You Can't Squeese Blood Out of a Turnip

In Kathleen A. Vinatieri the IRS tried to collect money from a person who didn't have enough to live on if she paid her taxes. IRS wanted her to file deliquent returns before it relieved her of having to pay before it waived collection in her situation.

Palm Canyon X Investments, LLC

This case involves some celebrity.

Palm Canyon X Investments, LLC through AH Investment Holdings, Inc., its tax matters partner, challenged the IRS in the United States Tax Court. The Tax Court filed its opinion on December 15, 2009. The IRS won the case. The case involves tax shelter-type issues. Palm Canyon, a single-member limited liability company owned by AH Investment Holdings, entered into some contracts known as "offsetting market-linked deposit contracts." So what? you say. Well, it was all important enough for a judge to write a 104 page opinion, including his conclusion that Palm Canyon was a farce --- a sham --- and that the market-linked deposit contracts lacked economic substance and could be disregarded. Of course, I won't be giving all the details here, but it is interesting to note that the case involves the actress, Suzanne Somer, and her husband, Alan Hamel, and the well-known "Thighmaster" exercise equipment.

Furthermore, in this case, the government was represented --- at least in part --- by two of my former colleagues at the IRS, Stephen M. Barns and David Sorenson, who were attorneys with District Counsel. David's office was two or three offices down from mine. Stephen's --- who incidentally went by Mark, his middle name --- worked in an office down the hall and then to the left a couple of offices, almost on the other side of the building. Anyway, I thought that was interesting.

Our Convoluted Tax & International Business Systems

This was a win for Symantec, who sent something like 14 lawyers to the Tax Court to face off against the 7 for the IRS before Judge Foley. The Tax Court found the government's case arbitrary, capricious, and unreasonable.

If for some irrational reason you want the flavor of just how complex things can be in taxation relative to international entities and a single issue, consider reading this case, which has 71 pages and a table of contents as follows:

CONTENTS

Background

I. Storage Management Software Products

II. Product Distribution Channels

III. Intensely Competitive Market

IV. Product Lifecycles and Useful Lives

V. Geographic Expansion

VI. The Cost-Sharing Arrangement

VII. VERITAS Ireland's Operations

VIII. Procedural History

Discussion

I. Applicable Statute and Regulations

II. Respondent's Buy-in Payment Allocation Is Arbitrary, Capricious, and Unreasonable

A. Respondent's Notice Determination Is Arbitrary, Capricious, and Unreasonable

B. Respondent's Determination in Amendment to Amended Answer Is Arbitrary, Capricious, and Unreasonable

1. Respondent's "Akin" to a Sale Theory Is Specious.

2. Respondent's Allocation Took into Account Items Not Transferred or of Insignificant Value

3. Respondent's Allocation Took Into Account Subsequently Developed Intangibles

4. Respondent Employed the Wrong Useful Life, Discount Rate, and Growth Rate

III. Petitioner's CUT Analysis, With Some Adjustments, Is the Best Method

A. Comparability of OEM Agreements

B. Unbundled OEM Agreements Were Comparable to the Controlled Transaction

IV. Requisite Adjustments to Petitioner's CUT Analysis

A. The Appropriate Starting Royalty Rate

B. The Appropriate Useful Life and Royalty Degradation Rate

C. Value of Trademark Intangibles and Sales Agreements.

D. The Appropriate Discount Rate

V. Conclusion

Yikes! A Casualty Loss!

In 2005, Justin Rohrs bought this nice, new truck, a 2006 Ford F-350, for $40,210.65. (Those who know me very well will perhaps know why that fact interests me.)

Anyway, a couple of months later, he went to a gathering at a friend's house where there was drinking, but he rode to and from it with someone else to avoid driving while intoxicated. After he got home from the gathering, though, he started off to his parents' house too soon. On the way, he didn't negotiate a turn --- he said there was a severe wind --- and the truck slid off the embankment, rolled over, and sustained harsh damage. Justin's blood-alcohol level registered 0.09 percent (the legal limit was 0.08 percent), so the police cited and arrested him. Justin filed a claim with his automobile insurance, but it was denied under the terms of his policy due to the DUI.

Ouch.

The next step for Justin, then, was to ask for a grace from the government in at least reducing his income taxes because of his casualty loss. He'd still have to pay for the damages, of course, or go without a truck, but at least he'd have his taxes reduced by being able to deduct his loss. He claimed a $33,629 casualty loss deduction for the damage.

IRS said no. Not only no, but they claimed that Justin was acting inappropriately by even claiming it. IRS asserted a penalty for Justin's inaccuracy.

Justin went to the Tax Court --- on his own (aka pro se).

The Income Tax Regulations provided that a crashed automobile could be a casualty loss if the damage wasn't due to a willful act or the willful negligence of a taxpayer, that is, of Justin. Justin said, naturally, it wasn't and that he wasn't willfully negligent; IRS maintained he was. IRS also said allowing Justin the grace would frustrate public policy.

Who won?

Justin did. It seems almost the very least that could/should be done considering the severe damage to his nice, new truck and the facts and circumstances of Justin's case.

Overall, the case is about analyzing the line between mere negligence --- which Justin admitted to --- and willful negligence and also what constitutes "the frustration of public policy."

Tax Protestor Antics

ROBERT CHARLES & LISA JEAN ABELL weren't able to ring a bell in defense of their frivolous arguments against IRS when they appealed their lower-court loss to the Tenth Circuit. They appear to have acted more like Cain than Abell.

Start-up Expenses, Office-in-the-Home, and More

JOHN Y. DING faced the IRS in Tax Court relative to what they claimed were his "business expenses." He claimed a bunch of expenses relative to his employment and a prospective business he was trying to get off the ground. It results in an interesting discussion and analysis of various matters including start-up expenses versus business expenses, rules governing an office in the home, and documentation, including the application of the Cohen rule.

Education Expenses --- Are They Deductible?

This case gives a good review of applicable law:
LORI A. SINGLETON-CLARKE vs COMMISSIONER OF INTERNAL REVENUE

It involves a RN who went back to school to become more effective in her then-present duties. She realized that nursing had evolved greatly in the 24 years since she earned her bachelor’s degree, and she felt disadvantaged working with highly educated doctors.