Tax Watch: Justice Dept. sues sellers of bogus schemes

The Department of Justice recently filed three lawsuits in federal courts in an effort to counter what it described as “a nationwide bogus tax scheme based on a misrepresentation” of Section 861, “U.S. Source Income.”

According to a Justice Department statement, the lawsuits allege that three individuals have ignored a number of Internal Revenue Service public announcements in 2001, as well as other warnings.

The statement did not name the individuals.

In addition, the department alleges that the individuals continued to solicit clients, collect fees for erroneous tax advice and impede IRS efforts to collect proper tax liabilities.

The lawsuits seek to enjoin three individuals, including an accountant, “from further promoting the frivolous Section 861 argument” that claims that section and other areas of the tax law exempt from taxation all domestic income earned by United States citizens.

The individuals, according to the department, “have preyed on uninformed taxpayers, convinced them to pay exorbitant fees for erroneous advice and sold them a theory that has been rejected as frivolous by every judge who has examined it.”

New-markets credit available on equity

The IRS has clarified that equity investments may be eligible for the new-markets tax credit under Section 45D, the Electricity Production Credit rules, even if those investments are made before an entity is certified as a community development entity and before the entity enters into an allocation agreement.

An equity investment in an entity is eligible to be designated as qualified if:

* It was made on or after April 20, 2001.

* The entity in which it was made is certified as a CDE before Jan. 1, 2003.

* The entity in which it was made receives notification of a credit allocation from the Community Development Financial Institutions Fund before Jan. 1, 2003.

* It otherwise satisfies the requirements of Section 45D.

Cite: Notice 2001-75

Court puts ceiling on roofer’s liability

The U.S. Tax Court, sustaining a filing penalty but refusing to impose an accuracy-related penalty, has allowed most of the business expense deductions claimed by a roofer on his return – even though most of his records were destroyed after his tax return preparer died.

Carroll Furnish operated a roofing business and hired a crew to help him. He maintained an office in his home and bought insurance for his business. Mr. Furnish even hired an accountant to do his returns for 1993-95. Unfortunately, after the accountant died, his wife threw out all of his clients’ records, including those of Mr. Furnish.

Mr. Furnish filed late returns for 1993-95 and claimed various Schedule C expense deductions, relying on records he was able to get from his suppliers. On audit, the IRS disallowed all Mr. Furnish’s claimed expenses except some related to his truck, insurance, legal fees, home office, utilities, supplies, taxes, license fees and labor.

Tax Court Judge Juan F. Vasquez ruled that Mr. Furnish was entitled to deduct the full amount of his claimed expenses for labor, insurance, home office, repairs, supplies and utilities. The court also allowed him a $100 legal fee deduction but found that he couldn’t deduct depreciation, because it wasn’t clear what property he depreciated.

The court held that although Mr. Furnish lacked detailed truck expense records, his uncontradicted testimony was credible and warranted, allowing all of the expenses that he claimed.

Cite: Carroll R. Furnish v. Commissioner, T.C. Memo. 2001-286

Immigration lawyer crosses the line

Jimmie Cannon was a lawyer who specialized in immigration law and practiced as Santa Ana Immigration Center. During 1982 and 1983, Mr. Cannon was married to Crucita Cannon, who worked at the center.

That was something that would come back to haunt him when he later sought a divorce and declared that his income was unknown.

Mr. Cannon maintained 22 receipt books for recording payments and balances due from clients. The books reflect total payments of $339,867 received during 1982 and $130,710 during 1983. Mr. Cannon rented commercial space in 1986 from Jorge Nanni, the property owner. In 1988, Mr. Nanni, who delivered boxes containing the receipt books to the IRS, evicted Mr. Cannon. In 1990, Mr. Cannon was disbarred in California.

In 1997, the IRS issued a deficiency notice based on the information in the receipt books, determining that Mr. Cannon had Schedule C income from his practice for 1982-83, and that he was liable for self-employment tax and for additions for failure to file tax returns and pay estimated taxes.

Mr. Cannon petitioned the Tax Court, claiming that he had no taxable income from the center or other sources for those years and thus no liability for taxes. Mr. Cannon filed for bankruptcy under Chapter 7 shortly before the trial date.

Tax Court Judge Mary Ann Cohen sustained the IRS’ determination after concessions. The court dismissed Mr. Cannon’s argument that the IRS had the burden of proof, noting that that standard is applicable to fraud cases and that no fraud was asserted.

Cite: Jimmie E. Cannon v. Commissioner, T.C. Memo. 2001-293