Tax Court In Brief: Kohout v. Commissioner: Reconstructing Accounting, Voluminous Writings, And Passthrough Loss

• Published date: 22 April 2022
• Subject Matter: Accounting and Audit, Tax, Accounting Standards, Income Tax, Tax Authorities
• Law Firm: Freeman Law
• Author: Cory Halliburton

The recent Tax Court case of Kohout v. Commissioner addresses several common evidentiary issues in the context of tax disputes. A summary, chart, or calculation to prove the content of voluminous records may be appropriate and admissible, but the Tax Court, as seen in the Kohout opinion, is quite comfortable with the financial data in, for example, bank statements that are 58-pages in length. A summary of voluminous records must be an accurate compilation of the underlying data; thus, a constructed summary of reconstructed accounting data is a recipe for evidence that lacks credibility or that will be deemed inadmissible by the Tax Court. And, an accounting 'reconstructionist' may attempt to reconstruct a taxpayer's return through the taxpayer's testimony or word, but the underlying records'bank statements and evidence of transfers'are a better and more probative source for the substance of a taxable transaction. We dive into more detail below:

Kohout v. Comm'r, T.C. Memo. 2022-37 |April 18, 2022 |Jones, J. | Dkt. No. 11958-17

Opinion

Short Summary: Todd and Lisa Kohouts had a medical funding and real estate business through a wholly-owned S corporation, Cornerstone Enterprises, Inc. (Cornerstone). Mr. Kohout was the sole shareholder. On its 2013 Form 1120S, U.S. Income Tax Return for an S Corporation, Cornerstone reported gross receipts of $1,829,524. Mr. Kohout signed Cornerstone's 2013 return and the Kohouts' personal return, although he was unaware of how Cornerstone's gross receipts were calculated as reported. For the 2013 tax year, the IRS notified the Kohouts of a $923,280 deficiency and accuracy-related penalties, under section 6662(a), in the amount of $184,676. The Kohouts petitioned for review of the deficiency, and the Kohouts and the IRS eventually resolved and stipulated to all substantive tax issues in the Kohouts' petition until the Kohouts filed an amended petition, alleging that they overstated the gross receipts of Cornerstone for the 2013 taxable year by $955,599. The Kohouts also alleged that Cornerstone and Mr. Kohout had sufficient bases in one of Cornerstone's subsidiaries, Preferred Medical Funding, LLC (PMF), to deduct pro rata shares of PMF's loss for the 2013 taxable year. None of the agreements related to Cornerstone's operations were presented to the IRS, and the record was void of any evidence of income that Cornerstone received from the operations. Mr. Kohout testified that he altered the QuickBooks computer files on...