TAX COURT OPINION

Case: Gunasundran Pillay & Kalaivani Govender
Docket Number: 1663-18
Judge: Nega
Opinion Type: bench
Filed: 01/19/2021
Pages: 21

Gunasundran Pillay & Kalaivani ) ) ) ) ) ) ) ) ) ) Docket No. 1663-18 Govender Petitioners v. Commissioner of Internal Revenue, Respondent O R D E R 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 Joseph W. Nega in New York, New York, containing his oral findings of fact and opinion rendered at the remote hearing at which the case was heard on October 16, 2020. In accordance with the oral findings of fact and opinion, an appropriate decision will be entered. UNITED STATES TAX COURT WASHINGTON, DC 20217 (Signed) Joseph W. Nega Judge Served 01/19/21 RECEIVED 10/29/20 IN THE UNITED STATES TAX COURT SFt In the Matter of: GUNASUNDRAN PILLAY & KALAIVANI GOVENDER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 1663-18 ) ) ) ) ) ) ) ) Pages: 1 through 19 Place: New York, New York (Remote Hearing) Date: October 16, 2020 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 IN THE UNITED STATES TAX COURT In the Matter of: GUNASUNDRAN PILLAY & KALAIVANI GOVENDER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 1663-18 ) ) ) ) ) ) ) ) Jacob K. Javits Federal Building 26 Federal Plaza Room 206, 2nd Floor New York, New York 10278 (Remote Hearing) October 16, 2020 The above-entitled matter came on for bench opinion, pursuant to notice at 2:35 p.m. BEFORE: HONORABLE JOSEPH W. NEGA Judge APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance cnners P R O C E E D I N G S 2 (2:35 p.m.) THE CLERK: Calling from the calendar docket number 1663-18, Gunasundran Pillay and Kalaivani Govender. (Whereupon, a bench opinion was rendered.) 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 3 1 2 3 4 5 6 7 8 9 10 11 Bench Opinion by Judge Joseph W. Nega October 16, 2020 Gunasundran Pillay & Kalaivani Govender v. Commissioner Docket No. 1663-18 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. This Bench Opinion is rendered pursuant to section 7459(b) and Rule 152, and it shall not be relied on as precedent in any other case. Unless otherwise indicated, all section references are to the Internal 12 Revenue Code in effect for the years at issue, and all 13 Rule references are to the Tax Court Rules of Practice and 14 Procedure. 15 Petitioners, Gunasundran Pillay (petitioner- 16 husband) and Kalaivani Govender (petitioner-wife), 17 appeared pro se. Christiane Sanicola and Brian Pfeifer 18 appeared on behalf of respondent. 19 20 21 Petitioners filed joint returns for 2014 and 2015. By Notice of Deficiency dated November 7, 2017, respondent determined deficiencies in the Federal income 22 tax of petitioners for tax years 2014 and 2015 (years at 23 issue) and determined that petitioners were liable for 24 accuracy-related penalties under section 6662(a) for the 25 years at issue. Pursuant to a Joint Stipulation of 4 Settled Issues filed by the parties on October 2, 2020, respondent conceded the full adjustment for canceled debt for 2014 and the accuracy-related penalties for the years at issue, and petitioners conceded the full adjustments for interest income for 2014 and the full adjustments for ordinary dividend income and qualified dividend income for the years at issue. The remaining issues for decision are whether petitioners received and failed to report $10,600 of taxable rental income for the 2014 taxable year. 1 2 3 4 5 6 7 8 9 10 Schedule C on the 2015 return, whether petitioners are 11 entitled to deductions in excess of the amounts allowed by 12 respondent relating to: (1) the business use of their 13 home; (2) car and truck expenses; (3) other expenses; and 14 15 (4) whether petitioners are entitled to claim a loss of $74,000. Finally, for Schedule E on the 2015 return, 16 whether petitioners are entitled to deductions in excess 17 of the amount allowed by respondent relating to utility 18 19 20 21 22 23 expenses. FINDINGS OF FACT This case was remotely tried on October 14, 2020. Petitioners resided in California at the time they filed their petition on January 15, 2018. During the years at issue, petitioner-husband 24 worked as a consultant specializing in implementing 25 Microsoft Dynamics AX, a computer software product that 5 facilitates business processes. Depending on the circumstances, petitioner-husband entered into business engagements with corporate clients either through: (1) Global Exp., a sole proprietorship; (2) Global Exp., Inc., Petitioners' wholly owned C corporation incorporated in Nevada; or (3) directly with the client. Depending on the way petitioner-husband engaged a client, he received from the client either a W-2, a Form 1099, or nothing. Global Exp., Inc.'s tax returns are not at issue in this case. In 2014, petitioners deposited seven checks, totaling $10,600, from Sancrosoft USA, Inc. (Sancrosoft) into their personal bank account. These checks were addressed to petitioner-wife and indicated that they were for "rent". Petitioners did not report this amount on their Schedule E with their 2014 tax return. With their 2015 joint tax return, petitioners filed a Schedule C and Schedule E, claiming expenses and losses. On the Schedule C, petitioners claimed the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 following items: (1) a deduction of $34,500 for car and 20 truck expenses; (2) a deduction of $4,399 for business use 21 of the home; (3) a deduction of $35,334 for other 22 expenses; and (4) a $74,000 loss. On the Schedule E, 23 Petitioners claimed a deduction in the amount of $12,000 24 for utility expenses relating to an investment property 25 located in Citrus Heights, California. Petitioners also ones owned a property in Des Moines, Iowa, but did not list 6 that property on their Schedule E. On November 7, 2017, respondent issued to Petitioners a Notice of oeficiency for the years at issue. Respondent also sent to petitioners a Form 4549, Income Tax Examination Changes, which indicated that the tax deficiencies were a result of respondent's adjustments to Petitioners' income for the years at issue. For the 2014 taxable year, the Form 4549 indicated, in relevant part, that respondent had included the $10,600 as Schedule E rents received. For the 2015 taxable year, the Form 4549 indicated, in relevant part, that respondent had made adjustments to petitioners' claimed Schedule C expenses for car and truck, business use of the home, and other expenses. The Form 4549 further indicated that respondent 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 had disallowed the Schedule C loss in the amount of 17 $74,000 and the Schedule E utility expenses in the amount 18 of $12,000. 19 20 21 OPINION I. Unreported Income for Tax Year 2014 The Commissioner's determinations in a notice of 22 deficiency are generally presumed correct, and the 23 taxpayer bears the burden of proving them erroneous. Rule 24 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). 25 The U.S. Court of Appeals for the Ninth Circuit, to which noss an appeal in this case would lie absent a stipulation to the contrary, see section. 7482(b)(1) (A), has held that, 7 for the presumption of correctness to attach to the notice of deficiency in cases involving unreported income, the Commissioner must establish "some evidentiary foundation" connecting the taxpayer with the income-producing activity, see Weimerskirch v. Commissioner, 596 F.3d 358, 361-361 (9th Cir. 1979), rev'g 67 T.C. 672 (1977), or demonstrating that the petitioner taxpayer actually received unreported income, see Edwards v. Commissioner, 680 F.2d 1268, 1270-1271 (9th Cir. 1982). The requisite evidentiary foundation is minimal 1 2 3 4 5 6 7 8 9 10 11 12 13 and need not include direct evidence. See Banister v. 14 Commissioner, T.C. Memo. 2008-201, aff'd, 418 F. App'x 15 637 (9th Cir. 2011). If the Commissioner introduces some 16 evidence that the taxpayer received unreported income, the 17 18 burden shifts to the taxpayer, who must establish by a preponderance of the evidence that the deficiency was 19 arbitrary or erroneous. See Hardy v. Commissioner, 181 20 21 22 23 F.3d 1002, 1004 (9th Cir. 1999), aff'g T.C. Memo. 1997- 97; Borna v. Commissioner, T.C. Memo. 2017-73, at *29. Petitioners deposited seven checks totaling $10,600 that they received from Sancrosoft into their 24 personal bank account. These checks were addressed to 25 Petitioner-wife with the memo line stating that they were 973) 406-2250 ] operations@escribers.net j wwwescnbersaet 8 1 2 3 4 5 6 7 8 9 for "rent". They were not addressed to Global Exp. or Global Exp., Inc. The Court finds that respondent has introduced evidence connecting petitioners with the unreported income from the rents received. See MacGregor v. Commissioner, T.C. Memo. 2010-187, at *15. Petitioners have failed to meet their burden to show that the portion of the deficiency attributable to the unreported income was erroneous. Under questioning, petitioners acknowledged that the checks were addressed to 10 petitioner-wife, indicated that they were for rent, and 11 were deposited into petitioners' personal bank account. 12 Petitioners did not provide credible testimony or 13 sufficient documentary evidence that the checks should 14 15 have been attributable to Global Exp., Inc. Further, assuming arguendo that the checks 16 should have been addressed to Global Exp., Inc. and should 17 have been included on the corporate return, petitioners 18 failed to provide documentary evidence to establish that 19 Petitioners transferred the amount to Global Exp., Inc. 20 Indeed, petitioners' references to several line items in 21 their bank statements, which purport to be statements to 22 Global Exp., Inc., cannot be substantiated because the 23 record did not establish the account number for Global 24 Exp., Inc. The bank statements that petitioners provided 25 to support that they made payments to the corporation were 9 not organized to identify the payments made in contrast to all the other items on the statements. The Court is not inclined to comb through voluminous, unorganized documents to discern whether the payments were actually made. See Hale v. Commissioner, T.C. Memo. 2010-229, at *6; Patterson v. Commissioner, T.C. Memo. 1979-362. Accordingly, respondent's determination with respect to the unreported income is sustained. II. Deductions Claimed for Tax Year 2015 A. Burden of Proof The Commissioner's determinations in a notice of 1 2 3 4 5 6 7 8 9 10 11 12 deficiency are generally presumed correct, and the 13 taxpayer bears the burden of proving them erroneous. 14 Rule 142(a)(1); Welch v. Helvering, 290 U.S. at 115. 15 Pursuant to section 7491(a), the burden of proof as to 16 factual matters shifts to the Commissioner under certain 17 18 circumstances. Petitioners did not allege or otherwise show that section 7491(a) applies. See sec. 7491(a) (2) (A) 19 and (B). Therefore, petitioners bear the burden of proof. 20 21 See Rule 142(a). Deductions are a matter of legislative grace, 22 and the taxpayer bears the burden of proving his or her 23 entitlement to any deduction claimed. Rule 142(a); Deputy 24 v. Du Pont, 308 U.S. 488,493 (1940); New Colonial Ice Co. 25 v. Helvering, 292 U.S. 435,440 (1934). This burden 10 requires the taxpayer to demonstrate that the claimed deduction is allowable pursuant to some statutory Provision and to substantiate the expense giving rise to the deduction claimed by maintaining and producing adequate records to enable the Commissioner to determine the taxpayer's correct liability. Sec. 6001; Higbee v. Commissioner, 116 T.C. at 440; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curium, 540 F.2d 821 (5th Cir. 1976). B. Schedule C and Schedule E Expenses Section 162(a) allows deductions for "all the 1 2 3 4 5 6 7 8 9 10 11 12 ordinary and necessary expenses paid or incurred during 13 the taxable year in carrying on any trade or business". 14 An expense is "ordinary" if it is customary or usual 15 within a particular trade, business, or industry, and 16 "necessary" if it is appropriate and helpful for the 17 development of the business. Deputy v. Du Pont, 308 U.S. 18 at 495; Welch v. Helvering, 290 U.S. at 113. Whether an 19 expense is ordinary or necessary is a question of fact. 20 Commissioner v. Heininger, 320 U.S. 467,475 (1943). 21 22 Taxpayers must satisfy the specific requirements for any deduction claimed, and are required to maintain 23 records sufficient to substantiate those claims. INDOPCO, 24 25 Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec. 6001; sec. 1.6001-1(a),(e), Income Tax Regs. Generally, records are adequate substantiation if they establish the amount 11 and purpose of the claimed deductions. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). No deduction may be allowed for personal, living, or family expenses unless the Code expressly provides otherwise. Sec. 262(a). 1. Schedule C: Business Use of the Home Generally, section 280A(a) provides that no deduction shall be allowed for the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence. As an exception to the general rule, section 280A(c)(1)(A) provides that a deduction for the business 1 2 3 4 5 6 7 8 9 10 11 12 use of a home shall be allowed "to the extent such item is 13 allocable to a portion of the dwelling unit which is 14 exclusively used on a regular basis as the principal of 15 business for any trade or business of the taxpayer." 16 Accordingly, the taxpayer must establish that a portion of 17 his dwelling unit is (1) exclusively used, (2) on a 18 regular basis, (3) for the purposes enumerated in 19 subparagraphs (A), (B), or (C) of section 280A(c)(1), and 20 (4) if the taxpayer is an employee, the office is 21 maintained for the convenience of the employer. Hamacher 22 23 24 v. Commissioner, 94 T.C. 348, 353-354 (1990). On the Schedule C and Form 8829 for tax year 2015, petitioners claimed a deduction of $4,399 for the 25 business use of 750 square feet, or 30%, of their 2,500- square-foot home. Respondent conceded that petitioners 12 are entitled to a deduction of $2,933 for the business use of 500 square feet, or 20%, of their home and disallowed a deduction for the excess amount and square footage claimed by petitioners. Petitioners have not produced any credible testimony or documentary evidence to establish that they are entitled to a deduction for the business use of their home in excess of the amount and square footage allowed by respondent. At trial, petitioners provided their own testimony and pictures of the home's interior. The 1 2 3 4 5 6 7 8 9 10 11 12 pictures, however, appear to show business documents, 13 books, work-related other devices, and other stored items 14 15 haphazardly distributed in various rooms of the house, some of which apparently also served as a bathroom and 16 living areas. The evidence offered by petitioners at 17 trial has failed to persuade us that they are entitled to 18 a deduction for the business use of their home in excess 19 of the amount allowed by respondent. Accordingly, 20 respondent's determination with respect to the business 21 use of the home is sustained. 22 23 24 ii. Schedule C: Other Expenses Petitioners claimed a deduction in the amount of $35,334.00 in other expenses on their Schedule C for the 25 2015 taxable year. Respondent disallowed $25,955 of those cr ners expenses. ouring trial petitioners asserted that these 13 other expenses were incurred in relation to the Des Moines, Iowa, property. In support of their position, Petitioners proffered documents, which include a restitution order, copies of checks, insurance invoices, and property tax invoices. These documents, however, failed to show that petitioners paid or incurred these expenses in the year at issue. Therefore, we sustain respondent's determination with respect to the other expenses. iii. Schedule C: Loss Petitioners claimed a $74,000 loss on their 1 2 3 4 5 6 7 8 9 10 11 12 13 Schedule C for the 2015 taxable year. Respondent 14 disallowed the loss in its entirety. Petitioners argued 15 that they reported $74,000 of income on their joint tax 16 return that was attributable to Global Exp., Inc. 17 Further, petitioners argued that they made payments to 18 Global Exp., Inc. that were deductible to avoid double 19 taxation on the income they claim was incorrectly included 20 on their joint return. 21 Petitioners have not adequately demonstrated 22 that the $74,000 amount should not have been included on 23 their joint return and should have been included on their 24 corporate return. Further, petitioners have not 25 adequately demonstrated that payment was actually made to . Cr ne s 14 the corporation. Finally, petitioners have not adequately demonstrated that, assuming arguendo the payment was made, it was a deductible item on their joint return. Accordingly, the Court sustains respondent's determination with respect to the disallowed income loss. 1v. Strict Substantiation Expenses: Car and Truck Expenses Taxpayers who wish to deduct business expenses related to travel, meals, entertainment, gifts, or the use 1 2 3 4 5 6 7 8 9 10 of "listed property" must comply with the strict 11 12 13 substantiation requirements of section 274(d). See also sec. 1.274-5T(a), Temporary 1ncome Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). As relevant here, the term "listed 14 Property" includes passenger automobiles. Sec. 15 280F(d)(4) (A)(i) and (ii). 16 17 18 19 Uncorroborated testimony is insufficient to satisfy the strict substantiation requirements of Section 274(d). See Rutz v. Commissioner, 66 T.C. 879, 885-886 (1979). To satisfy the strict substantiation requirements 20 of section 274(d), a taxpayer must establish "by adequate 21 records": (1) the amount of the expense, (2) the time and 22 Place of the travel, use, or purchase, and (3) the 23 business purpose or business relationship giving rise to 24 25 the expense. Sec. 274(d); sec. 1.274-5T(b)(6), (c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, A 73)406-2250 operations@escribersmet www.escribersmet 1985). 15 To substantiate by "adequate records," in Particular, the taxpayer must provide (1) an account book, a log, or similar contemporaneous record and (2) other documentary evidence that, in combination, sufficiently establish each required element for the deduction. Sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence includes receipts, paid bills, or similar evidence. Sec. 1.274- 1 2 3 4 5 6 7 8 9 10 5(c)(2)(iii), Income Tax Regs. The strict substantiation 11 12 13 14 requirements of section 274(d) for vehicle expense deductions must be met whether the taxpayer chooses to deduct either actual expenses or claim an amount in accordance with the standard mileage rate. Sec. 1.274- 15 5(j)(2), Income Tax Regs. 16 On their Schedule C for the 2015 tax year, 17 Petitioners claimed a deduction of $34,500 for car and 18 truck expenses. Respondent disallowed $28,290 of 19 Petitioners' claimed deduction. Respondent argued that 20 petitioners failed to provide adequate records to 21 substantiate that the amounts claimed were incurred and 22 Paid during the relevant tax year, were ordinary and 23 necessary, or had a business purpose. 24 At trial, petitioners similarly failed to 25 produce any contemporaneous books, records, receipts, or cr ne s 16 1 mileage logs that might establish that the petitioners are 2 3 4 5 6 7 8 9 10 11 12 13 entitled to a deduction for car and truck expenses in excess of the amount already allowed by respondent. Rather, petitioners attempted to substantiate their entitlement to these deductions through their own testimony and a collection of bank account statements, business calendar, partial client list, and a non- contemporaneous mileage log. Petitioner-husband admits that his mileage logs and the mileage indicated on his business calendar were assembled after-the-fact and in anticipation of this litigation. Furthermore, petitioners did not provide a credible explanation for the inconsistencies between the 14 mileage logs and business calendar. To this extent, we 15 find petitioners' testimony and mileage logs lack 16 credibility and are insufficient to adequately establish 17 the amount of the expense, the time and place of travel, 18 use, or purchase, as well as the business purpose giving 19 rise to the expense. Further, the collection of bank 20 21 22 statements petitioners provided were not organized to identify the deductible expenses in contrast to all other items on the statements. This Court is not required to 23 parse through unorganized evidence. See Hale v. 24 Commissioner, T.C. Memo. 2010-229; Patterson v. 25 Commissioner, T.C. Memo. 1979-362. 17 On the record before us, and in the light of the applicable strict substantiation requirements, petitioners have failed to carry their burden of proof with respect to Petitioner-husband's claimed deductions for car and truck expenses for 2015. Accordingly, respondent's determination with respect to the car and truck expenses is sustained. v. Schedule E: Utility Expenses Petitioners proffered documentation, including invoices and bank statements, to substantiate the $12,000 in utility expenses. Of the invoices, petitioners 1 2 3 4 5 6 7 8 9 10 11 12 produced a document stating that that they had paid 13 $561.78 in utility expenses for the Citrus Heights, 14 California, property. The respondent conceded this amount 15 during trial. Assuming arguendo that the invoices 16 Petitioners provided establish that they incurred 17 expenses, neither the invoices nor the record established 18 that petitioners actually paid the expenses in 2015. The 19 Court is not inclined to comb through voluminous, 20 unorganized documents to discern whether the utility 21 expenses were actually paid. See Hale v. Commissioner, 22 T.C. Memo. 2010-229; Patterson v. Commissioner T.C. 23 Memo. 1979-362. Although petitioners claimed that the 24 $12,000 of utility expenses related to both the California 25 and Iowa properties, petitioners' Schedule E only listed the California property. The Court is not persuaded by 18 petitioners' evidence that they should be allowed to deduct the utility expenses in excess of the amount conceded by respondent. Petitioners have failed in their burden of proof on this item. Accordingly, we sustain respondent's determination with respect to the remaining amount of disallowed utility expenses. III. Conclusion Accordingly, a decision will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. In reaching our holdings 1 2 3 4 5 6 7 8 9 10 11 12 herein, we have considered all arguments made, and, to the 13 extent not mentioned above, we conclude they are moot, irrelevant, or without merit. Decision will be entered under Rule 155. (Whereupon, at 2:55 p.m., the above-entitled matter was concluded.) 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 19 CASE NAME: Gunasundran Pillay & Kalaivani v. Commissioner DOCKET NO.: 1663-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 19 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Rogers Meyers on October 16, 2020 before the United States Tax 1 2 3 4 5 6 7 8 9 10 Court at its remote session in New York, NY, in accordance 11 with the applicable provisions of the current verbatim 12 13 14 15 18 19 20 21 22 23 24 25 reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. Meribeth Ashley, CET-507 Transcriber 10/27/20 Date Lori Rahtes, CDLT-108 Proofreader 10/27/20 Date