TAX COURT OPINION

Case: Robert Earl & Marlene Schenter
Docket Number: 9027-12S
Judge: Guy
Opinion Type: bench
Filed: 05/14/2013
Pages: 9

CZ UNITED STATES TAX COURT WASHINGTON, DC 20217 ROBERT EARL & MARLENE SCHENTER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 9027-12S. ) ) ) ) OR D E R 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the abovecaptioned case before Special Trial Judge Daniel A. Guy, Jr., at Portland, Oregon, on April 17, 2013, 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 for respondent. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. May 14, 2013 SERVED May 14 2013 Capital Reporting Company 1 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. 2 April 17,· 2013 3 3 4 5 6 7 8 9 10 11 12 13 14 15 16 1,7 18 19 20 Robert Earl & Marlene Schenter v. Commissioner Docket No. 9027-12S 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. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. This behch opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Ruhe 152'of the Tax Court Rules.of Practice and Procedure. 21 Hereinafter in this bench opinion, section references 22 23 24 25 are to the Internal Revenue Code of 1986, as amended, in effect for 2009. . Petitioners resided in Oregon at the time the petition was filed. When this case was called at . 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 the calendar call for the Court's small tax case trial session in Portland, Oregon, on the morning of 3 April 15, 2013, Petitioners appeared pro se. 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Kimberly T. Packer appeared on behalf of Respondent. The parties submitted to the Court a Stipulation of Facts and a Supplemental Stipulation of Facts, with numerous exhibits attached. The Court set the case for trial to begin at 1:30 p.m. on April 15, 2013. When Petitioners did not appear for trial at the designated time, the Court contacted Petitioners by telephone and learned that they did not intend to return to Court for trial. The Court called the case, filed the aforementioned Stipulation of Facts and Supplemental Stipulation of Facts, and informed counsel for Respondent that the Court would deem the case submitted and decide the matter on the record presented, including the Stipulations of Facts. Petitioners filed a timely petition with the Court challenging a Notice of Deficiency in respect of their tax liability for 2009. The issues for decision are whether Petitioners are: (1) 22 Entitled to a deduction for legal expenses of $30,000 23 24 25 reported on Schedule C, Profit or Loss From Business, (2) Entitled to a deduction for bad debt for 2009, and (3) Liable for an accuracy-related penalty under 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 section 6662(a). Mr. Schenter is an accomplished nuclear physicist. He earned a bachelor of science degree from the California Institute of Technology in 1958 and a doctorate degree in nuclear physics from the 6 University of Colorado in 1963. Mr. Schenter is a 7 8 proponent of the use of radioactive isotopes in diagnostic and therapeutic medical applications. 9 During the period 2006 to 2009, Mr. Schenter served 10 11 12 13 14 15 16 17 18 19 20 21 22 23 as the Chief Science Officer for Advanced Medical Isotope Corporation (AMIC). The record includes an agreement executed by Mr. Schenter and Stanley and Roseanne Satz during 2004. The agreement refers to loans totaling $275,000 that Mr. Schenter made to Bio-Nucleonics, Inc. during the preceding five-year period and terms for the repayment of those loans in a lump sum due January 1, 2005, or in monthly payments of $6,957.50 for 48 consecutive months beginning January 1, 2005. The agreement provided that Mr. Schenter would receive various amounts of Bio-Nucleonics corporate stock in the event of delinquent loan payments. The record also includes a copy of an email from 24 Christopher Orand to Scott Schenter (apparently Mr. 25 Schenter's son) dated August 5, 2009, indicating that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 Bio-Nucleonics was planning a private sale of securities in the coming months with the aim of raising funds to be used to repay the debt owed to 4 Mr. Schenter. 5 6 7 8 9 10 11 12 13 14 15 The record includes two Bank of America funds transfer request and authorization forms. Although one form is illegible, the second form indicates that Mr. Schenter authorized a transfer of $25,000 from his Bank of America account to Howdy Kabrins in April 2007. Federal income tax deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer 16 must substantiate deductions claimed by keeping and 17 18 19 20 21 22 producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability. Section. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89 through 90 (1975), affirmed per curiam, 590 F.2d 821 (5th Cir.1976). A taxpayer claiming a deduction on a federal income tax return 23 must demonstrate that the deduction is allowable 24 25 pursuant to a statutory provision and must further substantiate that the expense to which the deduction 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 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 relates has been paid or incurred. Section 6001; Hradesky v. Commissioner, 65 T.C. at 89-90. Under section 162(a), a deduction is allowable for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The determination of whether·an expenditure satisfies the requirements for deductibility under section 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). A deduction normally is not available for personal, living, or family expenses. Section 262(a). Although Petitioners claimed a deduction for legal expenses of $30,000 on Schedule C, there's no evidence in the record, such as receipts or cancelled checks, showing that Petitioners incurred legal fees during 2009, the amount of such fees, or how those fees might relate to a specific trade or business. Accordingly, Respondent's determination disallowing the deduction is sustained. When Petitioners appeared at the Court's calendar call, counsel for Respondent informed the Court that Petitioners intended to present evidence showing that they were entitled to a deduction for a bad debt. Section 166 allows a deduction for any bad 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 8 9 debt that becomes worthless during the taxable year. A bonafide debt is a debt that arises from a debtor- creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. Section 1.166-1(c), Income Tax Regulations . Although the record suggests that Mr. Schenter was a creditor of Bio-Nucleonics, Inc. during the period in question, there's no evidence 10 that the debt became worthless during 2009. 11 Petitioners have failed to show that they are 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entitled to a deduction for a bad debt in any amount for the taxable year 2009. Section 6662 (a) and (b)(1) imposes a penalty equal to 20 percent of the amount of any underpayment attributable to negligence or disregard of rules or regulations. The term "negligence" includes any failure to make a reasonable attempt to comply with tax laws, and "disregard" includes any careless, reckless, or intentional disregard of rules or regulations. Section 6662(c). Negligence also includes any failure to keep adequate books and records or to substantiate items properly . Section 1. 6662-3 (b)(1), Income Tax Regulations . Section 6664 (c)(1) provides an exception to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 the imposition of the accuracy-r'elated penalty if the taxpayer estab'l-ishes that there was reasonable cause for, and the taxpayer acted in good faith with respect to, the underpayment. Se,ction 1.6664-4 (a), Income Tax Regulations. A dÊt'e.rminatìoh of whether the taxpayer acted with reasonable àause and in good faith is made on a case-by-case basis, taking into account the pertinent facts and circumstances. Section 1.6664-46)(1), Income Tax Regulatioùs. The most important factor is the extent of the taxpaye'r's effort to assess his or her proper tax liability for 12.. the year. Id. The underpayment of tax required to- 13 14 15 be show on Petitioners' 2009 return is attributable to Petitioners' failure to substantiate a'deduction for legal expenses reported on Schedule C. There is 16. no evidence in the record to show that Petitioners 17 18 19 20 21 22 23 24 25 acted with reasonable cause or in good faith in this case. Considering all the facts and circumstances, we conclude the Petitioners are liable for the accuracy-related penalty under section 6662(a). Consistent with the preceding discussion, a decision will be entered for Respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:27 a.m., the above- 866.488.DEPO www.CapitalReportingCompany.com 1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Capital Reporting Company entitled matter was concluded.) 10 866.488.DEPO www.CapitalReportingCompany.com