Attorney-at-Law

TRIAL BY AMBUSH

In Uncategorized on 10/31/2019 at 17:38

But the Bushwhacker Gets Whacked

Moacir Santos, 2019 T. C. Memo. 148, filed 10/31/19, wants to claim he was prejudiced when IRS, at the trial, asserted that instead of unreported business income, he had constructive dividends from his wholly-owned C Corp.

Mo never bothered with tax returns until eighteen months after his petition, and then handed in unsigned ones, that included Sched Cs. Then, at the start of trial, Mo claimed all the income went to his C Corp. IRS said OK, so you got constructive dividends. And as we concede this is new matter, we have the burden of proof. And we also have your bank records.

Judge David Gustafson has this one.

“The Commissioner initially determined that Mr. Santos’s deficiency arose from unreported Schedule C income; and Mr. Santos’s petition appeared to claim that he was entitled to additional deductions.  However, at trial Mr. Santos moved to amend his petition (and the Commissioner did not oppose) to contend that the unreported amounts were gross receipts of [C Corp] and were therefore taxable as [C Corp]’s income, not his.  The Commissioner conceded the point, but this significant change prompted him to proceed under a new theory–i.e., that Mr. Santos had received constructive dividends from [C Corp].  Even though Mr. Santos’s asserted tax liability was smaller under this new theory than the amount stated in the SNOD, the Commissioner concedes that his constructive dividends argument constitutes ‘new matter’ since it required Mr. Santos to present different evidence.” 2019 T. C. Memo. 148, at p. 11 (Citation omitted).

Needless to say, IRS lost nothing by its concession. Mo’s proof was, shall we say, dubious.

“The Commissioner’s constructive dividend argument was tried by the implied consent of the parties.  See Rule 41(b)(1).  However, on brief, Mr. Santos argues that he will be deprived of ‘due process if * * * [the Commissioner] is allowed to proceed on a new theory first presented at the hearing’.  We interpret Mr. Santos’s argument to mean that he alleges that he was prejudiced because he was unfairly surprised by the Commissioner’s constructive dividend argument.  We disagree.  In the first place, he explicitly consented to the Commissioner’s raising that contention.  More important, Mr. Santos was the party who moved, on the day of trial, to amend his pleading in a manner that required the Commissioner to revise his position.  Mr. Santos was neither surprised nor prejudiced by the Commissioner’s constructive dividend argument.  Consequently, the Commissioner is permitted to advance his contention of constructive dividends; but as to that contention he bears the burden of proof.  He successfully sustained that burden….” 2019 T. C. Memo. 148, at p. 12.

Mo’s proof sustains IRS’ burden. I include only a couple examples (hi, Judge Holmes).

“First, the total value of the receipts Mr. Santos provided is $107,476, not the $79,928 he alleges constituted business expenses.  He does not specify which receipts compose the $79,928 of supposed business expenses, and he does not explain how he has a greater amount of receipts that are among his supposed business expenses but do not constitute business expenses.  It appears that he fabricated the receipts before he settled on his final story and did not notice the discrepancy.

“Second, receipts that are ostensibly from different vendors appear to be from the same receipt book.  He did not explain this fact.

“Third, the chronology of the dates written on the receipts does not follow the sequential order of the preprinted receipt numbers.  For example, a receipt numbered 238777 was dated July 2, 2010, for ‘New Fence our Richmond yard labor’, but the subsequent receipt, numbered 238778, was dated December 28, 2010 (more than 6 months later), for a $7,200 payment on an ‘Excavator CAT 308’.  And the next receipt, numbered 238779, jumps back 10 months and is dated February 28, 2010, allegedly for a payment on the same machinery.” 2019 T. C. Memo. 148, at pp. 15-16.

There’s more, but I’ll spare you.

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