Recent Tax Court Decision is a Cautionary Tale in Taxpayer’s Burden to Prove Deductions by Arthur Lieberman

Posted on March 27, 2018 by Art Lieberman

In matters in which the IRS determines that a taxpayer is deficient in meeting his or her income tax liabilities, it is generally presumed that agency is correct. It is the taxpayer who bears the burden to prove the IRS wrong by a preponderance of evidence. In essence, the IRS can challenge any and all taxpayer claims to credits and deductions, even if the taxpayer is in fact entitled to them. Taxpayers must then show demonstrative proof to back up the tax treatment for which they claim they are entitled.

This was the issue before the U.S. Tax Court in February 2018 when the IRS challenged a Mississippi family’s deduction of $27,646 in expenses incurred to replace carpeting and make other routine maintenance repairs to rental units in real estate property that the family owned.  The IRS issued the taxpayer a notice of tax deficiency and a related penalty contending that those repairs constituted a property “improvement” that the taxpayer should have written off and depreciated over time. The only proof that the taxpayer presented to prove that it properly deducted those expenses was a three-page list of its itemized repairs and associated costs.

The court subsequently ruled in favor of the IRS due to the taxpayer’s inability to meet its burden of proof and provide a preponderance of documents, records and other physical evidence to counter the IRS’s claim.

What could the taxpayer have done differently? According to the court, the taxpayer could have corroborated its position with records documenting the value of its properties before and after the repairs through appraisals, or inspection reports or lease contracts that stipulate the taxpayer’s requirement to make repairs in between tenants.

In light of the court’s decision, it behooves taxpayers to err on the side of caution and take extraordinary steps to prove their decisions to claim deductions, especially with regard to real property and the repair regulations. As a minimum, taxpayers should take before and after photographs and/or video of items that require repairs in order to demonstrate that the costs they incur are in fact a result of general property maintenance and not improvements, restorations and betterments to extend the property’s useful life or adapt it for a new or different use.

About the Author: Arthur Lieberman is a director in the Tax Services practice of Berkowitz Pollack Brant, where he works with real estate companies and closely held businesses on deal structuring, tax planning, tax research, tax controversies and compliance issues.  He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at