TAX COURT OPINION

Case: Brian Cunningham
Docket Number: 27379-13
Judge: Gustafson
Opinion Type: bench
Filed: 09/24/2014
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 BRIAN CUNNINGHAM, Petitioner, v. ) ) ) JRN ) Docket No. 27379-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Columbia, South Carolina, on September 10, 2014, containing his oral findings of fact and opinion, 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 Gustafson at Columbia, South Carolina, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. September 24, 2014 SERVED Sep 25 2014 Capital Reporting Company 3 Bench Opinion by Judge David Gustafson September 10, 2014 BRIAN CUNNINGHAM Docket No. 27379-13 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. Petitioner Brian Cunningham filed no tax returns for the years 2008 and 2009. By notices of deficiency dated August 12, 2013 (Exs. 1-J and 2-J), the Internal Revenue Service (IRS) determined deficiencies in Mr. Cunningham's 2008 and 2009 Federal income tax, plus additions to tax. The parties have resolved many issues in the case, and the remaining issues for decision are whether Mr. Cunningham is entitled to any deductions above those that the IRS has allowed, and whether he is liable for the additions to tax. The case was tried in Columbia, South Carolina, 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 on September 9, 2014. Mr. Cunningham represented 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 himself, and respondent was represented by Olivia 2 Hyatt Rembach. 3 FINDINGS OF FACT 4 Mr. Cunningham's business 5 6 7 8 9 10 11 12 13 14 15 16 In 2008 and 2009 Mr. Cunningham was self- employed in a multi-level marketing business as a distributor of household products sold by Waiora LLC. To conduct his own distributorship, Mr. Cunningham used a pass-through entity he owned called Shofar LLC; and although his wife's name appears on the organizing documents for Shofar, he acknowledges that he is taxable on all the income of Shofar, and the IRS acknowledges that he is entitled to all its deductions. Income Mr. Cunningham concedes that he received from 17 Waiora nonemployee compensation in the amounts of 18 19 20 21 22 23 24 $138,155 in 2008 and $74,696 in 2009. (Ex. 5-J; Stip. 7.) At the conclusion of trial, the parties stipulated that he also received additional business income of $54,403 in 2008 and $31,739 in 2009. In December 2009 he sold his distributorship for $50,000, which the parties stipulate constituted long-term capital gain. The parties agree that two 25 large checks he deposited on December 31, 2009, were 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company life insurance proceeds that were not taxable income to Mr. Cunningham. Thus, all the income issues in the case are resolved by the agreement of the 5 parties. Cost of Goods Sold As for Mr. Cunningham's cost of goods sold ("COGS"), before trial the parties stipulated that he had COGS of $4,970 in 2008 and $3,360 in 2009. At the conclusion of trial, the parties stipulated that he had additional COGS of $1,656 in 2008 (see Ex. 21- P at 11) and $247 in 2009 (see id. at 64). Thus, the COGS issues are resolved by the agreement of the parties. Deductions We find that Mr. Cunningham also incurred deductible business expenses of $6,575 in 2008 and $3,830 in 2009. These expenses, substantiated by some documentation and Mr. Cunningham's testimony, are tallied on Exhibit 26-C, which was prepared by the Court after trial and will be served on the parties with the transcript of this bench opinion. We do not find that payments that Mr. Cunningham made to his mother (see Ex. 17-P at 44-46) were business expenses. He alleges that she made payments to purchase Waiora household products in order to 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 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 boost his sales numbers so as to generate larger bonuses, and that he then used the products for business purposes, such as giving them to prospective customers to induce purchases. However, he provided no other evidence to corroborate his testimony, he admitted that sometimes the products were used in his own household, and he did not identify any recipient of the products. We are not convinced that these products were devoted to business purposes. During trial, Mr. Cunningham abandoned his claim for deductions for medical expenses, explaining that he was sure that his family medical expenses did not reach the 7.5% floor prescribed in section 213. Mr. Cunningham made charitable contributions of $15,003 in 2008 and $14,091.in 2009, as tallied on 16 Exhibit 26-C. The Commissioner concedes that these 17 18 19 20 were contributions to qualified charitable organizations. (Payments that Mr. Cunningham made to his church or other organizations for T-shirts, for books, or for registration fees for himself or 21 members of his family to attend events were not 22 23 24 25 contributions and are not deductible.) Non-compliance with tax laws Mr. Cunningham has not filed a tax return since 2003. (For at least the years at issue, neither his 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 wife nor Shofar filed returns.) In 2007 (i.e., 2 3 4 5 6 7 before the years at issue) Mr. Cunningham hired an accountant to create his LLC and to straighten out his tax situation, and he signed the necessary authorizations for the accountant (and his colleagues) to deal on his behalf with the IRS. Thereafter Mr. Cunningham provided his accountant 8 with copies of his financial information and records. 9 However, the accountant died four years later in 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2011, and before his death he did not prepare any returns for Mr. Cunningham or Shofar. Mr. Cunningham was aware that he had not signed and filed any returns,. but he left his tax matters with that accountant. In 2012 Mr. Cunningham addressed his tax situation again by hiring another accountant, but he has still not filed any tax returns. Mr. Cunningham has experienced personal trouble in recent years--i.e., the death of his father and grandmother, the decline of his elderly grandfather, and a serious injury to his arm. However, he has been employed for most of this period and is evidently able to handle the business of life. The IRS eventually caught up with Mr. Cunningham. It received Waiora's reports on Forms W- 2 (Ex. 5-J) of the compensation paid to Mr. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 Cunningham, prepared substitutes for returns pursuant to section 6020 (Stip. 5-6; Exs. 3-J, 4-J), and issued statutory notices of deficiency to him (Stip. 3-4; Exs. 1-J, 2-J). He timely mailed a petition to this Court on November 11, 2013, on which he reported a Texas address. I. General evidentiary principles OPINION The IRS's determination in the notice of deficiency is presumed correct, and the taxpayer generally bears the burden to prove his entitlement to any deductions he claims, Rule 142(a); and a taxpayer must satisfy the specific requirements for any deduction he claims, see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). The Commissioner bears the burden of proof where he introduces "new matter" into the case, as he did here by arguing that Mr. Cunningham had income not reflected on the notices of deficiency from sources other than Waiora. However, that issue has been resolved by the parties. II. Business expense deductions Pursuant to section 162(a), a taxpayer may deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on 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 9 any trade or business". In contrast, except where specifically enumerated in the Code, no deductions are allowed for personal, living, or family expenses. See 262(a). Since Mr. Cunningham used the Shofar bank account as a dual purpose personal and business account, the nature of his expenditures was often unclear. Where there was no basis for discerning a business purpose (e.g., grocery purchases at Costco), or for allocating between business and personal (such as to buy checks to be used for both purposes), or where personal indicia predominated (as when he paid his mother for purchase of household supplies), we did not allow a business expense deduction. III. Addition to tax The IRS has the burden of production to show that Mr. Cunningham is liable for the three additions to tax determined against him in the notice of deficiency. See section 7491(c). The Commissioner carried that burden in this case. A. Failure to file Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return, and Mr. Cunningham stipulated that he failed to file returns for 2008 and 2009. (Stip. 2.) The addition to tax applies "unless it is shown that such 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 10 1 failure is due to reasonable cause and not due to 2 willful neglect". Sec. 6651(a)(1). Mr. Cunningham 3 urges us to excuse his non-filing because of his 4 difficult personal circumstances. However, those 5 difficulties have not prevented him from working at 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 his employment, and we do not see how they could be the reason for his non-filing for a period of years. He points to the death of his accountant, but that death took place three years ago in 2011. The deaths in his family are certainly serious challenges to one's well-being and equilibrium, but those deaths (and the death of his accountant) occurred long after his 2008 and 2009 returns were due, and more years have passed with his returns still unfiled. We hold he did not show reasonable cause. B. Failure to pay Section 6651(a)(2) imposes an addition to tax for failure to pay the amount of tax shown on a return, and the Commissioner contends that Mr. Cunningham is liable for this addition for 2008 and 2009. A return made by the Secretary under section 6020(b)--i.e., an SFR--is treated as "the return filed by the taxpayer for purposes of determining the amount of the addition" under section 6651(a)(2). See sec. 6651(g)(2). Mr. Cunningham stipulated that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 the Commissioner prepared SFRs for him (see Stip. 5- 6; Exs. 3-J, 4-J), and the Commissioner has thus carried his burden of production to show that Mr. Cunningham is liable for the addition to tax under section 6651(a)(2). Mr. Cunningham has not substantiated a reasonable cause defense, and he is liable for the failure-to-pay addition to tax. C. Failure to pay estimated tax Section 6654 imposes an addition to tax on an individual taxpayer who underpays his estimated tax. A taxpayer must pay estimated tax for any year in which he has a "required annual payment". Sec. 6654(d). Thus, the IRS's burden of production under section 7491(c) requires it to produce, for each year for which the addition is asserted, evidence that, inter alia, the taxpayer filed no return for the preceding year. The Commissioner met this burden here by showing that Mr. Cunningham did not file returns for the years preceding 2008 and 2009. 20 Consequently, the Commissioner carried his burden of . 21 22 23 24 25 production to show that Mr. Cunningham is liable for the section 6654 addition, and he did not demonstrate that he meets any exception (cf. sec. 6654(e)). He is therefore liable for this addition for failure to pay estimated tax. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 So that the tax liability (and the corresponding additions to tax) can be recomputed, decision will be entered under Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:45 a.m., the above-entitled matter was concluded.) 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 Deductions Exhibit 26-C Deductible business expenses for 2008 Expenses from Exhibit 21-P Page Date Payee Amount 03 04 05 06 10 12 14 19 020108 020808 021908 022508 022608 022608 022708 030808 031808 032608 032608 032708 040708 041508 041808 042808 050808 050708 051508 051908 052708 052708 052808 060208 060708 061608 061 808 061908 ZRII MLM ZRII Internet, Inc. ZRII ZRII ZRII MLM ZRII ZRII ZRII Internet, Inc. MLM Networx Axis41 ZRII URI MLM Networx Axis41 1&1 ZRII G&B ZRII MLM Networx Axis41 ZRII 193.09 53.00 12.95 29.97 280.69 288.34 137.35 53.00 12.95 288.34 288.34 29.97 53.00 1.00 12.95 272.29 175.20 53.00 29.95 12.95 29.97 272.29 119.75 213.39 53.00 19.95 12.95 49.73 062008 062608 062608 070108 070808 0715 071608 072808 081508 081808 082508 082608 091508 091608 092508 100208 100208 100108 101508 101608 102708 110308 110308 111708 112408 112508 120208 123008 120108 121608 122608 22 23 27 28 30 32 33 34 35 37 38 Networx 1&1 ZRII ZRII ZRII return check Networx ZRII ZRII Networx ZRII 1&1 ZRII Networx ZRII ZRII Networx ZRII ZRII Networx ZRII ZRII Networx ZRII ZRII 1&1 ZRII Networx Aloha ZRII ZRII ZRII 19.95 29.97 305.85 209.69 140.25 39.90 24.99 305.85 39.90 24.99 43.95 286.95 39.90 24.99 286.95 1.00 268.29 131.95 39.90 24.99 255.49 59.95 131.95 24.99 29.97 255.49 49.95 15.62 131.95 24.99 255.49 Subtotal from Ex. 21-P for 2008 6,575.41 2008 accounting expenses paid to Hodge & Associates Exhibit Check Date 15-P 17-P 1145 1069 1070 1126 5215 03/14/2008 05/27/2008 05/27/2008 08/12/2008 12/23/2008 2008 accounting subtotal Amount 825 825 825 635 650 3,760 2008 other expenses Exhibit Check Date Payee Amount 15-P 19-P 1126 01/20/2008 01-10/2008 Robert Wambach (postal fee) Forex (49.95 x 10) 2008 other expenses subtotal RECAP: Subtotal from Ex. 21-P for 2008 2008 accounting subtotal 2008 other expenses subtotal 2008 total business expenses 74 500 574 6,575 3,760 574 10,909 3 Deductible business expenses for 2009 Expenses from Exhibit 21-P Page Date Payee Amount 39 41 44 45 47 51 52 56 59 63 65 67 70 72 010809 012609 012709 022609 020209 022609 030209 030209 031609 032609 033009 040109 041009 042709 050909 050909 052609 060609 061609 062409 062609 070109 071609 072709 081709 082609 083109 092809 102609 112709 Bluenova.com ZRII ZRII EZbusiness ZRII ZRII ZRII ZRII check reversal Liberty ZRII Cal Nutri ZRII ILearning ZRII Candlewealth Candlewealth ZRII Strategic Strategic GoDaddy ZRII Mandura Strategic ZRII Strategic ZRII Mandura ZRII ZRII ZRII 4 149.94 255.49 24.99 45.92 131.95 255.49 131.95 33.00 37.00 255.49 346.17 131.95 99.95 131.95 145.80 113.92 131.95 45.00 15.00 19.18 131.95 112.00 30.00 131.95 30.00 131.95 112.00 131.95 131.95 131.95 76 122309 122409 Harvest ZRII Subtotal from Ex. 21-P for 2009 2008 accounting expenses paid to Hodge & Associates Exhibit Check Date 17-P 5237 5384 01/19/2009 07/14/2009 2009 accounting sub total 2009 other expense Exhibit Date Payee 19-P 12/24/2009 Marie Howard (web page) RECAP: Subtotal from Ex. 21-P for 2009 2009 accounting sub total 2009 other expense 2009 total business expenses 119.85 131.95 $3,829.59 Amount 1,650 1,700 3,350 Amount 429 $3,830 3,350 429 7,609 5 Charitablecontributions Exhibit Check Date P_aym Amount 15-P 17-P 1116 1133 1014 1025 1049 1081 1093 1100 1101 1104 1128 1141 1147 5167 5193 5207 01/19/2008 Calvary Chapel 02/20/2008 Calvary Chapel 03/20/2008 Calvary Chapel 04/16/2008 Calvary Chapel .05/16/2008 Calvary Chapel 06/19/2008 Calvary Chapel 07/01/2008 Child Evang. 07/24/2008 Calvary Chapel 07/24/2008 Calvary Chapel 07/24/2008 Mult. Mins. fbo Calvary Chapel 08/23/2008 Calvary Chapel 08/26/2008 Calvary Chapel 09/16/2008 Calvary Chapel 10/18/2008 Calvary Chapel 11/22/2008 Calvary Chapel 12/16/2008 Calvary Chapel 19-P Compassion 2008 charitable contributions total 17-P 5227 5257 5275 5297 5314 5296 5315 5316 5317 5318 5324 5367 01/18/2009 Calvary Chapel 02/16/2009 Calvary Chapel 03/22/2009 Calvary Chapel 04/20/2009 Calvary Chapel 04/12/2009 U Turn for Christ 04/19/2009 NSCC Youth 04/21/2009 U Turn for Christ 04/21/2009 U Turn for Christ 04/21/2009 U Turn for Christ 05/10/2009 Calvary Chapel 05/24/2009 Calvary Chapel 06/20/2009 Calvary Chapel 6 1,300 1,500 1,100 1,200 1,750 1,550 315 1,300 50 73 950 25 950 960 900 840 240 15,003 800 950 670 710 40 40 20 20 50 220 610 550 5385 5431 5340 5411 5416 5420 5471 5474 07/17/2009 Calvary Chapel 08/18/2009 Calvary Chapel 09/27/2009 Calvary Chapel 10/20/2009 Calvary Chapel 11/01/2009 Calvary Chapel 11/17/2009 Calvary Chapel 12/17/2009 Calvary Chapel 12/27/2009 Calvary Chapel Compassion 19-P 2009 charitable contributions total 625 520 500 320 220 560 600 5,000 1,066 14,091 7