Court Case Brief Case Study

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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.

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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….....

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