10/05/2020
Is an IRS Schedule C tax form – the form you report sole proprietor and LLC business income on – evidence of business ownership? It seems pretty obvious since the form is titled “Net Profit from Business (Sole Proprietorship).” But a trial court here in Ohio does not think it proves ownership so I spent last Thursday morning (October 1, 2020) in Athens arguing to an appellate panel that it does.
16 months ago during a trial I was cross-examining a party about her income – or lack thereof. Included in her tax returns, that were prepared by an accountant, was a Schedule C listing some business income. The business income was also listed on the Ohio tax returns which indicated 100% ownership of the business. The party, under oath, denied owning this business and said the accountant made a mistake.
As I began to further inquire about the business, the court told me “the documents will speak for themselves” and ordered me to move on in my questioning. When I tried to ask more business related questions later during cross-examination, opposing counsel objected, and the court instructed me to stop inquiring about any business ownership. I did not get to ask any more questions about the business on the tax returns or other businesses that I had evidence the party was involved with. The court coldly instructed me to “ask another question please.”
So, I move on the best I could since most of my questions were to establish the party’s unreported business income. But the “documents will speak for themselves” and it’s very obvious the Schedule C is for business income. You can imagine my shock when the court issued its written decision noting “there is insufficient evidence that the defendant has an ownership interest” in the business.
Insufficient evidence? Other than the tax forms the party signed indicating ownership of the business and reporting income from the business! And there’s no other evidence because the court stopped an entire line of questioning meant to establish the party’s ownership in the business despite her testimony to the contrary!
In briefing the appellate court, I could not find one case where a party was challenging their ownership of a business after having filed a Schedule C. Instead, Ohio courts and the United States Tax Court regularly recognize the Schedule C reports an owner’s business profits or losses. An owner, not an employee, files a Schedule C with their taxes. The other side did not file a merit brief nor appear at oral argument.
It’s hard not to say “duh” in reference to the trial court’s obvious error to something so obvious as a person filing business tax forms has an ownership interest in the business and I think the panel recognized the error. But there is great deference to trial court decisions so now we wait for the appellate court to (hopefully) reverse the decision and send this matter back to the trial court for a new trial. But then the next challenge begins – the business was closed (and inventory I suspect transferred to another business that I have yet to discover) shortly after the trial court’s decision was published and notice of appeal was filed.
The fight continues.
