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Simpson v. Commissioner (T.C. Memo. 2020-100)

On July 7, 2020, the Tax Court issued a Memorandum Opinion in the case of Simpson v. Commissioner (T.C. Memo. 2020-100). The issue before the court in Simpson was whether the petitioners were allowed deductions for unreimbursed partnership expenses (2012-2014) and unreimbursed employee business expenses (2014), which deductions were adjusted in the IRS’s amended answer.

Background

The IRS issued the petitioners a notice of deficiency for tax years 2012, 2013, and 2014. Among other determinations made in that notice, the IRS disallowed the petitioners’ deductions for unreimbursed partnership expenses and unreimbursed employee business expenses. The IRS also disallowed unreimbursed employee business expense deductions for 2012 and 2013, and the some of the unreimbursed partnership expense deductions for 2013 and 2014. The IRS answered the petition, and (for reasons not specified in the opinion) decided to turn the screws on the petitioners even more and file an amended answer raising new matters and increasing the deficiencies.

Burden of Proof

Generally, the IRS’s determinations set forth in a notice of deficiency are presumptively correct. Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Thus, the taxpayers bear the burden of proving otherwise. Id. However, if the IRS gets a bee in their administrative bonnet, and raises a new matter, increases the deficiency, or raises affirmative defenses, the IRS bears the burden of proof as to those newly pleaded issues. Tax Court Rule 142(a)(1).

In Simpson, the new matters raised in the amended answer relate to the petitioners’ unreimbursed partnership expenses for 2012 and unreimbursed employee business expenses for 2014. For those issues and those issues alone, the IRS bear the burden of proof. In a thoughtful aside, Judge Buch notes that burden of proof matters only in the event of an evidentiary tie, which is rare, or a “failure of proof,” which is, as Simpson shows us, ever so much more common.

Because the burden is on the IRS as to petitioners’ 2014 unreimbursed employee business expenses, the IRS must show that the petitioners either are not entitled to deduct the expenses or cannot substantiate the expenses. Phillips v. Commissioner, T.C. Memo. 2013-215, *27-*28. In Storey v. Commissioner, T.C. Memo. 2012-115, the IRS bore the burden of proof on the substantiation issue raised. In Storey, the failed to meet its burden because, while the IRS was able to point to inadequacies in the records provided as substantiation, the taxpayer provided additional information when questioned. Id.

In the present case, when asked for additional substantiation, the petitioners failed to provide any additional documents or information. The Tax Court observed that when a party fails to provide evidence available to the party, the court can, and likely will, draw an adverse inference. See, e.g., Abramson v. Commissioner, T.C. Memo. 1987-276 (citing Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d 513 (10th Cir. 1947)). On the flipside, the IRS failed to meet its burden with regard to meals, entertainment, and miscellaneous expenses. The record is silent as to reimbursement, and Counsel failed to ask the petitioners whether they could produce substantiation.

(T.C. Memo. 2020-100) Simpson v. Commissioner

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