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Taxpayer’s Asperger’s Not Reasonable Cause for Exemption

Author: Frank L. Brunetti|January 14, 2016

Asperger’s not reasonable cause for exemption in tax case

Taxpayer’s Asperger’s Not Reasonable Cause for Exemption

Asperger’s not reasonable cause for exemption in tax case

The U.S. Tax Court recently ruled that an investor cannot cite mental health, specifically autism spectrum disorder, as an excuse for failure to file accurate federal income taxes because the taxpayer failed to present evidence that would constitute reasonable cause. Health reasons can provide reasonable cause if the taxpayer cannot function because of the severity and duration of the illness. 

In a Law360 report, the Court also asserted that there are no exceptions for late return filings for taxpayers that use a Section 475(f) mark-to-market accounting method for reporting securities trades. Section 475(f) mark-to-market permits a taxpayer to mark his portfolio to market, as if the positions were actually sold at year-end. In exchange for forgoing capital gain, a taxpayer has ordinary income or loss. Anyone with large capital losses and no capital gain to offset will inquire on whether the capital losses can be converted into ordinary losses in order to offset other income.

Once a method of accounting is properly, the taxpayer must adhere to the particular requirements for reporting. The taxpayer failed to demonstrate that he properly elected Section 475 and he did not report in a manner consistent with that method. 

In 2013, William F. Poppe filed his 2007 tax returns following a notice of tax deficiency sent to him by the IRS. Poppe had reported a $1.2 million loss for 2003, for which he corrected the amount of capital gains and losses he claimed on his 2007 return. In his claim, he stated that his election of using a mark-to-market method in 2003 allowed him to make the correction on his 2007 return, and therefore not be subject to further taxes owed in addition to interest and penalties.

For his mistake, Poppe argued that his Asperger’s syndrome caused him to fall into a deep depression over his investment losses, which in turn resulted in a lack of organization in filing his tax return.

The Court rejected Poppe’s claims that his Asperger’s syndrome and election to use a mark-to-market accounting strategy excused him from tax deficiencies. With regards to the mark-to-market method, the Court ruled that by not accurately reporting his investment losses on his 2007 returns, the losses should be treated as net operating losses. In turn, the Court argued that this mark-to-market method was filed in 2003, which meant that it should be applicable to that year, and not 2007. Further, the judge also claimed that he did not keep an accurate record of his mark-to-market method used in 2003, so he could not make the claim for his corrected return for 2007.

The Court also cited three other mistakes that he made in using the mark-to-market method. The first was that he did not obtain a signed copy of the mark-to-market method, so there was no evidence of it being filed on time in 2003. Secondly, taxpayers need to file returns with mark-to-market methods by April 15 of the tax year. He filed his return on July 25, 2005 for his 2003 tax year. Finally, he failed to attach the signed copy of the Form 3115, Application for Change in Accounting Method, to his 2003 tax return. In turn, the Court ruled that these mistakes rendered his tax claim invalid.

The Court asserted that his Asperger’s syndrome did not prevent him from filing tax returns or other functions that require “a high degree of concentration and ability to analyze and organize information.” According to Accounting Today, this ruling refuted the witness testimony from a licensed psychologist who claimed that the chronic and pervasive nature of the neurological disorder left him incapable of conducting certain executive activities due to his inadequate social cognition and extreme dependence on routines. Therefore, he was not cognizant of the gravity of failing to file his tax returns accurately and in a timely manner.

The Court disagreed with this assessment because the witness was neither a licensed medical physician and did not treat him during the listed years in the case. Further, the Court’s decision claimed that based on the fact that he did not seek treatment for his disability during the listed years, and that he was gainfully employed as an active securities trader, he was not incapable of managing his business affairs. Thus there was no reasonable cause for failure to file proper returns. The taxpayer’s proofs for the relevant time period were weak or non-existent and the decision is no surprise.

There are cases where the severity and duration of the illness are severe and so sudden in its onset that the taxpayer could not have planned for it. One such example is a taxpayer who became a quadriplegic as the result of an automobile accident. Taxpayers should not count on the mercy of the courts, except in extreme personal circumstances.

Taxpayer’s Asperger’s Not Reasonable Cause for Exemption

Author: Frank L. Brunetti

The U.S. Tax Court recently ruled that an investor cannot cite mental health, specifically autism spectrum disorder, as an excuse for failure to file accurate federal income taxes because the taxpayer failed to present evidence that would constitute reasonable cause. Health reasons can provide reasonable cause if the taxpayer cannot function because of the severity and duration of the illness. 

In a Law360 report, the Court also asserted that there are no exceptions for late return filings for taxpayers that use a Section 475(f) mark-to-market accounting method for reporting securities trades. Section 475(f) mark-to-market permits a taxpayer to mark his portfolio to market, as if the positions were actually sold at year-end. In exchange for forgoing capital gain, a taxpayer has ordinary income or loss. Anyone with large capital losses and no capital gain to offset will inquire on whether the capital losses can be converted into ordinary losses in order to offset other income.

Once a method of accounting is properly, the taxpayer must adhere to the particular requirements for reporting. The taxpayer failed to demonstrate that he properly elected Section 475 and he did not report in a manner consistent with that method. 

In 2013, William F. Poppe filed his 2007 tax returns following a notice of tax deficiency sent to him by the IRS. Poppe had reported a $1.2 million loss for 2003, for which he corrected the amount of capital gains and losses he claimed on his 2007 return. In his claim, he stated that his election of using a mark-to-market method in 2003 allowed him to make the correction on his 2007 return, and therefore not be subject to further taxes owed in addition to interest and penalties.

For his mistake, Poppe argued that his Asperger’s syndrome caused him to fall into a deep depression over his investment losses, which in turn resulted in a lack of organization in filing his tax return.

The Court rejected Poppe’s claims that his Asperger’s syndrome and election to use a mark-to-market accounting strategy excused him from tax deficiencies. With regards to the mark-to-market method, the Court ruled that by not accurately reporting his investment losses on his 2007 returns, the losses should be treated as net operating losses. In turn, the Court argued that this mark-to-market method was filed in 2003, which meant that it should be applicable to that year, and not 2007. Further, the judge also claimed that he did not keep an accurate record of his mark-to-market method used in 2003, so he could not make the claim for his corrected return for 2007.

The Court also cited three other mistakes that he made in using the mark-to-market method. The first was that he did not obtain a signed copy of the mark-to-market method, so there was no evidence of it being filed on time in 2003. Secondly, taxpayers need to file returns with mark-to-market methods by April 15 of the tax year. He filed his return on July 25, 2005 for his 2003 tax year. Finally, he failed to attach the signed copy of the Form 3115, Application for Change in Accounting Method, to his 2003 tax return. In turn, the Court ruled that these mistakes rendered his tax claim invalid.

The Court asserted that his Asperger’s syndrome did not prevent him from filing tax returns or other functions that require “a high degree of concentration and ability to analyze and organize information.” According to Accounting Today, this ruling refuted the witness testimony from a licensed psychologist who claimed that the chronic and pervasive nature of the neurological disorder left him incapable of conducting certain executive activities due to his inadequate social cognition and extreme dependence on routines. Therefore, he was not cognizant of the gravity of failing to file his tax returns accurately and in a timely manner.

The Court disagreed with this assessment because the witness was neither a licensed medical physician and did not treat him during the listed years in the case. Further, the Court’s decision claimed that based on the fact that he did not seek treatment for his disability during the listed years, and that he was gainfully employed as an active securities trader, he was not incapable of managing his business affairs. Thus there was no reasonable cause for failure to file proper returns. The taxpayer’s proofs for the relevant time period were weak or non-existent and the decision is no surprise.

There are cases where the severity and duration of the illness are severe and so sudden in its onset that the taxpayer could not have planned for it. One such example is a taxpayer who became a quadriplegic as the result of an automobile accident. Taxpayers should not count on the mercy of the courts, except in extreme personal circumstances.

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