District Counsel explains Discovery

First Letter: Explains Cohan Criteria

From District Counsel:

To: Philip J.

I received your letter dated Sept 19, 2009 which discussed your estimated expenses on Sept 23, 2009.

While the Cohan case does permit the Tax Court to approximate a deductible amount, the Court may only do so if a taxpayer establishes that he or she is entitled to a deduction, but cannot substantiate the precise amount. Cohan v. Commissioner, 39 F. 2d 540, 543-44 ( 2d Cir. 1930 ). In addition, the taxpayer must also establish a rational basis for making the estimate, and the estimate must have a credible evidentiary basis. See Norgaard v. Commissioner, 939 F. 2d 874, 879 ( 9th Cir. 1991 ); Vanicek v. Commissioner, 85 T.C. 731, 743 ( 1985 ).

A taxpayer is required to keep records sufficient to enable the Commissioner to determine whether the taxpayer is liable for tax. I.R.C. &6001 and Treas. Reg. & 1.6001-1(a). A taxpayer bears the burden of substantiating the amount and purpose of any claimed deduction. Hradesky v. Commissioner, 65 T.C. 87 ( 1975 ), affd. Per curiam 540 F.2d 821 ( 5th Cir. 1976 ). The Court need not accept a taxpayer’s self-serving testimony when the taxpayer fails to present corroborative evidence. Bean v. Commissioner, T.C. Memo. 1990-304 ( citing Tokarski v. Commissioner, 87 T.C. 74, 77 ( 1986 ), affd. Without published opinion 956 F. 2d 1166 ( 9th Cir. 1992).

Certain expenses, such as the use of listed property, require more stringent substantiation. I.R.C. & 274 (d) and 280 F (d) (4) (A). I.R.C. & 274 (d) requires a taxpayer to substantiate an expenditure with adequate records or present sufficient evidence to corroborate his own statements. Temp. Treas. Reg. &1.274-5T ( c ) ( 1 ). Listed property under I.R.C. & 280F ( d ) ( 4 ) ( A ) include automobiles, computers and peripheral equipment, and cellular telephones. The Court is not permitted to approximate the deductible amount for expenses subject to the stringent requirements of I.R.C. & 274(d ).

Please send any documentation you have to substantiate the 116,970.60 of estimated expense you purportedly incurred in 2005 to the letterhead address above.

Yours, District Counsel

2nd letter from District Counsel (Sept 24 To Patriot). Response to informal POD

I received your letter dated Sept 24, 2009, concerning informal discovery.

Three documents are enclosed with this letter: 1. A redacted copy of a Certified Literal Transcript for your 2005 taxable year; 2. A redacted copy of a Certified IRPTRN, Information Return Program Transcript for your 2005 taxable year; and 3. A redacted copy of a Substitute for return ( SFR ) under I.R.C. & 6020 (b) for your 2005 taxable year.

In addition, I have subpoenaed A.W.C. Carriers, Inc. regarding any non-employee compensation paid to you in 2005. I will send you a copy of these documents once I receive them. Any other potential evidence I gather before our possible trial on March 1, 2010, in Columbia, SC will be sent to you in accordance with the Court’s Sept 29, 2009, Pretrial Order.

Yours, District Counsel

3rd Letter from District Counsel (Sept 27 to Patriot). Requirements for Cohan

I received your Sept 27, 2009 response to my Sept 24, 2009, Branerton letter.

In your Sept 27, 2009, letter you said that your records were stolen in the process of moving? Could you please provide me with some more information on this incident? Any of the following would help: a police report; the telephone of the law enforcement agency that carried out the investigation, a receipt or bill from the moving company; the date (s) of the move; where you moved from; where you moved to; and any other related information.

Our records indicate that you have lived at #### since at least January of 1996, and that you have maintained several different P.O. Boxes during that same time. Please provide me with any information to the contrary.

As to your discussion of estimated expenses, please refer to my response to your Sept 19, 2009, letter.

Yours, District Counsel

4th Letter from District Counsel to Patriot (Sept 28). BOP Explanation

I received your Sept 28,2009, letter concerning I.R.C. & 7491.

It is true that I.R.C. & 7491 shifts the burden of proof to respondent, but only if: 1. The petitioner has complied with the substantiation requirements of the Internal Revenue Code; and 3. The petitioner has reasonably cooperated with respondent’s request. I.R.C. & 7491 (a) (2).

At this point, you have not satisfied the requirements of I.R.C. & 7491 (a.) (2) to shift the burden to respondent because you have not substantiated any of the 116,970.60 in estimated expenses you purportedly incurred in 2005, which were mentioned in previous letters that you sent.

In addition. You have repeatedly mentioned that you did not maintain ( or that you no longer have ) the records that you are required to maintain under the Internal Revenue Code. In your Sept 19, 2009, letter, in paragraph 3 and again in paragraph 6, you stated that you did not have adequate books and records.

In your Sept 27, 2009, letter you stated that your records were stolen, thus, you know longer have them. The failure to substantiate any of your expenses combined with your lack of records means that, at this point, you have failed to shift the burden of proof in accordance with I.R.C. & 7491 (a).

If you have any records or documentation, please send them to the letterhead addressed above.

Yours, District Counsel

5th letter from District Counsel (Sept 30). Response to Admissions

I received your letter dated Sept 30, 2009, requesting informal admissions. My response is below.

1. Denies for lack of sufficient knowledge or information.

2. Admits that petitioner had a wife in 2005. Denies the remaining allegations for lack of sufficient knowledge or information.

3. Denies for lack of sufficient knowledge or information.

4. Denies.

5. Admits, that at this point in time respondent does not have any wage statements from petitioner’s employer’s Alleges that respondent does have certified transcripts showing non-employee compensation received by petitioner in 2005. Respondent further alleges that authentic records relating to petitioner are being subpoenaed from AWC Carriers, Inc. for the 2005 taxable year.

6. Denies.

7. Denies for lack of sufficient knowledge or information.

8. Denies for lack of sufficient knowledge or information.

9. Denies for lack of sufficient knowledge or information.

10. Admits that petitioner is entitled to deduct legitimate substantiated business expenses under I.R.C. & 162. Alleges that petitioner has failed to substantiate any of his claimed expenses for 2005 under the requirements of I.R.C. & 6001 and 274 (d), to the extent applicable.

11. Denies.

12. Denies for lack of sufficient knowledge or information.

13. Admits, that at this time, respondent does not have the original source documents from petitioner’s employer’s . Alleges that these documents are being subpoenaed.

14. Denies. Alleges that respondent does have certified transcripts showing income to petitioner for the year 2005 taxable year.

Yours, District Counsel