TAX COURT OPINION

Case: Alejandro Sandoval & Veronica Virrueta
Docket Number: 10400-17
Judge: Goeke
Opinion Type: bench
Filed: 03/29/2018
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 ALEJANDRO SANDOVAL & VERONICA VIRRUETA, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) .) ) ) ) ) Docket No. 10400-17. ) ) ) ) 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 Joseph Robert Goeke at San Francisco, California containing his oral findings of fact and opinion rendered at the trial session at which this case was heard. .. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. March 29, 201 8 SEIWED MAR 3 0 2018 Bench Opinion by Judge Joseph Robert Goeke March 9, 2018 Alejandro Sandoval & Veronica Virrueta v. Commissioner of 3 Internal Revenue Docket No. 10400-17 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. The oral findings of fact and opinion shall not 1 2 3 4 5 6 7 8 9 10 be relied upon as precedent in any other case. This 11 opinion is rendered pursuant to the authority in Internal 12 Revenue Code section 7459(b) and Rule 152 of the Tax Court 13 Rules of Practice and Procedure. Section references 14 hereinafter in this bench opinion are to the Internal 15 Revenue Code, and Rule references are to the Tax Court 16 Rules of Practice and Procedure. 17 18 19 The present case is before us based upon our jurisdiction to review deficiency determinations made by the Respondent after the issuance of a notice of 20 deficiency se a timely filed petition. At the time they C 21 22 filed the petition in this case, the Petitioners were residents of California. They filed a Federal income tax 23 return jointly for the year 2014 and subsequently timely 24 25 filed a Federal income tax return for the year 2015. The Respondent issued a notice of deficiency on 73)406-2250|operationseescrbetsmet|www.escrbersmet 7 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 February 8th, 2017 for both of the years 2014 and 2015. The record reflects that the addition to tax that was determined in that notice of deficiency was approved by the immediate supervisor of the examining agent that initiated the determination to assert the addition to tax. The record at trial consisted of the stipulation of facts and attached exhibits and the testimony of Mr. Sandoval. In the notice of deficiency issued to the Petitioners, the Respondent determined deficiencies in income tax for the years 2014 and 2015 in the amounts of $34,047 and $21,237, respectively. Respondent also determined additions to tax under section 6662(a) in the amounts of $6,809 and $4,247, respectively. The adjustments which triggered the additional tax amounts related to Schedule C expenses which were 16 disallowed in the notice of deficiency. There were two 17 Schedule Cs associated with the year 2014, and the other 18 expense amounts on both of those forms were totally 19 disallowed, those amounts being $4,910 and $42,739. In 20 2015, no other expense amounts were disallowed in the 21 notice of deficiency. However, in both years, 2014 and 22 23 24 25 2015, commissions and fees claimed in the amounts of $44,133 for 2014 and $41,993 for 2015 were disallowed in full, and car and truck expenses in the amounts of $22,729 and $23,589, respectively, were disallowed. 73)406-2250|operationseerrbers.net|www.escribers.net 5 The trial focused on whether the Petitioner could substantiate the disallowed expenses. The Petitioner submitted, for 2015, Forms 1099 reflecting payments of $18,100 and $1,929 to two individuals who Mr. Sandoval testified did work relative to his real estate business in 2015. For 2014, he submitted three such Forms 1099 Miscellaneous which he testified were filed with the Internal Revenue Service in the Internal Revenue Service Center in Kansas City, Missouri. The amounts reflected on these Forms 1099 Miscellaneous were $13,470, $21,250, and $9,411. We determine that, based upon his testimony, these amounts were properly deductible, and they should reduce the adjustments made in the notice of deficiency for commissions and fees. This results in some residual adjustment in 2014, and we sustain that adjustment for lack of substantiation by the Petitioners. The automobile expense deductions at issue for both years before the Court were the subject of a mileage log submitted by Mr. Sandoval. And based upon his testimony, we believe the mileage reflected in that log for both years is correct and reflects amounts which can 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 be used as the basis to allow as a deduction the standard 24 mileage rate for vehicles in 2014 and 2015. The amounts . 25 we determine are allowable are 40,587 miles in 2014 and (973)406-2250|operationseerrkers.net|www.eserbers.net 6 1 2 3 4 5 6 7 8 9 41,025 miles in 2015. To the extent these amounts are less than the adjustments in the notice of deficiency, the excess amounts adjusted would be sustained. Finally, for 2014, there are other expense amounts which we previously determined. The first amount, $4,910, is reflected in the Schedule C on the joint Federal income tax return for 2014 that relates to Mrs. Sandoval's business. She did not testify, and there is no substantiation for the amount of $4,910, so we sustain 10 Respondent's adjustment with respect to that amount. 11 We note, and it is well established, that the 12 Petitioners bear the burden of proof to establish that 13 expenses claimed on their income tax return are 14 deductible. This is clearly set forth in the Tax Court 15 Rules, Rule 142(a)(1). Internal Revenue Code section 7491 16 provides that if credible evidence is submitted, the 17 18 burden of proof would shift to the Commissioner. However, the requirements of that section have not been met in the 19 present case. So the burden of proof does remain on the 20 Petitioners in this case, and they have not sustained it 21 with respect to the $4,910 claimed as other expenses 22 23 24 associated with Mrs. Sandoval's business. However, we now turn to the larger amount, $42,739 which is reflected on the Schedule C associated 25 with Mr. Sandoval's business. He testified about those } Em (973)406-2250|operationseescrbersmet|www.escribers.net 7 1 2 3 4 5 6 7 8 9 10 11 12 amounts but provided no documentation to support his testimony. Mr. Sandoval didn't dispute the fact that such documentation was required under the Internal Revenue Service regulations, and we note that, for the most part, the expenses associated with those other items are not such that they require special documentation pursuant to section 274(d). However, it is still necessary that Petitioners document the expenses regardless of whether they require the additional documentation in the heightened substantiation requirements of section 274(d). We also note that it is not required that we accept self-serving testimony to support deductions. And 13 while we are cognizant of the need to determine the proper 14 tax liability of the Petitioners, we must expect that they 15 act with a certain amount of good faith in obtaining the 16 appropriate records to substantiate their expenses. Given 17 18 19 that admonition, we will analyze the specific amounts that constitute the $42,739 that make up the other expense category associated with Mr. Sandoval's Schedule C on the 20 2014 Federal income tax return of the Petitioners. We 21 will analyze each of the items reflected on the return 22 that are listed to make up the other expense category. 23 The first item is appraisal fees in the amount 24 of $995. We believe that this amount would generally have 25 been reimbursed to Mr. Sandoval in closing arrangements (973)406-2250|operationseestrbersmet)www.escrbersmet 8 concern1ng financial transactions. However, based upon his testimony, it appears that at certain times such fees may have fallen upon him in the exercise of his efforts to sell properties in estate sales. Therefore, we determine that, in lieu of the amount claimed, a $500 deduction would be appropriate. He also claims education expense. He did not testify specifically what was the nature of this expense and did not provide.any substantiation, and that amount se 1 2 3 4 5 6 7 8 9 10 t+re--amatmt of $484 is not deductible, and the adjustment 11 made by the Respondent is sustained. 12 13 14 15 16 17 The next item is escrow coordinators, and that amount is $4,650. Mr. Sandoval did not explain to our satisfaction why he would not have been reimbursed for such amounts in real estate closings and bheb it appears 6 that amount may have been a duplication of reimbursements that would have been made in a normal real estate closing. 18 Therefore, that amount is not allowed, and Respondent's 19 adjustment is sustained. 20 He claims $5,671 for internet, cell phone, and 21 e-fax expense. It's not clear how much of this expense is 22 personal, and Mr. Sandoval did obviously, once again, not 23 provide any substantiation of this expense. We determine 24 that $1,500 is an appropriate expense for his business 25 activities and his use of the internet or cell phone (973)406-2250|operationseescribersnet|www.escrbersnet 9 1 2 3 4 5 6 7 8 9 related to those activities. He also claims expense for home staging and decorating, but once again, it is not clear how much of this expense was reimbursed. And it is also not substantiated. Given that, we do not sustain any of the amounts claimed and, rather, find that Respondent's determination disallowing this expense is sustained in full. The same is true of a desk fee expense claim, as 10 well as janitorial expenses,3which it's not clear that Mr.9 11 Sandoval was not reimbursed for. Open house expenses 12 appear to be of the type that a real estate agent like Mr. 13 Sandoval may, in fact, have incurred. And that expense, 14 15 in the amount of $2,590 is allowed to Mr. Sandoval, and the Government's adjustment with respect to that is not 16 sustained. 17 18 The expense he claims for MLS dues subscription in the amount of $3,537 is also allowed given the nature 19 of his business and the fact that this would not be 20 normally a reimbursable expense. Therefore, the 21 Government's adjustment for that expense is not sustained. 22 23 24 25 The amount of $218 for postage expense is allowed, and the Government's expense is not sustained. However, with respect to all the other expenses claimed, the Government's adjustments are sustained, and (973)406-2250|operationseescrbers.netlwwwascribers.net . 10 1 2 3 4 5 6 7 8 9 the amounts are disallowed. Our determinations with respect to these expenses based upon the record of trial is such that a Rule 155 computation will be necessary. The final issue in the case is whether the addition to tax should be sustained under section 6662(a) for both years in question. We determine that to the extent deficiencies exist after our analysis of the e4esm expenses, that the additions to tax are appropriate on the 10 basis of negligence and the failure of the Petitioners to 11 maintain and produce proper records. Petitioners offer no 12 13 14 15 16 17 basis for a determination that their actions were reasonable in this regard, nor did they explain why they had not maintained appropriate records. Mr. Sandoval acknowledged that he had no excuse for his failure to produce the records at this time nor for his failure to provide the records to the Internal 18 Revenue Service. Therefore, to the extent there are 19 deficiencies remaining in this case, the additions to tax 20 for both years in questions would be upheld. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:26 p.m., the above-entitled matter was concluded.) 21 22 23 24 25 (973)406-2250|operations@escrbersmet|www.escrbers.net