TAX COURT OPINION

Case: Leon Trotman & Helen Trotman
Docket Number: 24941-13S
Judge: Whalen
Opinion Type: bench
Filed: 10/16/2014
Pages: 15

LMJ MS UNITED STATES TAX COURT WASHINGTON, DC 20217 Petitioners, v. Docket No. 24941-13S LEON TROTMAN & HELEN TROTMAN, ) ) ) ) ) ) ) ) ) ) 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 herewith to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above-case before the undersigned at Boston, Massachusetts, containing the oral findings of fact and opinion rendered on September 11, 2014, which states, on page 16, that decision will be entered under Rule 155. For cause, it is ORDERED that the Court's transcript of the proceedings in the above-case is hereby amended as follows: On page 16, the decision line is amended to read: Decision will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. October 16, 2014 SERVEDOct162014 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 Capital Reporting Company 3 Bench Opinion by Judge Laurence J. Whalen September 11, 2014 Leon Trotman & Helen Trotman Docket No. 24941-13S FINDINGS OF FACT AND OPINION I. 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. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463(a) of the Internal Revenue Code of 1986, as amended, and Rules 170 through 179 of the Tax Court Rules of Practice and Procedure. Hereinafter all section references are to the Internal Revenue Code as amended and in effect for the taxable years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure. Pursuant to sec. 7463(b), the decision to be entered in this case is not reviewable by any other court, and this bench opinion shall not be treated as precedent for any other case. III. . This bench opinion is made pursuant to the 866.488.DEPO www.CapitalReportingCompanycom Capital Reporting Company 4 1 2 3 4 5 6 7 authority granted by section 7459(b) and Rule 152. Mr. Leon Trotman appeared in these proceedings IV. on behalf of petitioners and Carlton W. King, Esquire, appeared on behalf of respondent. v. Respondent determined deficiencies in 8 petiti ers' Federal income tax for taxable years 9 2010 2011, in the amount of $11, 688 and $11, 758, l_ 10 11 12 13 14 15 16 17 18 19 20 21 22 23 respectively. Respondent also determined that · petitioners are liable for the accuracy-related penalty under section 6662 in the amount of $2,337.60 and $2,351.60, respectively. The deficiencies in petitioners' tax for taxable years 2010 and 11 are based upon four adjustments to petitioners' returns that were determined in the notice of deficiency. First, respondent increased the amount of the pensions and annuities reported on petitioners' returns by $1,067 and $6,027, respectively. Petitioners conceded this adjustment in the petition. Second, respondent increased the amount of qualified dividends reported on petitioners' returns by $40 and $55, respectively. 24 Petitioners conceded this adjustment in the petition. 25 Third, respondent disallowed losses of $25,186 and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 $22,800, respectively, claimed on the Schedule E, Supplemental Income and Loss, filed with petitioners' returns. This adjustment was based on respondent's determination that the losses were passive activity losses as defined by section 469(c). A small amount of the loss claimed for 2010, $357, was allowed as a result of the $25,000 offset for rental real estate 8 activities set forth in section 469(i). Fourth, 9 respondent disallowed traveling expenses which were 10 11 12 13 14 15 16 17 18 claimed as unreimbursed employee expenses on Schedule A, Itemized Deductions, in the amount of $22,100 and $19,145, respectively. VI. After concessions, there are three issues for decision by The Court: (1) Whether the losses claimed on petitioners' Schedules E for 2010 and 2011 are passive activity losses subject to disallowance under section 469(a); |19 (2) Whether petitioners are entitled to 20 21 22 23 24 25 Schedule A deductions for unreimbursed employee expenses for taxable years 2010 and 2011; (3) Whether petitioner is liable for the accuracy-related penalty under section 6662(a) for 2010 and 2011. VII. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Petitioner and his wife resided in the State of 2 Massachusetts at the time their petition in this case 6 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 was filed with The Court. On Schedule A, Itemized Deductions, filed with each of petitioners' returns for taxable years 2010 and 2011, petitioners claimed unreimbursed employee expenses. of $22,100 and $19,1.45, respectively. Each Schedule A refers to a Form 2106, Employee Business Expenses, that was also filed with petitioners' return. On the Form 2106 for 2010, petitioners claimed vehicle expenses of $19,600 and meals and entertainment expenses of $5,000. The amount deducted on the Schedule A for 2010, $22,100, equals the vehicle expense plus one-half of the meals and entertainment expense (i.e., $19,600 plus $2,500). On the Form 2106 for 2011, petitioners claimed vehicle expenses of $16,145 and meals and entertainment expenses of $6,000. The amount deducted on the Schedule A for 2011, $19,145, equals the vehicle expense plus one-half of the meals and entertainment expense (i.e., $16,145 plus $3,000.) VIII. Our legal analysis in this case is necessarily guided by several fundamental principles of tax litigation. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 First, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). This principle was firmly established by the United States Supreme Court and has been reaffirmed more recently by The Court. See INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Parenthetically, we note that section 7491(a), 10 which shifts the burden of proof to the Commissioner 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in certain cases, does not apply in this case because petitioners have not raised the issue nor have they shown that this case satisfies the limitations imposed by section 7491(a)(2). Indeed, one of the principal issues in this case involves petitioners' failure to substantiate the unreimbursed employee expenses claimed on their return. See sec. 7491(a) (2)(A). Second, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. DuPont, 308 U.S. 488, 493 (1940). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. Per curiam 540 F.2d 821 (5th Cir. 1976). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 Third, The Court is not bound to accept the unverified and undocumented testimony of a taxpayer. Hradesky v. Commissioner, supra; Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Fourth, a party's failure to introduce documentary evidence that is within the party's possession or control and that he implies would be favorable to him, gives rise to the presumption that, if produced, such evidence would be unfavorable. 10 Recklitis v. Commissioner, 91 T.C. 874, 890 (1988); 11 12 Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal 13 Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 14 15 16 17 18 19 20 21 22 23 24 25 (1946), affd. 162 F.2d 513 (10th Cir. 1947). IX. Schedule E Losses from Rental Real Estate: The issue whether petitioners are entitled to the losses from rental real estate that were claimed on the Schedule E is controlled by the application of the rules, set forth in section 469, governing the disallowance of passive activity losses. Generally, those rules operate to disallow the deduction of passive activity losses. See section 469(a)(1) (A). A passive activity loss is defined as the excess of the aggregate losses from all passive activities for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 a particular year over the aggregate income from all passive activities for the year. Sec. 469(d)(1). The term "passive activity" includes any trade or business in which the taxpayer does not "materially participate". Sec. 469(c) (1). Section 469(c)(2) sets forth a per se rule which states "the term 'passive activity' includes any rental activity". Under that provision, any rental 9 activity, including a rental real estate activity, 10 11 12 13 14 such as petitioners' rental activity, is defined as a "passive activity" and is automatically subject to the loss disallowance rules of section 469(a)(1). There are two exceptions to the application of the per se rule in the case of a rental real estate 15 activity. The first exception is found in section 16 17 18 19 20 21 22 23 24 25 469(c)(7) which applies to the rental activities of taxpayers engaged in real estate trades or businesses, so-called real estate professionals. Under that exception, the losses from rental real estate activities are not treated as per se passive activities, but rather as trades or businesses, subject to the material participation requirements of section 469(c)(1). Sec. 469(c)(7); see also sec. 1.469-9(e)(1), Income Tax Regs. A taxpayer qualifies as a real estate professional, under section 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 469(c)(7)(B), if- (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during the taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and (ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. The second exception to the general rule that rental real estate activities are per se passive activities (and therefore subject to the disallowance rule of section 469(a)) is found in section 469(i). Under that provision, a taxpayer who "actively" participates in a rental real estate activity may offset passive losses related to the activity with a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 maximum loss of $25,000 per year. See sec. 469(i)(1) 20 and (2). This exception is subject to phase out when 21 22 23 24 25 the taxpayer's adjusted gross income (AGI) (determined without regard to any passive activity loss) exceeds $100,000. Sec. 469(i)(3). Under the phase out, the $25,000 offset is reduced by 50 percent of the amount by which the taxpayer's AGI 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 exceeds $100,000. Sec. 469(i)(3) (A). Paragraph 4 of the petitioners' petition states that petitioners "dispute the examiner's (Respondent) determination that we are not entitled to -b. Schedule E Real Estate Loss: (2010) $25,186.00 (2011) $22,800.00." The petitioner further states that petitioners "can demonstrate to the court that we are entitled to the stated Schedule E Rental Loss." Petitioners, however, have failed to demonstrate in this proceeding that they are entitled to the rental real estate losses claimed on Schedules E. In fact, Mr. Trotman did not testify at trial and Ms. Trotman did not appear. There is nothing in the record to show that the losses from the rental of petitioners' basement are not passive activity losses, as defined by section 469(d). Pursuant to section 469(c)(2), the rental of their basement is a "passive activity." Petitioners did not take the position on either of their returns for 2010 or 2011 that one or the other of them is a so-called real estate professional as defined by section 469(c)(7)(B) and they have not made that argument in these proceedings. Indeed, petitioners' return for 2010 claimed the $25,000 offset of section 469(i), and suggests that petitioners did not claim 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 to qualify as a real estate professional. 2 Petitioners have presented nothing from which we can 12 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 conclude that the losses reported on their Schedules E for 2010 and 2011 are not passive activity losses subject to disallowance by section 469(a). We hereby sustain respondent's determination on this issue. X. Schedule A, Unreimbursed Employee Expenses: Section 162 generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The determination of whether an expense satisfies the requirements for deductibility under section 162 is a question of fact. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). The term "trade or business," as used in section 162(a), includes the trade or business of being an employee. Primuth v. Commissioner, 54 T.C. 374, 377- 378 (1970). Unreimbursed employee business expenses incurred as a requirement of a taxpayer's employment may be deductible. Fountain v. Commissioner, 59 T.C. 696, 708 (1973). As true for all deductions, unreimbursed employee business expenses must be substantiated. 25 Specifically, as pertinent herein, section 274(d) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 provides that no deduction is allowable for traveling expenses (including meals and lodging while away from home) or with respect to listed property, as defined in section 280F(d)(4), unless the deduction is substantiated in accordance with the strict substantiation requirements of section 274(d) and the regulations promulgated thereunder. Included within the definition of listed property in section 280F(d)(4) is any passenger automobile or other property used as a means of transportation. Sec. 280F(d)(4)(A)(i), (ii); sec. 1.280F-6(b) and (c), Income Tax Regs. Under section 274(d), no deduction is allowable for expenses incurred for traveling expenses or in respect of listed property on the basis of any approximation or the unsupported testimony of the taxpayer. See, e.g., Murata v. Commissioner, T.C. Memo. 1996-321; Golden v. Commissioner, T.C. Memo. 1993-602. Section 274(d) provides that no deduction shall be allowed unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement: (1) the amount of the expense; (2) the time and place of the expense; and (3) the business purpose of the expense. See Oswandel v. Commissioner, T.C. Memo. 2007-183 at 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 *7. In other words, in the absence of adequate records or sufficient evidence corroborating the taxpayer's own statement, any deduction that is subject to the stringent substantiation requirements of section 274(d) is proscribed. In this case, petitioners deducted the unreimbursed employee expenses of Ms. Trotman purportedly related to her job as a nurse. For both of the years in issue, 2010 and 2011, petitioners deducted vehicle expenses and meals and entertainment. Petitioners' return preparer testified that he was given three W-2s relating to Ms. Trotman's employment as a nurse. Thus, it appears that the subject unreimbursed employee expenses relate to Ms. Trotman's employment as a nurse. We know very little else about these expenses because Ms. Trotman did not appear for trial. As a result, petitioners did not meet the stringent substantiation requirements of section 274(d), described above. Accordingly, we have no alternative but to sustain respondent's determination on this issue. XI. Finally, we turn to the accuracy-related penalty under section 6662(a). According to the notice of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 deficiency, respondent determined that the underpayment of tax for both 2010 and 2011 is attributable to one or both of (1) negligence or disregard of rules or regulations, see section 6662(c), or (2) substantial understatement of income tax, see section 6662(d). Based upon our review of the record in this case, we find that respondent has 8 met his burden of production with respect to the 9 penalty under section 6662(a). 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 At trial, petitioners did not expressly address the accuracy-related penalty. It may therefore be said that they failed to carry their burden of proof. See Rule 142(a). Moreover, it is clear that petitioners were negligent in failing to report all of their pensions and annuity income and qualified dividend income on their returns. Petitioners' return preparer testified that petitioners failed to provide complete information regarding their pension and annuity income and qualified dividend income. It is also clear that petitioners were negligent in claiming on Schedule E, contrary to section 469(a), passive losses from the rental of a portion of their residence, and in claiming on Schedule A Ms. Trotman's unreimbursed employee expenses for travel 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 and meals and entertainment when there was no basis for claiming such deductions, at least, no basis suggested at trial. Furthermore, the record established that there was a substantial understatement of income tax for both years. See section 6662(d). Petitioners also failed to prove that the understatement should be reduced because of adequate disclosure or substantial authority. See section 6662 (d) (2) (B) . In view of the foregoing, we sustain respondent's determination on this issue. X. In order to give effect to the foregoing and concessions, decision will be entered pur-süant-to Rule -155. IXX. This concludes The Court's oral findings of fact and opinion in this case. (Whereupon, at 5:44 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com