TAX COURT OPINION

Case: Huu C. Merrigan & Kyung J. Merrigan
Docket Number: 24331-16S
Judge: Thornton
Opinion Type: bench
Filed: 02/20/2018
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 HUU C. MERRIGAN AND KYUNG J. MERRIGAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 24331-16S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED: That the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Michael B. Thornton at New York, New York, 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 for respondent. (Signed) Michael B. Thornton Judge Dated: Washington, D.C. February 20, 2018 SMED FEB 2 2 2018 Bench Opinion by Judge Michael B. Thornton February 6, 2018 Huu C. Merrigan & Kyung J. Merrigan v. Commissioner of 3 Internal Revenue Docket No. 24331-16S THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. Except as otherwise provided by Rule 152(c) of 1 2 3 4 5 6 7 8 9 10 the Tax Court Rules of Practice and Procedure, the oral 11 12 13 f.indings of fact and opinion shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the 14 authority granted by section 7459(b) and Rule 152. 15 Hereinafter in this bench opinion, section references are 16 17 to the Internal Revenue Code in effect for the taxable years at issue. All rule references are to the Tax Court 18 Rules of Practice and Procedure. All monetary amounts are 19 rounded to the nearest dollar. 20 This proceeding for the redetermination of a 21 deficiency is a Small Tax Case conducted pursuant to the 22 provisions of section 7463, and Rules .170 through 175. 23 Pursuant to section 7463(b), the decision entered in this 24 25 case is not reviewable by any other court. This case was tried on February 5, 2018, in New (973)406-2250|operatbnseescribetsmet|www.escribers.net York, New York. Petitioners appeared pro se. Mr. Aaron M. Greenberg and Mr. Brian J. Bilheimer appeared on behalf 4 of respondent. By notice of deficiency, respondent determined deficiencies in petitioners' 2013 and 2014 Federal income tax of $6,082 and $13,955, respectively. Respondent further determined accuracy-related penalties pursuant to section 6662(a) of $1,216 and $2,791 for tax years 2013 and 2014, respectively. In the notice of deficiency respondent determined that petitioners failed to report income from capital gains and state tax refunds for both years at issue; petitioners have conceded the issues of unreported income for both years. Respondent also disallowed deductions claimed on 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 petitioners' 2013 and 2014 Schedules C, Profit or Loss 16 17 18 19 20 21 22 From Business, for utilities, meals, taxes and licenses, supplies, office expenses, interest, automobile expenses, and advertising. Petitioners timely filed a petition contesting respondent's'determination. The issues for decision are: (1) whether petitioners are entitled to the deductions claimed on their 2013 and 2014 Schedules C; and (2) 23 whether petitioners are liable for the section 6662 24 accuracy-related penalty for 2013 and 2014. We hold for 25 respondent on all issues. (973)406-2250|operationseescribetsnet|www serbersnet I 1 2 3 4 5 6 7 8 9 5 Findings of Fact During 2013 and part of 2014 Mr. Merrigan was employed by Schering Plough/Merck. During 2013 and 2014 Mr. Merrigan claims he also operated a tax return preparation and financial consulting business out of petitioners' home. During the years in issue Mr. Merrigan held a license as a certified public accountant (CPA) with the State of New York. In 2013 Mr. Merrigan's tax return preparation and financial consulting business had one 10 client: his mother. And in 2014 Mr. Merrigan's tax 11 12 13 14 15 16 17 18 19 20 21 return preparation and financial consulting business had two clients: his mother and another person. Ms. Merrigan claims she operated a floral design business during 2014, which business was also conducted out of petitioners' home. Mrs. Merrigan was interested in and enjoyed plants. She commenced this activity in the spring of 2014 in order to assist with family finances. She had only minimal sales, however, and this activity ended in 2014. Petitioners timely fi.led their 2013 and 2014 Federal income tax returns. Petitioners attached 22 Schedules C to their returns reporting gross receipts and 23 expenses for their businesses. The 2013 and 2014 24 Schedules C for Mr. Merrigan's tax return preparation and 25 financial consulting business reported gross receipts of cribers (973)406-2250|operationseescribersmet|www.esabersmet $850 and $1,200, respectively, and total expenses of $24,893 and $25,850, respectively. The 2014 Schedule C for Ms. Merrigan's floral design business reported gross receipts of $150 and total expenses of $14,300. 6 Opinion The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving those determinations erroneous by a preponderance of the evidence. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 162(a) generally allows a deduction for 1 2 3 4 5 6 7 8 9 10 11 12 ordinary and necessary expenses paid or incurred during 13 14 15 the taxable year in carrying on any trade or business. An expense is ordinary if it is a common or frequent occurrence in the type of business involved. Deputy v. du 16 Pont, 308 U.S. 488, 494-495 (1940). An expense is 17 18 19 necessary if it is appropriate and helpful to the taxpayer's business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943). No deduction, however, is allowed for 20 personal, living, or family expenses. Sec. 262. 21 22 Deductions are a matter of legislative grace; the taxpayer bears the burden of substantiating his or her 23 claimed deductions by keeping and producing records 24 sufficient to enable the Commissioner to determine the 25 correct tax liability. Sec. 6001; INDOPCO, Inc. v. 73) 406-2250|operationseerrbe smet| www.escribersact Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), 7 (e), Income Tax Regs. If a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the precise amount, we generally may estimate the amount of the deductible expense. Cohan v. Commissioner, 39 F.2d 540., 543-544 (2d Cir. 1930). We cannot estimate deductible expenses unless the taxpayer presents evidence providing a sufficient basis for making an estimate. 1 2 3 4 5 6 7 8 9 10 Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). 11 12 13 Section 274(d) imposes more rigorous substantiation requirements for certain expenses, including those pertaining to meals and vehicles. 14 Expenses subject to section 274(d) must be substantiated; 15 they cannot be estimated. See Sanford v. Commissioner, 50 16 T.C. 823, 828 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969). 17 18 To obtain a deduction for meals expenses, the 19 taxpayer must show: (1) the amount of each expenditure; 20 21 22 (2) the time and place of each expenditure; (3) the business purpose of each expenditure; and (4) the business relationship to the taxpayer of the "person or persons 23 entertained" at the meal. Sec. 1.274-5T(b)(3), Temporary 24 25 Income Tax Regs., 50 Fed. Reg. 46015 (Nov. 6, 1985). To obtain a deduction for vehicle expenses, (973)406-2250|operationsgescribersmet|www.esolbers.na 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 i.e., expenses related to the use of a passenger automobile, a taxpayer must substantiate with adequate records or by sufficient evidence corroborating his own statement: (1) the "amount of each separate expenditure" with respect to the passenger automobile; (2) the "amount of each business/investment use * * * based on the appropriate measure (i.e., mileage for automobiles * * *), and the total use of the [passenger automobile] for the taxable period"; (3) the "[d]ate of the expenditure or use" with respect to the passenger automobile; and (4) the "business purpose for an expenditure or use" with respect to the passenger automobile. Secs. 274(d) and 280F(d)(4); sec. 1.274-5T(b)(6) and (c)(1), Income Tax Regs. Alternatively, a taxpayer may calculate his 15 deductible passenger automobile expenses by multiplying 16 his business miles by the standard mileage rate for the 17 18 year and then adding allowable tolls and parking fees; under this alternate method, however, the taxpayer is not 19 relieved of the requirement to substantiate the amount of 20 21 each business use (i.e., the business mileage), or the time and business purpose of each use. Sec. 1.274- 22 5(j)(2), Income Tax Regs. Consequently, substantiation of 23 miles and business purpose is a prerequisite to claiming a 24 deduction whether petitioners meant to claim actual 25 automobile expenses or meant to use the alternative EM (973)406-2250loperationseescrbersmet|www.esctbersmet 9 standard-mileage-rate method. . As a general rule, section 280A(a) denies deductions with respect to the use of a dwelling unit that was used by the taxpayer as a residence during the taxable year. Section 280A(c)(1) (A), however, permits the deduction of expenses allocable to a portion of a dwelling unit that was used exclusively on a regular basis as the principal place of business for a taxpayer's trade or business. 1 2 3 4 5 6 7 8 9 10 With respect to the deductions claimed by 11 petitioners for meals and automobile expenses, petitioners 12 13 14 15 provided no log or other records showing the amount, business purpose, date, or any other details with respect to, any -of the meals or automobile expenditures claimed as deductions. Petitioners provided only an estimate of 16 meals expenses which was derived from their bank 17 statements. Petitioners also provided estimates of miles 18 driven in 2013 and 2014, which does not list the mileage, 19 dates, or business purposes for any individual trips. 20 Petitioners have not met the strict substantiation 21 22 requirements of section 274(d) for the claimed deductions for meals and vehicle expenses. Accordingly, respondent 23 properly disallowed petitioners' claimed deductions for 24 meals and automobile expenses for 2013 and 2014. 25 With respect to the deductions claimed by (973)406-2250|operationseescrbetsmet|www.escribers.net 10 1 2 3 4 5 6 7 8 9 petitioners for advertising, taxes and licenses, and interest, petitioners submitted no documentary evidence to support that the amounts claimed as deductions were paid. We note that a large portion of the interest allegedly paid appears to have been related to personal expenditures unrelated to petitioners' business activities. Under section 163(h), personal interest is not deductible. Accordingly, respondent properly disallowed deductions for advertising, taxes and licenses, and interest for 2013 and 2014. 10 11 With respect to the deductions claimed by 12 petitioners for supplies, office expenses, and utilities, 13 petitioners provided bank statements showing a series of 14 15 expenditures, some of which petitioners claim related to business activities. Many of these expenses appear to 16 have been personal. See sec. 262. For example, 17 petitioners claimed deductions for the purchase of a 18 19 laptop and RV; however, petitioners admitted at trial that they used these items for personal purposes. Similarly, 20 utilities expenses appear to include petitioners' personal 21 phone expenses. Additionally, many of the amounts claimed 22 23 24 25 as deductions appear to have been spent on petitioners' home, including heating repairs. As noted, a deduction is allowed for business use of one's home under section 280A(c)(1) (A) only if the portion of the home used for (973)406.2250|operationseerribersmet|www.esalbersmet 11 business was used exclusively for business. The record is insufficient to support petitioners' claim that certain portions of the home were used exclusively for business. Finally, with respect to all of the claimed deductions for supplies, office expenses, and utilities, the record is . insufficient to substantiate, or even allow us to estimate, how much of each category may have comprised ordinary and necessary business expenses. Accordingly, respondent properly disallowed the deductions for supplies, office expenses, and utilities for 2013 and 2014. Section 6662 imposes an addition to tax of 20% 1 2 3 4 5 6 7 8 9 10 11 12 13 on the portion of an underpayment attributable to any one 14 of various factors, one of which is "negligence or 15 16 17 18 19 disregard of rules or regulations". Respondent has asserted a penalty under section 6662 for, among other things, negligence and disregard of rules and regulations. Under section 7491(c) respondent bears the burden of production with respect to this penalty. Once 20 respondent has met his burden of production, the burden of 21 proof is upon the taxpayer to show that he is not liable 22 23 24 25 for the penalty. See Higbee v. Commissioner, 116 T.C. 438, 449 (2001). Under section 6751(b)(1) a penalty may be assessed only if the initial determination was approved in (973) 406-2250| ope,ationseescrbersmetj www.escribersmet 12 1 writing by an immediate supervisor. Graev v. 2 3 4 5 6 7 8 9 10 11 12 13 14 Commissioner, 149 T.C. No. 23 (December 20, 2017). Respondent has produced a civil penalty approval form to meet his burden of production with respect to section 6751(b)(1), and the parties agree that this requirement is satisfied in this case. Negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code, and "disregard of rules or regulations" includes any careless, reckless, or intentional disregard. Sec. 6662(c). Negligence is determined by testing a taxpayer's conduct against that of a reasonable, prudent person. Zmuda v. Commissioner, 731 F.2d 1417, 1422 (9th Cir. 1984), aff'g 79 T.C. 714 (1982). 15 Negligence includes any failure by the taxpayer to keep 16 adequate books and records or to substantiate items 17 properly. Sec. 1.6662-3(b)(1), Income Tax Regs. 18 Petitioners exhibited a lack of due care in failing to 19 keep adequate books and records and in failing to properly 20 21 substantiate expenses underlying claimed deductions and credits. Respondent has therefore carried his burden of 22 production with respect to the section 6662(a) penalty. 23 24 25 The accuracy-related penalty does not apply with respect to any portion of an underpayment if the taxpayer acted with reasonable cause and in good faith with regard (973)406-2250|operationsøescrbers.net|www.escribers.net 13 1 2 3 4 5 6 7 8 9 to that portion. Sec. 6664(c)(1). That determination is made case by case, depending on the facts and circumstances. Sec. 1.6664-4(b) (1), Income Tax Regs. Those circumstances include the experience, knowledge, and education of the taxpayer. Id. During the years in issue, Mr. Merrigan was a licensed CPA. He testified that he knows, and would recommend to his clients, that they should keep books and records to support any deductions claimed. He has not followed his own advice as relates to 10 petitioners' taxes for the years at issue. Petitioners do not contend, nor does the record demonstrate, that they had reasonable cause or acted in good faith with respect to their deficiencies for 2013 and 2014. The penalties under section 6662 for 2013 and 2014 are therefore sustained. Decision will be entered for respondent. This concludes the Court's findings of fact and opinion in this case. (Whereupon, at 11:00 a.m., the above-entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operationseescribers.net|www.escribers.net