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of damages for legal malpractice and was frivolous, and the court had repeat- itemized deductions on Schedule
were, therefore, taxable. In addition, the edly informed the taxpayer that it was, A to the extent that the expenses
income to be included was to be grossed the Tax Court concluded that a Sec. were substantiated.
up by the legal fee that her malpractice 6673 frivolous position penalty was ap- Notable on the substantiation issue
attorney was paid, and such legal fee was propriate. However, because the taxpayer was that the taxpayer used a phone app
to be deducted on Schedule A, Itemized testified that she was unemployed and for tracking mileage that allowed him
Deductions, not netted against the settle- the Sec. 6673 penalty would cause her to generate a mileage log that included:
ment proceeds received. hardship, the Tax Court imposed a pen- (1) the date; (2) the time the travel
Wages — frivolous claims sanc- alty of only $250. was initiated; (3) a description of the
tions: In Muhammad,13 the Tax Court activity, such as delivering flyers; (4) a
upheld the IRS’s determination that the Secs. 67 and 212: 2% floor purpose, which was listed as a business;
petitioner incorrectly and frivolously ex- on miscellaneous itemized (5) “from,” which was always home; (6)
cluded her wages from her Form 1040. deductions “to,” which was a generic description of
During 2016, the petitioner was em- In Monroe,14 the court dealt with an the locations where he placed the flyers;
ployed by a university and earned wages unusual situation where the taxpayer, (7) a beginning odometer reading; (8)
in the amount of $48,535. In addition to who worked in car sales, received W-2 an ending odometer reading; and (9) a
her wages, she had a federal income tax commissions from his employer for the mileage calculation. The court accepted
of $1,770, Social Security tax of $3,009, sale of automobiles and additionally the reports from the app as contempo-
and Medicare tax of $703. The wages received incentive payments from the car raneous mileage logs.
and all withholdings were reported on manufacturer. The manufacturer issued a
Form W-2, Wage and Tax Statement. Form 1099-MISC, Miscellaneous Income, Sec. 85: Unemployment
The petitioner filed a Form for the incentive payments. The taxpayer compensation
1040-EZ, Income Tax Return for Single reported the 2014 and 2015 incentive Unemployment benefits —
and Joint Filers With No Dependents, for payments on Schedule C, Profit or Loss special rule for 2020: In 2021, the
the 2016 tax year, at which point she From Business, and deducted related ex- IRS sent millions of refunds to identi-
did not include the Form W-2 with her penses incurred related to marketing to fied taxpayers who had paid taxes on
return and instead filed a Form 4852, increase his car sales. unemployment compensation benefits
Substitute for Form W-2, Wage and Tax The IRS contended that the incen- that, under ARPA, were excluded from
Statement, reporting $0 wages and all tive payments were not self-employment income. The situation arose because, by
the listed withholding, ultimately result- income and that any related expenses the time ARPA was enacted in March
ing in a refund of all withholding, less were miscellaneous itemized expenses 2021, some taxpayers had already
the $2 tax liability she reported on her deductible on Schedule A. The court filed 2020 tax returns including the
tax return. agreed with the Service, based upon unemployment benefits, or else did
The petitioner received a deficiency Groetzinger,15 that not every income- so afterward.
notice in which the IRS adjusted her in- producing or profit-making endeavor Under ARPA, taxpayers who
come to include all of her wage income, constitutes a trade or business. Here, earned less than $150,000 in MAGI
resulting in a tax deficiency, and imposed the incentive payments were not trade were permitted to exclude from 2020
an accuracy-related penalty. The taxpayer or business income but rather were income unemployment compensation
challenged the IRS’s determinations in reportable as “other income” not subject up to $20,400 (for married taxpayers
Tax Court arguing that the income she to self-employment tax, since the IRS filing jointly) and $10,200 for all other
received was not categorized or taxed as stipulated that the income was not self- taxpayers. In a July 2021 news release,16
“wages” since she did not engage in the employment income. the IRS specified that while the re-
“exercise of Federal privileges.” Since the income was not Schedule funds are automatic, there are several
Noting that this was a timeworn tax C income, the expenses incurred were scenarios where taxpayers might need
protester argument relying on a misread- unreimbursed employment-related ex- to file amended returns because they
ing of Sec. 3401(c), which no court had penses and/or expenses incurred in the would now be eligible for deductions or
ever accepted, the court upheld the IRS’s production or collection of income and credits that were not claimed on their
determinations. Because the argument thus were deductible as miscellaneous original return.

13. Muhammad, T.C. Memo. 2021-77. 15. Groetzinger, 480 U.S. 23, 35 (1987).
14. Monroe, T.C. Summ. 2021-24. 16. IR-2021-159 (July 28, 2021).

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