TAX COURT OPINION

Case: Erskine Marvin Greene
Docket Number: 19676-07S
Judge: Colvin
Opinion Type: bench
Filed: 01/13/2009
Pages: 12

UNITED STATES TAX COUR T WASHINGTON , DC 2021 7 ERSKINE MARVIN GREENE, Petitione r v . ) Docket No . 19676-07S COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R CAL iaL. -jS . T . JUDGE FILE S 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 petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Special Trial Judge Robert N . Armen, Jr . at Chicago, Illinois, on December 10, 2008, containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, a , Decision will be, entered under Rule 155 . (Signed) Robert N . Armen, Jr. Special Trial Judg e Dated : Washington, D .C . January 13, 2009 SERVED JAN .1 4 2009 3 1 Bench Opinion by Special Trial Judge Robert N . Armen Jr . December 10, 200 8 3 Greene v . Commissioner Docket No . 19676-07 S 4 I . 5 THE COURT : THE COURT HAS DECIDED TO RENDER ORA L 6 FINDINGS OF FACT AND OPINION IN THIS CASE , AND THE FOLLOWING 7 REPRESENTS THE COURT ' S ORAL FINDINGS OF FACT AND OPINION . 8 THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED 9 UPON AS PRECEDENT IN ANY OTHER CASE . 10 II . 11 This proceeding was heard as a Small Tax Cas e 12 pursuant to the provisions of section 7463 of the Internal 13 Revenue Code of 1986 , as amended , and Rules 170 through 175 14 of the Tax Court Rules of Practice and Procedure . 15 III . 16 This bench opinion is made pursuant to th e 17 authority granted by section 7459 ( b) of the Internal Revenue 18 Code of 1986, as amended , and Rule 152 of the Tax Cour t 19 Rules of Practice and Procedure . 20 Hereinafter in this bench opinion , . and unless 21 otherwise indicated , all section numbers refer to th e 22 Internal Revenue Code , as amended and in effect for 2004 and 23 2005, the taxable years in issue , and all Rule numbers refer 24 to the Tax Court Rules of Practice and Procedure . 25 Heritage Reporting Corporation (202) 628-4888 4 1 IV . 2 Erskine Marvin Greene appeared on his own behalf . 3 Laurie A . Nasky appeared on behalf of Respondent . 4 V . 5 Respondent determined deficiencies in Petitioner's 6 Federal income taxes of $2,577 for 2004 and $4,738 for 2005 . 7 VI . 8 Respondent concedes that Petitioner is entitled to 9 additional deductions on Schedule E for depreciation o f 10 $3,892 for 2004 and $875 for 2005 . Respondent also concedes 11 that Petitioner is entitled to an additional deduction o n 12 Schedule E for painting expense in the amount of $375 for 13 2004 . Finally, Respondent concedes that Petitioner i s 14 entitled to additional deductions on Schedule E fo r 15 insurance expense of $147 for 2004 and the same amount for 16 2005 . 17 After Respondent's concessions, the issues for 18 decision are as follows : 19 (1) Whether Petitioner underreported rent s 20 received on his Schedule E for 2004 . We hold that 21 he did in the amount determined by Respondent in 22 the Notice of Deficiency . 23 (2) Whether Petitioner overstated deductions 24 for mortgage interest expense on Schedules A and E 25 . for 2004 and for 2005 . We hold chat he did to the Heritage Reporting Corporatio n (202) 628-4888 5 1 extent stated herein . 2 (3) Whether Petitioner is entitled t o 3 deductions for 'auto and travel' and for 'othe r 4 expense ' as claimed by him on Schedule E for 2005 . 5 We hold that he is not . 6 VII . 7 Some of the facts have been stipulated and they 8 are so found . 9 Petitioner resided in the State of Illinois at the 10 time that the petition was filed with the Court . 11 During 2004 and 2005, the taxable years in issue, 12 Petitioner owned residential real estate located on East 13 74th Place in Chicago, Illinois .. Petitioner lived on the 14 second floor of this property . Petitioner rented the first 15 floor to a family for use as their residence, and he rented 16 the basement to an unrelated individual for use as tha t 17 individual's residence . 18 During his working career, Petitioner was employed 19 by the United States Postal Service . It would appear that 20 he retired from the Postal Service sometime in 2005 . 21 During his employment with the Postal Service , 22 Petitioner would commute between his residence on East 74th 23 Place and the post office to which he was assigned . 24 Petitioner paid mortgage interest in 2004 in the 25 total amount of $6,808 . In 2005, Petitioner paid mortgage Heritage Reporting Corporatio n (202) 628-4888 6 1 interest of $11,794 . 2 Petitioner timely filed Federal income tax returns 3 for 2004 and 2005 . Because he is not at all familiar wit h 4 the laws governing the Federal income tax in general or the 5 preparation and filing of tax returns in particular , 6 Petitioner paid professionals at Jackson-Hewitt to prepare 7 his returns . Petitioner's 2004 Return . 8 On his return for 2004, Petitioner reported his 9 wages from the Postal Service . Petitioner attached to his 10 return a Schedule A ('Itemized Deductions'), on which h e 11 claimed several deductions, including one for home mortgage 12 interest of $6,808 . Petitioner also attached a Schedule E 13 ('Supplemental Income and Loss') to his return, on which he 14 reported rents received and expenses (includin g 15 depreciation) in respect of the property at East 74th Place . 16 In that regard, Petitioner reported rents received o f 17 $9,785, and he claimed deductions for a number of expenses, 18 including mortgage interest of $6,808 . Petitioner's 2005 19 Return . 20 On his return for 2005, Petitioner reported his 21 wages from the Postal Service as well as retiremen t 22 distributions . Petitioner attached to his return a Schedule 23 A, on which he claimed several deductions, including one for 24 home mortgage interest of $11,794 . Petitioner also attached 25 a Schedule E ('Supplemental Income and Loss') to his return, Heritage Reporting Corporatio n (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 on which he reported rents received and expenses in respec t of the property at East 74th Place . Petitioner claime d deductions for a number of expenses, including auto an d travel of $8,531 ; mortgage interest of $5,897 ; and other expenses of $4,500 . The specific nature of the 'othe r expenses' was not identified on either the Schedule E or i n the statement attached to the return . Respondent's Notic e of Deficiency . In the Notice of Deficiency, Respondent determine d that Petitioner underreported rents received for 2004 in th e amount of $3,715 . Respondent also determined tha t Petitioner overstated the deduction for mortgage interest i n both 2004 and 2005 . Finally, for 2005, Responden t disallowed deductions claimed on Schedule E for auto an d travel and for other expenses . VIII . Before turning to the substantive issues in thi s case, we should first identify several fundamenta l principles that inform our. disposition of those issues . First, as a general rule, the'Commissioner' s determinations are presumed correct, and the taxpayer bear s the burden of proving that those determinations ar e erroneous . Rule 142(a) . This principle was firml y established by the United States Supreme Court as early a s 1933 and has been reaffirmed by the Supreme Court a s Heritage Reporting Corporation (202) 628-4888 8 1 recently as 1992 . See INDOPCO, Inc . v . Commissioner , 503 2 U .S . 79, 84 (1992); Welch v . Helvering , 290 U .S . 111, 115 3 (1933) . 4 Although section 7491(a) may serve to shift the 5 burden of proof to the Commissioner under certai n 6 circumstances, that section has no application to th e 7 present case in view of the fact that : (1) Petitioner ha s 8 not asserted its applicability ; (2) Petitioner has failed to 9 demonstrate that he satisfied the conditions precedent for 10 the applicability of that section, see section 7491(a)(2) ; 11 and (3) Petitioner failed to introduce credible evidenc e 12 sufficient to establish a prima facie case, see section 13 7491(a)(1) . 14 Second, deductions are a matter of legislativ e 15 grace, and the taxpayer bears the burden of proving that he 16 or she is entitled to any deduction claimed . Rule 142(a) ; 17 18 19 Deputy v . du Pont , 308 U .S . 488, 493 (1940) ; New Colonial Ice Company v . Helvering , 292 U .S . 435, 440 (1934) ; INDOPCO, Inc . v . Commissioner , supra ; Welch v . Helvering , supra . 20 This includes the burden of substantiation . Hradesky v . 21 Commissioner , 65 T .C . 87, 90 (1975), affd . per curiam 540 22 F .2d 821 (5th Cir . 1976) . 23 Third, section 6001 and the regulation s 24 promulgated thereunder require taxpayers to maintain records 25 sufficient to permit verification of income and expenses . Heritage Reporting Corporation (202) 628-4888 9 1 See section 1 .6001-1(a) and (e), Income Tax Regs . As a 2 general rule, if, in the absence of such records, a taxpayer 3 provides sufficient evidence that the taxpayer has incurred 4 a deductible expense, but the taxpayer is unable t o 5 adequately substantiate the amount of the deduction to whic h 6 he or she is otherwise entitled, the Court may estimate the 7 amount of such expense and allow the deduction to tha t 8 extent . Cohan v . Commissioner , 39 F .2d 540, 543-544 (2 d 9 Cir . 1930) . However, in order for the Court to estimate the 10 amount of an expense, we must have some basis upon which an 11 estimate may be made . Vanicek v . Commissioner , 85 T .C . 731, 12 743 (1985) . Without such a basis, any allowance woul d 13 amount to unguided largesse . Williams v . United States , 245 14 F .2d 559, 560 (5th Cir . 1957) . Of course, certain expenses, 15 such as those for travel and with respect to listed property 16 such as an automobile, may not be estimated because of the 17 strict substantiation requirements-mandated by sectio n 18 274(d) . See Sanford v . Commissioner , 50 T .C . 823, 827 19 (1968), affd . per curiam 412 F .2d 201 (2d Cir . 1969) ; 20 section 1 .274-5T(a), Temporary Income Tax Regs . For such 21 expenses, only documentary substantiation will suffice . 22 IX . 23 With the foregoing principles firmly in mind, we 24 can quickly dispose of the substantive issues in this case . 25 Rental Income Issue . Heritage Reporting Corporation (202) 628-4888 1 0 1 On his Schedule E for 2004, Petitioner reported 2 rents received of $9,785 . Respondent determined tha t 3 Petitioner underreported this amount by $3,715 . The sum of 4 these two amounts is $13,500 . 5 At trial, the parties stipulated to a summar y 6 schedule prepared by Petitioner of rents received in 2004 . 7 This schedule shows that Petitioner received rents of more than $13,500 in 2004 . Respondent's counsel stated that an 9 increase to the adjustment in the Notice of Deficiency would 10 not be sought . Accordingly, based on Petitioner' s 11 admission, Respondent's determination in the Notice of 12 Deficiency on this matter is sustained . 13 Mortgage Interest Expense Issu e 14 Petitioner paid mortgage interest in 2004 in the 15 total amount of $6,808 . On his 2004 return, Petitione r 16 claimed a $6,808 deduction therefore -on Schedule A and 17 another $6,808 deduction therefor4'on Schedule E . 18 Obviously, such a duplication of the deduction i s 19 unwarranted . It is also clear that the total amoun t 20 actually paid, $6,808, must be allocated between Schedule A 21 and Schedule E . Based on Petitioner's description of the 22 property, a reasonable allocation between personal an d 23 business is 50-50 . Accordingly, we hold that Petitioner is 24 entitled to two deductions of $3,404 for mortgage interest 25 expense, one such deduction on Schedule A and the other suc h Heritage Reporting Corporation (202) 628-4888 11 1 deduction on Schedule E . Respondent's determination on this 2 matter is sustained to that extent . 3 In 2005, Petitioner paid mortgage interest o f 4 $11,794 . On his 2005 return, Petitioner claimed an $11,794 5 deduction thereforvon Schedule A and a $5,897 deductio n 6 therefor,E'_on Schedule E . This duplication is unwarranted . 7 Again, we allocate on a 50-50 basis . Accordingly, we hold 8 that Petitioner overstated his deduction for mortgag e 9 interest expense on his Schedule A for 2005 and that he is 10 only entitled to such a deduction of $5,897 . Respondent's 11 determination on this matter is sustained to that extent . 12 Auto and Travel Issu e 13 At trial, Petitioner described the $8,53 1 14 deduction on his 2005 Schedule E for auto and travel expense 15 as 'outrageous', and he blamed Jackson-Hewitt for scheduling 16 what he implies was an unwarranted deduction . No t 17 surprisingly, he offered no documentary evidence in support 18 thereof . This is sufficient evidence to sustai n 19 Respondent's determination on this matter . See section 20 274(d) . 21 However, we note additionally that the onl y 22 testimonial evidence offered by Petitioner related to this 23 matter demonstrates that the only 'auto and travel' expense 24 incurred by Petitioner in 2005 was for commuting between his 25 residence at East 74th Place and his place of employment , Heritage Reporting Corporation (202) 628-4888 12 1 i .e ., the post office to which he was assigned at the time . 2 However , as a matter of law, it is clear that a taxpayer's 3 cost of commuting between the taxpayer ' s personal residence 4 and place of employment is a nondeductible personal expense . 5 Commissioner v . Flowers , 326 U .S . 465, 473-474 (1946) ; 6 sections 1 .162-2(e), 1 .262-1(b)(5), Income Tax Regs . 7 In view of the foregoing, Respondent' s 8 determination on this matter is sustained . 9 Other Expense s 10 As previously stated, the specific nature of the 11 $4,500 deduction for 'other expenses' in 2005 was no t 12 identified on either the Schedule E or in a statement 13 attached to the return . At trial, Petitioner was unable to 14 say what the deduction represents, much less introduc e 15 either testimonial or documentary evidence in support 16 thereof . Under these circumstances, Respondent' s 17 determination on this matter must be sustained . 18 X . 19 At trial, Petitioner repeatedly emphasized that he 20 is not familiar with tax matters and that, for such reason, 21 he seeks out someone to prepare his returns for him . 22 Petitioner seemed to think that if errors were made on his 23 2004 and 2005 returns, the preparer should be responsible, 24 or at least partly responsible, for the consequences o f 25 those errors . Petitioner stated at trial that 'It's all Heritage Reporting Corporation (202) 628-4888 1 3 1 Jackson-Hewitt's fault' . 2 If a penalty is determined by the Commissioner, 3 for example, a penalty for failure to timely file a return 4 or an accuracy-related penalty based on negligence o r 5 substantial understatement of liability, reasonable reliance 6 on professional advice may serve as a defense to the 7 8 penalty . But reasonable reliance on professional advice is not a defense to liability for the tax itself . In othe r 9 words, the taxpayer remains liable to the Government for his 10 or her own tax liability . Whatever remedy the taxpayer may 11 have against the preparer does not lie in an action fo r 12 redetermination in this Court, where the only .parties are 13 the taxpayer and the Commissioner . In short, even if the 14 errors on Petitioner's returns were Jackson-Hewitt's , 15 Petitioner remains liable to the Government for Petitioner's 16 own tax . 17 XI . 18 In order to give effect to our disposition of the 19 disputed issues, as well as Respondent's concessions , 20 decision will be entered pursuant to Rule 155 . 21 XII . 22 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT 23 AND OPINION IN THIS CASE . 24 (Whereupon, at 9 :59 a .m ., the bench opinion in the 25 above-entitled matter was concluded . ) Heritage Reporting Corporation (202)'628-4888