T.C. Memo. 1997-257

UNITED STATES TAX COURT

RODNEY J. AND LORRAINA S. HUANG, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14667-96. Filed June 10, 1997.

Rodney J. and Lorraina S. Huang, pro se.

David A. Winsten, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Chief Judge: Respondent determined deficiencies of

$7,461 and $10,167 in petitioners’ Federal income taxes for 1992

and 1993, respectively, and penalties of $1,492 and $2,033 under

section 6662(a) for 1992 and 1993, respectively. Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect for the years in issue, and all Rule
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references are to the Tax Court Rules of Practice and Procedure. 

The issues for decision are whether petitioners are entitled to

deduct expenses claimed on Schedules A, C, and E of their

Forms 1040 for the years in issue and whether they are liable for

the penalties determined by respondent.

FINDINGS OF FACT

Petitioners resided in Hawaii at the time that they filed

their petition. 

During 1992 and 1993, petitioners maintained journals of

their expenditures by cash and by check, including but not

limited to expenditures for meals at restaurants, for groceries,

for items at department stores and at drugstores, for

unidentified supplies, and for medical expenses. The recorded

expenditures were transferred to a monthly summary. On the

monthly summary, the majority of the expenditures, including auto

expense, electricity, entertainment, laundry ($60 per month),

rent, supplies, telephone, and water, were claimed to be

“deductible”. The monthly allocations recorded for 1992 and 1993

were as follows:
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 Total Total

 Month “Deductible” “Personal”

Jan. 1992 $ 2,628.75 $402.73

Feb. 1992 1,900.82 467.15

Mar. 1992 2,236.51 244.28

Apr. 1992 2,035.30 289.15

May 1992 8,102.56 100.75

June 1992 3,202.55 202.76

 July 1992 3,347.10 176.81

Aug. 1992 3,219.43 201.18

 Sept. 1992 2,786.08 175.78

 Oct. 1992 2,975.31 246.22

Nov. 1992 3,077.19 226.70

Dec. 1992 14,898.97 213.27

Jan. 1993 4,149.40 234.20

Feb. 1993 4,413.19 175.09

Mar. 1993 4,650.48 126.61

Apr. 1993 3,924.60 384.54

May 1993 3,859.91 206.31

June 1993 4,963.33 177.24

July 1993 4,000.50 300.30

Aug. 1993 3,985.91 368.72

Sept. 1993 4,037.29 325.07

Oct. 1993 3,831.84 102.68

Nov. 1993 3,907.11 302.93

Dec. 1993 11,336.90 263.92

On their Federal tax returns for 1992 and 1993, petitioners

reported, among other things, the following items:

 Items 1992 1993

Wages $72,648.44 $72,674.35

Losses from 

 Schedule C 19,841.45 39,504.60

Losses from

 Schedule E 4,900.00 9,600.00

On Schedule A for 1992, petitioners claimed $10,920 in

unreimbursed employee expenses, including $3,220 vehicle expense;

$500 parking fees, tolls, and local transportation; $300 travel
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expenses while away from home; and $3,600 meals and

entertainment. 

Petitioners’ Schedules C reported that they were in a

“telecommunications” business known as “Today’s Enterprises”. 

Petitioners reported no gross receipts from this business during

1992 or 1993 but claimed the following expenses: 

Items 1992 1993

Advertising $ 240.00 --

Car and truck expenses 2,200.00 $ 11,080.98

Office expense -- 1,718.62

Rent

 Vehicles, machinery, and

 equipment 3,120.00 5,800.00

 Other business property -- 9,600.00

Supplies 4,417.92 --

Travel

 Meals and entertainment 7,200.00 12,000.00

 Enter 20% of line 24b

 subject to limitations 1,440.00 2,400.00

 Subtract line 24c from 

 line 24b 5,760.00 9,600.00

Utilities 1,277.66 --

Other expenses

 Equipment 2,054.00 1,705.00

 Publications 635.87 --

Tentative profit (loss) (19,841.45) (39,504.60)

The amounts claimed as losses on Schedules E attached to

petitioners’ returns for 1992 ($4,900) and 1993 ($9,600)

represented $700 per month in 1992 and $800 per month in 1993

allegedly owed to petitioners by Today’s Enterprises for rent

beginning June 1992. Petitioners claimed the loss as rent not

received because Today’s Enterprises had no income. At least as
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to 1993, the same amount was deducted as rent on petitioners’

Schedule C. The rents claimed were for petitioners’ personal

residence. 

Respondent determined that petitioners’ deductible losses

were $2,954 for 1992 and $455 for 1993. The remaining deductions

claimed were disallowed because petitioners had not established

that they paid or incurred the expenses during the years in issue

or that the expenses were ordinary and necessary business

expenses. 

OPINION

Petitioners contend that they commenced a business in May

1992 and that all of the deductions claimed on their returns were

correct. They assert that their representations must be accepted

and that the Internal Revenue Service (IRS) has “illegally”

disallowed their deductions. Notwithstanding the Court’s attempt

to direct their testimony to specific items, they simply persist

in insisting that the Court require the IRS to “rescind and

abate” the notice of deficiency. Petitioners did not present any

documents supporting their contentions that items listed in their

journals were deductible. 

Petitioners have the burden of proving that respondent’s

determination is erroneous. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); Rockwell v. Commissioner,

512 F.2d 882, 886 (9th Cir. 1975), affg. T.C. Memo. 1972-133. 
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Their assertion that their return was correct as filed has no

evidentiary weight. See Wilkinson v. Commissioner, 71 T.C. 633,

639 (1979). 

Section 262 provides as follows:
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SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.

(a) General Rule.--Except as otherwise expressly

provided in this chapter, no deduction shall be allowed

for personal, living, or family expenses.

(b) Treatment of Certain Phone Expenses.--For

purposes of subsection (a), in the case of an

individual, any charge (including taxes thereon) for

basic local telephone service with respect to the lst

telephone line provided to any residence of the

taxpayer shall be treated as a personal expense.

The tax returns that they filed and the journals that petitioners

presented create a strong inference that petitioners have

improperly deducted many household and living expenses. They

have failed to present evidence that would overcome this

inference. 

Section 274(d) requires, with respect to entertainment

expenses, that taxpayers substantiate, among other things, the

business purpose of each expense and the business relationship to

the taxpayer of persons entertained. Although they deducted

thousands of dollars each year for “entertainment”, petitioners

have failed to substantiate any of those expenses as required by

section 274. The amounts claimed apparently included in many

instances three meals a day for petitioners and their dependent

son. Although they claim that they were entertaining potential

customers, this claim is inherently improbable. 

Petitioner Rodney J. Huang testified that the total monthly

rent for petitioners’ residence was $1,350 and that he allocated

$700 to business expense (for 1992; in 1993, the amount claimed
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was $800 per month). The records of “personal” items each month

during the years in issue, however, showed less than the alleged

personal portion of the rent. Moreover, in addition to recording

alleged business rent on Schedule C for 1993, petitioners claimed

a rental loss on Schedule E because they did not recover the rent

from the business. Thus, the rent was deducted twice on that

return. In any event, a cash basis taxpayer cannot deduct as a

loss income that was not received or previously reported. See,

e.g., Hort v. Commissioner, 313 U.S. 28, 32-33 (1941); Marks v.

Commissioner, 390 F.2d 598 (9th Cir. 1968), affg. T.C. Memo.

1966-62. Petitioners’ claims regarding rent expense are patently

untenable. 

In addition, petitioners have not made the showing required

to deduct expenses relating to business use of their home. 

Section 280A provides in pertinent part as follows:

(a) General Rule.--Except as otherwise provided in

this section, in the case of a taxpayer who is an

individual or an S corporation, no deduction otherwise

allowable under this chapter shall be allowed with

respect to the use of a dwelling unit which is used by

the taxpayer during the taxable year as a residence.

* * * * * * *

(c) Exceptions for Certain Business or Rental Use;

Limitation on Deductions for Such Use.

(1) Certain business use.--Subsection (a)

shall not apply to any item to the extent such

item is allocable to a portion of the dwelling

unit which is exclusively used on a regular 

basis--
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(A) as the principal place of business

for any trade or business of the taxpayer,

(B) as a place of business which is used

by patients, clients, or customers in meeting

or dealing with the taxpayer in the normal

course of his trade or business, or

(C) in the case of a separate structure

which is not attached to the dwelling unit,

in connection with the taxpayer’s trade or

business.

In the case of an employee, the preceding sentence

shall apply only if the exclusive use referred to

in the preceding sentence is for the convenience

of his employer.

* * * * * * *

(5) Limitation on deductions.--In the case of

a use described in paragraph (1), (2), or (4), and

in the case of a use described in paragraph (3)

where the dwelling unit is used by the taxpayer

during the taxable year as a residence, the

deductions allowed under this chapter for the

taxable year by reason of being attributed to such

use shall not exceed the excess of--

(A) the gross income derived from such

use for the taxable year, over

(B) the sum of--

(i) the deductions allocable to

such use which are allowable under this

chapter for the taxable year whether or

not such unit (or portion thereof) was

so used, and

(ii) the deductions allocable to

the trade or business (or rental

activity) in which such use occurs (but

which are not allocable to such use) for

such taxable year.
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Petitioners have failed to satisfy any of the requirements of

section 280A; specifically, they have failed to show that any

portion of their residence was used exclusively for business. 

Moreover, because their alleged business had no income, they

cannot deduct any of the costs of maintaining their home. 

With respect to the employee business expenses claimed on

Schedule A for 1992, petitioners presented neither explanation

nor substantiation. The amounts claimed are again inherently

unreasonable. Further, it appears that some of the items claimed

on Schedule A were duplicated on Schedule C. Petitioners claimed

on Schedules A and C for 1992 total meals and entertainment

expenses of $10,800, which is approximately 15 percent of their

total reported income for that year. Petitioners in 1992 claimed

vehicle expenses relating to alleged business use of two cars,

for a total of $5,420, but they did not provide any evidence of

how the cars were used either in Mr. Huang’s employment or in

petitioners’ telecommunications business. 

Section 6662(a) provides, among other things, for a penalty

equal to 20 percent of the portion of an underpayment

attributable to negligence. Negligence is defined in section

6662(c) as follows:

(c) Negligence.--For purposes of this section, the

term “negligence” includes any failure to make a

reasonable attempt to comply with the provisions of

this title, and the term “disregard” includes any

careless, reckless, or intentional disregard.
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Mr. Huang testified that petitioners did not consult any tax

preparer, accountant, or lawyer with respect to the claims made

on their returns. On consideration of the record in this case,

respondent’s determination of the penalties must be sustained.

Decision will be entered

for respondent.