TAX COURT OPINION

Case: Sheryl Lynn Thornton
Docket Number: 15248-17
Judge: Goeke
Opinion Type: bench
Filed: 07/02/2018
Pages: 10

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 SHERYL LYNN THORNTON, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 15248-17. ) ) ) ) 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 to respondent a copy of the pages of the transcript of the trial in the above case before Judge Joseph Robert Goeke at Los Angeles, California, containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. July 2, 2018 SERVED Jul 03 2018 | 1 Bench Opinion by Judge Joseph Robert Goeke 3 2 3 4 5 6 7 8 9 June 22, 2018 Sheryl Lynn Thornton v. Commissioner of Internal Revenue Docket No. 15248-17 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. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This 10 opinion is rendered pursuant to Rule 152 of the Tax Court 11 Rules of Practice and Procedure, and rule references in 12 the remainder of this bench opinion are to the Tax Court 13 Rules of Practice and Procedure. Section 7459(b) provides 14 further support for the rendering of this bench opinion. 15 This section is in the Internal Revenue Code, and all 16 17 18 section references in this bench opinion are to the Internal Revenue Code as applicable to the case before us. The present case involves a notice of deficiency 19 determination issued by the respondent to the petitioner, 20 who is a resident of California and was a resident of 21 California when she filed her petition in this case. She 22 filed a timely petition for review of respondent's Notice 23 of Deficiency determination. The year in question is 24 25 2015. On her 2015 income tax return the petitioner reported items of income and expense related to two Schedule C activities. On the first Schedule C she 4 reported income and expense from her work as a real estate agent. On the second Schedule C she reported expenses for a company called CanvasYourCan.com. This second Schedule C expense is the focus of the two adjustments which are before us: whether petitioner is entitled to expenses in the amount of $55,629 on her Schedule C relating to her activities associated with Canvas Your Can, and whether the addition to tax is applicable under section 6662. There are several other adjustments, but they either have been conceded or are purely computational. This case was tried on June 19, 2018 and the 1 2 3 4 5 6 7 8 9 10 11 12 13 petitioner testified. In addition, the parties had a 14 significant stipulation of facts which included various 15 exhibits. That stipulation of facts and those exhibits 16 were also entered into the record, and those facts are so found. 17 18 Petitioner's 2015 income tax return was selected 19 for examination by respondent's examination division, and 20 there were two proposed substantive adjustments. There 21 was a slight increase in petitioner's real estate 22 activities, which she no longer contests, and there was 23 the disallowance of the expenses associated with Canvas 24 Your Can in the amount of $55,529 on the grounds that this 25 activity was not an active trade or business in 2015 and $73)406.2250|operationsgescribertnetlwwwascribers.net that the payment of the expenses had not been substantiated. Regarding the addition to tax, 5 respondent's revenue agent determined that section 6662(b) was applicable and there was a substantial understatement of tax. This determination was approved in writing by the revenue agent's immediate supervisor. After the Notice of Deficiency was issued, the petitioner provided certain documents associated with Canvas Your Can which resulted in respondent conceding 1 2 3 4 5 6 7 8 9 10 some of the expenses which petitioner claimed and which 11 were disallowed. While respondent's determination is that 12 petitioner has substantiated additional expenses, 13 14 respondent still argues these expenses should be disallowed, because they are start-up expenses and not 15 currently deductible in 2015. The amounts which 16 respondent still maintains have not been substantiated and 17 18 are also start-up expenses include travel and meals and entertainment expense in the amount of $16,612; meals and 19 entertainment in the amount of $767; public relations in 20 the amount of $12,000; ans automobile expense in the amount 21 of $2,251. 22 The petitioner established a website for 23 CanvasYourCan.com in 2015. This website has a screenshot 24 25 but has no additional information and has remained in that status up to the present time. The travel expenses (97334002250|opentionseesertbetsmt|wwwescdbers.net claimed by petitioner for Canvas Your Can include a trip to Copenhagen, a trip to Las Vegas, and South Dakota, and 6 various food and hotel expenses, including expenses for petitioner's children and some amount she paid her children to help her during the travel. Petitioner has not provided any evidence which would establish a specific business nature of the travel in question other than her testimony. In other words, there is no evidence to corroborate specific business meetings or other activities that took place in Copenhagen, Las Vegas, or South Dakota. Based upon petitioner's testimony and the evidence in record, the Court determines that petitioner 1 2 3 4 5 6 7 8 9 10 11 12 13 did attempt to begin a business in 2015 which was related 14 to developing covers for garbage cans which people could 15 place over their garbage cans to make them more 16 attractive. Petitioner did investigate various ways to 17 design these covers and engaged in several other 18 activities, based upon her testimony, associated with 19 developing this business. She also sought to have her 20 business be the basis for the television program Shark 21 22 23 24 Tank, but ultimately her request to be included in that program was rejected. We first analyze whether petitioner has substantiated the expenses that remain in dispute, and we 25 note that the travel expenses are subject to the strict cribers (973)406-2250|operationseexribermet|www.esoibenaet . 7 1 2 3 4 5 6 7 8 9 substantiation requirements provided by section 274. Section 274 provides, in general, that no deductions otherwise allowable shall be allowed for certain specific activities including travel and automobile expenses unless some specific substantiation requirements have been met. Section 274(d). With respect to these expenses, the taxpayer's substantiation must provide, by adequate records or by sufficient evidence corroborating the taxpayer's own statements, that the amount of the expenses 10 is established; the time and place of the expenses is 11 established; and that the business purpose of the expense 12 13 14 and the business relationship of the taxpayer to the person receiving the travel expense or associated with the travel or other business expense is established. Section 15 274(d)(3). 16 With respect to the expenses which respondent 17 maintains have not been substantiated associated with 18 deductible meals and entertainment, travel meals and 19 entertainment, and automobile expense, as reflected in 20 paragraph 7 of the stipulation of facts in this case, we 21 determine that petitioner has failed to meet the 22 requirements of section 274. We note that the petitioner 23 has the burden of proof in this case and has not 24 established a basis on which the burden of proof should be 25 shifted to respondent pursuant to section 7491 and Rule (9733406-2250|operationsgescrbersnet|wwwascribers.net 8 1 2 3 4 5 6 7 8 9 142(a). While generally we determine the question of whether the petitioner was engaged in an active conduct of a business in 2015 on the basis of the preponderance of the evidence, which is significant and fully developed in this case, we do apply the burden of proof as it relates to the substantiation of the expenses associated with Section 274, and we find that petitioner has failed to substantiate those expenses. In addition, the petitioner 10 has the burden of proof to establish that she paid $12,000 11 12 for public relations in 2015. And based upon her testimony and the inconsistent nature of her testimony 13 with the offered records, we find that petitioner has 14 failed to substantiate the public relations expense as 15 well. The records and petitioner's assertion that she 16 paid for the expense in cash simply are not credible. And 17 18 we find that the records appear to have been generated simply to support a deduction, and there's no evidence at 19 all that a payment was actually made. 20 21 22 23 24 We turn to the remaining expenses and the basic argument of whether the expenses are allowable under section 195. Section 195(a) provides that except as otherwise provided in the section no deduction shall be allowed for start-up expenditures. The petitioner has not 25 made an election to deduct a certain portion of these 9 1 2 3 4 5 6 7 8 9 expenses pursuant to section 195(b). So the question becomes whether the expenses petitioner claimed relative to Canvas Your Can in 2015 were in fact start-up expenses under section 195. In Richmond Television Corporation v. United States, 345 F.2d 901 (4th Cir. 1965) vacated and remanded per curiam on other grounds, 382 U.S. 68 (1965), the Fourth Circuit held that a business does not begin under section 162(a) and section 195 until it begins to "function as a going concern and begins performing the 10 activities for which it was organized." In this case 11 there's no dispute that the petitioner did not begin 12 significant sales in 2015, nor did petitioner begin 13 14 15 licensing her idea which she maintains was her primary business purpose. She did testify at trial that she had roughly 16 $600 or $700 in sales, but she failed to report those on 17 18 her income tax return, and we find her testimony regarding these sales to be vague and not credible. Regardless, 19 even if such minor sales did take place they would not 20 amount to anything other than prototypes being provided to 21 her neighbors as a demonstration and would not 22 significantly avoid the application of section 195, 23 24 because petitioner had no basis to actually manufacture her product in 2015, had not a source of the raw 25 materials, had not arranged any facilities to store the cdbers (973)406.2250|operatiomeescribersnetlwwwescribersnet product or ship it, had not seriously begun negotiations to license the product, and clearly was not engaged in any 10 other activity other then pursuing an idea to have a company and an idea to have a business We believe that there's little doubt in this case that these expenses were of a start-up nature and that petitioner's failed to establish that she was engaged in a functioning trade or business in 2015 with respect to Canvas Your Can. Regarding the addition to tax, respondent has 1 2 3 4 5 6 7 8 9 10 the addition coming forward with evidence to support the 11 assertion of a substantial understatement. Respondent has 12 met that burden based upon our previous determinations, 13 but we turn to whether the petitioner's activities were 14 reasonable or she has reasonable cause for her activities. 15 We believe that petitioner was sincere in her efforts to 16 17 form a business and believe that she actually was engaged in a business, despite the fact that she was 18 unsophisticated about the start-up nature of the business. 19 20 And therefore, to the extent she has substantiated the expenses, we would not find that the addition to tax is 21 applicable, but with respect to the expenses which we had 22 previously determined she has not substantiated and 23 especially those for which we find her testimony is not 24 credible, we believe that respondent's determination is 25 well founded with respect to the substantial cribers (9D)406-2250]operetlempestribersnetjwww.escribersnet understatement penalty. 11 So the addition to tax will have to be determined based upon the fact that we find some of the expenses in question to be subject to a reasonable cause exception because of petitioner's unsophisticated assumption that she had properly determined she was in a business and the fact that she did rely upon her return preparer in making these determinations. We think that she has met the requirements for reasonable cause, only with respect to the expenses for which she has 1 2 3 4 5 6 7 8 9 10 substantiated. However, we sustain respondent's 11 deficiency determinations in full, based upon petitioner's previous concession and our determinations that none of the expenses are, in fact, allowable in 2015. So therefore a Rule 155 computation will be necessary with respect to the additions to tax. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:31 a.m., the above-entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ) Scribers