Ray W. and Marilyn S. Sowards - Page 15

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                         (2).  Limitations.--Paragraph (1) shall apply                
                    with respect to an issue only if--                                
                              (A) the taxpayer has complied with the                  
                         requirements under this title to substantiate                
                         any item;                                                    
                              (B) the taxpayer has maintained all                     
                         records required under this title and has                    
                         cooperated with reasonable requests by the                   
                         Secretary for witnesses, information,                        
                         documents, meetings, and interviews * * *                    
          One of the issues to be decided in this case is whether                     
          petitioners have adequately substantiated those expenses claimed            
          on their returns and disallowed by respondent.  The legislative             
          history of section 7491 explicates:                                         
                    Nothing in the provision shall be construed to                    
               override any requirement under the Code or regulations                 
               to substantiate any item.  Accordingly, taxpayers must                 
               meet applicable substantiation requirements, whether                   
               generally imposed or imposed with respect to specific                  
               items, such as charitable contributions or meals,                      
               entertainment, travel, and certain other expenses.                     
               Substantiation requirements include any requirement of                 
               the Code or regulations that the taxpayer establish an                 
               item to the satisfaction of the Secretary.  Taxpayers                  
               who fail to substantiate any item in accordance with                   
               the legal requirement of substantiation will not have                  
               satisfied the legal conditions that are prerequisite to                
               claiming the item on the taxpayer’s tax return and will                
               accordingly be unable to avail themselves of this                      
               provision regarding the burden of proof.  Thus, if a                   
               taxpayer required to substantiate an item fails to do                  
               so in the manner required (or destroys the                             
               substantiation), this burden of proof provision is                     
               inapplicable. [H. Conf. Rept. 105-599, supra at 241,                   
               1998-3 C.B. at 995; fn. refs. omitted; emphasis added.]                
          As we find infra, petitioners failed to adequately substantiate             
          those deductions claimed on their returns.                                  





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