On her 2003 tax return, Alta Ellis-Babino claimed a whopping $1,000,000 general business credit. She used what she could, then carried the unused credit of $996,848 forward and used it to reduce her tax liability from 2005-2008.
For whatever reason, the notion of a retired school teacher spending her free time plugging away in her basement laboratory and spending untold millions in an effort to find a cure for teenage sassmouth proved too farfetched for the IRS to believe. The Service audited the returns, found no compelling reason to believe any R&D activities had been undertaken, and summarily denied the credits.
What followed was a miraculously meandering argument in front of the Tax Court, with Babino first stating that she had never claimed to be entitled to an R&D Credit, next asserting that her late husband had “purchased” the right to the credits, before finally, her brother stepped in and testified that he had hired Babino to work in his “think tank,” and it was he who compensated Babino by giving her the tax credit.
The Tax Court had little patience for it all:
Petitioner did not present a coherent argument as to her entitlement to the claimed $1 million general business credit. Petitioner did not present any evidence that she incurred any expenses related to clinical trials or research and development. There are no receipts or other documents concerning expenses in the record. Petitioner fails to meet her burden of proving that respondent’s determinations were improper and is therefore liable for the deficiencies in income tax for the years at issue.