COUPLE GETS ATTORNEY'S FEES IN TIMELY FILING CASE.
A U.S. district court has awarded a couple attorney's fees in a case in which the court previously held that their tax return was timely filed des...pite the government's argument to the contrary.
Rolly Sorrentino mailed his 1994 tax return to the IRS in 1998, more than six weeks before the April 15 filing deadline. Sorrentino said he placed the original 1994 tax return in a U.S. Postal Service mail drop and kept a copy for his records. The IRS didn't receive the couple's return, but it did receive a copy of the original in October 1998. The IRS disallowed the refund claim as untimely, saying it was filed in October, when it was received. The district court found that the couple was entitled, under the common law mailbox rule, to a rebuttable presumption that their 1994 return was timely filed and that the government failed to rebut that presumption. Rolly J. Sorrentino, et ux. v. United States; No. 01-K-129 (D. Colo. Jan. 9, 2002) (For a summary, see Tax Notes, Feb. 25, 2002, p. 1000; for the full text, see Doc 2002-3682 (25 original pages) or 2002 TNT 31-19.)
Senior U.S. District Judge John L. Kane granted the couple's request for attorney's fees, finding that their cancelled checks and statements from their attorney were proof of the fee amount. The court ordered the government to pay the couple $210 in fees.
Tax
Peterman v. Commissioner
N/A
OUTCOME: Win
TAX COURT SUSTAINS DETERMINATION AGAINST DRUG DEALER.
Michael John Peterman was involved in the illegal sale of cocaine. During an investigation of Peterman's activities, law enforcement official...s arranged to have Kip Gillie, one of Peterman's customers, make a "controlled buy" of 1 ounce of cocaine while under police surveillance. Gillie was familiar with Peterman and the details of his illegal drug sales. The police placed a listening device on Gillie and provided him with marked bills. Peterman was arrested in April 1989 and charged with three counts of criminal drug charges. He pled guilty to two counts.
Peterman had not report any of the income from his cocaine sales on his 1989 income tax return and kept no records of his sales. The IRS reconstructed Peterman's unreported cocaine income and determined that he had approximately $80,000 of unreported illegal income during 1989. The IRS determined a deficiency in income tax and additions to tax for negligence.
Tax Court Judge Jacobs has sustained the Service's determination. The court rejected Peterman's contention that the notice of deficiency was arbitrary and capricious, and, therefore, declined to examine the evidence used by the IRS in reaching its determination. Judge Jacobs also rejected Peterman's request that the court shift the burden of going forward to the IRS. Next, the court found that the method of calculation used by the IRS in determining the income derived from Peterman's illegal activities was reasonable and that the evidence from Gillie and enforcement officials supported the Service's calculation. Finally, Judge Jacobs upheld the imposition of additions to tax, finding that Peterman was negligent in his failure to report illegal income and that Peterman's understatement was "substantial."
Tax
Steines v. Commissioner
N/A
OUTCOME: Win
TAX COURT IMPOSES PENALTY FOR FRIVOLOUS SUIT.
Loras Steines was employed by John Deere Harvester in 1988. On his 1988 federal income tax return, he reported income of $43,636 and claimed a business... loss of $100,000,000,000 and zero taxable income for the year. He signed the form under penalties of perjury. On a Schedule C attached to the Form 1040, he reported no gross receipts or sales and reported legal and professional services expenses of $111,111,111,111 and claimed a net loss for a fictitious business called "All You Can Do Is All You Can Do." On a second Schedule C, he reported net profit of $11,111,111,111 for a fictitious business called "Frivolous -- Disability and The Cover Ups." The IRS determined a deficiency and additions to tax for failure to file, for negligence, and for failure to pay estimated tax against Steines.
Tax Court Judge Parker has upheld the deficiency and the additions to tax, except the failure to file penalty, finding that Steines failed to present any evidence whatsoever with regard to his tax liability. The Form 1040 filed by Steines and signed by him under penalties of perjury, the court held, was a return even though it was "patently frivolous in part." The court cited Badaracco v. Commissioner, 464 U.S. 386 (1984), and Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934). Noting Steines' failure to address any of the tax issues in his case, the court awarded the government $5,000 as a penalty for Steines' filing a frivolous petition.
Tax
Van Zelst v. Commissioner
N/A
OUTCOME: Win
TAX COURT SLASHES ALLOWABLE CHARITABLE DEDUCTION, FINDS PROPERTY WAS OVERVALUED.
The Tax Court has held that taxpayers were entitled to only a small portion of the charitable deductions they claime...d with respect to property in Alaska that they donated to the National Park Service, finding that the taxpayers substantially overvalued the property.
In 1969, Geneva Pacific Corp. purchased certain property in Alaska (the Nelson Mine property). This property is remote, with access limited to helicopters or small-wheel planes, and the terrain is steep, precluding any travel by vehicle. Geneva Pacific's president at the time of purchase was Theodore W. Van Zelst (T.W.). In 1981, Cooper Industries acquired Geneva Pacific, and the Nelson Mine property, which was patented. Cooper also acquired the Peavine property, which was unpatented. The Peavine property is located near a gravel airstrip, but rock slides are common in the area.
Cooper attempted to sell both properties in 1982, and sold them to T.W. in 1983, in connection with the termination of his employment. The purchase price consisted of two components: (1) $30,174; and (2) T.W.'s waiver of any royalty rights he had under his Geneva Pacific employment contract. T.W. did not improve the property or attempt to mine the copper contained in the properties.
In October 1983, T.W. made gifts of undivided interests in the properties (totaling 26.5 percent) to family members and an unrelated person. In July 1985, the owners donated both properties to the National Park Service. At that time, the property was subject to an injunction, precluding mining activity in Alaskan national parks without court approval. The donors all claimed charitable deductions on their 1985 income tax returns with respect to the donation; their tax returns included a copy of an appraisal valuing the property at $2,750,000. The donors carried over the unused portions of the deductions to their 1986 and 1987 returns. The IRS disallowed most of the claimed deductions, based on its determination that the fair market value of the donated property was $286,500.
Judge Julian I. Jacobs found that the donated property had an air market value of only $38,000. Judge Jacobs disapproved of the income-stream or discounted cash flow analysis used by the taxpayers' appraiser, reasoning that the patented acres were unimproved and were not generating income. The court stated that the comparable-sales approach used by the Service's expert was more appropriate. Judge Jacobs also found it unreasonable to assume, as did the taxpayers' experts, that the patented acres could be used as a seasonal recreational resort, agreeing with the IRS experts that the property was "not physically suited for a resort." Further, Judge Jacobs found that the taxpayers' appraiser did not consider the injunction in valuing the property's mineral interests. The court also sustained additions to tax for negligence, valuation overstatement, and additional interest for tax-motivated transactions
Tax
Gaylen v. Commissioner
N/A
OUTCOME: Lost
COUPLE DENIED DISABLED ACCESS CREDIT, BUSINESS EXPENSE DEDUCTION.
The Tax Court has held that a couple isn't entitled to a section 44 credit or section 162 deduction for a subscription to a telepho...nic communications program for deaf individuals because the program didn't enable them to comply with the Americans With Disabilities Act and they failed to show they were conducting a trade or business.
Tax
Holowinski v. Commissioner
N/A
OUTCOME: Part Win/Part Loss
ANTIQUE GLASSWARE ACTIVITY WAS NOT FOR PROFIT; LOSSES DENIED.
The Tax Court has denied losses claimed by a couple with respect to their antique glassware sales activity, finding that the couple did... not engage in the activity with a profit motive.
Albert and Betty Holowinski were retired in 1992 when they decided to buy and sell antique glassware. Betty read a book entitled How to Make Money in Antiques, and Albert spoke with an accountant about bookkeeping and tax matters. They began buying in April, focusing primarily on glass produced by one manufacturer.
During the years 1992-94, the Holowinskis traveled to antique conventions and shops around the central United States. They believed they could purchase glassware for 40-50 percent of its resale value. The couple stored the glassware in their home; some of the pieces were displayed in the living areas of the home. They kept detailed inventory records and a mileage log. They maintained a separate bank account for the activity in 1992 and part of 1993, but closed the account in 1993 to eliminate the bank fees. They insured their glassware inventory.
Betty spent about 40 hours per week on the activity; Albert spent 20-30 hours. They sold items through advertisements in newsletters, at antique conventions, and by renting a showcase at an antique gallery. During these three years, the Holowinskis' sales totaled $4,100, and they reported losses totaling nearly $34,000. The IRS disallowed the loss deductions, asserting that the activity was not for profit.
Special Trial Judge Carleton D. Powell agreed with the IRS, finding that the factors set forth in reg. section 1.183-2(b) weighed more heavily in favor of the Service. In the couple's favor, the court found that the Holowinskis carried on the activity in a businesslike manner, maintaining inventory records, collecting sales tax, advertising, and renting a showcase. But the court also found that the Holowinskis reported a string of substantial losses, never prepared a profit and loss statement, and derived personal pleasure from the activity. Nevertheless, Judge Powell refused to sustain negligence penalties under section 6662(a) and (b)(1), finding that the couple acted with reasonable care and good faith.
Tax fraud and tax evasion
Wenz. v. Commissioner
N/A
OUTCOME: Win
FRAUD PENALTIES UPHELD FOR USE OF SHAM CORPORATIONS TO DISGUISE INCOME.
The Tax Court has sustained deficiencies and fraud penalties against a couple who used corporations and other entities to shi...eld their income and property gains from federal income tax.
Robert and Judith Wenz wholly owned or controlled at least seven corporations and other entities, including trusts. They were also officers and directors of some of the corporations. The Wenzes used these entities to move funds around without any apparent business purpose. One example of the transactions engaged in by the Wenzes is as follows.
In 1978, Judith purchased residential property in California for $60,000. In 1981, she purportedly transferred this property to OMR Corp., for consideration of less than $100. In 1986, OMR sold the property to a third party for $260,000, consisting of $160,000 in cash and a promissory note in the amount of $100,000. The cash proceeds were deposited into OMR's checking account but were withdrawn and used for the Wenzes' personal benefit.
OMR did not timely file federal income tax returns. After the IRS commenced an audit, Robert prepared returns for OMR's taxable years ended September 30, 1986-1989. The 1987 return reported that OMR had an adjusted basis in the property of $259,778 and that the gain realized on the sale was only $222. The Wenzes did not report any income from the sale.
The IRS determined that the Wenzes received a constructive dividend in the amount of the net cash proceeds from the sale of the OMR property and properties transferred to other entities. And, the IRS determined that the Wenzes were taxable on the interest income, dividend income, and capital gains purportedly earned by the Wenz Family Trust, asserting that the trust was a grantor trust and a sham. The Service also asserted additions to tax for fraud.
Judge Stephen J. Swift largely sustained the Service's determinations. The court found that the Wenzes failed to establish that OMR and the other entities had any valid business purpose, and that the only motive for the property transfers was tax avoidance. Judge Swift added that the funds in these entities' bank accounts were used by the Wenzes to pay personal expenses. Thus, the court agreed with the IRS that the corporations were shams.
Judge Swift also held that the trust was not to be recognized for tax purposes. The court noted that Robert exercised authority over the trust administration, even though he was not specifically authorized to do so; he also listed trust assets as his own in order to obtain a personal line of credit. The court also found no evidence that distributions were made to or for the benefit of the Wenz children, as was required.
Finally, the court sustained the fraud penalties, finding that the Wenzes used corporations to disguise the personal nature of income, to shelter income from federal income tax. Noting that Robert was a management consultant for an accounting firm for several years and a financial consultant for 16 years, Judge Swift also found that the taxpayers had "substantial experience in business activities."
