TAX COURT OPINION

Case: Collin S. Pulsipher & Marcella P. Pulsipher
Docket Number: 5409-17S
Judge: Buch
Opinion Type: bench
Filed: 02/15/2018
Pages: 9

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 COLLIN S. PULSIPHER & MARCELLA P. PULSIPHER, Petitioners, v. ) ) ) ) ) Docket No. 5409-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioners and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California, 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) Ronald L. Buch Judge Dated: Washington, D.C. February 15, 2018 SERVED Feb 15 2018 . (cid:16)042 1 2 Bench Opinion by Judge Ronald L. Buch January 24, 2018 3 Collin S. Pulsipher and Marcella P. Pulsipher v. 4 5 6 8 9 Commissioner-of Internal Revenue Docket No. 5409-17S THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. This opinion is in conformity with 10 Intefnal Revenue Code section 7459(b) and Rule 152(a) of 11 12 13 14 the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury regulations in effect during the year at issue, and Rule refer.ences are to the Tax Court Rules of 15 Practice and Pröcedure. 16 This case was heard purscant to section 7463. 17 Under sectiòn T463(b), the decision to be entered in this 18 case is not reviewable by any other court, and this 19 opinion may not be treated as precedent for any other case. 20 21 As a general matter, the Commissioner's 22 determinations in the notice of deficiency are presumed 23 correct,.a.nd the taxpaper.bears the burden of proving an 24 error. Ruléi.142(a); Welch v. Helvering, 290 U.S. 111, 115 25 (1933). In limited situations, the burden can shift to 1 the Commissioner.under section 7491(a), but the record 2 . does not establish that the criteria under section 7491 3 4 5 6 7 8 9 have been established, therefore, the burden of proof remains on the Pulsipher(cid:0)541. Background Mr. Pulsipher considers himself to be a professional artist. What he means by that is that he is a man of many talents and interests,.all of which broadly fall.into the arts. He has worked in fashion. He has 1(i worked as a musician. He has worked on set design. As 11 relevant to 2015, the year in issue, he was employed on 12, production sets. He was also winding down his involvement 13 in a band. And he was taking. the initial steps toward 14 pitching a réality TV show. 1 His concept for a reality TV show is to focus on 16 motorcycle touring. To that.end, he bought equipment and 1 took motorcycle camping trips with cameras mounted to . . 18 motorcycles. It is clear that this is an activity Mr. 19 20 21 Pulsipher enjoyed; it is uncléar the extent to which this was a bona fide business venture. We need not answer that question, but we also note that, to date, nothing has come 22 of that venture. 23 2 2 When it came time to prepare Mr. Pulsipher and his wife's return, the couple hired -and paid a return .preparer. Mr. Pulsipher described his businesses to the 1 2 3 4 5 6 7 8 9 . return preparer and provided the totals of his business expenses based on his discussion with the return preparer. The result.of these discussions, as relevant here, was a Schedule C, Profit or oss fróm Business, prepared ,for Mr. Pulsipher. The Schedule C for Mr. Pulsipher lists his profession as "Artist: inger/writer/designer". The Sch.edule C shows.a few hundred dollars of income and several thousand dollars of expenses; $26, 907 to be exact. 10 Those expenses largely consist of travel-related expenses 11 (car and truck, travel, meals) and "other éxpenses" that 12 13 14 are broken out on an attached schedùle. .Many of the expenses that are broken out appear to be personal. But some appear to be related to his business as a musician. 15 Specifiçally, $1,120 are related to musical equipment, 16 lyric books, or studio rehtal. 17 18 The Commissio'ñer disallowed all of the Schedulè C expenses and asserted an accuracy-related penalty for 19 negligence and substantial -understatement. The 21 Commissioner provided supervisory apprçval of both 21 penalties. 22 23 At trial, Mr. Pulsipher provided handwritten lists that he prepared for trial showing his expenses. 24 While we give little weight to the handwritten lists, 25 those lists were accompanied by either bank records or . 1 2 3 4 5 6 7 8 9. receipts. Most of -the expenses are related to travel f'òr the reality shoW1he was devèloping. And the deductibility of those trävel expenses is questiánable. All of the travel appears more likely to have been for personal pleasure than for business purposes, but we need not decide that question. Discussion Taxpayers can deduct "ordinary and necessary expenses paid or incurred during the taxable year in 10 carrying on any trade or business." Sec. 162(a). 11 12 13 14 15 16 However, they äre ñot allowed a deduction for personal, living, or family expenses except where specifically allowed in the Code. ,Sec. 262(a). Taxpayers are required to maintäin sufficient records to show whether or not such person is liable for tax. Sec. 6001. These records must be retained for as long as the contents may become 17 material and must be kept available for inspection. 18 19 Certain éxpenses require strict substantiation under section 274(d). Such expenses include those related 2 to travel., meals and éntertainmeñt, gifts, and listed 21 property under section 280F(d)(4).. For the years at 22 issue, listed property included, among other things, 2 2 2 passenger automobiles and other propérty used as a means of transportation. Sec. 280F(d)(4.). Under the strict substantiation rules the taxpayer must have adequate 1 2 3 4 5 6 records or sufficient evidénce to.corroborate (1) the amount of the expense, (2) the time and place the expense was incurred, (3) the business purpose of (cid:16)254heexpense, and (4) the business relatioñship of the taxpayer to any others benefitted by.the expense. Sec. 274(d).. To substantiate by a'dequate records, the taxpayer must 7 maintain an account book, a log, a diary, or a similar 8 9 10 11 12 record and documentary evidence to establish each element of an expense. The bulk of Mr. Pulsipher's èxpenses are related to the preliminary steps he took to develop a reality show.. Generally, expenses under sectión 162 are 1 deductible to the extent that they relate to a functioning 14 business at the time the expenses were incurred. Hardy v. 15 Commissi·pne , 93 T.C. 684, 68¯6 (1989), aff'.d. in part, 16 remanded in patt, 1990 U.S. App. Lëxis 19670 (10th Cir. 1 1 1 Oct. 29th, 1990); Glotov v. Commissioner, T.C. Memo. 2007- 147. A functioning business is one that is performing the activities for which it .ïs organized. 4. The bulk of 20 Mr. Puls.ipher's expenses are rel'ated to the preliminary 2 steps he took in developing a reality show, and not ·his 22 income as .a musician. Because those expenses are not 23 related to' a functioning business, they cannot properly be 24 offset.against his income as a músician. . 23 To the extent his expenses relate to a new 1 2 3 4 5 6 7 8 9 business, section 195.disallows business expenses for start-up expenditures. A start-up expenditure is any amount paid or incurred in connection with: (1) investigating the creation or acquisition of an active trade or business (2) creating an .active trade or business, or .(3) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins in anticipation of such activity becominci arr active trade or business. Sec. 10r 195 (c) (1) . In all instances, the amount in question must 11 be allowable as a deduction in the case of an existing 12 active trade or business. Id. Because the reality show 13 was a new venture and not an active business, Mr. 14 Pulsipher's expenses are not deductible under section 195. 15 1 Certain of the expenses reported by Mr. Pulsipher appear to be directly related to his work as a 1 musician, which was the source of the income shown on his 18 Schedule C, in particular, the expenses related to 19. drumming (drum sticks, etc.), lyric books., and studio 20 rental. Those expenses total $1,120. Those expenses do 2 not require strict substantiation, and we are satisfied 22 that those expenses .were related to his business as a 23 musician and in fact incurred. 24 23 In .addition to the tax, the Commissioner has asserted an accuracy-related pénalty for either negligence 1 2 3 4 5 6 7 8 9 10 11 or a substantial undetstatement. In a case involving an individual taxpayer, the Commissioner bears the burden óf productiön. One element of that burden is establishing that thé ini ial determination of the penalty was approved in writing by the immediàte supervisor of the official who determined the penalty. See sec. 7491(c).. The Commissioner satisffed that.burden by putting.into. evidence the signed äpproval of the.initial. penalty determination. As for establishing a substantial understatement, the amount of the deficiency will need to be recomputed based on this opinion. If the amount of the 12 deficiency exceeds the.greater of 10% of the tax required 13 14 15 1. 17 18 1 20 21 22 23 24 25 to be shown on the return or $5000, the Commissioner's burden will have been satisfied. We now turn to negligence. In the event that the threshold for a substantial understatement has not been met, the Commissioner.argues that a penalty should apply for negligence. Specifically, the Commissioner argues that Mr. Pulsipher's lack of substantiation justifies such a penalty. But the expenses that have been disallowed were not disallowed for lack of substantiation. The expenses were disallowed because start-up expenses for a reality show were improperly aggregated with the income from being a musician. Mr. Pulsipher credibly testified that he discussed these expenses with his return preparer. . 1 2 3 We understand from Mr. Ptilsipher's testimony that it was the return preparer who aggregated those expenses. On this recor'd, we cannot say that Mr. Pulsipher® was . 4 negligent. We need not reach the issue of the quality of 5 6 7 his substantiation. Because we have found that some of Mr. Puléipher's schedule C exp.enses were deductible, decision 8 will be"entered under Rùle 155. (Whereupon, at 9:41 a.m.,. the above-entitled matter was concluded. ) , 9 10 11 12 13 15 16 17 .18 19. 20 21 23 24 25