TAX COURT OPINION

Case: William Clark
Docket Number: 22320-12
Judge: Gustafson
Opinion Type: bench
Filed: 12/18/2013
Pages: 13

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 WILLIAM CLARK, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 22320-12. ) ) ) ) OR D E R Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Denver, Colorado, on December 3, 2013, containing his oral findings of fact and opinion, 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 Judge Gustafson at Denver, Colorado, 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. December 18, 2013 SERVED Dec 19 2013 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bench Opinion by sudge David Gustafson December 3, 2013 William Clark v. Commissioner Docket No. 22320-12 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 Gode, and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By notice of.deficiency dated June 11, 2012 (Ex. 1-J), the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of petitioner William Clark for the year 2008, along 16 with an accuracy-related penalty pursuant to section 17 6662 (a) . The issues for decision are whether 18 Mr. Clark substantiated his entitlement to deductions 19 20 21 22 he claimed on multiple Schedules C, arising from his claimed business use of vehicles, and whether he is liable for the accuracy-related penalty. The case was tried in Denver, Colorado, on December 2, 2013. 23 Mr. Clark represented himself, and respondent was 24 25 represented by Philip E. Blondin. FINDINGS OF FACT 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Mr. Clark's martial arts activity in general 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Mr. Clark grew up in California, where he still has relatives and friends. He has been a student of the martial arts since age 11 and an instructor since .. age 20. He taugh martial arts in multiple schools simultaneously. n some of them he had an ownership interest and for thers he was a teacher and management consultant. In 1996 he moved to Colorado, though he maintained a connection with martial arts schools and instructors in California. Under the trade name "Z Ultimate Self Defense Studios," he built up a network of about 23 Colorado schools by 2008, and he owned interests in 17 or 18 of them and consulted and taught with the rest. He also worked in connection wit 10 additional schools (for a total of 33) in nearby states. In the years before and after 2008, his work consisted of -- in addition to martial arts instruction per se -- recruiting and training new instructors, recruiting investors and starting new schools, finding landlords and negotiating leases, supervising construction, advertising, and other promotion. Such promotion took place in a variety of circumstances, such as festivals, parades, "wellness" fairs, and church Jazaars, at which he would set up a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 booth to meet prospective students, teachers, or investors. Mr. Clark regularly attended martial arts- related events ou.side Colorado, such as tournaments and seminars . These events took place in places including Las Vegas, Phoenix, Salt Lake City, and 7 California. At t ese events he networked with fellow 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 instructors and investors, and he also promoted his business with new prospects. To conduct this activity, Mr. Clark must have driven a substant al amount. Mr. Clark's martial arts activity in 2008 The foregoing is activity that Mr. Clark engaged in over a course of years. However, with respect to the year 2008, there is little evidence of any such events that took lace in that year. He did present, in conjunction wi h substantiating the use of a motor home (described below), evidence of five events -- one each in Rapid City, Kansas City, and Albuquerque, and two in California (see Ex. 8-P) -- and we find that he did attend those events in conjunction with his business. But we are otherwise unable to say whether or how man business meetings, promotions, or events he attended in 2008. 25 Mr. Clark's vehicles 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 In August 2007 Mr. Clark bought for $36,800 a Ford Excursion SUV, which was driven approximately 20,000 miles total in 2008. (Ex. 9-P.) In February 2008 he bought for $108,000 a Bentley Continental -- a luxury vehicle which may have been driven a total of approximately 6,000 miles in 2008. (Ex. 10-P.) On S hedules C-1 and C-4 of his 2008 return (Ex. 2-P), Mr. Clark claimed deductions for business use of t ese two cars. However, in the absence of probative evidence about specific business events in 2008 or about specific use of either vehicle for business tasks, we are unable to quantify any 2008 use of eïther of these two vehicles as business-related rather than personal. On Schedules C-2 and C-3 of his 2008 return (Ex. 2-P), Mr. Clark claimed car and truck expense deductions for unidentified vehicles. No evidence was put on at trial about these vehicles, so we do not find that expenses were incurred on them for business purposes. In July 2008 Mr. Clark purchased a motor home for $185,000. Pho·tographs in evidence show that it is about as long as 2-1/2 minivans. (Ex. 8-P.) He is not allowed to park it on his street but must keep it in storage. It contains a bedroom, bathroom, 866.488.DEPO www.CapitalReportingCompany.èom Ca ital Reporting Company 7 kitchen, and living room. It has "slide-outs" on either side, so t at the exterior walls can be extended outward o make the living room larger. When thus enlarge , the living room may be as large as 12 feet by 18 feet and can seat 8 people in a meeting. An awnir g can be extended from the side of the motor home to create an outdoor meeting area. Mr. Clark uses the motor home in connection with his martial arts business. He uses it to haul a trailer that carries equi ment used at his remote events. At an event, the motor ome becomes a hub of activity with current and prospective students, teachers, investors, and collaborators. In or around it he holds meetings and gives demonstrations. He lets his colleagues use the motor home to change clothing and to get away from the crowds. After 2008 -- but indicative of his subjective purposes in 2008 -- he had the motor home decorated with a 1 rge and bright rendering of his "Z I 1 2 3 7 8 9 10 11 12 13 14 15 16 17 18 19 Ultimate" logo, so that it functioned as an attention- 20 21 22 23 24 25 getting advertisement for his business. He drove the motor home from Colorado to the five remote events mentioned above, totaling about 8,000 miles in 2008. In that connection, he incurred repair and fuel co t-s for the motor home, of which he subs tantiated $5, 382 . g We find that the motor home 866.488.DEPO www.CapitalReportingCompany.com Ca ital Reporting Company was used for business purposes and not personal use. If on the way to an event he needed to make an . 8 overnight stop, he slept in the motor home. He testified that, while at the event, he stayed with friends or in a hotel and never in the motor home; but we are unpersuaded by his uncorroborated testimony on that! score. However, even if he did sleep in the motor home during these events,·we find that the motor hone was not used predominantly to furnish lodging oc in connection with the furnishing of lodging. Rather, the motor home was instead used predominantly for transportation, for hauling, for promotion, for meetings, and to generate goodwill among current and prospective customers, investors, and colleagues; and providing lodging was, if not incidental, then nonetheless a minority of its use. Tax return Mr. Cla k filed a Form 1040 tax return for 2008. (Ex. 2-J.) To that return were attached nine Schedules C ("Pro it or Loss from Business") which reported information from various of his martial arts ventures . (We refer to the first as Schedule C-1, the second as Schedule C-2, etc. ) Schedule C-1 reported vehicle ëxpense and depreciation for the Ford Excursion, for which it reported the business 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Cä itál Reporting Company 9 1 2 3 4 5 6 7 8 9 use as 100%. As we noted above, Schedules C-2 and C-3 reported car expenses from unidentified vehicles. Schedule C-4 reported vehicle expense and depreciation for he Bentley, for which it reported the business use as 100%. · Schedule C-6 reported vehicle expense o $19, 996 and depreciation of $111, 000 for the otor home, for which it reported the business use as 100%. Mr. Cla k's return was prepared by a 10 Certified Public Accountant, to whom Mr. Clark 11 12 13 14 15 16 17 18 19 20 21 22 provided the information reflected on the return. The evidence offered at trial gave little detail about the nature of that information provided to the CPA. We therefore infer that Mr. Clark informed the CPA that as to each of the Ford Excursion, the Bentley, and the motor home, the business use was 100%, and informed the CPA about expenses from the vehicles not identified on the return or testified about at trial. We also infer that he informed the CPA that his car expense for the motor home was the $19,996 that was reported, rather than the.$5,382 he substantiated at trial. 23 Notice of deficiency and petition 24 25 After examining petitioner's return, the IRS disallowed all of the car and truck expense (totaling 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 about $40,000) and all of the vehicle depreciation (totaling about $130,000). The IRS issued its notice of deficiency on bune 11, 2012 (Ex. 1-J); and Mr. 4 Clark timely file his petition in this Court on 5 September 6, 2012. At the time he filed his 6 petition, he resi ed in Colorado. (Stip. 1.) 7 8 9 10 11 I. Burden of prbof OPINION The IRS's determination is presumed correct, and taxpayers generally bear the burden to prove their entitlement to any deductions they claim. Rule .12 142(a). Deductions are a matter of legislative 13 14 15 16 17 18 19 20 21 22 23 24 25 grace, and taxpayers must satisfy the specific requirements for ny deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxp yers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 1(a); see also id. ,S'ec.-1(e) ("The books or records *** shall be retained so long as the contents thereof may become material in the administration of any internal revenue aw"). Certain expenses are subject to especially strict substantiation rules under section 274 (d). These include expenses associated with the use of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 certain "listed p operty, " which is defined in section 280F (d) (4 to include passenger automobiles . When section 274 ( ) applies, a taxpayer must substantiate -- u ing adequate records or sufficient evidence corroborating the taxpayer' s own statement -- (1) the amount of the expense; (2) the time.and place the expense was incurred; (3) the business purpose of the expense or business use of the asset; and (4) the busindss relationship of the taxpayer to other persons benefited by the expense or use, if any. Shea v. Commissioner, 112 T.C. 183, 187 (1999). II. Discussion A. Motor home expenses The IRS contends that the motor home was devoted to personal use, but we conclude otherwise. We hold that Mr. Clark su stantiated his business usage of the motor home. lthough he did not maintain a contemporaneous log, the motor home was used on only a few occasions (i.e., for five trips), and Mr. Clark was able to corroborate the facts about the routes he took and the locations at which he purchased fuel, in a manner that accounted for all but 400 of the 8,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2·0 21 22 23 miles that the motor home was driven in 2008 (and his 24 25 testimony that the 400 miles constituted local travel incidental to thos trips was plausible). He is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 therefore entitled to deduct the $5,382 of vehicle expenses for the motor home that he substantiated. As for depreciation on the motor home, the IRS contends that the motor home was used predominantly for lodging and taat the depreciation deduction must be disallowed pursuant to sections 50 (b) and 179(d) (1) -- a contention that we do not uphold. The IRS does not asse t any error in the amount of 9 Mr. Clark's claim of a depreciation deduction for the 10 motor home, so we do not sustain the disallowance of 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 that deduction. B. Expensen of the other cars As for the Ford Excursion, the Bentley, and the two unidentified c ars, we hold against Mr. Clark and sustain the IRS's disallowances. For the Ford and the Bentley, Mr. Clark gave only the most general information about his use of the cars and provided no documents to show the quantum of their business use. To his credit, he did not claim an unlikely ability to remember details from 2008, but to his detriment he therefore put on virtually no evidence. Moreover, he expressed the iew that all he does six days a week is work-rela ed and that he virtually never uses his vehicle for p rsonal trips or errands. This testimony was not credible. It seems to reflect a 866.488.DEPO www.Ca italReportingCompany.com Capital Reporting Company 13 tendency to view personal expenses as somehow business related, but in any event he did not prove any percentage of business use. The Court is tempted to assume that some significant percentage of his vehicle use -- 50%? 60%? -- may indeed be business related, and this seems likely to be true over the course of years. But we must decide his business use in a particular year -- 2008 -- and on that subject he did not give u enough evidence to support any finding under sec ion 274 (d). III. Penalty 1 2 3 4 5 6 7 8 9 10 11 12 ' Section 6662 imposes an "accuracy-related 13 14 15 16 17 18 19 20 21 22 23 24 25 penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's neglig nce or disregard of rules or regulations or thdt is attributable to any substantial under tatement of income tax. The precise amount of the 2008 understatement that will result from the adjustments that we have sustained is yet to be determi ed pursuant to Rule 155, but it appears that it will be "substantial" under section 6662(d) -- i.e., that it will exceed both $5,000 and 10 percent of the tax that should have been reported. We therefore need not reach the issue of negligence. Mr. Clark cannot successfully invoke any of the 866.488.DEPO www.CapitalReportingCompany.com Capi al Reporting Company 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 defenses that a ta payer might assert against an 14 accuracy-related penalty: He had no "substantial authority" for his position; and he did not disclose on his return that he could not substantiate the amounts or the bus ness purpose of the claimed deductions we disa low (see sec. 6662(d) (2) (B)); and he did not show r asonable cause and good faith for his erroneous rep rting (see sec. 6664 (c) (1) ) . He attempts to invok , this third potential defense by showing that he hired a competent CPA to prepare his return; and the defense might be available if the evidence showed t at he had relied on professional advice to take th erroneous deductions. But to successfully invo e this defense, he would have to show that he gave correct information to his return preparer and that the errors on the return were the result of the preparer's actions -- but evidence of such facts is lac ing. So that the iability can be recalculated to reflect the determination in this opinion, decision will be entered rsuant to Rule 155. This conclu es the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 4:12 p.m., the above- entit ed matter was concluded. ) 866.488.DEPO ww.Gap talReportingCompany.com