Courts Play Host To Another Cast Of Unusual Characters
It’s Not Tax Fraud…It’s Fargo
(RIVERWOODS, ILL., January 29, 2002) – Although tax law is not
regarded as exciting by most, every so often the creative
interpretation of the rules by taxpayers can make even a mundane tax
case most interesting, if not downright entertaining, according to CCH
INCORPORATED (CCH), a leading provider of tax law information. And
2001 was no exception, as taxpayers who were called to court tried to
justify how they creatively applied the complex rules of federal tax
"In some proceedings, you have to wonder exactly what the
taxpayer – or quite often, the tax evader – was thinking when they
took the steps that landed them in court. While in other cases, you
can see how things just start to spiral out of control," said Kay
Harris, a CCH tax law editor.
While the courts didn’t hesitate to throw the book at those who
wantonly disregarded the rules, they did show patience for those who
just found themselves in too deep.
Here’s a look at some of the more interesting tax issues that
played out in the nation’s courts during 2001.
What is it About Fargo?
So bizarre were the circumstances that landed a Fargo, N.D. liquor
store owner in court that, well, you could make a movie out of it.
But, the Tax Court was so taken with our leading character – who
impressed them as a "sincere, although mistaken, individual"
– that this tale has a relatively happy ending. While the taxpayer
was hit with some heavy tax deficiencies and penalties, the Court did
not find that he intended to commit fraud.
At the center of our story is a liquor store owner, his store and
the issues of underpayment of taxes and disallowed expenses, which for
the most part were related to the taxpayer’s failure to maintain any
meaningful distinction between his personal income and expenses and
those of his business.
Prior to the years in question, his wife had done his bookkeeping.
But when she died tragically in an auto accident, the taxpayer muddled
through on his own, without professional tax help or the necessary
bookkeeping skills or knowledge.
That’s when the trouble started. And while the IRS went after
both the taxpayer and his business for fraud, the Tax Court was
surprisingly more lenient.
While the taxpayer drew money freely from his business for
everything from a $10,000 diamond ring to his wife’s funeral
expenses, he reported no income for the years in question and did not
file an income tax return for two of those years.
His business made cash "loans" totaling nearly $100,000
to the taxpayer and his family – although no loan documents existed
and there was no evidence that there was any intent to repay the
corporation. The corporation held title to the $60,000 condominium in
which the taxpayer and his wife lived, as well as the cars that he and
his children drove.
The family’s summer vacations were mischaracterized as annual
stockholders’ meetings for the corporation. The business, of course,
paid the expenses the family incurred during their meetings by the
He also allowed the store’s till to be used regularly to cash
employee paychecks and cover expenses, without reporting the money
taken from the till as income.
And then, there were the gambling trips to Vegas – all for the
good of the business, of course.
To the taxpayer, it made perfect sense to take a couple of trips
each year to Las Vegas to exchange Canadian currency from his business
and deduct the trips as a business expense. After all, the casinos
provided a better exchange rate than he could get in Fargo. And once
there, a little gambling with the company’s money also seemed in
Between 1991 and 1993, he won more than $21,000 gambling, but did
not report any gambling winnings for those years. After coming to the
conclusion that since he gambled with the company’s Canadian
currency the winnings were taxable to the business, he did, however
attempt to correct the previous omissions and reported $20,000 of
gambling winnings on the corporation’s 1994 return.
He may have continued along this route undetected except for a
routine review the IRS conducted of records of businesses in the Fargo
area to make sure that businesses had properly reported cash
transactions. During the review, the IRS came across records from a
car dealership that revealed the liquor store had purchased a car for
about $9,000 in cash.
On the basis of that, the IRS started an investigation of the
liquor store and its owner and discovered the questionable deductions
and unreported income. The IRS charged the liquor store and the owner
The Tax Court agreed with the IRS that additional taxes were owed.
However, the Court did not agree that tax evasion and fraud had
occurred. Rather, the kindly Court found that what was proved was a
negligent or, at most, willful disregard of rules and regulations.
Eugene A. Beck, et.al. v. Commissioner of Internal Revenue
This Tax Preparer Was a Threat to the Tax System, Taxpayers
Imagine hearing from your CPA that you could exclude from gross
income Social Security taxes withheld from your wages or that you are
guaranteed a tax refund. Sound too good to be true? Well, of course,
But that didn’t stop this tax preparer, or his tax planning firm,
from making such claims. Of course, he wasn’t a CPA either; he just
represented himself as one.
The IRS got wind of his tax advice and tried to get the
"CPA" to stop and to cooperate – without much luck: He
continued plying his not-so-ethical trade and wouldn’t even produce
a list of his clients for the IRS. He also threatened to sue clients
for breach of contract if they cooperated with the IRS by withdrawing
their amended returns, or if they admitted liability and paid any
The IRS sought a preliminary injunction against him and his firm to
stop him from preparing false returns, making false claims and
threatening clients and to require him to cooperate with the IRS
investigation. A federal district court in North Carolina agreed with
the IRS to issue the injunction, finding that the tax preparer’s
efforts to influence or intimidate his clients would irreparably harm
the tax system and the public if he were not stopped.
Alfred Abdo, Jr., d/b/a American Tax Planning Company v. United
States Internal Revenue Service
Bookkeeper Gets the Book Thrown at Her for Bad Recordkeeping
"It’s just a lot of paperwork," said an exasperated
entrepreneur who reported income and expenses for her businesses with
little documentation to back her claims. The IRS was less than pleased
– especially since one of her businesses was an accounting,
bookkeeping and income tax service.
The taxpayer ran a business services company, as well as a wedding
minister service. She also provided notary public services. And
although she made part of her living helping others keep good books
and records, she didn’t take a liking to detailed bookkeeping for
her own businesses.
In an audit of her 1996 return, the IRS found deductions had been
overstated by nearly $40,000. On the Schedule C for her business
services company, she had deducted $59,323. When pressed for
substantiation for the expenses, the taxpayer was unable to come up
with documentation for most of the expenses, including all of her
reported bad debt, travel, meal and car expenses and depreciation. As
a result, the Tax Court cut the allowable expenses and unsubstantiated
As for her notary public business, the taxpayer reported $9,240 in
income. Under the tax code, income from services as a notary public is
not subject to self-employment tax. However, she had no records for
the business, and when asked about such records responded: "It’s
just a lot of paperwork. I didn’t bring the details."
Too bad, then, the Court said, ordering she pay the self-employment
tax on $9,140. Since she did have a notary seal, however, the Court
generously allowed her to exclude $100 from self-employment income.
Inez T. Morin v. Commissioner of Internal Revenue
Talk About Living Your Work
For a Texas dentist, his job may have been his life’s work, but
the Tax Court found that he took the maxim far beyond what the tax law
allows. In a review of the dentist’s 1996 federal return, the IRS
found many expenses mischaracterized.
For example, grocery expenses were claimed as dental practice
postage expenses; payments made to his children at the rate of his
child support obligation were deducted as "contract
services"; and all expenses related to his residence were
deducted as dental lab expenses.
He also deducted all amounts paid on his credit card, including
those for clothing, bedding and cosmetics and tickets to entertainment
events, claiming that they were gifts to unidentified staff members.
Payments for laundry, sunglasses, a bicycle, erotic tapes, children's
videos and tax protest materials also were deducted as business
According to the dentist, every single payment that he made during
the year was business-related. Justifying his deductions, he
testified: "…it's very difficult for me to distinguish between
a personal expense and business expense when it comes to a credit
card. I charge most of my business expenses up on a credit card, and I
deduct whatever I have paid for that year, I deduct that."
Explaining his deduction of items based on checks payable to cash,
he testified: "…personal and business to me are one and the
same. It's no use to pay expenses and maintain two bank
In the absence of credible proof that these items truly were
business related, the Court sided with the IRS, finding a deficiency
of approximately $40,000 in the dentist’s federal income tax for
1996 and assessing an additional penalty of about $8,000.
Michael A. McCann v. Commissioner of Internal Revenue
About CCH INCORPORATED
CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in
1913 and has served over four generations of tax and business
professionals and their clients. CCH is a wholly owned subsidiary of
Wolters Kluwer North America. The CCH web site can be accessed at cch.com.
The tax and accounting destination site can be accessed at tax.cchgroup.com.
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