TAX COURT OPINION

Case: Myrone J. Foster
Docket Number: 15193-08S
Judge: Colvin
Opinion Type: bench
Filed: 12/28/2009
Pages: 17

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 MYRONE J . FOSTER, Petitioner, r ) v, ) Docket No . 15193-08 S COMMISSIONER OF INTERNAL REVENUE, Respondent .' ) O-R D E R Pursuant to Rule 152(b), TaxtCourt Rules of Practice and Procedure, it i s 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 Judge Laurence J . Whalen at Baltimore, . . Maryland, containing his oral findings of fact and opinion rendered on December 1, 2009 . In accordance'with the oral findings of fact and-opinion, decision will be entered pursuant to Rule'155 . (Signed) Laurence J . Whalen Judge Dated Washington, D .C . December 28, 2009 SERVED DEC 2 9 2009 2 1 Bench Opinion by Senior Judge Lawrence J . Whale n December 1, 200 9 3 Myrone J . Foster v . Commissioner Docket No . 15193-08 S The Court has decided to render ora l 5 findings of fact and opinion in this case, and th e following represents the Court's oral findings of fact and opinion . 8 This proceeding was heard as a small tax 9 case pursuant to the provisions of Section 7463 of the 10 Internal Revenue Code of 1986, as amended, and Rules 11 170 through 179 of the Tax Court Rules of Practice and 12 Procedure . Hereinafter, all section numbers refer to 13 the Internal Revenue Code, as amended and in effec t 14 for 2005, the taxable year in issue, and all rul e 15 numbers refer to the Tax Court Rules of Practice and 16 Procedure . This bench opinion is made pursuant to the 17 authority granted by Section 7459(b) and Rule 152 o f 1 8 19 the Tax Court Rules of Practice and Procedure . Myrone J . Foster appeared in this proceedin g 20 on his own behalf and Jonathan M . . Hauck, Esquire, 21 appeared on behalf of Respondent . Responden t 22 determined a tax deficiency of $3,386, and an addition .23 to tax under Section 6651(a)(1) of $134 i n 24 Petitioner's 2005 federal income tax . The tax 25 deficiency was based upon three adjustments to Heritage Reporting Corporatio n (202) 628-4888 3 1 Petitioner's return . First, Respondent disallowed a 2 deduction of $22,860 claimed on Schedule A, Itemized 3 Deductions, and Form 2106, Employee Business Expenses, 4 as unreimbursed employee expenses . 5 This amount includes vehicle expenses of 6 $9,712, parking fees, tolls and transportation of 7 $1,500, travel expenses while away from hom e 8 overnight, including lodging, car rental, et cetera , 9 of $5,200, business expenses of $2,698, and 50 percent 10 of his meals and entertainment expenses of $3,750 . 11 Second, Respondent disallowed a deduction of $2,000 12 claimed on Schedule A as unreimbursed employe e 13 expenses for "clothing" . Finally, Respondent 14 disallowed $150 claimed on Schedule A as "tax 15 preparation fees" . Respondent concedes the 16 disallowance of the tax preparation fees in the amount 17 of $150 . 18 After this concession, there are three 19 issues for decision . First, whether Petitioner is 20 entitled to the Schedule A deduction for th e 21 unreimbursed employee expenses of $22,860 claimed on 22 his 2005 return . Second, whether Petitioner i s 23 entitled to the Schedule A deduction for th e 24 unreimbursed employee expenses of $2,000 for clothe s 25 claimed on his 2005 return . Three, whether Petitione r Heritage Reporting Corporation (202) 628-4888 1 is liable for the addition to tax under Section 2 .6651(a)(1) in the amount of $134 . Some of the facts have been stipulated b y 4 the parties and they are so found . In addition to the 5 facts stipulated, the Court finds the following facts : 6 Petitioner resided in and around Baltimore, Marylan d 7 at the time that his petition in this case was filed 8 with the Court . During 2005, Petitioner was employed 9 on a full-time basis by the Environmental Protectio n 10 Agency . His pay grade was a .GS-7 or GS-9 . Petitioner 11 reported wages of $41,540 from EPA . He also reported, 12 wages of $969 from Sears Roebuck and Company . During 13 2003, Petitioner incorporated M . Jamal Foste r 14 Foundation Inc . 4H Management in the State o f 15 Maryland, hereinafter referred to as 4H Management . 16 The articles of incorporation describe the 17 purpose of the corporation as follows : "To provide 18 ongoing outreach and services to neighborin g 19 communities . To aid in community developmen t 20 efforts ." Petitioner is listed as .the resident agent 21 of the corporation and his address is listed as th e 22 address of the corporation . There were four directors 23 of the corporation : jetitionerPetitioner's father , 24 Warren ; Petitioner's former wife, Lakeesha ; and two 25 others . Recently, the. corporation's website described Heritage Reporting Corporatio n (202) 628-4888 5 1 the four business lines of the corporation a s 2 ministerial .or church consulting, property management 3 services, private investigation and custodia l 4 services . 5 Petitioner testified at trial, and base d 6 upon his testimony we find that Petitioner's primar y 7 purpose for engaging in the 4H Management activity was 8 not to make a profit . The deductions for unreimburse d employee expenses here in dispute are-allowable, if a t 10 all, under Section 162(a) . That section generall y 11 allows a deduction for ordinary and necessary expenses 12 paid or incurred during the taxable year in carrying 13 on any trade or business . The term "trade o r 14 business" as used in Section 162(a) includes the trade 15 or business of being an employee . See Primuth v . 16 17 Commissioner , 54 T .C . 374, 377-378 (1970) ; Christensen v . Commissioner , 17 T .C . 1456 (1952) . 18 To be engaged in a trade or business within 19 the meaning of Section 162, "the taxpayer must be 20 involved in the activity with continuity an d 21 regularity and the taxpayer's primary purpose for 22 engaging in'the activity must be for income o r 23 profit" . Commissioner v . Groetzinger , 480 U .S . 23, 35 24 (1997) . If the taxpayer is not engaged in a trade or 25 business under Section 162, the taxpayer may generally Heritage Reporting Corporatio n (202) 628-4888 6 1 deduct the expenses relating to an activity "no t 2 engaged in for profit" only to the extent of the gross 3 income derived from the activity for the taxable year . 4 Section 183 (a) and (b) (2) . 5 The determination of whether an expenditure 6 satisfies the requirements for deductibility unde r 7 Section 162 is a question of fact . See Commissioner 8 v . Heininger , 320 U .S . 467, 476 (1943) . In general, 9 an expense is ordinary if it is considered normal , 10 usual or customary in the context of the particular 11 business out of which it arose . See Deputy v . du 12 Pont , 308 U .S . 488, 495 (1940) . Ordinarily, an 13 expense is necessary if it is appropriate and helpful 14 to the operation of the taxpayer's trade or business . 15 See Commissioner v . Tellier , 383 U .S . 687 (1966) ; 16 Carbine v . Commissioner , 83 T .C . 356, 363 (1984), 17 affd . 777 F .2d 662 (11th Cir . 1985) . On the other 18 hand, Section 262(a) generally disallows a deduction 19 for personal, living or family expenses . 20 Our legal analysis is necessarily guided by 21 several fundamental principles of tax litigation . 22 First, as a general rule, the Commissioner' s 23 determinations are presumed correct, and the taxpayer 24 bears the burden of proving that those determinations 25 are erroneous . Rule 142(a) . This principle wa s Heritage Reporting Corporation (202) 628-4888 7 1 firmly established by the United States Supreme Court 2 as early as 1933 and has been reaffirmed by th e 3 Supreme Court through the years . See, e .g ., INDOPCO 4 Inc . v . Commissioner , 503 U .S . 79, 85 (1992) . The 5 burden of proof with respect to a factual issue that 6 affects a taxpayer's liability for tax may be shifted 7 to the Commissioner where the "taxpayer introduce d 8 credible evidence with respect to such issue" . Sec . 9 7491(a)(1) . 10 In this case, Petitioner does not claim that 11 the burden shifts to Respondent under section 7491(a) . 12 In any event, Petitioner has failed to establish that 13 he has satisfied the requirements of Sectio n 14 7491(a)(2) . On the record before us, we find that the 15 burden of proof does not shift to Respondent unde r 16 Section 7491(a) . Second, deductions are a matter of 17 legislative grace and the taxpayer bears the burden of 18 proving that he or she is entitled to any deductions 19 claimed . Rule 142(a) ; Deputy v . du Pont , 308 U .S . 20 488, 493 (1940) ; New Colonial Ice Co . v . H'lvering , 21 292 U .S . 435, 440 (1934) . This includes the burden of 22 substantiation . Hradesky v . Commissioner , 65 T .C . 87, 23 90 (1975), affd . per curiam 540 F .2d 821 (5th Cir . 24 1976) . 25 Third, the Court is not bound to accept as Heritage Reporting Corporatio n (202) 628-4888 8 1 gospel the unverified and undocumented testimony of a 2 taxpayer . Hradesky v . Commissioner , supra ; Tokarski 3 4 v . Commissioner , 87 T .C . 74, 77 (1986) . See als o Loveel & Hart, Inc . v . Commissioner , 456 F .2d 145, 184 5 (6th Cir . 1972), affg . T .C . Memo . 1970-335 ; MacGuire 6 v . Commissioner , 450 F .2d 1239, 1244 (5th Cir . 1971), 7 affg . T .C . Memo . 1970-89 ; Niedrincihaus v . 8 Commissioner , 99 T .C . 202, 212 (1992) . We also 9 observe that Section 6001 and the regulation s 10 promulgated thereunder require taxpayers to maintain 11 records sufficient to permit verification of income 12 and expenses . 13 Thus, generally speaking, to be entitled to 14 business deductions under Section 162(a), a taxpayer 15 is required to substantiate the deductions through the 16 maintenance of books and records . As a general rule, 17 if the trial record provides sufficient evidence that 18 the taxpayer has incurred a deductible expense but the 19 taxpayer is unable to adequately substantiate th e 20 amount of the deduction to which he or she i s 21 otherwise entitled, the Court may estimate the amount 22 of such expense and allow the deduction to tha t 23 extent . See Cohan v . Commissioner , 39 F .2d 540, 543- 24 544 (2d Cir . 1930) . 25 However, in order for the Court to estimate Heritage Reporting Corporatio n (202) 628-4888 9 1 the amount of an expense, we must have some basis upon 2 which an estimate may be made . Vanicek v . 3 Commissioner , 85 T .C . 731, 743 (1985) . Without such a 4 basis, any allowance would amount to unguide d 5 largesse . Williams v . United States , 245 F .2d 559 , 6 560 (5th Cir . 1957) . In the case of certain expenses, 7 Section 274(d) overrides the so-called Cohan doctrine . 8 See Sanford v . Commissioner , 50 T .C . 823, 827 (1968), 9 affd . per curium 412 F .2d 201 (2d Cir . 1969) ; Sec . 10 1 .274-5T(a), Temporary Income Tax Regs . 11 Specifically, Section 274(d)(1) and (4) 12 provide that no deduction is allowable for travel , 13 including meals while away from home, and with respect 14 to listed property as defined in Section 280F (d)(4), 15 unless the deductions are substantiated in accordance 16 with the strict substantiation requirements of Section 17 274(d) and the regulations promulgated thereunder . 18 Included in the definition of listed property in 19 Section 280F(d)(4) is any passenger automobile . 20 Section 280F(d) (4) (A) (1) . 21 Thus, under Section 274(d), no deduction may 22 be allowed for expenses incurred for travel, and n o 23 deduction may be allowed for expenses incurred in 24 respect of listed property, such as a passenge r 25 automobile, on the basis of any approximation or the Heritage Reporting Corporatio n (202) 628-4888 10 1 unsupported testimony of the taxpayer, e .g ., Golden v . 2 Commissioner , T .C . Memo . 1993-602 . In other words, in 3 the absence of adequate records or sufficient evidence 4 corroborating the taxpayer's own statement, deductions 5 that are subject to the stringent substantiatio n 6 requirements of Section 274(d) are proscribed . 7 At a minimum, when travel or listed property 8 is involved, the taxpayer must substantiate : 1) the 9 amount of the expense ; 2) the time and place of travel 10 or use of the listed property ; and 3) the busines s 11 purpose for the travel or use . Section 1 .274- 12 5T(b)(6), Temporary Income Tax Regs . It is not enough 13 to establish one of those elements, for example, the 14 time and place that a particular expense was incurred . 15 Rather, all of the elements must be established . 16 Section 274(d) . 17 In order to substantiate a deduction b y 18 means of adequate records, a taxpayer must maintain a 19 diary, a log, or a similar record and documentary 20 evidence that, in combination, are sufficient to 21 establish each element of each expenditure or use . 22 Sec . 1 .274-5T(c)(2)(h), Temporary Income Tax Regs . To 23 be adequate, a record must generally be written . Each 24 element of an expenditure or use that must b e 25 substantiated should be recorded at or near the time Heritage Reporting Corporatio n (202) 628-4888 1 1 1 of the particular expenditure or use . Sec . 1 .274- 2 5T(c )( 2)(ii)(A ), Temporary Income Tax Regs . 3 As to Petitioner ' s deduction fo r 4 unreimbursed employee expenses in the amount of 5 $22,860, Petitioner did not satisfy the stric t 6 substantiation requirements of Section 274 . At trial, 7 Petitioner relied upon a mileage log sheet , referred 8 to herein as . mileage log, to substantiate th e 9 unreimbursed employee expenses of $22,860 claimed in 10 his return . This amount is composed of vehicl e 11 expenses of $9,712, parking fees, tolls an d 12 transportation of $1,500, travel expenses while away 13 from home overnight, including lodging, car rental, et 14 cetera, .of $5,200, business expenses of $2,698, and 50 15 percent of his meals and entertainment expenses o f 16 $3,750 . Unfortunately, Petitioner's mileage lo g 17 raises more questions'than it answers and we find tha t 18 it does not substantiate Petitioner's claimed 19 deductions . 20 First, and most importantly, the mileage log 21 does not show the amount of each expense, the time and 22 place of the travel or use of the listed property and 23 the business purpose for the travel or use, a s 24 required by Section 274 . Petitioner's testimony is 25 that the mileage log shows the mileage driven during Heritage Reporting Corporatio n (202) 628-4888 1 2 1 January through November of 2008 in connection with 2 his activities on behalf of 4H Management . The log 3 purports to show that a total of 60,148 miles were 4 driven in making 1,518 "stops" . In his testimony , 5 Petitioner acknowledged that he could not identify the 6 location or purpose of any of those stops . 7 He testified generally and vaguely that some 8 stops involved consulting with churches, some stop s 9 involved helping friends, some stops involved his 10 father's business, "Dynamex", and some may have 11 involved the government contract business of 4H 12 Management . In preparing his return for 2005 , 13 Petitioner and his accountant did not identify which 14 specific stops involved his activities on behalf of 4H 15 Management . Rather, they simply deducted a 16 percentage, approximately one-third, of the tota l 17 shown on the mileage log . Actually, they took 36 .58 18 percent of the total (22,000 divided by 60,148) . 19 Second, with only several exceptions in the 20 case of "Volvo" and "rental car", Petitioner could not 21 match a specific automobile with the mileage that was 22 recorded on the mileage log . In this connection, we 23 note that the Form 2106, Employee Business Expenses, 24 attached to Petitioner's 2005 return specificall y 25 refers to "Vehicle 1" that was placed in service on Heritage Reporting Corporatio n (202) 628-4888 1 3 1 "07/01/20002", and "Vehicle 2" that was placed in 2 service on "05/01/2005" . According to Form 2106 , 3 Vehicle 1 accounted for 13,000 of the miles for which 4 deductions were taken and Vehicle 2 accounted fo r 5 9,000 of the miles, a total of 22,000 miles . 6 Petitioner testified that could not state which of his 7 many cars were included in the log . 8 Third, the mileage log shows two categories 9 of expenses, one labeled "gas" expenses and the other 10 labeled "tolls/misc" . The record does not explai n 11 what expenses are included in the category labeled 12 "tolls/misc" . Presumably, the expenditures labeled 13 "gas" were for fuel purchases . The mileage lo g 14 purports to show that in driving 60,148 miles during 15 2005 the total amount paid for "gas" was $5,351 .92 and 16 the total amount paid for "tolls/misc" was $8,232 .00 . 17 If both categories of expenses are proportionatel y 18 reduced to be equivalent to 22,000 miles, that is, the 19 number of miles that forms the basis for th e 20 deduction, then the gas expense is equivalent t o 21 $1,957 .73 (i .e ., $5,351 .92 times 36 .57 percent) and 22 the tolls/misc expenses is equivalent to $3,011 .27 23 (i .e ., $9,232 times 36 .57 percent) . 24 Furthermore, assuming that the "gas " 25 expenditures are deducted on Petitioner's return as Heritage Reporting Corporatio n (202) 628-4888 1 4 1 vehicle expenses, then the tolls/misc category, 2 amounting to $3,011 .27, the amount equivalent t o 3 22,000 miles, must be the basis for Petitioner's claim 4 to have substantiated the remaining deduction s 5 totalling $16,898 . These remaining deductions consist 6 of parking fees, tolls and transportation of $1,500 , 7 travel expenses while away from home overnight , 8 including lodging, car rental, et cetera, of $5,200, 9 business expenses of $2,698, and 100 percent of hi s 10 meals and entertainment expenses of $7,500 . We do not 11 agree with Petitioner's implicit assertion tha t 12 tolls/misc expenditures of $3,011 .27 can substantiate 13 deductions totalling $16,898 . 14 Fourth, we find Petitioner's testimony about 15 the mileage log and about his activities on behalf of 16 4H Management allegedly shown by the mileage log to be 17 incredible . Most significantly, we do not believ e 18 that Petitioner could .have been a full-time employer 19 of the Environmental Protection Agency and at the same 20 time have taken the trips shown on the mileage log . 21 Also, we find it incredible that Petitioner's father 22 accompanied him on virtually all of those trips simply 23 because he was retired and he had nothing better t o 24 do . Also, the mileage log purports to show that some 25 expenses were reimbursed, whereas Petitioner's clear Heritage Reporting Corporatio n (202) 628-4888 15 1 testimony at trial was that 4H Management had no 2 reimbursement policy . 3 As to Petitioner's deduction of $2,000 for 4 the unreimbursed cost of roads, we also sustai n 5 Respondent's .determination that Petitioner is not 6 allowed the claimed deduction . We do so becaus e 7 Petitioner's testimony at trial was that his primar y 8 purpose for engaging in the 4H Management activity was 9 not for income or profit . Thus, we find that in 2005 10 he did not engage in the 4H Management activity as a 11 trade or business under Section 162 . See Commissioner 12 v . Groetzinger , 480 U .S . 23, 35 (1987) . 13 Generally, Section 183(a) disallows an y 14 deduction attributable to an activity not engaged i n 15 for profit, except as provided under Section 183(b) . 16 Section 183(b)(1) permits deductions which ar e 17 otherwise allowable regardless . of profit objective . 18 Deductions that would be allowable if the activit y 19 were engaged in for profit are permitted, but only to 20 the extent that gross income attributable to the 21 activity exceeds the deductions permitted by Section 22 183(b)(1) . Section 183(b)(2) . In this case, there is 23 no amount that is allowed as a deduction under Section 24 183(b) . In view of the foregoing, we sustai n 25 Respondent's disallowance of the unreimbursed employee Heritage Reporting Corporatio n (202) 628-4888 1 6 1 expenses claimed on Schedule A for 2005 . 2 The third and last issue in this case i s 3 whether Petitioner is liable for the addition to tax 4 under Section k651(a)(1) . Section 7491(a) provides 5 that the Commissioner will bear the burden o f 6 production with respect to the liability of any 7 individual for an addition to tax . "The 8 Commissioner's burden of production under Section 9 7491(c) is to produce evidence that it is appropriate 10 to impose the relevant penalty, addition to tax, or 11 additional amount ." Swain v . Commissioner , 118 T .C . 12 358, 363, 2002 WL 844723 (2002) ; see also Higbee v . 13 Commissioner , 116 T .C . 436, 446, 2001 WL 61723 0 14 (2001) . If a taxpayer challenges an addition to tax 15 or penalty, the taxpayer's challenge will succee d 16 unless the Commissioner produces evidence that .the 17 addition to tax or penalty is appropriate . Swain v . 18 Commissioner , supra at 363-365 . 19 The Commissioner, however, does not have the 20 obligation to introduce evidence regarding reasonable 21 cause or substantial authority . Higbee v . 22 Commissioner , supra at 446-447 . In this case , 23 Respondent determined that Petitioner is liable for an 24 addition to tax under Section 6651(a)(1) for 2005 . 25 Section 6651(a)(1) imposes an addition to tax for Heritage Reporting Corporatio n (202) 628-4888 1 7 1 failure to file a return on the date prescribe d (determined with regard to any extension of time fo r 3 filing) unless the taxpayer can establish that such 4 failure is due to reasonable cause and not willful 5 neglect . The parties stipulated that Petitioner filed his 2005 return on May 4, 2006 , and that the deadline 8 for filing the return was April 18, 2006 . Thus, the 9 Court finds that Respondent has met his burden of 10 production with regard to the additions to tax under 11 Section 6651(a)(1) . Petitioner has presented n o 12 evidence indicating his failure to file was due t o 13 reasonable cause or that Respondent's determination is 14 otherwise incorrect . Accordingly, Petitioner i s 15 liable for the addi t i on to tax un d er S ec ti on 16 6651(a)(1) for 2005 . 17 To give effect to our disposition of the 18 disputed . issues, as well as Respondent's concession, 19 decision will be entered pursuant to Rule 155 . 20 This concludes the Court's oral findings of .21 fact and opinion in this case . /1 22 2 3 ,2 4 25 Heritage Reporting Corporation (202) 628-4888