T.C. Summary Opinion 2006-164

UNITED STATES TAX COURT

SAMUEL S. AND LAURA M. PINKNEY, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8761-05S. Filed October 16, 2006. 

Samuel S. and Laura M. Pinkney, pro sese.

Alexander D. DeVitis, for respondent.

PANUTHOS, Chief Special Trial Judge: This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed. The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority. Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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1 Respondent concedes deductions for $2,825 of charitable

cash contributions and $314.94 of other expenses. Petitioners

concede their gross income includes $1,063 of gambling winnings,

$14 of interest income from Fiscal Federal Credit Union, and $185

of gross receipts from Nuways, Inc. Petitioners also concede the

disallowance of deductions for $6,964.45 of medical and dental

expenses; $2,918 of charitable noncash contributions; $1,730 of

car and truck expenses; $4,149.72 of travel expense; $1,340.52 of

meals and entertainment expenses; and $2,135.16 of advertising

expense. Adjustments not addressed in this opinion are

computational. 

Respondent determined a $7,073 deficiency in petitioners’

2002 income tax and a $1,414.60 accuracy-related penalty pursuant

to section 6662(a). After concessions,1 the issues for decision

are: (1) Whether petitioners can deduct (a) $246 for charitable

cash contributions, (b) $24,510.89 of other expenses, (c) $55 of

bad debt expense, and (d) $3,506 for home office expense; and (2)

whether petitioners are liable for an accuracy-related penalty

under section 6662(a). 

Some of the facts have been stipulated and are so found. 

Petitioners Samuel Pinkney and Laura Pinkney are married and

resided in Los Angeles, California, at the time their petition

was filed. Petitioners have a son, Roderick Pinkney (Roderick),

who was approximately 41 years old during the year at issue. For

convenience, we combine our findings and discussion herein. 

Unless otherwise indicated, all references to petitioner are to

Samuel Pinkney. 
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Burden of Proof

In general, the Commissioner’s determinations set forth in a

notice of deficiency are presumed correct, and the taxpayer bears

the burden of showing that the determinations are in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant

to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances. 

Petitioners have neither alleged that section 7491(a) applies nor

established their compliance with the requirements of section

7491(a)(2)(A) and (B) to substantiate items, maintain records,

and cooperate fully with respondent’s reasonable requests. 

Petitioners therefore bear the burden of proof. 

1. Petitioners’ Claimed Deductions

Deductions are a matter of legislative grace, and the

taxpayer bears the burden of proving that he is entitled to any

deduction claimed. Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934). The taxpayer is required to

maintain records that are sufficient to enable the Commissioner

to determine his correct tax liability. See sec. 6001; sec.

1.6001-1(a), Income Tax Regs. 

A. Charitable Cash Contributions

In general, section 170(a) allows as a deduction any

charitable contribution made within the taxable year. A

charitable contribution means a contribution or gift to or for
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the use of, inter alia, a State, possession of the United States,

or any political subdivision of the foregoing. Sec. 170(c)(1). 

On their joint 2002 Federal income tax return, petitioners

deducted charitable cash contributions of $5,456. Respondent

initially allowed $2,385 of that amount and later conceded an

additional $2,825, leaving $246 in dispute. At trial,

petitioners introduced a copy of a check for $25 to the City of

Carson. The face of the check bears no indication that the $25

represents a contribution or gift, and petitioners offered no

testimony with respect to this item. Accordingly, respondent’s

determination is sustained to the extent of $246. 

B. Other Expenses

Section 162(a) generally allows a deduction for ordinary and

necessary business expenses. To qualify as an allowable

deduction under section 162(a), an item must be: (1) Paid or

incurred during the taxable year; (2) for carrying on any trade

or business; (3) an expense; (4) a necessary expense; and (5) an

ordinary expense. Commissioner v. Lincoln Sav. & Loan

Association, 403 U.S. 345, 352 (1971); FMR Corp. & Subs. v.

Commissioner, 110 T.C. 402, 414 (1998). 

Petitioners attached to their return a Schedule C, Profit or

Loss From Business, for a business described as real estate

consulting. Petitioners deducted $29,132 of other expenses on

Schedule C, consisting of items such as supplies expense, tax
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2 Petitioners did not report any amount as wage expense on

their Schedule C. It appears that petitioners instead reported

the alleged payments to their son as a component of other

expenses. 

preparation expense, and professional business expense. 

Respondent initially allowed $4,306.17 of that amount and later

conceded an additional $314.94, leaving $24,510.89 in dispute. 

At trial, petitioners introduced: (1) A receipt for $447

related to Getotis.com; (2) receipts totaling $888.75 from PrePaid Legal Services, Inc.; (3) a Form 1099-MISC, Miscellaneous

Income, indicating that petitioner paid his son, Roderick, $5,460

of nonemployee compensation;2 (4) receipt stubs and checks drawn

on petitioner’s account to Roderick; and (5) a Form 1096, Annual

Summary and Transmittal of U.S. Information Returns, used to

transmit the Form 1099-MISC to the Internal Revenue Service. 

With respect to the receipt for $447, it is not clear from

the document what type of expense this represents or how

Getotis.com relates to the real estate consulting business. 

Petitioners offered no testimony on this matter, and, therefore,

they have failed to prove the $447 is an ordinary and necessary

business expense. 

With respect to the receipts for $888.75 from Pre-Paid Legal

Services, Inc., legal fees generally are deductible if they are

sufficiently connected with the taxpayer’s trade or business. 

See, e.g., Kenton v. Commissioner, T.C. Memo. 2006-13. 
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Petitioners, however, offered no testimony or other evidence to

demonstrate that the $888.75 was a deductible legal expense or

otherwise constituted an ordinary and necessary business expense. 

Accordingly, petitioners are not entitled to a deduction for this

amount. 

With respect to the purported payments to Roderick,

compensation is deductible as a trade or business expense only if

it is (1) reasonable in amount, (2) based on services actually

rendered, and (3) paid or incurred. See O’Connor v.

Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax

Regs. When the compensation is paid to a family member, the

Court carefully scrutinizes the transaction. Denman v.

Commissioner, 48 T.C. 439, 450 (1967); Hamdi v. Commissioner,

T.C. Memo. 1993-38, affd. without published opinion 23 F.3d 407

(6th Cir. 1994). In deciding whether payments to a family member

are deductible, we examine all the facts and circumstances. 

Eller v. Commissioner, 77 T.C. 934, 962 (1981). Facts that

militate against the deductibility of such payments include

failing to maintain adequate records of the family member’s

hours, duties, and earnings, and failing to file appropriate

information returns. See Haeder v. Commissioner, T.C. Memo.

2001-7; Martens v. Commissioner, T.C. Memo. 1990-42, affd.

without published opinion 934 F.2d 319 (4th Cir. 1991); O’Connor

v. Commissioner, supra. 
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Petitioner testified that Roderick performed a number of

tasks for him in 2002, such as recruiting clients, setting up

meetings, and making presentations. Petitioner typically paid

Roderick in cash, although Roderick sometimes received payment by

check. Petitioner testified that he recorded the payments in a

notebook, which was not made part of the record. Petitioner and

Roderick later created receipts to correspond to the payments,

including receipts created at the end of 2002. The receipts were

made on preprinted, numbered forms. Some of the receipts were

not written in chronological order. For example, receipt No.

804201 is dated April 30, 2002, while receipt No. 804202 is dated

January 14, 2002. 

Petitioner filed a Form 1099-MISC for Roderick, as well as a

Form 1096. However, both the Form 1099-MISC and the Form 1096

were filed late. Roderick did not report the $5,460 as income. 

Petitioner contends Roderick was not required to file a 2002 tax

return because he had little or no additional income that year. 

Respondent introduced evidence, however, indicating that Roderick

earned $8,136 of wage income from United Airlines Inc., $675 of

gambling winnings, $8,541 of unemployment benefits, and $295 of

nonemployee compensation from Nuways, Inc. 

Examining all the facts and circumstances, we conclude that

petitioners cannot deduct the $5,460 as a trade or business

expense. The receipts introduced to substantiate the payments to
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Roderick are of doubtful accuracy. To the extent such payments

were made, petitioner did not keep a written log of Roderick’s

hours or duties, nor did he explain how he determined Roderick’s

compensation. As a result, it is not clear whether the payments

represent reasonable compensation for the services, if any, that

Roderick performed. Roderick’s failure to report the $5,460

casts further doubt on the deductibility of the payments, as does

petitioner’s failure to timely file information returns. See

Haeder v. Commissioner, supra; Martens v. Commissioner, supra. 

Accordingly, petitioners have failed to meet their burden of

proof, and respondent’s determination is sustained to the extent

of $24,510.89.

C. Bad Debt Expense

In general, section 166(a)(1) allows as a deduction any debt

which becomes worthless within the taxable year. Business debts

may be deducted against ordinary income to the extent that such

debts become wholly or partially worthless during the year.

Nonbusiness debts also may be deducted, but only in the same

manner as short-term capital losses, and only if the debts are

wholly worthless in the year claimed. Sec. 166(d); sec.

1.166-5(a)(2), Income Tax Regs. Section 166(d)(2) provides

generally that a “nonbusiness debt” means a debt other than a

debt created or acquired in connection with a trade or business 
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of the taxpayer or a debt the loss from the worthlessness of

which is incurred in the taxpayer’s trade or business.

Petitioners did not claim a deduction for bad debt expense

on their return. Shortly before trial, however, petitioners

asserted they were entitled to a $55 deduction for bad debt

expense incurred in connection with a trade or business. 

Petitioners introduced a check for $55 to Phillip Peterson. In

the memo section of the check is written “Loan”. Even if we

assume that the $55 represents a loan made in connection with a

trade or business, there is no evidence that the debt became

wholly or partially worthless within the taxable year 2002. 

Accordingly, petitioners are not entitled to a deduction. 

D. Home Office Expense

Section 280A(c)(1) permits the deduction of expenses

allocable to a portion of a dwelling unit that is used

exclusively and on a regular basis as either (1) the principal

place of business for the taxpayer’s trade or business, or (2) a

place of business that is used by clients or customers in meeting

or dealing with the taxpayer in the normal course of the

taxpayer’s trade or business. The deduction cannot exceed the

gross income derived from the business use of the residence over

the sum of certain deductions allocable to such income. Sec.

280A(c)(5); Cunningham v. Commissioner, T.C. Memo. 1996-141,

affd. without published opinion 110 F.3d 59 (4th Cir. 1997).
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Petitioners attached to their return a Form 8829, Expenses

for Business Use of Your Home, but did not claim a deduction for

home office expense on Schedule C. Shortly before trial,

petitioners asserted they were entitled to deduct $3,506 of home

office expense. Petitioners offered no evidence, however, that

any portion of their home meets the requirements of section

280A(c)(1). Accordingly, they are not entitled to a deduction. 

2. Accuracy-Related Penalty Under Section 6662(a)

Section 6662(a) provides that a taxpayer may be liable for a

penalty of 20 percent of the portion of an underpayment of tax

attributable to negligence or disregard of rules or regulations. 

Sec. 6662(a) and (b)(1). Negligence includes any failure by the

taxpayer to keep adequate books and records or to substantiate

items properly. Sec. 1.6662-3(b)(2), Income Tax Regs. Disregard

of rules or regulations includes any careless, reckless, or

intentional disregard. Sec. 1.6662-3(b)(1), Income Tax Regs. An

exception to the section 6662(a) penalty applies when the

taxpayer demonstrates (1) there was reasonable cause for the

underpayment, and (2) the taxpayer acted in good faith with

respect to the underpayment. Sec. 6664(c). 

Respondent determined a $1,414.60 penalty against

petitioners pursuant to section 6662(a). Under section 7491(c),

the Commissioner bears the burden of production with respect to

the accuracy-related penalty. To meet this burden, the

Commissioner must come forward with sufficient evidence

indicating that it is appropriate to impose the penalty. Higbee
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v. Commissioner, 116 T.C. 438, 446 (2001). Under Rule 34(b),

however, the taxpayer is required to assign error in the petition

to each and every error alleged to have been committed by the

Commissioner, including issues with respect to which the

Commissioner bears the burden of proof. Any issue not raised in

the assignments of error is deemed to be conceded. Id.; see also

Swain v. Commissioner, 118 T.C. 358, 363-364 (2002). 

Petitioners did not assign error to the determination of the

penalty in their petition. Nor did they dispute the

determination at trial. Accordingly, the penalty is deemed to be

conceded. See Rule 34(b); Swain v. Commissioner, supra. Even if

petitioners had challenged the penalty, petitioners failed to

keep adequate books or records or to properly substantiate the

disallowed expense deductions. See sec. 1.6662-3(b)(1), Income

Tax Regs. Petitioners introduced no evidence to indicate their

failure was due to reasonable cause or good faith. See sec.

6664(c). Accordingly, respondent’s determination is sustained. 

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be entered

under Rule 155.