TAX COURT OPINION

Case: Ndile George Njenge & Ekinde Sone Nzelle Rachel
Docket Number: 12793-06S
Judge: Goeke
Opinion Type: summary
Filed: 07/15/2008
Pages: 13

FILE S T .C . Summary 0pini n 2008-8 4 UNITED STATES TAX COUR T NDILE GEORGE NJENGE AND EKINDE SONE NZELLE RACHEL, Petitioners V . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 12793-065 . !Filed July 15, 2008 . Ndile George Njenge and Ekinde Sone Nzelle Rachel, pro sese . Margaret A . Martin , . for responden t GOEKE, Judge : This case was heard pursuant to the provisions .of section 7463 of the Internal Revenue Code in effect when the petition was filed . Pursuant to section 7463(b), th e decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any othe r case . SERVED JUL 1 2008 This case arises from a petition filed in response to a } notice of deficiency .l , , . Respondent disallowed $11,871 of the car and truck expens e II~ -deductions petitioner., claimed on their Schedule C, Profit or il l Loss From Business, and home mortgage interest and real estate tax deductions claimed on their Schedule A, ItemizedlIDeductions, for 2003 . After the audit, petitioners also claimed entitlement to additional unclaimed Schedule C expenses not represented on their 2003 Federal in cirome tax return, which were also disallowe d in the notice of defi ciency . On the record before us, we must decide petitioners' e ntitlement to,those deductions pursuant t o sections 162, 163 and it 164 .1 Backgroun d Some of the fact s have been stipulated, and the' stipulatio n of facts and the attached exhibits are incorporated herein by this reference . Atlklthe time the petition was filed,llpetitioners were residents of California . Petitioners claimed on Schedule A of their income tax retur n fort 2003 deductions for home mortgage interest and real estate taxes of $3,522 and $3,194, respectively, on property claimed a s 11 11 their residence (re s idence property) . Petitioners resided at the residence property for all of 2003 ; at that time title to th e 'Unless otherwise indicated, all section references are to the . Internal RevenulllCode, and all Rule references are to the Tax Court Rules of Practice and Procedure . - 3 - property was in the name of petitioners' son, Muabe Etuge,2 as was the mortgage on the property . Mrl. Etuge obtained a mortgage loan and took title to the house essentially to procure it for petitioners, who were unable to'secure such a loan because of . financial difficulties .3 Mortgage pa ments from 2001 until the- time of trial were made through CamrockGeneral Engineering Co ., of which petitioner Ekinde Rachel (Mrs . Rachel) was a registere d agent and Mr . Etuge was president . The mailing address of Camrock General Engineering Co. is that of the residenc e property . Petitioners also claimed ..a $15,722 loss on their Schedule C . The income and expenses'detailed on the Schedule C were those of a corporation known as NG&N Construction Co . (NG&N) ., of which Mrs . Rachel was ..both the .registered agent . and : president, related to work done under a contract . discussed infra . The mailing address of NG&N was also that of the-residence property . The-gross receipts listed on theSchedule C : consisted of a sum reportedly paid to petitioner Ndile Njenge (Mr . Njenge) by his sister, Ntube Alice Njenge, pursuant to a purported contract she .entered into with NG&N for work to be done on property which , 2Muabe Etuge held title to the property from 2001 to .2005, when petitioners assumed ownership . 'Petitioners had previously filedlfor bankruptcy and . received a discharge of-debtor in a ch', . 7 bankruptcy proceeding on Jan . 30, 2001 . - 4 11 a at that time, she owned (project property) . Toward the end of 2003,petitioners decided not to repair the property but instead to tear it down and build a new residence . In 2005 Ntube Alic e Njenge quitclaimed th' project property to petitioners in lieu o f paying the previously'agreed-upon amount specified in' the contract .' Petitioners took-title to the project property on May , 23, 2005 ., Petitioners clalimed Schedule C deductions of $15,767 relating to the car ckhd truck expenses resulting from the haulin g i p of materials and trash to and from the worksite at the projec t property . Petitioners lost the documents substantiating their I~ M purchase of two vehilcless and could provide only a registration card for one of those vehicles ;' consequently, depreciation an d mileage were estimated .using,the 30-percent .depreciation limit for,2003 and a mileage rate of .36 cents . Petitioners also=claimed entitlement to deductions fo r additional unclaimed,Schedule :C expenses paid from a Wells Farg o bank'account in the name of Mr . Njenge related to~tAe rebuilding J1 I 4The contract sppecified a payment of .$55,000 . Because of the additional workk-equired in tearing down and rebuilding the property, that total .was revised to $69,074, which petitioners claimed as income on ; their 2003 tax return . Because the property was later quitclaimed to petitioners in lieu of . payment, the $69,074 was never reliceived despite its being reported as income . 5One 1988 Dodge Dakota and one Chevrolet flatbdd truck . 'Valid from Apr . 30 ; 2005, to Apr . 30, . 2006 of the project property .°'- The additional expenses, . totaling $64,448 .96, were claimed aft-er responildent's audit ; the original amount deducted on'their Schedule C w 6.$75,292 . AS a . .result , petitioners now claim a $3,849 overpayment . Discussion Generally, taxpayers bear the burden of proving th e Commissioner's determinations are erroneous . ;Rule' .142(a) ; Welch v . Helvering 290 U .S . 111,=-115 (1933) . . . Deductions are'strictly a matter-of legislative grace, and taxpayers bear the-burden of proving they ..are entitled'toany claimed deductions .. .INDQPCO, ._ Inc . v .' Commissioner , 503'U .S . 79, 84 (1992) ;= New Colonial Ic e Co . v . Helverina , .292 U .S .'435, 440 (111934) Taxpayers are required to maintain records sufficient to substantiate th e amounts of the deductions claimed . The first .issue we must decide is whether-petitioners ar e entitled"to'claim Schedule'A,deductions for' the . mortgage . payments and real estate taxes paid on the residence property- Section- 163(a-)- generally' allows a deduction -for all interest paid -or, ., accrued within' the' taxable year . on indebtedness . .Section 163(h)(cid:127)(I), however, provides that'noncorpor .ate taxpayers . . generally cannot deduct personal interest .' Pursuant to',section 163(h)('2)(D) qualified residence interest is . excluded from the definition of personal . interest ; thus, deduction of qualified residence interest .within the meaning of section 163(h)(3) is allowed . Section 16 3 (h) (3) (A) defines the term "qualified residence interest" as interest paid or accrued on aelquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer . The aforementioned indebtedness must be an obligation of the taxpayer and not an obligation of,another . See Golder v . Commissioner , T .C . Memo . 1976-150, affd . 604 F .2d 3411 35 (9th Cir .' 1979) . Where the residence is occupied exclusively by th e I taxpayers and all mortgage payments are made by the axpayers , the indebtedness may be found to rest solely on those taxpayers, . See ;Uslu v . Commissiner , T .C . Memo . 1997-551 . Conversely, where title to the property and the debt to a third-party !lender for the mortgage are held by another, taxpayers' may not be found to hold the exclusive burden and benefit of the property and therefore are not entitled to a deduction . See Lori,a v . Commissioner , T .C . Memo . 1995-420 . . Where the taxpayers ar e equitable and beneficial owners of the property , enjoying exclusively the burden and benefit of the property,ipayments of interest are deductible . Uslu v . Commissioner , supra . Thus ., the point at issue is whether petitioners are the equitable an d beneficial owners of : ;the residence property . it M Respondent contends that because petitioners had no .-legal R II obligation to make mirtgage payments and did not hold legal title to the residence priperty, they are not entitled toljdeduct th e li -' 7 - mortgage payments . Respondent further contends that-petitioner s did not make any mortgage payments o n the residence property ; payments were made by Camrock Genera l Engineering ' C Petitioners assert . that while.. their son, Mr . Etuge, held- legal title to the residence property' petitioners owned Camrock General Engineering Co ., and-through the company they had assumed payment of the mortgage from its .outset,;..mortgage payments wer e Engineering ce ., :of which petitioners evidence shows the company was- not operating as-an active, business . . :Mr-. Njenge testified that the corporation,was merel y experimental, stating that-"the company actually=wasn't formed, " and they "wanted to try something new * * * but it just didn' t happen .." 'The company was suspended on October 1, 2003, and .Mr . Njenge . further testified that, ;, . as a. result, they were- "-left . with a fully-established bank .account" that Mrs .-Rachel used to pa y bills . See Damron v .-Commissioner, T C . Memo . 1983-451 . (finding " where the'taxpayer leaves-his employm6nt-with the intention of resuming-work in that trade or business at,,some indefinite time in the .,f'uture ; he(cid:127)is not considered toll .be "carrying on" the trade or .business during that period), .. Petitioners stated ; no intention of resuming the corporate activity in the future . r. The corporate bank account functioned, only as a personal account for 11 m petitioners, making the mortgage payments directly attributabl e - 8 - to them . Mr . Etuge did not reside at the residence property with petitioners, and petitioners paid for all- maintenance of, and taxes,;on, the property . Petitioners held exclusively the burde n and benefit of the pr''perty, using Mr .-Etuge's name solely t ii acquire a mortgage 1 an and continuously occupying the residence property from the outset of its acquisition . See Trans v . Commissioner , T .C . Mmo . 1999-233 ; Uslu v . Commissioner , supra . When petitioners moveL to the project property, theyi~began serving as landlords ;ifor the residence property--renting it ou t to one tenant and performing all services related toftha t tenancy . We find petitioners were equitable and beneficial owners of the property . Because it is .undisputed that the residenc e !~ I I property is a "qualified residence" under section 1613(h)(4)(A) , it E I we find petitioners are entitled to the claimed Schedule A III I deductions for the mortgage interest on the residence property . Section 164(a)- allows a taxpayer deductions for State and ,II it local income taxes,,l eal property taxes, and personal property taxes . As with mortgage interest, we have held that taxpayers who, do not have legal title to property may nevertheless deduct property taxes paid with respect to the property if the y establish equitable .iownership of the property . See' Trans v . 11 Commissioner , supra; Uslu v :- Commissioner , supra .., : Because we have found petitioners to be the equitable and beneficial-owner s of the' residence, property, we accordingly find petitioners=,are entitled to the claimed Schedule A deductions for-real estat e taxes on the residence property . The second'issue we must . decide is whether petitioners ar e entitled to deduct Schedule C car and truck expenses of $15,767-. ° Section 6001 requires taxpayers-to maintain records . sufficient to establish 'the ,amount of, their income and'-deductions ;- .we have--held that where the taxpayers'-testimony .i~ general, conclusory, o r uncorroborated, this Court is not-required'_to-accept'suc h testimony .as sustaining : the taxpayers burden, .of proof . . . See Lerch v .' Commissioner , T .C . Memo . 198 -295, affd . 877 F .2d :'62 4 (7th Cir . 1989) ; Geiger v . Commissioner , T .C .. Memo . 1969-159,. affd . 440 F .2d'688 (9th Cir . 1971) Section 274 further requires strict substantiation-by either adequate records or sufficient .- evidence of expenses with 'respect- to'listed ..property .as defined "in section 280F(d)(4), which includes the Dodge Dakota-in th e instant case .? 'The Chevrolet flatbed truck is excluded from the definition-'of listed-property under section-1 .27 4 5T (k)'(2),(ii) (J) Temporary Income Tax Regs . 50 Fed- .-Reg . 46033 (Nov . 6, 1985)- ;-however, (cid:127)petitioners have failed-to-substantiat e 'Listed property includes, but is not limited to, any :passenger automobile or any other property used as .a means o f transportation . Sec . 280F(d) (4) (A) (i) and (ii) - 10 - the deductions associated with this vehicle even in the absenc e of the requirements of section 274(d) . 'Petitioners have produced a vehicle registration for onl y one of the vehicles ii" question and could not provide proof of purchase or a mileage log for either vehicle ; all deductions wer e estimated . The estimation used for depreciation of the vehicle s included the additional 30 percent .allowed for new vehicles (fo r 2003), : but petitioners failed to present any purchase records o r other evidence to substantiate how long they had owned th e vehicles . Pet.itioners .also offered no corroboratingjNevidence for the mileage totals used in the calculation for Schedule C mileag e deductions . Therefore ., we find petitioners have failed to establish their entitlement to the claimed Schedule C deduction s for car and truck expenses . The final issue we must decide is whether petitioners are entitled to deductions for additional unclaimed Schedule C expenses paid from their Wells Fargo bank account . Pursuant to II ? section 162(a) business expenses can be deducted s o long as they primarily benefit the business and pursuant to Rule 1.42(a) ar e substantiated by adequate records . See Hradesky v . Commissioner , !I I 65 T .C . 87 (1975), a'ffd . 540 F .2d 821 (5th Cir . 1976) ; Alemasov. it v . Commissioner , T .C .,~~, Memo . 2007-130 . Pursuant to sectio n 262(a ), no deductions are allowed for personal , living, or famil y expenses . We. have found business activities engaged in primarily ICI - 1 1 for the personal benefit of the taxpayers do not constitute business expenses .°"See Baldwinv .~Commissioner , T .C . Memo . 2002- 162 . Petitioners have claimed entitlement .-to .deductions from unclaimed-additional expenses paid=frym a personal Wells Farg o bank account registered to Mr ." Njenge .Petitioners assert the expenses incurred are Schedule C .expenses related,to,,rebuilding the project property . However, while the project property wa s owned by°Mr . Njenge'ssister, she lived in New Orleans and di d not reside at the project property . All mortgage-documents concerning the project property were sent-Fto petitioners' residence property . Petitioners have-neither sold nor attempted to make any commercial-.returns on the project property since moving in-and have used it solely, as their personal residence . Petitioners have provided no ._evidence to substantiate a ,,claim, , that the expenses incurred in the construction of their residenc e on the project property were primarily for-the benefit of thei r business . Additionally, we have held that taxpayers must .be-'.'carryin g on" a trade or busi-ness, even though unemployed, at the time the expenditures are incurred . An important factor in determining whether taxpayers are-ina trade or business during a period .of , unemployment is whether the taxpayers' absence from the trade o r business is "t-emporary" or "indefinite" . See Furner v . I I - 12 - Commissioner , 393 F .2d 292 (7th Cir . 1968)(cid:127), affg . 47 ~,~T .C . 165 (1966) ; Haft v . Commissioner , 40 T .C . 2 (1963) ; Owen1v . Commissioner , 23 T .C!! 11 377 (1954) ; Damron v . Commissioner , supra . 11 In Owen , we found the taxpayer had not been carrying G on a trade or busines s as a lawye r where he provided no legal services f. during the taxable year and his only income for thatil.year wa s received from the Government in payment fo r his services rendered to the U .S . Department of Justice . III Conversely,,wher j the taxpayers are activepy seeking work for that trade or business and have an expectaton of income in the year at issue and subsequent years, orlwhere the taxpayers consider the business to be their full-time +P1oTment or devote substantial time and effort to that trade' or business, the taxpayers have been found to be carrying on such a trade or business . See Westphal v , T .C . Memo . 1994-537 ; Louismet v . Commissioner , T .C . . Commissioner . Memo . 1982-294 . ,During 2003 petitioners had only one. contract under NG&N fo r III 1~ ~~ the work being performed on Mr . Njenge' s sister's residence at the ' proj ect property . Njenge state d in his testimony that no work had been performe d up to the dat e o f trial since the completion of that 2 0 03 contract . All o f petitioners' income fo r the . 2003 tax year was derived from ea r wa Mr . Njenge's position as a civil engineer for the Government , and petitioners suspended NG&N in August of that 1 11 III . before the completion of the work on th e ti II, project property . Thus, we find that 13 carrying on a trade or business, but nsteadwere simply,using their existing NG&N bank account to pay expenses related to wor k performed on the project property . Lastly, the only financial records petitioners provided relating to the expenses at issue were copies of bank statements that reflect various payments to supply companies and othe r entities that . petitioners testified, in a somewhat conclusor y manner, were related to the work performed on the project property . We have held that such a thin showing of evidence is not sufficient to satisfy taxpayers' burden of substantiation . See Alemasov v . Commissioner , supra (finding credit card records in conjunction with the taxpayer's testimony were not adequat e substantiation of business expenses ) . Furthermore, petitioners admitted through testimony that some of the claimed expenses connected with that bank account were- strictly for personal item s and services, deductions for which arej disallowed pursuant t o section 262(a) . Accordingly, we hold that petitioners have failed to carry their, burden of establishing entitlement to . the additional Schedule C deductions . To reflect the foregoing, Decision will be-entered under Rule 155 .