefit concept was not designed to stretch that far. The Court explained it as follows:

(1) He deducted something in 2010.

(2) She deducted the same something in 2011.

(3) Had he died in 2010, would the two have cancelled each other out?

To which the Court said no. If he had died in 2010, he would have deducted the supplies; the estate tax rule would have kicked-in; her basis would have reset to FMV; and she could have deducted the supplies again.

It is a crazy answer but the right answer.

Is it a loophole? 

Some loophole. I do not consider tax planning that involves dying to be a likely candidate for abuse. 

HRAs Are Back

I am glad to see that Health Reimbursement Accounts (HRAs) are coming back.

They should never have gone away. They were, unfortunately, sacrificed to the idiocracy. That crowd would rather have you starve than give you half a loaf.

And henceforce they shall be called Qualified Small Employer Health Insurance Arrangements (QSEHRAs).

They are sorta like the former HRAs, with a couple of twists.

So what are these things?

Simple. I used to have one.

My HRA covered all the medical incidentals: deductibles, co-pays, chiropractor, dental, eyeglasses and so on. One would submit out-of-pocket medical expenses, and the firm would reimburse. There was a ceiling, but I do not recall what it was. The ceiling was fairly high, as my partner had some ongoing medical expenses.  The HRA was a way to help out.

Then they went away.

One now didn’t have “insurance.” One now had “plans.”

The demimondes, of course, decided they could tell you what had to be in your “plan.”

Take a nun.

No problem: you had to have contraceptives in your plan.

A 50-year old tax CPA?

No sweat: prenatal care in your plan.

But you don’t need prenatal care.

Stinks to be you. 

HRAs were sacrificed to the loudest of the boombots.

You see, an HRA did not “cover” pre-existing conditions. It did not offer “minimum essential” coverage. It also could not do your laundry or fix a magnificent BLT on football Sunday, but those latter limitations were not politically charged.

The HRA did not cover pre-existing. True. It did however pay for your co-pays, out-of-pocket and deductibles, but not – technically – your preexisting. It seems covering existing was just not good enough.

It did not provide minimum essential. True. It was not insurance. It was there to help out, not to replace or pretend to be insurance. But it was sweet to have the extra money.

Too bad. HRAs had to go.

People complained. People like my former partner. Or me, for that matter.

So a compromise was reached. You could have an HRA as long as you matched it with insurance that met all the necessary check-the-box features we were told to buy.

What if you did not provide health insurance? Perhaps you were a small company of 8 people, and insurance was not financially feasible at the moment. Could you offer an HRA (say $2,000) to help out your employees? Something is better than nothing, right?

Nope.

Well, technically you could.

But there was a fine. Of $100 per day. Per employee.

Let me do the math on this: $100 times 365 days = $36,500 per year.

Per employee.

There goes that $2,000 you could give your employees.

To be fair, the government indicated that they would not enforce these penalties through 2016, but you would have to trust them.

Right ….

I had this conversation with clients. More than once.

Multiply me by however many tax practitioners across the nation giving the same advice.

How many people lost their $2,000 because of this insanity?

Fortunately, HRAs are back.

In 2017. Sort of. 

They will be available to employers with fewer than 50 full-time-equivalent employees.  

All employees with more than three years of service must be eligible to participate.

Employees employed less than 90 days, are under age 25, are part-time or seasonal can be excluded.

Must be funded 100% by the employer.

Salary reductions are not permitted.

There are dollar limitations ($4,950 if employee-only, $10,000 if family/dependent).

There may be a hitch from the employee side:

·      The HRA is tax-free as long as the employee has health insurance.

·      The HRA is taxable if the employee does not have health insurance.

COMMENT: I suppose an employer will require proof of insurance/non-insurance before writing the first check. This will tell them whether the HRA reimbursement will be taxable to the employee.

·      If the employee is on an Exchange, any subsidy will be reduced by the amount reimbursable under the HRA. This is an indirect way of saying that a purpose of the new HRA is to allow small employers to reimburse employees for individual insurance premiums. Prior to 2017, this act was prohibited under ObamaCare.

Not surprisingly, there will be yet-another-code on the W-2 to report the benefit available under the HRA, but we do not have to worry about it until next year’s (that is, the 2017) W-2.

And they did away with the $100/employee/day/yada yada yada absurdity.

Hey, progress. Back to the way it used to be.

Merry Christmas

Would You Believe?

It is a specialized issue, but I am going to write about it anyway.

Why?

Because I believe this may be the only time I have had this issue, and I have been in practice for over thirty years. There isn’t a lot in the tax literature either.

As often happens, I am minding my own business when someone – someone who knows I am a tax geek – asks:

          “Steve, do you know the tax answer to ….”

For future reference: “Whatever it is - I don’t. By the way, I am leaving the office today on time and I won’t have time this weekend to research as I am playing golf and sleeping late.”

You know who you are, Mr. to-remain-unnamed-and-anonymous-of-course-Brian-the-name-will-never-pass-my-lips.

Here it is:

Can a trust make a charitable donation?

Doesn’t sound like much, so let’s set-up the issue.

A trust is generally a three-party arrangement:

·      Party of the first part sets up and funds the trust.

·      Party of the second part receives money from the trust, either now or later.

·      Party of the third part administrates the trust, including writing checks.

The party of the third part is called the “trustee” or “fiduciary.” This is a unique relationship, as the trustee is trying to administer according to the wishes of the party of the first part, who may or may not be deceased. The very concept of “fiduciary” means that you are putting someone’s interest ahead of yours: in this case, you are prioritizing the party of the second part, also called the beneficiary.

There can be more than one beneficiary, by the way.

There can also be beneficiaries at different points in time.

For example, I can set-up a trust with all income to my wife for her lifetime, with whatever is left over (called the “corpus” or “principal”) going to my daughter.

This sets up an interesting tension: the interests of the first beneficiary may not coincide with the interests of the second beneficiary. Consider my example. Whatever my wife draws upon during her lifetime will leave less for my daughter when her mom dies. Now, this tension does not exist in the Hamilton family, but you can see how it could for other families. Take for example a second marriage, especially one later in life. The “steps” my not have that “we are all one family” perspective when the dollars start raining.

Back to our fiduciary: how would you like to be the one who decides where the dollars rain? That sounds like a headache to me.

How can the trustmaker make this better?

A tried-and-true way is to have the party of the first part leave instructions, standards and explanations of his/her wishes. For example, I can say “my wife can draw all the income and corpus she wants without having to explain anything to anybody. If there is anything left over, our daughter can have it. If not, too bad.”

Pretty clear, eh?

That is the heart of the problem with charitable donations by a trust.

Chances are, some party-of-the-second-part is getting less money at the end of the day because of that donation. Has to, as the money is not going to a beneficiary.

Which means the party of the first part had better leave clear instructions as to the who/what/when of the donation.

Our case this week is a trust created when Harvey Hubbell died. He died in 1957, so this trust has been around a while. The trust was to distribute fixed amounts to certain individuals for life. Harvey felt strongly about it, because - if there was insufficient income to make the payment – the trustee was authorized to reach into trust principal to make up the shortfall.

Upon the last beneficiary to die, the trust had 10 years to wrap up its affairs.

Then there was this sentence:

All unused income and the remainder of the principal shall be used and distributed, in such proportion as the Trustees deem best, for such purpose or purposes, to be selected by them as the time of such distribution, as will make such uses and distributions exempt from Ohio inheritance and Federal estate taxes and for no other purpose.”  

This trust had been making regular donations for a while. The IRS picked one year – 2009 – and disallowed a $64,279 donation.

Here is IRC Sec 642(c):

(c)Deduction for amounts paid or permanently set aside for a charitable purpose

(1)General rule

In the case of an estate or trust (other than a trust meeting the specifications of subpart B), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined without regard to section 170(c)(2)(A)). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulations.

The key here is the italicized part:        

“which pursuant to the terms of the governing instrument…”

The Code wants to know what the party of the first part intended, phrased in tax-speak as “pursuant to the terms of the governing instrument.”

The trustees argued that they could make donations via the following verbiage:

in such proportion as the Trustees deem best, for such purposes or purposes, to be selected by them as the time of such distribution….”

Problem, said the IRS. That verbiage refers to a point in time: the time when the trust enters its ten-year wrap-up and not before then. The trustees had to abide by the governing instrument, and said instrument did not say they could distribute monies to charity before that time.

The trustees had to think of something fast.

Here is something: there is a “latent ambiguity” in the will. That ambiguity allows for the trustees’ discretion on the charitable donations issue.

Nice argument, trustees. We at CTG are impressed.

They are referring to a judicial doctrine that cuts trustees some slack when the following happens:

(1) The terms of the trust are crystal-clear when read in the light of normal day: when it snows in Cincinnati during this winter, the trust will ….

(2) However, the terms of the trust can also be read differently in the light of abnormal day: it did not snow in Cincinnati during this winter, so the trust will ….

The point is that both readings are plausible (would you believe “possible?”).

It is just that no one seriously considered scenario (2) when drafting the document. This is the “latent ambiguity” in the trust instrument.

Don’t think so, said the Court. That expanded authority was given the trustees during that ten-year period and not before.

In fact, prior to the ten years the trustees were to invade principal to meet the annual payouts, if necessary. The trustmaker was clearly interested that the beneficiaries receive their money every year. It is very doubtful he intended that any money not go their way.

It was only upon the death of the last beneficiary that the trustees had some free play.

The Court decided there was no latent ambiguity. They were pretty comfortable they understood what the trustmaker wanted. He wanted the beneficiaries to get paid every year.

And the trust lost its charitable deduction.

For the home gamers, our case this time was Harvey C. Hubbell Trust v Commissioner.

Business League: A Different Type Of Tax-Exempt

You may have heard about business leagues.

One very much in the news recently is the National Football League, which has been considering giving up its tax-exempt status.

In the tax world, exempt entities obtain their exempt status under Section 501(c). There is then a number, and that number is the “type” of exempt under discussion. For example, a classic charity like the March of Dimes would be a 501(c)(3). When we think of tax-exempts, we likely are thinking of (c)(3)’s, for which contributions are deductible to the donor and nontaxable to the recipient charity.

The (c)(3) is about as good as it gets.

A business league is a (c)(6). So is a trade association.

Right off the bat, payments to a (c)(6) are not deductible as contributions. They are, however, deductible as a business expense- which makes sense as they are business leagues. You and I probably could not deduct them, but then again you and I are not businesses.

There are some benefits. For example, a (c)(6) has virtually no limit on its lobbying authority, other than having to pro-rate the member dues between that portion which represents lobbying (and not deductible by anybody) and the balance (deductible as a business expense).

There are requirements to a (c)(6):

(1)  There must be members.

a.     The members must share a common business interest.

                                                              i.     Members can be individuals or businesses.

                                                            ii.     If membership is available to all, this requirement has not been met. This makes sense when you consider that the intent of the (c)(6) is to promote shared interests.

(2)  Activities must be directed to improving business conditions in a line of business.

a.     Think of it as semi-civic: to advance the general welfare by promoting a line of business rather than just the individual companies.

b.    This pretty much means that membership must include competitors.

c.     Sometimes it can be sketchy to judge. For example, the IRS denied exemption to an organization whose principal activity was publishing and distributing a directory of member names, addresses and phone numbers to businesses likely to require their services. The IRS felt this went too close to advertising and too far from the improvement of general business conditions.

(3)  The primary activities must be geared to group and not individual interests.

a.     The American Automobile Association, for example, had its application denied as it was primarily engaged in rendering services to members and not improving a line of business.

(4)  The main purpose cannot be to run a for-profit business.

a.     This requirement is standard in the not-for-profit world. You can run a coffee shop, but you cannot be Starbucks.

b.    For example, a Board of Realtors normally segregates its MLS activities in another – and separate – company. The Board itself would be a (c)(6), but the MLS is safely tucked away in a for-profit entity – less it blow-up the (c)(6).

(5)  Must be not-for-profit.

a.     Meaning no dividends to shareholders or distributions rights if the entity ever liquidates.

b.    BTW – and to clarify – a not-for-profit can show a profit. Hypothetically it could show a profit every year, although it is debatable whether it could rock the profit level of Apple or Facebook and keep its exemption. The idea here is that profits – if any – do not “belong” to shareholders or investors.

(6)  There must be no private inurement or private benefit to key players or a restricted group of individuals.

a.     Again, this requirement is standard in the not-for-profit world.

b.    This issue has been levelled against the NFL. Roger Goodell (the NFL Commissioner) has been paid over $44 million a year for his services. It does not require a PhD in linguistics to ask at what point this compensation level becomes an “inurement” or “benefit” disallowed to a (c)(6).

There is litigation around (4) and (6). The courts have allowed some business activity and some benefit to the members, as long as it doesn’t get out of hand. The courts refer to this as “incidental benefit.”

Which can lead to interesting follow-up issues. Take a case where the organization runs a business (within acceptable limits) and then uses the profit to subsidize something for its members. Can this amount to private inurement? The members are – after all - receiving something at a lower cost than nonmembers.

Let’s take a look at a recent application. I think you know enough now to anticipate how the IRS decided.

(1)  The (c)(6) members are convenience stores and franchisees of “X.”

(2)  Revenues will be exclusively from member fees.

(3)  One-quarter of member fees will be remitted annually to the national franchisee (that is, the franchise above “X”)

(4)  Member franchisees will elect the Board.

(5)  The (c)(6) will educate and assist with franchise policies.

(6)  The (c)(6) will facilitate resolution between members and executives of “X.”

How did it go?

The IRS bounced the application.

Why?

We could have stopped at (1). There is no “line of business” happening here. Members are limited to franchisees of “X.” Granted, “X” participates in an industry but “X” does not comprise an industry. 

The organization tried to clean-up its application after being rejected but it was too little too late.

The organization was not promoting the industry as a whole. It rather was promoting the interest of the franchisee-owners. 

Nothing wrong with that. You just cannot get a tax exemption for it.

How To Lose All Of Your Auto Deduction

I am not a fan of dumb.

And I am reading big dumb.

The IRS wanted over $22 thousand in taxes and $4,000 in penalties. There were several issues, but there was one that racked up the money.

What do you need if you want to claim auto expenses on your tax return?

Answer: some kind of record, like a log.

There is a reason for this. It is not random, chaotic or unfathomable.

The reason has two parts:

(1)  There was a very famous case decided in the 1930s concerning George Cohan. George was a playwright, a composer, a singer, actor, dancer and producer. He was very famous. He was also a terrible record keeper. Given his day job, he spent a ton of money schmoozing people. He deducted some of those expenses on his tax return, as he had to wine and dine to maintain his recognition, connections and earning power. Problem was: he kept lousy records. One had to – essentially – take his word for the expenses.

The Court, knowing who he was, thought it believable that he had incurred significant entertainment expenses. The Court simply estimated what they were and allowed him a deduction.

Ever since, that guesstimate has been referred to in taxation as the “Cohan rule.”

Problem was: everything can be abused. What started out as common sense and mitigation for George Cohan became a loophole for many others.

(2)  Congress got a bit miffed about this, especially when it came to travel, transportation and entertainment expenses. These expenses can be “soft” to begin with, and the Cohan rule made them gelatinous. Congress eventually said “enough” and passed Code Section 274(d), which overrides the Cohan rule for this category of expenses.

BTW, “transportation” is just a fancy tax-word for mileage.

The tax-tao now is: no records = no mileage deduction. Forget any Cohan rule.

Now, you do not need to record every jot and tittle as soon as you get in the car. Records can include your Outlook calendar, for example. You could extend the appointment by mileage from MapQuest and (probably) have the IRS consider it adequate. The point is that you created some record, at or near the time you racked up the mileage, and that record can be reasonably translated into support for your deduction.

Enter Gary Roy.

He was a consultant in Los Angeles. He worked out of his home and drove all over the place for business. He must have made a couple of bucks, as he purchased an Aston Martin Vantage.

This is not a car you see every day. Chances are the last time you saw an Aston Martin was in a James Bond movie.

You know he deducted that car on his tax return.

There are multiple issues in the case, but the one we want to talk about is his car. Roy appeared before the Court and straight-facedly claimed that he kept a mileage record for the Aston. He presented a sheet of paper showing mileage at the beginning of the year and mileage at the end of the year. He helpfully added the description “business use” so the Court would know what they were looking at.

As far as he was concerned, this was all the record-keeping he needed, as the car was 100% business use.

I want to be sympathetic, I really do. I suppose it is possible that he did not understand the rules, but I read in the decision that he used a tax preparer. 

COMMENT: To whom he paid $250. Given that there were complexities in his tax return – the business and a gazillion-dollar car, for goodness’ sake – he really, really should have upgraded on his tax preparer selection.

Roy had no chance. That stretch of tax highway has a million miles on it, and he missed the pavement completely.

Without the Cohan rule, the Court was not going to spot him anything. He just got a big zero. That is what Section 274(d) says. 

And is what Congress wanted back when.

Worst case scenario for Mr. Roy.