Opinion ID: 3050656
Heading Depth: 2
Heading Rank: 6

Heading: Unsubstantiated Deductions

Text: “[A]n income tax deduction is a matter of legislative grace and . . . the burden of clearly showing the right to the claimed deduction is on the taxpayer.” New Colonial Ice Co. v. Helvering, 292 US 435, 440 (1934); Boyd Gaming Corp. v. Comm’r, 177 F.3d 1096, 1098 (9th Cir. 1999). Taxpayers are required to keep sufficient records to substantiate deductions. I.R.C. § 6001; Treas. Reg. § 1.6001-1(a). This Court reviews for clear error the Tax Court’s factual determination that a taxpayer has failed to produce sufficient evidence to substantiate a deduction. Maciel v. Comm’r, 489 F.3d 1018, 1028 (9th Cir. 2007).
[13] The Commissioner disallowed in full the depreciation losses, allegedly attributable to depreciating solar water heatbeen too late to litigate the question. “Ordinarily, arguments not timely presented are deemed waived.” Boardman v. Estelle, 957 F.2d 1523, 1535 (9th Cir. 1992). 10 Needless to say, the Commissioner had no opportunity to respond to any such arguments. 16186 SPARKMAN v. CIR ing equipment, that HEH had allocated to Sparkman on his Schedules K-1. The Tax Court agreed, stating that the “only evidence introduced at trial in support of the claimed HEH losses consists of self-serving figures listed in the HEH returns (prepared, signed, and filed by Sparkman less than 3 weeks before trial) . . . , and Sparkman’s returns for the years at issue,” which the Tax Court declined to accept because they were not credible. The only other document in the record cited by Sparkman is a document, produced by HEH and given to HEH’s “beneficiary”-customers, purporting to allocate to them a portion of the cost of the equipment as a tax credit, similar to schemes rejected by the Tax Court in Hvidding, T.C. Memo 2003-151, and Richter, T.C. Memo. 200290. The Tax Court did not commit clear error in declining to accept such a document at face value. [14] Sparkman now contends that, instead of disallowing the losses in full, the Tax Court ought to have approximated the correct amount of the depreciation losses. Sparkman cites Cohan v. Comm’r, 39 F.2d 540 (2d Cir. 1930), to support his contention.11 This circuit’s precedents adopting the Cohan rule, however, are clear that the rule does not obviate the need for some proof of entitlement to a deduction in the first place. The finding of the Tax Court that Sparkman failed to establish such an entitlement eliminates the requirement that the Tax Court estimate what those losses were. See Edelson v. Comm’r, 829 F.2d 828, 831 (9th Cir. 1987) (summarizing Cohan as standing for the proposition that “a court should allow the taxpayer some deductions if the taxpayer proves he is entitled to the deduction but cannot establish the full amount claimed” (emphasis added)); see also Norgaard v. Comm’r, 939 F.2d 874, 879 (9th Cir. 1991) (noting that, 11 In Cohan, the taxpayer, a theater producer, was unable to substantiate his entertainment deductions, and the Commissioner sought to disallow them entirely. The circuit court reversed, ordering that “the Board should make as close an approximation as it can” of the losses to which Cohan was entitled. 39 F.2d at 543. SPARKMAN v. CIR 16187 under the Cohan rule, the trial court “may not be compelled to guess or estimate . . . even though such an estimate, if made, might have been affirmed”). Reviewing the evidence does not give the panel “the definite and firm conviction that a mistake has been committed,” Wolf, 4 F.3d at 712, required to reverse the Tax Court under the clear error standard.
Sparkman claims that he is entitled to additional deductions, arising out of charitable donations made in 1997 and 2000, which he did not claim on his original tax returns for that year. He testified that he intentionally did not claim all the charitable deductions he was entitled to because the depreciation deductions he was claiming through HEH had reduced his adjusted gross income such that he could not take the full amount of charitable deductions. See I.R.C. § 170(b)(1) (limiting the charitable contribution deduction to 50% of the taxpayer’s adjusted gross income). If his depreciation deductions are disallowed, and his adjusted gross income correspondingly increased, he argues in the alternative that he should be allowed the charitable deductions. The record contains five receipts from charitable organizations. Four are from United States IAS Members’ Trust, acknowledging donations made in the years 1997 to 2000. The third is from the Church of Scientology, acknowledging a donation made in 2000. All are addressed to Sparkman. As Sparkman himself admitted in testimony, however, in the past he had donated to these organizations personally, through Mercury Solar PTO, and through HEH—but the receipts were always sent to Sparkman. Sparkman contends that the 1997 and 2000 donations should be attributed to him personally, but that the 1998 and 1999 donations were properly attributable to HEH. 16188 SPARKMAN v. CIR [15] Sparkman has produced no evidence that the funds referred to in any of these receipts were drawn on his personal funds, as opposed to HEH’s, apart from his own testimonial insistence that “the ones I have claimed are definitely attributable to me.” Neither the Commissioner nor the Tax Court was required to accept Sparkman’s testimony as a substitute for the documentary substantiation I.R.C. § 6001 requires. [16] For these reasons, we hold that the Tax Court did not commit plain error in finding that Sparkman has failed to substantiate his depreciation and charitable deductions.