Western CPE Blog
Breaking tax and accounting news and analysis from the experts at Western CPE.
U.S. v. James J. Kelly, No. 23-1481, 6th Circuit, 2024
Appeal Failed for Willful Penalties (U.S. v. James J. Kelly, No. 23-1481, 6th Circuit, 2024) The Appellate Court found that the “undisputed facts show that James Kelly knew about his foreign account, undertook considerable efforts to keep it secret, did not consult with any professionals about his tax obligations, and then failed to ensure that the FBARs were submitted after learning he had not met these reporting requirements in the past. Given all of this, Kelly’s failure to satisfy his FBAR requirements for the years 2013, 2014, and 2015 was a willful violation of the Bank Secrecy Act.” The Court …
U.S. v. David Vettle, No. 4:21-CV-03099 (Apr. 11, 2024)
Taxpayer Was Willful in Failure to File FBARs When He Ignored Red Flags (U.S. v. David Vettle, No. 4:21-CV-03099 (Apr. 11, 2024)) David Vettel opened a Swiss bank account and, from 2006 to 2011, failed to file FBARs to report the account. CPA Terri Phelps prepared Mr. Vettel’s federal income tax returns for tax years 2006, 2007, 2008, 2009, 2010, and 2011. Mr. Vettel did not provide CPA Phelps with information about his Swiss bank account.CPA sent organizer and engagement letter. CPA Phelps sent Mr. Vettel an “organizer” each that contained a series of questions to which Mr. Vettel was …
U.S. v. Mahyari, 3:20-cv-1887-IM (DC-Or. Jan. 24, 2024)
Difficulties Understanding English Did Not Negate Willful Penalty (U.S. v. Mahyari, 3:20-cv-1887-IM (DC-Or. Jan. 24, 2024) The IRS determined that Ali Mahyari and his spouse willfully failed to disclose qualifying foreign bank accounts in 2011, 2012, and 2013, and imposed a penalty of $604,860 in total for the violations. The court held that a willful violation of the FBAR reporting requirements includes “both knowing and reckless” violations for purposes of a civil FBAR penalty.The Mahyaris argued that they “faced significant barriers adjusting to American laws and practices and becoming proficient in the English language,” and that their “limited English skills …
Alexandru Bittner v. US, No. 21-1195 (2023)
IRS Can Impose Only One Non-Willful Penalty for Late FBAR Covering Multiple Foreign Accounts (Alexandru Bittner v. US, No. 21-1195 (2023)) The U.S. Supreme Court in a 5-4 decision has held that non-willful Foreign Bank Account Report (FBAR) penalties apply per report, not account. The decision is being hailed as a surprising and significant win for non-willful FBAR non-filers.200 Accounts Walk Into an FBAR. The Court released its opinion in Bittner v United States on Feb. 28, 2023. Justice Neil M. Gorsuch, authoring the opinion, agreed with Mr. Bittner’s reading of the law in that the Bank Secrecy Act’s $10,000 maximum penalty for the …
U.S. v. Fazio Alicea, CA-4 (Jan. 19, 2023)
Shared Responsibility Payment Is a Priority Status Tax in Bankruptcy (U.S. v. Fazio Alicea, CA-4 (Jan. 19, 2023)) For clients who declared bankruptcy while owing an individual mandate penalty, the Fourth Circuit reversed a district court decision and held that the shared responsibility payment under the ACA is a tax rather than a penalty, and it is entitled to priority status under the Bankruptcy Code.Also see. US v. Russell Brown, CA-9 (Feb. 27, 2023), where the Court ruled that the shared responsibility payment was a tax (not a penalty) and therefore entitled to priority status in the Bankruptcy Code.Don’t forget state …
Chalaundra Sneed v. Comm., TCS 2023-11
Advance Premium Tax Credits Require Taxpayer Attach Form 8962 to Tax Return (Chalaundra Sneed v. Comm., TCS 2023-11) Chalaundra Sneed enrolled in health insurance for herself and her two dependents through the Oklahoma Health Insurance Marketplace. She received Advance Premium Tax Credits (APTC) on the basis of the information she provided in her application. Ms. Sneed did not attach a copy of Form 8962, Premium Tax Credit (PTC), to her income tax return, but later mailed it separately. The notice of deficiency determined that Ms. Sneed was ineligible for the PTC because her MAGI for year at issue exceeded 400% …
US v. Gregory VanDemark, CA-6, Docket No. 21-3470, June 30, 2022
Taxpayer Asks Bank Employee About Cash Reporting Requirements (And Surprise, the IRS Finds Out) (US v. Gregory VanDemark, CA-6, Docket No. 21-3470, June 30, 2022) Gregory VanDemark owns the Used Car Supermarket, which sells cars from two lots in Amelia, Ohio. In 2013 and 2014, VanDemark funneled away his customers’ cash down payments. In 2012, VanDemark deposited $265,499.25 in cash into the business bank account. But in 2013 and 2014, that number was much reduced to $12,194.63 and $71,150.86, respectively. Because the stashed-away cash never reached the bank account, it never made it into VanDemark’s QuickBooks files. And because VanDemark’s …
Kwaku Eason and Ashley Leisner v. Comm., TCS 2024-17
Printing Business Cards and Stationery Does not Start a Business. (Kwaku Eason and Ashley Leisner v. Comm., TCS 2024-17) Kwaku Eason and Ashley Leisner attempted to start a business “to provide advice and guidance to real estate owners and investors.” They purchased courses through a company called Advanced Real Estate Education (Education), paying over $41,000 for two courses in 2016. They also had business cards and stationery printed that year but did not provide details of any other activity related to their “business.” After failing to provide many of the services that the taxpayers expected to receive, Education went out …
Greg M. Kellett v. Comm., TCM 2022-62
Social Media Start Up Business Permitted Some Expenses Even with Zero Income (Greg M. Kellett v. Comm., TCM 2022-62) Greg Kellett timely filed his 2015 tax return deducting 100% of his business costs related to his new social media website. Schedule C expenses totaled $25,922, comprised primarily of $20,509 paid for engineering services and the remainder for telephone, internet, and marketing. The IRS disallowed all of the expenses as startup expenses because the taxpayer reported no business income during 2015 and he did not bill for any of his services. Mr. Kellett explained to the Court that he launched the …
Carol A. Wright et al v. Comm., TCS 2024-9
Shoebox Records with Both Wives Bring Same Result (Carol A. Wright et al v. Comm., TCS 2024-9) IRS issued five notices of deficiency: two to Steve Wright’s former wife Carol for tax years 2014 and 2015 when they owned an S corporation (APR) together, and three to Steve and his current wife Tami for tax years 2014, 2015, and 2016. The IRS had disallowed expenses in APR and for Steve and Tami’s Café business. To substantiate the expenses at trial, both wives and Steve submitted thousands of pages of records with even more thousands of photocopied receipts and the like. …
Oleg Kolomiyets v. Comm., TCS 2024-8
There’s No Haggling in Tax Court (Oleg Kolomiyets v. Comm., TCS 2024-8) Oleg Kolomiyets petitioned the Tax Court for a redetermination of a deficiency proposed by the IRS disallowing expenses for lack of substantiation. The taxpayer had a Schedule C “Real Estate Advising” that reported gross receipts of $5,250 and expenses of $117,475. Expenses claimed included (1) $8,625 car and truck, (2) $78,892 legal and professional, and (3) $14,141 for “Other.” In what reads like an opening offer, the taxpayer presented bank and credit card account statements, proposing that he “is entitled to a deduction for one-half of the expenditures.”The …
Katherine Kalk v. Comm., TCM 2024-82
Consultant Loses Business Expenses but Wins Gambling Deductions (Katherine Kalk v. Comm., TCM 2024-82) Katherine Kalk worked as an IT consultant. During 2011 and 2012 she provided the bulk of her services to a client that had 120,000 employees. On her tax returns for those years, she claimed cost of goods sold for computers, computer peripherals and software. She also claimed expenses for legal, home office, rental, utilities, commissions, supplies and other expenses. Unfortunately, Katherine was unable to provide one shred of documentary evidence to support her deductions. Ms. Kalk also filed a Schedule C for an activity she described …
John K. Pak, et al v. Comm., TCM 2024-86
Cohan Works for Contract Labor and Depreciation (John K. Pak, et al v. Comm., TCM 2024-86) John Pak operated a high-end Japanese restaurant inside a leased space in a shopping mall in Gulf Shores, Alabama. The location was undeveloped and substantial custom build-out improvements were made to create the restaurant with hibachi grills, a 25-foot sushi bar and 16-foot martini bar. Mr. Pak testified that he spent over $1.5 million on the build-out and equipment but could not provide any records to substantiate the amounts claimed at trial – 12 years after the improvements had been made. He also claimed …
Christopher R. Pangelina v. Comm., TCM 2024-5
Tile Contractor Unable to Shore Up Deductions Without Proper Substantiation (Christopher R. Pangelina v. Comm., TCM 2024-5) Christopher Pangelina filed each of his 2010 through 2017 income tax returns between one and six years late. Although 2017 was technically a substitute-for-return prepared by the IRS, Mr. Pangelina did provide a copy of an unsigned 2017 tax return two days before the first scheduled trial date on Feb. 1, 2021. Each of his returns was prepared by a paid preparer. In an examination of the returns, the IRS had disallowed the following expenses:YearDescriptionAmounts2010Other Deduction$100,2462011All deductions allowed$02012Rent & Wages$18,259 & $34,7912013Interest & …
Paul Anthony Steward v. Comm., TCS 2024-3
Tile Contractor Unable to Shore Up Deductions Without Proper Substantiation (Christopher R. Pangelina v. Comm., TCM 2024-5) In 2018 and 2019, Paul Anthony Steward was a performing musician. He claimed auto expenses for driving his car from his home to various venues where he performed with his band. He introduced an after-the-fact mileage log and documentation of royalties he collected for his performances. He claimed that many of his records were destroyed in a fire. The IRS had allowed a portion of the claimed auto expenses, and even more in a stipulation after trial. Mr. Steward also claimed $19,402 for …
Jesse Alvarado and Estate of Maria De Lourdes Velasques v. Comm., TCM 2024-1)
Used Car Salesman Sells Judge on Cohan Rule (Jesse Alvarado and Estate of Maria De Lourdes Velasques v. Comm., TCM 2024-1)) After 25 years as a commercial lender at Comerica Bank, Mr. Alvarado opened South Bay Autos, a used car business, preparing a few tax returns on the side. South Bay relied heavily on credit, both for the acquisition of inventory and for the sale of vehicles to customers. South Bay purchased vehicles at car auctions using credit with terms that required repayment in 45 days before having to pay high interest charges. Vehicles were generally sold on credit, with …
Karim Gobran and Ashley Smith-Gorbran v. Comm., T.C. Summary 2023-24
Multiple Years at Same Job Location is Not Temporary (Joseph & Ashley Ledbetter v. Comm., TC Summary 2023-19) Mr. Ledbetter was a union craft sheet metal worker from 2000 through the years at issue – 2015 and 2016. He received all of his work assignments through his union. The work assignments he received were with a contactor to the Tennessee Valley Authority (TVA). The contractor did not hire sheet metal workers on a permanent basis. The length of the assignments varied with the size of projects and availability of funds. Mr. Ledbetter worked for the same contractor at TVA for …
William French Anderson et al v. Comm., CA-10 No. 23-9002, May 17, 2024
Second Opinion: Appellate Court Confirms Tax Court Diagnosis – Doctor’s Legal Fees Not Deductible (William French Anderson et al v. Comm., CA-10 No. 23-9002, May 17, 2024) William French Anderson, considered to be the “father of gene therapy”, was denied deductions for legal expenses of $292,175 and $68,120 on his 2013 and 2014 income tax returns, respectively. In 2006 he was convicted of sexual abuse of a minor (the daughter of his senior lab scientist and business partner) and sentenced to 14 years in prison. He filed numerous appeals, all of which were denied. In the Tax Court, Dr. Anderson …
Mylan, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 156 T.C. No. 10, aff’d CA-3 Nos. 22-1193, 21-1194 and 22-1195 (July 27, 2023)
Legal Fees Incurred by Generic Drug Manufacturer Not Required to be Capitalized (Mylan, Inc. & Subsidiaries v. Commissioner of Internal Revenue, 156 T.C. No. 10, aff’d CA-3 Nos. 22-1193, 21-1194 and 22-1195 (July 27, 2023)) Generally, legal expenses incurred in defense of a patent or in a patent infringement action when creating a new product would be required to be capitalized as part of the cost of the asset. Treas. Reg. §1.263(a)-(4)(b)(1)(v) requires that a taxpayer capitalize “an amount paid to facilitate” an acquisition or creation of an intangible.Mylan brought generic drugs to market using and FDA process called Abbreviated …
Edwin L. Gage and Elaine R. Gage v. Comm., TCM 2023-47
Settlement Payment Given to Attorney Not Deductible Until Delivered (Edwin L. Gage and Elaine R. Gage v. Comm., TCM 2023-47) The Gages had a protracted dispute with the Department of Housing and Urban Development (HUD). They reached a settlement in 2012 requiring them to pay $875,000 to HUD. In December 2012, the Gages purchased a cashier’s check for $875,000 and gave it to their attorney. Their attorney contacted the HUD attorney and offered the payment, but the HUD attorney would not accept the check until the settlement was finally approved. The Gages’ lawyer held the check. The settlement was approved …