TAX COURT OPINION

Case: Thomas A. Updegrove
Docket Number: 27087-14S
Judge: Swift
Opinion Type: bench
Filed: 12/04/2015
Pages: 7

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 THOMAS A. UPDEGROVE, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 27087-14S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and respondent a copy of the pages of the transcript of the trial in the above case before Judge Stephen J. Swift at Philadelphia, Pennsylvania, on November 18, 2015, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Stephen J. Swift Judge Dated: Washington, D.C. December 4, 2015 SERVED Dec 04 2015 Capital Reporting Company 3 I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 'Bench Opinion by Senior Judge Stephen J. Swift November 18, 2015 Thomas A. Updegrove v. Commissioner Docket No. 27087-14S THE COURT: THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. THESE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. MR. UPDEGROVE: Can I come a little closer, Your Honor? THE COURT: Come forward if you want to hear. I expected you to come forward. MR. UPDEGROVE: Sit down, Your Honor? THE COURT: Please. Okay, so as stated, the Court's going to render a bench opinion in this case. The trial was held on Monday, and the following constitutes the 20 Court's findings of fact and conclusions of law. 21 22 23 24 25 This case involves Petitioner's 2010 Federal income tax liabilities, late -negligence penalty under section 6662, and late filing penalty relating to his 2010 tax return. The tax deficiency determined against Petitioner for 2010 was in the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company total amount of $6,442, and penalties under GG72 of 6662 4 $1,288, and under 6651 of $1,610. Also, self- employment taxes were determined by Respondent of $5,152. The issue in the case involves the substantiation of the payment and the nature of claimed "Other Expenses" claimed on Petitioner's 2010 tax return of $23,904. Respondent disputes whether the expenses were incurred and the ordinary and necessary nature there Petitioner has his own business as a computer consultant to other small businesses. He provides and maintains software that helps small businesses manage and secure their software, their Internet connections, the integrity and efficiency of their computers, of its clients computers, and the Internet connectivity of clients' computers. Petitioner also over the years had a second business involving a martial arts school. And some of the confusion in this case stems from payments from one of his businesses made to the other of his businesses and the apparent merger or mixing of at least some aspects of the two businesses for bookkeeping and tax purposes raising questions about the purpose of the expenses and questions about what 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com C Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 I appeared to be some duplicate expensing on his 2010 tax return of some expenses. On his 2010 tax return, Petitioner filed a Schedule C for the business labeled Internetwork service, and reported gross receipts in the amount of $158,288 and business expenses in the total amount of $145,733. As a result, Petitioner reported business income -- net business income of $12,555. Respondent's Notice of Deficiency to '10 Petitioner with respect to Petitioner's 2010 tax 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 liability disallowed $23, 904 of the $65, 794 "Other Expenses" claimed on Petitioner's Schedule C. Regarding the burden of proof under section 7491 the Tex--C-eer-t--Rtrtes, i4 Petitioner makes no particular argument, that the burden of proof should be on Respondent under section 7491(a). Taxpayers are required, under the Internal Revenue Code and the regulations to keep records of accounts, documentation of their expenses that are sufficient to establish the amount of income deductions and expenses r r t-a*-r-et-ar¬n for which they're claiming deductions. Internal Revenue Code section 162(a) permits deductions for ordinary and necessary expenses paid or incurred during the taxable year in 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 carrying on a trade or business. An ordinary expense is one that is common and acceptable to the particular business. Welch v. Helvering, 290 U.S. 11 113-114 (1933). A necessary expense is an expense that is appropriate and helpful in carrying on a trade or business. We had four subcategories of "Other Expenses" that are in dispute in this case that 9 Petitioner claimed as "Other Expenses" on his tax 10 11 12 13 14 15 16 17 18 19 return and that Respondent has disallowed. They are labeled computer supplies in the amount of $11,209, credit card fees in the amount of $5,601, installation materials in the amount of $152, and labeled software expenses in the amount of $6,942, totaling the four categories equals $23,904. To support his claimed expenses, Petitioner has given some general testimony and submitted a copy of his general ledger for 2010. Also submitted at the trial was a profit and loss statement that 20 Petitioner's accountant apparently has recently 21 22 23 24 25 provided to Respondent, Petitioner's provided to Respondent. It's not clear when that profit and loss statement was prepared by Petitioner's accountant. Petitioner acknowledges that a number of the claimed expenses in dispute are mislabeled on I s7s 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 his tax return. For example, the entire subcategory of computer supplies totaling $11,209, Petitioner admits were mislabeled and Petitioner now claims they actually constituted $6,000 he rent, $1,300 of 5 utilities, $565 in insurance, $1,000 of out-of- 6 7 8 pocket miscellaneous expenses, and $56 of other expenses. Such errors in labeling are not insignificant and handicap Respondent and the 9 Court's ability to properly evaluate the legitimacy 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of the disputed expenses. Other than his general testimony, Petitioner has not provided documentation or other credible or adequate evidence of the purpose of the disallowed expenses. Medical expenses claimed by Petitioner now on cross-examination, there are medical expenses claimed. The medical expenses claimed or medical insurance clai Petitioner, on cross-examination, now admits were not for himself or for any business employee, but were xxe a lady friend. Petitioner argues his friend helped in the business and yet he paid her no wages or salary. Clearly such medical insurance payments for a non-employee, unpaid friend appear to be not ordinary and necessary business expenses. They're quite extraordinary expenses of a personal nature. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Credit card payments claimed as business expenses in 2010 of $5, 601 admittedly relate primarily to purchases by Petitioner dating back to fv years before 2010 before which inadequate or essentially no substantiation% been provided by had 1 2 3 4 5 8 Ut En 6 Petitioner. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In summary and for the reasons stated, we sustain Respondent's disallowance of the disputed $23,904 claimed business expenses. Regarding the penalties Respondent has G662 determined against Petitioner under section Er&5-2 and 6651, Petitioner makes no discrete argument as to his non-liability therefor, and Respondent has satisfied his burden of production regarding thereto. The Court also notes the Eccpon:1:nt's, (-e÷e-) failure to report any self-employment tax of $5,152, which lu¥e not been addressed by Petitioner. In summary, the Court sustains Respondent's determination of the disallowed expenses of the tax deficiency at issue in this case and Respondent's determination of thc de-t-eëmètre-t-i-en and imposition of the section 6662 penalty, the 6/a4-1- p:nalty, and the self-employment taxes that have been determined. This concludes the Court's findings of fact and conclusions of law in this case. 866.488.DEPO www.CapitalReportingCompany.com