Welcome to the first installment of a weekly column from Kelly Phillips Erb, the TaxGirl. Erb will offer commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
Tax is all about deadlines. But what if you can’t meet those deadlines because of your circumstances? If it’s nearly impossible for you to comply with the law, shouldn’t you get a break? Perhaps, but a recent Tax Court memorandum makes it clear that it’s the taxpayer’s burden to prove that the failure to file and pay was due to reasonable cause.
Claude Tate George made a name for himself at the University of Connecticut, where he hit a buzzer-beater in the Sweet Sixteen of the 1990 NCAA Tournament. UConn didn’t advance much further—the University of Nevada Las Vegas would go on to win the trophy—but the shot put George on the map. That year, he was taken in the first round of the National Basketball Association draft by the New Jersey Nets. His professional basketball career would prove to be short, but it would be enough to earn George an NBA pension.
After basketball, George tried his hand at investing. That ended almost as quickly as it began: In 2011, authorities alleged that George’s company was nothing more than a Ponzi scheme. He was alleged to have used money from investors to pay numerous personal expenses, including a $19,000 federal income tax bill. In 2013, George was found guilty on four counts of wire fraud and was sent to jail.
In that same year, George received a $208,111 distribution from his NBA pension. Since the distribution was taxable, the bank withheld $41,622 from George’s check.
George didn’t file a tax return for the tax year 2013, so the IRS filed one for him. On the substitute return, the IRS included the pension distribution in gross income, plus an additional 10% tax for early distributions from a qualified retirement plan. The IRS also claimed the standard deduction and one personal exemption for George. And of course, the IRS piled on penalties for failing to file and pay tax timely. The result was a tax bill of $70,318 for the 2013 tax year, plus additions of $8,753. George got credit for the $41,622 of withholding, leaving a liability of $28,696 plus additions.
At the Tax Court
On Oct. 15, 2015, George timely filed a petition with the U.S. Tax Court. He argued three things:
(1) The IRS miscalculated the tax;
(2) George’s incarceration prevented him from filing and made it impossible to get the information that he needed; and
(3) Paying the amounts owed would pose a financial hardship.
The IRS asked for summary judgment, meaning that it wanted the judge to decide the case without a full trial. Under the court’s rules, summary judgment is appropriate when “There is no genuine dispute as to any material fact and that a decision may be rendered as a matter of law.” The Tax Court granted the motion.
First, the Tax Court determined that the tax was calculated correctly. Under Section 63 of the tax code, a taxpayer who fails to file isn’t entitled to itemize deductions. Since the IRS filed a substitute return for George, he was only allowed the standard deduction.
The Tax Court made clear that it might have sympathy for George if his failure timely to file or to pay was due to reasonable cause: Being in jail doesn’t on its own constitute reasonable cause. Under IRS regulations, reasonable cause would include “a satisfactory showing” that George had exercised ordinary care. However, George didn’t offer any evidence that he made an effort to comply timely, including filing for an extension. An extension would have given George more time to file (though not more time to pay)—and it’s typically free and easy—but he didn’t request an extension.
Give Them the Facts
And while the court concedes that it’s possible that George’s time behind bars could have interfered with his ability to get his tax documents together, George didn’t offer any information that he had taken steps to improve his situation. At the least, the court suggested, he might have asked his family for help—and George didn’t offer any confirmation that had happened.
Finally, George claimed that paying the tax would pose a hardship on him and his family. However, the court noted that George failed to provide any specific facts about his financial situation that would support the idea that he couldn’t pay the tax.
In short, the Tax Court found that George didn’t prove that there was a genuine dispute that would merit a trial. As a result, the Tax Court granted the IRS’ motion for summary judgment.
The takeaway? Life happens, but having a bad run—even if it involves a stay in jail—isn’t enough on its own to justify not filing and paying at tax time. Deadlines are essential, and if you know that you can’t meet them, make an effort to comply, like filing for an extension to get more time. Also, when it comes time to pay, the IRS does work with taxpayers, but you need to be able to provide details about your specific financial situation: Don’t be skimpy with the facts when resolving your matter depends on them.
The opinion is available as a Tax Court memo—that’s the case for about 90% of Tax Court opinions. Tax Court memos generally involve matters where the law is settled, and the result is dependent on circumstances. Tax Court memos are not intended to be used as precedent, but taxpayers often cite them in their cases.
The case is George v. Commissioner, T.C., No. 26045-15, 9/25/19.