Carol A. Wright et al v. Comm., TCS 2024-9

IRS issued five notices of deficiency: two to Steve Wright’s former wife Carol for tax years 2014 and 2015 when they owned an S corporation (APR) together, and three to Steve and his current wife Tami for tax years 2014, 2015, and 2016. The IRS had disallowed expenses in APR and for Steve and Tami’s Café business. To substantiate the expenses at trial, both wives and Steve submitted thousands of pages of records with even more thousands of photocopied receipts and the like. The court had instructed the petitioners not to do so, but they just didn’t listen.

Even after explaining that the shoebox records approach was not appropriate, the court looked at the records anyway. That’s when the real trouble began. Sorting through the voluminous records, the court found that summary worksheets didn’t reconcile with the tax return and frequently appeared to include fabricated expenses. In a series of purported meal checks, the receipts all showed one “Chicken Caesar Salad” and between six and nine “gins”. The judge aptly named this paragraph of the decision, “Meals and Entertainment – The Nine Martini Lunch.”

Fabricating expense records is not a good idea during an IRS examination, and it is an even worse idea during a Tax Court trial. Citing Brown V. Comm., TCM 1985-269, “Where it becomes apparent that some evidence tendered by the taxpayers is not trustworthy, we must regard the taxpayers’ credibility as so damaged that their uncorroborated testimony is insufficient on any other issue as to which they bear the burden of proof.”

Tax practitioner planning. Unsurprisingly, these taxpayers were not represented by counsel and could not follow directions from the judge about assembling records. Appropriate representation in the earlier examinations may have laid enough footwork to avoid the aches and pains of trial.