TAX COURT OPINION

Case: John Fritts Pittaway & Dawn Chang
Docket Number: 13511-09S
Judge: Colvin
Opinion Type: bench
Filed: 07/27/2010
Pages: 10

14V UNITED STATES TAX COURT WASHINGTON , DC 2021 7 JOHN FRITTS PITTAWAY AND DAWN CHANG, . Petitioners, V . Docket No . 13511-09 S COMMISSIONER OF INTERNAL REVENU E Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 David Gustafson at Honolulu, Hawaii, on June 22, 2010, 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 under Rule 155 . (Signed) David Gustafson Judg e Dated : Washington, D .C . July 27, 2010 SERVED Jul 28 2010 1 Bench Opinion by Judge David Gustafson - June 22,, 2010 2 JOHN FRITTS PITTAWAY, DAWN CHANG Docket No : 13511-09S 3 THE COURT : The Court has decided t o 4 render oral Findings of Fact and Opinion in this case, 5 and the following represents the Court's oral Findings 6 of Fact and Opinion . The oral Findings of Fact an d 7 Opinion shall not be relied on as precedent in any 8 other case . 9 This Bench opinion is made pursuant to 10 the authority granted by section 7459(b) of th e 11 Internal Revenue Code 1986, as amended, and Rule 152 12 of the Tax Court Rules of Practice and Procedure . ' 13 By a statutory notice of deficiency dated 14 March 5, 2009, Internal Revenue Service (IRS ) 15 determined a deficiency in the 2004 Federal income tax 16 of petitioners John Fritts Pittaway and Dawn Chang in 17 the amount of $12,178 plus an accuracy-related penalty 18 under section 6662 in the amount of $2,435 .60 and a 19 failure-to-file addition to tax under sectio n 20 6651(a)(1) in the amount of $3,172 .28 . In dispute is 21 the petitioners' entitlement to (1) car and truc k 22 expenses of $1,125 ; (2) travel expenses (originall y 23 claimed as $27,682 but now reduced by petitioner s 24 $16,204) ; and (3) meals and entertainment expenses of 25 $1,013 . Heritage Reporting Corporation (202) 628-4888 3 1 Trial of this case was conducted on June 2 21, 2010, in Honolulu, Hawaii . Only Ms . Chang 3 testified . We find the following facts : 4 Findings of Fact . 5 The petitioners were married in 2004 and 6 are now divorced . Mr . Pittaway practiced dentistry in 7 2004 . In addition, the petitioners reported on 8 Schedule C to their tax return a "Sales" busines s 9 under an arrangement with Quixtar (formerly "Amway") . 10 In 2004 petitioners reported gross revenues of $42,224 11 from the sales business . The characterize the sales 12 business as Mr . Pittaway's sole proprietorship, with 13 Ms . Chang as a helper, but it is clear that both were 14 substantially involved in the business . 15 Ms . Chang drove 5,513 miles in a van, 16 mostly making pickups and deliveries of products . 17 These miles were tallied in a reliable an d 18 contemporaneous log that Ms . Chang maintained an d 19 which she explained in credible testimony . (Ex . 3-P .) 20 Petitioners spent $2,200 for food (some 21 purchased at the grocery store, and some a t 22 restaurants) for meetings and other functions wit h 23 their distributors and prospective distributors -- all 24 documented with receipts and notations of th e 25 identities of the persons involved, whose busines s Heritage Reporting Corporation (202) 628-4888 4 1 relationships with the petitioners they supported by 2 documents and Ms . Chang's credible testimony . (Exs . 3 5-P, 7-P . ) 4 Petitioners incurred business-relate d 5 travel expenses totaling as follows : $1,219 .74 for travel to Anaheim, California, from January 30 t o 7 February 2, 2004 ; $887 .96 for travel to Waikoloa , 8 Hawaii, in February 2004 ; $1,673 .86 for travel to Long 9 Beach, California, in March 2004 ; and $2,160 .75 for 10 travel to Portland, Oregon, in July 2004 -- altogether 11 totaling, $5,942 .31 . These trips were to attend 12 Quixtar seminars, and the expenses were all 13 documented . 14 Petitioners undertook the sales activity 15 with an intention to make a profit . 16 Petitioners did not file their 2004 tax 17 return (Ex . 1-J) until December 18, 2007 . That return 18 reported, inter alia, travel expense totaling $27,68 2 19 on Schedule C . Thereafter the IRS issued its notice 20 of deficiency (Ex . 2-J) on March 5, 2009, an d 21 petitioners timely filed their petition on June 3, 22 2009 . At that time Ms . Chang resided in the Hawaii . 23 The record does not show where Mr . Pittaway resided . 24 Opinion . 25 The IRS's determination reflected on a Heritage Reporting Corporation (202) 628-4888 5 1 notice of deficiency is presumed correct, and th e 2 taxpayer bears the burden to prove his entitlement to 3 the exemptions and credits he claimed . Rule 142(a) ; 4 Welch v . Helvering, 290 U .S . 111, 115 (1933) . I 5 taxpayer who is carrying on a trade or business ma y 6 deduct ordinary and necessary expenses incurred in 7 connection with the operation of the business . Sec . 8 162(a) . However, a taxpayer cannot reduce his taxabl e 9 income by claiming as deductions the expenses he 10 incurs for his hobby or other non-profit activity'. 11 Section 183(a) provides generally that if an activity 12 is not engaged in for profit, no deductio n 13 attributable to such activity shall be allowed except 14 as provided in section 183(b) . Respondent apparentl y 15 does not overtly contend that the petitioners' sales 16 business was not entered into for profit ; but if the 17 contention is made implicitly, we reject it and find I 18 that petitioners' sales activity was a for-profit 19 business activity . 20 What respondent does explicitly contend is 21 that petitioners failed to substantiate thre e 22 components of their business expenses -- i .e ., car 23 truck expense, food and entertainment expense, and 24 travel expense . These are among the expenses that, 25 pursuant to section 274(d), are subject to strict , Heritage Reporting Corporation (202) 628-4888 6 1 substantiation rules . To deduct such expenses, the 2 taxpayer must substantiate by adequate records o r 3 sufficient evidence to corroborate the taxpayer'sjown 4 testimony : (1) the amount of the expenditure or use, 5 which includes mileage in the case of automobilesr ; (2 ) 6 the time and place of the travel, entertainment, o r 7 use ; (3) its business purpose ; and in the case o f 8 entertainment, (4) the business relationship to the 9 taxpayer of each expenditure or use . Sec . 10 274(d)(flush language) . Petitioners meet this 11 standard as follows : 12 Petitioner substantiated food expense 13 totaling $2,200 dollars . 14 Petitioner substantiated the 5,51 3 15 business miles driven by Ms . Chang and are entitled to 16 a mileage deduction for those miles . We do not find 17 the number of business miles, if any, tha t 18, Mr . Pittaway drove in their second vehicle, since Ms . 19 Chang did not have personal knowledge of his vehicle 20 use, and Mr . Pittaway did not appear at trial t o 21 authenticate his log or substantiate his travel . 22 Petitioners substantiated business travel expense!of 23 $5,942 .31 for the four trips that Ms . Chang too k 24 (sometimes with Mr . Pittaway) to attend seminars . . For 25 six other trips, they substantiated expenditures bu t Heritage Reporting Corporation (202) 628-4888 7 1 did not meet their burden of proving the "ordinary and 2 necessary" business purpose of the trips, some o f 3 which had an apparent personal component that rendere d 4 the alleged business purpose incidental (i .e ., trip s 5 to Calgary, where Mr . Pittaway's mother resided, and 6 trips to Salt Lake City, to which the family wa s 7 contemplating a move), and some of which involved only 8 Mr . Pittaway, who did not appear at trial to testify . 9 Addition to tax under section 6651(a)(1) . 10 The notice of determination also reflects the 11 determination of an addition to tax under section ! .12 6651(a)(1) for the petitioners' failure . to file their 13 income tax return when due . Section 6651(a)(1 ) 14 authorizes the imposition of an addition to tax for 15 failure to file a timely return unless the taxpayer 16 proves that such failure is due to reasonable caus e 17 and is not due to willful neglect . Sec . 6651(a)(1) ; 18 see United States v . Boyle, 469 U .S . 241, 245 (1985) . 19 Respondent met his burden of production under section 20 7491(c) with the stipulated fact that the return was 21 filed December 18, 2007 . (Stip . 2 .) The petitioners 22 allege no reasonable cause to excuse the non-filing, 23 and the addition will be sustained . 24 Section 6662(a) accuracy-related penalt y 25 The IRS determined that the petitioners are liabl e -Heritage Reporting Corporation (202) 628-4888 8 1 for the accuracy-related penalty of section 6662(a) , 2 but it is unclear whether the asserted basis is tha t 3 their underpayment was the result or negligence under 4 section 6662(b)(1) or that it was a "substantial 5 understatement of income tax" under sectio n 6 6662(b)(2) . An understatement of income tax i s 7 substantial if it exceeds the greater of $5,000 or 10 8 percent of the tax required to be shown on the return . 9 Section 6662(d) (1) (A) . Pursuant to 7491(c) ., th e 10 Commissioner bears the burden of producing sufficient 11 evidence showing the imposition of the penalty is , 12 appropriate in the given case . Higbee v . 13 Commissioner, 116 T .C . 438, 446 (2001) . Once the y 14 Commissioner meets this burden, the taxpayer must com e 15 forward with persuasive evidence that th e 16 Commissioner's information is incorrect . Rule 142(a) ; 17 Higbee v . Commissioner, supra at 447 . 18 The parties will be directed under Rule 155 t o .19 recompute the petitioners' tax liability pursuant~to 20 this opinion . If that recomputation shows that the 21 understatement was substantial, then the penalty wil l 22 be due . 23 However, if the understatement is not substantial , 24 then the penalty is due only to the extent that the 25 understatement is attributable to negligence . Heritage Reporting Corporation (202) 628-4888 9 1 Although we have sustained the IRS's disallowance of a 2 portion of the car and truck expense, we do not Hin d 3 the petitioners' deduction of that amount to be 4 negligent . 5 Petitioners originally reported travel expense of 6 $27,682 but admit now that $11,478 of this amount' was 7 an error and that they can substantiate only $16,204 8 (of which we allow only $5,942) . The $11,478 mistake 9 did constitute negligence, . and the penalty is due on 10 the tax attributable to that overstatement of the , 11 deduction . However, we disallowed the remainder not 12 because the deduction was negligent -- it was not'-- 13 but because we found the substantiation inadequate . 14 A taxpayer who is otherwise liable for th e 15 accuracy-related penalty may avoid the liability if 16 she successfully invokes one of three othe r 17 provisions : Section 6662(d) .(2)(B), provides that an 18 understatement may be reduced, first, where th e 19 taxpayer had substantial authority for her treatment 20 of any item giving rise to the understatement or , 21 second, where the relevant facts affecting the item's 22 treatment are adequately disclosed and the taxpayer 23 had a reasonable basis for her treatment of that item . 24 Third, section 6664(c)(1) provides that if a taxpaye r 25 shows that there was reasonable cause for a portion o f Heritage Reporting Corporation (202) 628-4888 1 0 1 an underpayment and that she acted in good faith 'with 2 respect to such portion, no accuracy- related penalty 3 shall be imposed with respect to that portion . Th e 4 record suggests no basis for any of these defenses as 5 to the portion of the understatement attributableit o 6 the $11,478 mistake . 7 The petitioners bore the burden of proving an y 8 defenses, see Higbee v . Commissioner, but they 9 asserted none . We therefore sustain th e 10 accuracy-related penalty as to the portion of the i 11 understatement attributable to $11,478 and disallowe d 12 travel expense . 13 Decision will be entered Under Rule 155 . 14 This concludes the Court's oral Findings of Fac t 15 and Opinion in this case . 16 (Whereupon, at 4 :58 p .m ., the bench opinion in 17 the above-entitled matter was concluded . ) 1 8 1 9 2 0 21 2 2 2 3 2 4 25 Heritage Reporting Corporation (202) 628-4888