Big brother doesnt always win. Here are a few brief summaries of cases the IRS lost:

$$$ IRS loses. Sloppy records dont negate profit motive. An insurance executive moved his home to a farm and worked the farm as a sideline. He had deducted four years of losses from it when the IRS said he had no profit motive and disallowed his deductions. The Tax Court agreed, saying his amateurish business records indicated a lack of business intent. But the Court of Appeals restored the deductions. Why: The
executive had made substantial investments in and improvements to the farm, consulted with experts about running it, and had a business plan calling for start-up losses and later gains. All this indicated he did have a profit motive, notwithstanding his careless and sloppy records.
Robert E. Holmes, CA-6, 99-2 USTC
¶50,642.

$$$ IRS loses. Agents may he sued. During a tax dispute, Mary Ann Tobin gave to the IRS records
that it requested. Later, the IRS returned the records to her--and also returned other records she had never given it. Ms. Tobin then sued the IRS agents handling the case, saying they had illegally searched her home and had misrepresented themselves to her employees by saying they worked for her accountant, to get the employees to give records to them. The IRS moved to dismiss, saying the statute of limitations had run out since the records allegedly were stolen. Court: The limitation period didnt begin to run until the alleged theft was discovered, so Ms. Tobin may continue her suit.
Mary Ann Tobin v. Jennifer Troutman,
D. Ky., 99-2 USTC

$$$ IRS loses. Occasional inventor doesnt owe self-employment tax. Melvin Levinson operated a retail store for more than 40 years, and in his spare time created and patented various inventions. On his tax return, he reported royalty income from patents and settlement payments he received from a business that had infringed his patents. The IRS imposed self-employment tax on his invention-related income. Tax Court: Levinson did not design inventions regularly or continuously, but only sporadically. Thus, he was not engaged in the trade or business of inventing, and did not owe self-employment tax on his invention-related income.
Melvin L Levinson, TC Memo 1999-2 12.

$$$ IRS loses. Deduction for legal fees to win punitive damages. An independent contractor sued a company that broke a contract with him. He won $80,000 in damages and $250,000 in punitive damages, and deducted $140,000 in legal fees as a business expense. Snag: The IRS said the punitive damages were not business income but other income reportable on Schedule A, and that corresponding legal fees were a personal expense, not a business expense. This sharply reduced the deduction for them due to the deduction floor on miscellaneous expenses and the Alternative Minimum Tax. Tax Court: For the contractor. His suit
arose entirely out of his business, so all his legal costs were a business expense.
George W GuilI, 112 TC No. 22.

$$$ IRS loses. Pays legal fees after wrongly challenging ntractors. A nightclub treated exotic dancers who worked for it as independent contractors. The IRS tried to recategorize the dancers as employees, but lost because their treatment was an established industry practice the club could rely on. Then
the club asked the court to order the IRS to pay its legal bills because the IRS challenge had been unjustified. The IRS objected. Court: If a reasonable person could think treating the dancers as lessees was permissible under the Tax Code, [the clubs] reliance on an industry practice that did just that was reasonable. So the IRSs action had been unjustified, and it must pay the legal bills.
Marlar, Inc., W.D. Wash., 98-2 USTC ¶50,619




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