TAX COURT OPINION

Case: Kevin D. & Darla J. Carlson
Docket Number: 11368-09
Judge: Colvin
Opinion Type: bench
Filed: 07/19/2010
Pages: 11

UNITED STATES TAX COURT WASHINGTON; DC 2021 7 Kevin D . and Darla J . Carlson, Petitioners , v . ) Docket No''t . 11368-09 . COMMISSIONER OF INTERNAL REVENUE , Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s ORDERED that the Clerk of the Court shall transmit herewith to Petitioners and to respondent a copy of the pages of the transcript of the trial in the abov e case before Judge Holmes at St . Paul, Minnesota on June 8, 2010, containing his oral findings of fact and opinio n rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, a decision will be entered under Rul e 155 . (Signed ) Mark V. Holmes Judge Dated : Washington, D .C . July 19, 2010 SERVED Jul 28 2010 3 1 Bench Opinion by Judge Mark V . Holmes June 8, 201 0 2 Carlson v . Commissioner Docket No . 11368-09 3 The Court has decided to render ora l 4 findings of fact and opinion, and the following, 5 represents the Court's oral findings of fact and 6 opinion : 7 This bench opinion is made pursuant to the 8 authority granted by section 7459(b) of the Internal 9 Revenue Code of 1986, as amended, and Rule 152 of the 10 Tax Court's Rules of Practice and Procedure . 11 The Carlsons were both Minnesota residents 12 at the time they filed their petition . They reached a 13 stipulation with the Government which I admitted into 14 evidence . The years at issue are 2006 and 2007 . The 15 case was essentially a substantiation case wit h 16 several issues left unsettled . These were set out at 17 paragraphs 7, 9, and 12 of the parties' stipulation . 18 Some categories are common to both years, and some are 19 easier to decide than others . 20 Taking them in order -- well, actually, a 21 bit of background first . Mrs . Carlson operated a 22 home-based business selling jewelry for Premie r 23 Designs, Incorporated . Premier Designs, Incorporated, 24 is a multilevel sales organization, and Mrs . Carlson 25 developed many people to work downline from her i n Heritage Reporting Corporation (202) 628-4888 4 1 this structure, "downline" meaning in this case, those 2 who sold products to the actual consumer but had been 3 trained or somehow brought into the organization b y 4 Mrs . Carlson . Mrs . Carlson received a commission of 5 10 percent from the sales of those downline from her, 6 and that was the predominant source of her own income, 7 her husband being a wage employee and his income not 8 being at issue in this case . 9 Taking the contested issues in order, the 10 first was two categories called "downline cards and 11 gifts" and "incentives for downline ." Downline cards 12 and gifts, as Mrs . Carlson explained, were those cards 13 and gifts given to people downstream from her in the 14 multilevel sales marketing organization not ivied t o 15 specific sales incentives or presentation incentives ; 16 for instance, birthday cards, gifts on anniversaries 17 of employment, and such . 18 The Commissioner's main objection to the . 19 deductions in this category, which for 2006 amounted 20 to $8,329 for downline cards and gifts, and incentives 21 for downline of $8,665 in 2006 and $7,470 in 2007, was 22 that I .R .C . section 274(b)(1) limits the busines s 23 deduction for gifts to $25 per individual recipient . 24 However, gifts have a defined meaning in tax 25 law . If I may quote in Minnesota a case involving a Heritage Reporting Corporation (202) 628-4888 5 1 Green Bay Packer, the famous Paul V . Hornung : 2 "The types of motives or intentions of a 3 transferor are indicative of a gift transfe r 4 qualifying under section 102 . This analysis has been 5 concisely summarized in DeJong -- that's capital "D," 6 capital "J" -- v . Commissioner , 309 F .2d 373, 379 (9th 7 Circuit 1962), affirming 36 T .C . 896 (1961), as , 8 follows : 9 "'The value of a gift may be excluded from 10 gross income only if the gift proceeds from a detached 11 and disinterested generosity or out of affection , 12 admiration, charity or like .impulses and must b e 13 included if the claimed gift proceeds primarily from 14 the constraining force of any moral or legal duty or 15 from the incentive of anticipated benefit of a n 16 economic nature . 17 "'The determination of the gift issue, when 18 approached with the Supreme Court's Duberstein -- and 19 that's capital D-U-B-E-R-S-T-E-I-N -- rationale, is 20 essentially dependent upon "the application of the 21 fact-finding tribunal's experience with th e 22 mainsprings of human conduct to the totality of the 23 facts of each case ." Commissioner v . Duberstein , 363 24 U .S . 278, 289 (1960) .1- 25 The mainsprings of human conduct here wer e Heritage Reporting Corporation (202) 628-4888 6 1 generally business-oriented for Mrs . Carlson . He r 2 downstream cards and gifts were given not to friends 3 but to those who worked for her in some sense, though 4 they were probably independent contractors rather than 5 employees, the distinction in this context not making 6 any difference . The incentives for downline category 7 that she elaborated on yesterday were very 8 specifically meant as rewards for profit-makin g 9 activities . I find her testimony on this point to be 10 entirely credible . 11 And so I believe she substantiated and I 12 find that she substantiated the full amount wit h 13 receipts and other records and so grant her the full 14 amount that she sought of $8,329 in downline cards and 15 gifts for 2006 and $8,665 in downline incentives for 16 2006, $7,470 in downline incentives for 2007 . There 17 was an uncontested category in 2007 of downline cards 18 which the Government has already conceded . 19 Although these are more modest in amount, 20 the analysis is the essentially the same as that 21 involving Mr . Hornung nearly 50 years ago . Her motive 22 was commercial, and therefore the gifts are deductible 23 because they are not, in a tax law sense, gifts a t 24 all . 25 The second category is what Mrs . Carlson put Heritage Reporting Corporatio n (202) 628-4888 7 1 in her records as "Makeup," which consisted of four 2 different items : nails, hair, clothing, and then on e 3 which will be disallowed in its entirety for which she 4 had no receipts at all . The amounts at issue in this 5 category for 2006 were $3,873, of which the Government 6 conceded nothing, and $3,846, of which the Government 7 conceded 846 . As to the nails and hair, they wer e 8 obviously entirely personal expenses, and Mrs . Carlson 9 more or less conceded that fact . Those expenses will 10 be denied in full . 11 The clothing is a tiny bit different . The 12 test for the deduction of clothing is a three-part 13 test . First, to be deductible, the clothing must be 14 specifically worn as a condition of employment, it 15 must not be adaptable to general use as ordinary 16 street clothing, and it must not actually be used as 17 clothing . 18 Of course, most of the clothing expenses 19 that Mrs . Carlson is trying to deduct were very 20 definitely adapted to her general use, and, as she 21 admitted in testifying, she actually wore many o f 22 them . But again there was credible testimony that at 23 least some went to a mannequin, a mannequin that she 24 uses in her business as a demonstration model . She 25 even gave it a name : Stiffany, I believe . An d Heritage Reporting Corporation (202) 628-4888 8 1 clothing for this model, which is of a different size 2 and shape than Mrs . Carlson, would be deductibl e 3 because it's not even capable of use by her . The 4 problem of course is trying to distinguish between the 5 clothing that she would use herself when making 6 presentations for her sales force and clothing tha t 7 she simply demonstrated on the mannequin and could not 8 use for herself . 9 In 2007, the amount that the Government gave 10 was $846 out of $3,846, and that seems entirel y 11 reasonable and even generous to me . And so I will 12 affirm the Government's holding on that year . For 13 2006, however, the Government gave nothing on a 14 claimed deduction of 3,873 . I can't be extremel y 15 specific in what percentage Mrs . Carlson is entitled 16 to take, but the fault of not being able t o 17 distinguish between Stiffany the mannequin's clothing 18 expenses and her own is Ms . Carlson's own fault i n 19 this regard . And so I will grant only 10 percent of 20 her deduction of $3,873, or $387, as a clothin g 21 expense for 2006 . 22 The third category of contested expenses I 23 group together . These are miscellaneous, renewal fee, 24 and telephone expenses . In miscellaneous expenses , 25 the Government disallowed $160 of a $4,740 expense for Heritage Reporting Corporation (202) 628-4888 9 1 2006 ; renewal fees, the Government disallowed $351 out 2 of a $703 renewal fee expense ; and the Governmen t 3 disallowed $945 out of a $2,690 expense, all for 2006 . 4 The contested expense that remained for 2007 in this 5 cluster of categories was the telephone expense o f 6 $2,869, of which the Government disallowed 940 . As 7 Mrs . Carlson honestly conceded in her testimony, these 8 items were either duplicative or due to the somewha t 9 arcane rules on what phone expenses people are allowed 10 to deduct who run a business out of their home . I 11 therefore give no additional deduction in any of these 12 categories for either of the years at issue to th e 13 Carlsons . That means that the amount allowed is as 14 stated in the stipulation in that category called 15 "amount allowed . " 16 The fourth issue was Mr . Carlson's travel 17 expenses . He accompanied Mrs . Carlson to conventions 18 in 2006 and 2007 at her jewelry show in Dallas, Texas . 19 The amounts at issue in disallowed travel expenses 20 here were, for 2006, the amount claimed of $12,165 ; 21 after the stipulation was signed, $7,775 was left in 22 issue . And in 2007, the amount claimed was $13,366 ; 23 the amount at issue left after the stipulation wa s 24 $7,682 . 25 The adjustments were basically two . One was Heritage Reporting Corporatio n (202) 628-4888 1 0 1 a concededly personal vacation to Florida, which of 2 course will be disallowed in its entirety as a 3 personal expense . But there was no question in terms 4 of the substantiation of the amount or the actual 5 incurring of the payment on Mr . Carlson's expenses to 6 Dallas, which in each year were $228 in airfare an d 7 $130 in registration fees . The Government objected to 8 these deductions, relatively small in the overal l 9 category of travel expenses, on the grounds that Mr . 10 Carlson's travel expenses were to be disallowed as he 11 does not sell jewelry and is not an employee of Mrs . 12 Carlson's business . 13 The relevant regulation is 26 CFR section 14 1 .162-2(c) : 15 "Where a taxpayer's wife accompanies him on 16 a business trip, expenses attributable to her travel 17 are not deductible unless it can be adequately shown 18 that the wife's presence on the trip has a bona fide 19 business purpose . The wife's performance of som e 20 incidental service does not cause her expenses to 21 qualify as deductible business expenses . The same 22 rules apply to any other members of the taxpayer's 23 family who accompany him on such a trip . " 24 The archaic language in this regulatio n 25 indicates the age of it : it's over 50 years old . I'll Heritage Reporting Corporatio n (202) 628-4888 1 avoid any constitutional problems and substitut e 2 "husband" wherever "wife" occurs in the regulation, 3 but the principle is the same indeed . 4 What I need to look for here is a bona fide 5 business purpose, not a predominate purpose, and I do 6 find that Mr . Carlson, by his credible testimony and 7 his wife's credible testimony ; was not going down to 8 Dallas in July on a vacation, but rather was there to 9 learn how to support his wife's multilevel marketing 10 business . He took seminars ; he actually paid th e 11 registration fee to get in and take what he called the 12 men's course that was offered for half aaday there . 13 And I find that he was credible on this point, and so 14 will allow that relatively small part of the overall 15 travel expense that the Carlsons claimed . 16 That leaves only the fifth item, which is 17 penalties . The IRS asserted accuracy-relate d 18 penalties on every part' of the understatement of the 19 Carlsons for 2006 and 2007 . Of course, the penalties 20 drop away on those items on which I find .for th e 21 Petitioners in this case . 22 As to the makeup expenses -- that's the 23 hair, nails, clothing, and various expenses for which 24 Mrs . Carlson had no receipts --,these are inherently 25 personal, and I will uphold the penalty on that , Heritage Reporting Corporation (202) 628-4888 1 2 1 portion of the deficiency attributable to the 2 disallowance of these makeup expenses . 3 As to the miscellaneous, renewal fee, and 4 telephone expenses, which I am also disallowing, Mrs . 5 Carlson freely conceded them, but for the most part 6 these appear to be almost math-like errors of double 7 counting in her books and records . I do not find 8 those to be negligent ;-'they were just mistakes . As to 9 the telephone expenses, those rules are a bit arcane, 10 as I said, for people who are running a business out 11 of their home, and I likewise won't impose th e 12 negligence penalty on any deficiency attributable to 13 the overstatement of telephone expenses . 14 On the other hand, the travel expenses , 15 where the Carlsons attempted to deduct the cost of a 16 personal vacation to Florida, that again is s o 17 personal and so obviously nondeductible that I will 18 uphold the accuracy-related penalty on those expenses . 19 This concludes the Court's oral findings of 20 fact and opinion in this case . When the transcript 21 comes out, I will issue an order that sets'fo'rth a 22 deadline for computations under Rule 155 . 23 Thank you very much . 24 (Whereupon, at 9 :17 a .m ., the bench opinion 25 in the above-entitled matter was concluded . ) Heritage Reporting Corporation (202) 628-4888