In Uncategorized on 07/19/2012 at 12:14

 And You Can Get a Bigger Deduction

That’s the story of David Brian Smith, T.C. Sum. Op. 2012-71, filed 7/18/12, “just sayin’”.

Dave invented an electric back-washer that attached by suction to shower stall walls, for the benefit of  “only the lonely” who had no one to wash their backs for them. These unfortunates were at risk of dislocating shoulders, etc., in the pursuit of cleanliness. Dave diligently pursued his invention, working in his friend’s workshop and driving his own truck only on business. But Dave was stymied twice by the weight of the necessary electric motor, which made his device more useful for scrubbing ankles as it crashed to the shower stall floor.

Finally, like Dustin Hoffman, in the classic “The Graduate”, he found the magic word–“Plastics”. He hired an expert and paid his expenses to check out plastic injection moldings for a lightweight version of his idea.

Dave was diligent and active and tried hard. Finally, he discovered that, while an all-plastic version would do the job, he hadn’t the capital to bring his dream to fruition, and so the Great Unwashed must remain so–at least as to their backs.

IRS nails Dave for a couple of non-reportings, not at issue here, that result in $2700 in additional tax. IRS doesn’t question Dave’s $5600 Schedule C manufacturing loss and neither does Tax Court.

But post-petition (Tax Court petition, that is), Dave files a 1040X claiming additional Schedule C manufacturing deductions, and proffers documents to substantiate same. IRS tells Dave to go scrub his back, they won’t wash, and they’re not buying his documents.

But Judge Gerber decides Dave’s documents will wash. “Respondent (IRS) did not question whether petitioner (Dave) was engaged in a business activity or whether he was entitled to a loss. We therefore limit our inquiry to whether petitioner has shown entitlement to deduct amounts in excess of those he originally reported. After reviewing petitioner’s documentary evidence and testimony we have concluded that petitioner is entitled to deduct amounts in excess of those originally claimed. At trial petitioner provided documentation and testimony that supported amounts in excess of the amounts respondent permitted. The documents presented in Court were likely the same as or similar to those presented during the administrative process. The difference is that petitioner was able to provide documentation for expenses which, in the aggregate, exceeded the amounts respondent allowed.” T.C. Sum. Op. 2012-71, at pp. 5-6. (Footnote omitted).

Dave doesn’t get the Section 179 deduction he claims, and his cellphone documentation fails the Section 274 test. So he only gets another $2900 of deductions, rather than the $7900 he was claiming.

But he did get something, so it’s off to a Rule 155 powwow for Dave.

Takeaway–Even if you can’t substantiate at audit, keep looking for paper. It might turn up in the wash.

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