TAX COURT OPINION

Case: Kyle Patrick Kurtenbach
Docket Number: 4608-16S
Judge: Leyden
Opinion Type: bench
Filed: 04/10/2018
Pages: 18

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 KYLE PATRICK KURTENBACH, Petitioner, v. ) ) ) ) Docket No. 4608-16S. 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 Petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Diana L. Leyden at Houston, Texas, on March 6, 2018, containing her oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Diana L. Leyden Special Trial Judge Dated: Washington, D.C. April 10, 2018 SERVED Apr 10 2018 Bench Opinion by Special Trial Judge Diana L. Leyden March 6, 2018 Kyle Patrick Kurtenbach v. Commissioner of Internal 3 Revenue Docket No. 4608-16S 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. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED 1 2 3 4 5 6 7 8 9 10 UPON AS PRECEDENT IN ANY OTHER CASE. See Rule 152(c), Tax 11 Court Rules of Practice and Procedure. 12 13 This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal .14 Revenue Code of 1986, as amended, and Rules 170 through 15 16 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the 17 authority granted by section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. 20 21 22 23 Hereinafter in this bench opinion, all section references are to the Internal Revenue Code, as amended and in effect for the relevant times, and all Rule references are to the Tax Court Rules of Practice and 24 Procedure. 25 The Court uses the term "Internal Revenue (973)406-2250|operationsperrbersnet|www.escribersmet 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Service" or "IRS" to refer to administrative actions taken outside of these proceedings. The Court uses the term "respondent" to refer to the Commissioner of Internal Revenue, who is the head of the IRS and is respondent in this case, and to refer to actions taken in connection with this case. The trial of this case was conducted on March 5, 2018, in Houston, Texas. Petitioner appeared on his own behalf. Susan Kathy Greene and Christina D. White appeared on behalf of respondent. In a notice of deficiency dated November 19, 2015, the IRS determined deficiencies in petitioner's 2012 and 2013 Federal income tax of $4,640 and $14,998, respectively, an accuracy-related penalty under section 6662(a) of $928 for 2012, an addition to tax under sections 6651(a)(1) of $2,791.58 for 2013, an addition to tax under section 6651(a)(2) for 2013 in an amount to be determined, and an addition to tax under section 6654(a) 19 of $217.61 for 2013. 20 21 22 23 25 For 2012 respondent concedes that (1) petitioner is entitled to a loss on Schedule E, Supplemental Income and Loss, of $25,000 after the passive activity limitationl, (2) petitioner did not have additional gross 1 The parties agree that to the extent p eXPenses listed on the notice of deficiency exceed the $25, 000 passive activity loss, petitioner concedes he is not entitled to a deduction for the excess, the disallowed rental (973)406-2250|operationseescrbers.net|www.escrbers.net 5 receipts or sales on Schedule C, Profit or Loss From Business, of $8,591.43, and (3) petitioner is not liable for an accuracy-related penalty under section 6662(a). Petitioner concedes that he is not entitled to a 2012 Schedule E passive activity loss carryover from a prior year. 1 2 3 4 5 6 . 7 For 2013 petitioner concedes that he received 8 9 10 11 wages of $69,744 reported on a Form W-2, Wage and Tax Statement, by AMEC EC Services, Inc., (AMEC) and gross rental income that should have been reported on a Schedule E of $15,300. Respondent concedes that for 2013 12 petitioner is entitled to Schedule E deductions for 13 expenses associated with two rental properties totaling 14 15 $18,374.01, rather than the $3,207 of expenses the IRS allowed in the notice of deficiency, as follows: (1) auto 16 and travel expenses of $581.84; (2) legal and professional 17 18 19 20 21 expenses of $58; (3) mortgage interest of $2,885.55; (4) other interest expense of $480; (5) repair expenses of $151.94; (6) supply expenses of $13.99; (7) taxes of $1,105.82; (8) mortgage insurance of $322.20; (9) internet expense of $50; (10) COSTCO dues of $110; (11) homeowner 22 association fees of $8,662.69; (12) depreciation expense 23 24 25 of $1,129 with respect to certain items placed into service in 2012 and each having a life of five years; and (13) other depreciation with respect to the two rental (973)406-2250|operationseescrbersmet|www.escrbersmet 6 1 2 3 4 5 6 7 8 9 10 11 properties of $2,822.98. Respondent also conceded that for 2013 petitioner was entitled to a capital loss on Schedule D, Capital Gains and Losses, of $1,022 and a deduction for moving expenses of $1,124.00. Petitioner conceded.that he is liable for the additions to tax under section 6651(a)(1) and (2) for 2013. The parties agree that petitioner is liable for the addition to tax under section 6654(a) but that the amount is computational. Before trial, petitioner asserted for the first time that he was entitled to the following deductions totaling $4,841 with respect to football officiating 12 activity he engaged in during 2013 that should have been 13 14 reported on a Schedule C: (1) $65 for dues; (2) $100 for tailoring; (3) $246 for a uniform and Reebok Zig 15 Magistrate shoes; (4) $695 for actual car expenses for 16 petitioner's 2011 Prius; (5) $2,950 for depreciation with 17 18 19 20 respect to his Prius and a paper shredder; (6) $378 for car insurance; (7) $6.00 for supplies| and (8) $401 for car registration for his Prius. After concessions by the parties, the issue for 21 decision by the Court is whether petitioner is entitled to 22 23 24 25 claim the deductions totaling $4,841 for 2013 with respect to his football officiating activity. Petitioner asserts that he was engaged in a trade or business of football officiating in 2013, that he (973)406-2250|operationsees rbersmet|www.escribers.net 7 1 2 3 4 5 6 7 8 9 10 11 used his 2011 Prius 100% of the time for that activity, and that the claimed deductions were ordinary and necessary expenses in carrying on that trade or business. Respondent contends that petitioner did not conduct a football officiating activity as a trade or business and, in the alternative, that petitioner did not sufficiently substantiate the claimed deductions. Some of the facts are stipulated and are so found. The first stipulation of settled issues, the second stipulation of settled issues, and the oral |12 statement of settled issues at the calendar call are I 13 14 15 incorporated herein by this reference. Petitioner resided in the State of Texas at the time that the petition was filed with the Court. 16 Petitioner's Background 17 18 19 Petitioner received a Bachelor of Science degree in business .administration, accounting, and finance from the University of Nebraska in 2008. He worked for 20 Deloitte & Touche from January 2009 through July 2011 and 21 became a certified public accountant (CPA) in 2010. 22 Petitioner subsequently worked at Midwest Holding, Inc., 23 24 as a controller from July 2011 through July 2012, at which time he began working for AMEC where he worked until 25 October 2014. Since October 2014 petitioner has worked 73)406-2250|operationsgescrbersmet|www.escribersnet 8 1 2 3 4 5 6 7 8 9 full-time as a controller for several different companies. Toward the end of 2012, petitioner moved from Nebraska to Atlanta, Georgia, to take a position at AMEC. In that position petitioner was allowed to work remotely from his home in Atlanta. When petitioner moved to Atlanta, he became interested in officiating elementary, middle, and high school football games. In April 2013 petitioner receive an email from the Atlanta Area Football Officials 10 Association (AAFOA) inviting petitioner to attend a sign- 11 up session for new recruits to join as members of that 12 association. The email indicated that there was a $65 fee 13 14 to join as a member. Petitioner provided several emails dated 15 April 27, May 24, May 28, June 8, June 13, and June 26, 16 17 18 19 20 21 2013, from AAFOA to all AAFOA members about attending training sessions and scrimmages and assigning scrimmages to attend. Petitioner did not provide any emails that indicated he attended or was assigned to attend any of the scrimmages. Petitioner also provided an email dated July 3, 2013, inviting him to a first meeting of AAFOA at 22 which training expectations were to be discussed and 23 24 25 informing him that he should place an order for his uniform and black and white New Balance shoes Model U950 (or that he could use Adidas black and white football (973)406-2250|operationseescrbers.net|www.escribers.net 9 1 2 3 4 5 6 7 8 9 shoes instead). Petitioner provided an email dated July 8, 2013, addressed to him that listed upcoming AAFOA training classes and the first AAFOA meeting on July 15, 2013. Petitioner provided emails from AAFOA to him that show he was assigned to be an electronic clock operator (scoreboard operator) for two games on August 16 and August 23, 2013, and an official at three games on October 12, October 17, and October 22, 2013. Petitioner did not provide any evidence that he in fact worked in any 10 of these capacities at any of the games to which he was 11 assigned. 12 13 In 2013 petitioner received one payment of $256.58 from AAFOA with respect to his football 14 officiating activities. 15 16 Petitioner did not have any background in football officiating and did not subscribe to any 17 magazines or other services about officiating. Before 18 moving to Atlanta petitioner had not engaged in football 19 officiating, and he did not engage in football officiating 20 21 22 23 24 in Houston, Texas, after his move there in November 2013. Petitioner did not set up a separate business name for his football officiating activity. Instead, he intended to report it on a proposed 2013 tax return under the name of his Schedule C accounting business, Landoff, a 25 sole proprietorship. Petitioner did not maintain a ) BM (973)406-2250|operationseescrbers.net|www.escrbers.net 10 separate bank account for his football officiating activiti h, did not have a formal business plan, did not have any documented financial goals for the activity, did not have any projections of when the activity might produce a profit, had no formal books or records for the activities, and did not maintain a contemporaneous mileage record. In preparation for trial petitioner prepared a 1 2 3 4 5 6 7 8 9 mileage log that listed alleged trips to local schools in 10 the Atlanta, Georgia, area starting from January 7, 2013. 11 Petitioner, however, conceded that he did not engage in 4es$ed PR 12 13 14 15 16 17 any officiating activity until at least June or July of 2013. In fact, the evidence petitioner provided shows he was scheduled to officiate starting in August 2013. The listed mileage on the noncontemporaneous log was contradicted by the mileage reading listed on a May 18, 2013, repair invoice for his car. On that invoice the 18 mileage for his car was 11,150 miles. Yet, the 19 noncontemporaneous mileage log did not list any mileage 20 reading over 11,150 until July 28, 2013. Petitioner could 21 22 23 24 not explain this discrepancy at trial. During 2013, petitioner worked full time for AMEC (i.e., 8 hours a day, five days a week). The games at which he asserted he had officiated sometimes started 25 after school on Thursdays or Fridays. Others occurred on (973)406-2250|operationseestrbers.netlwww.emibers.net 11 Saturdays. The usual number of games that a football official, conducting the same kind of activity that petitioner asserted he had engaged in, officiated would be between 50-100 games per year. Petitioner documented that he was scheduled to officiate five games during 2013. 2013 Tax Return Petitioner filed a request for an automatic extension to file his 2013 Federal individual income tax return by October 15, 2014, and remitted a payment of 1 2 3 4 5 6 7 8 9 10 $1,200 with his request for an automatic extension. 11 However, he failed to file a tax return for 2013. 12 Petitioner had not made any estimated tax payments for 13 2013. The IRS prepared a substitute for return for 2013. 14 Discussion 15 Generally, the Commissioner's determination of a 16 deficiency is presumed correct, and the taxpayer bears the 17 burden of proving it incorrect. See Rule 142(a); Welch v. 18 Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions 19 20 21 22 23 24 are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Under section 7491(a), the burden of proof may 25 shift to the Commissioner if the taxpayer produces 51HilEllli (973)406-2250|operationseescrbetsmet|www.escribetsmet 12 1 2 3 4 5 6 7 8 9 10 11 12 credible evidence with respect to any relevant factual issue and meets other requirements. Petitioner has not argued that section 7491(a) applies nor established that its requirements are met. The burden of proof remains with petitioner. 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. As a general rule, if, in the absence of such records, a taxpayer provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is . 13 unable to adequately substantiate the amount of the 14 deduction to which Me is otherwise entitled, the Court 15 may estimate the amount of such expense and allow the 16 deduction to that extent. Cohan v. Commissioner, 39 F.2d 17 18 540, 543-544 (2d Cir. 1930). However, for the Court to estimate the amount of an expense, we must have some basis | 19 upon which an estimate may be made. Vanicek v. 20 Commissioner, 85 T.C. 731, 743 (1985). Without such a 21 basis, any allowance would amount to unguided largesse. 22 Williams v. United States, 245 F.2d 559, 560 (5th Cir. 23 24 25 1957). In estimating the amount allowable, the Court bears heavily upon the taxpayer who failed to maintain required records and to substantiate deductions as the cribers (973)406-2250|operationseescrbenmet|www.escriben.net 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Code requires. See Cohan v. Commissioner, 39 F.2d at 544. For certain kinds of business expenses, section 274(d) overrides the Cohan rule. See Sanford v. Commissioner, 50 T.C 823, 827 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969). Section 274(d) provides that no deduction is allowed with respect to travel, entertainment, or listed property as defined in section 280F(d)(4) unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (1) the amount of the expense or item; (2) the time and place of the travel, entertainment, or expense; (3) the business purpose of the entertainment or expense; and (4) the taxpayer's relationship to the person or persons entertained. To meet the adequate records requirements of section 274(d), a taxpayer must maintain an account book, 17 diary, log, statement of expense, trip sheets or similar 18 19 record, and documentary evidence. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs. In the absence of adequate 20 records to substantiate the expense, the regulations 21 provide that a taxpayer may establish an element by "his 22 own statement, whether written or oral, containing 23 specific information in detail as to such element", and by 24 "other corroborative evidence sufficient to establish such 25 element." Sec. 1.274-5T(c)(3)(i) Temporary Income Tax $73)406-2250|operationseescrbersnet|wwwescribers.net 1 2 3 4 5 6 7 8 9 10 11 12 Regs Petitioner claims that he paid ordinary and necessary expenses of $4,841 with respect to his football officiating activity and that this activity was carried on as a trade or business in 2013. In this case we must determine whether petitioner's football officiating activity in 2013 constitutes a trade or business. Section 162(a) allows a taxpayer to deduct all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. In general, however, a taxpayer may not deduct expenses incurred in connection with activities not engaged in for profit, such 13 as activities primarily carried on as a sport, as a hobby, 14 15 16 17 18 19 20 21 22 or for recreation, to offset taxable income from other sources. See sec. 183(a) and (b); sec. 1.183-2(a), Income Tax Regs. Section 183(c) defines an activity not engaged in for profit as "any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212." Deductions are allowable under section 162 or under section 212(1) or (2) if the taxpayer is engaged in the 23 activity with the "actual and honest objective of making a 24 profit." Dreicer v. Commissioner, 78 T.C. 642, 645 25 (1982), aff'd without published opinion, 702 F.2d 1205 (973)406-2250|operationsperrbers.net|www.escribees.net 15 1 2 3 4 5 6 7 8 9 (D.C. Cir.. 1983); Golanty v. Commissioner, 72 T.C. 411, 426-427 (1979), aff'd without published opinion,.647 F.2d 170 (9th Cir. 1981) . The existence of the requisite profit objective is a question of fact that must be decided on the basis of the entire record. Elliott v. Commissioner, 84 T. C. 227, 236 (1985) ,. af f ' d without published opinion, 782 F..2d 1027 (3d Cir. 1986) ; Dreicer v. Commissioner, 78 T.C. at 645; sec. 1.183-2(b), Income Tax Regs. In resolving this factual question, greater 10 weight is given to objective facts than to a taxpayer's 11 12 13 14 15 16 17 18 19 statement of intent. See Westbrook v. Commissioner, 68 F.3d 868, 875-876 (5th Cir. 1995), aff'g T.C. Memo. 1993- 634; sec. 1.183-2(a), Income Tax Regs. For purposes of deciding whether the taxpayer has the requisite profit objective, profit means economic profit, independent of tax savings. Surloff v. Commissioner, 81 T.C. 210, 233 (1983) . If an activity is not engaged in for profit, section 183(b)(1) allows deductions that would be 20 allowable without regard. to whether the activity is 21 22 engaged in for profit. Secti.on 183(b) (2) allows deductions equal to the amounts of deductions that would 23 be allowable if the activity were engaged in for profit, 24 but only to the extent gross income derived from the 25 activity exceeds the deductions allowed by reason of N7i)406-2250|operat nseescribersmet|www.escribersmet . 16 1 2 3 4 5 6 7 8 9 section 183(b)(1). Regulations set forth a nonexhaustive list of factors that may be considered in deciding whether a profit objective exists. These factors are: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the taxpayer's 10 success in carrying on other similar or dissimilar 11 activities; (6) the taxpayer's history of income or losses 12 with respect to the activity; (7) the amount of occasional 13 profits, if any, which are earned; (8) the financial 14 15 16 17 status of the taxpayer; and (9) any elements indicating personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs. No single factor, or even the existence of a 18 majority of factors supporting or rebutting the existence 19 of a profit objective, is controlling. Sec. 1.183-2(b), 20 21 Income Tax Regs. Rather, all facts and circumstances with respect to the activity are to be taken into account. 22 Golanty v. Commissioner, 72 T.C. at 426; sec. 1.183-2(b), 23 24 Income Tax Regs. Petitioner did not engage in the football 25 officiating activity for profit. ,Petitioner did not keep Cribers (973)406-2250|operationseescrben.net|wwwsscribers.net 17 1 2 3 4 5 6 7 8 9 complete and accurate books and records for his football officiating activity. Petitioner did not engage in an extensive study of football officiating. He testified that he had attended a training that the AAFOA required. Petitioner, however, did not testify that he had studied football officiating or consulted with other officials either before or after he joined the AAFOA. Petitioner did not provide credible testimony or evidence to show how much time he devoted to the football officiating activity 10 during 2013. Petitioner did not engage in football 11 officiating either before or after 2013. 12 13 14 The record shows that petitioner only received $256.58 for officiating in 2013. However, petitioner asserts that he expended $4,841 for expenses, including an 15 assertion that he used his car 100% of the time for his 16 17 football officiating. Petitioner did not have any financial projections of profit or loss from his football 18 officiating activity and did not have a business plan. 19 The Court finds that petitioner did not have a plan for 20 bringing the activity into a profitable position and did 21 not have an intent to make a profit from his football 22 officiating. Moreover, petitioner earned wages of $69,744 23 24 25 from his job as a controller for AMEC. Those wages are substantial in comparison to his asserted gross income of $256.58 from football officiating. } EM (973)406-2250|operationseescrbers.net|www.escribers.net Petitioner's testimony appeared to the Court to indicate that he enjoyed officiating and that petitioner had personal motives, not business motives, for engaging 18 in the activity. Petitioner, a licensed CPA, surely understood the rules for proving whether his football officiating was a trade or business. Yet petitioner testified he kept some records on scra s of paper which he could not produce for trial that alleged business activity and, in fact, did 1 2 3 4 5 6 7 8 9 10 not timely file his 2013 tax return. The records that 11 petitioner provided at trial and to which the parties 12 13 14 15 16 stipulated to substantiate the football officiating expenses were vague, did not show a connection between the expense and operating a football officiating business, and in some respects were contradictory. Considering all the facts and circumstances, we 17 hold that petitioner did not conduct the football 18 officiating activity in a businesslike manner and did 19 not engage in the activity with the requisite profit 20 objective during the taxable year 2013. Even though 1 21 petitioner did not have a profit objective, he could still 22 23 24 25 take deductions that would be permitted if the activity was engaged in for profit, but only to the extent of the gross income derived from the activity. See sec. 183(b)(2). Petitioner is therefore entitled a deduction (973)406-2250|operationseescrbers.net|www.escribers.net 19 for expenses related to the football officiating activity in the amount of $256.58, the amount of the gross income he derived from the football officiating activity. In order to give effect to our disposition of the disputed issues, decision will be entered under Rule 155. THIS CONCLUDES THE COURT ' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 2:27 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 (973)406-2250|operationseeserbers.net|www.escribers.net