Opinion ID: 545523
Heading Depth: 1
Heading Rank: 4

Heading: The IRS Assessment of Belle Isle Riding Academy's Tax Liability

Text: 51 The Academy presents us with four arguments in its brief on appeal: (1) that it has no tax liability at all because it made a timely election under subchapter S of the Internal Revenue Code; (2) that the IRS acted unreasonably in disallowing expenses BIRA incurred during the contested years when calculating the corporation's taxes; (3) that the IRS improperly attributed income from a bicycle rental concession to the corporation rather than to Walton personally; and (4) that the court ought to have followed the findings of a second IRS audit conducted on BIRA rather than the audit performed by Agent Backaitis. 52 BIRA first contends that it was not subject to taxation in the years 1976-1979 because it had executed a valid election as an S corporation under the terms of the Internal Revenue Code. 26 U.S.C. Secs. 1362 and 1363. Corporations having made such an election are not taxed as separate entities. 26 U.S.C. Secs. 1363 and 1366. 53 The Academy raised this issue for the first time in its reply to the government's response to the Academy's motion for a new trial. In fact, all the evidence BIRA has adduced in support of its status as an S corporation was introduced only after the conclusion of the trial. A district court's refusal to grant a new trial will be reversed only for an abuse of discretion. Logan v. Dayton Hudson Corp., 865 F.2d 789, 790 (6th Cir.1989). As one commentator has written, in a civil action, [a] principle that strikes very deep is that a new trial will not be granted on grounds not called to the court's attention during the trial unless the error was so fundamental that gross injustice would result. C. Wright & A. Miller, Federal Practice and Procedure: Civil Sec. 2805 (1973); see also Nissho-Iwai Co. v. Occidental Crude Sales, Inc., 848 F.2d 613, 619 (5th Cir.1988); Computer Sys. Eng'g, Inc. v. Quantel Corp., 740 F.2d 59, 69 (1st Cir.1984). There was no gross injustice here. BIRA had access to all the documents it relied on in its motion for a new trial before this action was ever commenced. The court therefore acted properly in denying BIRA's motion for a new trial based on its filing status. 54 BIRA next argues that even if it is subject to taxation, the Commissioner erred in computing its tax liability. As noted above, the IRS calculated BIRA's tax liability by reconstructing its income and expenditures based upon information obtained from the Academy's books and records and from third persons. The Academy apparently has no quarrel with the income figures the IRS has produced; it takes issue only with the government's refusal to deduct the amount of certain expenses from these figures before computing the taxes owed. The IRS agent who performed the audit on BIRA testified at trial that because Walton did not furnish him with sufficient information to determine the Academy's tax liability, he was forced to rely on information obtained from third persons. The agent explained that he was unable to obtain records of BIRA's expenses from BIRA's accountant because BIRA had not authorized the accountant to discuss the matter with the IRS. 55 On appeal, BIRA maintains that the IRS ought to have requested such authority from Walton, and that by failing to do so it did not meet its burden of proving that the expenses listed in BIRA's books and records were inaccurate. As explained earlier, the taxpayer, not the government, bears the burden of persuading the trier of fact that the IRS has improperly disallowed deductions from income. BIRA failed to adduce any evidence whatsoever at trial in support of the validity of the expenses claimed on its books. Accordingly, the district court correctly accepted the government's determination of BIRA's expenses. 56 The Academy contends that income from a bicycle rental concession was improperly included in the IRS's calculation of its income. BIRA relies on the fact that Walton signed the contract for the concession with the City of Detroit and gave no indication on the document that he was acting in his capacity as an officer of the Academy. The district court found that, in view of the extensive commingling of assets between Walton and BIRA, the form of the signature was not dispositive. We agree. 57 It is undisputed that the bicycle rental concession was operated on the grounds of the Academy, and that Walton paid the Academy no rent for the space. Nor does BIRA contest the fact that its ledger contained an account entitled Bicycle Rental which included entries totaling over $3,000. On the basis of this evidence, we agree with the district court that income from the concession was properly attributed to the Academy. 58 Finally, the Academy argues that the district court erred in refusing to admit working papers prepared by a second IRS investigator who had audited the Academy. BIRA contends that these papers reveal that the corporation earned no income and therefore owes no tax. BIRA's counsel called the IRS agent who performed the second audit, Robert L. Gardner, to the stand during trial. Gardner testified that the figures contained in his working papers were not necessarily accurate because they reflected certain concessions made for the purpose of settlement negotiations. When Walton's attorney attempted to elicit testimony regarding the amount of liability shown in the second examination, government counsel objected on the grounds of relevance. The court sustained the objection. Agent Gardner then testified that, after examining the records of the Academy and the results of the first IRS audit, he believed that the original audit contained no errors. Given Gardner's testimony, we can see no relevance in his working papers. In any case, the trial judge is accorded broad discretion in determining whether evidence should be admitted based on considerations of relevance and materiality. Bowman v. Koch Transfer Co., 862 F.2d 1257, 1262 (6th Cir.1988). We review only for abuse of discretion, id., and find none here.