Cliff Is Not a Thief

Originally Published on forbes.com on July 17th,2011

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I’m not one for keeping the names of actors straight, so the name John Ratzenberger doesn’t really stick in my mind.  Cliff Clavin, the postal employee, is of course another matter.  Everybody knows his name and that of his best friend Norm Peterson, who at one time was an accountant.  When David Aliotomet Mr.  Ratzenberger, they came up with a business plan that could plausibly have been the result of a brainstorming session of theCheers regulars:

The business concept was to use celebrities, such as Mr. Ratzenberger, and create media which would then be sold to corporations to advertise on the Internet. Mr. Alioto testified that a business plan named Big Rent Tent (BRT) was developed, which included multiple celebrities. Mr. Alioto became CEO of BRT around September 2000.

I don’t know, maybe it wasn’t such a bad idea.  Execution on the other hand was definitely not good.  Mr. Alioto advanced $103,150 to the BRT.  When he found out that nobody else was committed to putting in any money, he abandoned the project.  That was in 2001.  He made no attempt to recover the money from anyone.  In 2005, Mr. Alioto went through personal bankruptcy.  Included in his assets was a claim against BRT and Mr. Ratzenberger in theamount of $313,363.  The bankruptcy trustee did not attempt to recover anything on that “asset”.

Sometime in 2005, Mr. Alioto received an e-mail from Mr. Ratzenberger’s financial manager indicating that Mr. Ratzenberger was not going to reimburse him.  Sadly we don’t have the text, because Mr. Alioto could not produce a copy of the e-mail for the tax court decision, that gave us this story.  Based on the e-mail, Mr. Alioto claimed a theft loss deduction for 2005, which carried over to 2006 and 2007.

Mr. Alioto lost in Tax Court.   Most of the evidence indicated that he knew that he was not going to recover anything from BRT as early as 2001.  Further the Court went to great length to indicate that no aspersions should be cast on Cliff, I mean Mr. Ratzenberger:

There is nothing in the record that would prove that Mr. Ratzenberger committed any wrongdoing. Mr. Alioto did not present any evidence demonstrating that Mr. Ratzenberger or his agents did anything illegal and failed to show any specific promises or agreements made by Mr. Ratzenberger and his agents. Mr. Alioto never contacted the police, the Securities and Exchange Commission, or any State licensing division, never filed suit against Mr. Ratzenberger, and never had any written contract between himself and Mr. Ratzenberger. At trial Mr. Alioto claimed that a formal agreement did exist between himself and Mr. Ratzenberger but that he had left it at home and did not want to share it with anyone.

The Tax Court did cut Mr. Alioto a little bit of a break.  They did not sustain penalties:

We believe that Mr. Alioto did in fact make a good faith effort on the basis of his knowledge of the facts and understanding of the law. Mr. Alioto is not a tax expert, nor has he any background in tax law. Respondent does not dispute that Mr. Alioto incurred $103,150 of expenses. Neither does respondent dispute that Mr. Alioto was involved in a complicated business transaction. Mr. Alioto sincerely believed he was shorted $103,150 in this business transaction, and he genuinely believed he was entitled to some income tax relief. Thus, given these difficult circumstances, we find that the claims of losses were made with reasonable cause and in good faith. Accordingly, we do not sustain respondent’s imposition of accuracy-related penalties for tax years 2005, 2006, and 2007.

There are two tax lessons here.  The first is that if you are going to use documents to support your position you have to hang on to them and be willing to show them to people, like IRS agents and the Tax Court.  The other is that losses need to be claimed at the earliest reasonable time to avoid being whipsawed by the IRS.  The business lesson is a new evaluation technique.  When you have an idea, mentally run it by the crowd at Cheers.  If you think they would be enthusiastic about it, pass.