Saturday, March 26, 2011

Judge: No Day Trading When You Owe The IRS

A tax court judge ruled that the IRS could refuse to settle the back tax liability of a man who was hoping to day-trade his way out of debt. The lost investment was seen as a dissipated asset, causing the IRS to deny his offer in compromise. reports:

    Larry E. Tucker owed nearly $15,000 in back taxes for 1999, 2000, 2001 and knew he would have a balance due for 2002 when he received an advance in January 2003, for freelance web design work he would be doing later that year. So he decided (he told the IRS and the court), that he’d try to pay off both the IRS and his other creditors by day-trading his way to profits.

    He deposited $23,700 in an E*Trade account and later, in response to margin calls, put in another $21,000. By the time Tucker threw in the towel on day trading in April 2003, he had lost $22,645 of his stake. He used what was left mostly for basic living expenses that year.

    Later, when Tucker tried to settle his growing tax debt through what is known as an offer-in-compromise (OIC), the IRS turned him down on the grounds that he had “dissipated” through day trading assets he could have used to pay his tax bill in full. In his opinion here, Tax Court Judge David Gustafson concluded that Tucker’s “foray into day trading was purely speculative” and that the IRS was within its rights to deny the OIC.

    Carlton M. Smith, Tucker’s attorney, said Wednesday morning that he and Tucker plan to appeal both this week’s decision and an earlier July 2010 Gustafson decision in the case which rejected a constitutional challenge to the way the IRS collections appeals officers who heard Tucker’s case were appointed.

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