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Univ. of South Carolina School of Law

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Friday, May 17, 2013

Leisure Suit Larry & the IRS: U.S. Tax Court Uses Rule 1003 to Exclude Altered Duplicate

Federal Rule of Evidence 1002, the Best Evidence Rule, provides that

An original writing, recording, or photograph is required in order to prove its content unless these rules or a federal statute provides otherwise.

That said, Federal Rule of Evidence 1003 provides that

A duplicate is admissible to the same extent as the original unless a genuine question is raised about the original’s authenticity or the circumstances make it unfair to admit the duplicate.

It is rare that a duplicate is deemed inadmissible under Rule 1003, but that is exactly what happened in the recent case, Heinbockel v. C.I.R., 2013 WL 1953732 (U.S.Tax.Ct. 2013).

In Heinbockel, the U.S. Tax Court gave the following colorful introduction:

Before Grand Theft Auto, before World of Warcraft, before even Sonic the Hedgehog, Leisure Suit Larry left the Land of the Lounge Lizards to become the unlikely hero of an incredibly successful seven-game series (e.g., Leisure Suit Larry Goes Looking For Love (in Several Wrong Places)) that created a cultlike following. Larry was born and grew to immaturity at a software company called Sierra On-line, and Ed Heinbockel was Sierra's CFO. Although Ed modestly called Larry a "warped idea", Sierra's enormous success in the early days of video games clearly took some entrepreneurial skill. And this Ed showed at an early age. He graduated from Cal Poly–San Luis Obispo in 1980 with a degree in mechanized agriculture, but went back to his alma mater in the mid–80s to improve his business acumen—earning his MBA from Cal Poly–SLO. After a successful five-year run at Sierra—and at about the same time that Larry's colleague, Passionate Patti, was Doing a Little Undercover Work—Ed cashed out his Sierra stock and formed Tsunami Media, Inc.

(Side note 1: I actually had one of the Leisure Suit Larry games back in the 1980s, but my family's computer was so slow, it would never run properly).

(Side note 2: The court took "judicial notice that Leisure Suit Larry: Reloaded is set to be released on the world in the very near future.").

Fast forward a few decades, and the U.S. Tax Court tells us the following:

Ed and Lydia Heinbockel are a happy couple possessed by entrepreneurial spirit. In 2005–07 Ed worked full time running a successful training simulations company, while Lydia—a visibly fashionable and energetic woman—ran a personal-shopping business "24–7". The Heinbockels claim that their income from these two sources was significantly offset by losses from three other activities during those years. Although these cases force us to rummage through some of the shopping business expenses to check for substantiation, most of the disagreement—as measured by the money at stake-between the IRS and the Heinbockels is about whether their forays into plane chartering, grape farming, and moneylending were motivated by profit.

One question that arose was whether a loss that Ed claimed as a business loss was in fact a business loss. That loss consisted of the purchase of Mooney Encore, a four-passenger single-engine aircraft. According to the Court,

Although Ed testified that he bought it for business purposes, the documents he signed to buy the airplane suggest otherwise: The loan agreement had a space to complete the following clause: "This Property will be used for _______ purposes." The word "PERSONAL" was typed in that space.FN3  

FN3. David Harlow, who is currently vice president and general counsel for VP [Ed's company], was trial counsel for the Heinbockels. When Harlow asked Ed questions about this loan agreement, he referred to a copy of it where the word "PERSONAL" had been mysteriously made illegible—or what Ed later called "digital trash." No other word on that copy was unreadable. Counsel for the Commissioner pointed out that the word "PERSONAL" was perfectly legible on the copy the IRS had obtained that was also in the record. We did not admit the copy that Mr. Harlow was using because it was clearly inauthentic. See Fed.R.Evid. 1003. We think it more likely than not that the insertion of the "digital trash" was intentional, and this finding does affect our view of the Heinbockels' overall credibility.

-CM

http://lawprofessors.typepad.com/evidenceprof/2013/05/federal-rule-of-evidence-1002-the-best-evidence-rule-provides-that-an-original-writing-recording-or-photograph-is-requ.html

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