Attorneys are known to love to argue, but sometimes making too many arguments can backfire. In a recent court decision, the U.S. District Court for the District of Maryland reminded attorneys and taxpayers that arguments with minimal or no reasoned analysis will hold little weight in court. In Estate of Bowen v. United States, Civ. Action No. MJF 2231 (Dist. Ct. Maryland July 23, 2012), the taxpayer referenced a multitude of Internal Revenue Code sections with very little explanation or analysis regarding the applicability of these sections to the case at hand. As such, the court couldn’t sufficiently review the taxpayer’s argument and granted summary judgment in favor of the government. This case provides a warning to attorneys and taxpayers alike to exercise caution before throwing in everything but the kitchen sink.
The Damaged Yacht
Robert Bowen was a retiree who died in 2009. After his retirement, he ordered a yacht from a Chinese boat-building company for approximately $750,000. The boat was shipped from China in late 2006 and arrived by freight shipment in North Carolina during the last few days of December 2006. After the boat was inspected in North Carolina in early 2007, Bowen discovered that it had many problems. Although it’s unclear what precisely was wrong with the boat, Bowen’s estate alleged that he spent nearly $1 million to repair it. Bowen brought two suits to recover these expenditures: (1) against the Chinese company for manufacturing defects, and (2) against an insurer for damage arising during the shipment of the boat to the United States. In 2009, Bowen reached a deal with the insurer, and he received a settlement award of $120,000. However, he never recovered anything from the Chinese company. In June 2010, after Bowen’s death, his estate sold the boat for $350,000, a devastating loss.
A “Hodge-Podge” of Claims
Bowen’s estate sued the government, asking the court to grant a tax refund for Bowen’s 2006 tax returns, based on these yacht expenditures. The estate’s claim was based on what the court referred to as a “ ‘hodge-podge’ [of claims,] with a listing of Internal Revenue Code Sections that, for the most part, have no conceivable materiality.” Since the estate generally just rambled off a list of IRC provisions, often without giving any explanation regarding the applicability of these provisions to the situation at hand, the court had little patience for the estate’s request for a tax refund. As such, the court ultimately granted summary judgment for the government.
The court rejected many of the estate’s arguments in a few short sentences. For instance, the estate claimed that the yacht expenditures were deductible under IRC Section 174, which relates to research and experimental expenditures. In one sentence, the court held that Section 174 was inapplicable, as the estate hadn’t provided any evidence that the amounts incurred with respect to the boat were reasonable expenses for research and experimental purposes.
Some of the estate’s other arguments regarding the deductibility of the yacht expenditures received a bit more attention. One such argument was that the yacht expenditures were deductible as a business loss for damaged inventory. The estate claimed that Bowen was involved in a boat business in 2006, that the boat at issue was part of the inventory of this business and that this boat became worthless by the end of 2006. While this argument received a bit more thought from the court, it ultimately didn’t hold any water. First, the court held that the estate didn’t provide any evidence that sufficiently showed that the boat was worthless or valued at zero at the end of 2006. In addition, the decedent’s 2006 tax return included an election that required any business inventory be reported at cost, rather than zero, at the end of the year. Therefore, the court granted summary judgment for the government on this issue.
Another argument that received a closer look from the court was the estate’s claim that the decedent’s 2006 return should be amended to reflect a depreciation deduction under IRC Section 167(a). For purposes of analyzing this argument, the court assumed – but didn’t hold – that the estate could prove the boat was used in Bowen’s trade or business or held for the production of income at the end of 2006, as required by Section 167(a). The court noted that, in general, a deduction under Section 167(a) isn’t allowed until the depreciable property is placed in service. Here, there was insufficient evidence to show that the boat was placed into service before the end of 2006. After all, the yacht didn’t arrive in North Carolina until the last few days of December 2006, and it wasn’t inspected, let alone put into service, until January 2007. Therefore, the court rejected this argument and granted summary judgment in favor of the government on this issue.
The court also took a more thoughtful review of the estate’s request for a deduction under IRC Section 165, which applies to losses from casualties. To qualify under Section 165, such casualty must be sudden, unexpected or unusual. In addition, a deduction under Section 165 is allowed only to the extent to which the loss isn’t compensated for by insurance or otherwise. Here, the estate argued that the boat was damaged by waves while in transit. However, the estate couldn’t point to any admissible evidence to prove this point—the most the estate could produce was hearsay from boat crew members. Also, the estate couldn’t distinguish how much of the damages suffered were due to manufacturing defects, rather than casualty losses. In addition, the decedent had already been compensated by insurance for some, and perhaps all, of the casualty losses suffered, as he received a settlement award of $120,000. The estate couldn’t produce any evidence that satisfactorily showed that the decedent suffered any casualty losses greater than $120,000, and as such, the court denied any deduction under Section 165.
A Cautionary Tale
This case demonstrates the importance of making a well-reasoned analysis that connects all the dots. For many of the estate’s arguments, the court was left to guess why various IRC provisions were applicable to the case at hand. The court was clearly unwilling to do so, which is why so many of the estate’s claims were summarily dismissed. This provides a warning to professionals and taxpayers alike that blanket references to a multitude of IRC provisions won’t win a case, unless these references are meaningful and carefully explained. Everyone should be sure to only make those arguments for which they have adequate support and attempt to make a clear point-by-point analysis. Throwing in everything but the kitchen sink may harm, not help, your case.