T .C. Su m m ary Op i n io n2 01 7 -9 0

UNITED STATES TAX COURT
PAUL CHEN, Pet it i on er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 4 7 98 -1 6 S. Fi l edDecem b er 1 3 , 2 01 7
.
Pau l Ch en , p ro s e. J as o n T. Sco tt , fo r res p o n d en t .

SUM M ARY OPINION PANUTHOS, Sp eci al Tri al J u d g e: Th i s cas e was h eardp urs u an t t o th e p ro v is i o n s o f s ect i o n 7 4 6 3 o f t h e In t ern al Rev en u e Co d e i n effect wh en th e p et i t i o n was fi l ed
. 1 Pu rs u an t t o s ect i o n7 4 6 3(b ), th e d eci si on t o b e en t eredi s n o t

1 Un l es s o th erwi s e i nd i cat ed , s ub s equ en ts ect i on referen ces are t o t h e (co n ti n u ed ...)-2
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rev i ewab l e b y

an y o ther co u rt , an d t h i s o p i n i o ns h al l n o tb e t reat ed as p reced en t fo r an y o th er cas e. In a n o t ice o f d efi ci en cy d at edM arch 2 8 , 2 0 1 6 , res p o n d en td et erm in eda d efi ci en cy

o f $ 4 ,3 8 9 i n p et i t i o n er’ s 2 01 4 Fed eral i n co m e t ax . Aft er a co n ces s i o n , 2 th e i s s u e fo r d eci s i o n i s wh et h er p et i t i o n er i s en t i t l edt o d educt$ 8 ,4 3 0 as a co m

m i s s i on reb at e o nh i s 2 0 1 4 Sch edu le C, Pro fi to r Lo s s Fro m Bu s i n es s . Back gro u n d So m e o f t h e fact s h av e b een s ti p u lat ed an dare s o fo u n d. Th e s t ip u l at i o n o f fact s an dth e acco m

p an y i n g ex h i b i t s are i nco rp o rat ed h erei nb y th i s referen ce. Pet i t io n er res i dedi n Cal ifo rn i a wh en h i s p et i t io nwas t i m el y fi l ed
. Du ri n g th e y ear i n i s su e p et i t i on er was a real es t at e b ro k er an d earn edcl i en t
co m m i s s io n s fro m

p u rch as es an ds al es o f real es t at e. Pet i t i on er h ad ag reem en t s wi th cl i en t s wh ereb y

h e wo u l d reb at e a p o rt i o no f t h e co m m i s s i o nearn edi f t h e

1 (...co n t in u ed ) In t ern al Rev enu e Co d e i n effect fo r t h e y ear i n i s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rt Ru l es o f Pract ice an dPro cedu re.

2 Pet i t i on er co n ced es thath e recei v edan dfai ledt o rep o rt$ 1 2 ,7 5 0 i nn o n em pl o y ee i n co m e fo r 2 0 1 4 , as d et erm i n edi n t h e n o t ice o f d efi ci en cy . Other ad ju s t m en t s i n th e n o t ice o f d efi ci en cy are co m p u t at i o n al an d wi l l b e res ol v edb y th e Co u rt ’ s co n cl us i o n o n th e d edu ct i o ni s s u e.-3
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cl i en t p erfo rm edm os t o f t h e wo rk wi th res p ect t o fi n d i n g a p ro p ert y t o p u rch as e o r s h o wi n g a p ro p ert y

fo r s al e. Th e reb at e am o u n twas co m p u t edas p ercen t ag e o f th e t o t al co m

m i ss io n earn edb y

p et i t i o n er. In 2 0 1 4 p et i t i o n er en t eredi n t o a co m m i s s io nreb at e ag reem en twi th h i s cl i en t, J ack s o n Yu en . 3 In M ay 2 0 1 4 M r. Yu en p u rch as eda h o u s e fo r $ 5 10 ,0 0 0
an d p et i t i o n er recei veda co m m i s s i o no f $ 1 2,7 5 0 fro m

th is tran s act io n . OnM ay 1 5 , 2 0 1 4 , p et i t i o n er wro te a ch eckp ay ab l e t o M r. Yu en fo r $ 8 , 4 3 0 p u rs u an tt o the
co m m i s s io n reb at e ag reem en t . Fo r t ax ab l e y ear 2 0 14 fo u r Fo rm s 1 09 9 -M ISC, M is cel l an eo u s In co m e, were i s su edt o p et i t i o n er as fo l lo w s : (1 ) In t ero Li n co l n Cas t l e Vi ew Real ty d .b .a. In t ero , rep o rt i n g n o n em

p lo y ee co m

p en sat i on o f $ 2 0 ,3 7 5 ; (2 ) M eri t ag e Ho m es o f Cal i fo rn i a, In c., rep o rt in g n o nem p l oy ee co m

pen s at i o no f $ 3 1,2 6 5 ; (3 ) NRT W es t , rep o rt i n g n o n em

p l o y ee co m

p en s at i o no f $ 2 9 , 3 7 5; an d(4 ) Tay l o r M o rri s o n

3 Th e ag reem en t , d at ed Ap ri l 2 , 2 0 1 4 , refl ect s th e fo l l o wi n g co m m i s si o n reb at e s tru cture: (1 ) fo r a p u rch as e p ri ce o f up t o $ 2 9 9 ,9 9 9 , th e cl i en trecei v es a reb at e eq u al t o 6 5 % o f p et i ti o n er’ s co m m i ss i o n; (2 ) fo r a p u rch as e p ri ce o f $ 3 0 0 ,0 0 0 t o $ 9 9 9 , 9 9 9 , th e cl i en trecei v es a reb at e eq u al t o 7 0 % o f p et i t io n er’ s co m m i s s io n ; (3 ) fo r a p u rch as e p ri ce o f $ 1 m i l li o n t o $ 1 ,9 9 9 , 9 9 9 , th e cl i en t recei v es a reb at e eq u al t o 7 5 % o f p et i t i on er’ s co m m i s s io n ; (4 ) fo r a p u rch as e p ri ce o f $ 2 m i l l i o n t o $ 2 ,9 99 ,9 9 9 , th e cl i en trecei v es a reb at e eq u al t o 8 0 % o f p et i t i o n er’ s co m

m i s s i o n ; an d(5 ) fo r a p urch as e p ri ce g reat er t han $ 3 m i l li o nth e cl i en t recei v es a reb at e eq u al t o 9 0 % o f p et i ti o ner’ s co m m i s s i o n .-4
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Cal i fo rn i a LLC, No rt h ern Cal i fo rn i a Di v i si on , rep o rt i n g n o n em p l o y ee co m p en s at i o n o f $ 4 0 ,0 0 0
. Pet i t i o ner t i m el y

fi l eda 2 0 1 4 Fo rm 1 0 4 0 , U.S. In di vi dual In co m e Tax Retu rn , at t ach in g a Sch edu l e C. Un d er t h e b u s in es s n am e An gel In v es t m en t Real ty , p et i t i o n er rep o rt ed$ 1 0 8 ,2 6 5 i ng ro s s recei p t s an d t o t al ex p en s es o f $ 9 0 ,2 0 6 , i n cl u d i n g $ 7 8,6 0 4 fo r co m m i ss i o n s an dfees p ai d
. In th e n ot ice o f d efi ci en cy res p o nd en t d et erm i n edth atp et i t i o n er h adfai l ed t o rep o rt$ 12 , 7 5 0 i n t ax ab l e i n co m e, t he d i fferen ce b et ween the $ 1 2 1 ,0 15 4 t o t al
am ou n trep o rt edo n th e Fo rm s 1 0 9 9 -M ISC i s s uedt o p et it i o n er fo r 2 01 4 an dth e $ 1 0 8 ,2 6 5 rep o rt edas Sch edu le C g ro s s recei pt s o np et i t i o n er’ s 2 01 4 Fo rm 1 0 4 0
. Res po n d en td i dn o td i s al l ow an y o f t he d edu ct i o n s cl ai m ed o n p et i t io n er’ s Sch edu l e C. Pet i t i o n er t i m el y fi l eda p et i t i o ni nwh i ch h e co nced edth at h e h ad fai l edt o rep o rt$ 1 2 ,7 5 0 i n t ax ab l e i n co m e, as sert i n g t h ath e i s en t i t l ed t o an ad d it i o n al d educt i o n fo r a co m m i s s i o nreb at e p ai d
. Attri al p et it i on er as s ert edth ath e h adan ad d i t i o n al co rres p o n d i n g d educt i o n o f $ 8 , 4 3 0 , rep res en t i n g th e co m m i s s i o n reb at e h e p ai dt o M r. Yu en . 5

4 $ 2 0 ,3 7 5 % $ 3 1,2 6 5 % $ 2 9 ,3 7 5 % $ 4 0 ,0 0 0 ' $ 1 2 1 ,0 1 5
. 5 Pet i t i on er as s ert ed i n h i s p et i t i o nth atfo r “ 20 1 4 , I o m i t t edo ne i n co m e co m m i s s io n fro m

a cl ien t , t ot al i n g t o $ 1 2 , 7 5 0 . Ho wev er, I d i dcred i ts o m e o f m y (co n ti n u ed ...)-5
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Pet i t io n er as s ert edth ath e k ep treco rd s o f t h e co m m i s s i o ns recei vedan d
co rres p o n d i n g co m

m i s s i o n reb at es p ai dt o cl i en t s fo r t ax ab l e y ear 2 0 14 an d t h ath e d i dn o t b ri n g thes e reco rd s t o co u rtb u tco u l dp ro v i d e t h em t o res p o n d en t . Atth e co n cl u s i o n o f t h e t ri al , the Co u rto rd eredthatth e reco rdwo u ldrem ai no p en an d p ro v id edp et i t i o n er ad d i t io nal t i m e t o p ro v id e res po n d en twi th co p i es o f can cel ed ch eck s o r an y

o th er d o cu m en t at i o nt o s ub st an t i at e t h e $ 8 ,4 3 0
. Sub s equen t l y , res po n d en tfi l eda s t atus rep o rti n wh i ch h e as s ert s t h at p et i t i o n er p ro v i d edco p i es o f d o cu m en t s (s i x can cel edch eck s an d o n e d o cu m en t t i tl ed“ In st ru ct i on s fo r Di s b u rs em en to f Co m m i s s i on ”) p u rp o rt ed l y

refl ect i n g s ev en i n s t an ces i n wh i ch p et it i o n er p ai dco m m i s s i on reb at es t o b u y ers . Th e am ou n t s refl ect edo n thes e d o cu m en t s t o t al $ 7 0 ,1 8 4
. Res po n d en t as sert s th at

“ [g ] i v en th atthe n ew i n fo rm at i o n p ro v i dedb y Pet i t i o ner p urp o rt ed ly

s ub s t an t i at es an am o u n tl es s th an th e al read y al l o w edd edu ct i on , i trem ai n s Res p o n d en t ’ s

5 (...co n t in u ed ) co m m i s s io n t o th e b u y er. Fo r th i s p art icu l ar cl i en t , I g av e t h e cl i en tcred itan d ch ecki n th e t o t al am o u n to f $ 10 ,1 7 6.5 0 .” At tri al p et i t i o n er as s ert edth atth e d educt i o n was fo r a co m

m i s s i o n reb at e o f $ 8 ,4 3 0 p ai dt o M r. Yu enan dp ro v i d eda co p y o f t h e ch eckp ay ab l e t o M r. Yu en refl ect i n g th is am ou n t.-6
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p o s i t i on ” t h atp et i t i o n er h as n o tp ro v i d eds ubs t an ti at i o nfo r t h e ad d i t i o n al am o u n t cl ai m ed
. 6 Di s cu ss i o n Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race, an da t ax p ay er i s req u i redt o
m ai n t ai n reco rd s s u ffi ci en t t o s ub s t an t i at e ex pen s es u n d erl y i n g d edu ct i o n s cl ai m ed
o n h i s o r h er ret urn . Sec. 6 0 0 1 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . ; s ee New Co l on i al Ice Co
. v . Hel v eri ng , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Sect io n 1 6 2 (a) g en eral l y

al lo ws d educt i o n s fo r al l o rd i n ary an d n eces s ary ex p en s es p ai d o r i n cu rreddu ri n g the t ax ab l e y ear i ncarry in g o n an y trad e o r b u s i n es s . Ing en eral , n o d edu ct i o ni s p erm i t t edfo r p ers o n al , l i v i n g , o r fam i l y ex p en s es . Sec. 2 6 2 (a). Th e t ax p ay er b ears th e b u rd en o f p ro vi n g thatex p en s es were o f a b u s i n es s n atu re rat h er t h an p ers o n al an dth at they were o rd in ary

an d
n eces s ary . Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S.1 11 , 1 1 5 (1 9 33 ). If t h e t ax p ay er i s ab l e t o es t ab l i s h th ath e p ai do r i n cu rred a d edu ct i b l e ex p en s e b u t i s u n ab l e t o s ub s t an t i at e t h e p reci s e am o un t , th e Co u rtg en eral l y m ay ap p ro x i m at e t h e d edu ct ib le am o u n t , b u to nl y i f th e t ax pay er p res en t s s u ffi ci en t
ev i d en ce t o es t ab l i s h a rat io n al b as i s fo r m ak i n g th e es t i m at e. See Co h an v .

6 Pet i t i on er d i dn o tfi l e a s t atu s rep o rto r o th erwi s e ex pres s d i s ag reem en t wi th res p o n d en t ’ s s t atus rep o rt . Sub s equ en t l y , th e Co u rtcl os edth e reco rdan d d eem edth e m at ter s ub m i t t ed
.-7
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Co m m i s s i o n er, 3 9 F.2 d5 4 0 , 5 4 3 -5 4 4 (2 d Ci r. 1 93 0 ); s ee al so Van i cek v . Co m m i s s i o n er, 8 5 T.C. 7 31 , 7 4 2 -7 4 3 (1 9 8 5 ). Pet i t i o ner s eek s t o d edu ct$ 8 ,4 3 0 as a co m m i s s i o nex p en s e, i nad d it i o nt o th e d edu ct i o n o f $ 7 8 , 6 0 4 fo r co m m i s s i o n s an dfees al read y cl ai m edo nh i s Sch edu l e C. Pet i t i o n er h as n o tp ro v i d edan y ev i d en ce t o p ro v e t h atthe $ 8 ,4 3 0
was n oti n cl u d edas p arto f t h e cl ai m edd edu ct i o no f $ 7 8,6 0 4 . Th erefo re, we co n cl u d e th atp et i t i on er h as n o ts at i s fi edh i s b u rd en o f p ro o f an dh e i s n o t en t i t l ed t o thi s ad d i t i o n al d edu ct i o n . To refl ectthe fo reg o i n g , Deci s i o n wi ll b e en t eredfo r res p o nd en t .