TAX COURT OPINION

Case: David McCallum & Annie M. McCallum
Docket Number: 16833-17
Judge: Kerrigan
Opinion Type: bench
Filed: 11/14/2018
Pages: 8

SR UNITED STATES TAX COURT WASHINGTON, DC 20217 DAVID MCCALLUM & ANNIE M. MCCALLUM, Petitioner(s), v. ) ) ) ) ) ) Docket No. 16833-17. 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 trial in the above case before Judge Kathleen Kerrigan at Houston, Texas, containing her 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, a decision will be entered under Rule 155. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. November 14, 2018 SERVED Nov 14 2018 Bench Opinion by Judge Kathleen Kerrigan October 30, 2018 David McCallum & Annie M. McCallum v. Commissioner of 3 Internal Revenue Docket No. 16833-17 THE COURT: The Court has decided to render in this case the following as its oral Findings of Fact and Opinion, which shall not be relied upon as precedent in any other case. This Bench Opinion is 1 2 3 4 5 6 7 8 9 10 made pursuant to the authority granted by section 11 12 13 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. All section references are to the Internal 14 Revenue Code in effect for the year in issue, and all 15 Rule references are to the Tax Court Rules of Practice 16 17 18 and Procedure. By Notice of Deficiency dated August 8, 2017, the Internal Revenue Service determined a deficiency in 19 the Federal income tax of petitioners for tax year 2014 20 21 22 and an accuracy-related penalty pursuant to section 6662(a). After concession, the issues for consideration are whether petitioners are entitled to 23 claim any of the disallowed unreimbursed employee 24 expenses for tax year 2014 and whether they are liable 25 for the section 6662(a) penalty. 9733406-2250|operationsges ribersnet|www.escribersmet 1 2 3 4 5 6 7 8 9 Trial of this case was conducted on October 29, 2018, in San Francisco, California. The petitioners represented themselves, and Caitlin A. Homewood represented respondent. The parties' stipulation of facts and attached exhibits were admitted into evidence. Petitioner husband was the only witness. We find the following facts: FINDINGS OF FACT Petitioners resided in California when the 10 petition was timely filed. They filed a joint Federal 11 12 income tax return for tax year 2014. Petitioner husband worked as an airplane 13 mechanic. He used his own airplane, which was kept at 14 the Napa County Airport, to fly to various jobs. 15 Petitioner husband would contact different companies to 16 17 see if they needed their aircrafts serviced. During 2014, he performed services for three 18 different companies. He received wages of $58,823 from 19 L-3 Communications Vertex Aerospace (L-3 Vertex), 20 $12,224 from L-3 Communications Integrated Systems (L-3 21 22 Integrated), and $461 from Napa Jet Center, Inc. (Napa Jet Center). The majority of the work for Napa Jet 23 Center was performed at the Napa County Airport. Some 24 of the repair jobs would take petitioner husband less 25 than six minutes to complete. (973)406-2250|operationsøescribetsmetIwww.escribersaet 1 2 3 4 5 6 7 8 9 Petitioner husband's services for L-3 Vertex and L-3 Integrated were usually performed at locations other than Napa County Airport. Typically, petitioner would start his day by checking in with Napa Jet Center to see if they had work for him. He would often leave from that location and fly to other locations to perform work for L-3 Vertex and L-3 Integrated. L-3 Vertex and L-3 Integrated had no policy regarding expenses for traveling to a job location. 10 However, they provided a car service to take mechanics 11 12 13 14 15 to the location of planes. Petitioner husband chose to fly his own plane. Petitioner husband kept records of his flights through his plane's GPS system. The GPS system recorded the flights in real time. Later, petitioner 16 husband compiled the data from his plane's GPS system. 17 18 19 20 21 He separated his business flights from his nonbusiness flights in his records. On November 28, 2016, a group manager for respondent signed a Civil Penalty Approval Form for a substantial understatement penalty regarding 22 petitioners' 2014 tax year. 23 24 25 OPINION Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and a (973)406-2250|operationseerribers.net]www.esoibersaet 1 2 3 4 5 6 7 8 9 taxpayer bears the burden of proving those determinations are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses. See sec. 1.6001- 1(a) and (e), Income Tax Regs. Unreimbursed Employee Expenses Section 162(a) allows a taxpayer to deduct all 10 ordinary and necessary expenses paid or incurred in 11 12 13 carrying on a trade or business. An ordinary expense is one that commonly or frequently occurs in the taxpayer's business. Deputy v. DuPont. 308 U.S. 488, 14 485 (1940), and a necessary expense is one that is 15 appropriate and helpful in carrying on the taxpayer's 16 business, Welch v. Helvering. 290 U.S. at 113. The 17 18 expense must directly connect with or pertain to the taxpayer's business. Sec. 1.162-1(a), Income Tax Regs. 19 A taxpayer may not deduct a personal, living, or family 20 expense unless the Code expressly provides otherwise. 21 Sec. 262(a). 22 Whether an expenditure is ordinary and 23 necessary is generally a question of fact. 24 Commissioner v. Heininger, 320 U.S. 467,475 (1943). A 25 taxpayer must show a bona fide purpose for the A cribers (973J406-2250|operatkmseescrbers.net|www.escribers.net expenditure; there must also be a proximate 7 relationship between the expenditure and his or her business. Challenge Mfg. Co. v. Commissioner, 37 T. C. 650 (1962). Pursuant to section 162(a) a taxpayer may deduct unreimbursed employee expenses as an ordinary and necessary business expense. Lucas v. Commissioner, 79 T.C. 1, 7 (1982). Such deductions are allowed only to the extent that the total deduction exceeds 2% of adjusted gross income. Sec. 67(a). 1 2 3 4 5 6 7 8 9 10 Section 262(a) provides that personal, living, 11 or family expenses are not deductible. Section 12 13 162(a)(2) allows traveling expenses to be deducted if they are ordinary and necessary expenses and have been 14 incurred while the taxpayer is away from home in the 15 pursuit of a trade or business. Barone v. 16 Commissioner, 85 T.C. 462,465 (1985), aff'd without 17 published opinion, 807 F. 2d 177 (9th Cir. 1986). Except 18 19 for taxpayers on temporary work assignments, costs of traveling to and from a place of business are considered 20 personal expenses and are not deductible. Commissioner v. 21 Flowers, 326 U.S. 465, 473-474 (1946). Petitioner husband 22 was not on a temporary work assignment. He chose to fly 23 his plane instead of taking transportation provided by L-3 24 Vertex and L-3 Integrated. His unreimbursed travel 25 expenses are considered personal expenses and are not (973)406-2250|operationseestrbersmet|wnyw.esalbersmet 1 2 3 4 5 6 7 8 9 deductible as ordinary and necessary business expenses or as unreimbursed employee expenses. KK Accuracy-13elated Penalty The Commissioner bears the burden of production with respect to a section 6662(a) penalty. Sec. 7491(c). Once the Commissioner meets this burden, the taxpayer must come forward with a persuasive evidence that the Commissioner's determination is incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446-447 10 (2001). Section 6751(b) (1) provides that "[n]o penalty 11 under this title shall be assessed unless the initial 12 determination of such assessment is approved (in 13 writing) by the immediate supervisor of the individual 14 making such determination or such higher level official as 15 the Secretary may designate." In Graev v. Commissioner, 16 149 T.C._(Dec. 20, 2017), supplementing and overruling in 17 part 147 T.C. 460 (2016), we held that the Commissioner's 18 burden of production under section 7491(c) includes 19 establishing compliance with the supervisory approval 20 requirement of section 6751(b). 21 Respondent provided a Civil Penalty Approval 22 Form meeting the requirements of section 6751(b). 23 Respondent also satisfied the burden of production with 24 respect to the section 6662(a) penalty by producing 25 evidence that the understatement of income tax is (973)406-2250|operationseescrbertnetlwww.escribetsmet 1 2 3 4 5 6 7 8 9 substantial as defined in section 6662(d)(1)(A). The deficiency in this case is both greater than $5,000 and in excess of 10% of the tax required to be reported, and is thus substantial pursuant to section 6662(d)(1) (A). However, the accuracy-related penalty will not apply with respect to any portion of an underpayment for which it is shown that the taxpayer had reasonable cause and acted in good faith. See sec. 6664(c)(1). Petitioner husband kept records pertaining to all of 10 his flights for his travel to and from jobs. He 11 provided credible testimony on how he calculated the 12 miles he traveled and the amount of reimbursement he 13 received. We find that petitioner husband acted in 14 15 16 good faith. Petitioners are not liable for the section 6662(a) penalty. A decision will be entered under Rule 155. 17 This concludes the Court's oral Finding of Fact and 18 Opinion in this case. (Whereupon, at 9:11 a.m., the above-entitled matter was concluded.) 19 20 21 22 23 24 25 (973)406-2250|operationsøerrbetsnet|wwwescribersnet