State Bar of Wisconsin Return to Wisconsin Tax Appeals Commission





2033 N. 47th Street and

Milwaukee, WI 53208




P.O. Box 8933

Madison, WI 53708


DOCKET NOS. 98-I-80, 98-I-81



This matter was heard at Waukesha on July 8, 1999. Attorney William Stephenson represents the petitioners. Attorney Veronica Folstad represents the respondent.

Having considered the entire record, the Commission hereby finds, concludes, and orders as follows:


1. The petitioners, Billy E. and Terry Stephenson ("the Stephensons"), were assessed additional income taxes by the respondent, Wisconsin Department of Revenue (the "Department"), for the years 1991 through 1994, which is the period under review.

2. The Stephensons timely petitioned the Department for redetermination of its actions,(1) which was denied. They then timely appealed the Department's denial to this Commission.

3. In 1991, petitioner Billy E. Stephenson ("Billy") attempted to open a telemarketing business known as AIM (Associated International Marketing) or AIM, Inc. (the "business"). AIM was never formally incorporated. AIM never had any employees and never produced any receipts or income. The alleged business was operated out of the basement of the Stephensons' residence at 1285 North 68th Street in Wauwatosa.

4. Billy claimed to have purchased various items for use in the business, most of which figured in the claimed deductions which were disallowed by the Department. The claimed business items included desks, tables, chairs, computers, phones and other office equipment, two boats, a camper, an automobile, a commercial furnace, and various office supplies.

5. For 1991, the Stephensons claimed a net business loss on Schedule C (federal Form 1040) of $8,608, consisting of nine separate line items. This entire amount was disallowed by the Department for lack of substantiation.

6. For 1992, the Stephensons claimed a loss on the sale of business property on federal Form 4797 of $9,770 from the sale of "telemarketing business." They reported the sales price as "0." The Department disallowed the entire loss as unsubstantiated.

7. In 1993, the Stephensons rented out the second floor of real estate they owned at 1285 N. 68th Street in Wauwatosa, Wisconsin, for which they received $1,500 in rent. For 1993, the Stephensons claimed a total loss from rental real estate on Schedule E (Form 1040) of $9,296, consisting of ten separate line items. The entire loss was disallowed as unsubstantiated. However, the Department allowed $1,500 as an offset to the rent received.(2) In addition, the Department disallowed for lack of substantiation that part of petitioners' 1993 claimed Wisconsin itemized deduction credit attributable to unreimbursed employee business expenses of $8,430 the Stephensons claimed on Schedule A (Form 1040).

8. For 1994, the Stephensons claimed a $6,500 short-term capital loss on Schedule D (Form 1040), which was disallowed by the Department. Petitioners conceded this item at the hearing. They also claimed a loss on the sale of business property on federal Form 4797 of $970 for the sale of a camper, which was disallowed for lack of substantiation. In addition, the Department disallowed for lack of substantiation that part of the Stephensons' 1994 claimed Wisconsin itemized deduction credit attributable to unreimbursed employee business expenses of $8,307 claimed on Schedule A (Form 1040).



Sec. 274 [1986 Code].

* * *

(d) SUBSTANTIATION REQUIRED.--No deduction or credit shall be allowed --

(1) under section 162 or 212 for any traveling expense ...

* * *

unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the travel, ... or use of the facility or property, ... (C) the business purpose of the expense or other item, ....

Treas. Reg. § 1.274-5T

(c) Rules of substantiation--

(1) In general. Except as otherwise provided in this section and § 1.274-6T, a taxpayer must substantiate each element of an expenditure or use (described in paragraph (b) of this section) by adequate records or by sufficient evidence corroborating his own statement. Section 274(d) contemplates that a taxpayer will maintain and produce such substantiation as will constitute proof of each expenditure or use referred to in section 274. Written evidence has considerably more probative value than oral evidence alone. In addition, the probative value of written evidence is greater the closer in time it relates to the expenditure or use. A contemporaneous log is not required, but a record of the elements of an expenditure or of a business use of listed property made at or near the time of the expenditure or use, supported by sufficient documentary evidence, has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall. Thus, the corroborative evidence required to support a statement not made at or near the time of the expenditure or use must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or neat the time of the expenditure or use supported by sufficient documentary evidence. The substantiation requirements of section 274(d) are designed to encourage taxpayers to maintain the records, together with documentary evidence, as provided in paragraph (c)(2) of this section.

(2) Substantiation by adequate records--

(i) In general. To meet the "adequate records" requirement of section 274(d), a taxpayer shall maintain an account book, diary, log, statement of expense, trip sheets, or similar record (as provided in paragraph (c)(2)(ii) of this section), and documentary evidence (as provided in paragraph (c)(2)(iii) of this section) which, in combination, are sufficient to establish each element of an expenditure or use specified in paragraph (b) of this section....

(ii) Account book, diary, etc. An account book, diary, log, statement of expense, trip sheet, or similar record must be prepared or maintained in such manner that each recording of an element of an expenditure or use is made at or near the time of the expenditure or use.

* * *

(B) Substantiation of business purpose. In order to constitute an adequate record of business purpose within the meaning of section 274(d) and this paragraph (c)(2), a written statement of business purpose generally is required. However, the degree of substantiation necessary to establish business purpose will vary depending upon the facts and circumstances of each case. Where the business purpose is evident from the surrounding facts and circumstances, a written explanation of such business purpose will not be required. For example, in the case of a salesman calling on customers on an established sales route, a written explanation of the business purpose of such travel ordinarily will not be required....

* * *

(C) Substantiation of business use of listed property--

(1) Degree of substantiation. In order to constitute an adequate record (within the meaning of section 274(d) and this paragraph (c)(2)(ii)), which substantiates business/investment use of listed property (as defined in § 1.280F-6T(d)(3)), the record must contain sufficient information as to each element of every business/investment use. However, the level of detail required in an adequate record to substantiate business/investment use may vary depending upon the facts and circumstances. For example, a taxpayer who uses a truck for both business and personal purposes and whose only business use of a truck is to make deliveries to customers on an established route may satisfy the adequate record requirement by recording the total number (of) miles driven during the taxable year, the length of the delivery route once, and the date of each trip at or near the time of the trips. Alternatively, the taxpayer may establish the date of each trip with a receipt, record of delivery, or other documentary evidence.

* * *

(iii) Documentary evidence. Documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure shall be required for --

* * *

(B) Any other expenditure of $75 or more ($25 or more for expenditures incurred before October 1, 1995) except, for transportation charges, documentary evidence will not be required if not readily available, ....


The Department properly determined the Stephensons' tax liability for 1991, 1992, 1993, and 1994 because the Stephensons did not substantiate the deductions and losses that they claimed and were disallowed by the Department for those years.


It is well settled that when an assessment is disputed, as it is here, the burden of proof is on the taxpayer to show error in the additional assessment because the additional assessment is presumed to be correct. Woller v. Department of Taxation, 35 Wis. 2d 227, 232 (1976).

The Department assessed the Stephensons for their failure to substantiate various claimed deductions and losses. The only issue before us is whether the record shows that those claimed deductions and losses have been substantiated by the Stephensons. We conclude they have not.

Section 174 of the Internal Revenue Code and its associated Treasury Regulations detail the rules of substantiation required for various business expenses. The Stephensons have failed to meet these requirements for any of the disputed items.

The only witness called by the Stephensons was petitioner Billy Stephenson. His self-serving testimony was generally confusing and unconvincing with respect to the deductions and losses at issue. Without independent corroboration, such self-serving testimony is insufficient to meet the taxpayer's burden of showing error in the Department's assessment. See, Treas. Reg. § 1.274-5T, supra.

Most of the disputed adjustments relate to business deductions and losses claimed in conjunction with Billy's alleged telemarketing business. There was no corroborating evidence that Billy ever engaged in the business or that the claimed items were actually used or purchased for that business or any business. Billy himself admitted he didn't do any work in the business in 1991 and that the business never produced income at any time during the period under review.

As part of his testimony, Billy offered and the Commission received 20 exhibits, most related to Billy's claimed telemarketing business. However, none of these exhibits substantiated any of the items disallowed by the Department.(3) Billy also testified that a flood in 1997 damaged and destroyed many of his business receipts, but he provided no evidence corroborating this.

In addition to finding utter failure by the Stephensons to substantiate the deductions and losses disallowed, we offer the following brief observations with respect to each year of the period under review.

1991 Items

The Stephensons' claim of a net business loss fails because they failed to show that AIM was ever operated as a business. Without an actual business, no deductions for claimed business expenses are allowable. In addition, none of the expense items claimed on Schedule C were shown to have been actually made. The exhibits presented were confusing, contradictory, and inconclusive as proof.

1992 Items

Similarly, the Stephensons' claim of a 1992 loss on the sale of a telemarketing business fails because Billy did not show that he actually operated such a business or that it ever existed except in name.(4) Further, Billy did not verify the cost or other basis shown on the tax return.

1993 Items

One issue for 1993 is the Stephensons' claimed loss from rental real estate. They failed to substantiate any claimed expenses over and above the $1,500 already allowed by the Department as an offset to the $1,500 rental income. No receipts for any of the claimed expenses were produced, and even the most generous view of allowable depreciation expense would be $800, which is far less than the $6,000 claimed. Therefore, the entire claimed rental loss must be disallowed.

A second issue for 1993 is the Stephensons' claimed $8,430 deduction for unreimbursed employee business expenses, consisting of $7,980 in vehicle expenses, including depreciation, and $450 for petitioner Terry Stephenson's work uniforms. None of these items was substantiated at the hearing. Although a vehicle log was produced, there was no showing of a business purpose for any of the entries made, only numbers. This is not proof of business travel. Nor was any proof produced to show that $450 had been expended for work uniforms. The only evidence presented was that Terry's employer had no uniform reimbursement policy, but this does not verify the amount of the claimed expense.

1994 Items

Again, the Stephensons presented no documentation or other verification of either the claimed $970 loss on the sale of a camper allegedly used in a trade or business or the employee business expenses of $8,307 claimed on Schedule A. No business purpose was shown for any of these items and no receipts were produced.


Billy's testimony at trial was confusing and inconclusive. The exhibits he presented did not substantiate any of the disputed items. We conclude that the Department's assessments must be sustained for lack of substantiation by the Stephensons.


The respondent's action on petitioners' petition for redetermination is affirmed.

Dated at Madison, Wisconsin, this 20th day of April, 2000.



Mark E. Musolf, Chairperson


Thomas M. Boykoff, Commissioner

ATTACHMENT: Don M. Millis, Commissioner


June 8, 2000 Petition for rehearing denied pursuant to s. 227.49(3)

July 6, 2000 Appealed to Milwaukee County Circuit Court (00CV005439)

1 The Department issued two assessments: one for 1991 (Docket No. 98-I-80); the other for 1992 through 1994 (Docket No. 98-I-81).

2 Total claimed rental expenses were $10,796.

3 Several exhibits related to claimed rental expenses, of which $1,500 were allowed by the Department to offset $1,500 of rental income. Finding of Fact 7.

4 As noted earlier, the name appeared to be a corporate name, but corporate status was unclear.