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Tax Court Corner – Three Cases, Three Great Tips

by | Oct 4, 2023 | Taxes, Uncategorized | 0 comments

Here’s a roundup of several recent tax court cases and what they mean for you.

Blogging for Taxes

(Thomas v. Commissioner of IRS, 160 T.C. No. 4)

The innocent spouse relief rule allows one spouse to avoid paying taxes caused by the other spouse due to their actions on a joint return. The spouse seeking relief can only discharge this tax liability if they had no prior knowledge of the error, and if it relates solely to their spouse’s income from employment or self-employment.

Facts: Sydney Thomas and her husband did not pay the full tax liability shown on their 2012, 2013, and 2014 tax returns. Following her husband’s death, Ms. Thomas sought to discharge the remaining tax liability using the innocent spouse relief rule.

The IRS argued that the innocent spouse relief rule didn’t apply, using as evidence posts from Ms. Thomas’s personal blog that contained information about Ms. Thomas’s assets, lifestyle, business, and her relationship with her husband. Ms. Thomas countered that these posts were inadmissible. The tax court agreed with the IRS and allowed the posts to serve as evidence.

Tax Tip: Be aware of what you post online. Remember that the IRS can use your social media posts as evidence against you.

 

Keep Those Receipts

(Craddock v. Comm’r, T.C. Summary Opin. 2023-4)

You can deduct business expenses if they are “ordinary and necessary” for the regular operation of your business. You must also, however, have proper evidence to support these expenses.

Facts: Matthew and Chasta Craddock filed a joint 2018 Form 1040 tax return, reporting $1,000 of income and a loss of $33,104 from Mr. Craddock’s business. Included in the business loss were car and truck expenses, along with other expenses.

After selecting the Craddock’s 1040 return for audit, the IRS subsequently disallowed all business expenses. All business miles were disallowed because Mr. Craddock’s mileage log for his truck did not break down personal miles vs. business miles. The IRS, supported by the court, also disallowed all other business expenses because Mr. Craddock could not produce proper documentation.

Tax Tip: It’s not enough to record your business expenses. You must also have appropriate substantiation as defined by the IRS. Pay attention to your recordkeeping or hire someone to help so you can defend your business expenses in the event of an IRS audit.

What’s Your Hobby?

(Wondries v. Comm’r, T.C. Memo. 2023-5)

The IRS requires that you have a profit motive if you want to deduct business expenses on your tax return. If the IRS believes that you don’t have a genuine profit motive, it may reclassify your business as a hobby and disallow certain expenses in the future.

Facts: Paul and Patricia Wondries purchased a 1,100-acre ranch in California in 2004. While Paul had previously owned many successful businesses, this was the first foray into ranching for both Paul and Patricia.

In 2015, 2016 & 2017, the Wondries reported ranch losses of $473,901, $223,095, and $229,124, respectively, on their individual tax returns. Following an audit, the IRS assessed an additional $421,503 in taxes and $84,301 in penalties, claiming that the Wondries were not operating the ranch with a profit motive.

The tax court disagreed with the IRS, citing a full-time foreman the Wondries hired to run the ranch, and an official accounting and payroll system that was used to record transactions. So while never realizing a profit over 13 years, the tax court concluded that the Wondries did, indeed, operate the ranch with a profit motive.

Tax Tip: If you are trying to start and grow a business, consider creating a business plan that shows which year you anticipate first turning a profit. Also consider asking for help so you understand the specific details of what the IRS is looking for when determining whether you have a true profit motive.