TAX COURT OPINION

Case: Marcus L. Head & Amanda R. Head
Docket Number: 3796-17
Judge: Nega
Opinion Type: bench
Filed: 11/07/2017
Pages: 14

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 MARCUS L. HEAD & AMANDA R. HEAD, Petitioners, v. ) ) ) ) Docket No. 3796-17. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge Joseph W. Nega at Memphis, Tennessee, on October 3, 2017, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. It is further ORDERED that the Court's transcript of the proceedings in the above case is hereby amended as follows: On page 11 beginning on line 3 and continuing to line 24, the text beginning with the first full paragraph through the second full paragraph shall be deleted. On page 13 at the end of the 21st line, add the following Footnote 2 as follows: In the notice, respondent determined that the underpayment of tax was attribute to one or more of the following: (1) negligence or disregard of rules or regulations; (2) substantial understatement of income tax; (3) substantial valuation misstatement (overvaluation); (4) transaction lacking economic substance." Because we have already held that petitioners are liable under sec. 6662(a) due to a substantial understatement of tax under sec. 6662(b)(2), we need not reach those alternative agreements. SERVED Nov 07 2017 - 2 - In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Joseph W. Nega Judge Dated: Washington, D.C. November 7, 2017 3 Bench Opinion by Judge JOSEPH W. NEGA October 3, 2017 MARCUS L. HEAD & AMANDA R. HEAD V. COMMISSIONER Docket No. 3796-17 The Court has decided to render the following as its oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. In this Bench Opinion, unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the year at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. This Bench Opinion is rendered pursuant to section 7459(b) and Rule 152, and this opinion shall not be treated as precedent for any other case. Petitioner Marcus L. Head appeared pro se on behalf of himself and petitioner Amanda R. Head. Dustin J. Pitts appeared on behalf of respondent. Respondent determined a deficiency of $5,208 in petitioner0 Federal income tax (tax) for their tax year 2013 and an accuracy-related penalty of $1,041.60 under section 6662(a). After concessions,*** Footnote 1, in theC deficiency notice respondent disallowed petitioners'6¼Î deduction that they claimed n their Schedule C, Profit or([W Loss from usiness,(Schedule C for Other Expenses, $880.(3Mk At trial petitioners conceded that they were not entitled 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 (973)406-2250|operations@escribersnet|vavw.escribers.net 4 to that deduction. End of footnote. *** The issues remaining for decision for petitioners' tax year 2013 are whether petitioners: (1) are entitled to a deduction claimed a heir Schedule C for "Car and truck expenses" incurred in connection with a trade or business of $16,077; (2) are entitled to a deduction claimed a their Schedule C for "Depreciation and section 179 expense " incurred in connection with a trade or business of $3,875; and (3) are liable for the accuracy-related penalty under section 6662. {We shall refer collectively to petitioners' Schedule C "Car and trucks expenses" and their Schedule C "Depreciation and section 179 expense[s]" as petitioners' Schedule C deductions.) FINDINGS OF FACT This case was tried on October 2, 2017, in Memphis, Tennessee. Petitioners resided in Mississippi at the time they filed the petition. Petitioners timely filed their orm 1040, U.S. Individual Income Tax Return (return for their tax year(3W 2013 (2013 return). Petitioners attached to that return Schedule C. In that Schedule C, petitioners stated that petitioner husband's "principal Business or Professional, Including Product or Service" was "Landscaper". In the Schedule C, petitioners reported $0 of total income and claimed total 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 EM (973)406-2250]operations@escribers,net|www.escribers.net 5 expenses and a net loss of $20,832. Those expenses consisted of "Car and truck expenses" of $16,077, "Depreciation and section 179 expense#[s]" of $3,875, and "Other expenses" of $880 for "Cell Phone". Petitioners also attached to their 2013 return Form 4562, Depreciation and Amortization (Form 4562). In that form, petitioners claimed the following depreciation deductions and section 179 expenses with respect to a "Truck" and a "2008 Saturn", with a 100% business use. Petitioners' Form 4562 showed that petitioners had driven 28,455 total business miles and 28,455 total miles during x year 2013. At a time not established by record, respondent commenced an examination of petitioners' 2013 return. During that examination, respondent requested that petitioners provide information with respect to their Schedule C activity. In response, petitioners indicated that petitioner husband was a "consultant" that "Travel[s] to different site locations to consult and do inspections, in state and out of state." Petitioners also provided to respondent a mileage log for Petitioner husband labeled "Consulting-FDA-2013", copies of twelve monthly bank A ¿ÍNt3 statements for tax year 2013, and service records for the two vehicles. On November 28, 2016, respondent issued 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 (973) 406-2250| operations@escribers net | www.escribers.net petitioners a notice for their tax year 2013. In that notice, respondent disallowed petitioners' Schedule C deductions and determined that petitioners were liable for 6 an accuracy-related penalty under section 6662(a). On January 24, 2017, petitioners filed Form 1040X, Amended U.S. Individual Tax Return (amended return), for their taxable year 2013 (2013 amended return). Petitioners attached to that amended return Schedule C. In that Schedule C, petitioners stated that petitioner husband's "Principal Business or Profession, Including Product or Service" was "Home Inspector". On June 13, 2017, petitioners filed a second amended return for their taxable year 2013. Petitioners attached to that second amended return Schedule C. In that Schedule C, petitioners stated that petitioner husband's "Principal Business or Profession, Including Product or Service" was "Landscaper". OPINION I. Burden of Proof The Commissioner's determinations in a notice are generally presumed correct, and the taxpayer ordinarily bears the burden of proving those determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are a 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 matter of legislative grace; the taxpayer bear the burden (973)406-2250|operations@escribersmet j www.escribersaiet 7 of proving entitlement to deductions allowed by the Code and of substantiating expenses underlying aimed deductions by keeping and producing records sufficient to enable the Commissioner to determine the correct liability. Se A 01; INDOPCO, Inc. v. Commissioner, 503 U.S. 79,84(1992); New Colonial Ice Co., v. Commissioner, 292 U.S./ 435,440(1935); Sec. 1.6001-1(a),(e), Income Taxc3 Regs. II. Petitioner's Schedule C Deductions Section 162(a) allows a taxpayer to deduct "all of t -y-hn*s-i-nese-esc-penses-pa-i-d----I-I-m anrry, Arvike tha All of the ordinary and necessary expenses paid or incurred during the taxable year in carrying trade or business". In general, however, a taxpayer may not deduct expenses incurred in connection 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 with activities not engaged in for profit, such as 17 18 19 20 21 22 23 24 25 activities primarily carried on as a sport, as a hobby, or for recreation, to offset taxable income from other sources. Sec. 183(a) and (b); Sec. 1.183-2(a), Income Tax Regs. Section 183(c) defines an "activity not engaged in for profit" as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." "An activity is engaged in for profit if the taxpayer has an actual, honest profit motive, even if it (973)406-2250|operationseescribersmet|www.escribers.net 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 is unreasonable or unrealistic." Keating v. Commissioner, 544 F.3d 900,904 (8th Cir7 2008), Aff'g T.C. Memo. 2007- A 309; see Sec. 1.183-2(a), Income Tax Regs. Whether the taxpayer had the requisite profit objective is determined by looking at all the facts and circumstances. Evans v. Commissioner, 908 F.2d 368,373 (8th Cir. 1990), rev'g T.C. M88 Memo. 146-468; Sec. 1.183-2(a), Income Tax Regs. We give greater weight to objective facts than to a taxpayer's statement of intent. Thomas v. Commissioner, 84 T.C. 1244,1269(1985), Eff'd, 792 F.2d 1256(4th Cir. 1986); 8eC. 1.183-2(a), Income Tax Regs. Evidence from the years after the year at issue is relevant to the extent it creates inferences regarding the taxpayer's requisite profit objective in earlier years. See e.g., Smith v. Commissioner, T.C. Memo 1993-140. If an activity is not engaged in for profit, section 183(b)(1) allows deductions that would be allowable without regard to whether the activity is engaged in for profit. Section 183(b)(2) allows deductions equal to the amounts of deductions that would be allowable if the activity were engaged in for profit, but only to the extent gross income derived from the activity exceeds the deductions allowed by reason of section 183(b)(1). Section 1.183-2(b), Income Tax Regs. provides a A (973)406-2250|operationseescribersnet|væ,s.escribersmet 1 2 3 4 5 6 7 8 9 nonexclusive list of factors to consider in evaluating a taxpayer's profit objective, such as: (1) the manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his or her advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or loss 10 with respect to the activity; (7)the amount of occasional 11 12 13 14 15 16 17 18 19 20 21 22 23 profits earned, if any; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation were involved. No single factor is determinative of the taxpayer's intention to make a profit, and more weight may be given to some factors than others. Golanty v. Commissioner, 72 T.C. 411,426 (1979), aff'd without published opinion, 647 F.2d 170 (9th Cir. 1981); see Dunn v. Commissioner, 70 T.C. 715,720(1978) aff'd on another issue, 615 F. 2d 578 (2d Cir. 1980); gec. 1.183-2(b), Income Tax Regs. Petitioner husband did not engage in the business for profit. He testified that he engaged in this activity in his free time during the weekend while 24 maintaining a full-time job elsewhere. Petitioner husband 25 never returned a profit or tried to adapt his business (973)406-2250|operations@escriberssiet|vewytescribers.net 10 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 plan to make his business profitable. In fact, petitioner husband testified that he often was not paid by his clients, that those clients were family members, and when those family members did pay him it was for an amount significantly less than the amount it should have been for the work performed. After evaluating the factors (especially hub petitioner oral testimony), we are not persuaded that petitioner husband's business was an activity engaged in for profit. On the record before us, we find that petitioners' Schedule C deductions are subject to the limitations of section 183. On that record, we find that respondent's determinations in the notice with respect to petitioners' Schedule C deductions are sustained. III. Section 6662(a) Accuracy-Related Penalty Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of any portion of an underpayment that is attributable to negligence or disregard of the rules or regulations, or any substantial understatement of tax. Section 6662(d)(1)(A) defines a substantial understatement as an understatement that exceeds the greater of 10% of the tax required to be shown on the return for the taxable year or $5,000. Section 6662(d)(2) (A) defines "understatement" as the excess of the amount of tax required to be shown on the return for (973)406-2250|operations@escribers,net|wwnescribers.net 11 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 the taxable year.over the amount of tax imposed which is shown on the return reduced by any rebate. The term "negligence" in section 6662(b)(1) includes any failure to make a reasonable attempt to comply with the Code. Sec. 6662(c). Negligence also has been defined as failure to do what a reasonable person would do under the circumstances. Leuhsler v. Commissioner, 963 F.2d 907,910 (6th Cir. 1992), aff'g T.C. Memo 1991-179; Antonides v. Commissioner, 91 T.C. 686,699 (1988), aff'd, 893 F.2d 656 (4th Cir. 1990). The term "negligence" also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. The term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). For purposes of section 6662(b)(2), an understatement is equal to the excess amount of tax required to be shown in the tax return over the amount of tax shown in the return. Sec. 6662(d)(2) (A). An understatement is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown in the tax return for that taxable year or $5,000. Sec. 6662(d)(1)(A). The accuracy-related penalty under section cribers (973)406-2.250|operations@escribersmet j www.escribers.net 12 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 6662(a) does not apply to any portion of an underpayment if it is shown that there was a reasonable cause for, and that the taxpayer acted in good faith with respect to that portion. Sec. 6664(c)(1). The determination of whether the taxpayer acted with reasonable cause and in good faith depends on all of the pertinent facts and circumstances, including the taxpayer's efforts to assess the taxpayer's proper tax liability, the knowledge and experience of the taxpayer, and the reliance on the advice of a professional, such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Respondent bears the burden of production with respect to accuracy-related penalty under section 6662(a) that respondent determined in the notice. See ec. (JWd 7491(c); Higbee v. Commissioner, 116 T.C. 438,446-447 (2001). To satisfy the respondent's burden of production, respondent must come forward with "sufficient evidence indicating that it is appropriate to impose" the penalty. See Higbee v. Commissioner, 116 T.C. at 446. Although respondent bears the burden of production with respect to the accuracy-related penalty under section 6662(a), respondent "need not introduce evidence regarding reasonable cause***or similar provi.sions. *** [T]he taxpayer bears the burden of proof with respect to those issues." Id. On the record before us, we find that (9733406-2250|operations@escribersnet|vnyw.escribers.net 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 respondent has carried respondent's burden of production under section 7491(c) with respect to the accuracy-related penalty under section 6662(a). It is respondent's position that the petitioners 13 are liable for the accuracy-related penalty for taxable A A year 2013 because there is a substantial understatement of tax for that year under section 6662(b)(2). In their 2013 return, petitioners showed a "Total Tax" of $17,759. In the notice, respondent determined a deficiency of $5,208. We agree with hat there is a substantial CM understatement of tax for petitioners 3. On the record before us, we find that petitioners have failed to carry their burden of establishing that there were reasonable cause for, and that they acted in good faith with respect to, the underpayment for the tax year 2013. On that record, we find that petitioners have failed to carry their burden of establishing that they are not liable for the tax year 2013 for the accuracy-related penalty because of a substantial understatement of tax under section 6662(b)(2). III. Conclusion Accordingly, a decision will be entered for respondents This concludes the Court's oral findings of fact and opinion in this case. In reaching our holdings } cnbers (973)406-2250|operationsgescribers.net|www.escnbers.net 14 1 2 3 4 herein, we have considered all arguments made by the parties, and to the extent not mentioned above, find those arguments moot, irrelevant, or without merit. (Whereupon, at 11:19 a.m., the above-entitled 5 matter was concluded.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 cribers (973)406-2250|operationsgescribers.net|www.escribers.net