TAX COURT OPINION

Case: Elena Cristea & Umberto C. Cristea
Docket Number: 6245-21S
Judge: Holmes
Opinion Type: bench
Filed: 11/08/2023
Pages: 10

United States Tax Court Washington, DC 20217 Petitioners v. Elena Cristea & Umberto C. Cristea, COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 6245-21S. 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 of the trial of the above case before Judge Mark V. Holmes at Hartford, Connecticut on October 3, 2023, containing his oral findings of fact and opinion rendered after the conclusion of trial. In accordance with the oral findings of fact and opinion, a decision for Rule 155 will be entered. (Signed) Mark V. Holmes Judge Served 11/08/23 Bench Opinion by Judge Mark V. Holmes Octobe r 3 , 2023 Elena Cristea & Umberto C. Cristea v . Commissioner o f 3 Internal Revenue Docket No. 6245 - 21 S THE COURT : The Court has decided t o render oral findi ngs of fac t and opinion and t h e fo llowi ng represents the Court ' s oral findin gs of fact and opin ion. This bench opinion is made pursuant to the authority granted by 1 2 3 4 5 6 7 8 9 10 sec ti on 7459 (b) of the Inter nal Revenue Code of 1986 a s 11 amended and Rule 152 of t he Tax Court ' s Rul es of Pract i ce 12 and Procedu r e. 13 This case involves t he 2010 and 2011 taxes of 14 the Cristeas . 15 16 FINDING OF FACT The Cris t eas were residents of Connecticut at 17 the t ime they filed their petiti on . But really , the key 18 fact here is that Ms . Cris tea l os t her job at IBM during 19 the Great Recession bac ~ in her cas ~ in 2009 . That meant MH 20 tha t at the star t of 2010 , she was unempl oyed and l ooking 21 hard to fi nd a new job o r maybe s ta r t a business of he r 22 own to bring some money into her fami ly. 23 She was entirely credible in her te stimony about 24 how hard she worked t o improve herself through taking 25 self-improvement courses and ta ki ng s eminars and tryi ng t o l®t•tii (973) 406-2 250 I o peratiom@lescribers.net I •1,ww.escribers.n et find a job in another f i e l d , go i ng on job- hunt i ng 4 expeditions all the way back to Romania . And in fact , she finally did get a management job again back in 2012 . But she reported her effort ~ and the money she spent on her MH job searcf1; in a way that was almost guaranteed to attract MH an audit . Three parts of her return with her husband , in fact , got audited . These were expenses that she reported as unre i mbursed employee business expenses on her Schedule 1 2 3 4 5 6 7 8 9 10 A, five categories of expenses on her Schedule C, and a 1 1 large number of expenses that she reported on her Schedule 12 E . Each of these requires some discussion . 1 3 1 4 OPINION I ' ll begin to take each of these in alphabetical 1 5 order . On her Schedule A, the Cristea ' s reported 1 6 unre i mbursed emp l oyee business expenses in 20 1 0 of $7 , 525 1 7 and i n 201 1 of $6 , 694 . These we re mos t ly trave l in 1 8 vehicle expenses . Howeve r, duri ng t hose years , Ms . 1 9 Cristea simply wasn ' t an employee . If you ' re not an 20 employee , then you can ' t take unreimbursed employee 21 b u siness expenses . See for examp l e , Wh i tt i ngton v . 22 23 Commis s ioner , 11 0 T . C. M. 170 , 172 (2015 ). I sus t ained the disa l lowance of Sche dule A expenses on thf ~ ground MH 24 alone . 25 Her Schedu l e C expenses are somewhat more IMi·Wi f.17 3) 406-2 250 ) operatio ns(i!)escribers.net I 'hww.escribers.n et complicated . They were , as I sa i d , in five d i fferen t categories . Cost of goods sold , trave l expenses , car and truck expenses , legal and professional services expenses , 5 and all other e xpens e s . I 'l l t a ke these in order . Noting generally that Ms . Cristea had no income from a business in either year; : ¢he described the MH business as " real estate " and she intended to buy , rehabilitate , and then sell properti e s she found tha t were under valu~ , in her opinion . d She wasn ' t actually in MH 1 2 3 4 5 6 7 8 9 10 business in these years . She was j ust looking for 11 property t o invest in and then flip . But again , the 12 Government specifically disclaimed relying on the absence 13 of t-fre business to d i sallow these expenses and challenged MH tt.., 14 them only regarding substantiation . 15 So I ' ll go through each of these five categor i es 16 of expenses , b e ginning with cost of goods sold. Cos t of 17 good s sold has no meaning for a business that has no 18 inve ntory . In 20 10 , Ms . Cristea claimed a $17 , 495 19 adjustment for cost of good s so l d ; its disallowance , I 20 have to sustain . Again , it doesn ' t make any sense to have 21 cost of goods sold in a business wi thout any inventory . 22 I wi l l group the t r a ve l and car an d truck 23 expenses for both years . I n 2010 , she reported $4 , 420 in 24 trave l expenses and $6 , 100 in car and truck expenses . In 25 20 11, she repo rted $3 , 080 i n travel expenses and $1 , 978 in IW•tii (97 3) 406-2250 / operatio ns@•escribers.net I v,ww.escribers.n et car and truck expenses . I ' m grouping these together because Internal Revenue Code section 274 (d ) imposes strict substantiation requ irements with respect to 6 deductions for travel , mea l s and ente rtainment , and listed property . Listed property includes passenger automobiles . Expenses that are subject to section 274 (d ) must be substantiated either by adequate records or by s u fficient evidence corroborating the taxpayer ' s own statement showing the amount o f the expense , the time and 1 2 3 4 5 6 7 8 9 10 place the expense was incurred , and the business purpose 11 of the expense . See 26 C. F . R . Section 1.274-ST(a) (3) . 12 It ' s not enough for a taxpayer to establish one 13 of them . She has to establish all of them . We have no 14 discretion in this area and so we can ' t estimate a 1 5 taxpayer ' s expenses here . In this case, the Cristeas 16 failed to produce adequa t e records o r sufficient evidence 17 to substantiate business travel and car and truck 1 8 expenses , plus the business purpose of those expenses in a 1 9 business that , again , had not invested in any real 20 property and had not flipped any real property. The Court 2 1 can't estimate any of these expenses in any event . I wil l 22 sustain the disallowance of those expenses . 23 The fourth category is l egal and professional 24 services expenses of $12 , 582 in 2010 and $5 , 535 in 201 1. 25 Again , there were no rece i pts or even testimony from Ms . 1'8MIH (97 3) 406-2250 I operations@>escribers.net I w"1w.escribers.n et 1 Cristea about what these expenses were and how they 7 2 3 4 5 6 7 8 9 qualified as legal and professional services in relation to a real estate business that was not yet up and off the ground . I ' ll sustain the disallowance of t hese expenses as well . That leaves an unusual category of other Schedule C expenses . The Commissioner did not specify what these are . There is a category on the Schedule C called " Other Expenses " but Ms. Cr i stea did not claim any 10 deductions fo r that category of other expenses. And so I 11 construed the other expenses that the IRS disallowed to 12 mean all the other little line items on the Schedule C 13 that were not included in the first four categories 14 without discussion . 1 5 These were disallowed to the extent of $7 , 955 in 16 2010 and $21,777 in 2011 . This was especially odd . If 17 one looks at Exhibit 3 - J at Bates Number 51 and looks at 18 part 2 of the form relating to expenses , one can add it up 19 and come up with a number $25 , 450 in other expenses on 20 Schedule C, and they were di sa ll owed only to the extent of 21 $7,955. So there was no substantiation of any of these 22 expenses in a way that made it more likely than not that 23 they were actually incurred in Ms . Cristea ' s Schedule C 24 business , such as that business was . So I ' ll disallow 25 them , but only to the extent in the Notice of Deficiency . ltl~MH (973) 406-2 250 I ope.rations@lescriberrnet I ,,.·,w,.escribers.n <>t That means in disallowing of these $25 , 450 of other Schedule C expenses, only the $7 , 955 that were disallowed 8 by the Commissioner in his Notice of Deficiency. Similarly , for 2011 , if one adds up all the other Schedule C expenses outside of the four categories I ' ve already discussed, the number totals $21 , 977 and only $21 , 777 was disallowed on the Notice of Deficiency . So I agree that these deductions are not allowable but wil l sustain the disallowance only to the extent that the y were 1 2 3 4 5 6 7 8 g 10 in the Notice of Deficiency , which means that Ms . Cristea 11 will get $200 extra in 2011 and many thousands of dollars 12 extra in 2010 . Neither of these are noti ced in the Notice 13 of Deficiency and the Government d i dn 't plead an increase 14 in disallowance, so it probably did not make a difference 15 in the end . 1 6 That leaves the third category o f expense, 1 7 Schedule E expenses. Again, the Government challenged 18 19 20 21 22 23 these expenses only for lack of substantiation . Disavowing the statement of the Pre -Trial Memorandum that . \Ve challenged Ms. Cristea ' s act:....e-f participation and any MH possible characterization that she was a real estate professional and again , saying t hat she had an active real estate business when she was looking for her very first 24 property , which she didn't even buy until 2011 . So again, 25 this is a fight about substantiation . i;;l73) 406-2250 I operation, 1[ •escribers,11et i '1oww.escribers.n et What ' s left after several concessions and 9 sett l ements before the trial began are f or the 2010 t ax year , expenses on Schedule E for advertising , auto and travel , clean ing and maintenance , commission , legal and other professional fees , repairs , and supplies l ::: f hat can MH be found on Exhibit 1- J at page 8 . For 2011 , the categories of expense are those listed on Ms . Cr istea ' s Schedule E for 2011 , Exhibit 3 - J at page 56 . And these are , again , adver t ising , auto and 1 2 3 4 5 6 7 8 9 10 travel , clean ing and maintenance , l egal and other 11 professional fees , repairs , supplies , and all - purpose 12 other category on line 19 of her alleged form . Some of 13 these are subjec t to the same res t rictions under section 14 274 as were he r Schedule C expenses , the travel and 15 vehic l e expenses , and there was a s i mil ar l ack of any 1 6 detai l ed substantiat io n re qui r ed by tha t sect i on for these 17 expenses in the record . 18 On the rest , there was just no proof or basis on 19 which I could estimate any expenses . In , again , a 20 business that real l y wasn ' t much of a business for the two 21 yea r s at ques t i on . Wi th t h a t , I will sustain the 22 Government ' s disa l lowance of all of those expenses in the 23 contes t ed categories . 24 That l eaves on l y the question of penalt i es . 25 There were t wo penalt ie s a t i ssue i n th i s case . The first IB4•tii (,17 3) 406-2 250 I o perations1~lell:riberrnet I wNw.escribers.n et 10 was a penalty under section 6 651 (a) ( 1) . This is a section of the Internal Revenue Code that provides when a taxpayer fails to file a tax return within the time prescribed by law. Unless it is shown that her failure is due to reasonable cause and not willful neglect , there has to be added an amount that can increase up to 25 percent of the tax owed . Here, Ms . Cristea admitted during trial that she was extremely late in filing these tax returns . Indeed, 1 2 3 4 5 6 7 8 9 10 years late in fil i ng them, and there really i s no 11 reasonable excuse for her action , but she didn't really 12 present any . I ' ll sustain the Government ' s 6651(a) (1) 13 penalty . 1 4 That leaves the accuracy- related penalty under 15 section 6662 of the Code. Section 6662(a) provides for a 1 6 pena lt y for negligence or disregard of rules and 17 regulat i ons or for a substantia l understatement of income 18 tax. The Government sustained its burden of coming 19 forward just as a matter of math because the 20 understatement of income tax resulting from the aggressi v e 21 deductions that Ms . Cristea t ook puts her over t he 22 thresho ld as a matter of arithmetic. 23 I recognize that these were se lf-prep ared 24 returns that Ms. Cris tea did f o r herself and her husband 25 and they we re very far under the norm i n reporting (97 3)406-2250 I operations1i!)escribers.11et I """"11.escribers.net 11 deductions without substantiation for a business without customers or income. Her deductions for employee business expenses, wh i le she was not even an employee, a n d for deductions relating to a single rental property that were grossly excessive based on the proof that she ultimately came forward with. However, there were some concessions and settlements of other issues in the case, so a Decision wi l l be entered under Rule 155. Th i s concludes the Court's oral findings o f f act 1 2 3 4 5 6 7 8 9 10 and opinion i n this case. 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (Whereupon, at 11:23 a.m., the above-entitled matter was concluded.) lli•fiH !973) 406-2 250 I operations@escribers.net I w,w,.escribe~.n et