Tax News

CCH (cch.taxgroup.com) reports:

An individual who conducted an automobile body repair shop business through his wholly owned S corporation received and failed to report taxable income in the amounts determined by the IRS. Although checks received from insurance customers were deposited in a business account and reported as taxable income, checks from other sources were generally cashed and the proceeds dispensed to the taxpayer and family members for personal use.
The taxpayer's contention that the proceeds from the cashed checks were kept as a large petty cash fund, which was embezzled by the company bookkeeper, was implausible. Although the bookkeeper had embezzled company funds, a previous investigation by authorities and the taxpayer's accountant concluded that the embezzlement was accomplished by writing and cashing unauthorized company checks and making unauthorized contributions to a 401(k)
plan. Furthermore, the taxpayer had previously denied the existence of a petty cash fund.
Since the court found that the bookkeeper did not embezzle additional funds from a petty cash fund, the company was not entitled to an embezzlement loss deduction in excess of the amount already claimed.
The court also disallowed numerous deductions claimed as business expenses of the body repair shop and of a taxpayer's second wholly-owned S corporation that allegedly conducted a race car business. These deductions were personal expenses of the taxpayer and his family or were unsubstantiated. They included the down payment and closing costs for the purchase of 80 acres of land, as well as costs related to improvements on the tract and the construction of personal residences built by the taxpayer for himself and his two sons. Additional personal expenses deducted as business expenses included dry cleaning bills, lease payments for personal vehicles, insurance premiums on a personal boat and Winnebago motor home, utilities and taxes for a lake-front vacation home, and several family vacations.
Expenses related to race cars owned by the taxpayer were also disallowed in the absence of any evidence that the taxpayer actually used the cars in any racing activities.
Finally, a fraud penalty was imposed. The taxpayers' pattern of cashing checks from noninsurance customers and failing to deposit the proceeds was part of a deliberate scheme to report only easily traceable income. Thus, the evidence clearly established the taxpayers' fraudulent intent.
L.F. Haney, Sr., TC Memo. 2007-238, Dec. 57,060(M)
Other References:
Code Sec. 61
CCH Reference - 2007FED ¶5600.55
Code Sec. 165
CCH Reference - 2007FED ¶10,101.101
Code Sec. 183
CCH Reference - 2007FED ¶12,177.205
Code Sec. 262
CCH Reference - 2007FED ¶13,603.117
CCH Reference - 2007FED ¶13,603.147
Code Sec. 6663
CCH Reference - 2007FED ¶39,658.475
Tax Research Consultant
CCH Reference - TRC BUSEXP: 15,054
CCH Reference - TRC BUSEXP: 30,104.10
CCH Reference - TRC BUSEXP: 39,052
CCH Reference - TRC PENALTY: 6,100