Kelly Bullis: Happy ending: Attorney loses tax court case

Some of the best attorney jokes I get come from attorneys. Hey! They’re people with feelings too. Well, that aside, it usually warms our hearts to hear of an attorney that cheated the system and got caught.

Mr. James Avery, Esq., started his law practice in the late 1980s in Colorado, specializing in personal injury. In 2003, Avery moved to Indiana, continuing his law practice there. In 2010, he moved back to Colorado. In 2005, while living in Indiana, Avery started participating in car shows, having purchased a 30-year-old Ferrari and another collector car. He believed that the car shows could provide an opportunity to meet potential clients.

Soon Avery found the car shows too boring and in 2008, he began to participate as a driver in car racing. He purchased two Dodge Vipers. On the back of one of them, he put a small sticker advertising his law practice. Most of the racing activities occurred between 2008 and 2010. Over that period, Avery was only able to show he got two clients from all this activity. When Avery moved back to Colorado, he stopped the car racing and car collecting activities. Avery also failed to file timely tax returns for 2008 and 2009. (Was he was having a mid-life crisis?)

The IRS prepared substitute returns for those years, and, in 2013, Avery filed delinquent 2010 and 2011 returns. He timely filed his 2012 return, but failed to file the 2013 return, so the IRS prepared a substitute return for 2013. The IRS filed tax deficiency notices for 2008, 2009, 2013 and audited Avery’s 2010 through 2012 returns, issuing delinquency notices for those years as well. This guy was in trouble and owed a lot of back taxes. So, what would any aggressive attorney do? Double down and try to change the outcome.

In 2016, Avery submitted delinquent returns for 2008, 2009, and 2013 and amended returns for 2010 through 2012, claiming exactly $355,000 in deductions relating to “advertising expenses” (the car collecting and racing activities) on those returns. (This guy is acting STUPID on so many levels.)

Wonder of wonders, the IRS allowed $51,634 of those “advertising” expenses, disallowing the rest. Code Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during a tax year in carrying on any trade or business. The taxpayer bears the burden of proving their entitlement to the deduction and substantiating the expenses.

Avery took this to Tax Court and the court concluded that Avery’s racing-related costs were neither necessary nor common expenses for an attorney to incur. The court instead ruled that the car collecting and racing activities constituted hobbies. They disallowed the excess $303,366 in “advertising costs.” Nice try, Mr. Avery, but it didn’t work, and now your story is public, allowing all of us to learn from your stupidity. Thanks dude!

Have you heard? Proverbs 14:5 says, “A truthful witness will not lie, but a false witness pours out lies.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. On the web at BullisAndCo.com. Also on Facebook.