- 20 - Floors Trust had unreported income in that amount,12 which is reportable by Harlan because Floors Trust is disregarded. V. Floors Trust Deductions A. Rent Respondent determined that a $6,000 rent expense deduction claimed on the Floors Trust return should be disallowed for failure to substantiate or to show that such expenses were ordinary or necessary business expenses.13 On brief, respondent contends only that the rent expenditures were not ordinary and necessary expenses of the floor installation business, within the meaning of section 162, because rent had not been paid before the 12 We are mindful that the Court of Appeals for the Ninth Circuit, to which an appeal in this case would ordinarily lie, has held that, where unreported income has been determined, the presumption of correctness attaches to a notice of deficiency only where the Commissioner has established “some evidentiary foundation” linking the taxpayer to an income-producing activity or the receipt of unreported income. See Rapp v. Commissioner, 774 F.2d 932, 935 (9th Cir. 1985); Edwards v. Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982). In this case, given that Harlan conceded (i) that he received services from bartering equal in value to the amounts determined by respondent and (ii) that amounts paid for the floor installation services rendered by Harlan were deposited into the bank account that respondent analyzed, there is an ample evidentiary foundation for respondent’s determination of unreported income. 13 Because we have concluded that Floors Trust is a sham that is disregarded for Federal income tax purposes, it is Harlan, as sole proprietor of the floor installation business reported to the Schedule C filed by Floors Trust, who may be entitled to any deduction for rent (or other trade or business expenses) claimed by Floors Trust. We note in this regard that respondent has conceded Harlan’s entitlement to deductions for numerous expenses of the floor installation business initially claimed by Floors Trust on its 1998 return. See supra note 10.Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Next
Last modified: May 25, 2011