TAX COURT OPINION

Case: Bill Shu Chan
Docket Number: 28863-14
Judge: Kerrigan
Opinion Type: bench
Filed: 01/13/2016
Pages: 8

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 BILL SHU CHAN, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. ) ) ) ) 28863-14. ORD E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of Court shall transmit herewith to petitioner and respondent a copy of the pages of the transcript of trial in the above case before Judge Kathleen Kerrigan at San Francisco, California, on December 9, 2015, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. January 13, 2016 SERVEDJan 152016 Capital Reporting Company 3 1 2 Bench Opinion by Judge Kathleen Kerrigan December 9, 2015 3 Bill Shu Chan v. Commissioner 4 5 6 7 8 9 10 11 12 Docket No. 28863-14 THE COURT: The Court has decided to render 1 in this case the following as its oral findings of fact and opinion, which shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice & Procedure. Unless otherwise indicated, 13 all section references are to the Internal Revenue 4J- 14 15 16 17 18 19 20 21 22 23 24 25 Code in effect for the years in issue, ex,_ ¼ h b Couv By notice of deficiency dated September 10th, 2014, the Internal Revenue Service determined a deficiency in the federal income tax of Petitioner for tax years 2011 and ')f. Respondent disallowed v_oll 1290 of office expenses Petitioner claimed on Schedule C, profit or loss from business for tax year 2011. Petitioner has conceded this issue. Respondent disallowed Petitioner's deductions for attorneys' fees of 135,471 for tax year 2011 and 164,427 for tax year 2012. The issue for our decision is whether 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 Petitioner is entitled to deductions for attorneys' 2 3 4 fees. Trial of this case was conducted on 2OlA December 7th in San Francisco, California. A 5 Petitioner represented himself; Nicholas R. Rosado 6 7 represented Respondent. The parties' stipulation of facts and exhibits were admitted into evidence along 8 with the attached exhibits. Only Petitioner 9 testified. We find the following facts: 10 11 12 13 14 15 FINDINGS OF FACT Petitioner resided in California when he filed the petition. Before the years at issue, Petitioner commenced a lawsuit against the neighbors of his residence in 16 California. The lawsuit was for actual and treble 17 18 19 20 21 22 23 damages and attorneys' fees for trespass, negligence, and hiring of unlicensed contractors to perform licensed services. This case was settled as a result of mediation on August 4th, 2008. The dispute was about the pruning of trees. Petitioner contended that these trees were on his property. As part of the settlement, Petitioner will not replant trees 24 within a 10-foot front setback. 25 Petitioner was not content with the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 settlement and hired counsel to have the settlement agreement withdrawn. On August 19th, 2009, counsel filed a complaint on behalf of Petitioner against the law firms which represented Petitioner during his dispute with his neighbor. During 2011 and 2012, Petitioner was . represented by three different law firms. The invoices for the three law firms describe activities related to the legal malpractice claim in the dispute | 1 2 3 4 5 6 7 8 9 10 with his neighbor. The invoices do not mention 11 Petitioner's business. 12 13 14 15 16 17 18 i 19 Petitioner operated a business out of his home. He made equipment that was sold to the defense industry. OPINION Generally, the Commissioner' s determinations in a notice of deficiency are presumed correct, and a taxpayer bears the burden of proving those determinations are incorrect. Rule 142(a); Welch v. 20 Helvering, 290 US 111, 115 (1933). Petitioner does 21 22 23 not contend that the burden of proof should be shifted to Respondent under section 7491(a), and the record does not suggest any basis for a shift. 24 Attorneys' Fees Deductions 25 Deductions are a matter of legislative grace, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 and a taxpayer must prove his or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 US 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 US 435, 440 (1934). Sections 162 and 212 allow a deduction for all ordinary and necessary expenses paid or incurred during a taxable year in carrying on a trade or business, or for the production or collection of income. See sections 162(a) and 212. Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the year in carrying on a trade or a business. Section 212 allows an individual to deduct all the ordinary and necessary expenses paid or incurred in producing income; managing, conserving, or 15 maintaining property held for the production of 16 17 18 income; or determining, collecting, or refunding a tax. Ordinary and necessary expenses incurred in connection with the management, conservation, or 19 maintenance of property held for use as a residence 20 21 22 23 24 25 by the taxpayers are not deductible. Section 1.212- 1(h), Income Tax Regs. Section 262(a) disallows a deduction for personal expenses. To determine whether an expense is deductible as a trade or business expense or as a non-business, profit-seeking expense, as opposed to a 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 nondeductible personal expense, we look to the origin and character of the expense. Woodward v. Commissioner, 397 US 572, 577 (1970); United States v. Gilmore, 372 US 39, 48 (1963); American Stores Co. & Subs. v. Commissioner, 114 TC 458, 470 (2000). If 6 Petitioner's personal lawsuit against his neighbor is 7 8 9 10 11 12 13 14 proximately related to his trade or business, then the legal expenses associated with the lawsuit are deductible. See Kornhauser v. United States, 276 US 145, 153 (1928); Dowd v. Commissioner, 68 TC 294, 303-304 (1977). The ascertainment of a claim's origin is a factual determination that must be made on the basis of the facts and circumstances of the litigation. 15 United States v. Gilmore, supra at 47-49. The most 16 17 18 19 20 21 22 23 24 25 important factor to consider is the circumstances out aof which the litigation arose. See Boagni v. Commissioner, 59 TC 708 (1973). Petitioner contends that the legal claims were related to his business. Petitioner operates his business from his residence. He testified that he needs to keep his equipment cool and that the trees provided shade that kept his property cool. Petitioner filed the claim against his neighbors. The complaint was silent regarding his 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 business. Petitioner contends that he did not want to make it public that he operated a business from his residence because of the value of the equipment. 4 Petitioner testified that trees help lower 5 6 7 8 9 10 11 12 13 14 15 16 17 18 temperatures, and heat could impact the equipment that he manufactures. The origin of Petitioner's legal claims were personal in nature. Petitioner failed to provide evidence that the civil lawsuit against his neighbor proximately related to his trade or business. Petitioner's lawsuit did not arise directly out of his business affairs. The circumstances out of which the litigation arose were the result of Petitioner's use of the property as his primary residence. Petitioner's legal claims were also not related to a non-business, profit-seeking motive. The record is devoid of evidence establishing that 19 Petitioner's legal expenses were incurred for the 20 21 22 23 production of income; the management, conservation, or maintenance of property held for the production of income; or determining, collecting, or refunding a tax. Instead, the record establishes that 24 Petitioner's legal expenses were incurred for the 25 management, conservation, or maintenance of property 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 held for use as a residence by Petitioner. As such, Petitioner is not entitled to deduct his legal expenses, under either 162(a) or section 212. 5 Conclusion Accordingly, we sustain the deficiency determined by Respondent, and a decision will be entered for Respondent. This concludes the Court's oral findings of the facts and opinion in this case. (Whereupon, at 2:46 p.m., the above- entitled matter was concluded.) 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