Tax Court in Brief – Eze v. Commissioner

The Tax Court in Brief – August 1st – August 5th, 2022

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

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Tax Litigation:  The Week of August 1st, 2022, through August 5th, 2022

Eze v. Comm’r, T.C. Memo. 2022-83 | August 4, 2022 | Lauber, J. | Dkt. No. 21425-19

Opinion

Short Summary: During tax years 2015 and 2016, Petitioner Nnabugwu C. Eze (“Petitioner”) reported income and expenses from two sets of activities on Schedules C—consulting in the electronic healthcare field (“Schedule C1”) and residential construction (“Schedule C2”). Petitioner reported expenses on Schedules C1 and C2 primarily related to car/truck expenses and other expenses. While Schedule C1 reported net profits in tax years 2015 and 2016, Schedule C2 reported significant net losses nearly offsetting Schedule C1’s net profit.

The IRS selected Petitioner’s 2015 and 2016 tax returns for examination and issued Petitioner a timely notice of deficiency. The IRS disallowed all car/truck expenses on Schedules C1 and C2, 90 percent of the other expenses on Schedule C1, and all of the other expenses on Schedule C2. Additionally, the IRS assessed certain accuracy-related penalties under Section 6662(a).

Petitioner timely filed his petition for redetermination of the deficiencies and accuracy-related penalties. The IRS conceded the accuracy-related penalties, pursuant to I.R.C. § 6751(b)(1). After Petitioner changed counsel, eventually representing himself pro se, and obtaining continuances, Petitioner’s case proceeded to remote trial on March 29, 2022.

Key Issue:

• (1) Whether petitioner has substantiated expenses allegedly incurred in conducting two sets of sole proprietorship activities.

Primary Holding:

• (1) Petitioner has not substantiated expenses allegedly incurred in conducting two sets of sole proprietorship activities save one exception.

Key Points of Law:

• The Commissioner’s determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. See Rule 142(a).
• The burden of proof may shift to the Commissioner if the taxpayer “introduces credible evidence with respect to [a relevant] factual issue” and satisfies three additional conditions: (1) the taxpayer must have “complied with the requirements under [Title 26] to substantiate any item,” (2) the taxpayer must have “maintained all records required under [Title 26],” and (3) the taxpayer must have “cooperated with reasonable requests by the [IRS] for witnesses, information, documents, meetings, and interviews.” See R.C. § 7491(a)(1), (2)(A)-(B).
• Deductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992).
• A taxpayer must show that he has met all requirements for each deduction and keep books or records that substantiate the expenses underlying it. See R.C. § 6001; Roberts v. Comm’r, 62 T.C. 834, 836 (1974).
• If a taxpayer claims a deduction but cannot fully substantiate the underlying expense, the Court in certain circumstances may approximate the allowable amount, “bearing heavily if it [so] chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Comm’r, 39 F.2d 540, 543–44 (2d Cir. 1930).
• No deduction is allowed for vehicle expenses unless the taxpayer substantiates, by adequate records or sufficient evidence corroborating his own statements, the amount, time and place, and business purpose for each expenditure. See Treas. Reg. § 1.274-5T(c).

Insight: As this case suggests, taxpayers must be able to substantiate all expenses claimed on their tax returns. Failure to provide sufficient, accurate books and records, especially with respect to car and truck expenses, will result in the IRS disallowing such expenses. In fact, as the Court notes, the taxpayer’s explanation for the expenses must be plausible and credible. Moreover, taxpayers should be wary of claiming significant expenses on Schedule C that result in large net losses. Those situations may result in a higher likelihood of an IRS audit. Finally, although it was not a focus of the opinion, this case did involve the IRS’s concession of certain penalties, pursuant to I.R.C. § 6751(b)(1), as the IRS could not demonstrate adequate supervisory approval of the penalties.

The post Tax Court in Brief | Eze v. Commissioner | Schedules C and C2 Business Expense Deductions of a Sole Proprietorship appeared first on Freeman Law.

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Preserving Error on a Motion-in-Limine Violation

A recent Fifth Court opinion reminded of the importance of an offer of proof, in addition to arguing the related objection, to appropriately preserve error. In the same vein, Phoenix Thera-Lase Systems, LLC v. Curewave Lasers, LLC reminded of an additional step needed to preserve error as to a claimed violation of a motion in limine:

Here, Phoenix’ counsel objected immediately to Herbert’s reference to “two felonies.” However, counsel did not request an instruction to disregard; instead, following an off-the-record discussion at the bench, counsel withdrew the question that elicited the complained-of response. To the extent counsel did not request an instruction to disregard, any error is waived.

No. 05-20-00665-CV (Aug. 4, 2022) (mem. op.).

The post Preserving Error on a Motion-in-Limine Violation appeared first on 600 Commerce.

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The Bureau of Safety and Environmental Enforcement Issues New Hurricane Rule For Oil Rig Owners

The Bureau of Safety and Environmental Enforcement (BSEE), a unit of the Interior Department, recently issued a new requirement for oil rigs to be more prepared for the 2022 hurricane season.  Oil rig owners must now report the time needed to evacuate crewmembers and send progress reports of shutdowns as tropical storms approach. This comes in the wake of a steady increase of several near misses of hurricane explosions in 2020 and 2021.

Oil rigs in the Gulf of Mexico are susceptible to hurricane disasters. When a hurricane makes a direct hit on the rig, there is a possibility it can explode. This is especially the case when rig owners do not properly shut down operations in time, in order to maximize profits.

Hurricane safety precautions are absolutely necessary to protect crewmembers on offshore oil rigs.

In one of the deadliest offshore oil disasters in U.S. history, BP’s Deepwater Horizon oil rig exploded 40 miles off the coast of Louisiana in 2010, killing 11 crew members and injuring 17 others. The explosion also caused a huge oil spill in the Gulf, the environmental effects of which are still felt today. BP spent tens of billions of dollars settling lawsuits and cleaning up the mess. Investigators found that BP was badly behind schedule drilling the well, so it cut corners for safety to finish up quickly.

Just this year, an offshore drilling unit lost 11 marine riser joints and a lower marine riser package, polluting the Gulf of Mexico, in a failed attempt to evacuate the area from Hurricane Ida.  The BSEE identified that the rig had delayed evacuation procedures during the encroaching storm, poor operational decisions, and equipment breakdowns.

In 2020, an oil rig company was sued for negligence by failing to move their oil rig quickly enough to get out of a hurricane’s path in the Gulf.

Oil rig platforms are usually designed to withstand both gale force winds and severe weather, including a Category 5 hurricane. The national standards are defined by regulations from the BSEE. Standard preparations include mandatory evacuation of non-essential personnel, regular warnings and updates on impending storms, suspension of all drilling operations, activating the shut-in procedure to close the sub-surface safety valves, and closing wells. Oil rig operators also need to have the right amount of “T-Time” (the time needed to secure wells safely, pull risers, prepare the ship for transit, and evacuate the weather event). Oil rig crews often evacuate from hurricanes departing by helicopter and leaving a few crew members to ride out the storm. However, some oil rig companies skirt safety procedures and do not give themselves enough time to evacuate, shut in the wells, secure equipment, and protect remaining crewmembers.

The new regulation will require oil rig owners to report their T-Time during the hurricane and send regular updates of how rigs are progressing with safety procedures.

If you or your loved ones have been affected by an offshore oil rig accident, we are here to help.

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(Podcast) Potential Changes to SCOTX Petition Practice | Justice Evan Young

Texas Supreme Court Justice Evan Young’s career has taken him many different places—the United States Supreme Court, Iraq, and now the Texas Supreme Court. Join Todd Smith and Jody Sanders as they host Justice Young for a discussion of his path in the law and his transition from practitioner to judge. Justice Young provides a unique, behind-the-scenes perspective on the Texas Supreme Court and its operations. He also discusses potential changes in how the

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A victory on tester standing – lawsuit by Rafael Segovia dismissed.

I’m not above patting myself on the back, and today Judge Sam Lindsay granted a Motion to Dismiss I filed for the defendant in Segovia v. Admiral Realty, Inc., Case No. 3:21-cv-2478 (N.D. Texas August 4, 2022). Judge Lindsay found, correctly, that Segovia had failed to plead the concrete and particularized injury and imminent threat of future harm required to maintain an action under Title III of the Americans with Disabilities Act.  Segovia and his lawyers¹ have filed the same form complaint in at least 31 lawsuits in the Northern District of Texas, and every single one of those cases that is still open should be subject to dismissal based on the same reasoning used by Judge Lindsay.² This isn’t, by the way, Segovia’s first setback. In June he voluntarily dismissed a lawsuit against another of my clients because he had made a fatal error when amending his complaint to avoid my original motion to dismiss. In July his attorneys voluntarily dismissed an almost identical complaint against one of my clients (though filed by a different serial ADA filer) rather than face the possibility of losing on summary judgment.

The conventional wisdom in the kind of serial ADA case filed by Segovia is that a quick settlement is the cheapest way out, but with Judge Lindsay’s opinion clients willing to take some risk could well decide they are not interested in paying off plaintiffs like Segovia whose industrial approach to litigation seems to be more about making money than helping those with disabilities.

+++++++++++++++++++++++++++++++

¹ He was represented in this case by William Strickland. He is represented in others by Matthew Sapp and Michael Sturgill of the Sapp Sturgill firm.

² Other District Judges are not obligated to agree with their colleagues, so other judges in the Northern District might reach a different result, but it is reasonable to hope other judges will appreciate the value of consistency among different courts when confronted with identical claims.

 

 

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West Virginia vs. EPA: A Recap and What it Means

In a decision that effected a major change to the federal government’s ability to regulate, the Supreme Court of the United States struck down the Environmental Protection Agency’s greenhouse gasses rules. In its interpretation of a section of the Clean Air Act, the Supreme Court applied a legal principle that could impact far more government regulation than just the EPA’s regulation of emissions.

In West Virginia vs. EPA, West Virginia challenged an Obama Administration-era set of rules aimed at government coal-powered plants. The rules addressed carbon dioxide emissions from existing coal- and natural-gas-fired power plants. The EPA had promulgated a set of rules based on the authority it believed it had from Section 111(d) of the Clean Air Act. What was notable about these rules is that they did not contain measures that would have required power plant owners to operate their plants in a cleaner manner. Instead, they attempted to shift the overall mix of pollutants in the nation’s air. These rules incontrovertibly went a step beyond prior environmental regulations. Under the EPA’s rules, the agency decided the proportion of coal-fired power as part of the nation’s overall output should drop from 38 percent to 27 percent to reduce emissions.

The EPA Was Attempting to Reduce Production from Coal-Powered Plants

For its authority to do so, the EPA cited to the section of the law that allowed it to regulate emissions of non-criteria, non-hazardous air pollutants from stationary sources through the identification of the “best system of emission reduction” that is “adequately demonstrated.” In this case, the EPA’s rules required either a reduction of production of coal-fired power or that the companies subsidize production of other forms of cleaner energy. The EPA’s rules had a clear purpose to make solar and wind power a more prominent part of national power production.

West Virginia argued that the EPA’s rules exceeded the statutory authority the agency had under the Clean Air Act. The state was following up on arguments the Trump Administration made when it suspended these rules in 2019. The essence of the argument is that rule changes these momentous could only be made in a law passed by Congress, as opposed to being contained in rules made by unelected federal agency staffers.

The Court Concluded the EPA Exceeded its Authority Under the Major Questions Doctrine

The Supreme Court considered whether the EPA’s rules were permitted by the statutory authority it was granted by Section 111(d). Ultimately, a six-judge majority concluded they were not. The Court reviewed Section 111 within the context of the EPA’s overall authority and found it was an ancillary statute meant to fill gaps not addressed by the EPA’s other authority. Specifically, the emissions by these coal-fired power plants were addressed by other authorities, so using the very broad authority conferred by Section 111 was unnecessary.

The linchpin of the Court’s decision was the “major questions” doctrine. There is a body of case law that has considered whether agencies have attempted to assert power beyond what Congress could have intended when they are asserting a highly consequential power. Here, the Supreme Court concluded the EPA was trying to take a “long-extant” part of a statute and use it to initiate a “transformative expansion in [its] regulatory authority.”

In “major questions” cases, the Court requires that Congress be the one to make these changes to the law, rather than an agency greatly expanding the law through regulation. The Court explained that it was highly unlikely that Congress would have given the EPA this breadth of discretion to fundamentally change an entire sector of the American economy. The Court concluded that Congress had considered and rejected similar changes, even after learning of the dangers of greenhouse gasses.

West Virginia vs. EPA Is About Far More than Climate Change

In setting aside the EPA’s regulations, the Court did not express an opinion about the merits of the EPA’s rules. It could be that Congress makes a decision that would impose the same caps and requirements. The main holding was that it needs to be Congress that does this as opposed to the EPA.

While West Virginia vs. EPA was touted in the media as a case about climate change, its real impact extends far beyond environmental issues. At its core, the case was about the government’s ability to regulate in general. Agencies issue and enforce rules based on laws and the authority given to them by Congress. The Court explicitly disclaimed that it was taking any stance on climate change. The real issue is what can be done by executive agencies and what must be done by Congress.

It must not go unstated that West Virginia vs. EPA is the most consequential Supreme Court decision in administrative law since Chevron vs. National Resources Defense Council. While Chevron expanded the federal government’s deference toward an agency that interprets a statute and takes action based on that interpretation, West Virginia vs. EPA held that some issues should be the subject of laws as opposed to a regulation based on laws. As much as “Chevron deference” served to expand the administrative state, West Virginia vs. EPA could remove many of the foundational underpinnings for it.

The question is where this leaves the ability of executive branch agencies to regulate going forward. West Virginia vs. EPA involved a transformative approach that sought to change an entire sector. Arguably, the EPA’s rules were one of the more ambitious programs done under executive rulemaking. However, it would be logical to expect that some would use the opening provided in West Virginia vs. EPA to challenge further government rules that may be less far-reaching than the ones proposed by the EPA. The key will be how the Court defines “major questions” in future cases that are sure to come before it.

The post West Virginia vs. EPA: A Recap and What it Means appeared first on MehaffyWeber.

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Did the Fifth Circuit Get it Right When it Said that Manifestation of a Disability Does Not Excuse Bad Conduct?

Today’s case of the day is Harkey v. NextGen Healthcare, Inc., here, decided by the Fifth Circuit in a per curiam decision on July 15, 2022. The case is better known as the sleepwalker claiming disability discrimination case, and it has been over the legal blogosphere due to its sensational facts, which are described in detail below. As usual, the blog entry is divided into categories and they are: facts; court’s reasoning that summary judgment for the employer was justified; my thoughts on why this decision could have gone the other way; and thoughts/takeaways/questions. Of course, the reader is free to focus on any or all of the categories.

 

I

Facts (taken directly from the opinion)

NextGen hired Jennifer Harkey in March 2008 as an “Implementation Specialist.”^[**] She worked without incident for over a decade. In September 2018, she was promoted to the position of “Sales Specialist,” effective November 1, 2018.

On the evening of October 10, 2018, Harkey was attending an out-of-town national sales conference for NextGen at a large hotel in St. Louis, Missouri. After a dinner and a few drinks with a female co-worker, Harkey headed up to her room. She then watched some television and fell asleep.

Around midnight, another employee of NextGen who was also attending the conference, Scott O’Donnell, had just returned to his room from the hotel bar when he heard a knock at the door. Rather than peering through the peephole, assuming it was one of the other men who he had just been at the hotel bar with, he opened the door. There stood Harkey, whom he did not recognize. Harkey says that she was wearing a “black cotton robe” that fell to her knees and that she was naked under the robe.

O’Donnell was startled and stepped backwards. Harkey entered the room without looking at O’Donnell. O’Donnell said something along the lines of “I think you’re in the wrong room. What are you doing here? You need to get out” and remembers repeating “You’re in the wrong room.” Harkey said nothing, walked over to a made bed and got in it, then pulled the sheets all the way up to her face. According to O’Donnell, “She just laid there, didn’t move and was nonresponsive to me asking her to leave and telling her she was in the wrong room.” Harkey did not touch O’Donnell during the incident. Moreover, O’Donnell states that she never propositioned him or sexually harassed him.

Still, O’Donnell was concerned. He was a married man on an out-of-town business trip, and a woman was in a bed in his hotel room. He called his supervisor, Sean Murtagh, to the room. Murtagh also did not recognize Harkey as a NextGen employee. Murtagh decided to contact Jill Burke, the director of Human Resources at NextGen, who was also attending the conference. When Burke arrived, she attempted to wake Harkey repeatedly. Burke pulled back the covers and Murtagh snapped a picture of her. Burke was able to waken Harkey, but Harkey was disoriented. Burke also described Harkey as “smell[ing] of alcohol” and “exposing skin.” Although he was further away, Murtagh testified that he did not smell alcohol and that her robe fully covered her, so that no “personal part[s]” were exposed.

Eventually, hotel security was called, and it was determined that Harkey’s room was next door to O’Donnell’s. According to Burke’s notes, which she discussed during her deposition, as security helped get Harkey back to her room, Harkey was “very apologetic” and embarrassed. According to Burke, Harkey stated that she must have been sleepwalking, which she had done from time to time when she was a child. Burke’s notes also recall that Harkey said that she “wasn’t assaulted or anything” in the hotel room, that she was fine, and that she was “so sorry.” O’Donnell went back into his room, gathered his stuff, and moved to a different hotel room.

O’Donnell was asked to write an e-mail about what happened. At that point, he was extremely uncomfortable “because of the accusatory-sounding questions that [Burke] had asked [him] earlier in the night about what happened.” Because of his discomfort at that line of questioning, he mentioned wanting to speak with a lawyer before writing an e-mail about the incident. He later testified about his concern with how his wife would react to learning about the situation and, more generally, about how it might be interpreted in the “Me Too” era.

The next morning, Harkey went downstairs for breakfast and business meetings. At some point in the morning, she was asked to go up to a conference room where she saw Burke sitting alone at a long conference table. Harkey said she had “a flashback” and remembered her face from the night before. Burke told Harkey to sit down and that she “was in very big trouble,” “needed to be concerned,” and that Burke wanted to discuss last night. Harkey told her about the evening, as she could recall it. Harkey told her she had sleepwalked throughout her childhood but that it rarely happens. She was also asked about what she was wearing. Harkey stated that she felt from the beginning of the conversation that Burke had made her mind up about what had happened. Burke told her to pack her bags and that she was suspended on paid leave. Multiple times in the conversation, Burke called Harkey a “liability.” Burke told Harkey to “call a doctor,” and Harkey said she would quickly do so.

Harkey called her doctor for a referral as she was waiting for her flight home and began the process for making an appointment with a diagnostician, Dr. Sudan. Harkey sent an e-mail to Burke on October 12, 2018 (the day after the incident), informing her of the medical updates and assuring her that she was taking the situation seriously. On October 16, Harkey sent an e-mail updating Burke that she had been able to get an appointment with Dr. Sudan for the following week. Later the same day that she sent that e-mail, on October 16, Harkey was terminated.

When Harkey was able to see her doctor, he diagnosed her condition as somnambulism, otherwise known as “sleep walking disorder.” On September 4, 2019, Harkey brought a lawsuit in state court alleging that she was fired on account of a disability. It was removed to federal court, with the operative complaint alleging violations of the ADA and the TCHRA.

II

Court’s Reasoning That Summary Judgment Is Justified for the Employer

 

1. The controlling question is whether the plaintiff suffered an adverse employment action because of (emphasis in opinion) her disability.
2. Even if plaintiff’s sleepwalking disorder was a disability under the ADA, she was properly terminated because of what happened when she sleepwalked.
3. The Fifth Circuit has previously held that where a plaintiff’s outburst was arguably caused by his PTSD, the company was justified in terminating that individual because the outburst also violated company policy.
4. The ADA does not insulate emotional or violent outbursts blamed on an impairment.
5. A prior Fifth Circuit case also held that an employee verbally abusing his supervisor for denying his vacation request was also grounds for termination despite the employee suffering from bipolar disorder. That decision said that while the employee’s reaction could have been attributed to his bipolar disorder, the ADA is not a get out of jail free card to avoid accountability for the employee’s actions.
6. That plaintiff’s severe, unprofessional, and inappropriate conduct was purportedly caused by her sleepwalking disorder is of no matter, as the ADA does not give employees license to act with impunity.
7. When plaintiff sleepwalked into her male coworker’s room in the state that she was in, the employer had a reason to fire her, and the ADA is no barrier to that termination.

 

III

My Thoughts on Why This Decision Could Have Gone the Other Way

 

1. It certainly appears that the director of HR rushed to judgment and that little independent investigation ever occurred. I join labor and management side lawyers on social media talking about how a rush to judgment by HR is never a good idea.
2. There was no interactive process.
3. Magic words are not required to begin the interactive process, as we discussed here for example, and most certainly what happened here is enough to put an employer on notice that a reasonable accommodation needed to be discussed.
4. Plaintiff told HR the morning after the incident that she had a record of sleepwalking in childhood. Remember, a person with a record of a disability, 42 U.S.C. §12102, is protected under the ADA.
5. Plaintiff made clear that she was seeking the assistance of medical professionals to figure all this out, but the employer terminated her before that could all be accomplished.
6. Bostock v. Clayton County, which we discussed here, has changed causation. The question is whether the disability was a determining factor in the termination. Arguably in this case, it was. Again, magic words are not necessary and there was a complete absence of any interactive process.
7. It is an oversimplification to say, especially after Bostock, that sleepwalking being the cause of the conduct is of no matter.

 

IV

Thoughts/Takeaways/Questions

 

1. Was plaintiff a valuable employee? She worked there without incident for over a decade and had been promoted to the position of sales specialist.
2. Did plaintiff ever have to work with Scott O’Donnell, the person whose room she walked into, in her job?
3. Was plaintiff a direct threat to anyone during the incident or in the future? Could any future direct threat be eliminated with reasonable accommodations?
4. I can’t see the United States Supreme Court deciding in favor of the plaintiff on this one.
5. Could she do the essential functions of the job with or without reasonable accommodation? If not, might there have been another job in the company that she could have done with or without reasonable accommodations? Was traveling even an essential function of her job? Of any job in the company?
6. The employer won this one. However, an employer would do well to look at §§III, IV of this blog entry prior to terminating an individual when something like this occurs.
7. What company policy was violated?
8. This isn’t the first time we talked about the line between how disability may manifest itself in the form of bad conduct. See this blog entry for example.
9. The decision is a per curiam and is not published. I asked Prof. Leonard Sandler (a Clinical Law Professor at the University of Iowa whom I had the privilege of meeting in person just recently when I did a training for Disability Rights Iowa), for more information about per curiam opinions. He sent me this article. After reading that article, a strong argument can be made that our case of the day was not appropriate for a per curiam decision.

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