John A. Hatling, et ux. v. Commissioner, TC Memo 2012-293 , Code Sec(s) 1341; 6663.
JOHN ALLEN HATLING AND KATHLEEN ANN HATLING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
|Code Sec(s):||1341; 6663|
|Docket:||Dkt. No. 20709-10.|
|Judge:||Opinion by Marvel, J.|
Official Tax Court Syllabus
CounselJohn Allen Hatling and Kathleen Ann Hatling, pro sese.
MEMORANDUM FINDINGS OF FACT AND OPINION
FINDINGS OF FACT
1 Unless otherwise indicated, section references are to the Internal Revenue Code (Code) in effect for the years at issue, and Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.
2 Petitioners concede the deficiencies for 2001-04 as determined by respondent in the notice of deficiency. Petitioners also concede the sec. 6663(a) civil fraud penalty for 2004.
3 Mr. Hatling was suspended from the practice of law for a period of 45 days as a result of his conviction for willfully failing to pay Minnesota State income tax for 2003. See infra p. 3.
4 Mr. Hatling's work includes estate planning, and he has attended at least one seminar covering the representation of clients before the Internal Revenue Service (IRS) and the use of alternative payment options, such as offers-in-compromise.
5 Minn. Stat. Ann. sec. 289A.63(1)(b) (West 2007 & Supp. 2012) provides that "[a] person required to pay or to collect and remit a tax, who willfully attempts to evade or defeat a tax law by failing to do so when required, is guilty of a felony."
6 In preparing petitioners' tax returns Mr. Hatling claimed a claim of right deduction for each year in the amount of gross income that was not offset by business expense deductions.
7 For 2003 in addition to disallowing a claimed business expense deduction of $32,004, respondent also disallowed $2,323 of claimed cost of goods sold.
8 On his 2001 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $793, "Contributions" of $150, "Dues & Subscriptions" of $2,376, "Banking & Credit Charges" of $672, "Legal Library" expenses of $2,791, "Interest" expenses of $6, "Postage" expenses of $1,599, "Telephone" expenses of $11,008, and expenses of $79,913 under an entry entitled "See Line 48 Other Expenses", for total other expenses of $99,308. On the 2001 Form 8275, however, Mr. Hatling purported to claim a claim of right deduction of $99,308. In the notice of deficiency respondent determined that only $79,913 of Mr. Hatling's claimed other business expenses deduction, rather than the entire amount, was attributable to his claim of right deduction. Respondent categorized the remainder, $19,395, as other business expenses and disallowed $2,539 of this amount. On his 2002 Schedule C Mr. Hatling reported the following as other expenses: "Education, Professional" expenses of $897, "Contributions" of $922, "Dues & Subscriptions" of $2,223, "Banking & Credit Charges" of $688, "Legal Library" expenses of $6,272, "Interest" expenses of $5,702, "Postage" expenses of $1,322, "Telephone" expenses of $6,972, and expenses of $91,726 under an entry entitled "Claim of Right Pursuant to IRC 1341(a)(5)(B) See Form 8275 attached", for total other expenses of $116,724. In the notice of deficiency respondent determined that Mr. Hatling deducted $91,726 as a claim of right deduction. Respondent categorized the remainder, $24,998, as other business expenses and disallowed $6,624 of this amount. On his 2003 Schedule C Mr. Hatling reported other expenses of $39,950 under an entry entitled "Claim of right pursuant to IRC 1341(a)(5)(B). See Form 8275 attached". Respondent disallowed the entire amount of the claimed other expenses Mr. Hatling deducted.
9 For 2001 respondent also determined that petitioners failed to report $2,820 in gross profits from rents and $80 of dividend income. For 2002 respondent also determined that petitioners failed to report $27,166 in gross profits from rents, $23 of dividend income, and $376 of capital gain. For 2003 respondent also determined that petitioners failed to report $6,759 in gross profits from rents, $63 of dividend income, and $159 of capital gain.
10 In the case of a joint return the sec. 6663(a) penalty does not apply with respect to a spouse unless some portion of the underpayment is due to the fraud of that spouse. See sec. 6663(c).
11 These factors are not exclusive. See Niedringhaus v. Commissioner, 99 T.C. 202, 211 (1992).
12 For each of the years at issue the record contains two versions of profit and loss statements with respect to Mr. Hatling's law practice: a copy petitioners provided during the audit process (audit PandL statement) and a copy they provided during formal discovery (discovery PandL statement). Petitioners reported gross receipts with respect to Mr. Hatling's law practice on the documents as follows:
Year Audit PandL statement Discovery PandL statement Return 2001 $187,627 $187,741 $187,741 2002 261,448 146,796 261,448 2003 188,940 191,836 173,278
13 Petitioners also appear to contend the claim of right deductions were not fraudulent because the deductions clearly were impermissible and therefore Mr. Hatling could not have been attempting to conceal his income. We reject petitioners' contention for several reasons. First, the Code provides that taxpayers may deduct from income an amount received under a claim of right.See sec. 1341. Petitioners have failed to convince us that simply by including the claim of right deductions on their returns, they disclosed that the deductions they were claiming were clearly improper. Second, while the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary, see sec. 7482(b)(1)(A), (2), has not addressed the issue of whether a taxpayer's disclosure may preclude a finding of fraudulent intent, at least two other Courts of Appeals, as well as this Court, have held that disclosure does not preclude a finding of fraudulent intent, see Edelson v. Commissioner, 829 F.2d 828, 832-833 (9th Cir. 1987), aff'g T.C. Memo. 1986-223; Granado v. Commissioner, 792 F.2d 91, 93-94 (7th Cir. 1986), aff'g T.C. Memo. 1985-237; Price v. Commissioner, T.C. Memo. 1996-204; Cloutier v. Commissioner, T.C. Memo. 1994-558. But see Zell v. Commissioner, 763 F.2d 1139, 1144 (10th Cir. 1985) ("Clearly, where the taxpayer has informed the IRS of his refusal to file or to pay, and of the reasons for that refusal, the government has not been deceived. In addition, the disclosure clearly negates any intent to deceive."), aff'g T.C. Memo. 1984-152; Raley v. Commissioner, 676 F.2d 980, 983-984 (3d Cir. 1982) (holding that a taxpayer did not act with fraudulent intent because he "went out of his way to inform every person involved in the collection process that he was not going to pay any federal income taxes"), rev'g T.C. Memo. 1980-571. Third, petitioners deducted the claim of right deductions with the intent of underreporting their taxable income and evading their obligation to pay their proper income tax liabilities when due.
14 With respect to 2002 the gross receipts shown on the audit PandL statement, $261,448, equal the gross receipts Mr. Hatling reported on the 2002 Schedule C. However, the gross receipts shown on the discovery PandL statement for 2002 are $146,796. The difference is attributed to the fact that on the audit PandL statement, Mr. Halting reported fee income of $261,448, but on the discovery PandL statement, he reported fee income of only $103,130. Petitioners have not introduced any evidence to explain this discrepancy. While this discrepancy is suspect, we note that the audit PandL statement appears accurate and the expense amounts on the discovery PandL statement are generally consistent with the expense amounts shown on the audit PandL statement and Mr. Hatling's Schedule C. Accordingly, this discrepancy does not compel us to find that petitioners failed to maintain adequate books and records.
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