TAX COURT OPINION

Case: Thomas V. Meyers
Docket Number: 16821-07S
Judge: Colvin
Opinion Type: bench
Filed: 11/28/2008
Pages: 19

UNITED STATES TAX COUR T WASHINGTON, DC 2021 7 THOMAS V . MEYERS, Petitione r v . ) Docket No . 16821-07S . COMMISSIONER OF INTERNAL REVENUE , 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 of the above case before Judge L . Paige Marvel at Winston-Salem, North Carolina, November 5, 2008, containing her 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) L . Paige Marvel Judg e Dated : Washington, D .C . November 28, 2008 SERVED DEC -1 2008 3 1 Bench Opinion by Judge L . Paige Marvel November 5, 2008 2 Docket No . 16821-07S Thomas V . Meyers v . Commissioner 3 The Court has decided to render oral findings 4 of fact and opinion in this case, and the followin g 5 represents the Court's oral findings of fact and opinion . 6 The oral findings of fact and opinion shall not be relied 7 upon as precedent in any other case . 8 This proceeding for the redetermination of a 9 deficiency is a Small Tax Case conducted pursuant to the 10 provisions of Section 7463 of the Internal Revenue Code 11 of 1986 as amended and Rules 170 through 175 of the Tax 12 Court Rules of Practice and Procedure . 13 This bench opinion is made pursuant to the 14 authority granted by Section 7459(b) of the Interna l 15 Revenue Code of 1986 as amended and Rule 152 of the Tax 16 Court Rules of Practice and Procedure . Unless otherwise 17 indicated, subsequent section references made in thi s 18 bench opinion are to the Internal Revenue Code of 1986 as 19 amended and in effect for the relevant period an d 20 subsequent rule references are to the Tax Court Rules of 21 Practice and Procedure . 22 Petitioner, Thomas V . Meyers, appeared pro 23 se . Edwina L . Jones appeared on behalf of Respondent . 24 This is a deficiency proceeding filed b y 25 Petitioner to contest income tax deficiencies and Section Heritage Reporting Corporatio n (202) 628-4888 4 1 2 3 6662 penalties determined by Respondent for the calenda r years 2004 and 2005 in a notice of deficiency dated Ma y 23, 2007, as follows : 4 Year Inc . Tax Deficiency Sec . 6662 Penalt y 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2004 2005 $9,706 .00 $1,941 .20 $6,699 .0 0 $1,339 .8 0 All of the income tax deficiencies and Section 6662 penalties are in dispute except as concede d by the parties . The issues for decision are : 1 . Whether Petitioner was engaged in a software consulting activity for profit during 2004 an d 2005 ; 2 . If so, whether Petitioner is entitled t o deduct Schedule C expenses as claimed for the softwar e consulting activity on the joint returns he filed wit h his wife for 2004 and 2005 ; 3 . Whether Petitioner is entitled to deduc t Schedule C expenses as claimed on the joint return h e filed with his wife for 2005 with respect to his rea l estate business ; 4 . Whether Petitioner is entitled t o charitable contribution deductions and miscellaneou s itemized deductions that he claimed on the joint return s he filed with his wife for 2004 and 2005 ; Heritage Reporting Corporation (202) 628-4888 5 1 5 . Whether Petitioner and his wife ha d 2 unreported income from a state income tax refund in 2005 ; 3 6 . Whether Petitioner is liable for th e 4 Section 6662 accuracy-related penalty for 2004 and 2005 . 5 Petitioner concedes that he and his wife are 6 not entitled to deduct unreimbursed employee busines s 7 expenses of $17,481 for 2004, except to the extent that 8 these expenses relate to Petitioner's attempts to find 9 employment as a salesman . 10 Petitioner also concedes that he and his wife 11 are not entitled to deduct unreimbursed employee business 12 expenses of $14,583 for 2005 . With respect t o 13 Petitioner's real estate business for 2005, Respondent 14 concedes that Petitioner is entitled to the following 15 Schedule C expenses for 2005 : 16 Item Amount 17 Advertising $3,584 .00 18 Car & truck expenses 9,717 .00 19 Office expense 541 .00 20 Other : 21 Closing gifts for clients 50 .00 22 NAR dues 839 .00 23 Howard Perry & Walston (misc) 997 .00 24 TOTAL $15,728 .0 0 25 Petitioner concedes that he is not entitled Heritage Reporting Corporatio n (202) 628-4888 to deduct the following expenses claimed as Schedule C deductions with respect to his real estate business fo r 6 2005 : Item Amount Insurance (other than health) $1,600 .0 0 1 2 3 4 5 6 Interest - other 2,250 .0 0 7 Legal and prof . services 3,200 .0 0 8 Rent 1,800 .0 0 9 Repairs & maintenance 900 .0 0 10 Supplies 1,980 .0 0 11 Travel 6,000 .0 0 12 Utilities 2,200 .0 0 13 TOTAL $19,930 .0 0 14 15 16 17 18 19 20 21 With the exception of the concession s described above, all Schedule C deductions claimed b y Petitioner with respect to his real estate busines s remain in dispute . Findings of Fact . Some of the facts have been stipulated to . The stipulations of fact ar e incorporated herein by this reference . When he petitioned this Court, Petitioner resided in Durham , 22 North Carolina . 23 24 25 Petitioner and his wife timely filed thei r Form 1040, U .S . Individual Tax Return, for 2004 on Apri l 15, 2005 . Heritage Reporting Corporation (202) 628-4888 1 On Schedule A of their 2004 joint return , 2 Petitioner and his wife claimed a charitable contribution 3 deduction of $24,502, consisting of $5,502 of gifts made 4 by cash or check, $8,500 of other gifts, and a charitable 7 5 contribution carryover of $10,500 . 6 Petitioner and his wife also claimed a 7 miscellaneous deduction of $150 for tax preparation 8 software . 9 On Schedule C of their 2004 joint return, 10 Petitioner and his wife claimed income and expense s 11 attributable to an alleged software consulting business 12 activity that Petitioner allegedly operated during 2004 . 13 The Schedule C showed gross income of $1,150, tota l 14 expenses of $13,916, a tentative loss of $12,766, a 15 deduction for the business use of Petitioner's home of 16 $3,717, and a total net loss of $16,483 . 17 Part IV of the Schedule C claimed tha t 18 Petitioner used his vehicle in 2004 and that Petitioner 19 had written evidence to support his deduction of car and 20 truck expenses on the Schedule C . 21 Petitioner and his wife also timely filed 22 their 2005 joint income tax return . On Schedule A o f 23 their 2005 joint return, Petitioner and his wife claimed 24 a charitable contribution deduction of $10,564 , 25 consisting of $4,064 of contributions made by check or Heritage Reporting Corporatio n (202) 628-4888 8 1 cash and $6,500 of other contributions . 2 Petitioners also claimed unreimburse d 3 employee business expenses of $14,583 and a miscellaneous 4 deduction for tax preparation fees of $350 . 5 Petitioner also attached two Schedule Cs to 6 his 2005 return -- one for his software-consultin g 7 activity and one for his real estate activity . On his 8 software-consulting activity Schedule C, Petitioner did 9 not claim any income or expenses, but he did claim a 10 deduction of $4,182 for the business use of his home . 11 On his real estate activity Schedule C , 12 Petitioner claimed gross income of $14,003, expenses of 13 $70,618, a tentative loss of $56,615, a business-use-of- 14 home deduction of $1,920, and a net loss of $58,535 . 15 By notice of deficiency, dated May 23, 2007, 16 Respondent determined federal income tax deficiencies for 17 2004 and 2005 . The deficiencies resulted from the 18 following adjustments : 19 1 . Disallowed Schedule C expenses claime d 20 with respect to the software-consulting activity - 21 $17,633 for 2004 and $4,182 for 2005 ; 22 2 . Disallowed Schedule C expenses claimed 23 with respect to the real estate activity for 2005 -- 24 $32,910 ; 25 3 . Disallowed depreciation claimed on the Heritage Reporting Corporatio n (202) 628-4888 9 1 real estate activity Schedule C -- $10,050 ; 2 4 . Disallowed deduction for business use of 3 home -- $1,920 ; 4 5 . Itemized deductions -- $40,595 for 2004 5 and $24,977 for 2005 ; 6 6 . Inclusion of prior year state tax refund 7 in 2005 -- $1,845 . 8 The notice of deficiency also asserted that 9 Petitioner and his wife were liable for the Section 6662 10 accuracy-related penalty . 11 A trial in this case was held on November 3, 12 2008 . Petitioner was the only witness . Petitioner did 13 not introduce any substantiation of the disallowe d 14 Schedules A and C deductions that are still in dispute . 15 Petitioner testified that he had maintained records for 16 his Schedule C activities on his computer, but, on some 17 date that does not appear in the record, his computer 18 crashed . 19 Petitioner also testified that he had worked 20 as a software consultant for a company until the end of 21 2003 or the early part of 2004 and that most the expenses 22 he claimed on his Schedule C for the software-consulting 23 activity were related to the job search he conducte d 24 after his consulting arrangement ended . 25 In 2005, Petitioner took one or more courses Heritage Reporting Corporatio n (202) 628-4888 1 0 1 to become a real estate agent and acquired his rea l 2 estate license . During the last half of 2005, Petitioner 3 worked as an independent contractor for Howard Perry and 4 Walston (HPW), an affiliate of Coldwell Banker . 5 Petitioner testified that HPW provided him with a cubicle 6 at its offices for which Petitioner was charged a monthly 7 fee . 8 Petitioner did not maintain a separate bank 9 account or any accounting books and records for hi s 10 software-consulting activity for 2004 and 2005 . 11 Petitioner did not spend significant time and effort on 12 his software-consulting activity during 2004 and 2005 ; 13 the time he spent consisted primarily of looking for a 14 job . 15 Although Petitioner claims to have worked in 16 a software business owned by his brother at some point in 17 the past, Petitioner has had no meaningful prio r 18 experience in operating a similar activity . Petitioner 19 did not offer any credible evidence to establish an y 20 history of income or loss with respect to the software- 21 consulting activity or profit generated in other years . 22 Petitioner admitted at trial that he estimated many of 23 the expenses he deducted or that he could not explain 24 what the expenses were . 25 Discussion . Ordinarily, the taxpayer has the Heritage Reporting Corporatio n (202) 628-4888 11 1 burden of proving that the Commissioner's determination s 2 in the notice of deficiency are in error . Rule 142(a) . 3 In certain circumstances, Section 7491(a) may 4 shift the burden of proof with respect to any factua l 5 issue relevant to ascertaining the liability of th e 6 taxpayer to the Commissioner if the taxpayer introduces 7 credible evidence regarding the factual issue, and th e 8 taxpayer satisfies the requirements of Section 7491(a)(2) 9 regarding the maintenance of all required records and the 10 substantiation of items claimed on the taxpayer's return . 11 In this case, Petitioner did not introduc e 12 credible evidence regarding the adjustments made by 13 Respondent, and he did not satisfy the requirements of 14 Section 7491(a)(2) . Consequently, Petitioner has the 15 burden of proof with respect to Respondent' s 16 determinations . 17 Activity for Profit .As a general rule, an 18 individual taxpayer is not allowed to deduct losses 19 attributable to an activity not engaged in for profit . 20 See Sec . 183(a) . However, certain deductions described 21 in Section 183(b) may be allowable, even if the activity 22 is not engaged in for profit . See Sec . 183(b) ; Sec . 23 1 .183-1(b)(1), Income Tax Regs . 24 Section 183(c) defines an activity no t 25 engaged in for profit as an "activity other than one with Heritage Reporting Corporatio n (202) 628-4888 12 1 respect to which deductions are allowable for the taxabl e 2 year under Section 162 or under paragraph (1) or (2) of 3 Section 212 ." In order for an activity to qualify as an 4 activity for profit, the taxpayer must conduct th e 5 activity with the objective of making a profit . See 6 Golanty v . Commissioner , 72 T .C . 411, 425 (1979), affd . 7 without published opinion, 647 F .2d 170 (9th Cir . 1981) . 8 9 Wnether a taxpayer engaged in an activit y 10 with the requisite profit objective is a factual issue to 11 be resolved on . the basis of all surrounding facts and 12 circumstances . See Golanty v . Commissioner , supra , at 13 426 . In making a Section 183 determination, more weight 14 is given to objective facts than to the taxpayer' s 15 statement of intent . Sec . 1 .183-2(a), Income Tax Regs . 16 Section 1 .183-2(b), Income Tax Regs, sets 17 forth a nonexclusive list of factors that should b e 18 considered in determining whether an activity is engaged 19 in for profit . These factors include : (1) the manner in 20 which the taxpayer carried on the activity ; (2) th e 21 expertise of the taxpayer or his advisers ; (3) the time 22 and effort expended by the taxpayer in carrying on th e 23 activity ; (4) the expectation that the assets used in the 24 activity may appreciate in value ; (5) the success of the 25 taxpayer in carrying on other similar or dissimila r Heritage Reporting Corporation (202) 628-4888 13 1 activities ; (6) the taxpayer's history of income or los s 2 with respect to the activity ; (7) the amount o f 3 occasional profits, if any, that the activity generates ; 4 (8) the financial status of the taxpayer ; and (9) whether 5 elements of personal pleasure or recreation are involved . 6 No single factor is controlling, and the necessar y 7 analysis examines all of the relevant facts and 8 circumstances . 9 The relevant facts established by th e 10 extremely sparse and unsatisfying record in this case 11 establish that Petitioner was not engaged in any 12 software-consulting activity for profit after 2003 or, at 13 the latest, the early part of 2004 . 14 After Petitioner's consulting arrangement 15 with his previous company ended, Petitioner did nothing 16 more than a few odd jobs, helping friends and/o r 17 neighbors with their computers while he looked for a job . 18 19 Petitioner did not maintain a separat e 20 banking account for the software-consulting activity, nor 21 did he keep separate accounting books and records . 22 Petitioner did not devote substantial time 23 and effort to software consulting during 2004 and 2005 . 24 He did not have a degree or formal training in computer 25 science . His only education in computer software wa s Heritage Reporting Corporation (202) 628-4888 14 1 acquired through on-the-job training . 2 Petitioner admitted that he estimated many of 3 the Schedule C expenses he claimed . In addition , 4 Petitioner could not explain what expenses he paid in 5 each expense category, nor could he explain the larg e 6 round numbers claimed on the Schedule C for many expense 7 categories . It appears that Petitioner may have made up 8 the numbers when he prepared his Schedules C, a behavior 9 that is neither businesslike nor legal . 10 Petitioner did not satisfy his burden o~ ~ 11 proving that he was engaged in a software-consultin g 12 activity for profit during 2004 or 2005 . In addition, 13 Petitioner failed to substantiate any of the expenses he 14 claimed on his Schedules C for the software activity . 15 Consequently, we sustain Respondent' s 16 determination disallowing Petitioner's Schedule C losses 17 for 2004 and 2005 with respect to his software activity . 18 Real Estate Activity . Section 162 authorizes 19 a deduction for the ordinary and necessary expenses paid 20 or incurred during a taxable year in carrying on a trade 21 or business . Section 179 authorizes certain capita l 22 costs to be expensed in the year in which they are paid 23 or incurred, and Section 280A authorizes a deduction for 24 a taxpayer's business use of his home, under certai n 25 circumstances . Heritage Reporting Corporation (202) 628-4888 15 1 Deductions are a matter of legislative grace, 2 and a taxpayer must prove that he is entitled to an y 3 deduction . INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 4 84 (1992) ; New Colonial Ice Co . v . Helvering , 292 U .S . 5 435, 440 (1934) . Moreover , a taxpayer must maintai n 6 records sufficient to substantiate his deductions . Sec . 7 6001 ; Sec . 1 .6001-1(a), Income Tax Regs . 8 In addition, Section 274(d) requires that , 9 for certain kinds of expenses, such as travel, meal, and 10 entertainment expenses, the taxpayer must provid e 11 adequate records or corroborate testimony with othe r 12 evidence establishing the amount of the expense, the time 13 and place of the expense, the business purpose of th e 14 expense, and the business relationship to the taxpayer of 15 the persons entertained . 16 In the notice of deficiency, Respondent 17 allowed Petitioner $15,728 of the Schedule C expense s 18 with respect to his real estate activity . Petitioner has 19 not substantiated any additional Schedule C expenses . 20 Although Petitioner testified at length at 21 trial, he did not substantiate any of the disallowe d 22 expenses with documents, and his testimony regarding the 23 expenses was too generalized and unreliable to support 24 the allowance of any additional expenses , even on a n 25 estimated basis . See Cohan v . Commissioner , 39 F .2d 540 Heritage Reporting Corporatio n (202) 628-4888 1 6 1 (2d . Cir . 1930) . Moreover, Petitioner offered no 2 credible proof of any kind that he paid deductible 3 travel, meal, or entertainment expenses . 4 We sustain Respondent's determinatio n 5 disallowing Petitioner's Schedule C expenses with respect 6 to his real estate activity . 7 Schedule A Deductions .Petitioner and his wife 8 claimed unreimbursed employee expenses on Schedules A to 9 their 2004 and 2005 returns . Petitioner and his wif e 10 have conceded that the claimed expenses are no t 11 deductible, except to the extent that they were job- 12 hunting expenses . 13 Although Petitioner testified generally that 14 many of the Schedule C expenses he deducted were paid as 15 he searched for a job, Petitioner did not explain what 16 the expenses were or why they apparently were claimed on 17 both Schedules A and C . In any event, Petitioner did not 18 even come close to substantiating that he paid deductible 19 job-hunting expenses or unreimbursed employee expense s 20 for 2004 and 2005 . 21 Petitioner and his wife also deducted a 22 substantial amount of charitable contributions on their 23 Schedules A for 2004 and 2005 . Petitioner did no t 24 introduce a single check, receipt, or supporting 25 statement to prove that he and his wife made charitable Heritage Reporting Corporation (202) 628-4888 1 7 1 contributions during 2004 and 2005 . 2 Although Section 170(a)(1) authorizes a 3 deduction for charitable contributions made during the 4 taxable year, a charitable contribution deduction i s 5 allowable only if the taxpayer substantiates th e 6 contribution, as provided in the applicable regulations . 7 See Secs . 1 .170A-1(a) and 1 .170A-13, Income Tax Regs . 8 We sustain Respondent's determinatio n 9 disallowing Petitioner's Schedule A itemized deductions 10 for charitable contributions, unreimbursed employe e 11 business expenses, and miscellaneous deductions, as 12 enumerated in the notice of deficiency . 13 Income Tax Refund .Petitioner and his wif e 14 were required to include in their taxable income for 2005 15 any refund of state income tax paid in 2004 if the y 16 received a tax benefit from deducting the state tax paid . 17 See, e .g ., Monroe v . Commissioner , T .C . Memo . 1979-100 . 18 Petitioner stipulated that he and his wife 19 received an income tax refund of $4,196 from the N .C . 20 State Department of Revenue in 2005, but he and his wife 21 only included $2,351 on their 2005 joint return . 22 Petitioner failed to offer any proof why 23 Respondent's proposed adjustment with respect to the 24 state income tax refund is in error, and, consequently, 25 we sustain the adjustment to Petitioner's income for 200 5 Heritage Reporting Corporation (202) 628-4888 1 8 1 with respect to the refund . 2 Section 6662 Penalty . Section 6662 imposes a 3 penalty equal to 20 percent of the underpaymen t 4 attributable to negligence or disregard of rules or 5 regulations , or to any substantial understatement of 6 income tax . Sec . 6662 ( a) and (b)(1)-(2) . The term 7 "negligence" includes any failure to make a reasonabl e 8 attempt to comply with the Internal Revenue Code , and the 9 term "disregard" includes any careless, reckless, o r 10 intentional disregard . Sec . 6662(c) . Petitioner failed 11 to maintain adequate records to substantiate hi s 12 Schedules A and C deductions, and he failed t o 13 substantiate the deductions claimed, as required by 14 Section 6001 and related regulations . 15 A failure to maintain required records and to 16 substantiate deductions claimed is an adequate basis for 17 imposing the Section 6662 penalty . See, e .g ., Simonelli 18 v . Commissioner , T .C . Memo . 1985-12 . 19 Alternatively, the Section 6662 penalty may 20 be imposed on Petitioner because Petitioner's 2004 and 21 2005 tax returns contained a substantial understatement 22 of income tax . Section 6662(d)(1)(A) defines a 23 "substantial understatement of income tax" as an 24 understatement that exceeds the greater of 10 percent of 25 the tax required to be shown on the return for the Heritage Reporting Corporatio n (202) 628-4888 1 9 1 taxable year or $5,000, whichever is greater . 2 Petitioner and his wife understated thei r 3 income tax liabilities for 2004 and 2005 by amounts that 4 qualify as substantial understatements . 5 Although Respondent had the initial burden of 6 production regarding the Section 6662 accuracy-relate d 7 penalty for 2004 and 2005, Respondent satisfied tha t 8 burden by introducing stipulated copies of Petitioner' s 9 2004 and 2005 returns and the notice of deficiency and b y 10 concessions that Petitioner was not entitled to 11 deductions claimed on his 2004 and 2005 returns . 12 Once Respondent satisfied his burden oX k_, l 13 production, Petitioner had the obligation of coming 14 forward with evidence demonstrating that the accuracy- 15 related penalty should not be imposed . Petitioner did 16 not satisfy his burden . 17 Although Petitioner claimed that he 18 maintained business records on his computer and that his 19 computer crashed, Petitioner's testimony on this poin t 20 was simply not credible . Petitioner did not explain what 21 happened to the original bank records , invoices , credi t ~1 y s l M 22 card receipts, purchase records, and other original 23 business records . 24 In addition, Petitioner did not make any 25 attempt to obtain copies of his business records or Heritage Reporting Corporatio n (202) 628-4888 2 0 1 testimony from third parties that might have convinced 2 this Court that he really had paid business expense s 3 during 2004 and 2005 beyond those allowed by Respondent . 4 On this very unsatisfying record , we conclude 5 that Petitioner did not prove either that he was no t 6 liable for the Section 6662 accuracy - related penalty or 7 that he met the requirements for a reasonable caus e 8 exception under Section 6664(c) . 9 We sustain Respondent ' s determination that 10 Petitioner is liable for the Section 6662 accuracy- 11 related penalty for 2004 and 2005 . 12 Decision will be entered for Respondent . 13 This concludes the Court ' s oral findings of 14 fact and opinion in this case . 15 (Whereupon , at 9 :55 a .m ., the bench opinion 16 in the above - entitled matter was concluded . ) 17 18 // 1 9 20 // 2 1 22 // 2 3 24 25 Heritage Reporting Corporation (202) 628-4888