TAX COURT OPINION

Case: Mila Alemasov & Victor Popov
Docket Number: 11223-05
Judge: Couvillion
Opinion Type: memo
Filed: 05/22/2007
Pages: 11

""_e*to , 20'7-13 0 UNITED STATES TAX COURT MILA ALEMASOV AND VICTOR POPOV, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 11223-05 . Filed May 22, 2007 . William E . Taggart, Jr . , for petitioners . Margaret Burow , for respondent . MEMORANDUM OPINION COUVILLION, Special Trial Judge : Respondent determined a $14,241 deficiency in petitioners' Federal income tax for 2002, a $570 addition to tax under section 6651(a)(1) for failure to file timely, and a $314 accuracy-related penalty under sectio n SERVED MAY 2 2 2007 - 3 - degree in business and finance from the University of San Francisco . Petitioner held a number of jobs before 1998, the year she began working for Bank of America in the fields of finance and securities investment . She worked for Bank of America until she was released sometime in 2001 . In connection with her release, petitioner received "settlement fees" of $400,000 from Bank of America during 2002 . In addition, petitioner received unemployment compensation of $13,840 that year . With the money received from these sources, petitioner began an activity as a real estate finder and consultant, an activity that allowed her to attend to her two minor children .' Petitioner testified that she traveled to Hawaii, Korea, China, and Las Vegas during 2002 on behalf of her clients to search for prospective real estate investment opportunities . However, petitioner's lack of a salesperson' s 4The nature and terms of these fees were not made part of the record ; however, petitioners included the $400,000 as income on their income tax return for 2002 . 'Petitioner decided to begin an activity as a real estate finder and consultant sometime in September 2001 . Petitioner claimed that as a real estate finder she searched for real estat e investments on behalf of clients interested in purchasing property . She would, assuming that properties she recommended were purchased, receive a fee for her services . At trial, petitioner conceded that she did not enter into any written agreements in 2002 with her clients . Although she testified that she had numerous e-mail exchanges with clients during the year at issue, she did not offer into evidence any of these e-mail communications . Petitioner claimed she had oral agreements regarding fee arrangements with her clients . - 5 - $27,000 payment .6 The 2002 return reported as income the $400,000 settlement fee that had been paid to petitioner by Bank of America and included a Schedule C, Profit or Loss From Business, relating to an activity with the principal business purpose described as "Real Estate Investments" . The return reflected a loss of $31,261 from the Schedule C activity . Petitioners' 2002 Federal income tax return was selected for examination . They were issued information document requests by the IRS and were requested to substantiate the deductions claimed on Schedule C of their 2002 return . When petitioners did not provide the requested documents timely, respondent issued a 30- day letter proposing to disallow all of the claimed Schedule C expenses . Petitioners protested the proposed deficiency and engaged the services of an enrolled agent ; however, the agent was unable to resolve the matter with respondent's Appeals Office . Respondent then issued to petitioners a notice of deficiency determining a deficiency of $14,241 in their Federal income tax for 2002 . In the notice of deficiency, respondent disallowed all of petitioners' claimed Schedule C deductions for 2002 for the reason tha t Since you did not establish that the business expense shown on your tax return was paid or incurred durin g 'The unpaid portion of the $94,659 is not at issue in this case, and there are indications in the record that petitioners made subsequent payments on the 2002 liability . - 7 - Section 7491(a) places the burden of proof on the Commissioner as to any issue upon which the taxpayer introduces credible evidence and which is relevant to the taxpayer's tax liability . However, for the burden of proof to be placed on the Commissioner, the taxpayer must comply with the substantiation and record-keeping requirements of the Internal Revenue Code . Moreover, section 7491(a) requires that the taxpayer cooperate with reasonable requests for "witnesses, information, documents, meetings, and interviews" . Sec . 7491(a)(2)(B) . The notice of deficiency, upon which this case is based, states with respect to the expenses claimed : "We are not allowing the amount on your return because we did not get an answer to our request for information to support your entries ." Petitioners failed to cooperate with reasonable requests by respondent for documents as required by section 7491(a)(2)(B) . On the record, the Court has denied petitioners' motion . The first issue is whether petitioners are entitled to deductions under section 162(a) for expenses which they claim petitioner incurred in a real estate trade or business activity for profit . Section 162(a) allows a deduction for all ordinary and necessary expenses incurred in carrying on a trade or business . Section 212 allows a deduction for all ordinary and necessary expenses paid or incurred for the production of income . - 9 - the gift ; (3) the business purpose of the expense ; and (4) the business relationship to the taxpayer of the persons entertained or receiving the gift . The substantiation requirements of section 274(d) are designed to encourage taxpayers to maintain records and documentary evidence to substantiate each element of the expense sought to be deducted . Sec . 1 .274-5T(c)(1), Temporary Income Tax Regs ., 50 Fed . Reg . 46016 (Nov . 6, 1985) . The term "listed property" is defined in section 280F(d)(4) and includes any passenger vehicle, any other property used as a means of transportation, and computers . Sec . 280F(d)(4)(A)(i), (ii), (iv) . Under section 274(d), substantiation by means of adequate records requires a taxpayer to maintain a diary, a log, or a similar record, and documentary evidence that, in combination, are sufficient to establish each element of each expenditure or use . Sec . 1 .274-5T(c)(2)(i), Temporary Income Tax Regs ., 50 Fed . Reg . 46017 (Nov . 6, 1985) . To be adequate, a record must generally be written, and each element of an expenditure or use that must be substantiated should be recorded at or near the time of that expenditure or use . Sec . 1 .274-5T(c)(2)(ii)(A), Temporary Income Tax Regs ., 50 Fed . Reg . 46017 (Nov . 6, 1985) . The primary evidence that petitioners paid or incurred the expenses related to their real estate activity consists of petitioner's testimony and spreadsheets that she compiled for - 11 - have paid in cash, they did not provide receipts or any type of documentary evidence to support the payment .' With regard to the other claimed car and truck expenses, petitioners provided a small number of receipts . Most of the documentation to support these expenses consisted of monthly credit card statements or annual gas card statements . Petitioners presented no records to substantiate that the car and truck expenses claimed on their Schedule C for 2002 were related to the real estate activity or were other than personal expenses . Although statements from Chevron and Shell reflected the total amounts charged on credit cards during 2002, there is no documentation or other evidence to show that the charges were for ordinary and necessary expenses related to the claimed business rather than for personal use . Similarly, other receipts and monthly credit card statements show that money was paid to Union 76 and Geary Automotive Service ; however, petitioners likewise failed to establish that these were ordinary and necessary expenses of the real estate activity . For these reasons, respondent's determination disallowing petitioners' Schedule C car and truck expenses is sustained . 'The claimed expenses for which no receipts were provided include those for gasoline, repairs, and licenses . - 13 - Visa credit cards . On their Chevron credit card, petitioners incurred monthly finance charges every month during 2002 . The five Visa credit card statements show, along with interest and finance charges, transactions at Kinko's, Safeway, Whole Foods Market, and Bally Total Fitness, among other places, indicating that the interest related substantially to credit card charges for personal purposes . Section 262 expressly disallows deductions for personal, living, or family expenses . Petitioners failed to substantiate that any interest expense associated with the credit card charges was other than a nondeductible personal expense . No portion of the interest was shown to be related to the real estate activity . The claimed interest, therefore, is not allowed as a deduction . Office Expense s Petitioners offered monthly credit card statements and copies of two checks to substantiate the $1,689 for office expenses . Absent further corroborating evidence to support thes e expenses and their relationship to the real estate activity, the Court sustains respondent's disallowance of these expenses . ' 'The $1,689 also included what appear to be utility expenses attributed to two vendors or service providers listed as "PG&E" and "Water" . Regardless of their classification, petitioners did not establish that those expenses were related to the real estate activity or were other than personal . Petitioners also claimed as office expenses cellular phone charges to T-Mobile . Cellular phones are classified as listed property under sec . 280F(d)(4)(A)(v), and petitioners offered n o . .) (continued . Travel - 15 - Petitioners contend that the $9,615 claimed for traveling expenses was for trips to Hawaii, Korea, China, Las Vegas, and Chicago, for the purpose of locating potential real estate investment opportunities for petitioner's clients . With the exception of expenses for airfare to Hawaii and Chicago, a rental car in Hawaii, lodging in Hawaii and Las Vegas, and a few incidental traveling expenses, petitioners contend that they paid the traveling expenses in cash . In support of these expenses, petitioners offered airline receipts, a few credit card statements, and two taxi cab receipts . Although section 162(a) expressly permits a deduction for traveling expenses away from home in the pursuit of a trade or business, section 274(d) imposes strict substantiation requirements for deductions related to traveling expenses . A deduction for traveling expenses demands, pursuant to section 274(d), that the taxpayer substantiate by adequate records or by sufficient evidence the amount of the expense, the time and place of the travel, and the business purpose of the expense . On the record, the Court holds that petitioners' limited receipts and lack of evidence to corroborate their own statements fail to satisfy the strict substantiation requirements of section 274(d) . See sec . 274(d) ; sec 1 .274-5T(b)(2), Temporary Income Tax Regs ., 50 Fed . Reg . 46014 (Nov . 6, 1985) . Despite petitioner's - 17 - place, and business purpose of the expenditure and must provide adequate records or sufficient evidence to corroborate the claimed expense . Sec . 274(d) ; sec . 1 .274-5T(c)(1), Temporary Income Tax Regs ., supra . In order to meet the "adequate records" requirement, a taxpayer must maintain an account book, diary, statement of expenses, or similar record and documentary evidence (such as receipts, paid bills, or similar evidence) which, when combined, establish each element of the expense that section 274(d) requires to be established . Sec . 1 .274-5T(c)(2)(i), Temporary Income Tax Regs ., supra . Petitioners' credit card statements and the spreadsheet that was created after the year at issue do not meet the adequate records requirement for meals and entertainment expenses of section 274(d) and the regulations because they fail to sufficiently corroborate petitioners' own statements . Id . Since petitioners did not provide the required substantiation for these expenses, they are not entitled to the deduction for meals and entertainment expenses . Other Expense s Petitioners claimed a deduction of $3,585 for other expenses, including books, postage, printing, Internet access at Kinko's, and other items . Aside from monthly credit card statements and nonitemized credit card receipts, petitioners offered no documentary evidence to support the claimed expenses . Additionally, petitioners did not establish that these expenses - 19 - 6651(a)(1) ; United States v . Boyle , 469 U .S . 241, 245 (1985) . "Reasonable cause" requires the taxpayer to demonstrate that he exercised ordinary business care and prudence . United States v . Stanford , 979 F .2d 1511, 1514 (11th Cir . 1992) . "Willfu l neglect" is defined as a "conscious, intentional failure or reckless indifference ." United States v . Boyle , supra at 245 . Petitioners concede that, although they were given an extension of time to file their 2002 return until August 15, 2003, the return was not filed until September 16, 2003 . Since the return for the year at issue was filed late, the only issue that remains is whether the late filing is excused by reasonable cause . Sec . 6651(a)(1) ; United States v . Boyle , supra at 245 . Petitioners' explanation for failure to file their return timely was that their return preparer filed a Form 2688 to request additional time to file their 2002 return . Respondent has no record that such a request was made . Additionally, petitioners contend that respondent's Appeals Office conceded the section 6651(a)(1) addition to tax . In support of this argument, petitioners point to the Certificate of Assessments, Payments, and Other Specified Matters, which was offered into evidence by respondent and shows that, for the year at issue, respondent abated the addition to tax on October 20, 2003 . Respondent denies making such a concession and insists that imposition of - 21 - 913 (1989) (section 6651(a) addition to tax upheld where taxpayers failed to show what records were needed or what actions they took to obtain such records) . To support the claim that their return preparer requested an additional extension of time to file their 2002 return, petitioners offered an unsigned copy of a Form 2688 and contend that this is similar to what was submitted . Notwithstanding their attempt to shift responsibility for their late filing to their return preparer, such reliance on one's accountant or return preparer does not constitute "reasonable cause" for a late filing under section 6651(a) . United States v . Boyle , supra at 252 ; see also Ruddel v . Commissioner , supra . On this record, the Court holds that petitioners are liable for the section 6651(a)(1) addition to tax . The Court has considered all other arguments advanced by the parties, and, to the extent those arguments have not been specifically addressed, the Court concludes they are without merit . Decision will be entere d under Rule 155 .