John Bullis: A few lessons from court cases

Every week there are many court decisions in our great country. Some of the recent cases can provide guidance or lessons:

FRIVOLOUS RETURNS

An individual who raised only frivolous arguments was convicted and sentenced for tax evasion and for failure to file returns. His argument that paying federal income taxes was optional was also rejected. Court of Appeals 7th circuit. (Nevada is in 9th circuit).

Lesson: That argument has been litigated for many years. It won't work!

UNDERREPORTED INCOME

The bank deposits method (adding up all deposits for the year with certain adjustments to estimate total income) was found appropriate to show the sole owner business had unreported gross receipts from his clothing sales business. He was liable for the accuracy-related penalty because his failure to maintain adequate books or records for his business was evidence of his negligence or disregard of the rules and regulations.

Lesson: Keep good business records. QuickBooks is not that hard to learn.

JAIL TIME

The 27-month sentence imposed on an individual who pleaded guilty to conspiracy to defraud the IRS was found to be reasonable. Court of Appeals 4th circuit.

Lesson: It's probably worth it to get the good, experienced attorney.

NO RECOVERY OF FEES AND COSTS

A taxpayer's claim for court costs and fees was denied by the Tax Court because she did not actually incur the costs she claimed and because the IRS's position was substantially justified.

Lesson: Always get the documentation entered into the record. If you did not pay it, don't try to claim it.

EVEN IRS EMPLOYEES MESS UP

An IRS tax compliance officer was not entitled to claim charitable contribution deductions, medical and dental expense deductions and dependency exemption deductions.

Lesson: Claim what you are entitled to, but no more than that.

S CORPORATION TAX BASIS

Married individuals who owned an S corporation were denied deductions based on the pass-through losses because their bases (cost of investments, loans) in the S corporation were reduced to zero.

Lesson: Be careful to compute the tax basis correctly. The negative tax basis can be a deduction in the following year(s) if there are profits or more is invested.

Did you hear? "Duct tape is like The Force. It has a light side, a dark side, and it holds the universe together." It's by Carl Zwanzig.

• John Bullis is a certified public accountant, personal financial specialist and certified senior adviser, serving Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs, LLC.