Tax News

CCH (cch.taxgroup.com) reports:

An individual was precluded by the equitable principle known as the doctrine of duty of consistency or quasi-estoppel from claiming ordinary loss treatment with respect to losses from a stock trading account when, in the preceding tax year, his wife filed a separate return that reported the gains from the same account as capital by reason of her status as an investor. The taxpayer attempted to claim ordinary loss treatment on the basis of his status as a trader with a mark-to-market election in effect under Code Sec. 475.
The doctrine of consistency applies if: (1) the taxpayer made a representation of fact or reported an item for tax purposes in one tax year; (2) the IRS acquiesced in or relied on that fact for that tax year; and (3) the taxpayer seeks to change the representation previously made in a later year after the statute of limitations bars adjustments for the earlier year.
In the tax year preceding the tax year in which the taxpayer sought to claim ordinary losses with respect to the account as a trader with a mark-to-market election, gains from the trading account were reported on a separate return filed by the taxpayer's wife, as capital gain. No gain from the account was reported on the taxpayer's separately filed tax return for that year even though the taxpayer now admitted to conducting all of the trading activity in the account. This method of reporting constituted a representation that the taxpayer's wife owned the account, the gains and losses were properly attributable to her, and the transactions were capital in nature. Thus, the first element of the doctrine of consistency was satisfied.
The second element was satisfied by virtue of the IRS having accepted the separate returns of the taxpayers showing the gains as capital and attributable to the wife. Finally, the third element was satisfied because the three-year statute of limitations barred the IRS from assessing any additional tax based on the changed position of the couple that the capital gains previously reported by the wife were ordinary income of the husband.
Various expenses claimed with respect to the husband's alleged stock trading and consulting activities were disallowed for lack of substantiation or recharacterized as employee expenses (i.e., itemized deductions) subject to the two-percent-of-adjusted-gross-income limitation. None of the supporting documentation provided by the taxpayers established a connection between the expenses incurred and any particular business activity other than his consulting business.
An accuracy-related penalty for negligence and substantial understatement of income tax was sustained. The taxpayers offered no specific defense to imposition of the penalty. They appeared to have attempted to manipulate the tax rules without justification by claiming capital gains in a year when the account generated gains and ordinary losses in a year in which the account generated losses.
L.B. Arberg, TC Memo. 2007-244, Dec. 57,066(M)
Other References:
Code Sec. 162
CCH Reference - 2007FED ¶8520.5875
Code Sec. 274
CCH Reference - 2007FED ¶14,417.26
Code Sec. 475
CCH Reference - 2007FED ¶22,268.55
Code Sec. 6501
CCH Reference - 2007FED ¶38,963.32
Code Sec. 6662
CCH Reference - 2007FED ¶39,651G.305
Tax Research Consultant
CCH Reference - TRC BUSEXP: 24,802
CCH Reference - TRC IRS: 30,356
CCH Reference - TRC PENALTY: 3,102