Put the Proof on Paper


A pair of recent Tax Court memos emphasized the longstanding rule of Welch v. Helvering, 290 U.S. 111 (1933), that taxpayers have the burden of proof when challenging an IRS determination. If the IRS audits a return, it is entitled to not take the taxpayer’s word on expenses, deductions and business activities. It needs to see the supporting documents.

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.

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With all the recent tax law changes, this year it’s more important than ever to make sure your clients’ tax situations are squared away before year end. This report provides necessary guidance to ensure 2019 starts without a hitch.

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