TAX COURT OPINION

Case: Bridget Wanzo
Docket Number: 31242-09
Judge: Goeke
Opinion Type: bench
Filed: 04/12/2011
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 BRIDGET WANZO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 31242-09. 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 the transcript Petitioner and to respondent a copy of of the trial in the above case before Judge Joseph Robert Goeke at San Francisco, California, on March 18, 2011, containing his oral findings of the trial. fact and opinion rendered at the pages of the conclusion of In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. April 12, 2011 $6RVE0 APR 1 4 2011 | Bench Opinion by Judge Joseph Robert Goeke March 18, 2011 Bridget Wanzo v. Commissioner Docket No. 31242-09 3 . 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. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. The Court renders this opinion pursuant to . Internal Revenue Code section 7459(b) and Rule 152 of the Tax Court Rules of Practice & Procedure. After this point, section references are to the Internal Revenue Code and rule references are to the Tax Court Rules of Practice & Procedure. This is a deficiency case in which Respondent issued a notice of deficiency for income tax for the year 2006. Respondent also included in the notice of deficiency additions to tax under section 6651(a) (1) and section 6662(a). The Petitioner filed a timely petition and the Court has jurisdiction to review the deficiency determinations for the year 2006. The Commissioner asserts a deficiency of $44,036 in tax and $12,599.25 as addition to tax under section 6651(a) (1), and $8807.20 as an addition to tax under section 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 Heritage Reporting Corporation (202) 628-4888 4 6662(a). The Petitioner has the burden of proof under section 7491 and Rule 142. At the time she filed her petition in this case, the Petitioner resided in California. ' During 2006 Petitioner ran a day-care business in Oakland, California. Her business was very successful due to her hard work and her personal attention to the needs of the children she cared for and the parents of those children. She filed her federal income tax return for 2006 in October of 2007. The return was filed delinquently because the Petitioner relied upon her return preparer and her return preparer's assurance that the return period would bþ extended. On her 2006 return as filed, incorrect deductions were claimed by Petitioner's return preparer. Petitioner now acknowledges this and caused he submission of a Éorm C o 1040-X for the year 2006. This 1040-X femm was not filed by Respondent but was admitted as an exhibit at trial and was the basis for Petitioner's arguments as to the proper amount of deductions for the year 2006. At trial, the Petitioner testified credibly about the expenses she incurred and the operation of her business. We begin our analysis with the first adjustment made by Respondent, which was to remove $186,525 which Petitioner had reported as wages and have that amount 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 Heritage Reporting Corporation (202) 628-4888 5 correctly deemed to be self-employment income associated with Petitioner's operations öf the day-care business. We find Respondent's determination in this regard to be correct, and Petitioner concedes this adjustment as part of the changes to her income tax return On the rm 1040-X, submitted as Exhibit 3-J at trial. We will analyze the correct amount of Petitioner's taxable income for.2006 by reference to the orm 1040-X. Because of the changes which will be necessary both to Petitioner's origina filed return and to the determinations Respondent has made in the notice of deficiency, a Rule 155 computation will be necessary in this case. That computation must be done in accord with our analysis, which will begin with the 1040-X filed by Petitioner in the context of the Schedule C expenses shown on that schedule, fM040-X. Any expenses claimed on the original return which are not addressed in the context of the 4eem Schedule C associated with Exhibit 3-J will be disallowed. Addressing the expenses reflected on the Schedule C, we begin with advertising expense claimed in the amount of $ 200. Based upon Petitioner's testimony and the stipulated exhibits submitted by Petitioner, we determin,e that the correct amount of advertising expense in 2006 em $928. 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 Heritage Reporting Corporation (202) 628-4888 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 The next expense claimed is automobile mileage expense, in the amount of $ 936. This expense is associated with two vehicles which Petitioner credibly testified were used primarily in her business. We find that the primary use of these vehicles was business, in accord with Treasury reg. section 1.274-2(e) (4) (ii) (A). We also find that the mileage shown on the amended orm 1040-X submitted with respect to the 2002 Chevy Suburban and the 1995 Nissan Quest minivan are correct business miles, and that the deductions claimed with respect to these two vehicles, in the amount of $3936, is correct. The next line item reflects labor expense in the amount of $37,000. Based upon the checks submitted by the Petitioner, which were exhibits at trial, and her testimony, we find the entire amount of this item to be substantiated 16 a and that Petitioner is entitled to $37,000 in labor expense 17 18 19 20 21 22 23 24 25 as a Schedule C expense in 2006. The next item claimed is $29,70-7 -in depreciation expense, which relates to Petitioner's election under section 179 to fully expense the cost of a GMC 1500 extended-cab vehicle. Petitioner also claimed depreciation in the amount of $1630 associated with the same vehicle in 2006, reflecting that only one half of the cost of the vehicle should be depreciated, as the vehicle was only used 50 percent for business. Heritage Reporting Corporation (202) 628-4888 7 We find the election to treat the vehicle as a section 179 expense in 2006 to be inconsistent with the operation of section 179, because Petitioner has not established that the vehicle was used 100 percent in her business. We do, however, find that 50 percent of the depreciation on the vehicle is allowable, and therefore of the $29,707 claimed as depreciation on line 13 of Schedule C of the Óorm 1040-X, we determine only $ 630 As deductible and that the remaining amount is not deductible in 2006. With respect to the claimed insurance expense of $)250, we find that Petitioner has substantiated this expense and that it is allowable in full. We also uphold the office expense, taxes and license expenses, deductible meals and entertainment expense9 and other expenses reflected on Schedule C of Exhibit 3-J in the record of trial, in the stipulated 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 - exhibits. 18 19 20 21 22 23 24 25 Petitioner has also claimed on line 30 of Schedule C a $54,492 expense for business use of home. Petitioner credibly testified that she used her home as the location of the day-care business activities. On form 8829 associated with Exhibit 3-J, the specific expenses associated with the business use of the home are listed. With respect to those expenses, we find as follows: The home insurance in the amount of $3135 is Heritage Reporting Corporation (202) 628-4888 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 8 sustained. The repairs and maintenance expense in the amount of $7835 is sustained. The utility expense in the amount of $3820 is also sustained. Petitioner asserted a 100-percent business use of the home. We find that the correct amount of business use is 90 pércent, based upon her testimony and the record of trial. We also find that the deductible mortgage interest real estate taxes, are both sustained in the amounts reflected on lines 10 and 11 of orm 8829 of Exhibit 3-J. We also further find that the depreciation claimed on line 29 for use of the home in the amount of $3322 is sustained. Given our determination about the business percentage use of the home, the amount shown on orm 8829 will have to be recomputed in the s ) 155 computation. The parties entered into a stipulation of settled issues in this case in which the Petitioner stipulated that there were no deductible legal and professional expenses, no deductible travel expenses, and no deductible rent or lease of vehicle, machinery, and equipment expenses in 2006. Our determinations are in accord with that stipulation of Heritage Reporting Corporation (202) 628-4888 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 9 settled issues. The remaining two issues are whether Petitioner is liable for the additions to tax. We will first address the addition to tax under section 6662(a). Section 6662(a) imposes an addition to tax in the amount of 20 percent of the portion-to which the underpayment of tax is either due to negligence or substantial understatement of income tax, as provided in section 6662(b). Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would exercise under the circumstances. Anderson v. Commissioner, 62 F.3d 1266, 1271 (10th Cir 1985), affg. T.C. Memo 1993-607; and Neelv v. Commissioner, 85 T.C. 934, 947 (1985). The focus of the inquiry is the reasonableness of the taxpayer's actions in view of the taxpayer's experience, the nature of the activity, and the taxpayer's adtions in connection with the activity. Henry Swartz Corporation v. Commissioner, 60 T.C. 728 (1973). When considering the negligence addition, we evaluate the particular facts of each case, judging the relative sophistication of the taxpayer as well as the manner in which the taxpayer approached the activity. The inquiry into a taxpayer's negligence is highly individualized and turns on all the surrounding Heritage Reporting Corporation (202) 628-4888 | 1 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 10 circumstances, including the taxpayer's education, intellect, and sophistication. Merino v. Commissioner, 196 F.3d 147, 154 (3rd Cir. 1999). Whether a taxpayer is negligent in claiming a tax deduction depends on both the legitimacy of the underlying deduction and the due care in claiming the deduction. Sax v. Commissioner, 82 F.3d 918, 920 (9th Cir. 1996), affg. T.C. Memo 1994-217. A taxpayer may avoid liability for negligence penalties under certain circumstances if the taxpayer reasonably relied upon professional advice. In the present situation, it is clear that Petitioner's return preparer was not competent to do her returns. But we consider Petitioner's circumstances in light of her self-made business and the tremendous personal burden she bore in running that business. We note that Petitioner's business was all-consuming and involved her activities seven days a week, with the pressures of the responsibility for numerous children who were at her home or subject to transportation requirements and other responsibilities associated with her business activities. She also engaged in creative marketing activities and other efforts to promote her business and attract customers. Given all these responsibilities, in her unique situations, given her educational background and her Heritage Reporting Corporation (202) 628-4888 11 personal circumstances, we find that Petitioner's efforts to submit her return through the return preparer who originally prepared her 2006 return, were reasonable for her unique circumstances. And in accord with that, we find that she is not subject to the addition to tax for negligence in the amount of $§ 807.20 for the year 2006. We next turn to the addition to tax associated with Petitioner's delinquent filing of her federal income tax return under section 6651(a) (1). We find that Respondent has borne the burden of production in establishing that the return was filed delinquently and that Petitioner was required to file a return. Given this determination, the burden falls on the Petitioner to establish that she had a reasonable cause for her delinquent filing of her 2006 federal income tax return. We carefully considered Petitioner's testimony relative to the circumstances which led to the delinquent filing of the return, and her anticipation that her return preparer had sought an extension of the return due date. We realize that Petitioner's efforts in this regard were minimal. However, taking into account the circumstances we described in the context of the negligence penalty, we find that the Petitioner had reasonable cause for the failure to timely file her 2006 federal income tax return, and we find 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 Heritage Reporting Corporation (202) 628-4888 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 12 that the addition to tax under se.ction 6651(a) (1) is not applicable. However, we would advise the Petitioner that in the future, having had this experience of federal tax litigation, she will be held more accountable and her circumstances as far as the sophistication of her tax knowledge have changed from year 2006, which is the basis for our determination in this case. As stated previously, the Court's determinations in this case will require a recomputation of Petitioner's tax liability in accord with Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:41 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888