TAX COURT OPINION

Case: Susan Kathleen Cunningham
Docket Number: 21167-11
Judge: Laro
Opinion Type: bench
Filed: 01/11/2013
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 SUSAN KATHLEEN CUNNINGHAM, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) O R D E R Docket No. 21167-11 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 petitioner and to respondent a copy of transcript of at San Francisco, California, containing his findings of opinion rendered at heard. the trial in the above case before Judge David Laro fact and the trial session at which this case was the pages of the In accordance with the Oral Findings of Fact and Opinion, the Decision will be entered under Rule 155.. . (Signed) David Laro Judge Dated: Washington, D.C. January 11, 2013 SERVED JAN 14 2013 1 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 1 BENCH OPINION by Judge Daivid Laro 2 Susan Kathleen Cunningham v. Commissioner^Docket otA:te r oca12aenue 3 3 No.21167-11 Octobéi 2G, 2012 4 THE COURT: Tyhe Court has 5 decided to render 6 al F indings of fact and opinion 6 7 in this case, and the following are the Court's oral findings of fact and opinion. This bench opinion is 8 made pursuant to the authority granted by section 9 7459(b) and Rule 152. 10 Section references are to the Internal 11 Revenue Code, and ule references are to the Tax 12 Court Rules of Practice & Procedure. Petitioner 13 14 15 refers to Susan Kathleen iCunningham. Dollar amounts are rounded. Petitioner, whilie residing in California, 16 petitioned the Court for a redetermination of a 17 notice of deficiency in which Respondent determined 18 19 for 2007 a $631,064 deficienc '$141,989 addition to tax under section 6651(a) (1),f$107,281 addition to 20 tax under36651(a) (2), and a $28,721 addition to tax 21 under section 6654. 22 23 After the parties'· concessio , the remaining issues for decision are, one, whether 24 Petitioner+is entitled to deduct $93023 interest 25 expense she claimed on her 2007 F deral income tax (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 1 2 return. We hold that she is; -T-we, whether Peltitioner is subject to 3 additions to tax under sections 6651(a) (1) and (2), 4 5 and 6654. We hold that she is. Background. The parties submitted a 6 stipulation of facts, a stipulation of settled 7 8 9 10 issues, a second stipulation of settled issues, and accompanying exhibits. Petitioner also testified at trial to support her claims. In 20073 Petitioner had a company, Access, 11 which provided marketing and promotional services 12 13 14 15 relating to trade shows. Her business eventually failed and is no longer in existence. Petitioner did not timely file her ederal income tax return for 2006; FRespondent then prepared 16 a substitute for return (SFR) on May 6, 2008, pel- on 17 behalf of Petitioner under section 6020 (b) . 18 Petitioner also did not timely file her Frederal 19 income tax return for 2007, tRespondent then prepared 20 an SFR for 2007 on January 313-t, 2011. on behalf of 21 22 etitioner. On June 13th, 2011, rRespondent issued to etitioner a statutory notice of deficiency for 2007 23 based on the 2007 SFR. 24 Petitioner timely filed a petition with the 25 Court to challenge the statutory notice. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cúnningham 10-26-2012 Subsequent to t(cid:16)041hefi ng of the petition, 5 etitioner submitted her 2007 ffederal income tax return, which fRespondent :had accepted. Schedule ·C, 1 2 3 4 Pprofit or lloss from Business, which was attached to 5 her 2007 tax return, reported gross receipts of 6 7 8 9 $24,113 in total expenses of $39,239, which included an interest expense of $9023 from finance c rges acicrued on Petitioner's business credit amean-t. At trial, espondent conceded that 10 F#etitioner is entitled to ideduct all expenses reported 11 on the Schedule C except e $9023 interest expense. 12 Discussion. Oné, linterest expense. 13 Determinations of the Commissioner in a deficiency 14 notice are presumed correct, and the taxpayer bears 15 16 the burden of proving otherwise. Welch v. Helvering, 290 U.S. 111, 115, 54 S . Ct . 8, 78 L . Ed . 212 (1933) ; 17 Rule 142 (a) . 18 Deductions are .a matter of legislative 19 grace, and a taxpayer bears the burden roducing 20 sufficient evidence, such as her books or records, to 21 substantiate any deductión that would otherwise be 22 allowed by theÛ¢ode. Sec. 6001; Sec. 1.6001-1(a), 23 Income Tax Regs.; INDOPCO, Inc. v. Commissioner, 503 24 25 U.S. 79, 84 (1992); Rule 142(a). Under the Cohan rule, the Court may (866) 448 - DEPO . www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 6 1 estimate the amount of deductible expenses if the 2 3 4 5 6 7 taxpayer produces credible evidence. providing a reasonable basis for the Court to approximate. Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930) . Deductible expenses include interest paid or incurred on indebtedness properly allocable to a trade or business (other than a trade or business of 8 performing services as an employee). Sec. 9 163(h) (2) (A); Sec. 1,1.63-9T (b) (1) (i), Temporary Income 10 Tax Regs.f 52 Fed. Reg. 48409 (Dec. 22, 1987). 11 12 13 Debt is allocable to a trade or business if the underlying expenditures are ordinary and necessary expenses paid or incurred during the 14 taxable year in carrying !on a trade or business. See 15 Sec. 162 (a) . 16 In evidence are statements from 17 Petitioner's various business credit accounts. They 18 include statements from "American Express Business ,19 Capital Line ') with an opening balance of $52, 504 and 20 an ending balance of N42,607 in 2007; $$tatements from 21 an "American Express Executive Business Card" with an 22 opening balance of 5,674, an endin balance of 23 Y25, 699 in 2007; one statement fron Advanta Platinum 24 Business Card from April 2008, which shows a balance 25 of I13,183; and statements from a Washington Mutual (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 1 Business Card which shows that a balance transfer of 2 $7,500 was made in November 2007 to pay down the 3 Advanta Platinum Business Card. 4 5 6 7 The balances in these accounts were carried forward from previous yeairs cán which finance charges had accrued. The statements in evidence also provide the amount of finance charges incurred in 2007. 8 Respondent does not dispute that these statements are 9 sufficient to substantiate the amount of interest 10 expense etitioner claimed on her 2007 tax return. 11 Respondent only argues that Petitioner has not 12 provided sufficient evidence to show tJat the 13 underlying expenses that gave rise to the finance 14 15 16 17 18 charges were ordinary and necessary business expenses . We find that fetitioner has met her burden to show the interest expense she claimed on her 2007 tax return was incurred on indebtedness properly 19 allocable to her business. With the exception of the 20 American Express Business Capital Line, all of the 21 credit accounts were in the name of Access, 22 Petitioner's business. 23 Petitioner testified credibly at trial that 24 she used the credit cards pnly to pay business 25 expenses; s$he also testified credibly that she did (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 8 1 not use the business account's to pay personal 2 3 4 5 6 expenses. Further, Access incurred a net loss of 5,172 before interest expense in 2007.,. and regularly suffered losses in years preceding 20073 which together strongly supports Fetitioner's testimony that she used the credit Liæes to subsidize her 7 busine ss . 8 Thus, we believe i any advances etitioner 9 made on her business credit accounts were ordinary 10 expenses necessary to sustain the erations of her 11 business that had consistently run a deficit. On 12 13 crosstexamination, etitioner stated that she had refinanced certain loans on her commercial properties 14 and used part of the proceeds for personal expenses; 15 bSut she testified unequivocally that she did not 16 deduct any interest incurred on those loans on her 17 18 2007 tax return. Respondent argues that the Court should 19 draw an inference from that testimony that etitioner 20 regularly commingled her business accounts with 21 personal funds. However, because Petitioner did not 22 deduct interest incurred on indebtedness allocable to 23 personal use, we believe pfetitioner regularly 24 separated her business accounts from accounts that 25 had personal elements and has deducted only interest (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cunningham 10-26-2012 that was incurred on b¯usiness-related indebtedness. 9 Accordingly, the record as a whole provides a sufficient basis to conclude under Cohan that all 1 2 3 4 of the $9,023 interest expense is properly allocable 5 6 7 8 9 to pfetitioner's business. and thus deductible. Two, Sgtatutory additions to tax. sections 6651(a) (1) and (2) impose additions to tax for a taxpayer's failure to timely file her Frederal income tax return and the failure to pay the amount of tax 10 shown on the return, unless such failure is due to 11 reasonable cause and not willful neglect. Such 12 additions to tax are calculated based on the amount 13 of tax required to be shown on her tax return, in the 14 case of failure to file, a:nd the amount of tax shown 15 16 on the tax return31n the case of failure to pay. Section 6654 (a) imposes an addition to tax 17 determined based on the tax shown cán the tax return 18 if there is an underpayment of estimated tax by a 19 taxpayer, unless the taxpayer can show she meets one 20 of the exceptions under section 6654 (e). 21 Respondent has the burden of production 22 with respect to the additions of tax. Sec. 7491; 23 Rùle 142 (a) . 24 In light of our findings today, it is 25 doubtful that FPetitioner had any underlying tax (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Susan Kathleen Cùnningham 10-26-2012 10 1 liability in 2007 on which FRespondent may assess any 2 additions to tax under section 6651(a) (1) and (2) and 3 4 6654 . In any event, Petitioner has not shown her failure to timely file her Frederal income tax return 5 or her failure to pay shown on the return was due to 6 7 reasonable cause and not willful neglect. Petitioner has also failed to demonstrate she meets one of the 8 exceptions under section 6654 (e). Thus she would be 9 subject to the additions to tax, if any. 10 The extent to which Respondent may assess 11 any additions to tax is an issue to be determined unde r 3155 . 12 13 Ner. 3.,.. Conclusion In reaching these 14 holdings, we have considered all. arguments made at 15 16 trial and3 to the extent nót mentioned above, we conclude that they are moot, irrelevant, or without 17 merit. 18 Decision will be entered under Rule 155. 19 This concludes the Court's Oral Frindings of Fract and 20 Opinion in this case . 21 A-11 right. Lét me go off thc rccord a 22 meme-Frt-y 23 24 25 (Whereupon, at 8:59 a.m., the bench ¯ opinion in the þbove-entitled matter was concluded.) 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