Prison Confinement Doesn't Excuse Failure to File Return or Make Election to Itemize

(Parker Tax Publishing October 2020)

The Third Circuit, affirming the Tax Court, held that a former professional basketball player who failed to file a tax return because he was in prison could not itemize deductions for the year at issue because he failed to make the required election to itemize deductions. According to the court, the taxpayer's argument that (1) he did not have access to certain records due to his incarceration, and (2) if he had filed a return, he could have reported deductible expenses in excess of the standard deduction, did not create a genuine dispute as to a material fact sufficient to overcome the IRS's motion for summary judgment. George v. Comm'r, 2020 PTC 296 (3d Cir. 2020).

Background

C. Tate George is a former professional basketball player, serving a prison sentence after being convicted in 2013 of wire fraud in connection with a Ponzi scheme. George spent all of 2013 in prison. The same year, at age 45, he received a National Basketball Association pension distribution of $208,111. The bank that processed the distribution withheld $41,622 of income tax from the distribution. George did not file a federal income tax return for 2013, so the IRS filed a return on his behalf.

The IRS concluded that George had an unpaid tax balance for 2013 of $28,696, based on the following. The entirety of his 2013 income was considered to be his pension distribution of $208,111. He was assumed to have a filing status of single, which resulted in a standard deduction of $6,100 and a personal exemption of $3,900, which resulted in taxable income of $198,111. The IRS assumed an income tax of $49,507, plus a 10 percent additional tax for an early pension distribution of $20,811. These two amounts combined resulted in a tax liability for 2013 of $70,318. The IRS subtracted the $41,622 withheld by the processing bank to arrive at the unpaid balance of $28,696. The IRS also concluded that George was liable for additional penalties of $6,457 for failing to file a return and failing to pay the amount of tax shown on the return prepared by the IRS.

George challenged the deficiency in the Tax Court, arguing that he was unable to file a tax return for 2013 because of his incarceration and that all taxes owed for the pension distribution were withheld by the NBA Pension Office, and that satisfying the deficiency would be a hardship on him and his family. The IRS moved for summary judgment, which George opposed. George argued that his incarceration left him unable to access necessary documentation to substantiate deductions and, if he had his records he might have reported deductible expenses in excess of the standard deduction allowed by the IRS.

The Tax Court granted summary judgment to the IRS. The court noted that a taxpayer must make an election in order to itemize and by failing to file a return, George failed to make the election. The court held that George's arguments did not create a genuine dispute as to a material fact sufficient to overcome the IRS's motion for summary judgment. George appealed to the Third Circuit, arguing that he should have the opportunity to itemize his deductions and that the penalties should not have been assessed since his incarceration caused his failure to filed his 2013 tax return.

Analysis

The Third Circuit affirmed the Tax Court's decision. George's arguments regarding itemized deductions, the court found, were meritless. The court emphasized that, unless an individual makes an election under Code Sec. 63(e), no itemized deduction is allowed for the tax year. The election must be made on the taxpayer's return. Absent a filed return that makes the appropriate election, the court observed, a taxpayer is not entitled to itemize. Furthermore, the court said, George failed to so much as identify or describe a single expenditure that would qualify for a deduction or credit.

With respect to the penalties, the court noted that Reg. Sec. 301.6651-1(c)(1) provides that a taxpayer who wishes to avoid additional taxes for failing to file a tax return or pay taxes must make an affirmative showing of all facts alleged as a reasonable cause for the failure to file such return or pay such tax on time. A taxpayer's failure to pay will be considered to be due to reasonable cause, the court stated, to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. The court found that, although George pointed generally to his incarceration as causing his failure to file his 2013 tax return, he put forth no explanation or evidence for why he could not timely file his return, nor did he seek an extension to do so. Thus, the court said, he did not put on a showing that he exercised ordinary business care and prudence in providing for payment of his tax liability. Similarly, the court noted, although George generally asserted a hardship on him and his family if he is required to pay the penalties, he put forth no specific facts in that regard either.

For a discussion of itemized deductions available to individuals, see Parker Tax ¶82,125. For a discussion of delinquency penalties, see Parker Tax ¶262,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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