Saturday, August 30, 2014

Fantasy Gravel Mining and Other Fun From the Tax Court

Originally Published on on February 16th,2012
Here are a few tax court decision that I find too interesting to pass up, but cannot quite turn into full length posts.
This case is a bit too much on the lawyerly side for me to go into deeply, but it has an important lesson.  If you are going to represent yourself in Tax Court, try to get at least some advice.  Mr. Koprowsky had a Tax Court small claims decision decided against himself and his wife.  Having lost that, he wanted to claim that he was an innocent spouse, the income in dispute having been his spouse’s.  The Tax Court ruled that his claim was barred by the doctrine of “res judicata”.  Presumably he should have brought up the innocent spouse defense sooner.  Although, not obvious to me, I suspect the issue would have been obvious to most attorneys.
This is a collection due process case. Once there has been a final determination of how much tax you owe, there is an entirely differentsystem to determine how much you can actually afford to pay.  The IRS determinations in that area can be appealed to Tax Court.  The case involvespayroll liabilities from the early 1990′s.  The IRS finally levied in 2007, at which point the collection due process machinery kicked in.  The taxpayer claims that he needs brain surgery that will cost $100.000 and hasno insurance or any assets.  The IRS appeals officer came up with $200 per month as being what would be reasonable to pay toward the old liability and would not consider the requred brain surgery, since it wasn’t documented.  Of course it wasn’t documented because the taxpayer could not afford to go back to the doctor.  The Tax Court sent it back to the IRS for reconsideration.
This is another battle in the Colorado range war that I recently wrote about.  Once again the charity involved is Greenlands Reserve. According to its most recent 990 (2009), Greenlands has $151,000,000 in conservation easements on its balance sheet and not much else.  It accumulated the easements over less than 10 years as taxpayers took advantage of Colorado’s very generous transferable tax credit.  In the Carpenter case, the entire deduction was disallowed because the restrictions were not strong enough.  This case, on the other hand, was about valuation .  Since there is rarely a market for the actual easements their value is computed by figuring the value of the property at its highest and best use before the easement and after the easement.  If the easement does not change the highest and best use, it is probably not worth very much.  Giving away the easement in a case like that is like me renouncing my super powers.  The taxpayers claimed theirfarmland was a really great spot to have a gravel mine, but the Tax Court agreed with the IRS that the farmland was a really good spot to have a farm.  There is a really interesting discussion of what is involved in imagining a fantasy gravel mine – things like whether the power company will back haul the gravel for you in its coal hoppers.  The Tax Court valued the easements at less than 10% of the taxpayer’s valuation.
I always tell people to consult lawyers on litigation matters, but if Mr. Palmer, who was representing himself in Tax Court, had asked me as a friend, I think I would have told him that he didn’t have a very good chance of winning.  He did not file a return for 2006, so the IRS prepared a substitute return computing a tax of $656.  He caught them on a technicality though.  He lives in Oklahoma and the notice was sent from their Holtsville NY office, which has no authority over him.  The Tax Court told him the argument was frivolous, although they did not sanction him.

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