TAX COURT OPINION

Case: Phillip Wayne Orrick
Docket Number: 16372-16S
Judge: Nega
Opinion Type: bench
Filed: 10/19/2017
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 PA PHILLIP WAYNE ORRICK, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 16372-16S. ) ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge Joseph W. Nega at Memphis, Tennessee, on October 3, 2017, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. October 19, 2017 SERVED Oct 19 2017 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge JOSEPH W. NEGA Date: October 3, 2017 PHILLIP W. ORRICK V. COMMISSIONER Docket No. 16372-16S The Court has decided to render oral findings of fact and opinion in this case. The following represents () A the Court's oral findings of fact and opinion. This Bench Opinion is made pursuant ht)(, to section 7459(b) and Rule 152. This case was a small case subject to the provisions of A section 7463 and Rules 170 through 174. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the year issue, and all rule references are to the Tax Court Rules of Practice and Procedure. Phillip W. Orrick appeared pro, se. Joseph E. Nagy appeared on behalf of Respondent. The issues for decision are whether petitioner: (1) is entitled to certain Schedule C, Profit or Loss from Business, as described below, and (2) is liable for an accuracy-related penalty under section 6662(a) for the year at issue. (973)406-2250|operations@escribers.net|www.escribers.net 4 FINDINGS OF FACT This case was tried on October 2, 2017, in Memphis, Tennessee. At the time the petition was filed Petitioner resided in Missouri. Petitioner operates a residential construction business as a sole proprietorship. For the year at issue petitioner's business generated significant expenses that resulted in petitioner reporting Schedule C losses of $43,584. By a notice of deficiency dated April 25, 2016, respondent determined a deficiency in petitioner's Federal income taxes, of $7,205, and asserted an accuracy-related penalty of $1,217 under section 6662(a) for the taxable year 2013 (the year at issue). The alleged deficiency arises from Respondent's disallowance of petitioner's Schedule C deductions of: (1) $6,126 of meals and entertainment expenses and $29,448 of vehicle expenses, stemming from petitioner's claimed travel of 52,120 business miles, and (2) $2,220 of legal and professional expenses. The accuracy-related penalty is based on a substantial understatement of income tax. I. Burden of Proof OPINION Generally, the Commissioner's determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operations@escribers.net|wwwmaibers.net 5 1 2 3 4 5 6 7 8 9 10 11 142 (a)(1); Welch v. Helvering, 290 U.S. 111,115(1933). Deductions and credits are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction or credit claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488,493(1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435,440(1934). II. Schedule C Expenses Section 162(a) allows deductions for "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". An expense is "ordinary" if it is customary or usual 12 within a particular trade, business or industry, and 13 14 15 "necessary" if it is appropriate and helpful for the development of the business. Deputy v. du Pont, 308 U.S. 5 lch v. Helvering, 290 U.S. at 113. 16 Whether an expense is ordinary or necessary is a question 17 18 19 20 21 22 23 24 of fact. Commissioner v. Heininger, 320 U.S. 467,475(1943). Taxpayers must satisfy the specific requirements for any deduction claimed, and are required to maintain records sufficient to substantiate bhee laims. INDOPCO Inc. v. Commissioner, 503 U.S. 79,84(1992); Sec. 6001; Sec. 1.6001-1(a),(e), Income Tax Regs. Generally, records are adequate substantiation if they establish the amount 25 and purpose of the claimed deductions. Higbee v. (973)406-2250|operations@escribers.netlwww.escribersmet 6 Commissioner, 116 T.C. 438,440(2001). No deduction may be allowed for personal, living, or family expenses unless the code expressly provides otherwise. Sec. 262(a). A. Legal and Professional Expenses Respondent disallowed petitioner's claimed Schedule C deductions for legal and professional fees. Petitioner testified that these expenses related toA Schedule C business filing for bankruptcy. Petitioner established through a combination of credible testimony and bank account records business purpose and necessity of( $2, 020 of legal and professional expenses, and accordingly deduct that amount for the year at issue etitioner, however, failed to substantiate the remainin $200 of his claimed legal expenses. Accordingly, we conclude that petitioner is entitled to his claimed Schedule C deduction for legal and professional fees to the extent established by the record. B. Strict Substantiation Expenses Taxpayers are prohibited from deducting business expenses related to travel, meals, entertainment, gifts and the use of "listed property" unless the taxpayer complies with the strict substantiation requirements of section 274(d). See also Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). As relevant here, the term "listed property" includes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operationseescribersmetlwww.escribersmet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 passenger automobiles. Sec. 280F(d)(4)(A)(i)and(ii). Uncorroborated testimony is insufficient to satisfy.the strict substantiation requirements of Section 274(d). Rutz v. Commissioner, 66 T.C. 879, 885-886 (1979). To satisfy the strict substantiation requirements of section 274(d), a taxpayer must establish "by adequate records": (1) the amount of the expense, (2) the time and place of the travel or use, and (3) the business purpose or business relationship giving rise to the expense. Sec. 274(d); Sec. 1.274-5T(b)(6),(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). To substantiate by "adequate records," in particular, the taxpayer must provide (1) an account book, a log, or similar contemporaneous record and (2) other documentary evidence that, in combination, sufficiently establish each required element for the deduction. Sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fe Reg. 46017 (Nov. 6, 1985). Documentary evidence includes receipts, paid bills, or similar evidence. Sec. 1.274- 5(c)(2)(iii), Income Tax Regs. The strict substantiation requirements of section 274(d) for vehicle expense deductions must be met whether the taxpayer chooses to deduct either actual expenses, or claim an amount in accordance with the standard mileage rate. Sec. 1.274- 25 5(j)(2), Income Tax Regs. 73)4062250|operations@escribers.netlwww.escnbers.net . 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Respondent disallowed petitioner's deductions for vehicle expenses, and meal and entertâinment expenses. At trial, petitioner did not produce any books, records, receipts, or mileage logs that might corroborate the amount or business purpose of his claimed vehicle expenses. Petitioner's only attempt to substantiate his deduction came by way of testimony. Petitioner's testimony, however, failed to credibly establish the purpose and nature of his vehicle expenses or account for his inability to produce any records sufficient to substantiate his claimed expenses. Petitioner, similarly, did not provide any documentary evidence to corroborate the amount he claimed as meal and entertainment expenses, nor did he produce any credible evidence to establish the business purpose of these expenses. Based on the heightened substantiation requirements, Petitioner failed to demonstrate that he is entitled to any deductions for car and truck expenses, or 20 meal and entertainment expenses for the year at issue. 21 22 23 24 25 Accordingly, Respondent's determinations are sustained. II. Section 6662(a) Penalty Section 6662(a) and (b)(2) imposes an accuracy- related penalty on any portion of an underpayment of Federal income tax that is attributable to, among other WEEE 973)406-2250|operationsøescribers.net| www.escribers iet 9 1 2 3 4 5 6 7 8 9 10 11 things, the taxpayer's "substantial understatement of income tax." An understatement of Federal income tax is substantial if the amount of the understatement for the taxable year exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A). The Commissioner bears the burden of production with respect to any accuracy-related penalty under section 6662. See Sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446. Once the burden of production is met the burden of proof shifts to the taxpayer to show that the penalty Sbcu 12 Mot apply. The section 6662 (a) accuracy-relatedd 13 14 15 16 17 18 19 20 21 22 23 24 25 penalty will not apply with respect to any portion of an underpayment if it is shown that there was reasonable cause and that the taxpayer acted in good faith. Sec. 6664(c)(1); Rule 142(a), Higbee v. Commissioner, 116 T.C. at 446-447. Whether a taxpayer acted in good faith depends upon the facts and circumstances of each case. See Sec. 1.6664-4(b)(1), Income Tax Regs. At trial, petitioner's testimony failed to establish reasonable cause. If the Rule 155 computations confirm a substantial understatement for the taxable year at issue, then respondent has met his burden of production and we hold that petitioner is liable for the accuracy- related penalty under section 6662(a) for a substantial (973) 406-2250 ) operations@escribersnet l wwwascibersnet 10 1 2 3 4 5 6 7 8 9 10 11 understatement of income tax insofar as the Rule 155 computations show one. Sec. 7491 ( c) ; Prince v. Commissioner, T. C. Memo 2003-247 . III. Conclusion Accordingly, a decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. In reaching our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, find those arguments moot, irrelevant, or without merit. (Whereupon, at 11:33 a.m., the above-entitled 12 matter was concluded.) t 13 14 15 16 17 18 19 20 21 22 23 24 25 BM 73)406-2250|operations@escn1mts.netlwww.esaibersaet