TAX COURT OPINION

Case: Vladimir Shpilrain
Docket Number: 10883-09S
Judge: Dean
Opinion Type: summary
Filed: 09/09/2010
Pages: 12

T .C . Summary Opinion 2010-133 UNITED STATES TAX COUR T VLADIMIR SHPILRAIN, Petitioner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 10883-09S . Filed September 9, 2010 . Vladimir Shpilrain, pro se . . Eliezer Klein , for respondent . DEAN, Special Trial Judge : This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed . Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case . Unless otherwise indicated, subsequent section references are .to the Internal Revenue Code in effect for the year a t SERVED . 51.1 CSP . 92010 - 2 - issue, and Rule references are to the Tax Court Rules of Practic e and Procedure . Respondent determined for 2006 a deficiency of $3,521 in petitioner's Federal income tax . The issue for decision is whether petitioner is entitled to deduct expenses for travel, meals, and entertainment in excess of those respondent allowed . Background Some of the facts have been stipulated and are so found . The stipulation of facts and the exhibits received in evidence are incorporated herein by reference . Petitioner resided in New York when the petition was filed . Petitioner became in 2004 a tenured professor of mathematics at the City College of New York, part of the City University of New York (CUNY) . In that same year petitioner started doing research in cryptography . His research in cryptography was related to his earlier work in a field of mathematics called group theory . Petitioner's research led to the idea of producing unique algorithms' on software for . cryptographic purposes to be sold to chip manufacturers . Petitioner found that in 2004 and 2005 there existed a substantial market for products like RFI D 'An algorithm is a step-by-step procedure for solving a problem or'accomplishing some end . Webster's Ninth New Collegiate Dictionary 70 (1990) . According to petitioner, cryptographic algorithms are very .fast and use very little computer memory, making them ideal for tiny computer chips . (radio frequency identification) tags, . "keyless" .. entry devices, and other .small electronic devices that , require . code encryption ; For a conference in 2005, "Crypto .2005", petitioner was listed on the program, along with Alexei Myasnikov and Alexander .Ushakov, as being responsible for the topic "A Practical Attack on a Braid Group Based Cryptographic Protocol" from 2 :25 .to 2 :50 p .m . ; In 2006 petitioner traveled to,Nashville,, Tennessee, on two occasions . He also made trips inx2006 . .to Ithaca, New York,_ Beijing,, China, his former home in Moscow, Russia,? Cologne and Bonn, Germany, and an international conference : on . information security and cryptography in .Busan, Korea . The purpose of th e trip to Ithaca was to discuss group-based cryptography with a Professor Reilly . Professor Reilly was not a,potential_ customer . Petitioner incurred no hotel expenses on his two trips .to Mosco w because he stayed. with his family . On the . application for the conference in Korea petitioner listed . his affiliation as City College of New York . Petitioner purchased during, 2006_over,70 books, related to the study of abstract . algebra, including three directly related to cryptography . Petitioner and his associates, Professors Myasnikov an d Ushakov, could have .used:-the . commercialization office at CUNY t o 2Petitioner made two trips to Moscow lasting from June 17 to 30, 2006, and from July 7 to 15, 2006 . promote their cryptographic algorithms . They did in fac t investigate using the'office in 2007 . They did not make earlier inquiries because petitioner did not know the office ;existed as he"was not previously involved in business operations . Petitioner timely filed his Federal income tax return for 2006 and attached to it a Schedule C, Profit or Loss From Business . The Schedule C listed the principal business or profession as "Research and Writing" and the business name as "Vladimir Shpilrain " . Petitioner listed his home address as the business address . Petitioner reported gross receipts and gross income of $ 476 . He reported expenses on the Schedule C of $15,397, including expenses for : (a ) Supplies of $4,230, including ' books and computer equipment ; '( b) travel of $ 7,920 ; and (c) meals and entertainment of $2,140 .- ' None of petitioner ' s products have a commercial name . Petitioner has no patent or copyright on his algorithms . Petitioner , however , citing the complexity of the mathematics'of his algorithms , minimized the necessity for intellectual property protection . Petitioner , as of trial,' had never sold a software, program . Petitioner ' s business has no Web site, and petitioner has no'Web site . Petitioner produced no physical evidence of his product at trial . Petitioner had at 'trial no records to document his meetings with potential buyers . 5 - Discussion Generally, the Commissioner's determinations in a . notice of deficiency are presumed correct,' . and the taxpayer has the .burden of proving that those determinations are erroneous ., See Rule 142(a) ; Welch v .,Helverinq , 290 .U .S . 1 .11 ; 115 (193'3) . In some cases the burden of proof with respect to relevant factual issues may shift(cid:127)tothe Commissioner under section .7491(a), . Petitioner did not argue or present evidence that he satisfied the requirements of section 7491(a) . Therefore, the burden-of proof with respect to the issues in the notice of deficiency does-not shift to respondent . ' Petitioner argues that he-is entitled to deduct the ordinary and necessary business expenses of his "research and writing" activity . Respondent in the notice of~deficiency determined that petitioner did not establish that the(cid:127),3claimed Schedule ..C expenses were paid or-were ordinary and necessary to'the extent they exceeded $5,337 . In his pretrial memorandum{respondent's-counsel argued, in addition to the-issues in=the statutory notice, that petitioner was not in a trade or business either because he had no profit objective, or alternatively, because he was just starting up but had not yet° commenced his business . Trade or Business Expense s Section 162 generally allows a deduction . for ordinary an d necessary expenses paid or,incurred during the taxable year in 6 - carrying on a trade or business . Generally, no deduction is allowed for personal, . living, or family expenses . See sec . 262 . The taxpayer must show that any claimed business expenses were incurred primarily for business rather than personal reasons . See Rule 142(a) ; Walliser v . Commissioner , 72 T .C . .433, 437 (1979) . To show that the expense was not for personal reasons, the taxpayer must show that the expense was incurred primarily to benefit his business, and there must have been a proximate relationship between the claimed expense and the business . See Walliser v . Commissioner , supra at 437 . Petitioner has, potentially, two trades or businesses . He is employed as a professor of mathematics,3 and he is, engaged in research and writing on mathematical issues . He "wears two hats" but the "hats" are so similar in appearance that it is difficult to tell the difference between them . Because of thi s circumstance, it is particularly important that petitioner distinguish his research and writing activity from his activity as college professor as well„as from his personal activities . If a particular expense is related to his employment, it might be deductible as an employee business expense on Schedule A, Itemized Deductions . Petitioner would have to show, however, that the expense was not subject to reimbursement from hi s 3An employee's performance of services is a trade or business . E .g ., Primuth v . Commissioner , 54 T .C . 374, 377 (1970) 7 - employer ,,CUNY . An expense is not deductible as, ordinary and necessary to the extent that it was subject to reimbursement by . the employer .- Podems v . Commissioner , 24 T .C : .21, 22-23 ( 1955) . For an expense to be deductible as, .a tradel 'or busines s expense on Schedule C .petitioner must show that the expense is not a personal expense and that the expense is that of a trade or business other than that of his services as an . employee . Petitioner spent a substantial sum for the purchase of-books related primarily to abstract algebra . He included $1,859 as the cost of the books on Schedule C in "supplies ", but he offered no evidence at trial , other-than his. own . testimony , that the book purchases were related to a trade~ or-business other than his employment . Expenses . Under Section 27 4 Certain business expense deductions ,described(cid:127) ;in section-274 are subject to'strict rules of-substantiation . See . sec . 1 .274 5T(c), Temporary 'Income Tax Regs ., 50-Fed . Reg . 46016 ( Nov . 6, 1985) . Section 274(d ) .provides that no deduction shall be allowed with respect to : (cid:127)(a) Any traveling expense, including , meals and lodging away from home ; ( b) any item related to an activity of a type considered .to .be 'entertainment , amusement, or recreation ; or (c) the - use of any " listed property", as defined if in section 280F(d)(4),4 unless the taxpayer substantiates certain - 8 elements . For an expense described in one of the above categories, the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony : (1) The amount of the expenditure or use ; (2) the time and place of the, expenditure or use ; (3) the business purpose of the expenditure or use ; and in the case of entertainment, (4) the business relationship to the taxpayer of each expenditure or use . See sec . 274 (d) . ' To meet the adequate records requirements of, section 274(d) a taxpayer must maintain some form of records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use . See sec . 1 .274-5T(c)(2), Temporary Income Tax Regs ., 50 Fed . Reg . 46017 .(Nov . 6, 1985) . A contemporaneous log is not required, but corroborative evidence to support a taxpayer's reconstruction of the elements of expenditure or use must have "a high degree of probative value to elevate such statement" to the level of credibility of a contemporaneous record . Sec . 1 .274-5T(c)(1), Temporary Income Tax Regs ., 50 Fed . Reg . 46.016 (Nov . 6, 1985) . 4iListed.property" includes any computer or peripheral equipment . Sec . 280F(d) (4) (A) (iv) . ncluded °in petition'er's 'deduction °for supplies was $2 ; 10 8 for 'a Sony Vaio notebook ' computer . Petitioner offered n o substantiation for the purchase of the computer, and the(cid:127)expense fails to meet the'requirements'of section 274(d) . _See sec . l .274-5T(d) (3) , Temporary Income Tax Regs ., 50 Fed .' Reg . 4~6026- (Nov . 6, 1985) . Petitioner's traveling expense deductions, including meal s and lodging away from 'home, are subject to section - 274 (d) and th e regulations thereunder . Petitioner presented receipts and trave l documents that meet the adequate records requirement s substantiate the amount'of his claimed travel'expenditures,and the time and place of_the expenditures . Where']e has failed i s at providing adequate records of the business purpose of th e expenditures . Petitioner'testified that heidInot keep forma l records because he did not think'he would'" need them" (for~IRS) . Petitioner testifiedztha'his business was a joint ventur e with Professors Ushakov and Myasrikov-and that there was a simple partnership agreement to share profits . . Petitioner explained' that his business operations include promotion and advertisin g and that the expenses at issue are related to promoting an d advertising his product .' Petitioner stated that he was promoting 'This testimony seems to conflict with his previous testimony that he did not contact the . commercialization.,office at CUNY before 2007 because he was not previously involved in "business operations" . - 10 - and advertising his products at various meetings . Petitioner testified . that his associates, who helped him create the software programs, also traveled abroad to conferences . According to . petitioner, some of these meetings were,conferences in cryptography that were attended not only by academic researchers but also by potential buyers "from the industry" . Petitioner explained that during presentations at the conferences, he described the . benefits and features of his product and invited contacts from interested parties . According to petitioner, there was feedback from his meetings : potential buyers made comments, asked questions and . suggested improvements . He had to think about the feedback and contact his partners to come up with improvements . The meetings were "quite useful :' because they gave him a feeling of what a particular industry wanted from a product like his . Petitioner's testimony is reasonable ; however, he .has failed to provide the Court with any adequate records or . sufficient evidence to corroborate his own testimony . There is documentary evidence .of only one trip to a,"conference" on cryptography in 2006, in Busan, Korea . At that conference petitioner listed himself as an affiliate of CUNY . Petitioner testified that h e met with "potential customers" in China, Russia, and Germany . failed, however, to provide any documentary evidence t o substantiate his own testimony on the business purpose of any of - 11 - the trips to Nashville , Tennessee , Ithaca, New York, Beijing , China, Moscow, Russia,' and Cologne and Bonn, Germany . Petitioner has failed to show that he is entitled t Schedule C deductions in excess of those respondent allowed . Because petitioner has failed to adequately substantiate his deductions, the Court need not address the profit objective, trade or business, and startup issues respondent raised in his pretrial memorandum . To reflect the foregoing, Decision will be entere d for respondent . 'Were petitioner to have met the requirements of sec : 274(d), with respect to the trips to Moscow, he would be required to show that portion of each trip that was spent on business as opposed to personal activities . See sec . 274(c) . .