Missing Opportunity IRC Sec. 280E

Missing Opportunity IRC Sec. 280E

Missing Opportunity IRC Sec. 280E – Israeli Diplomat Abba Eban had a famous quote “Palestinians never miss an opportunity to miss an opportunity.“. We leave the background of the quote those wiser than ourselves to explain. However, Neil and Andrea Feinberg did exactly that in [Neil Feinberg et ux., et al. v. Commissioner, (2017 Memo 2017-211)].

We intend to expand on our thoughts about this case in a lengthier article. However, if there EVER we an example of taxpayers being granted the benefit of the doubt by a court, and then proceeding to shoot themselves in the head due to self-inflicted wounds from a bumbling expert, incomplete and sloppy record keeping, this would be the case.

The court states

The taxpayer likewise bears the burden of proving his or her entitlement to deductions and of substantiating the amounts of items underlying claimed deductions.  INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income Tax Regs.  At minimum petitioners must produce business records or other evidence substantiating the amounts and the purpose of the deductions that they assert respondent improperly disallowed.  Higbee v. Commissioner, 116 T.C. 438, 440 (2001).

Under section 7491(a) in certain circumstances, the burden of proof may shift from the taxpayer to the Commissioner.  Petitioners have not claimed or shown that they meet the requirements of IRC Sec. 7491(a) to shift to shift the burden of proof to respondent.”

During the trial petitioners produced no contemporaneous records or any other business records pertaining to THC’s operations.  Instead, they rely exclusively on an expert report.

In accordance with the Court’s standing pretrial order and Rule 143(g), petitioners exchanged and submitted the expert report of Jim Marty, C.P.A., whom they contend is an expert in cost accounting, with an emphasis in the marijuana industry.

The Marty report was marked, and the related testimony of petitioners’ expert was heard solely as an offer of proof. Whether the report and testimony will be received in evidence and considered in determining THC’s COGS for tax years 2009-11 depends on the application of principles expressed in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), and rule 702 of the Federal Rules of Evidence.

Missing Opportunity IRC Sec. 280E

Rule 702 of the Federal Rules of Evidence provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an  opinion or otherwise if:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue

(b)  the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

In Daubert, 509 U.S. at 592, the Supreme Court stressed the trial court’s role as a “gatekeeper” in excluding at the outset evidence that is unreliable or irrelevant. The trial judge must make “a preliminary assessment of whether the reasoning or methodology underlying the testimony is scientifically valid and of whether that reasoning or methodology properly can be applied to the facts in issue.” Id. at 592-593.

The reliability and relevancy standards are embodied in rule 702 of the Federal Rules of Evidence, and they apply equally to expert testimony that is not “scientific”. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 148 (1999).  Although special considerations apply to jury trials, the Daubert analysis applies to bench trials as well as jury trials.  Boltar, L.L.C. v. Commissioner, 136 T.C. 326, 334 (2011) (citing Att’y Gen. of Okla. v. Tyson Foods, Inc., 565 F.3d 769, 779 (10th Cir. 2009)).

The taxpayer’s “possible slam dunk” through the use of a Daubert expert was blown apart due to a self-inflicted would involving a sloppy report and inadequate records. The court stated

The Marty report is brief and summary, and its content is unreliable. Multiple statements in the report refer to no underlying source of information. For other statements that do cite an underlying source, Marty has failed to include the[*9] information or data on which he relied. In many instances, the report does not reference or provide sufficient information or data for us to conclude that the opinions expressed are based on anything other than his own conjecture…

For the reasons stated above, we conclude that the Marty report is not admissible under rule 702 of the Federal Rules of Evidence because is it is not helpful in understanding evidence or in determining a fact and it includes legal conclusions.

Why are taxpayers and their experts so STUPID that they don’t “cross the T’s and dot the I’s” to provide credible, complete and accurate records and reports. Once again, they were NOT killed by IRC Sec. 280E, but rather zapped by their own sloth.

Missing Opportunity IRC Sec. 280E

Here is the entire opinion.

Missing Opportunity IRC Sec. 280E

See Alterman TC Memo 2018-83 Alternative View

Author: abizcannabis

Managing Director & CEO of integrated transactional financial advisory, tax, and technology consulting firm - aBIZinaBOX Inc New York, Chicago, and OaklandCPA.CITP.CISM.CGEIT.CGMAExpertise with: Alt. Investments/Private Equity, Real Estate, Professional Services, CA Cannabis, Tech Start-Ups and Distressed Assets/DebtTechnology Certifications including:Advanced & High Complexity Cloud Integrator AICPA PCPS, CAQ,, IMTA, CITP ISACA CGEIT, CISMState CPA Societies in California, Florida, Illinois, New York and TexasExpertise with Regulatory Compliance - US - HIPAA, FINRA, SEC Rule 17(a)(3)/(4), eDiscovery, FINCEN - EU- EBA, ESMA, EIOPA UK - BoE, PRA, FCA