In Hon Pui Yip v. Commissioner, TC Memo 2007-139, the court upheld the disallowance of $276,362 of claimed Schedule C expenses. The court found the taxpayer’s testimony about the expenses “sincere” but rejected the claim because the taxpayer did not produce any books or records documenting the charges. The taxpayer’s bare testimony was not the “credible evidence” necessary to shift the burden of proof to the IRS under IRC § 7491(a)(1).
The second case, Calpo Hom & Dong Architects Inc. v. Commissioner, TC Memo 2007-140, upheld a determination that the taxpayer was a qualified personal services corporation under section 448(d)(2) and subject to the flat 35% tax rate of section 11(b)(2). The court applied the principle of the Welch case and found the architect-owner’s testimony, combined with spotty documentary evidence, insufficient to meet the burden of proof that less than 95% of the corporation’s activities were related to architectural services.