Facing An Appearance In U.S. Tax Court For Your Trial? Here Are Some Tips To Consider.

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Facing An Appearance In U.S. Tax Court For Your Trial? Here Are Some Tips To Consider.

The U.S. Tax Court allows individual taxpayers to represent themselves without an attorney.  But don’t think that because you did not hire an experienced tax trial attorney that the Tax Court judge will give you much leeway.  Although you have the facts down cold and may have met with an auditor, the auditor’s manager, the appeals officer, and the IRS trial lawyer, the actual trial of your case in U.S. Tax Court is a whole new ball game. Keep in mind that the judge knows very little about your case and will have no patience nor is the judge able to educate you on how to present your case.

Actions that must happen in the weeks leading up to trial

The U.S. Tax Court will issue a Standing Pretrial Order in a regular case or a Standing Pretrial Order For Small Tax Cases. Read this order or notice from the Tax Court carefully and keep a copy. The Standing Pretrial Order or Notice has very specific instructions about getting ready for trial. One of the provisions of the Standing Pretrial Order (sent to petitioners in regular cases) is that you must file a pretrial memorandum. The Standing Pretrial Notice (sent to petitioners in S cases) states that you should submit a pretrial memorandum. The Tax Court encourages all parties to submit a pretrial memorandum. You should look at the Standing Pretrial Order or Notice and the form attached, which shows what a pretrial memorandum looks like. The pretrial memorandum can be very helpful in organizing and preparing your case. The pretrial memorandum may also help the judge to understand your position. Send your pretrial memorandum to the Tax Court, and send a copy to the IRS attorney. The Standing Pretrial Notice also tells you what you need to do to settle your case and how to stipulate facts if you do not settle.

During this period of time you should provide to the IRS copies of documents that you intend to use at trial, agree in writing to facts and documents that are not in dispute and consider whether you need any witnesses to support your case.

Things to expect during the trial

Before you come to Tax Court for the trial you will want to –

  • Think about what facts you want to tell the judge.
  • Organize any documents you have to support your case. If the IRS will not agree (stipulate) to your documents, bring three copies of each document to court.
  • Organize your facts and arguments so you can present your case clearly.

Come to court early so you will be ready when your case is called at the calendar call which starts at 10:00 a.m. You may receive a notice from the Tax Court recommending that you arrive at the Court by 9:00 a.m. to have the opportunity to meet with clinical and calendar call attorneys.

Actions that must happen after trial

After the trial is concluded, the judge usually will direct the parties to file briefs with the Court under the format of seriatim briefs (one after another) or simultaneous briefs.

If seriatim (non-simultaneous) briefs are ordered, you as the petitioner must file your “Opening Brief” first which is due 75 days after the trial has concluded.  The IRS thereafter responds to your Opening Brief with an “Answering Brief” which must it must file 45 days thereafter. You can then respond to the Answering Brief with a “Reply Brief.”

If simultaneous briefs are ordered, the you and the IRS will have a deadline set by the judge to submit each of your Opening Briefs and then each side will have the opportunity to file their Answering Brief by the deadline set by the judge.

These briefs are extremely important in assisting the judge to resolve your tax case and after the briefing process is complete, the ball is now with the Court to decide your case. The failure to file a brief in following specific Tax Court Rules can result in the dismissal of all issues on which you have the burden of proof (which unless the IRS is alleging fraud, will be all issues).

Are you facing an imminent trial in U.S. Tax Court?

While there is no rule forcing the IRS counsel to settle cases and the burden of proof is always on the taxpayer (unless the IRS alleges fraud), there may still be an opportunity to settle the case, limit the disputed issues or get a continuance that an experienced tax trial attorney can get for you.  But if this is something you are looking to do, you need to act quickly as the Tax Court values its trial time as a precious commodity and the last thing you want to do is to disrupt a judge’s schedule and tie up court resources.

What Should You Do?

Succeeding in a Tax Court case is all about organization and early preparation. Even if you believe that you are prepared to litigate your case before the Tax Court, litigating a tax controversy before the Tax Court is no simple task. You are facing an IRS trial attorney that does this every day before a judge who will provide you no leeway in adhering to court procedure just because you are not an experienced tax attorney.  Consider contacting an experienced tax attorney who can argue the application of your facts and circumstances and seek the best possible resolution for your trial.  The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Also, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in cryptocurrency, check out what a bitcoin tax attorney can do for you.

 

Taxpayers Invested In Syndicated Conservation Easements Have A Limited Opportunity To Settle With The IRS

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Taxpayers Invested In Syndicated Conservation Easements Have A Limited Opportunity To Settle With The IRS

Tax Court strikes down four more abusive syndicated conservation easement transactions prompting taxpayers to accept IRS settlement offers in syndicated conservation easement cases or face a higher tax bill.

A conservation easement imposes a restriction on real property, granted in perpetuity, on the use of real property.  The important role of conservation easements is to preserve land, natural habitats, open spaces, and historically important land areas. Conservation easements can include a restriction on the real property that preserves the facade of a building in a registered historic district.

The Internal Revenue Code includes tax incentives for taxpayers to contribute a a real property interest to qualified charitable organization exclusively for conservation purposes. This is referred to as a Qualified Conservation Contribution (QCC).  However, abusive syndicated conservation easement transactions have been of concern to the IRS for several years.

Abusive Syndicated Conservation Easements

Commissioner Chuck Rettig stated: “The IRS will continue to actively identify, audit and litigate these syndicated conservation easement deals as part of its vigorous and relentless effort to combat abusive transactions”.

Typical facts that the IRS has seen which the IRS believes to be support as an abusive syndicated conservation easement structure are as follows:

  1. Promoters syndicate ownership interests in real property through partnerships, using promotional materials to suggest that prospective investors may be entitled to a share of a conservation easement contribution deduction that equals or exceeds two and one-half times the investment amount.
  2. The promoters obtain an appraisal that greatly inflates the value of the conservation easement based on a fictional and unrealistic highest and best use of the property before it was encumbered with the easement.
  3. After the investors invest in the partnership, the partnership donates a conservation easement to a land trust. Investors in the partnership then claim a deduction based on an inflated value. The investors typically claim charitable contribution deductions that grossly multiply their actual investment in the transaction and defy common sense.

The four most recent U.S. Tax Court decisions disallowed conservation easement deductions totaling nearly $21 million.

IRS Syndicated Conservation Easements Settlement Program

On June 25, 2020, the Internal Revenue Service Office of Chief Counsel announced a time-limited settlement offer to certain taxpayers with pending docketed Tax Court cases involving syndicated conservation easement transactions.

The settlement offer would bring finality to these taxpayers with respect to the syndicated conservation easement issues in their docketed U.S. Tax Court cases. The settlement requires a concession of the income tax benefits claimed by the taxpayer and imposes penalties.

Among the key terms of the settlement offer:

  • The deduction for the contributed easement is disallowed in full.
  • All partners must agree to settle, and the partnership must pay the full amount of tax, penalties and interest before settlement.
  • “Investor” partners can deduct their cost of acquiring their partnership interests and pay a reduced penalty of 10 to 20% depending on the ratio of the deduction claimed to partnership investment.
  • Partners who provided services in connection with ANY Syndicated Conservation Easement transaction must pay the maximum penalty asserted by IRS (typically 40%) with NO deduction for costs.

IRS’ Coordinated Enforcement Strategy

The IRS has developed a comprehensive, coordinated enforcement strategy to address abusive syndicated conservation easement transactions and has also been working closely with the U.S. Department of Justice to shut down the promotion of them. The IRS has stated that it will continue to disallow the claimed tax benefits, asserting civil penalties to the fullest extent, considering criminal sanctions in appropriate cases, and continuing to pursue litigation of the cases that are not otherwise resolved administratively. Furthermore, this syndicated conservation easement resolution should not be deemed to have any impact on the potential criminal exposure, investigation and/or prosecution of any individual or entity that participated in or assisted or advised others in participating in a syndicated conservation easement transaction in any manner whatsoever.

Some promoters may tell their clients that their transaction is “better” than or “different” from the transactions previously rejected by the Tax Court and that it may be better for the client to litigate than accept this resolution. Therefore, when deciding whether to accept the offer, any such taxpayer should consult with independent tax counsel, meaning a qualified advisor who was not involved in promoting the transaction or handpicked by a promoter to defend it.

What Should You Do?

It should be certain that the IRS is not taking these transactions lightly and that the IRS is ready and willing to litigate any non-settled case to the fullest extent possible thus making taxpayers incur more legal fees and deal with the uncertainty of the outcome of a Tax Court trial. We encourage taxpayers who are in this situation to seek independent tax counsel.  Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California help you.  Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Why Hire A Tax Attorney If You Are In U.S. Tax Court For IRC Sec. 280E?

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Why Hire A Tax Attorney If You Are In U.S. Tax Court For IRC Sec. 280E?

IRS Tax Audits in the cannabis industry can be quite tricky. We previously wrote a blog on appealing these audits.

If you are involved in cannabis and dealing with an IRC Sec. 280E or other tax liability issue with the IRS and you are unable to reach a satisfactory resolution working with the IRS directly, then you may need to seek relief in the United States Tax Court. The U.S. Tax Court has jurisdiction over matters involving individual and business tax liability under the Internal Revenue Code, and, while individual taxpayers have the option to appear before the court pro se, most Tax Court litigants will benefit greatly from hiring a Board Certified Tax Attorney to represent them.

What Is The United States Tax Court?

The United States Tax Court is a Federal trial court. Because it is a court of record, a record is made of all its proceedings. It is an independent judicial forum. It is not controlled by or connected with the IRS. Congress pursuant to its authority under Article 3 of the U.S. Constitution created the Tax Court as an independent judicial authority for taxpayers disputing certain IRS determinations. The Tax Court’s authority to resolve these disputes is called its jurisdiction. Generally, a taxpayer may file a petition in the Tax Court in response to certain IRS determinations. A taxpayer who begins such a proceeding is known as the “petitioner”, and the Commissioner of Internal Revenue is the “respondent”.

Although the Tax Court is headquartered in Washington, D.C., its judges preside at trials in 60 U.S. cities, and its Special Trial Judges preside at trials in those cities and 15 additional cities.

How Do You Start A Case In The U.S. Tax Court?

If a taxpayer and the IRS do not agree to the findings of a tax examination, the IRS will send a notice proposing a tax adjustment (known as a “statutory notice of deficiency”). The statutory notice of deficiency gives you as the taxpayer the right to challenge the proposed adjustment in the U.S. Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the Tax Court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals.

If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. Therefore, to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

Reasons To Hire A Board Certified Tax Attorney

For a professional to be good at what he/she does, training and experience are necessary. The more real work experience you get, the more skilled you will be at your job. Most people do not have the adequate legal and tax knowledge to attend hearings or go to U.S. Tax Court without a Board Certified Tax Attorney present. Here are some other benefits of working with one.

Peace of mind

Although you can represent yourself in U.S. Tax Court, you may end up regretting it, especially if the outcome is not good. Having a Board Certified Tax Attorney with you will give you peace of mind irrespective of the case you are faced with. You can be confident that your case is being handled by someone who understands your legal and tax problems better and they will handle your case with utmost professionalism. Additionally, resolving complex tax issues, especially those involving IRC Sec. 280E, requires much more than simply finding the relevant provisions of the Internal Revenue Code. A Board Certified Tax Attorney will be able to conduct the necessary legal research to build a convincing (and legally-sound) argument for the best possible result.

Avoid incriminating yourself

Seasoned tax attorneys will spend time coaching their clients on how to behave and speak while in the U.S. Tax Court. This is important because the behavior and candor of a taxpayer in the courtroom can have tremendous effects on the case. A Board Certified Tax Attorney will go out of his/her way to ensure that you do not incriminate yourself whenever you speak in the Tax Court.

Reduce risks

Getting representation from a Board Certified Tax Attorney will boost the chances of keep your case on track to reaching the best possible result. A Board Certified Tax Attorney has experience handling tax cases in the U.S. Tax Court and they will handle any emerging issues before they become major problems for your case. When things get tough, you will be sure that your tax lawyer has the expertise and specialized training to handle the problem.

Conversant with all court procedures and rules

After filing a petition in the U.S. Tax Court, there are various time, form, and other procedural requirements that apply. An attorney who regularly practices before the Tax Court will be intimately familiar with these issues and will be able to ensure that procedural miscues do not jeopardize your case. Adhering to these procedures is crucial to the outcome of your case.

During your U.S. Tax Court case, the IRS through its counsel may file various motions to try to resolve the case with a finding of liability prior to trial. A Board Certified Tax Attorney will be able to interpret the substantive and strategic intent behind these motions and file appropriate responses with the Tax Court.

In many cases, issues that require resolution in the U.S. Tax Court will have ancillary legal implications as well. A Board Certified Tax Attorney will be able to identify these issues and address them before they lead to unnecessary costs and exposure.

Saving you money

Given the costly legal fees that people pay, it is difficult to believe that a Board Certified Tax Attorney can help you save cash. Most cases filed with the U.S. Tax Court settle. Should you settle your case? If so, when? A Board Certified Tax Attorney will be able to rely on the insights gained from numerous prior U.S. Tax Court cases to help you make informed decisions regarding settling or taking your case to trial.

What Should You Do?

When faced with litigation in the U.S. Tax Court, you need a tax lawyer by your side. Level the playing field and gain the upper hand by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), the Inland Empire (including Ontario and Palm Springs) and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Why Hire A Tax Attorney If You Are In U.S. Tax Court?

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Why Hire A Tax Attorney If You Are In U.S. Tax Court?

If you are dealing with a tax liability issue with the IRS and you are unable to reach a satisfactory resolution working with the IRS directly, then you may need to seek relief in the United States Tax Court. The U.S. Tax Court has jurisdiction over matters involving individual and business tax liability under the Internal Revenue Code, and, while individual taxpayers have the option to appear before the court pro se, most Tax Court litigants will benefit greatly from hiring a Board Certified Tax Attorney to represent them.

What Is The United States Tax Court?

The United States Tax Court is a Federal trial court. Because it is a court of record, a record is made of all its proceedings. It is an independent judicial forum. It is not controlled by or connected with the IRS. Congress pursuant to its authority under Article 3 of the U.S. Constitution created the Tax Court as an independent judicial authority for taxpayers disputing certain IRS determinations. The Tax Court’s authority to resolve these disputes is called its jurisdiction. Generally, a taxpayer may file a petition in the Tax Court in response to certain IRS determinations. A taxpayer who begins such a proceeding is known as the “petitioner”, and the Commissioner of Internal Revenue is the “respondent”.

Although the Tax Court is headquartered in Washington, D.C., its judges preside at trials in 60 U.S. cities, and its Special Trial Judges preside at trials in those cities and 15 additional cities.

How Do You Start A Case In The U.S. Tax Court?

If a taxpayer and the IRS do not agree to the findings of a tax examination, the IRS will send a notice proposing a tax adjustment (known as a “statutory notice of deficiency”). The statutory notice of deficiency gives you as the taxpayer the right to challenge the proposed adjustment in the U.S. Tax Court before paying it. To do this, you need to file a petition within 90 days of the date of the notice (150 days if the notice is addressed to you outside the United States). If you filed your petition on time, the Tax Court will eventually schedule your case for trial at the designation place of trial you set forth in your petition. Prior to trial you should have the opportunity to seek a settlement with IRS Area Counsel and in certain cases, such settlement negotiations could be delegated to the IRS Office Of Appeals.

If there is still disagreement and the case does go to trial, you will have the opportunity to present your case before a Tax Court judge. The judge after hearing your case and reviewing the record and any post-trial briefs will render a decision in the form of an Opinion. It could take as much as two years after trial before an Opinion issued. If the Opinion is not appealed to a Circuit Court Of Appeals, then the proposed deficiency under the Opinion is final and your account will be sent to IRS Collections.

IRS Area Counsel are experienced trial attorneys working for the IRS whose job is to litigate cases in the U.S. Tax Court and look out for the best interests of the Federal government. Therefore, to level the playing field, it would be prudent for a taxpayer to hire qualified tax counsel as soon as possible to seek a mutually acceptable resolution without the need for trial, and if that does not happen, to already have the legal expertise in place to vigorously defend you at trial.

Reasons To Hire A Board Certified Tax Attorney

For a professional to be good at what he/she does, training and experience are necessary. The more real work experience you get, the more skilled you will be at your job. Most people do not have the adequate legal and tax knowledge to attend hearings or go to U.S. Tax Court without a Board Certified Tax Attorney present. Here are some other benefits of working with one.

Peace of mind

Although you can represent yourself in U.S. Tax Court, you may end up regretting it, especially if the outcome is not good. Having a Board Certified Tax Attorney with you will give you peace of mind irrespective of the case you are faced with. You can be confident that your case is being handled by someone who understands your legal and tax problems better and they will handle your case with utmost professionalism.  Additionally, resolving complex tax issues requires much more than simply finding the relevant provisions of the Internal Revenue Code. A Board Certified Tax Attorney will be able to conduct the necessary legal research to build a convincing (and legally-sound) argument for the best possible result.

Avoid incriminating yourself

Seasoned tax attorneys will spend time coaching their clients on how to behave and speak while in the U.S. Tax Court. This is important because the behavior and candor of a taxpayer in the courtroom can have tremendous effects on the case. A Board Certified Tax Attorney will go out of his/her way to ensure that you do not incriminate yourself whenever you speak in the Tax Court.

Reduce risks

Getting representation from a Board Certified Tax Attorney will boost the chances of keep your case on track to reaching the best possible result. A Board Certified Tax Attorney has experience handling tax cases in the U.S. Tax Court and they will handle any emerging issues before they become major problems for your case. When things get tough, you will be sure that your tax lawyer has the expertise and specialized training to handle the problem.

Conversant with all court procedures and rules

After filing a petition in the U.S. Tax Court, there are various time, form, and other procedural requirements that apply. An attorney who regularly practices before the Tax Court will be intimately familiar with these issues and will be able to ensure that procedural miscues do not jeopardize your case.  Adhering to these procedures is crucial to the outcome of your case.

During your U.S. Tax Court case, the IRS through its counsel may file various motions to try to resolve the case with a finding of liability prior to trial. A Board Certified Tax Attorney will be able to interpret the substantive and strategic intent behind these motions and file appropriate responses with the Tax Court.

In many cases, issues that require resolution in the U.S. Tax Court will have ancillary legal implications as well. A Board Certified Tax Attorney will be able to identify these issues and address them before they lead to unnecessary costs and exposure.

Save you money

Given the costly legal fees that people pay, it is difficult to believe that a Board Certified Tax Attorney can help you save cash. Most cases filed with the U.S. Tax Court settle. Should you settle your case? If so, when? A Board Certified Tax Attorney will be able to rely on the insights gained from numerous prior U.S. Tax Court cases to help you make informed decisions regarding settling or taking your case to trial.

What Should You Do?

When faced with litigation in the U.S. Tax Court, you need a tax lawyer by your side. Level the playing field and gain the upper hand by engaging a tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and other California locations. We can come up with solutions and strategies to these risks and protect you and your business to maximize your net profits. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

Beware Of IRS Scams Extended To Taxpayers Appealing To The U.S. Tax Court

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Process Of Appealing To U.S. Tax Court

Under normal audit procedures, the IRS issues a 30-day letter, giving a taxpayer 30 days to file a protest and request an Appeals hearing. On the taxpayer’s failure to request a hearing or following an Appeals hearing, the Service issues a 90-day letter (officially called a “Notice Of Deficiency”), giving the taxpayer 90 days to file a Tax Court petition before collection proceedings begin.

With the reduction in the number of IRS audits and a reliance on computer matching, some taxpayers are facing automatic computer-generated 90-day letters, without first receiving a 30-day letter. IRS personnel call this practice, “smokeout” whereby the 90 days will toll around the time the IRS finally determines whether the tax is due, so that it can institute collection proceedings without delay.

While it is possible that writing letters and contacting the IRS could resolve disputes before the IRS issues a 90-day letter, you do not want to count on fully resolving the dispute within the 90-day period after the Notice Of Deficiency is issued. So in those cases, you will want to preserve your appeals rights by filing a petition in Tax Court.

Once a taxpayer files a Tax Court petition, IRS District Counsel has jurisdiction. Usually about six weeks after the Petition is filed, the IRS District Counsel will respond with a written Answer. Counsel then refers the case to the IRS Appeals Office to determine whether Appeals can settle it. If you are represented by counsel, Appeals and District Counsel will deal directly with your representative who must be admitted to practice in Tax Court.

Scam Artists Now Using The Tax Court Docket As A Means To Scam Taxpayers

For those taxpayers who are unrepresented by counsel and file a petition in the U.S. Tax Court, scam artists are now scouring the Tax Court docket (which is accessible by the public) to obtain information on taxpayers having disputes with the IRS and then calling the taxpayer before the taxpayer even receives the Answer that was filed by IRS District Counsel.

These callers may demand money or may say you have a refund due and try to trick you into sharing private information. These con artists can sound convincing when they call. Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves. They may know a lot about you and may be able to recite the last four digits of a victim’s Social Security Number and your place of business. They usually alter the caller ID to make it look like the IRS is calling – many times they will use a Washington, D.C. area code. The area codes for the Washington D.C. area are 202, 301 and 703. They will also background noise of other calls being conducted to mimic a call site. If you don’t answer, they often leave an “urgent” callback request and if they have your email address, will send bogus IRS emails to some victims to support their bogus calls. After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

How Do You Recognize That This Call Is Fake?

Here are five things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam. The IRS will never:

  1. Call you about taxes you owe without first mailing you an official notice.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So What Should You Do?

If you get a phone call from someone claiming to be from the IRS and asking for money, here’s what you should do:

If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.

And if you do owe taxes and you have not already resolved this with the IRS, then that is where we come in. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Beware Your Hobby Business Could Land You In Tax Court

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Your hobby business could land you in Tax Court – avoid IRS pitfalls by how you structure your small business.

Many people successfully develop a hobby into a going concern and actually receive income from it. That income must always be reported and taxes paid on that money regardless of your situation. If you leave that hobby as a hobby, under the tax law, you are not allowed to deduct any of the losses incurred by activity in that hobby. That is the reason most people turn their hobbies into businesses once they start making money.

When Are Hobby Losses Deductible?

By showing that your pursuit of your “hobby” is an activity engaged in for profit, you may be able to deduct those years where you incurred losses if you meet certain presumptions.

For activities not involving the breeding, training, showing, or racing of horses, the presumption is that you business is an activity engaged in for profit where you show annual net income from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the most recent taxable year. So if for the first three years your activity has incurred losses, you must show net income in years four and five (even if only $1.00 in each year) in order to still be able to deduct the first three years of losses.

For activities involving the breeding, training, showing, or racing of horses, the presumption will work in the same fashion except you must show annual net income from an activity for 2 or more of the taxable years in the period of 7 consecutive taxable years which ends with the most recent taxable year.

Challenges In U.S. Tax Court.

Despite these presumptions, the IRS does not always see your hobby as a viable business, and that is where tax difficulties arise. There are a number of court cases where the question of hobby or business has been decided for the particular business by the IRS, and under challenge, the cases end up in Tax Court. Here are five cases that landed in Tax Court worth discussing.

1. Fishing: In Busbee v. Commissioner, T.C. Memo 2000-182, this taxpayer decided to hold fishing tournaments. These tournaments required him to promote the activity through flyers, speaking engagements, and other marketing efforts. He had to recruit participants and sponsors. He intended his hobby of fishing tournaments to supplement his retirement income as he developed it into a business. Through the process, he became an expert in bass fishing. The Tax Court considered all of this, and allowed his business.

In Peacock v. Commissioner, T.C. Memo 2002-122, this taxpayer began tournament fishing in his retirement. Sailing everywhere on his personal yacht, he and his wife fished specifically for the pleasure of participating in the tournament, especially when these tournaments were in exotic locales. In this case, the Tax Court decided this was not a business but a hobby for the activity was not “motivated primarily by the pursuit of profit”. What probably hurt their case, even subtly, was the fact that they had just sold a business and were now millionaires.

2. Golfing: In William James Courville v. Commissioner, T.C. Memo 1996-134, an optical engineer, after 30 years of employment, was laid off. He decided to become a professional golfer, but took only 4 golf lessons while a “professional”. He did not qualify for the senior tour, and ended up with no income from this activity. However, he did submit a Schedule C, listing expenses totaling over $16,000. The Tax Court declared that he “failed to establish that his golfing activity was carried on with the actual and honest objective of making a profit”.

3. Track and field coaching: In Parks v. Commissioner, T.C. Memo 2012-105, the taxpayer began his professional career as a writer of freelance articles on the sport of track and field. Over a number of years, he owned a track and field magazine, coached at a number of different locations, studied with one of the foremost experts in the industry, then basically tried to establish himself and his trainees as credible within the field. By 2006, this man had a winning contestant who qualified for the Olympic trials, and by 2009, that contestant signed the taxpayer coach to a lucrative contract as his exclusive coach, and things only got better for the taxpayer. However, in a tax period of 9 years, the coach showed only a $43 profit, so the IRS claimed hobby not business. The Tax Court considered the case in great detail and decided primarily (although not all points) for the taxpayer, saying his income was growing and he had great potential for success. They did not see track and field as a typical hobby, and that did work to the taxpayer’s benefit.

4. Writing: There is an infamous case which always gives people a chuckle, and that is the man who decided to write about prostitution. Vitale v. Commissioner, T.C. Memo 1999-131. Ralph Louis Vitale, Jr., in 1999, claimed on his tax return that he was in the business of writing about prostitution. When this taxpayer began his “research” four years before his retirement, he was still a full-time employee. Over the course of time, he visited a large number of brothels doing his “research” and always paying for services in cash (no records kept). He did keep a journal detailing each of his visits and expenses, and eventually developed a manuscript from his notes. Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. All tolled, after he received $2,600 in royalties, the publisher went bankrupt. Subsequently, the book rights were returned to him, and he again began marketing his book throughout the industry. The IRS said this was just a hobby and disallowed Vitale’s deductions. So Vitale went to Tax Court. At first, the Tax Court felt that the taxpayer had a profit motive and overruled the IRS, even though the court also made comments about the “recreational” qualities of the contents of his book. The court did like his record-keeping and marketing and felt it showed his professionalism. But then the Tax Court disallowed all of his deductions, for the taxpayer could prove none of them (remember the cash payments?). Nevertheless, the court did not penalize this taxpayer in any way, saying that he had made a reasonable attempt to comply with the law.

The U.S. Tax Court weighs “profit motive” most heavily in each of their decisions. Profit is a key decider when considering whether an activity is hobby or business. Is your hobby truly for profit or only for pleasure? That is foremost and basic premise that the Tax Court considers.

What Should You Do?

There seem to be two “hobbies” that trigger audits most frequently and those are horses or yachts. Both are money pits, and so if people can figure out a way to make a business out of them, that will provide either tax deductions and/or income to cover the high expenses of each. The IRS knows this, and is very strict when applying the rules to these activities. When structuring these, pay very close attention to business start-up details.

Regardless, if you follow good business practices when converting your hobby into a business, you have a greater chance of convincing the IRS it is a real business. Your business records must be up-to-date and accurate, and your business plan must lay out a course for creating profit from your activity in the future. That written business plan can be a real asset if you end up in Tax Court versus the IRS.

Consulting a tax lawyer at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Francisco, San Diego and elsewhere in California early on in your business efforts will probably be the best investment you make in your business. A tax lawyer can review your actions and recommend steps to build your business in a sound manner. Furthermore, if you do end up facing the IRS at some point, your tax lawyer can defend you or negotiate for you, reducing your stress and exposure significantly. Remember, the IRS has their experts—you should too.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Francisco, San Diego and elsewhere in California has helped many people minimize or avoid adjustments from IRS by pursuing litigation and negotiations with the U.S. Tax Court. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.

Received A Notice Of Deficiency To Appeal IRS Proposed Adjustments To The U.S. Tax Court? Let us help you

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Before adjustments from an audit can be finally assessed, a taxpayer must be given the right to appeal to the United States Tax Court if the taxpayer should disagree with the findings of the IRS audit. The Appeals Office (or in certain cases the IRS agent) will issue a “90-day Letter” to a taxpayer, which essentially provides the taxpayer with up to 90 days to file a petition with the Tax Court and have his or her case heard by a judge.

At this stage, any professional who is to represent you in Tax Court must be admitted to practice before Tax Court. Requirements for practicing in Tax Court include passing a very difficult income tax exam. Most non-lawyers are not qualified to practice before Tax Court and would, therefore, be unable to provide this kind of tax audit help or represent you. However, a qualified IRS audit attorney can help you.

The United States Tax Court is a Federal court of record established by Congress under Article I of the Constitution of the United States. Congress created the Tax Court to provide a judicial forum in which affected persons could dispute tax deficiencies determined by the IRS prior to payment of the disputed amounts. The jurisdiction of the Tax Court includes the authority to hear tax disputes concerning notices of deficiency, notices of transferee liability, certain types of declaratory judgment, readjustment and adjustment of partnership items, review of the failure to abate interest, administrative costs, worker classification, relief from joint and several liability on a joint return, and review of certain collection actions.
Unlike appeals to other Federal courts, there is no requirement to pay any of the disputed tax liability in order to have your case heard in Tax Court.

The Tax Court is composed of 34 presidentially appointed judge-members. Trial sessions are conducted and other work of the Court is performed by these judges, by senior judges serving on recall, and by special trial judges. All of the judges have expertise in tax law and apply that expertise in a manner to ensure that taxpayers are assessed only what they owe, and no more. Although the Court is physically located in Washington, D.C., the judges travel nationwide to conduct trials in various designated cities.
A case in the Tax Court is commenced by the filing of a petition. The petition must be filed within the allowable time limit. The Court cannot extend the time for filing which is set by statute. A $60 filing fee must be paid when the petition is filed. Once the petition is filed, payment of the underlying tax is ordinarily postponed until the case has been decided.

In certain tax disputes involving $50,000 or less, taxpayers may elect to have their case conducted under the Court’s simplified small tax case procedure. Trials in small tax cases are generally less formal and result in a speedier disposition. However, decisions entered pursuant to small tax case procedures are not appealable.

Cases are calendared for trial as soon as practicable (on a first in/ first out basis) after the case becomes at issue. When a case is calendared, the parties are notified by the Court of the date, time, and place of trial. Trials are conducted before one judge, without a jury. Only those practitioners that are admitted to the Bar of the Tax Court may practice before this court.

Usually a case is settled by mutual agreement without the necessity of a trial. However, if a trial is conducted, in due course a report is ordinarily issued by the presiding judge, setting forth findings of fact and an opinion. The case is then closed in accordance with the judge’s opinion by entry of a decision.

By engaging our tax representation services, you can be assured that your petition and each stage of the litigation process will be persuasive because we know how to present your case with legal argument and tax authority.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people minimize or avoid adjustments from IRS by pursuing litigation and negotiations with the U.S. Tax Court. Working with a tax attorney is the best bet for minimizing adjustments that would create liability to the IRS.