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THINGS NOT TO DO ON AN IRS FORM 1040

The background: In 1989, LJR (a person and minority stockholder) received a check for $50,000 from a corporation owned by her parents. The memo portion of the check said "$10,000 gift $40,000 loan." That same day, LJR signed a promissory note to the corporation for $50,000. The note stated, "Unless sooner terminated …upon the death of both [parents], this note shall be cancelled." In 1993 and 1994, the parents reorganized this corporation into three new corporations. At the end of 1994, none of the corporations listed the promissory note as an asset.

In 1995, when it was time to file her 1994 Form 1040, the words "penalties" and "perjury" were crossed out above her signature. (Hence, the name of this article.) The 1040 reflected no tax payments or income for the year. The IRS examined her return, included the $50,000 in her income as discharge of indebtedness income, and assessed penalties for failure to make estimated payments.

Although LJR tried to explain away the disappearance of the loan—"...[But it was actually gifted to me at the rate of $10,000 per year over the five years…], the Tax Court agreed with the IRS and said that there was $50,000 of income realized by this transaction."

Finally, since the words "penalties" and "perjury" were crossed out, the IRS determined that LJR's 1040 was not a valid return. The tax court concluded that there was no statutory exemption which prevented LJR from being liable for penalties for failure to pay estimated taxes.

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