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Preparing Your Case for Tax Court

If you don’t settle, you must start to get ready for the trial. Although you have the facts down cold and have met with an auditor, the auditor’s manager, the appeals officer, and the IRS lawyer, tax court is a whole new ball game. It is a brand new hearing before a judge who knows nothing about your case.

Make a Trial Notebook

The best way to arrange your materials is the way lawyers do, with a trial notebook. This is a three-ring binder or a series of file folders. Each section contains information about the stages of the trial and the points you want to prove. Index your documents and witness statements backing up the point.

CAUTION:

Keep in mind that you must prove your case—by convincing the judge that the IRS is wrong. The IRS doesn’t have to prove it is right.

Your trial notebook should contain the following:

Opening statement

The first item in your notebook should be the opening statement you’ll give at the beginning of the trial. Summarize the case—create a roadmap of where you will go to prove that the IRS is wrong. Make it brief—no more than five minutes. Speak to the judge as if you were talking to a friend.

EXAMPLE:

“Your Honor, the IRS auditor found that I was not serious about making money in my side business as a ScamWay home products distributor. She said that the sales presentations in my home were really social gatherings and so she disallowed my $6,492 in losses. I will show the court the evidence of my profit motive and that I operated in a businesslike manner, even though my business showed a loss that year.”

EXAMPLE:

“Your Honor, the examination report is incorrect in finding that I was not entitled to claim my children, Katie and Rick, as exemptions on my tax return. I will testify that the children lived with me for the greater part of the year. I will show the court copies of school records proving the children were in school close to my home. I will present canceled checks showing that I paid for their clothing, medical care, and other needs. My next-door neighbor, Corrine Rogers, will testify that the children were living with me.”

Your testimony

Anytime you relate facts to the judge, you are testifying under oath. Write down your main points so you won’t forget any.

EXAMPLE:

To prove you tried to make a profit with ScamWay, you might write:

  • “Started ScamWay distributorship in 2008.”
  • “First two years, made small profits.”
  • “In-home presentations strictly followed the guidelines of ScamWay.”
  • “Third year. Lost money overall but made sales in February, May, June, and October.”

Make only an outline of your testimony, not a word-for-word recital. That sounds too artificial unless you are a trained actor.

Your evidence

Every tangible thing that helps tell your story to the judge—tax returns, canceled checks, receipts, bills, adding machine tapes, letters, photographs, charts, musical tapes, declarations of witnesses—is your evidence.

Arrange these documents in a similar binder, separate from your trial notebook. Put them in the order in which you want the judge to see them. Keep the originals in your evidence binder and make two complete copies, one for the judge and one for the IRS attorney.

EXAMPLE:

Where you are trying to show your ScamWay distributorship profit motive, include in your trial notebook the following documents:

  • Schedule C,Profit or Loss from Business, of two non-audited
  • tax returns showing a profit
  • the ScamWay home presentation guidelines
  • a videotape of one of your presentations, and
  • guest lists of the people attending the presentations.

As mentioned earlier, the formal rules of evidence don’t apply in S tax cases. Judges want to get to the bottom of the dispute and will generally consider anything you want to show them.

TIP:

Preparation always pays, even if you never get before the judge. Your trial notebook and evidence binder should be done before you meet the IRS attorney.

Show them to him or her. If you are well organized and might make a good impression in court, the lawyer might agree to settle. If the lawyer is not impressed with your work, he or she might tell you where you’ve missed the boat, giving you a chance to fix it before the trial.

Legal authority

Most tax court cases are factual disputes, not disputes over the meaning of the tax code. This means you rarely have to do legal research.

For instance, whether or not you operated your ScamWay venture in a businesslike manner is a factual issue. But some questions, such as which parent is legally entitled to claim a child as an exemption, is a legal one and may require research.

If you do any research and find something helpful, put copies of the cases or other legal authority in your trial notebook and your evidence binder.

Closing argument

The last thing in your trial notebook is your closing argument or statement—the summing up at the end of the trial. Like the opening statement, be brief and to the point.

EXAMPLE:

Your Honor, you have heard the evidence and can understand why I disagree with the auditor’s report. I believe I should owe only $412, not the $4,721 the government says.

I explained my efforts to make profits in the music business. I showed the court receipts and canceled checks for music expenses.

Although some of my records were missing, I am in substantial compliance with the tax law. I showed flyers promoting my appearances.

The Declaration of my booking agent, Irving R. Schwartz, states he made valiant efforts to get my band more performances.

After hearing my evidence, it should be clear that I had a profit motive. I operated in a businesslike manner. Even though I enjoyed my work, it was not a hobby, as the IRS contends. Therefore, my business losses should have been allowed by the auditor, and I should only owe tax for the additional interest I forgot to report of $412.

Thank you for hearing my case.

After you are done preparing your case for trial, practice your presentation in front of relatives or friends, or at least a mirror. Concentrate on making your points clearly and logically explaining your documents. Rehearsing gives you confidence in court.

Prepare Your Witnesses

In an S case, you might be the only one testifying. Written witness statements are okay if you don’t bring people to court. But live witnesses are always more impressive.

In deciding between live witnesses or written statements, consider the following.

Persuasiveness

A person whose testimony is extremely supportive—such as the stranger who purchased items at your ScamWay presentation and has no motive to lie—should testify in person.

Your witness will be more persuasive in person than on paper in testifying as to your businesslike manner of operation.

Convenience

Don’t seriously inconvenience someone or that person may retaliate in court. For instance, if the person at your ScamWay presentation is a pilot scheduled to be 40,000 feet above the ground on the trial date, settle for a written statement.

Cost

Some people are too expensive to bring to court. Suppose your trial focuses on work done on your rental property that was deducted as a repair. The IRS disallowed the repair deduction, saying that it was an improvement.

You want to bring to court the contractor who did your job, and have him testify as to the condition of the property. The law requires you pay a witness a fee for his time and for mileage from his house to court, which could add up if he must travel a long way, then sit in the hall awaiting his turn to testify. Just bring his statement.

Harm

If you’re concerned that your witness might say something harmful to your case, then provide a statement. If a witness is a real character, and you aren’t sure what might come out of his or her mouth, think twice. The IRS attorney gets to ask questions, too.

Getting Witnesses for Court

There are two ways to get witnesses to attend a trial: ask them or subpoena them.

A subpoena is a judge-sanctioned order to appear in court. You can probably depend on friendly witnesses to be at your trial without giving them a subpoena.

TIP:

If you want to be sure that a witness will show up, you must have the person served with a subpoena. This form is available from the tax court clerk in Washington.

Call or write for the form well before the trial. Enter the case number, witness’s name and address, and time and place of the trial. You must complete a separate subpoena for each witness.

CAUTION

The subpoena must be served on—hand-delivered to—the witness. This is your responsibility.

Anyone over 18 can serve your subpoena—except you or your spouse. But the rules of what constitutes proper service are strict, and so you might visit or call the nearest U.S. Marshal’s office and have a marshal serve your witnesses.

Be prepared to give the witness a check for the witness fee and mileage. Ask the tax court clerk the current witness fee and mileage rate when you request the subpoena forms.

If you decide to have witnesses testify, list them in your trial notebook. Make sure you give the IRS attorney their names and addresses on the trial memorandum before the trial. The attorneys for the IRS have the right to talk to your witnesses before trial but seldom do.

Bishop Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida. He helps clients with their various estate planning needs and helps clients navigate the Medicaid system here in Florida. He also represents clients nationwide and worldwide in front of the IRS. Bishop is also a V.A. accredited attorney and helps Veterans obtain benefits from the Department of Veterans Affairs.