Home > Tax Court > Pourquoi Story of Goo

Pourquoi Story of Goo

I think it’s fair to assume most folks other than tax professionals find U.S. Tax Court opinions plainly boring. Perhaps the same is true for most tax professionals. Sometimes, however, a judge will go extra lengths to add entertaining touches in an opinion that we can all find amusing. Today’s tax court case of Commissioner v. Esrig is a perfect example.

Here’s how the opinion begins:

Steven and Lori Esrig didn’t timely file their tax returns for any year from 1998 through 2003. For some years they were so late that the Commissioner prepared substitute returns for them, and for all those years he sent them notices of deficiency. But the Esrigs claim the Commissioner got it all wrong, that they don’t owe any taxes, additions to tax, or penalties because they were involved in a number of businesses for which, in total, they have more losses and deductions than income. The case is all about substantiation, and we therefore must decide whether the Esrigs have substantiated their claimed losses and deductions, and then figure out how much they owe in taxes, additions to tax, and penalties, if any.

The introduction’s tone makes it easy to see where this opinion is going. Well, not entirely.

In 2002, Steven Esrig started a company named Stelor Productions, Inc. At trial, he explained where the idea for this business came from:

Apparently, [Steven’s] then-five-year-old child asked to look at the Power Rangers website. Steven logged on but inadvertently mistyped a character in the web address. Instead of getting the Power Rangers website, up popped a seriously pornographic one. This, he told us, was the reason he started Stelor, a company he claims invented a technology that protects children from predators and pornography and “shuts down identity theft.”

Didn’t see that coming. Judge Holmes labeled this testimony as “nothing more than a pourquoi story.” Thanks judge, I learned a new phrase today. A pourquoi story is a fictional narrative that explains why something is the way it is. I wonder, what was the mistype? Shower Rangers?

There are more goodies. Mr. Esrig claimed the company failed because it endured several years of litigation after buying the domain name “googles.com.” In 1997, the prior owner of “googles.com,” Steven A. Silvers, a convicted narcotics trafficker and money launderer, published a children’s book about four-eyed creatures called “Googles” who live on planet Goo. After purchasing the rights to sell Googles products from Silvers in 2002, Esrig sued Google, among other companies, for trademark infringement. If you want a good laugh, check out this 2004 story for more background.

I can’t make this stuff up.

Back to the present case. Esrig claimed large net operating losses and losses from Stelor and other business activity during the years in question. The only proof he offered to the court was his testimony. Well, he actually offered the filed tax returns and IRS worksheets to substantiate the NOLs. No, a tax return is not substantiation. And the IRS worksheets were used to help the taxpayers compute their NOLs. Mr. Esrig failed to understand that he must prove the basis for the losses.

After agreeing with the Commissioner’s tax deficiencies, the court evaluated the proposed penalties. A taxpayer may dispute some types of penalties based upon reasonable cause. Mr. Esrig attributed the failure to timely file his tax returns on his preparer:

[Mr. Esrig] said that he’d asked his accountant to request extensions for all the years at issue, but his accountant missed all the deadlines because she had to serve a very long prison sentence for murdering her husband, and the person in her office who took over their account made a slew of mistakes.

Mr. Esrig offered no evidence of the alleged murder.

In the end, the court found for the IRS on each and every issue in dispute. For the years in question, the Esrigs now owe the IRS $705,911 in tax and $234,297 in penalties. Plus interest. These liabilities, my friends, is no pourquoi story.

Case: Commissioner v. Esrig, T.C. Memo. 2012-38 (Feb. 7, 2012).

Categories: Tax Court
  1. Christopher
    February 8, 2012 at 2:46 pm

    Amazing how many taxpayers don’t realize that they have to prove that they actually lost what they claim in order to claim the NOL.

    And 5-to-1 the website mistake was “Power Bangers”.

    • February 8, 2012 at 2:58 pm

      A-ha! I’d say “Power Bangers” is closer to 2-to-1. Your mind appears to be more imaginative than mine in that context… 😉

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s