TAX COURT OPINION

Case: Samuel Gaillard & Priscilla Gaillard
Docket Number: 5793-19
Judge: Gustafson
Opinion Type: bench
Filed: 11/17/2020
Pages: 13

SR UNITED STATES TAX COURT WASHINGTON, DC 20217 SAMUEL GAILLARD & PRISCILLA GAILLARD, Petitioners, v. ) ) ) ) ) Docket No. 5793-19. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER OF SERVICE OF TRANSCRIPT 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 herewith to petitioner and to the Commissioner a copy of the pages of the transcript of the trial in this case before the undersigned judge at the Washington, D.C., remote session 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. At trial petitioners intimated that they may have documentary evidence that they failed to produce at trial. They should note that any motion for reconsideration, with or without a new or further trial, would be due by December 17, 2020, under Rule 161. However, that date falls within the Court's eFiling blackout period (beginning November 21, 2020, through December 27, 2020). It is therefore further ORDERED that the deadline for a motion under Rule 161 is hereby enlarged to January 4, 2021. Any motion under Rule 161 must be filed by that date and should include the additional documentary evidence on which petitioners would rely. (Signed) David Gustafson Judge Dated: Washington, D.C. November 17, 2020 SERVED Nov 17 2020 RECEIVED 11/16/20 IN THE UNITED STATES TAX COURT SR In the Matter of: SAMUEL GAILLARD & PRISCILLA GAILLARD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 5793-19 ) ) ) ) ) ) ) ) ) Pages: 1 through 11 Place: Washington, DC (Remote Proceeding) Date: November 12, 2020 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 IN THE UNITED STATES TAX COURT In the Matter of: SAMUEL GAILLARD & PRISCILLA GAILLARD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 5793-19 ) ) ) ) ) ) ) ) ) United States Tax Court 400 Second Street, NW Third Floor, South Courtroom Washington, District Of Columbia 20217 (Remote Proceeding) November 12, 2020 The above-entitled matter came on for bench opinion, pursuant to notice at 1:00 p.m. BEFORE: HONORABLE DAVID GUSTAFSON Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance or ners 1 2 3 P R O C E E D I N G S 2 (1:00 p.m.) THE CLERK: Docket number 5793-19, Samuel 4 Gaillard & Priscilla Gaillard. (Whereupon, a bench opinion was rendered.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinion by Judge David Gustafson November 12, 2020 Samuel Gaillard & Priscilla Gaillard v. Commissioner of 3 Internal Revenue Docket No. 5793-19 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal 1 2 3 4 5 6 7 8 9 10 Revenue Code, and Rule 152 of the Tax Court Rules of 11 Practice and Procedure; and it shall not be relied on as 12 precedent in any other case. 13 14 By a statutory notice of deficiency ("SNOD") dated February 5, 2019 (Ex. 3-J), the Internal Revenue 15 Service ("IRS") determined a deficiency in the Federal 16 income tax of petitioners, Samuel Gaillard and Priscilla 17 Gaillard, for the 2015 and 2016 tax years and asserted 18 accuracy-related penalties under section 6662 for each 19 year. In the SNOD the IRS disallowed--for lack of 20 21 22 substantiation--business expenses that Mr. Gaillard reported on Schedule C, "Profit or Loss From Business", for 2015 and 2016, and business expenses that Mrs. 23 Gaillard reported on Schedule C for 2016; the IRS also 24 increased Mr. Gaillard's pension income for 2016 and 25 asserted on that income a 10-percent early distribution tax pursuant to section 72(t). 4 The Gaillards timely filed a petition with this Court to challenge the determinations. In the process leading up to trial, the Commissioner conceded various items including portions of the claimed business expenses; the 10-percent early distribution tax; and the accuracy-related penalties. Trial of this case was conducted remotely, with the parties and the Court attending virtually via the internet from their respective locations. Mr. Gaillard represented himself; Mrs. Gaillard did not attend; and Jacob Russin represented the Commissioner. During the 1 2 3 4 5 6 7 8 9 10 11 12 13 trial, the parties made various concessions (reflected 14 below in the findings of fact) including concessions on 15 amounts of certain business expenses deemed substantiated 16 for 2015 and 2016 and that the additional pension income 17 18 19 the Gaillards' received in 2016 was indeed taxable. The issue left for decision is the amount of business expenses (relating to professional services and contract labor) 20 that the Gaillards' were entitled to deduct for 2015 and 21 2016 for Mr. Gaillard's business. 22 On the evidence before us, and using the burden- 23 of-Proof principles explained below, we find the following facts: 24 25 FINDINGS OF FACT 1 Mr. and Mrs. Gaillard are married and live in 2 Maryland, where they resided at the time they filed their 5 3 4 5 6 7 Petition in this case. (Stip. 1.) Mr. Gaillard is a certified public accountant and Mrs. Gaillard is an insurance agent. Mr. Gaillard's business activities and expenses During 2015 and 2016, the relevant years, Mr. 8 Gaillard operated an accounting business, Gaillard & 9 Associates. (Stip. 4.) 10 11 Professional services and contract labor As part of Mr. Gaillard's business, he performed 12 various accounting projects including audits of business 13 and organizations, and from time to time he required 14 additional help to complete the larger projects. In order 15 to accommodate his needs, Mr. Gaillard would hire third 16 parties to perform work for his business, which he 17 18 reported as "professional expenses" in 2015 and "contract labor" in 2016. (Stip. 12-13.) During 2015 Mr. Gaillard 19 hired various individuals to whom he paid a total of 20 $28,373 (of which $28,338 was conceded by the 21 Commissioner) in professional expenses. During 2016 Mr. 22 Gaillard hired various individuals and paid a total of 23 $8,695 (as conceded by the Commissioner) in contract labor expenses. 24 25 Office space During 2015 and 2016, Mr. Gaillard operated his 6 business out of office space he rented from an entity named "1401 Associates". (Stip. 9.) During 2015 Mr. 1 2 3 4 Gaillard made monthly payments to 1401 Associates in the 5 6 7 8 9 10 11 12 13 14 amount of $1,600 for January, $1,625 for February through October, $1,725 for November, and $1,695 for December, for a total of $19,645 for the year (of which the Commissioner conceded $19,500). During 2016 Mr. Gaillard made monthly Payments of $1,710, for a total of $20,520 (all of which the Commissioner has conceded). Depreciation and section 179 Mr. Gaillard incurred business expenses related to the use of his vehicle during 2015 and 2016. (Stip. 11.) After Mr. Gaillard gave his testimony at trial, the 15 parties conferred and agreed that Mr. Gaillard incurred 16 vehicle business expenses totaling $8,600 for 2015 and 17 $8,000 for 2016--and we so find. 18 Mrs. Gaillard's business activities and expenses 19 20 21 Mrs. Gaillard also incurred various expenses in the insurance business she began operating in 2016. (Stip. 15.) Her business expenses included $50,780 in 22 payroll expenses (reported as "employee benefits"); 23 24 $32,886 in office rent; and $13,138 that she reported as "depreciation and section 179 expenses". (The Gaillards 25 had reported larger amounts for each of these expenses, e ne s but the Commissioner conceded these smaller amounts, to 7 which Mr. Gaillard agreed at trial). Pension Income In 2016 Mr. Gaillard received a distribution of Pension income in the amount of $5,581 from Massachusetts 1 2 3 4 5 6 Mutual Life Insurance, and at trial he conceded that this 7 amount was taxable income. 8 Gaillards' tax returns 9 For 2015 and 2016, Mr. and Mrs. Gaillard 10 electronically filed joint Forms 1040, "U.S. Individual 11 12 Income Tax Return." (Stip. 2.) On each return they reported their respective businesses on a corresponding 13 Schedule C. That is, Mr. Gaillard reported his business 14 on Schedule C for 2015 and on Schedule C1 for 2016, and 15 Mrs. Gaillard reported her business on Schedule C2 for 16 2016. On each Schedule C, the Gaillards reported their 17 various items of income and business expenses for each 18 year. 19 SNOD and Tax Court petition 20 The IRS examined the Gaillards' returns for 2015 21 and 2016. On February 5, 2019, the IRS mailed to the 22 Gaillards an SNOD that made the adjustments described 23 24 above. (Stip. 3.) Mr. and Mrs. Gaillard timely filed their 25 Petition with this Court. OPINION 8 I. APPlicable legal principles A. Burden of proof The IRS's determination is presumed correct, and taxpayers generally bear the burden to prove their entitlement to any deductions they claim. Rule 142(a)(1). Taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 1 2 3 4 5 6 7 8 9 10 11 12 1(a). 13 14 15 B. Business expense deductions Pursuant to section 162(a), a taxpayer may deduct "all the ordinary and necessary expenses paid or 16 incurred during the taxable year in carrying on any trade 17 or business". To prove entitlement to deduct an expense, 18 the taxpayer must prove not only the fact of the 19 expenditure but also the business purpose. Personal 20 expenses are generally not allowed as deductions. Sec. 21 262(a). 22 23 II. Analysis During the trial, the parties were able to agree 24 about most of the Gaillards' reported Schedule C expenses 25 for both 2015 and 2016. The only expense that remains to 73)406-2250}operations@escrîbetsmet|www.escribersaet be discussed is the professional or contract 9 labor expense for Mr. Gaillard's accounting business for both 2015 and 2016. For 2015 the Commissioner conceded that Mr. 1 2 3 4 5 Gaillard paid and is entitled to deduct $28,338 for 6 7 8 9 Professional expenses. Similarly for 2016 the Commissioner conceded that Mr. Gaillard is entitled to $8,695 for contract labor expenses. The Commissioner conceded these amounts based on various business records, 10 time sheets, cancelled checks, and corresponding payment 11 entries on business ledgers that Mr. Gaillard provided to 12 prove the fact of the expenses. However, Mr. Gaillard 13 maintains that the Commissioner conceded too little and 14 that Mr. Gaillard in fact paid greater amounts than the 15 Commissioner conceded. 16 We hold that petitioners did not satisfy their 17 burden of proof for substantiating deductions of Mr. 18 Gaillard's claimed business expenses beyond the amounts 19 that the Commissioner conceded. The records that Mr. 20 Gaillard presented at trial had entries that appear 21 duplicative or incomplete. The Gaillards provided some 22 cancelled checks, but when the Court examined them page by 23 page with Mr. Gaillard, the amounts added up to the totals 24 we have found. The Gaillards provided bank statements, 25 but when the Court examined them page by page with Mr. m en 1 Gaillard, he was unable to identify any payment that the 10 2 3 4 5 6 7 8 9 Commissioner had missed or that would otherwise increase the deduction to which the Gaillards would be entitled. The Gaillards provided what appeared to be summaries of Forms 1099-MISCs printed from return preparation software, but they did not provide any actual copies or records of the Forms 1099-MISCs that might have substantiated the payments alleged. In sum, Mr. Gaillard's records were generally lacking, and we find that he is entitled to no 10 more deductions than we have stated above. 11 12 III. Conclusion The IRS's SNOD is upheld in large part, to the 13 extent shown above. So that the liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 1:10 p.m., the above-entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 11 CASE NAME: Samuel Gaillard & Priscilla Gaillard v. Commissioner v. Commissioner DOCKET NO.: 5793-19 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 11 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Gary Baldwin on November 13, 2020 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its remote session in Washington, DC, in 11 accordance with the applicable provlslons of the current 12 verbatim reporting contract of the Court and have verified 13 14 15 16 17 18 19 20 21 3 24 25 the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Lori Rahtes, CDLT-108 Transcriber Jehdifer Lindeman Proofreader, CER 11/15/20 Date 11/15/20 Date