Case: 20-60004 Document: 00516013669 Page: 1 Date Filed: 09/14/2021 United States Court of Appeals for the Fifth Circuit United States Court of Appeals Fifth Circuit FILED September 14, 2021 No. 20-60004 Lyle W. Cayce Clerk Ames D. Ray, Petitioner—Appellant, versus Commissioner of Internal Revenue, Respondent—Appellee. Appeal from the United States Tax Court USTC No. 14052-16 Before Dennis, Higginson, and Willett, Circuit Judges. Stephen A. Higginson, Circuit Judge: Appellant Ames D. Ray claimed a deduction for certain legal expenses on his 2014 federal income tax return. The Internal Revenue Service disallowed this deduction and issued a notice of deficiency to Ray. The IRS imposed an accuracy-related penalty in addition to the deficiency amount. Ray filed a petition with the U.S. Tax Court challenging the deficiency determination and the imposition of the accuracy-related penalty. Following a one-day trial, the Tax Court issued a decision upholding in part the IRS’s deficiency determination and imposition of the accuracy-related penalty. Ray timely appealed the Tax Court’s decision. We affirm in part and reverse and remand in part. Case: 20-60004 Document: 00516013669 Page: 2 Date Filed: 09/14/2021 No. 20-60004 I. This case concerns deductions appellant Ames Ray claimed on his 2014 federal income tax return for legal expenses incurred in litigation against his ex-wife, Christina Ray, and her attorneys. This litigation has been ongoing for over twenty years, involves four separate lawsuits, and implicates facts dating back several decades. A. Ames and Christina Ray met while they were undergraduate students at Michigan State University, where both obtained advanced degrees in physics. They married in 1972 and moved to New York City in 1976. Christina developed a career in the finance industry, eventually serving as an officer at multiple financial institutions. She developed mathematical models for commodities trading and authored several books on risk management and options trading. In 1990, she founded a consulting firm to advise finance industry clients. Ames also worked for several financial institutions during the early stages of his career, but was never a commodities trader. In 1979, he developed a computer program that could analyze Securities and Exchange Commission filings, search for company information, and print financial statements, which he named “Firm Decisions.” Ames licensed this software to Citibank and received income from Citibank for the software until 1986. Ames and Christina divorced in 1977, though they continued to live together off and on until 1992, when Ames moved to Florida. During the time that they lived together after their divorce, the couple continued to maintain joint banking and credit-card accounts and own shared assets. The Rays used a ledger system to track their joint and separate expenses, as well as financial transactions between them. Over time, Christina incurred various debts to Ames, which the couple formalized in several written documents. In 1981, Ames and Christina 2 Case: 20-60004 Document: 00516013669 Page: 3 Date Filed: 09/14/2021 No. 20-60004 jointly purchased land in Sagaponack, New York with the intent of building a vacation home on the land. Due to disagreements over construction, in …
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