Rare is the day when the Tax Court releases a 77-page decision with nary a learning point to be found — as it did today in Powerstein v. Commissioner, T.C. Memo 2011-271 — but that’s not to say there wasn’t something worth blogging about within those 77 pages. In fact, one could argue that the Tax Court’s decision in Powerstein was as important as any in recent memory, as it settled a question long pondered by shiftless layabouts and frat boys alike: How much cash does the average person spend on alcohol in a year?
Allen Powerstein was, at various points in his life, a war veteran, a CPA, and a criminal. And while the court shed no light on Powerstein’s mettle as a fighter, if he was half as inept as he was at his latter two vocations, America’s struggle to defeat Vietnam in a ground war starts to make a bit more sense.
As a CPA and criminal, Powerstein was equal parts unethical and stupid: not only did he continuously rip off the IRS by understating clients’ income and overstating or fabricating deductions, he meticulously documented his shenanigans in correspondence with said clients. For your amusement, I’ve reprinted one of these letters in its entirety at the end of this post. I highly recommend you read it, if for no other reason than you’ll go to bed tonight feeling much better about your personal ethical boundaries.
Powerstein filed equally improper returns on his own accord, grossly understating his income for over a decade. The IRS eventually caught on, and Powerstein was subsequently convicted on tax evasion charges and sentenced to 63 months in prison in 1994.
At issue in today’s decision were Powerstein’s tax returns from 1984-1989. As he had failed to keep any relevant documentation, the IRS used the “net worth” approach to recreate Powerstein’s taxable income for those years. The “net worth” approach is one of several options the IRS has at its disposal to compute a taxpayer’s tax liability when either a return is not filed or reasonable supporting documents are not maintained, and it involves four steps:
1. Computing a taxpayer’s net worth at the beginning and end of each year at issue;
2. Taking the difference between a taxpayer’s net worth from the end of the year to the beginning of the year;
3. Decreasing the amount from #2 for nontaxable receipts, and
4. Increasing the amount from #2 for nondeductible personal expenses.
For a solid 50 pages, the Tax Court meticulously recreated Powerstein’s income, haggling over such minutiae as whether he was entitled to a deduction for a $230 copier and much more importantly, how much he was entitled to deduct each year for alcohol purchases.
After an analysis of the relevant factors, the IRS permitted Powerstein an average of $280 in annual booze allowance, in part because Powerstein supported his son-in-law, a court-described “social drinker” with a DUI to his credit. A quick search of the IRS website revealed the table used to reach this determination:
|Reasonable Annual Allowance for Alcohol Expenditures: 2011|
|Starting pitcher for the 2011 Boston Red Sox:||$4,125|
|Slow-pitch softball enthusiast:||$2,844|
|Arizona State graduate: 1972-Present:||$724|
|Uncomfortably older single guy at the club:||$611|
|Social Drinker with DUI :||$400|
|Jonas Brother (Combined number):||$11|
Now, back when I was 24, single, and cool (Ed note: author was never cool), I’d call $240 worth of booze “Tuesday,” but hey, Appletinis ain’t cheap.
Now older, married, and constantly sleepy, I’ve lost touch with whether a couple hundred bucks a year of booze is reasonable. Clearly, its location dependent, as a coal miners bar in Western PA is undoubtedly serving up drinks (read: beer) at 1/4 of Manhattan prices, but in general I think it’s probably fairly accurate, unless you’re hosting parties or rollin’ with Lindsay Lohan.
Below is the letter from Powerstein to his client. Enjoy.
Received your recent letter and IRS letter regarding the 1983 taxes. Before I explain the real meaning of their letter, I must point out that I am not surprised that we got such a letter and that the IRS computer is accurate in tracking bank interest reported on 1099s. We must carefully reply to [the] IRS and explain what we did and if there is any additional tax to pay, and I am not saying there will be, we will pay it at the appropriate time.
Here is why I like their letter:
1) I reported the Ford pension of $4,634, but showed the entire amount to be non-taxable and the IRS did not question this. I know you are both aware of this.
2) I claimed Airlift International as a worthless security in the amount of $4,251, however it really cost you $1,251. IRS did not question this.
3) I claimed a $2,000 exclusion for All-Savers Certificates at American Savings, when in fact you never had an All-Saver Certificate. IRS did not question this.
4) I claimed a $200 exclusion against the Merrill Lynch dividends. These dividends do not qualify for the exclusion. IRS did not question this.
5) I claimed 3-additional exemptions * * * which the IRS did not question. Each exemption is $1,000 or a total of $3,000 which we are really not entitled to.
6) I claimed a political party contribution credit of $100. IRS did not question this.
7) I claimed a residential energy credit carryforward from 1982 which the IRS did not question.
Please understand that the IRS sends these letters out to anyone who fails to report the amount
shown on the 1099, namely in our case Chase Federal. The CD penalty is something else. This is a routine letter but important to answer on time. Just think if they decided to audit the return on all the points I raised in the early part of this letter. You would owe a fortune. Speak to noone at the bank about the IRS letter but only that we need an amended 1099.