Avery v. Comm’r, T.C. Memo. 2023–18| February 21, 2023 | Lauber, J. | Dkt. No. 23237–18L (Collection Due Process and a Lawyer’s Race Car Business Expense Deductions)

Summary: Since 1982, James William Avery (Avery) was a practicing lawyer, specializing in personal injury law as a solo practitioner primarily in Denver, Colorado for the period 2008–2013 but also some in Indiana during 2008–2010. Avery became involved in car–racing activities in 2005 after he moved to Indiana. He began attending car shows, thinking this might be a way to meet potential clients. He purchased a race car and placed a decal for the Avery Law Firm, his “sponsor,” on the car. His website dedicated to racing activities linked to the Facebook page for his law firm, hoping to attract potential clients or referrals. But, after his marriage dissolved during the period 2011–2013, he all but quit racing, and the race car sat idle in a garage.

Avery failed to file returns for 2008 and 2009, and the IRS accordingly prepared substitutes for returns (SFRs). In 2011, Avery hired a new CPA. Some of Avery’s financial records remained in the possession of his wife, her father (Avery’s former CPA), or her divorce lawyer. On April 29, 2013, his new CPA filed delinquent returns for 2010 and 2011. Avery timely filed his return for tax year 2012, reporting zero tax due. Avery did not file a return for 2013, and the IRS prepared an SFR on the basis of third– party reports. On January 14, 2016, the IRS sent Avery a notice of deficiency for 2008, 2009, and 2013. The notice was based on the SFRs and determined deficiencies of $3,752, $242,788, and $141,754, respectively, plus additions to tax for failure to timely file, failure to timely pay, and (for 2009 and 2013) failure to pay estimated tax. The IRS examined Avery’s 2010–2012 returns. It disallowed for lack of substantiation all deductions claimed on his Schedules C, Profit or Loss From Business, and determined unreported gross receipts for 2011 and 2012. The IRS issued Avery a notice of deficiency for 2010–2012 that determined deficiencies for each year. The notice determined late–filing additions to tax for 2010 and 2011. Later in 2016, Avery prepared and submitted to the IRS delinquent returns for 2008, 2009, and 2013, and amended returns for 2010–2012. On his delinquent and amended returns Avery claimed in connection with his Schedule C business $355,000 of deductions for racing– related advertising expenses (contending the expenses promoted his litigation practice), all reported in round–dollar amounts of $50,000, $60,000, $65,000, or $70,000.
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