2trap
Margaret Fuller1 360x1000
Brendan Beehan 360x1000
Mary Ann Evans 360x1000
2defense
5albion
Edmund Burke 360x1000
1lafayette
Stormy Daniels 360x1000
George M Cohan and Lerarned Hand 360x1000
George F Wil...360x1000
9albion
2lafayette
3albion
Maurice B Foley 360x1000
Betty Friedan 360x1000
2gucci
1paradide
4albion
2transadentilist
499
Margaret Fuller4 360x1000
1lauber
1jesusandjohnwayne
storyparadox3
1madoff
8albion'
3paradise
11632
10abion
2paradise
1lookingforthegoodwar
2falsewitness
3confidencegames
12albion
1theleasofus
2confidencegames
Tad Friend 360x1000
Thomas Piketty3 360x1000
Gilgamesh 360x1000
LillianFaderman
2theleastofus
Margaret Fuller3 360x1000
7albion
Susie King Taylor2 360x1000
AlexRosenberg
1falsewitness
3theleastofus
Margaret Fuller 2 360x1000
Thomas Piketty1 360x1000
1albion
James Gould Cozzens 360x1000
Lafayette and Jefferson 360x1000
Margaret Fuller5 360x1000
1defense
1trap
Richard Posner 360x1000
Adam Gopnik 360x1000
399
299
1empireofpain
Maria Popova 360x1000
7confidencegames
storyparadox2
Margaret Fuller2 360x1000
Susie King Taylor 360x1000
Spottswood William Robinson 360x1000
Thomas Piketty2 360x1000
2jesusandjohnwayne
3defense
199
14albion
Margaret Fuller 360x1000
lifeinmiddlemarch1
11albion
1transcendentalist
5confidencegames
Mark V Holmes 360x1000
2albion
1confidencegames
Samuel Johnson 360x1000
Office of Chief Counsel 360x1000
4confidencegames
6confidencegames
Anthony McCann1 360x1000
6albion
lifeinmiddlemarch2
1gucci
Anthony McCann2 360x1000
Ruth Bader Ginsburg 360x1000
Learned Hand 360x1000
2lookingforthegoodwar
Storyparadox1
13albion
Originally published on Forbes.com on June 23rd, 2012

If you have a money-losing side activity, you might consider the tax savings as easing the pain a little bit.  According to some of the Amway critics, like Anna Banana, Amway IBO’s are encouraged to view income tax refunds as income from their activity.  You should also be aware that if you have persistent losses, there is a decent chance that the IRS will challenge your losses.  There are a number of avenues where you will be attacked including substantiation, Section 183 (hobby loss rules), and the passive activity loss rules.  Taxpayers and the IRS have mixed results in these cases.  Horse breeders frequently win.  Amway people almost always lose.  Win or lose, though, it is just about the taxes and interest and penalties.  Until you get to a case like that of Benjamin O. Agbaniyaka, whose loss in Tax Court in 2007 concerned, inter alia, his African arts and crafts sideline.  Mr. Agbaniyaka’s loss in Tax Court prompted his employer to fire him.  The Appeals Court for the Federal Circuit upheld the decision.

How do you lose your day job over an audit of your tax reporting of a side job? Mr. Agbainyaka worked for the IRS as a Revenue Agent. The IRS Restructuring and Reform Act of 1998 mandates termination of any IRS employee found to have willfully understated his federal tax liability, unless such understatement is due to reasonable cause and not willful neglect. The agency determined that Mr. Agbaniyaka had willfully understated his tax obligation for the four-year period and, in the alternative, found that he had violated the agency’s code of ethics.  He sought arbitration under the collective bargaining agreement with the National Treasury Employees Union.  The arbitrator ruled:

Given the Grievant’s experience and expertise, he was undoubtedly aware that he had to substantiate his efforts to conduct a business in 2001 and beyond. Being an experienced and knowledgeable Agency employee, he had to have been aware that he could not substantiate his alleged business activities. By claiming deductions on Schedule C, he knowingly and willfully submitted tax filing to which he was not entitled.

He appealed to the Merit Systems Protection Board, which agreed with the arbitrator.  The Circuit Court decision pretty much focuses on what I call “lawyerly” stuff about procedures and burden of proof and the like.  Ultimately they upheld the MSPB decision.  I am of two minds about this decision overall.  On the one hand, I think it is reasonable to hold IRS employees, particularly revenue agents, to a high standard with respect to their own tax compliance.  On the other hand, I think the result is on the harsh side.  The total deficiency for four years was only around $10,000.  It was conceivable that the Tax Court could have believed Mr. Agbaniyaka’s sincerity, in which case some of the deductions might have been allowed under the Cohan rule.  Under the statute, the alternative to having him fired, was for the IRS Commissioner to craft some other sanction.  Maybe they could have just made him work Amway cases for a couple of years.  That would have been punishment enough.

You can follow me on twitter @peterreillycpa.