Our tax laws are constantly being interpreted by the courts and by new regulations from IRS.
For example, the U.S. Tax Court found Mr. Banister subject to more tax because he failed to file his individual income tax returns in a timely manner.
IRS presented some factual foundation that seemed to link him to the receipt of unreported income. He failed to show the IRS deficiency was arbitrary or erroneous. (Maybe he needed an experienced, qualified tax attorney?)
Also, the penalty for failure to timely file was found by the court to be proper because he did not provide any evidence to show his failure to file timely was due to "reasonable cause."
In another case, the Kermans were found to have entered into a transaction that showed tax losses, but they were not able to deduct those losses.
The court found the transaction lacked "economic substance" (was a sham). They also were assessed a penalty of 40 percent under Code Section 6662 for the "accuracy related penalty" because they did not act in good faith and their actions were not justified by "reasonable cause."
Our U.S. Supreme Court may give a decision in the Sala case soon that will help define better what "economic substance" really is. The law was changed a little back in March 2010. The 10th Circuit denied an individual's refund claim based on an investment program that generated tax losses.
Sala apparently knew before he made the investment, the partnership would exist for only a short time and would be liquidated before the end of the tax year. He wanted some losses to offset his other income.
The court found the transaction lacked "economic substance" (wasn't real). Perhaps our Supreme Court will clearly define exactly what is "economic substance" for the future? I guess this case illustrates why we usually suggest our clients do not invest in fancy partnerships, even if the salesman says "it is OK." Unless you really understand the proposed investment, maybe it's best to decline to buy it.
Thank goodness, most of the court cases don't seem to apply to most folks.
Did you hear: "I didn't prepare myself to be 71. We should begin earlier to think about later on, because we are all living longer," by Lena Horne.
• Kelly Bullis is a Certified Public Accountant with more than 30 years of experience. Contact him at 775-882-4459.
