An inventive San Luis Obispo County, Calif., couple now owes back taxes and penalties after losing a protracted legal fight with federal authorities.
In a case that illuminates a colorful lifestyle while underscoring the importance of keeping good records, a U.S. Tax Court judge largely sided this week with the Internal Revenue Service against the claims of Edmond A. Heinbockel and his wife, Lydia Rose Heinbockel.
“Ed and Lydia Heinbockel,” U.S. Tax Court Judge Mark V. Holmes observed, “are a happy couple possessed by entrepreneurial spirit.”
But the couple, Holmes concluded in the opinion issued late Monday, must also pay more taxes for the years 2005-2007 after failing to demonstrate that their “forays into plane chartering, grape farming and money lending” were actually intended to turn a profit. The question of profit-seeking becomes crucial when tax officials determine what expenses can be written off as business-related.
The precise total amount the couple owes the IRS is not clearly summed up in the 76-page decision. All told, though, the IRS had disputed about $156,000 in deductions for the three years, and the agency wants to assess additional interest and penalties as well.
The judge, for instance, ruled the couple could not deduct the cost of a failed effort to plant a zinfandel vineyard. The judge further disallowed deductions for losses on a private airplane venture, as well as assorted deductions for Lydia’s claimed business expenses that included a spa visit, a limousine wine-tasting tour and trips to place like Santa Fe, N.M., and New York City.
“The absence of contemporaneous logs…and the numerous occasions where these alleged business trips appeared to be draped with personal pleasure, cause us to find that none of the travel and meals and entertainment expenses met the business purpose requirement of (the tax code),” Holme wrote.
The judge gave both parties until August to submit their respective assessments of what’s due.
The Heinbockels’ attorney could not be reached Monday or Tuesday, and an e-mail to the Heinbockels’ company was not responded to.
Ed Heinbockel is president and chief executive officer of Visual Purple, described by Holmes as a “successful training simulation company” that was founded near Yosemite National Park but later moved to San Luis Obispo. The company’s customers have ranged from the Federal Bureau of Investigation and Department of Homeland Security to the Defense Intelligence Agency.
Formerly the chief financial officer of the company once known as Sierra On-Line, famed for games such as the Leisure Suit Larry series, Heinbockel formed Visual Purple to develop 3-D simulation software for training. The privately held company has since branched into other information services as well.
Heinbockel’s wife, Lydia, a former model who was described by Holmes as a “visibly fashionable and energetic woman,” started a personal shopping service called Lydia’s World, also known as Lydia’s Personal Shopping Services. A legal filing described her as “a walking, talking example of how to look and feel good in quality pieces,” which she says is a business necessity as she seeks out an upper-crust clientele.
“It’s hard to divide between the business and me, and me and the business,” Lydia testified at the December 2010 trial in San Francisco, a transcript shows. “I mean, I’m constantly promoting myself, 24-7…I never walk out the door unless I look fantastic, because that’s how I market myself. That’s the way I get my business.”
When the IRS challenged the Heinbockels’ deductions on their 2005-through-2007 tax returns, the couple went to U.S. Tax Court starting in 2009.
In legal filings, the Heinbockels said they made “good faith efforts to fully comply with tax laws and regulations.” The couple further said that an IRS tax compliance officer had “acted in an unreasonable and impractical manner,” and they said they were improperly denied their full appeal rights.
Holmes, though, concluded that in a number of instances the couple lacked the proper records to support a number of Lydia Heinbockel’s business claims. Bigger-ticket differences arose over the business expenses claimed for the failed vineyard operation and Ed Heinbockel’s airplane, which Holmes noted “didn’t come close to generating a profit” but did have “strong personal or recreational elements.”