Tax Court in Brief | Kinney v. Commissioner | Schedule C Deductions Legal Fees, Insurance, Car and Travel Expenses

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Tax Litigation:  The Week of July 25th, 2022, through July 29th, 2022

Kinney v. Comm’r, T.C. Memo. 2022-81 | July 28, 2022 | Weiler, J. | Dkt. No. 17664-19

Short Summary: From 1975 until 2014 Charles Kinney worked as an attorney licensed in California. In 2008, he was declared to be a vexatious litigant for commencing unmeritorious litigations, primarily against his neighbor. On June 24, 2016, he was officially disbarred. This Tax Court opinion regards the IRS’s disallowance of Kinney’s claimed deductions for business expenses reported on Schedule C, Profit or Loss From Business for tax year 2016. On his return, Kinney reported that he was a consultant, but during the IRS’s audit proceedings, Kinney changed his “business” to “Data Entry, Consulting, Tech. Serv., [and] Whistle-Blower.” Kinney claimed deductions for car and truck expenses, insurance expenses (other than health), utilities expenses, and other expenses. The Schedule C business activities did not generate a profit and the business activities and associated expenses predominantly stemmed from litigation relating to challenging Kinney’s disbarment and lawsuits that would otherwise personally benefit him. The Tax Court opinion provides much detail on Kinney’s litigation proclivities and lawsuit losses because the expenses incurred by Kinney in various matters were reported on his Schedule C. While colorful, the details of those litigation matters are not relevant for this blog. For “other expenses,” Kinney claimed deduction for life insurance, personal liability umbrella insurance policy, and water sports accidents and injuries insurance.

Key Issues

Primary Holdings:

Key Points of Law:

Insights: Kinney represents another case of a taxpayer failing the substantiation requirements for deductions of business expenses under sections 162 and 274. Kinney failed to appropriately establish that the expenses claimed for deduction were related to a legitimate trade or business. The expenses were personal in nature, even though some were incurred in Kinney’s effort to save his law license or to protect his property. Insufficient corroborating testimony was given, and generalized or self-serving testimony is insufficient to otherwise establish any of the required elements for deduction of the claimed expenses.