In Uncategorized on 11/23/2016 at 16:22

The case is a supplement from Judge Cohen in Transupport, Incorporated, 2016 T. C. Memo. 216, filed 11/23/16. And if the names seem familiar, check out my blogpost  ”No Inventory? – No Fraud,” 9/14/15.

Even though Transupport had no inventory, IRS auditors made only slight revisions to Transupport’s creative numerology, until Harold tried to flog his enterprise, showing numbers far better than his tax returns. This prompted a whistleblowing buyer to howl to the Ogden Sunseteers.

Transupport’s COGS numbers get blown up (again), so IRS’s original numbers on that score survive, and the accuracy chop is sustained as well, but there’s still the question of compensation paid to Transupport’s only employees, Harold’s four sons. Was the compensation reasonable?

We get the usual dueling experts, with the usual result.

Judge Cohen has the usual response: “In most cases, as in this one, there is no dispute about the qualifications of the experts.  The problem is created by their willingness to use their résumés and their skills to advocate the position of the party who employs them without regard to objective and relevant facts, which is contrary to their professional obligations.   We conclude that petitioner’s experts disregarded objective and relevant facts and did not reach independent judgments, as is apparent from their stated opinions that petitioner’s reported income and deductions were correct as claimed on the returns filed.  We know from the factual evidence that the returns were consistently inaccurate and that the deductions were excessive.  Thus, the experts’ opinions fail a sanity check.  Respondent’s experts lacked complete information and acknowledged weaknesses.  As a result the parties were most effective in cross examination and exposing flaws in the work of their adversaries, leaving us with little to rely on other than the allocation of the burden of proof.” 2016 T. C. Memo. 216, at pp. 18-19. (Citation omitted).

Transupport’s attempted burden shift fails to convince as to the initial deficiency based upon excessive compensation.

“Petitioner had advance notice of respondent’s positions and conducted extensive depositions.  There was no surprise at trial and no unfairness in respondent’s more fully supported and justified recomputation of petitioner’s deductions for compensation to the Foote sons.  No different evidence on petitioner’s part was required because petitioner always had the burden of proving its deductible compensation, and that burden would not be satisfied by cross-examination of respondent’s expert.  If respondent had not presented any expert on compensation, petitioner would still be required to justify the amounts claimed on the returns, and none of the evidence does that.”2016 T. C. Memo., 216, at p. 31. Judge Cohen buys IRS’ expert as to the amounts shown in the SNOD.

But IRS has the burden as to the increased deficiency on the increase. And IRS’ expert also fails to connect.

The key is that IRS wild-carded in a new expert who didn’t bother to separate father’s compensation from sons’.

IRS’ wild-card “…uses total compensation because of the overlapping duties of petitioner’s officer-employees.  If the Foote sons had explained their duties and disavowed their knowledge and qualifications to the experts as they did during their trial testimony, respondent’s position might be stronger.  On balance, however, the failure to secure information from petitioner’s officers and notably the failure to consider Foote’s [senior’s] compensation separately undermines the reliability of [IRS expert’s] conclusions as to the comparisons between the Foote sons and others in comparable positions. [IRS’ expert’s] result is unpersuasive primarily because respondent has not seriously challenged the compensation paid to Foote.” 2016 T. C. Memo. 216, at pp. 33-34.

The years barred by SOL remain barred, and fraud is off the table, as before.

In short, back where it all started.

Edited to add, 2/21/18: Not quite, but sort of. 1 Cir affirmed Tax Court all the way in Transupport, Inc. v CIR, No. 17-1265, 2/14/18.  Thanks to Al Boudreau who let me know.


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