2025 TC Memo 80
Tax Ct.2025Background
- Adrienne Mennemeyer, a former financial advisor at Edward Jones and later PNC Investments, was terminated from PNC in 2013 and subsequently claimed she had difficulty finding new employment due to defamatory statements made by PNC.
- She initiated FINRA arbitration against PNC in 2015 alleging defamation, wrongful termination, and related claims but did not assert claims based on physical injury or sickness.
- The arbitration resulted in an award of compensatory and punitive damages to Mennemeyer, which was later settled for $1,510,000 in 2018, with most funds paid directly to her and the remainder to her attorneys.
- Mennemeyer subsequently operated Olive Tree Enterprises LLC, an antiques business, and claimed substantial deductions and losses associated with this business on her 2018 tax return.
- The IRS issued a Notice of Deficiency in 2023, finding underreported income and improperly claimed business expenses, and assessed an addition to tax for late filing.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Limitations Period | Assessment period expired before NOD issued | Valid extension signed, NOD issued timely | For Defendant |
| Taxability of Settlement | Settlement excludable under §104(a)(2) as relating to physical sickness | No evidence settlement was for physical injuries; was for economic harm and defamation | For Defendant |
| Business Expense Deductions (COGS, Vehicle, Car/Truck) | Deductions are valid; some records lost or cash purchases not tracked; requests Cohan rule estimate | No adequate substantiation for many expenses; strict substantiation for vehicles not met | For Defendant (except stipulated items) |
| Addition to Tax for Failure to Timely File | Extension to file was mailed but not acknowledged by IRS; relied on accountant | No proof extension filed; no IRS record; burden on taxpayer | For Defendant |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (deductions presumed correct; taxpayer bears burden of proof)
- United States v. Burke, 504 U.S. 229 (nature of underlying claim controls for §104 exclusion)
- Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (settlement proceeds are generally taxable unless a statutory exclusion applies)
- Commissioner v. Banks, 543 U.S. 426 (attorney’s fees included in plaintiff’s gross income in taxable settlements)
- INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (taxpayer must substantiate entitlement to deductions)
- Cohan v. Commissioner, 39 F.2d 540 (allows estimate of deductions where some evidence exists, but not for expenses subject to strict substantiation)