Taxable Talk

When the first lines of a Tax Court decision read,

Tax records are the ancient Egyptians of the modern age–plagued not by boils, frogs, flies, and lice but by fire, flood, mold, and theft. The cursed tax records in this case belonged to Raleigh Cox, who owned a business that fixed used cars and then resold them.

You know you must peruse the entire case. And, indeed, it’s a great decision well worth reading. Mr. Cox operated a business, but his records were stolen by an ex-employee. His accountant managed to mangle his cost of goods sold three times. Then there was the issue of cash payments made to his largest supplier (Concord) (by writing checks out to himself or his wife and then using the cash to pay his supplier). As the Court noted, “It’s easy to see why the Commissioner questioned Cox’s claim that he routinely made cash purchases….”

Normally the absence of documentation dooms a case. Here, however, Mr. Cox was able to (at trial) credibly explain that a former prisoner he hired likely stole the records. Adding to the problems, his accountant died in the middle of the audit by the IRS.

But Mr. Cox was lucky. The Court stated,

“And what written evidence exists supports Cox’s story. He had kept the general ledger for Washington Car upstairs at his shop, and [his new accountant] and he got copies from the bank of the statements that had been stolen. Our close side-by-side scrutiny of those statements and the general ledger shows that the ledger reasonably matches the statements for those purchases Cox made from Concord by check…Cox also insisted the owners of Concord give him receipts, and he kept them too–fortunately not stuffing them into the missing duffel bag. Those receipts also match–not perfectly, but in more than enough instances for us to believe that the ledger and remaining records are legitimate.”

There’s much more in this decision about an unfortunate taxpayer. A warning, though, for those who dispute the need for documentation: If you have all the documentation, and can prove the numbers on your tax return, you’re very unlikely to have to go to Tax Court (or lose in an audit situation).

Case: Cox v. Commissioner, T.C. Memo 2005-288

This entry was posted on Thursday, December 15th, 2005 at 9:09 pm and is filed under Tax Court. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.