Federal Income Tax 2 – Court Case File

Facts
The Cavaretta was a tax court case that took place between Jeffrey A. and Kevin M.
Murphy. Jeffrey A. was the individual who was representing the prosecutor, while Kevin M.
Murphy was the respondent to the case. Peter Cavaretta was the owner of a dental clinic where
his wife took care of all the books of accounts. The dental clinic provided services to several
insurance companies such as the Group of Health Inc (GHI). The dental clinic treated the
patients for the Group of Health Inc. at the rates that were in agreement. Cavaretta would bill
GHI and later send a check (“United States Tax Court,” 2010). If, for instance, Cavaretta
overcharged GHI, the agreed-upon contract required Cavaretta to make payments of the
difference. What GHI would do is to deduct the excess amount from reimbursement checks sent
by Cavaretta in the future. In the year 1995, Cavaretta started to bill GHI for planning and scaling.
However, Cavaretta did not carry out such a practice. Once GHI realized the false billing, they
started to ask for repayments. GHI sent a letter to Cavaretta demanding for a total of $1.1
million. Later they sent another letter to Karen, where they increased the demand to $1.6 million.
However, GHI backed off for its inflated estimates and come into an agreement that
Karen was supposed to pay a total of $544,216 as the amount for the false claims. Karen pleaded
guilty and was sentenced to a jail term of 18 months and two years parole (“United States Tax
Court,” 2010). Also, in the sentencing letter, the judge asked Karen to pay $600,000 to GHI, and
the first payment of $230,000 was to be paid through the lawyer of Karen while the remaining
amount would go straight to GHI. Later in the year, Karen’s lawyer sent a check of $230,000 to
GHI and also stated in the letter that Cavaretta had made payments of $165,833 and $55,322
consecutively (“United States Tax Court,” 2010). Peter Cavaretta treated the amount as business
expenses of schedule C. The deductions resulted in a net loss, which was carried back for three
years. Cavaretta received tentative refunds, and the commissioner gave a different perception
after auditing Cavaretta returns as they received a notice of deficiency for all the three financial
years. The critical concern is whether the payments made by Cavaretta are legally deductible as
loss carrybacks. If not, the question is whether the deficiencies came to form their disallowances
and if they should be in subjection to accuracy penalties.
Issues and Laws and Hand
From the case, the defendant was being accused of making charges for services that were
not in offer. He later paid the company, as was instructed by the judge. The amount paid was
amounting to the costs of the charges. Also, for the wife to be sentenced to an 18 months jail
term, she was tried in court as was found guilty of health care fraud. After the 18 months, she
was to serve another two years as parole. Another issue arose when Peter Cavaretta and his wife,
Karen Cavaretta, has different operations, but all were in connection to the business. Also, the
court realized that Peter Cavaretta and Karen Cavaretta had made the extra charges to the GHI
before they notified them of the additional costs. The court then came into the realization that
Stephen had taken part in the criminal defrauding of Raytheon and was to make a payment of $1
million to serve as restitution. More so, the court clarified that the compensation expenses that
Peter Cavaretta made to GHI could not be treated as expenses for the business as it was in the
case of Stephen (“United States Tax Court,” 2010). Based on the court’s judgment, Stephen’s
case was under the consideration of being a criminal fraud, which was not in connection with
any of the companies. Also, the case was missing a taxpayer who would be referred to as the

FEDERAL INCOME TAX 2 – COURT CASE FILE 3
wrongdoer. Therefore, the fact of Stephen applied to the case of Cavaretta. The commissioner
gave the ruling since some of the restitutions are not deductible. The judge gave out his verdict
stipulating that the decision made was not after pushing the Cavaretta to make the payment but to
ensure that the GHI company is whole again.
Conclusion
From the case, it can be concluded that the payments made to GHI by Cavaretta are
noncriminal and should be treated as compensatory restitution. The judge made the confirmation
that such fees cannot be classified as business payments since there were the expenses incurred
in committing fraud. Also, the business of Cavaretta was not a fraud. Instead, it was a dentistry
practice clinic. The Cavaretta, on the other hand, presented the argument that the payments that
took place towards Dr. Cavaretta should be treated as ordinary, and it was mandatory for him as
a doctor. The court agreed with Cavaretta doings to be correct in allowing such payments if it
contributed to the growth of the business or if the institution required the money. Deductibility is
different in various scenarios depending on the relationship between the debt and the
organization that is demanding the deduction (Graham and Kim, 2011). Hence, a business
venture will be legally legible in claiming a deduction if there is a valid reason for the
repayment. The judge only required Cavaretta to follow the law and came into agreement that
they had initially negotiated with GHI.
Analysis
Since Karen Cavaretta was the only individual who was to make the repayments, she
would not have been subjected to deductibility. The letters that came to from GHI demanded
Peter and Karen Cavaretta to make repayments of the amount with immediate effect. GHI
demanded the reimbursement so that they can be in a position to settle all the civil claims. One of
the civil claims was that the clients had lodged against Peter Cavaretta and Karen Cavaretta.
Peter Cavaretta provided the claim that when he heard about the restitution, he was of the idea
that it was the amount that the customers had overpaid him. The judge thus gave a ruling that is
in favor of Karen Cavaretta. The support was because she took the responsibility of filling the
returns with assistance from the commissioner instead of filling the returns on an individual basis
(Graham and Kim, 2011). The interpretation of the decision is that a spouse is in a position to
take a deduction present in a joint return even if the other spouse is not in a place to make the
deductions. The commissioner also stipulates that the family of Cavaretta is in a position to
receive a second deduction if the decision given by the judge gave room for a carryback.

FEDERAL INCOME TAX 2 – COURT CASE FILE 4

References

Graham, J. & Kim, H. (2011). The Effects of the Length of the Tax-Loss Carryback Period on
Tax Receipts and Corporate Marginal Tax Rates. National Tax Journal, 62(3): 413-427.
United States Tax Court. (2010). CAVARETTA V. COMMISSIONER | T.C. Memo. 2010-4 |
20100105961 | Leagle.Com. [online] Leagle. Retrieved from
https://www.leagle.com/decision/intco20100105961