A gift basket company and its founder were sued by the IRS just days before Christmas back in 2011. The IRS filed the case saying that the company was not entitled to tax refunds it received for the 2005 and 2006 tax years. In July of this year, a U.S. District Court Judge in California dismissed the IRS’ case putting an end to this tax controversy.

California based Houdini, Inc. has operations for Wine Country Gift Baskets in both Buena Park and Fullerton. The company had claimed a tax deduction for manufacturing during those tax years. IRS representatives claimed that the company was not entitled to the deduction since it merely “packages” and “repackages” gift towers and baskets and does not actually manufacture anything. The company disagreed with that assessment.

Houdini Inc. individually prepares each gift basket or tower by adding alcohol, chocolates, cookies, cheese, candies and other items. In his opinion, the judge indicated that the company “changes the form and function of the individual items” which makes each basket or tower a unique gift. Therefore, the company is entitled to the manufacturing deduction and gets to keep refunds amounting to approximately $280,000.

Many businesses, and people for that matter, in California mistakenly believe that is the IRS says it, it must be true. As this tax controversy illustrates, that isn’t always the case. Anytime the IRS sends out a notice or files a complaint, the receiving party has the right to challenge the validity of the IRS’ assertions. The IRS does make mistakes, and if a taxpaying business or individual believes that a mistake has been made, the IRS should be made to prove its case.

Source: OC Weekly, “Fullerton Gift Basket Business Defeats IRS Lawsuit in Tax Deduction Dispute,” R. Scott Moxley, July 24, 2013