Opinion ID: 200360
Heading Depth: 2
Heading Rank: 1

Heading: Deduction of Professional Fees

Text: 12 I.R.C. § 162 permits deductions from income for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Accrual method taxpayers may deduct expenses when they are incurred even if they have not yet been paid, as long as three factors are met: 1) all of the events that establish the fact of the liability must have occurred; 2) the amount must be able to be determined with reasonable accuracy; and 3) economic performance must have occurred. Treas. Reg. § 1.461-1(a)(2)(i); see also id. § 1.461-4 (explaining economic performance). Whether a taxpayer has satisfied the all events test is a question of law we review de novo. Gold Coast Hotel & Casino v. United States, 158 F.3d 484, 487 (9th Cir.1998). 13 At trial, the only person who testified on Interex's behalf was Olbres. She testified that she did not ask for nor did she ever see a bill for Coupounas's professional services. She did not ask what services Coupounas performed to be valued at $65,000, nor did she ask for or receive any time sheets or other supporting records. Furthermore, Olbres admitted that she did not carefully review the 1994 tax return. She was not even aware of the $65,000 debt until August 1998. 14 According to Olbres, Coupounas performed the following services: preparing tax returns; setting up the company's record-keeping system; preparing financial statements; reviewing letters and documents; advising Olbres with respect to the conversion of Interex from a subchapter C corporation to a subchapter S corporation; and answering legal questions. 15 1994 was not the only year in which Interex deducted sums for Coupounas's services. Deductions were taken for his services in the years from 1993 to 1997; Coupounas never issued a bill to Olbres detailing his services from 1994 to 1997. Moreover, after 1993, Coupounas was not paid at all by Interex until the $65,000 check was written in 1998, only after the IRS began to investigate that deduction. Finally, there is no evidence that Coupounas was ever paid for the debts allegedly incurred after 1994, including $36,000 in fees deducted in the 1995 return. 16 Coupounas did not testify at trial, refused to provide documents to the IRS, and did not cooperate with the IRS. At the close of trial, the Tax Court instructed the parties that the court would entertain a motion to reopen the record within thirty days if Coupounas became available to testify in court or to be deposed. Interex later notified the court that no testimony or statement from Coupounas would be added to the record. Coupounas was under an apparent obligation to provide documents to Interex, his client, arising out of his charges for any services to the company. See Mass. R. Prof. C. 1.4(a). Nonetheless, Interex provided no bills from Coupounas or documentation of $65,000 worth of services incurred in 1994. 17 Given the sparse evidence entered into the record by the petitioner, the tax court upheld the denial of the deduction because it failed at least two of the three requirements of the all events test. First, the court was not persuaded that economic performance had occurred; there was simply not enough evidence for the court to conclude that $65,000 in professional services were provided in 1994. Buttressing this decision was the fact that none of the services Olbres claimed that Coupounas had provided were specialized or numerous enough to be valued at $65,000. Second, because of the lack of an invoice and Olbres's inability to articulate the basis of the $65,000 fee, the court found that the amount of the fees owed could not have been determined with reasonable accuracy when the deduction was taken. 18 We affirm the Tax Court's holding on both grounds. Since Coupounas has been so lackadaisical in pursuing payment for these alleged debts, it is fair to infer that, to put it mildly, their value was distorted for tax purposes. Moreover, the services Olbres testified that Coupounas performed could not reasonably have been valued at $65,000. 2 19 The absence of documentation also makes it unlikely that the amount owed could have been determined with reasonable accuracy. There was no evidence as to how many hours Coupounas worked or to his billing rate for accounting or legal services. Olbres, the president and sole shareholder of Interex, testified she did not even know of the existence of the debt until August 1998. Even if Interex had introduced evidence that Coupounas had provided services that might possibly be worth $65,000, the accrued amount could not have met the all events test, and been properly deducted, until there was enough information to determine the value of those services. 20 In sum, the petitioner did not present enough credible evidence to shift the burden to the IRS to prove that the all events test had not been met.