Tuesday, March 25, 2003
As I have explained before, I am trying to review all of the Tax Court cases without doing research beyond the case itself, based partially on the theory that a court opinion has a duty to cite and explain the authority that logically supports its decision. Well, the decision in ROBERT J. HARTZ & SHARI L. HARTZ, has me utterly confused. In discussing the IRS�s determination that the Hartz� had unreported income in two tax years, Tax Court states, �No party presented reliable evidence concerning the correct amount of wage and business income in 1995 and 1996.� Tax Court then states that Robert testified he relied on 1099s for reporting his income. These forms were not submitted by either party, but the amounts reflected on the forms, for one year at least, were stipulated by the parties. Tax Court then states, �Because petitioners have not introduced any credible evidence regarding the amount of unreported income determined by respondent, petitioners ultimately bear the burden of proof with respect to this issue. Sec. 7491(a)(1);2 Rule 142(a); Ruidoso Racing Association, Inc. v. Commissioner, 476 F.2d 502, 507-508(10th Cir. 1973)�� The conclusion was, �Petitioners have presented no evidence refuting respondent�s determination or
otherwise tending to show it to be arbitrary or erroneous.� The Hartz failed to meet their burden, so they lost. This seems entirely unfair to me to put this burden on the taxpayers, but I was hopeful that maybe this case was decided on old law that has recently been improved. Then I read this footnote:
2 Respondent asserts that the �audit in this case began on April 3, 1998, so the provisions of I.R.C. sec. 7491 do not apply.� Because sec. 7491 does not alter the outcome, however, we need not decide whether its provisions are inapplicable in one or both of these cases.
What the Hell? If sec. 7491 does not alter the outcome, why did Tax Court cite it as the law they were following in making the decision? Maybe Tax Court meant that the Hartz still lose under 7491, so they do not have to decide if actually applies. But then why did they cite both sec. 7491 and a case from 1973? The discussion makes no distinction between old law and new law, so I have no idea which they were applying where. And why exactly does sec. 7491 not shift the burden to the IRS? If I remember other cases correctly, 7491 places a burden of production on taxpayers which must be met before the burden of proof shifts. This is recited by Tax Court, which then claims they presented no evidence. But Tax Court makes it sound like the lack of evidence prevents them from meeting the burden of proof, rather than the burden of production. And didn�t the Hartz provide evidence. The 1099s were not submitted, but shouldn�t a stipulation be enough? And for one year, the IRS determined unreported income by relying on the Hartz business books. Aren�t the business books evidence that should met the burden of production and shift the burden of proof? Maybe the numbers in the books and 1099s add up to support the IRS�s determination, but Tax Court does not say that, and even if they did, that would be evidence that would meet the IRS�s burden of proof if sec. 7491 applies. But Tax Court didn�t say that, they said the Hartz did not meet their burden of proof. Anyway, however I analyze this, Tax Court�s ultimate decision seems correct. Maybe Tax Court realized this and just got sloppy explaining why.
Tax Court disallowed travel deductions because the substantiating documentation was not prepared contemporaneously with the travel and did not document the business purpose.
Most of the legal expenses the Hartz attempted to deduct involved a personal matter, and they could not substantiate the amount of what little legal fees may have been legitimately business related.
Depreciation deductions were disallowed because there was no documentation of when the various items were purchased, what they cost, or what their business purpose was.
The Hartz provided no substantiation supporting the disallowed car and truck, rent expense, interest expense, and contract labor deductions.
Tax Court disallowed a claimed business loss deduction relating to a Winnebago. The purchase contract claimed it was to be used for personal and family purposes, and Tax Court simply did not believe Robert�s testimony that he intended to use it for business.
A late filing penalty was allowed where the IRS met their burden of production and the Hartz did not provide any evidence refuting the claim of late filing. Tax Court also sustained an accuracy related penalty for one of the tax years in question, citing primary a lack of records supporting the Hartz� underpayment.