TAX COURT OPINION

Case: Duncan Bass
Docket Number: 12871-17
Judge: Gustafson
Opinion Type: bench
Filed: 06/08/2018
Pages: 13

18 UNITED STATES TAX COURT WASHINGTON, DC 20217 DUNCAN BASS, Petitioner, v. ) ) ) ) Docket No. 12871-17. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b) of the 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 proceedings in the above case before the undersigned judge at Winston-Salem, North Carolina, containing his 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, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. June 8, 2018 SERVED Jun 08 2018 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge David Gustafson May 23, 2018 Duncan Bass v. Commissioner of Internal Revenue Docket No. 12871-17 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Rule 152 of the Tax Court Rules of 10 Practice and Procedure; and it shall not be relied on as 11 12 precedent in any other ·case. By notice of deficiency dated May 22, 2017 (Ex. 13 1-J), the Internal Revenue Service ("IRS") determined a 14 deficiency in the Federal income tax of petitioner Duncan 15 Bass for the year 2014. The issue for decision is whether 16 Mr. Bass substantiated his entitlement to deduct business 17 expenses claimed on Schedule C, which the IRS disallowed. 18 We uphold the IRS's disallowances in large part. 19 This case was tried in Winston-Salem, North 20 Carolina, on May 22, 2018. Mr. Bass represented himself, 21 22 23 and Tammie A. Geier represented the Commissioner. On the evidence before us, we find the following facts: FINDINGS OF FACT 24 Mr. Bass's employment 25 Mr. Bass is a hard-working man. In 2014 he was 4 1 2 3 4 5 6 7 employed full-time by Hirschfeld Industries in Colfax, North Carolina. (Stip. 6.) Hirschfeld builds highway bridges, and Mr. Bass's work in Colfax involved processing steel. We take notice, by means of an internet map, that the Colfax work site was about 20 miles from Mr. Bass's home. He commuted to work in his pickup truck, and he did not need to take tools with him to work. His daily 40- 8 mile round-trip to Colfax, if undertaken 5 days per week 9 10 for 50 weeks, would total 10,000 miles of commyting. Mr. Bass also worked part-time for Supreme 11 Maintenance Organization ("SMO") and Beaman Realty Co. 12 13 ("Beaman"), both in Greensboro, North Carolina. His work for SMO and Beaman was mainly janitorial. Commuting to 14 his SMO and Beaman jobs in Greensboro would add to his 15 16 17 18 19 commuting miles to an extent we cannot determine. From his three employers Mr. Bass received wages totaling $64,336, which the employers reported on Forms W- 2 and Mr. Bass reported on his Federal income tax return (Ex. 2-J). 20 Mr. Bass's self-employment 21 22 23 24 25 In addition to his work for those three employers, Mr. Bass was also self-employed and did janitorial, lawn, and a variety of other work under the name Bass & Co. He performed this work both on weekends and on weekdays. When working as Bass & Co. on weekdays, 5 he worked before and after his employee work in Colfax and Greensboro, so that some of his weekdays involved driving in his truck to multiple sites on his way to and from his employers. From his self-employment as Bass & Co., Mr. Bass received gross receipts of $5,771 (i.e., about $110 per week), which he also reported on his return on Schedule C ("Profit or Loss from Business"). (Ex. 2-J.) Bass & Co. expenses 1 2 3 4 5 6 7 8 9 10 For Bass & Co., Mr. Bass drove his truck to 11 clients' locations, and he took with him in the truck his 12 13 14 15 16 17 18 lawn mower and tools, plus gas cans for fuel for his power tools. However, employing the burden of proof principles described below, we are unable to quantify the mileage he drove for Bass & Co. For the mower and power tools that he used, Mr. Bass purchased gasoline, and he estimates that he spent $27 to $30 per week for this gasoline. From debit card 19 entries on his bank statements, he is able to substantiate 20 21 22 23 24 25 that he purchased gasoline in 2014; but some of his purchases were with cash (for which he presented no receipts), and at least some of his substantiated debit card purchases of gasoline included gasoline for his truck. In view of the burden of proof and his poor evidence, we estimate conservatively that he spent $15 per (973)406-2250|opeentlanseescrbersswtlwww.esc.ríbetsmet week for 50 weeks, totaling $750, 6 Daily in 2014 Mr. Bass wore a Bass & Co. uniform (of which he brought a sample to the trial), and he cleaned the uniforms with his laundry at the "Wash-N-Go". He demonstrated (citing Ex. 7-J at 056) that the cost of the washer is $4.50, and he testified credibly that a detergent packet costs $1 and running the dryer costs another $1, for a total cost of $6.50 for each trip to the laundry. He sometimes did laundry more than once a week, so we estimate that he made 60 trips per year, for a total cost of $390. However, Mr. Bass seems to have considered 1 2 3 4 5 6 7 8 9 10 11 12 all of his clothing, including socks and underwear, to be 13 his "uniform", and since that is not so, we must allocate 14 to business expense the percentage of this cost that 15 actually relates to the Bass & Co. uniforms. We therefore 16 17 conservatively estimate that 50% of this laundry expense -- $195 -- was a business expense for laundering 18 uniforms. 19 20 21 Mr. Bass maintained a cell phone account in 2014 (Exs. 12-J, 23-P), used the cell phone for his personal and Bass & Co. calls, and paid for the cell phone from his 22 bank account (Ex. 7-J). However, the bank statements are 23 difficult to read, and Mr. Bass did not make a tally of 24 25 the payments. The smallest phone payment for his cell phone that we spotted in the bank statements is $121.50, 73}406.2250|opeutionsosserben.net|WWWASCfbenAft . 7 1 2 3 4 5 6 7 8 9 so we estimate his yearly total by assuming 12 monthly payments of $120, for a yearly total of $1,440. We find reasonable his estimate that 50% of his phone usage was for Bass & Co., so the business expense portion was $720. Lend-a-Hand Before 2014 Mr. Bass formed a non-profit company called Lend-a-Hand. The Commissioner does not dispute that Lend-a-Hand is an organization described in sections 170(c)(2) and 501(c)(3), eligible to receive tax 10 deductible donations. Mr. Bass made in-kind contributions 11 12 to Lend-a-Hand, for which he claimed a charitable contribution deduction on Schedule A ("Itemized 13 Deductions") on his 2014 tax return. This deduction was 14 15 16 not disallowed on audit, and the Commissioner did not contend at trial that it should be disallowed. However, Mr. Bass alleges that he made 17 additional in-kind donations to Lend-a-Hand which he 18 reported on Schedule C as a business expense of Bass & Co. 19 We are unable to quantify those donations. 20 21 22 23 24 2014 tax return In January 2015 Mr. Bass filed his 2014 Federal income tax return (Ex. 2-J). Mr. Bass reported on his return the wage income he had received from his three employers, and he reported gross receipts of Bass & Co. on 25 Schedule C. Also on Schedule C, he reported 18,276 8 business miles driven and claimed the prescribed 56 cents per mile, yielding "Car and truck expenses" of $10,235, and he claimed "Other expenses" totaling $12,566 on line 27a, which he itemized in Part V as including "power tool expense" (meaning gas) of $1,377; "uniforms" (meaning laundering uniforms) of $408; "cell phone" of $1,621; and "Lend a Hand" of $9,160. (He also claimed other business expense deductions not in dispute here.) Notice of deficiency and petition 1 2 3 4 5 6 7 8 9 10 After examining Mr. Bass's return, the IRS 11 disallowed the claimed car and truck expense and "other 12 expenses" that Mr. Bass had claimed. The IRS issued its 13 notice of deficiency on May 22, 2017 (Stip. 2; Ex. 1-J). 14 Mr. Bass timely mailed his petition to this Court on June 15 16 17 18 19 20 21 4, 2017. At the time he filed his petition, Mr. Bass resided in North Carolina. (Stip. 1.) OPINION I. Applicable legal principles A. Burden of proof The IRS's determination is presumed correct, and taxpayers generally bear the burden to prove their 22 entitlement to any deductions they claim. Rule 142(a). 23 Taxpayers must satisfy the specific requirements for any 24 deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 25 U.S. 79, 84 (1992). Furthermore, taxpayers are required (973J406-2250|operationseescrbecuet|www.escribetsmet to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 9 1(a), Income Tax Regs. B. Business expense deductions Pursuant to section 162(a), a taxpayer may 1 deduct "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". In contrast, except where specifically enumerated in the Code, no deductions are allowed for 1 2 3 4 5 6 7 8 9 10 personal, living, or family expenses. Sec. 262(a). 11 12 13 14 C. The Cohan rule and section 274 When a taxpayer establishes that he paid or incurred a deductible expense but fails to establish the amount of a deduction, the Court may estimate the amount 15 allowable as a deduction. The seminal case so holding is 16 Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 17 18 19 20 21 22 23 1930), and we therefore call this principle "the Cohan rule." See also Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). A taxpayer may substantiate deductions through secondary evidence only where the underlying documents have not been intentionally lost or destroyed, see Boyd v. Commissioner, 122 T.C. 305, 320-321 (2004), and there must be sufficient evidence in the record to 24 permit the Court to conclude that a deductible expense was 25 paid or incurred in at least the amount allowed. Williams (973J406-2250|operationsoescrbersnet|www.esalbetsmet v. United States, 245 F.2d 559, 560 (5th Cir. 1957). 10 D. Section 274(d) The Cohan rule has been limited by Section 274(d), which establishes higher substantiation requirements for expenses related to (among other things) "listed property", defined in section 280F(d)(4) to include passenger automobiles. For these expenses, a taxpayer must prove: (1) The amount of each separate expenditure with respect to such property; (2) the amount 1 2 3 4 5 6 7 8 9 10 of each business use; and (3) the business purpose for an 11 expenditure or use with respect to such property. Sec. 12 1.274-5T(b)(6), Temporary Income Tax Regs. (Nov. 6, 1985). 13 The Court may not estimate these expenses. See Sanford v. 14 Commissioner, 50 T.C. 823, 827-828 (1968), aff'd per 15 16 17 18 19 20 curiam, 412 F.2d 201 (2d Cir. 1969). II. Analysis A. Car and truck expenses In view of the strict standard of section 274(d), Mr. Bass did not establish that he is entitled to a business expense deduction for mileage on his truck. 21 First, he did not convince us of the miles that he drove. 22 23 He proffered mileage logs (Ex. 15-J) that he admitted were not literally "contemporaneous" but alleged were prepared 24 periodically throughout 2014. However, the Commissioner 25 established during cross-examination that these logs were (973)406-2250|operationsoescrasersnet|wurw.exribersmet presented piecemeal to the Commissioner after this Court issued its decision in Bass v. Commissioner, T.C. Memo. 2018-19 (Feb. 21, 2018), holding against Mr. Bass on this issue. (See pages 8-9, commenting on petitioner's lack of 11 "a mileage log, trip sheets, or similar records".) We cannot rule out the substantial possibility that these logs were recently composed in preparation for trial. Second, Mr. Bass did not distinguish between non-deductible expenses of commuting to one's employment 1 2 3 4 5 6 7 8 9 10 and deductible expenses of one's business. Of the miles 11 Mr. Bass drove in 2014, no fewer than 10,000 must be 12 attributed to his commutes to his main job in Colfax and 13 his part-time jobs in Greensboro. We attempted at trial 14 to discern whether one could calculate the extent to which 15 his driving for Bass & Co. added to his commuting miles so 16 that the excess would be deductible, cf. Freeman v. 17 Commissioner, T.C. Memo. 2009-213, but Mr. Bass did not 18 offer enough information about the locations, much less 19 reliable information about the actual trips made, so we 20 21 22 are unable to identify deductible mileage. B. Power tool gas expense The Commissioner does not dispute that the 23 expense of gas that Mr. Bass purchased for the mower and 24 25 power tools is deductible on Schedule C, but contended rather that Mr. Bass failed to substantiate the expense. (973) 406-2250 ] operatiernoescrbermet | wwwascribersa et We found that he spent not 12 the $1,377 that he claimed but rather the lower amount of $750, and he is entitled to deduct that amount. C. Uniform cleaning The Commissioner does not dispute that the expense of cleaning uniforms is deductible on Schedule C, but contended rather that Mr. Bass failed to substantiate the expense. We found that he spent not the $404 that he claimed but rather the lower amount of $195, and he is 1 2 3 4 5 6 7 8 9 10 entitled to deduct that amount. 11 12 13 D. Cell phone The Commissioner does not dispute that the expense of a cell phone used for business is deductible on 14 Schedule C, but contended rather that Mr. Bass failed to 15 substantiate the amount of his cell phone expense and the 16 business-related portion of it. We found that he spent 17 not the $1,621 that he claimed but rather the lower amount 18 of $1,440, and that the business portion was not 100% (as 19 he reported on his return -- a mistake by his preparer, he 20 said) but 50% (as he testified at trial), so that he is 21 entitled to deduct $720. 22 23 24 25 E. Lend-a-Hand Mr. Bass contended that he is entitled to deduct as a business expense on Schedule C amounts that would otherwise be charitable deductions but that exceed the $73)406-22$0|operatiem(cid:16)042errbers.netlwurw.msalbersnet limit of section 170,(b)(1). 13 He evidently misunderstood a publication that he found (see Ex. 10-J at 093), advising that where "transfers" to a charity can be characterized as business expenses, then "Business expense treatment may be preferable where the 'contribution' exceeds the charitable deduction ceiling." However, that advice does not apply where the transfer to the charity is truly gratuitous, as Mr. Bass admits was the case here. One cannot evade the limit of section 170(b)(1) simply by 1 2 3 4 5 6 7 8 9 10 reporting the excess on Schedule C. Mr. Bass admits that 11 his transfers to Lend-a-Hand that he deducted as business 12 13 expenses on Schedule C are indistinguishable from the transfers that he deducted as charitable contributions on 14 Schedule A. For that reason, the entire $9,160 "Lend-a- 15 Hand" deduction was properly disallowed. 16 Even if in-kind donations to a charity could be 17 deductible as business expenses, we are not persuaded that 18 Mr. Bass actually made the donations that he claims. They 19 20 are substantiated (if at all) by receipts from Lend-a-Hand that Mr. Bass composed and issued to himself. This is not 21 absolutely disqualifying, since one can indeed make a 22 contribution to a charity that one founded and operates, 23 but the receipts do not prove anything that Mr. Bass's 24 testimony would not prove; in this case, they add nothing. 25 Moreover, Mr. Bass seems to admit that the receipts do not BM (973)406-22$0|operationsoascrberknet|wwwasabers.net 14 add up to $9,160; and he originally justified his $9,160 deduction not by such receipts but by purporting to prove actual cash payments to Lend-a-Hand for advertising and rent (see Ex. 24-J). He disclaimed this contention by the time of trial (after this Court rejected his similar contention for 2013 as "attempting to take a deduction for paying himself"; see T.C. Memo. 2018-19 at *10-*11), but this radical change in his characterization of the Lend-a- Hand deduction makes us doubt the reality of the alleged contributions and their supposed substantiation. Because we allow a portion of the power tool gas expense, uniform cleaning expense, and cell phone expense 1 2 3 4 5 6 7 8 9 10 11 12 13 that was disallowed in the IRS's notice of deficiency, 14 decision will be entered under Rule 155, so that the 15 deficiency can be recomputed. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:16 a.m., the above-entitled matter was concluded.) 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operationseescrbersnet|wwwaxribersmet