In my tax practice, I have noticed that the tax laws for issues that face my wealthy clients are often much more friendly than the tax laws for issues that face my not so wealthy clients. The most recent Vines v. Commissioner case and the Cowan v. Commissioner cases provide examples.

Facts & Procedural On Vines Case

I will set out the facts of the Vines case in detail, because the facts are interesting. Vines was an Alabama personal injury attorney. Vines stopped practicing law in 1999 in order to become a securities day-trader. Vines placed $5 million on account with two different brokerage companies to carry out this day-trading activity. Unfortunately, Vines margined his investment accounts and one of his brokerage accounts was liquidated when Vines could not cover the margin call. Vine’s investment earnings were $35 million in 1999 and 2000, but he lost $25 million in April 2000.

Vines’ CPA then failed to advise him of the availability of Section 475(f) for certain day traders. Later, Vines’ friend (who was a doctor) told Vines that he may be able to deduct his securities trading losses as ordinary losses pursuant to Section 475(f). After researching the issue, Vines’ CPA advised Vines that he should still be able to file for a 475(f) election. Vines hired a prestigious Washington DC law firm to help him make the election. The IRS denied the election, but the Tax Court affirmed Vines’ election on tax policy grounds.

Vines was able to recoup $2.5 million from his CPA for the CPA failing to advise Vines of the availability of Section 475(f) and Vines was able to recoup almost $2 million from the brokerage company that liquidated his margined investment account. At the end of the day, Vines claimed that his after-tax net worth was a negative $500,000.

Vines then sought to have the IRS pay his attorney fees. The Tax Court rejected Vines’ claim for attorney fees because the IRS position was “substantially justified.”

This decision was rendered nearly seven years after Vines stopped practicing law. During this time Vines experienced a short period of large investment gains, a one month $25 million dollar loss, and about four or five years of tax litigation. That is a pretty extraordinary seven years.

As I mentioned above, this case is interesting because it shows how the wealthy are able to create taxpayer favorable law. In this case Vines set precedent that the 475(f) election can be made not withstanding the express time restrictions for doing so. This isn’t a provision that is going to significantly help poorer taxpayers, as most poor taxpayers have little or no investments and if they did they would hopefully be more cautious about investing their wealth (as every penny counts).

Compare this to the case of Cowan v. Commissioner which was issued by the very same court in the very same month. In Cowan, the court rejected a taxpayers claim (a taxpayer who opted to represent themselves) because the taxpayer had missed a filing deadline for filing an amended tax court petition pursuant to the express time restrictions for doing so. I should note that Cowan could actually be wealthy as the facts do not set this out; I only cite this case because it is an issue that impacts many less-wealthy taxpayers.

The court sets out Cowan’s letter to the court, which was treated as an imperfect tax court petition. I put it here in its entirety as it is interesting as well:

Dear Tax Court Judge,
The Collection Due Process (hereafter “CDP”) Hearing that I requested has been decided. I need your assistance regarding a Notice of Determination I received from the Internal Revenue Service for the tax year [sic] 1995, 1996 and 1997. The Internal Revenue Service (hereafter “IRS”) DID NOT grant me a CDP Hearing, which I have requested. The Hearing they attempt [sic] to conduct was unfair and biased. I was not provided information that I requested from the hearing agent.

I think the IRS is wrong but I am not sure if I am doing this protest right. I told the IRS I didn’t owe them anything and they still have not shown me any proof to support their claim. Could you please write to me and let me know the procedure?

I need the help of the Tax Court to clarify this matter. I am unclear as to what rules of procedure and evidence were to preside over my CDP Hearing. Although I asked many times I never received any information on such procedures. The agent was no help at all.

Now a whole new procedure is beginning and I am more confused. I am unsure of what to do from here. Will you please advise what my next steps are and if there is public council [sic] available for my assistance? When am I supposed to go to court over this? Would I receive the assistance of a public defender?

Thank you for reading my letter and trying to help me.

I would guess that Vines did not have this same experience in dealing with the IRS, as his tax attorneys probably advised him up front that he would need to litigate the issue to get a favorable determination.

These are just two of the many cases where wealthy taxpayers and poorer taxpayers missed a filing deadline and one was afforded a second chance and the other was not.

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