The 'Don't Tell Me, Show Me' Case

http://www.ustaxcourt.gov/InOpHistoric/MistlebauerMemo.TCM.WPD.pdf

This case illustrates how important it is for business owners to:

A) Have a separate business/farm bank account

B) Make sure all business income and expenses run through this account

C) Reconcile deposits in this bank account with the gross income reported on the farm or business schedule

For partnerships and corps this process is a requirement to avoid negligence. It is an important practice even if you are a sole proprietor or single-member LLC.

The Court points out that: "A bank deposit is prima facie evidence of income and respondent (IRS is the respondent in tax court) need not prove a likely source of that income."

Deposits may exceed income for many reasons, including:

1. Line of credit draws

2. Credit card advances

3. Personal cash infusions

4. Transfers between bank accts

5. Redeposits of returned items

6. Repayments of loans/advances to others

It is the taxpayers responsibility to prove that any deposit is not income. It is best to gather this proof annually before memories fade. In this case the taxpayer told the court why his deposits were higher but provided absolutely no evidence to back up his verbal testimony.

The court's response: "We found his testimony about the deposits into petitioner’s bank accounts that remain at issue to be general, conclusory, uncorroborated, and self-serving. We are not required to, and we shall not, rely on that testimony. Petitioner (taxpayer is the petitioner in tax court) has failed to carry his burden."