TAX COURT OPINION

Case: Allan Morris Svela
Docket Number: 29056-21S
Judge: Choi
Opinion Type: bench
Filed: 12/05/2022
Pages: 18

Docket No.: 29056-21S United States Tax Court Washington, DC 20217 Page 1 of 1 ALLAN MORRIS SVELA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 29056-21S ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is hereby ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to the Commissioner a copy of the pages of the transcript of the trial in this case before the undersigned judge at the November 14, 2022, Los Angeles, California trial session containing the Court's 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 under Rule 155 in due course. (Signed) Eunkyong Choi (Signed) Eunkyong Choi Special Trial Judge Special Trial Judge Served 12/06/22 RECEIVED 11/29/22 IN THE UNITED STATES TAX COURT In the Matter of: ALLAN MORRIS SVELA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 29056-21S ) ) ) ) ) ) ) ) ) ) ) ) Pages: 1 through 15 Place: Los Angeles, California Date: November 16, 2022 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 1 IN THE UNITED STATES TAX COURT In the Matter of: ALLAN MORRIS SVELA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Docket No. 29056-21S ) ) ) ) ) ) ) ) ) ) ) ) Edward R. Roybal Center & Fed. Bldg. 255 East Temple Street Room 1167, 11th Floor Los Angeles, California 90012 November 16, 2022 The above-entitled matter came on for bench opinion, pursuant to notice at 1:01 p.m. HONORABLE EUNKYONG CHOI Special Trial Judge BEFORE: APPEARANCES: For the Petitioner: No Appearance For the Respondent: No Appearance 2 P R O C E E D I N G S (1:01 p.m.) THE CLERK: Recalling from the calendar docket number 29056-21S, Allan Morris Svela. (Whereupon, a bench opinion was rendered.) 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 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 3 Bench Opinion by Judge Eunkyong Choi November 16, 2022 Allan Morris Svela v. Commissioner Docket No. 29056-21S 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 case is a small tax case subject to the provisions of section 7463 and Rules 170 through 174. The oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times. This is a tax deficiency redetermination case. Petitioner challenges the Notice of Deficiency, dated June 8, 2021, in which respondent determined a deficiency in petitioner's federal income tax for taxable years 2017 and 2018 in the amounts of $8,172 and $8,085, respectively, and additions to tax pursuant to section 6662(a) in the amounts of $1,634 and $1,617, respectively. The deficiency stems from disallowed Schedule C expenses and a 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 disallowed Schedule A mortgage interest deduction. 4 Respondent concedes the mortgage interest deduction. Trial in this case was conducted during the Court's Los Angeles, CA trial session on November 14, 2022. Petitioner Svela represented himself. Respondent was represented by Brian Beddingfield. The Court admitted into evidence the parties' stipulation of facts along with the attached exhibits and also admitted into evidence Exhibits 1000-R, 1001-R, and 1002-R for respondent and Exhibit 1003-P for petitioner. On the evidence before us, and using the burden-of-proof principles explained below, the Court finds the following facts: FINDINGS OF FACT Petitioner resided in California at the time he filed his petition in this case. In 2017 and 2018, petitioner operated an identification (ID) card printing business for which he reported gross receipts of $2,170 and $1,7751, respectively, and expenses of $34,551 and $33,604, respectively. At all relevant times, petitioner was also a full-time employee of Johnson Controls, where he worked as a project engineer and earned a substantial salary. 1 Petitioner did not offer evidence showing that the business had gross receipts in these amounts. Petitioner's bank statements show that the only receipts he received for the business were from a customer called Namsa. The receipts from Namsa totaled $445. 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 Most of petitioner's business expenses for 5 taxable years 2017 and 2018 were for the race car he drove in Sports Car Club of America (SCCA) races. The race car expenses included storage for the race car, race registration fees, practice fees, car parts, hotel fees and meals when petitioner traveled to races, fuel for the race car, race car club membership fees, and insurance for the race car. The only expenses that were not for the race car were those for internet/fax, postage, and shipping, which totaled $1,220 and $1,408 for taxable years 2017 and 2018, respectively. Petitioner believes he is entitled to deduct his race car expenses because his ID card printing business sponsored the car to promote the business by placing two stickers with the business's name on the car. These stickers were among several other stickers on the car and, of all the stickers, were the least visible. The most visible sticker on the car was for Johnson Controls, petitioner's employer, who was not a sponsor-petitioner placed this sticker on the car because he needed a "big" sticker on the car but didn't have one. Further, petitioner believes he is entitled to deduct his racing expenses because they were necessary to promote petitioner's ID card printing business. Petitioner wanted to secure a contract to print SCCA's 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 annual membership ID cards, which he believed would 6 produce receipts of approximately $200,000 per year. During taxable years 2017 and 2018, petitioner's sole target for promoting the ID card printing business was the SCCA. Petitioner did not visit the SCCA in Kansas or contact the SCCA procurement division to attempt to secure the contract. Instead, he spoke with CCN Mark2 and learned that there is no bidding for the contract to print the SCCA membership cards and that he would therefore need access to the SCCA executives to request the contract. Petitioner believed that racing a car at SCCA races and winning those races was the only way to gain access to the SCCA executives and request the contract, although he was not told that racing cars was the only way to access the SCCA executives. Petitioner's ID card printing business also had a promotional tent at the races. Prior to attempting to procure the SCCA contract, petitioner promoted the business by "word of mouth." Petitioner has been interested in racing cars since he was a child. Prior to racing in the SCCA races, petitioner raced only go karts. However, he has always been interested in the racing business. Even though 2 It is not clear to the Court what CCN Mark's affiliation is with SSCA. 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 petitioner did not promote his ID card printing business 7 to SCCA after taxable year 2018 and closed the business in 2020, he continued to be involved in racing, as he bought a race car in 2021. Regarding the section 6662(a) penalty assessment, on August 31, 2020, the revenue agent's immediate supervisor signed a Civil Penalty Approval Form showing section 6662 penalties for the years in issue. That same day, a 30-day letter which included section 6662 penalties for the years in issue was sent to petitioner. OPINION Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving those determinations erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Regarding deductions for ordinary and necessary business expenses pursuant to section 162(a), the taxpayer bears the burden of proving that the expenses were of a business nature rather than personal. Id. Pursuant to section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. Petitioner does not contend, and the evidence does not establish, that the burden of proof shifts to respondent under section 7491(a) as to any issue of fact. Therefore, petitioner bears the burden of proof. 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 Deductions are a matter of legislative grace, 8 and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831- 832 (1965); sec. 1.6001-1(a), Income Tax Regs. Schedule C Expenses Section 162(a) allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. An expense is ordinary if commonly or frequently incurred in the trade or business of the taxpayer. Deputy v. du Pont, 308 U.S. 488, 495-496 (1940). An expense is necessary if it is appropriate and helpful in carrying on the trade or business of the taxpayer. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Welch v. Helvering, 290 U.S. at 113. The determination of whether an expenditure satisfies the requirements for deductibility under section 162 is a 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 question of fact. See Commissioner v. Heininger, 320 U.S. 9 at 475. The cost of race car sponsorship is an ordinary and necessary expense when the sponsorship is proximately related to the taxpayer's business. Gill v. Commissioner, T.C. Memo. 1994-92 (citing Henry v. Commissioner, 36 T.C. 879, 884 (1961)). A race car sponsorship is proximately related to a taxpayer's business if the sponsorship is reasonably calculated to advertise the business. Id. (citing Schulz v. Commissioner, 16 T.C. 401, 407 (1951) and Snow v. Commissioner, 31 T.C. 585, 592 (1958)). The claimed advertising purpose must not be merely a "thin cloak for the pursuit of a hobby" by the taxpayer. Id. (citing Rodgers Dairy Co. v. Commissioner, 14 T.C. 66, 73 (1950) and Challenge Manufacturing Co. v. Commissioner, 37 T.C. 650, 658-59 (1962)). Sponsoring a race car to advertise a taxpayer's business is more than just a hobby when the sponsorship primarily benefits the business and any benefit to the taxpayer is incidental. See Gill v. Commissioner, T.C. Memo. 1994-92. The taxpayer must prove that the business's purpose in sponsoring the taxpayer's racing activity was to gain a reasonable amount of publicity for the business. Lang Chevrolet Co. v. Commissioner, T.C. Memo. 1967-212 (citing Rodgers Dairy Co., 14 T.C. at 73). 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 The reasonableness of the relationship between 10 the amount expended for the racing activity compared to the amount of benefit reasonably calculated to be derived from racing is an objective indication of whether the purpose of the racing activity was to gain publicity for the business. Lang Chevrolet Co., T.C. Memo. 1967-212 (citing Sanitary Farms Dairy, Inc. v. Commissioner, 25 T.C. 463 (1955); and Rodgers Dairy Co., 14 T.C. at 73); see Brallier v. Commissioner, T.C. Memo. 1986-42. In Gill, because the taxpayer sponsored not only his own race cars, but also the race car of a third-party, the Court found that the taxpayer viewed sponsorship of race cars as a bona fide method for publicizing his business. T.C. Memo. 1994-92. The Court also emphasized the many ways in which the taxpayer's business benefited from the race car sponsorships. Id. The Court therefore found that the taxpayer's race car sponsorships were reasonably calculated to gain publicity for the taxpayer's business "that would allow it to distinguish itself from its competitors and that [the] sponsorship[s] [were] expected to provide [the taxpayer's business] with more than incidental benefits." Id. In Lang Chevrolet, the Court found that the business's sponsorship expenses were reasonable as they represented a small portion of the business's total 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 advertising expenses and because they were less than one 11 percent of the business's gross sales. T.C. Memo. 1967- 212. The Court further found that racing provided the business, which was a car dealership, with a gimmick that set it apart from other dealerships. Ultimately, the Court found that racing was an appropriate method for promoting the sale of cars. Petitioner has not shown that the costs his ID card printing business incurred for its sponsorship of petitioner's race car were ordinary and necessary expenses for the business. Unlike the taxpayer in Gill, petitioner has not shown that the sponsorship was proximately related to his business. Petitioner has not shown that the sponsorship was reasonably calculated to advertise his business. The stickers petitioner placed on the car for the ID card printing was the least conspicuous of all the various sponsorship stickers on petitioner's race car. Petitioner had other means of advertising his business to the SCCA, such as the promotion tent he set up at the races. Although petitioner chose to race a car to promote the business, he admits that he was not advised that the only way to promote his business to the SCCA was to race a 23 car. 24 25 Further, unlike the taxpayer in Lang Chevrolet, petitioner has not shown that the primary purpose of the 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 sponsorship was to benefit the business by gaining a 12 reasonable amount of publicity for the business. The amount of petitioner's expenses for the sponsorship are vastly disproportionate to petitioner's gross receipts for the business. Moreover, petitioner's business did not objectively benefit from sponsoring petitioner's race car as there is nothing in evidence to show that it benefited from the sponsorship in any way at all. Nothing in evidence shows that the ID card business's sponsorship of petitioner's race car resulted in publicity for the business. Ultimately, the benefit which petitioner purportedly intended to derive from the business's sponsorship of his race car-a contract to print SSCA's membership ID cards-was never realized. We find that the expenses petitioner's business incurred for sponsoring petitioner's race car were not ordinary and necessary business expenses. The expenses are not commonly or frequently incurred in the printing business and were not appropriate or helpful to petitioner's business. In each of the cases relating to a business's sponsorship of a race car, the purpose was to broadly advertise the business, not to do business with a single potential customer. It was not reasonable for petitioner's ID card printing business to incur such substantial expenses for the mere possibility of securing 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 a contract with SCCA. Only petitioner benefited from the 13 racing activity. It is clear from the fact that petitioner continued to be involved in racing, even though his business never benefited from the racing and even after he could no longer use the car to promote his business, that petitioner's racing activity was for his personal enjoyment. Section 6662(a) Penalties Section 6662(a) and (b)(2) impose a 20% penalty on an underpayment of tax if it is attributable to a substantial understatement of income tax. An understatement of income tax is "substantial" if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A). Respondent bears the burden of production with respect to a section 6662 penalty. See sec. 7491(c). This burden of production includes producing evidence that respondent has complied with the procedural requirements of section 6751(b). Frost v. Commissioner, 154 T.C. 23, 34 (2020). Once respondent meets this burden, the taxpayer must come forward with contrary evidence. Id. In Clay v. Commissioner, 152 T.C. 223, 249 (2019), we held that the "initial determination" occurs no later than "when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the 1 2 3 4 5 6 7 8 9 taxpayer that penalties will be proposed and giving the 14 taxpayer the right to appeal them with Appeals", and that a 30-day letter can serve as the initial determination for purposes of section 6751(b). See Clay v. Commissioner, 152 T.C. 223, 249 (2019). The requirements of section 6751(b) were met. Petitioner's understatement of income exceeds $5,000. Respondent has met respondent's burden of production by demonstrating a "substantial understatement 10 of income tax". 11 12 13 14 15 16 17 The accuracy-related penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that he or she had reasonable cause and acted in good faith. Sec. 6664(c)(1); see Higbee v. Commissioner, 116 T.C. at 446-447. Petitioner has not shown that he had reasonable cause. Accordingly, petitioner is liable for the section 6662 penalty for the 18 years in issue. 19 20 21 22 23 24 Respondent's Notice of Deficiency for taxable years 2017 and 2018 is sustained as it relates to the disallowance of petitioner's Schedule C expenses for petitioner's race car and the 6662 penalties. This concludes the Court's oral findings of fact and opinion in this case. A decision will be entered 25 under Rule 155. 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 (Whereupon, at 1:30 p.m., the above-entitled 15 matter was concluded.) CERTIFICATE OF TRANSCRIBER AND PROOFREADER 16 CASE NAME: Allan Morris Vela v. Commissioner DOCKET NO.: 29056-21S We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 16 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Jacqueline Denlinger on November 16, 2022 before the United States Tax Court at its session in Los Angeles, CA, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. _______________________________________________ Meribeth Ashley, CET-507 11/27/22 Transcriber Date _______________________________________________ Lori Rahtes, CDLT-108 11/27/22 Proofreader Date 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