Graffia v. Commissioner, 580 F. App'x 474

Preferred Capital Services Corporation (an S corp) was owned by Marilynne and David and operated by Paul; the company had no bank account, receipts, invoices, disbursements, or documentation for 2005–2007 (stipulated).
Paul purportedly generated losses through a series of agreements and promissory notes among Preferred Capital, Paul, Thomas Olson, and Olson-owned companies; the agreements produced no economic substance and no payments were made.
Preferred Capital reported over $1 million in net losses that flowed through to Marilynne (separate return) and to David & Amy (joint return); IRS issued notices of deficiency disallowing those flow-through losses and making other income and deduction adjustments.
The Graffias (Paul, Marilynne, David, Amy) tried the case pro se after counsel withdrew; Tax Court found they failed to meet their burden of proof, labeled the transactions shams, disallowed claimed benefits, and imposed accuracy-related penalties.
On appeal the Graffias argued the Tax Court misapprehended facts, should have accepted the documentary stipulations at face value, and committed legal error; the Seventh Circuit reviewed for clear error and affirmed, finding the appeals frivolous and warning of possible sanctions.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether flow-through losses attributed to Preferred Capital were valid	Graffia(s): documents and stipulations prove the transactions and losses	IRS: the transactions lacked economic substance; no supporting financial records; taxpayers bear burden	Court: Transactions were shams; losses disallowed
Whether proffered documents admitted at trial require courts to accept their substantive truth	Graffia(s): admitted documents compel acceptance of their content	IRS: authenticity ≠ believability; court may reject substance	Court: Admissibility does not compel believability; may discredit documents
Whether appellate court should consider documents not offered to Tax Court	Graffia(s): omitted documents show spoliation and should be considered	IRS: documents were not in evidence at trial; too late on appeal	Court: Will not consider evidence not presented to Tax Court
Whether Tax Court misapplied law or made clear factual errors	Graffia(s): Tax Court misapprehended facts and law (general claim)	IRS: Tax Court’s findings reviewed for clear error; Graffias did not identify reversible error	Court: No clear error; legal-misapplication claims undeveloped/waived; appeal frivolous

INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (U.S. 1992) (taxpayer bears burden to prove entitlement to deductions)
Welch v. Helvering, 290 U.S. 111 (U.S. 1933) (taxpayers must sustain burden of proof in tax cases)
Jacobs v. Marathon Cnty., Wis., 73 F.3d 164 (7th Cir. 1996) (admissibility does not compel believability)
Mejia v. Cook Cnty., Ill., 650 F.3d 631 (7th Cir. 2011) (court may discount admitted evidence when credibility lacking)
United States v. Firishchak, 468 F.3d 1015 (7th Cir. 2006) (admitted documents can be disbelieved by trier of fact)
Chen v. Holder, 715 F.3d 207 (7th Cir. 2013) (authenticity is a prerequisite to admissibility)
Freda v. C.I.R., 656 F.3d 570 (7th Cir. 2011) (appellate courts do not consider evidence not presented to Tax Court)
Hintz v. C.I.R., 712 F.2d 281 (7th Cir. 1983) (same: cannot raise new evidence on appeal)
Grove Fresh Distribs., Inc. v. John Labatt, Ltd., 299 F.3d 635 (7th Cir. 2002) (frivolous appeals may merit sanctions)