The “Pictures Are NOT Worth 1000 Receipts” Case

Petitioner: Philip Jensen


Memo Number: 2010-143


Decision Date: June 28, 2010


Burden of Proof: Taxpayer


Case in a Nutshell:

IRS claims entitlement to a tax deficiency as well as various penalties. Taxpayer seeks to mitigate by compelling the court to allow deductions related to his body shop business.

Discussion in a Nutshell:

The Taxpayer failed to file a tax return in 2005 so IRS prepared a return based on 1099s sent to taxpayer. The Taxpayer implicitly admitted receipt of the 1099 income and did not produce any receipts or reliable substantiation, not even bank statements or utility bills. He did not attempt to explain his failure to maintain records. He presented estimates of what he had spent based on percentages of his income, basing his assertion of entitlement to deductions and photographs of his operation taken in 2009. He claimed a lack of records justifies use of estimates. The Taxpayer “attached a form containing a hodgepodge of frivolous, irrelevant, and spurious arguments.” (I.e. the tax code is too confusing, etc.)

Decision in a Nutshell:

Estimates and speculation are not permissible as evidence of expenditures. The tax court may estimate deductible amounts of expenditures if an exact amount is not known due to a rational reason. The court may only construct estimates but only after the taxpayer has proven that the expenses were incurred. (Photographs of the shop taken several years later don’t quite cut it!) The taxpayer did not offer any reasonable basis for estimates to be constructed such as proof of all: number of vehicles painted, average gallons used to paint a vehicle, paint prices in 2005.

Take Aways:

•Since it is obvious that the taxpayer incurred some costs to operate this business, the tax court noted that the petitioner’s failure to seek competent tax advice caused him to forego the legitimate tax deductions, even significant ones such as the 179 election.

• Failure to retain records of the cost of equipment acquisition precludes the depreciation deduction in all future years for equipment placed in service during the disputed years.