- 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 NextLast modified: May 25, 2011