Nine Side Businesses, No Documentation = Big Tax Bill

If you’re a regular visitor to The Dinesen Tax Times, you know that I like to chronicle the cases that appear in front of the U.S. Tax Court, and the more bizarre, the better.  I ran across a case Wednesday that I think is certainly strange.

The case involved a California woman named Sharon Griffin who lost a Tax Court case involving 9 different “side businesses” that she ran.  Griffin worked part-time as a videotape operator and technician, making about $70,000 a year in the years in question before the Tax Court (2001-2003).  During these same years, she also filed Schedule C’s (sole proprietorship return) for 9 side businesses that took in more than $2.8 million in gross revenues.  But she always showed enough expenses on the Schedule C’s that she had losses each year.

Griffin’s businesses were diverse:  delivery service; video production; janitorial services; computer repair; handyman services; landscape maintenance; parking lot maintenance/steam cleaning; consulting services; and notary services.  Most of her business was conducted in her South Los Angeles neighborhood that she called “The Jungle.”

Griffin operated mainly in cash and told the Court that she tried to avoid banks and the “paper trail their records tend to create.”  Without a “paper trail” or much legitimate supporting documentation for her deductions, the Court ended up disallowing her business deductions, and also took away many of the personal itemized deductions she had claimed for things such as charitable contributions.

The total tax and penalty hit was not discussed in the Court’s ruling, but if she has to pay tax on $2.8 million of income, that would be well over $1 million in taxes owed.