Sham v. Commissioner
T.C. Memo. 2020-119

On August 12, 2020, the Tax Court issued a Memorandum Opinion in the case of Sham v. Commissioner (T.C. Memo. 2020-119). The primary issues before the court in Sham v. Commissioner were whether the petitioner had (or could) substantiate significant itemized deductions, business deductions, and other “miscellaneous” deductions, and (2) whether the petitioner had failed to report (or maintain records of) her gross receipts.

Introductory Note to Sham v. Commissioner

My dad ran political campaigns until I was about twelve, and I remember one distinctly.  A councilman whose campaign he ran the year prior was supporting a judge, who, by the councilman’s estimation needed help retaining his seat on the bench.  The judge’s opponent’s last name was Crook.  The ballot practically filled itself in, and the incumbent went on to serve for a number of years hence.

I tell that story to bring attention to the fact that the petitioner in the present case also has an unfortunately telling last name – Ms. Sham.  I will say that I entered the case a bit prejudiced against the petitioner, but I attempted to keep an open mind until Judge Gustafson, who I consider one of the more dry, somber of the Tax Court judges, began throwing shade at Ms. Sham.  Then, dear reader, all bets were off, and I knew I was in for a wild ride (by Judge Gustafson’s standards).

Background to Sham v. Commissioner

Ms. Sham has two master’s degrees.  That is the first sentence of the findings of fact, and the last nice thing that Judge Gustafson has to say about Ms. Sham. Ms. Sham had a “dispute” with her employer (an investment firm in Manhattan) that “precipitated a serious illness.”  She had surgery in 2009, sued her employer (for what, we do not discover), and received a settlement the terms of which “required her former employer to compensate her ‘like an executive.’”  It is not exactly clear what the Tax Court means by this, but, given the timbre of the remainder of the opinion, it does not reflect well on Ms. Sham.

Ms. Sham, “having significant experience with the health care industry,” on account of her precipitated serious illness and all, became a business “consultant” with “an anesthesiologist with whom she had a 15-year personal relationship.”  Wink. Wink. The opinion goes on to describe the financial “arrangements” between the doctor and Ms. Sham, which are as intertwined as I imagine they were during this time.

The Tax Court notes that although she was supposed to be compensated from a percentage of business income she generated (zero), “it does not appear that she was ever paid on that basis or on any other coherent basis.”  That, for those who are keeping score at home, was a Gustafson burn.

Although engaged to assist the negotiation contracts, the Tax Court noted that no business ever materialized – nor could Ms. Sham point to any prospects that she even pursued.  Ms. Sham’s job description (from the mouth of the Tax Court) “included time spent speaking with specialists, travelling to meetings, chit-chatting, and reading.”  She performed such exhaustive work until the good doctor cut her off in 2015.

Despite not actually “working,” Ms. Sham was not shy about claiming business related deductions, even when such expenses were not for a “business purpose” or could be “substantiated” in the slightest.  For instance, Ms. Sham claimed nearly $10,000 in business car and truck expenses in 2011 alone.

It does not appear that Ms. Sham actually owned a vehicle, and as such, the car and truck expenses were actually the good doctor’s expenses.  The Tax Court was also less than impressed by Ms. Sham’s deduction of her trips to India, Amsterdam, and Paris. Neither did the court allow the deduction for $450 of edible aromatic oils.  Draw your own conclusions as to that one.

The Opinion in Sham v. Commissioner

The Tax Court goes through the usual motions of determining burden of proof, but in the end casts aside any semblance of the “usual” noting that the rules regarding burden of proof apply if all things are equal.  In this case, the burden rested squarely on Ms. Sham, because the matters at issue were not in “equipoise.”

In 2010, Ms. Sham claimed a deduction for New York state income taxes.  In 2014, she received a refund of such taxes, but failed to include this on her return.  She posits two theories: first, she did report it on the return, just on the wrong line; and second, she disputes whether she in fact “received” the refund that the state reported it issued to her. Although Ms. Sham “argued that the IRS did not prove that she received the refund,” the Tax Court has its doubts. “In light of her first argument (that she reported the refund) and the evidence before us, we doubt the credibility” of the “non-receipt” assertion.

Ultimately, the Sham case turns on substantiation.  Ms. Sham had very little.  The Tax Court allowed most of her medical expense deductions, concluding that she was indeed very “ill” during this time, but it drew the line in the sand as to charitable, business, and other clearly personal items that Ms. Sham claimed as deductible.

The take-away is not to judge a book by its cover, but when it looks like a sham, reports tax like a sham, and is in point of fact a Sham, the cover matches the contents as the Tax Court so eloquently found.

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