TAX COURT OPINION

Case: Joseph Amato
Docket Number: 13599-14
Judge: Holmes
Opinion Type: bench
Filed: 07/13/2016
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 JOSEPH AMATO, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 13599-14. ) ) ) ) ) ) ) ) ) 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 of the above case before Judge Mark V. Holmes at San Diego, CA, on May 24, 2016 containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision for Petitioner will be entered. (Signed) Mark V. Holmes Judge Dated: Washington, D.C. July 13, 2016 SERVED JUL 1 5 2016 Capital Reporting Company 3 Bench Opinion by Judge Mark V. Holmes May 24, 2016 Joseph Amato v. Commissioner Docket No. 13599-14 THE COURT: In the case of Joseph Amato v Commissioner, Docket Number 13599-14, the Court has decided to render Oral Findings of Fact and Opinion, and the following is the Court' s Oral Findings of Fact and Opinion. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court's Rules of Practice and Procedure. At stake are Mr. Amato' s 2009, 2010, and 2011 tax years. For 2009, the income that Mr. Amato received was at issue; in all three years deductions were contested. The taxpayer, Mr. Amato, is an almost-retired lawyer and California resident as he was when he filed his petition. He was able to reach a stipulation with the IRS, which together with testimony in the case, constituted the record. Mr. Amato has been an attorney licensed to practice in California since 1966. In 1995 he bought a four-bedroom house with a pool on a close to a half 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 4 1 acre lot on Fairway Drive in Rancho Mirage, 2 California. he Fairway Drive property When he 3 4 5 6 7 8 9 first bought this property, he told his mortgage company he intended to use it as a personal residence. But he began living with his son and never actually moved into it to use it as a personal residence. In 2004, he and his girlfriend bought a three-bedroom house on Whitehall Court in Rancho 10 Mirage. He and she bought this property with a loan, 11 12 13 14 also a residential loan, and in each of the three years in question, 2009, 2010, 2011, he and she received separate Forms 1098 crediting each with payment of half of the Whitehall Court property 15 mortgage interest during the year. 16 17 18 19 20 21 22 23 24 25 The key factual dispute here is that Mr. Amato claims that during the three years at issue, he used the Fairway Drive property exclusively as a law practice office and thus was entitled to deduct all the expenses related to its upkeep and maintenance, as well as take depreciation on this. The IRS disagrees with his claims. I will start, however, with the income issue in this. The Notice of Deficiency determined "It is determined that in the absence of adequate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 records, your taxable income for the taxable year 2009 has been computed by reference to bank deposits. Thus, it is determined you had additional gross business income for the taxable year 2009". The Notice of Deficiency went on to increase his income for that year, gross receipts for that year, by $7,837. The bank deposit analysis was not explained by any testimony but it was a stipulated exhibit. And what it showed was this assertion that Mr. Amato had an extra $7,837 in gross receipts in his business in 2009. This is unusual because he had over $400,000 in deposits throughout that year, where, although he now semi-retired, he seemed to be pretty actively practicing law. He successfully explained almost all of this to the Examining Agent, leaving, as I said, only the $7,837. This consisted of two items. One is the $1,000 check from the insurance company; the other $6,837 deposited from his trust account. He claims that this was recovered cost from ongoing litigation for which he had not previously taken a deduction, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 which would be a perfectly routine expense for a 24 25 personal injury lawyer working on contingency. I am persuaded that because there were so 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 many other payments that were fully explained, 2 3 4 5 6 7 8 9 10 11 12 13 14 15 including tens of thousands of dollars from other insurance companies that year, and Mr. Amato's completely candid and honest testimony that he was a personal injury lawyer and thus highly unlikely to be on the payroll of any insurance company, particularly for such a small sum as $1,000, that this rather piddling amount is, in fact, a refund or other non-taxable income from some insurance company for some payment that year but does not repres.ent compensation for services rendered or other taxable income. Additionally, it is quite common, of course, for personal injury lawyers to take expenses or costs off the top when they get a settlement. 16 Typically, the settlement, as Mr. Amato explained, is 17 18 19 20 21 22 23 24 25 put into the client trust account and then sent out to the lawyer and to the client once a settlement is reached. In the end, I found Mr. Amato credible on this point. I believe him. The conclusion is that on this income issue, Mr. Amato wins. The biggest issue by far, however, is the deductions. These are contested deductions, mostly for the expenses of running that Fairway property. Here then let me quote from the Notice of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 Deficiency. The language here is particularly 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 important. "It is determined that your deduction for office in the home expense must be figured by dividing the expense for operating your entire home between the expense for the part used for personal purposes and the part for business." The Notice of Deficiency goes on to give him 20% and find, thus, that 80% of the home is used for personal use. This effectively reduced by a great amount his Schedule C deductions and increased by a bit his Schedule A deductions, as the real estate taxes that he claimed on his Schedule C were moved from Schedule C to Schedule A. I think that there is no reasonable way to read the Notice of Deficiency other than as a determination that Mr. Amato had used his Fairway 18 Drive property partly for business and partly for 19 20 21 22 personal use. Of course, that would be in general the case, but under Section 280(A), there's a general prohibition under deduction of personal expenses for the use of a dwelling unit for personal purposes, 23 which is defined as residential purposes. 24 25 The problem here for the IRS is his testimony. I found him to be completely credible 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 that during these three years, 2009, 2010, and 2011, he absolutely did not use the Fairway Drive property as a personal residence. He had another residence at that time, with which he was living with his lady friend who is also his paralegal. Her completely credible testimony said that she went to the Fairway 7 Drive property to help him with his law practice, 8 maintain the files; that's where they had their 9 computers. 10 11 12 13 14 15 The records that we have of his client trust fund show the Fairway Drive property as the business address. The bank account showed it as the business address. They all used this as the business address. His equipment necessary to the practice of law in the 21st century was all at the Fairway Drive 16 property. 17 18 19 20 21 22 23 24 So under Section 280(A), I certainly find no use of the Fairway Drive property as a personal residence and, therefore, 280(A) does limit deductions. And, in fact, I find no use of this property that was personal at all. It was simply his law office. The premise of the Notice of Deficiency on this point that all of his Schedule C expenses were 25 deductions for office in the home expense is simply 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 wrong by a preponderance of evidence. For that 2 matter, even trying it beyond a shadow of a doubt, it 3 4 5 6 7 simply wasn't his home at all. Now, the IRS did try to salvage some part of this case by questioning whether his personal expenses -- I'm sorry, whether his business expenses were ordinary and necessary or whether some of them 8 might have been personal expenses. But there is no 9 sign of this in the Notice of Deficiency. 10 11 12 13 14 There may be in the Answer. The first sentence of paragraph 5 of the Answer says, "Admits taxpayer disputes residence Schedule C business expense adjustments in the Notice of Deficiency; clarifies these adjustments do not require that 15 Petitioner actually resided at his second personal 16 17 18 19 20 21 22 23 24 25 residence during 2009, 2010 and 2011." In addition, the IRS points to language of the pre-trial memorandum, which on page 6 says, "Business deductions are allowed but only for ordinary and necessary business expenses. Taxpayers bear the burden to prove they're entitled to such deductions. Failure to produce records does not relieve taxpayers of their burden. To meet their burden, taxpayers must prove the amount claimed was paid or incurred, was incurred in carrying out a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 trade or business, was an expense, was a necessary expense, and was an ordinary expense. An ordinary and necessary expense is one that is appropriate and helpful to a taxpayer's business and results from an 5 activity that is normal, usual or customary. 6 7 8 9 Taxpayers must keep sufficient records to establish the amount of their deductions." (Numerous citations omitted). But this is simply not in the Notice of 10 Deficiency. And I see no way to read the Notice of 11 Deficiency as asserting that the Government was 12 13 14 claiming that the expenses that Mr. Amato claimed for his law practice were not ordinary and necessary, or were somehow put in issue by the Notice of 15 Deficiency. 16 17 18 19 20 21 22 23 24 25 Now, this is not a great surprise. I believe Mr. Amato when he said that he gave all the records of his law practice to Examining Agent. Here again, I find him to be completely credible for this point. What happens, though, is that it shifts the burden of proof to the Government if it wants to raise ordinary and necessary, or personal expenses other than personal use of the home, is a reason to contest Mr. Amato's tax return position. Rule 142 of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 course then shifts the burden of proof to the 2 Government. But then the Government is faced with challenging Mr. Amato's and his witnesses perfectly credible testimony. I saw nothing pointing to any particular problem with any particular expense as ordinary and necessary. And because the issue is raised only ambiguously in the answer and the pre-trial memo, I'm not even sure the Government has raised it adequately in order to come up with the second ground for challenging the deductions that Mr. Amato claimed on his Schedule Cs for the three years at issue. Even if it was raised, I find that Mr. Amato -- I'm sorry, I find that the IRS did not carry the burden of proof and again, rule entirely in favor of Mr. Amato on this point. The IRS also asserted a penalty under 6662 that goes away with the findings that I've made on income and deductions. This concludes the Oral Findings of Fact and Opinion in this case. Decision will be rendered for Petitioner. (Whereupon, at 10:16 a.m., the above- entitled matter was concluded.) 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