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$27,595,308 ISN'T CHICKEN FEED

May 16, 2007

Update: The decision discussed below was withdrawn 2/8/2008. The TaxProf reports:

It was subsequently determined that the claim of a tax deficiency by the IRS was an error. There was a stipulation of no tax deficiency or liability submitted to the Tax Court and the opinion was withdrawn by the Tax Court in this order.

Original post below.

It's not unusual for the Tax Court to throw out a case because the taxpayer fails to appear in court or file the required paperwork. It is unusual for it to happen when the IRS has asserted that an individual owes $27,595,308. And when the taxpayer is also a law professor, it's just baffling.

The Tax Court today dismissed Rutgers law prof Anna E. Charlton's petition, defaulting to a decision in favor of the IRS. While this doesn't end Ms. Charlton's ability to fight the assessment, it now becomes much more difficult and expensive.

The assessment appears to result from stock sales that were reported to the IRS on forms 1099-B but, according the the IRS, were never included on a tax return. The taxpayer filed a petition with the IRS saying that the IRS had not reduced the sales proceeds on the 1099-B filings by her cost basis in the stock, but she never provided any evidence or computation of her basis to the Tax Court. Attempts by the court and the IRS to contact her ahead of the trial date were unsuccessful, and she failed to show up at her trial:

Petitioner's failure to appear for trial is unexcused. In addition, petitioner has failed to properly prosecute this case in several other respects. Petitioner disregarded several orders of this Court including: (1) Our standing pretrial order, served August 18, 2006, which required her to submit a pretrial memorandum and to participate in the stipulation process; (2) our August 25, 2006 order to file a joint status report; and (3) our January 31, 2007 order to show cause. The USPS disposition of the two certified mailings sent by the Court to petitioner in January 2007 indicates that petitioner is now refusing to claim certified mail sent to her by the Court. Petitioner has also ignored attempts by the Court to initiate telephone conference calls by leaving recorded messages with petitioner at the telephone number she provided in her petition; these calls were intended to explore some means of resolving this case besides default.

This sort of assessment based on 1099-Bs isn't uncommon. Stockbrokers are required to report the gross sales price of securities trades on these forms, and IRS assessments, which treat the entire gross sales price as capital gain, are almost always too high. Taxpayers typically resolve them without much difficulty by coming up with evidence for the cost of the stock that was reported sold -- often by getting purchase records from their broker. It's puzzling that the taxpayer failed to do so here. Did she expect the $27 million assessments to just go away if she ignored it?

It would have been a mistake if the Tax Court had invited Ms. Charlton to work things out over a nice steak dinner. A visit to Google shows that Ms. Charlton was an adjunct professer at the Rutgers law school and served as co-director with her husband of the defunct Animal Rights Law Center at Rutgers. They seem to take a pretty hard-line stance on hamburgers. From his website:

The mission of this website is to provide a clear statement of a nonviolent approach to animal rights that (1) requires the abolition of animal exploitation; (2) is based only on sentience and no other cognitive characteristic, and (3) regards veganism as the moral baseline of the abolitionist approach.

Given the size of her tax bill, steak will be out of the question in any case.

Cite: ANNA E. CHARLTON, TC Memo 2007-122

UPDATE: The TaxProf has more.

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