TAX COURT OPINION

Case: Rosetta Murry
Docket Number: 8556-16S
Judge: Nega
Opinion Type: bench
Filed: 02/21/2017
Pages: 12

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 ROSETTA MURRY, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 8556-16S. ) ) ) ) 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 Washington, D.C., on February 9, 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. February 21, 2017 SERVED Feb 21 2017 (cid:16)042 Capital Reporting Company 3 1 2 Bench Opinion by Judge Joseph W. Nega February 9, 2017 3 Rosetta Murry v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 8556-16s 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. The oral findings of fact and opiniòn shall not be relied upon as precedent in any other case. In this Bench Opinion all citations are to sections, unless otherwise noted, of the Internal Revenue Code (Code) in effect for the year at issue, and all citations to Rules are to the Tax Court Rules of Practice and Procedure. This case was heard pursuañt to the provisions of section 7463 and Rules 170 through 174, and this opinion is rendered pursuant to section 7459(b) and Rule 152. 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. James O. Roberson, Jr. appeared on behalf of petitioner. Shari A. Salu appeared on behalf of respondent. FINDINGS OF FACT Some .of the facts are stipulated and are so 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. This case was tried on February 6, 2017, in 4 Washington, D.C. The issues for decision are whether 4 5 petitioner (1) is entitled to certain Schedule C, 6 Profit or Loss From Business, expenses for 2013, 7 8 9 described below, and (2) is liable for an accuracy- related penalty under section 6662(a) for 2013. Petitioner operated a business, Ritz Rose 10 Bouffant, Beauty & Glamour Spa LLC, as a sole 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 proprietorship. Petitioner timely filed a Federal income tax return for 2013, the taxable year at issue, and attached Schedule C for her sole proprietorship. On February 1, 2016, respondent issued a notice of deficiency to petitioner determining a deficiency in income tax and an accuracy-related penalty. Petitioner timely filed a petition for redetermination. Petitioner conceded all of the adjustments determined on the notice of deficiency, but now claims she is entitled to the following Schedule C expenses for 2013: 12,407 of vehicle mileage; $10,920 of actual vehicle expenses; $33,110 of legal expenses in connection with the audit of her 2009 Schedule C; $719 of expenses for supplies; $5,457 of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 expenses for additional supplies (listed on petitioner's documentation as "COGS"/"cost of goods sold"); $1,546 of travel expenses; $2,222 of expenses for business use of a home; $990 of other expenses for events; $1,560 of other expenses for Internet; $127 of other expenses for a license fee; $2,467 of other expenses for parking and tolls; $1,151 of other expenses for postage; and $1,317 of other expenses for telephone. Respondent stipulated that petitioner 10 made $800 of charitable contributions in 2013. 11 Petitioner offered oral testimony and introduced 12 13 documents to substantiate her expenses, including bank and credit card statements and receipts. We 14 will address the aforementioned expenses, and the 15 16 17 18 19 20 21 22 accuracy-related penalty, in turn. OPINION I. A. Schedule C Expenses Burden of Proof The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer ordinarily bears the burden of proving those determinations erroneous. Rule 142(a); 23 Welch v. Helvering, 290 U.S. 111, 115 (1933). 24 25 Deductions are a matter of legislative grace; the taxpayer bears the burden of proving entitlement to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 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 deductions allowed by the Code and of substantiating expenses underlying his claimed deductions by keeping and producing records sufficient to enable the Commissioner to determine the correct tax liability. Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Commissioner, 292 U.S. 435, 440 (1935); sec. 1.6001-1(a), (e), Income Tax Regs. Records are adequate substantiation if they establish the amount and purpose of the claimed deductions. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). B. Ordinary and Necessary Business Expenses Section 162(a) allows as a deduction "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". A taxpayer may not deduct personal, living, or family expenses unless the Code expressly provides otherwise. Sec. 262(a). Petitioner's entitlement to the Schedule C expenses at issue depends on whether the expenses are "ordinary and necessary" expenses in petitioner's business activity. An expense is "ordinary" if it is customary or usual within a particular trade, business, or industry, and "necessary" if it is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 appropriate and helpful for the development of the business. Deputy v. du Pont, 308 U.S. 488, 495 (1940); Welch v. Helvering, 290 U.S. at 113. Petitioner's records appear to be an expost compilation meant to maximize plausible deductions rather than provide convincing evidence of petitioner's actual business expenses. Petitioner's documentation only establishes that petitioner spent particular amounts at particular times in particular places. These records neither establish the purpose, necessity, or relation of the expenses to petitioner's business. Petitioner's oral testimony that all claimed expenses were "for business" was not a credible explanation or corroboration of her documentary substantiation. With exception for the legal expenses, we do not find any of petitioner's testimony credible. C. Expenses for Supplies, Events, Internet, License Fee, Postage, and Telephone Petitioner's testimony did not establish the ordinary and necessary business purpose (rather than personal nature) of nearly all her claimed expenses (including expenses for supplies, event expenses, Internet expenses, license fee expenses, 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 Capital Reporting Company 8 1 postage expenses, and telephone expenses). 2 Accordingly, petitioner may not deduct those expenses. 3 4 5 D. Legal and Professional Expenses In contrast to the above expenses, we find 6 petitioner's testimony and documentation credible as 7 8 9 10 11 12 13 14 15 16 17 18 19 to a portion of her legal and professional expenses. She adequately established the amount, business purpose, and necessity of $29,250 of legal and professional expenses, and may accordingly deduct that amount for tax year 2013. Petitioner failed to substantiate the business (rather than personal) nature of $3,860 of her claimed $33,110 legal and professional expenses because $3,860 of the expenses were paid from petitioner's personal bank accounts (accounts ending 8684 and 3842), not from her sole proprietorship's bank accounts (accounts ending 5146 and 4834). E. Travel, Car and Truck, and Parking and 20 Tolls Expenses 21 22 23 24 25 Certain expenses specified in section 274 are subject to strict substantiation rules. Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). No deductions are allowed for, among other things, traveling expenses and expenses 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 with respect to "listed property" defined in section 9 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 280F(d) (4) "unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement": (1) the amount of the expense, (2) the time and place of the travel or use, and (3) the business purposes of the expense. Sec. 274(d) (flush language); see sec. 280F(d)(4) (A)(i) and (ii) (defining "listed property" to include passenger automobiles.and other property used for transportation). To substantiate by adequate records, the taxpayer must provide (1) an account book, a log, or a similar record and (2) documentary evidence that together are sufficient to establish each element of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence includes receipts, paid bills, or similar evidence. Sec. 1.274-5(c) (2) (iii), Income Tax Regs. Petitioner did not provide a travel log, nor a log for her car and truck expenses, nor a log for her parking and toll expenses. Further, petitioner did not provide a credible explanation for the absence of adequate substantiation. We find that petitioner did not meet the heightened substantiation requirements, noted supra, with respect to her travel 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 expenses or car and truck expenses. See sec. 274(d)(1). Additionally, petitioner failed to provide any credible testimony at trial relating to these expenses. Based on the heightened substantiation requirements, petitioner has not demonstrated that she is entitled to any deduction for car and truck expenses or travel expenses for tax year 2013. F. Section 280A Home Office Deductions Section 280A(a) generally disallows deductions attributable to the use of a dwelling unit by the taxpayer during the taxable year as a residence. A dwelling unit is used as a residence if the taxpayer, or a family member, uses it for personal purposes for (among other things) more than the greater of 14 days during a year. Sec. 280A(d) (1), (2) (A). Section 280A(c)(1) (A) provides that a taxpayer may deduct expenses allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for any trade or business of the taxpayer. Petitioner bears the burden of proving entitlement to a home office expense deduction, but has not produced any credible testimony or documentary evidence that she used a portion of her 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 dwelling unit regularly and exclusively for business purposes. Petitioner conveniently testified (correctly) that a home office deduction is only allowed when used exclusively for business purposes, but that was the common retort throughout trial to 6 all questions regarding the deductibility of her 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 expenses. While petitioner may have correctly identified the legal standard for deducting expenses, it was clear that petitioner was woefully unaware.of the documentary requirements necessary to substantiate those expenses. Accordingly, petitioner is not entitled to a deduction for expenses attributable to the use of a home office for tax year 2013. 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 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). If the understatement of income tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 . 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 for the year at issue is substantial, the Commissioner has satisfied the burden of producing evidence that the penalty is justified. 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. If the Rule 155 computations confirm a substantial understatement for the taxable year at issue, then respondent has met his burden of production that the penalty is justified. See sec. 7491(c). Once the burden of production is met, a taxpayer bears the burden of proof for the underpayment of Federal income tax and he may rebut the evidence that a section 6662(a) accuracy-related penalty is appropriate if he can demonstrate (1) reasonable cause for the underpayment and (2) that he acted in good faith with respect to the amount paid. Sec. 6664(c)(1); see Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447, Petitioner attributes her understatement of income to an error in the computer software utilized by her paid tax preparer. The misuse of tax preparation software, even when unintentional or accidental, is no defense to a section 6662 penalty. See Bunney v. Commissioner, 114 T.C. 259, 266-267 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 (2000). Accordingly, petitioner did not satisfy her burden of proving reasonable cause for her underpayment of Federal income tax. See sec. 6664(c)(1). We therefore hold that if Rule 155 computations confirm a substantial understatement, petitioner is liable for the penalty for an underpayment attributable to a substantial understatement of income tax under section 6662(a) and (b) (2) . 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, and, to the extent not mentioned above, we conclude they are moot, irrelevant, or 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 without merit. 18 19 20 21 22 23 24 25 (Whereupon, at 2:15 p.m., the above- entitled matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com