Sunday, September 19, 1999

Court upholds IRS penalty for tax 'expert'

Couple negligent in preparing farm's returns

The Cincinnati Enquirer

        In trouble with the Internal Revenue Service, Ohioans James C. and Vivian C. Dodge urged the Tax Court to find that “Mr. Dodge was an expert at farm accounting and preparing farm tax returns, as he was an attorney at law who had been preparing 75-100 farm tax returns a year for over 25 years.”

        Even so, the Tax Court affirmed an IRS penalty for negligence in preparing tax returns for the couple's Adams County farm.

        The West Liberty couple appealed unsuccessfully to the 6th Circuit, in part, Judge Gilbert S. Merritt wrote, because they tried to “disavow the expertise they so readily claimed earlier as they know full well that attorneys who specialize in taxation are rightfully held to a higher standard of care with response to their preparation of tax returns.”

        The Dodges bought two Arab mares in 1981 and asked an accountant how to deduct farm expenses from other sources of family income. They were told to write a long-term plan showing how they intended to profit from the farm and to maintain separate books and records for their horse breeding.

        In 1982, they bought nearby land. Mr. Dodge joined horse associations in 1983 and attended horse clinics, hired professional trainers and paid stud fees.

        During the next 13 years, their mares produced eight foals and they sold two for a total of $2,900. They also bought, showed and trained numerous horses and sold eight during that period.

        The Dodges consulted no other breeders on how best to minimize costs and run a profitable horse farm, nor did they follow the accountant's 1981 advice.

        Instead, they neglected to itemize each horse's expenses or to separate horse-breeding costs from cattle breeding they began in 1985. They used the same checking account for personal and livestock spending.

        From 1983 through 1995, they reported annual horse-breeding losses from $16,291 to $74,017 and deducted them from their overall family income.

        The IRS eventually balked. It said the Dodges were not running their farm for profit and rejected deduc tions beyond farm income for 1991, 1992 and 1993.

        The IRS also assessed an “accuracy-related penalty” for what Judge Merritt called “negligence and a substantial understatement of income tax in light of Mr. Dodge's self-professed expertise in preparing farm tax returns.”

        Back taxes for three years were $36,614, plus a $4,885 penalty.

        Judges Merritt, Martha Craig Daughtrey and Arthur J. Tarnow affirmed the Tax Court. At the heart of the rulings was the Treasury regulation that negligence is strongly indicated where “a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction ... which would seem to a reasonable and prudent person to be too good to be true under the circumstances.”

        As Judge Merritt wrote, “A 13-year-long windfall that was enormous in comparison to the revenues generated by this family activity” was too good to be true.

        “For Mr. Dodge, a self-proclaimed and judicially recognized expert in farm taxation, there could have been little or no doubt about this matter.”

Worker to be reinstated
        Robert W. Ingle — a nuclear reactor operator for the Tennessee Valley Authority (TVA) — tested positive for marijuana in a random drug screen.

        TVA ordered him to contact its Employee Assistance Program but the program representative said Mr. Ingle had no drug problem and refused to enroll him for treatment.

        TVA refused to restore Mr. Ingle's security clearance or put him back to work until he completed the drug treatment program.

        Mr. Ingle's second attempt to enroll was rebuffed for the same reason — he didn't need it — and TVA again refused to reinstate his clearance.

        TVA eventually fired Mr. Ingle because he lacked a security clearance.

        An arbitrator concluded that TVA had treated Mr. Ingle unfairly and ordered him reinstated. U.S. District Judge R. Leon Jordan reversed the arbitrator, but the 6th Circuit reinstated the ruling.

        Judges Gilbert S. Merritt and Martha Craig Daughtrey said the arbitrator handled the issues properly and Mr. Ingle must get his job back. However, they freed TVA to conduct a new fitness hearing without missteps that marred earlier proceedings.


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