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SOMETIMES FURTHER NEGOTIATIONS AREN'T CALLED FOR

January 31, 2007

Bidyut Bhattacharyya is a principal engineer for Intel and, by all indications, a brilliant man. His papers include "Observation of Two-Dimensional Phase Separation in 3He-4He Films" and "Phase transition of two-dimensional 3He from a dilute to a dense phase."

When a guy like this has tax trouble, it just might mean the tax law is too complicated.

Mr. Bhattacharyya has done well at Intel. His W-2 for 2000 showed earnings of $746,192, including $606,963 from exercising non-qualified stock options. He also took premature IRA distributions. He didn't report his option income or all of the IRA distributions on his 1040, arguing (wrongly) that the options should be taxed as long-term capital gains.

The IRS notices when you don't report $600,000 in W-2 income, and they assessed additional tax of $314,372 and penalties of $38,837. In hindsight, Mr. Bhattacharyya should have taken the offer.

Instead, he went to the Tax Court and claimed he was owed a $9,000 refund. After reviewing the evidence that came out in the Tax Court proceeding, the IRS (with the Court's permission) boosted its assessment to $561,309 in taxes and $100,571 in penalties.

Things went badly for Mr. B. in Tax Court. Except for a relatively small amount of itemized deductions, the IRS swept the board. Goes to show: sometimes it's best to take the first offer from IRS.

One item must have been confusing for the scientist:

As described above, respondent met his burden of proving that petitioners are entitled to itemized deductions of only $243,363 and miscellaneous itemized deductions of only $84,581. However, petitioners argue that they are entitled to deduct the claimed expenses in full in 2000 because respondent allowed them to deduct similar expenses in 1999.

In the laboratory, identical inputs should produce identical results. The tax law isn't nearly so logical:

Petitioners' argument is without merit. Each taxable year stands alone, and respondent may challenge in a succeeding year what was condoned or agreed to in a former year... Respondent's allowance of certain itemized deductions in 1999 does not establish petitioners' entitlement to similar deductions in 2000.

The Moral? Brilliance is one thing; the tax law is something else entirely.

Cite: Bhattacharyya, T.C. Memo 2007-19

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