Fast-Driving Attorney Goes Off-Track in Tax Court

February 21, 2023

While not everyone has the skill set to be a competitive auto racer, we all should have what it takes to file our taxes on time. An attorney who held his own on the track was not so quick with some tax filings, giving the IRS the checkered flag in Tax Court yesterday.

The case involves an attorney who moved from Colorado to Indiana when he married. He kept his Colorado legal practice going, but got involved in auto racing in Indiana. He did well on the track, but not everything in Indiana went smoothly. From the Tax Court opinion:

Petitioner competed in road racing events at tracks in Indiana, Ohio, Wisconsin, Missouri, Pennsylvania, New York, Colorado, and other venues. He won “local championships in the Midwestern region” and at one point “placed as high as Top 10 nationally.” After his marriage dissolved, he allegedly “didn’t have the funds to race.” From that point forward his 2009 Dodge Viper mostly “sat in the garage” in Denver.

The attorney claimed his auto expenses as an expense of his law practice, as advertising and business development costs. The Tax Court disagreed:

His name and a decal for his law firm appeared in relatively small print on his Dodge Viper. This form of “signage” is at the opposite end of the spectrum from (say) a billboard or a newspaper ad. Indeed, every driver’s name typically appeared on his or her racing car. Petitioner has offered no reason why he should have a stronger claim to an advertising expense than thousands of other drivers.

Petitioner allegedly believed that being involved in car racing would enable him to meet lawyers, doctors, and other professionals who could help his career. But he could identify only one instance—involving a Pizza Hut franchisee—in which his racing activity actually intersected with his law practice. And that relationship did not lead to any personal injury litigation, but only to “consultation” about a vendor dispute.

While fast to the finish line on the track, the taxpayer was slower with taxes, according to Tax Court Judge Lauber: "Petitioner filed his 2010 and 2011 returns on April 29, 2013, more than a year late. He did not submit returns for 2008, 2009, and 2013 until March 2016."

The IRS assessed late filing penalties. Judge Lauber's discussion of the late filing has a lesson to all of us (my emphasis): 

Petitioner contends that his 2010 and 2011 returns were filed late because his financial records were in the possession of his original CPA, and then of his ex-wife’s divorce lawyer, until sometime in 2013. We do not find this excuse credible. Virtually all of his income consisted of receipts from his law practice. It is hard to believe that he did not have enough knowledge of what those receipts were to enable him to file a tax return. In any event, it is well settled that taxpayers must file timely income tax returns on the basis of the best information available to them at the time, and then file an amended return if necessary. We accordingly conclude that he is liable for the late-filing addition to tax for all five years.

What lessons can we take from this? 

First, just having your business name on a car doesn't convert it to a fully-deductible business use vehicle, regardless of what you might have seen on Tik-Tok.

More universally - you don't get a second chance to file by the deadline. By all means extend if you need time, but when the extended tax deadline looms, file the best you can -- but file. If you get better information later, you can amend, but you can't file on-time retroactively. Of course, keeping good records as you go makes things go much... faster.

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