TAX COURT OPINION

Case: Agnes Mae Zagar
Docket Number: 15292-17S
Judge: Carluzzo
Opinion Type: bench
Filed: 04/12/2019
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 AGNES MAE ZAGAR, Petitioner, v. ) ) ) ) Docket No. 15292-17S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) 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 transcript of the trial in the above case before Chief Special Trial Judge Lewis R. Carluzzo at Los Angeles, California, 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) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. April 12, 2019 SERVED Apr 12 2019 Bench Opinion by Special Trial Judge Lewis R. Carluzzo 3 March 28, 2019 Agnes Mae Zagar v. Commissioner of Internal Revenue Docket No. 15292-17s 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 (bench opinion). Section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and Rule references are to the Tax Court Rules of Practice and 1 2 3 4 5 6 7 8 9 10 11 12 Procedure. This bench opinion is made pursuant to the 13 authority granted by section 7459(b) and Rule 152. 14 This proceeding for the redetermination of.a 15 deficiency is a small tax case subject to the provisions 16 of section 7463 and Rules 170 through -4+9 Except as 17 Provided in Rule 152(c), this bench opinion shall not be 18 cited as authority, and pursuant to section 7463(b) the 19 decision entered in this case shall not be treated as 20 21 22 23 24 precedent for any other case. Agnes Mae Zagar appeared on her own behalf. Justine Coleman appeared on behalf of respondent. In a notice of deficiency dated April 14, 2017 (notice), respondent determined a deficiency in 25 Petitioner's 2014 rederal income tax. At issue in this case is petitioner's entitlement to certain deductions claimed on a Schedule C, Profit or Loss from Business, 4 included with her 2014 Federal income tax return (return). According to the notice, petitioner failed to substantiate those deductions and/or failed to establish that the deductions are ordinary and necessary business expenses. See sec. 162(a). Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioner resided in California. During 2014 petitioner was employed part-time as a librarian. She also conducted what she describes as a "resale" business. She started that business in 2000 and by 2014 she was closing it down. Through the business she bought and sold various items, stored them from time to time in rented storage spaces,·and sold them to her customers. She might have retained some receipts for the items she purchased for resale, but she kept no formal books and records that accounted for her inventory. She reported the income and expenses on a Schedule C included 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 with her return, which was prepared by a paid income tax 22 23 24 return preparer. Two of those deductions are here in dispute, namely, the deduction for car and truck expenses, and the 25 deduction for "other" expenses which consists of a variety of specific items. Respondent now concedes that petitioner has substantiated some of the expenditures for some of the expense items included in the deduction for other expenses, but does not concede that the expenses 5 were ordinary and necessary. As we have observed in opinions too numerous to count, deductions are a matter of legislative grace, and the taxpayer bears the burden of proof to establish entitlement to any claimed deduction. Rule 142(a); 1 2 3 4 5 6 7 8 9 10 INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) ; New 11 Colonial Ice Co. v. Commissioner, 292 U.S. 435, 440 12 (1934) . (Nothing in the record suggests that the 13 provisions of section 7491(a) are applicable, and we 14 Proceed as though they are not.) This burden requires the 15 taxpayer to substantiate deductions claimed by keeping and 16 producing adequate records that enable the Commissioner to 17 18 determine the taxpayer's correct tax liability. Section 6001; Hradesky v. Commissioner, 65 T. C. 87, 90 (1975) , 19 aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo 20 21 22 v. Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is allowable pursuant to 23 some statutory provision and must further substantiate 24 that the expense to which the deduction relates has been 25 paid or incurred. See section 6001; Hradesky v. Commissioner, 65 T.C. at 90; section 1.6001-1(a), Income 6 Tax Regs. It is generally well-known that a taxpayer may deduct ordinary and necessary expenses paid in connection with operating a trade or business. See section 162(a). Set against these fundamental principles of Federal income taxation, we proceed to consider petitioner's entitlement to the deductions here in dispute and for convenience combine factual findings and analysis on a deduction-by-deduction basis. We'll start with the deduction for car and truck expenses. According to petitioner, the deduction consists 1 2 3 4 5 6 7 8 9 10 11 12 13 of expenses incurred for mileage driven between her 14 residence (presumably) and her storage facility in 15 Bakersfield, California. In support of the deduction 16 petitioner submitted a summary of mileage driven that 17 shows the dates and number of miles driven for each trip. 18 Apparently petitioner's car was involved, but the trips 19 were taken by an unidentified friend of hers who was 20 helping her close the business by removing the items from 21 22 23 24 storage and disposing of the items in one manner or another. Deductions for car and truck expenses are subject to strict substantiation requirements. See sec. 25 274 and its corresponding regulation. In general, a taxpayer is required to keep contemporaneous records showing the dates, purpose and extent of miles driven. According to petitioner, she recorded the trips on a "calendar or log" she also used in connection with.her 7 Part-time employment. She did not provide the dócument to respondent, or to the Court. According to petitioner, the document she submitted in support of the deduction is a recently prepared summary of the information shown on her calendar or log. We agree with respondent, that the 1 2 3 4 5 6 7 8 9 10 written document submitted in support of petitioner's 11 12 claim to a deduction for car and truck expenses does not satisfy the written substantiation requirements imposed by 13 the relevant statute and regulation. Petitioner is not 14 entitled to a deduction for car and truck expenses. 15 16 17 18 19 Next we consider petitioner's entitlement to a deduction for other expenses. We begin with a finding that the categories of expenses included in the deduction should, in general, be considered ordinary and necessary to petitioner's resale business. That being so, she is 20 entitled to include in the deduction the expenses that 21 22 respondent now concedes as having been paid. After careful review of the evidence we find that she is further 23 entitled to include in the deduction the amounts shown on 24 25 her return for bank charges, internet costs, outside services, and telephone expenses. She is not entitled to 8 include the expenses for truck mileage in the deduction for the same reasons she is not entitled to a deduction for car and truck expenses claimed elsewhere on the Schedule C. We further find she is not entitled to include in the deduction for other expenses any amount shown for "worthless inventory". The only written record relating to inventory is a summary schedule showing purchases from 2006, and that document hardly supports the expense shown on the return. 1 2 3 4 5 6 7 8 9 10 Although sales transactions are shown on the document, 11 SPecific items of inventory are not. According to 12 Petitioner, the worthless inventory expense consists of 13 14 damaged items or items donated to charity. She did not specifically identify any item involved, and her vague and 15 generalized explanation does not support the deduction she 16 17 claims. Not to mention the inconsistency between the calculation of cost of goods sold shown on the Schedule C 18 and the deduction for worthless inventory claimed. 19 Petitioner blamed the inconsistency on her income tax 20 return preparer, but she did not call that individual as a 21 witness, and if the return preparer had an explanation for 22 the apparent inconsistency, the explanation was not 23 provided to the Court. Petitioner is not entitled to 24 25 include the worthless inventory expense in the deduction for other expenses shown on her return. To reflect the foregoing, decision will be 9 entered under Rule 155. This concludes the Court's bench opinion in this case. (Whereupon, at 9:37 a.m., the above-entitled matter was concluded.) 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