When Tax Court Says to Split the Difference

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There’s a laundry list of well-settled rules that make it easier for the IRS to discharge its mission to collect taxes.

For instance, when the agency dings someone for additional taxes, the law presumes its assessment is accurate until the taxpayer is able to establish that it’s erroneous.

Another helpful precept is that the Internal Revenue Code empowers the IRS to pursue more than one taxpayer for the same assessment. That approach makes it possible for the tax collectors to ensure that somebody is held responsible for payment of the tab.

Both rules were made expensively clear to a pair of Texas gamblers, Idus P. Ash and Ralph Cannon. IRS sleuths somehow discovered that an unidentified individual wagered about $65,000 on a college football game with Idus, who laid off some part of that with Ralph.

That unusual set of facts left IRS sleuths with the chore of figuring out whether to exact the taxes on gambling income of $65,000 from Idus or Ralph. They took the easy way out, hitting each Texan for the total tax tab.

Idus and Ralph thought they could best the IRS. The pair decided to take their disputes to the Tax Court, a forum that allows taxpayers to contest IRS assessments for additional taxes, interest and penalties without first paying the contested amounts. They asked the court to decide who actually owed the taxes.

The two gamblers didn’t make things easy for the court. Arriving at a decision proved to be particularly difficult because neither of them had kept records of their operations. Moreover, neither could offer other evidence that was believable. Their litigating approach failed to endear them to the court.

The right thing to do, concluded an unsympathetic Tax Court, was to take a cue from the Bible and hold each gambler liable for half of the taxes. As a basis for appealing the finding to a higher court, both of them contended that the court had arbitrarily arrived at a “Solomon-like decision.”

Unfortunately for them, the Tax Court’s ruling was narrowly upheld by an appeals court panel comprised of three judges. Because both Idus and Ralph failed to rebut the IRS’s presumptively correct assessments, each man could have been taxed on the entire $65,000. Therefore, tersely reasoned two of the judges, getting stuck with payment of half “is certainly not a matter which either can complain of.”

The third judge differed. He thought the appeals court ought to have reversed the Tax Court. His reading of the law was that the presumption favoring the government “clearly becomes irrational the moment it is extended to both taxpayers simultaneously”— a thought that probably comforted Idus and Ralph, but didn’t relieve them of their tax obligations.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting). 

About Julian Block

Julian Block

Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com

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