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TAX TIP: DON'T ASSUME A STUPID TAX COURT JUDGE

December 15, 2006

I read Tax Court opinions daily, and the thinking and knowledge behind them is up to a pretty high standard. Clearly, being stupid does not get you a seat on the Tax Court. The judges have strong backgrounds. For example, consider Judge Diane Kroupa's C.V.:

B.S.F.S. Georgetown University School of Foreign Service, 1978; J.D. University of South Dakota Law School, 1981. Prior to appointment to the Court, practiced tax law at Faegre & Benson, LLP in Minneapolis, MN. Minnesota Tax Court Judge from 1995 to 2001 and Chief Judge from 1998 to 2001. Attorney-advisor, Legislation and Regulations Division, Office of Chief Counsel and served as attorney-advisor to Judge Joel Gerber, United States Tax Court, 1984-1985. Admitted to practice law in South Dakota (1981), District of Columbia (1985) and Minnesota (1986). Member, American Bar Association (Tax Section), Minnesota State Bar Association (Tax Section), National Association of Women Judges (1995 to present), American Judicature Society (1995 to present). Distinguished Service Award Recipient (2001) Minnesota State Bar Association (Tax Section).

She's clearly no lightweight. So why did taxpayer Kai-Chung C. Lam traipse into her courtroom with a case that had to assume that the judge would be a moron?

Mr. Lam is an entrepreneur Tennessee. On audit, the IRS disallowed lots of expenses deductions because there was no evidence that the expenses were ever incurred.

For example:

Petitioner submitted a few documents that appear to have been drafted by third parties, but the amounts listed were crossed out, and petitioner wrote in different amounts. Petitioner explained that he made these alterations after negotiating a better price for the services, but he did not explain why he, and not the third party, made the alteration.

Aw, come on, Judge! I'm sure you always get bills from, say, the power company, scratch off their number, write in your own number and send the check, and they're just fine with that.

I love this part:

Petitioner presented documents and offered testimony regarding the repair and maintenance expenses claimed as deductions. Petitioner did not introduce a single receipt, though, that showed he paid a repair or maintenance expense for either of his businesses.

Petitioner suggested that some of the individuals and businesses with whom he dealt did not differentiate between receipts and invoices. Petitioner suggested that we therefore treat the invoices he submitted as receipts.

Petitioner testified that he used service providers who did not know how to read or write, so petitioner would occasionally himself prepare the invoice for the work done. Petitioner also presented invoices from a numbered "receipt book" he kept for use by service providers who did not produce their own documentation.

What a helpful guy - he goes out of his way to hire out service work to illiterates, and he even prepares their invoices! Lord knows how the illiterates get their other customers to pay.

Unlike his vendors, Judge Kroupa isn't illiterate - unfortunately for Mr. Lam. His apparent operating assumption - that she would be stupid enough to believe him - failed to pan out, and he owes $65,645 in additional taxes and $13,129 in penalties.

Cite: Lam, T.C. Memo 2006-265.

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