Court case brief format and analysis

Dennis L. Hayden and Sharon E. Hayden vs. Commissioner of Internal Revenue (CA-7), U.S. Court of Appeals, 7th Circuit, 99-2520, 2/11/2000, 204 F3d 772.

FACTS

Plaintiffs, Dennis and Sharon Hayden, married, were sole partners of the proprietorship called "Leddos Frozen Yogurt, LLC." In 1994, Leddos purchased equipment for $26,650 and on the tax return for 1994 tax year reported an income loss of $2,224, with total deduction for $13,294 and a loss of $15,718, Under section 179, on the Depreciation and Amortization form, Leddos reported the expense of $17,500 as deduction of the $26,650 invested in equipment. The Haydens reported this figure as a flow through to their 1994 federal income tax return.

During that same period, Dennis Hayden operated an accounting business as sole owner (Hayden & Associates, CPAs). Dennis Hayden paid the Hayden's 1993 income tax liability of $9,284 from the bank account of his accounting firm under the portion that was designed for "payroll" taxes. On the Hayden's joint 1994 income tax return, they added the $9,284 of the previous year and deducted $17,630 as "pay roll" taxes for the accounting business.

On November 26, 1997, the Commissioner of Internal Revenue determined that he Hayden's owned a deficiency of income tax to the amount of $3,784, plus $292,60 for the 1994 tax year. The Commissioner also overruled the $17,500 that had been claimed under section 179 deduction as well as the $9,284 claimed as "payroll taxes' on the 1993 personal income tax return. An accuracy-related penalty was added, and the Haydens filed a petition with the Tax Court contesting the deficiency as regards the section 179 deductions and the accuracy-related penalty.

The Tax Court had upheld the ruling of the Commissioner and resulting penalty, so the Hoydens now directed their appeal to the U.S. Court of Appeals

ISSUES

1. Whether the Haydens could claim flow-through deduction for their partnership's purchase of the equipment which, under IRS Code (26 USC, section 179) allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated.

2. Whether the Haydens could treat the cost of the property acquired under that section as a current expense in the year that the property is acquired, rather than depreciating the cost of the property over several years.

CONCLUSION

1. The U.S. Court of Appeals upheld the ruling of the Tax Court in that the Haydens owed $17,500 as tax that had been incorrectly claimed under section 179 deductions and that they also owed a $292.60 accuracy-related penalty

ANALYSIS

1. Leddos did not have any income for 1994 and section 179(b)(3)(A) maintains that the deduction under section 179 "shall not exceed the aggregate amount of taxable income of the taxpayer of any trade or business during such taxable year." Section 179 (c) (2) states similarly, but that section uses the terms 'partnership' which the Haydens, referring to section 701, is a term that is different from, and therefore does not refer to taxpayer. They therefore argued that the regulation is invalid.