To prove this adage, see Daniel D. and Dorothy Hultquist v. Com’r, 2011 T.C. Mem. 17, 1/24/11. Daniel D. gave money to one Duncan to develop fishing tackle, without any documentation. Daniel D. testified at trial he hoped to recoup the $32,000-plus he gave Duncan out of profits on the sales of the tackle.

Their venture never proved profitable, and Daniel D. alternatively claimed the $32,000 as cost of goods sold or as a business bad debt.

Without adequate records to substantiate the application of the money Daniel D. gave to Duncan (in simple terms, what Duncan spent the money for), and without a promissory note or any written acknowledgment of a debt from Duncan to Daniel D., Tax Court disallowed any deduction on any ground.

The principles enunciated in this case are nothing new, and in fact permeate most of the cases coming before Tax Court. But every so often, one finds a hidden gem in the dross. Daniel D.’s accountant (apparently a Certified Public Accountant, but in what State is not specified) delivered himself of this pronouncement:

“Petitioner showed the trial balance to his accountant, Wesley L. Delaney (Mr. Delaney), who advised petitioner to include the inventory total in cost of goods sold. Mr. Delaney advised petitioner to do this because ‘[Maiden Ventures is] a cash basis taxpayer, and a cash basis taxpayer is not going to have inventory’.” Huh?

Incidentally, Daniel D. was assessed a late-filing penalty.

The old Chinese adage is true: “The worst scrap of paper is better than best human memory.”