TAX COURT OPINION

Case: Salim Issa Farha
Docket Number: 15686-16
Judge: Buch
Opinion Type: bench
Filed: 06/27/2017
Pages: 10

SEC UNITED STATES TAX COURT WASHINGTON, DC 20217 SALIM ISSA FARHA, Petitioner, v. ) ) ) ) Docket No. 15686-16. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this Order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Los Angeles, California, 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) Ronald L. Buch Judge Dated: Washington, D.C. June 27, 2017 SERVED Jun 28 2017 Capital Reporting Company 3 1 2 3 4 5 Bench Opinion by Judge Ronald L. Buch June 8, 2017 Salim Issa Farha v. Commissioner Docket No. 15686-16 THE COURT: The following represents the 6 Court's oral findings of fact and opinion. The oral 7 8 9 10 11 12 findings of fact and opinion may not be relied upon as precedent in any other case. The opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax Codc Rules of Practice and Procedure. Any section references refer to the Internal revenue Code or the Treasury regulations in 13. effect during the year at issue, and Rule references 14 15 16 17 18 19 20 21 22 23 24 25 are to the Tax Court Rules of Practice and Procedure. The items at issue in this case are various Schedule C deductions claimed by Mr. Farha in connection with-is work as a realtor. The Commissioner allowed a substantial portion of the claimed expenses. Because Mr. Farha failed to show that he was entitled to deduct more than the Commissioner already allowed, we will enter decision for the Commissioner. Background During 2012 and 2013, the years in issue, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 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 Salim Farha was a relator. Mr. Farha presented a list showing the properties he sold, which indicated that all of the properties he sold were in the vicinity of Merced, California. Whenever he sold a property, he received a commission based on the sale price. His firm deducted from his commissions "errors and omissions" insurance premiums. The list of properties sold also showed in the insurance premiums deducted from his commissions. Mr. Farha drove a vehicle that he primarily used for his business. Mr. Farha testified -ehe he used one vehicle exclusively for business purposes, and he offered a log showing the business use of that automobile. His log was contradicted by contemporaneous repair receipts (which conflicted as to the mileage of the vehicle on given dates) and his tax return (which reported partial personal use of the automobile). During the years in issue, Mr. Farha traveled to locations of questionable relevance to his business as a realtor in Merced. He introduced evidence of a trip to San Diego. His evidence included airfare and hotel receipts, as well as the rental of a Ferrari. Mr. Farha also provided evidence of travel to Chicago, Illinois and Las 866.488.DEPO www.capitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 Vegas, Nevada. For each of these three trips, Mr. Farha did not recall the name of the client and Mr. Farha did not sell any properties to client. Each year, Mr. Farha timely filed a Form 1040, U.S. Individual Income Tax Return. In 2012, 6 Mr. Farha filed his Form 1040 and included a Schedule 7 8 9 10 11 12 13 14 15 16 17 18 19 20 C, Profit or Loss from Business, for his real estate agent business. On the Schedule C, Mr. Farha reported, among other things, car and truck expenses of $21,997, travel expenses of $1,000, and insurance expenses (other than health) of $4,800. In 2013, Mr. Farha filed his Form 1040 and included a Schedule C for his real estate agent business. On the Schedule C, Mr. Farha reported, among other things, car and truck expenses of $26,527, travel expenses of $4,200, and insurance expenses of $4,805. He did not report any income from Fund I Independent Foreclosure Review. Fund I Independent Foreclosure Review submitted to the Commissioner a Form 1099-MISC, 21 Miscellaneous Income, reporting that Mr. Farha 22 23 24 25 received $6,000 in 2013. Mr. Farha testified that he received this as compensation because a financial institution had improperly foreclosed on a property he had owned. He did not offer any reason for why 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 the item is not taxable, other than to say that he did not recall receiving the Form 1099. On April 27, 2016, the Commissioner issued a notice of deficiency determining ¿H: $2,760 and a $2,965 deficiency for 2012 and 2013, respectively. For 2012, the Commissioner disallowed only a portion of the Schedule C expenses: car and truck expenses of $5,449, travel expenses of $500, and insurance expenses of $875. Likewise, for 2013, the Commissioner disallowed only a portion of Schedule C expenses: car and truck expenses of $6,632, travel expenses of $3,465, and insurance expenses of $2,615. The Commissioner also determined that Mr. Farha had unreported income of $6,000. The Commissioner made relative correlative adjustments for each year. While residing in California, Mr. Farha timely petitioned. In his petition, he disputed the determinations made in the notice of deficiency. We must decide whether Mr. Farha received unreported income and whether he is entitled to additional expenses beyond those allowed by the Commissioner. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Discussion 25 In general, the Commissioner's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 determination in the notice of deficiency are presumed correct, and the taxpayer bears the burden of proving an error. Rule 142(a); Welch v. Helnerin, 290 U.S. 111, 115 (1933). In limited situations, the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established, therefore, the burden of proof remains on Mr. Farha. 1 2 3 4 5 6 7 8 9 10 Unreported Income 11 12 13 14 15 Where the Commissioner determines that a taxpayer received unreported income, he must "offer some substantive evidence showing that the taxpayer received income from the charged activities" before he may rely upon a presumption of correctness. 16 Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th 17 Cir. 1979), rev'g -4% T.C. 672 (1977). Mr. Farha does 18 19 20 21 22 23 not dispute receiving this income. Moreover, the Commissioner submitted a transcript of account and a Form 1099-MISC from Fund I Independent Foreclosure Review showing that Mr. Farha received income in the amount of $6,000. We find that the Commissioner had introduced sufficient evidence to connect Mr. Farha 24 with the income-producing activity. 25 Mr. Farha has not met his burden to show 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 that the income is not taxable. He did not provide any documents or testimony that the $6,000 amount should not be included in his income. He alleges that 4ëe did not receive a Form 1099-MISC. However, section 61(a) provides that gross income includes all income from whatever source derived; this inclusion of income is not dependent on receiving an information return. Accordingly, we sustain the 9 Commissioner's determination that Mr. Farha had 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 unreported income from Fund I Independent Foreclosure Review in the amount of $6,000. Deductions Income tax deductions are considered a "matter of legislative grace," and the taxpayers bear the burden of proving that they are entitled to any deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers can deduct "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Sec. 162(a). However, they are not allowed deductions for personal, living, or family expenses except where specifically allowed in the Code. Sec. 262(a). Taxpayers are required to maintain 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 sufficient records to "show whether or not such person is liable for tax". Sec 6001. These records 3 must be retained for as long as the contents may 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 become material and must be kept available for inspection. Sec. 1.6001-l(e), Income Tax Regs. Certain expenses require strict substantiation under section 274(d). Such expenses include those related to travel, meals and entertainment, gifts, and listed property under section 280F(d)(4). For the years at issue, listed property included, among other things, passenger automobiles and other property used as a means of transportation. Sec. 280F(d)(4). Under the strict substantiation rules the taxpayer must have adequate records or sufficient evidence to corroborate (1) the amount of the expense, (2) the time and place the expense was incurred, (3) the business purpose of the expense, and (4) the business relationship of the taxpayer to any other benefitted by the expense. A Sec. 274(d). To substantiate by adequate records, the taxpayer must maintain an account book, a log, a diary, or a similar record and documentary evidence to establish each element of an expense. Sec. 1.274- 5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 In some instances, the Court may approximate the amount if the taxpayer can establish a deducible expense but cannot substantiate the precise amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d. Cir. 1930). But the Court is precluded from making estimates of expenses that are subject to section 274(d) strict substantiation rules. Deely v. Commissioner, 73 T.C. 1081, 1101 (1980); sec. 1.274- ST(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Mr. Farha failed to show that he incurred deductible Schedule C expenses in excess of what the Commissioner already allowed for each year. With one exception, all of the expenses at issue are subject to strict substantiation. The exception is in the errors and omissions insurance, but the Commissioner allowed insurance expenses in excess of that amount. The remaining insurance expense was related to Mr. Farha's automobile, which brings it within the section 274(d) limitations. As for the expenses claimed by Mr. Farha, his detailed log of automobile travel was contradicted by his automobile repair records. And while Mr. Farha no doubt traveled by automobile in his work as a realtor, we cannot conclude on the record before us that he travelled in 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 excess of the amount of travel expenses already allowed by the Commissioner. In contrast to his automobile travel log, 4 Mr. Earha's other travel suffered from lack of detail 11 regarding the business purpose of his travel. His trips to Chicago, San Diego, and Las Vegas appear to be personal travel. His inability to recollect, for example, what client he was trying to impress by renting a Ferrari or for whom he made a special trip to Chicago strains credibility. In sum, we sustain the Commissioner determination that Mr. Farha may not deduct travel expenses, car and truck expenses, and insurance expenses in excess of the amount already allowed by the Commissioner. Decision for respondent. (Whereupon, at 9:16a.m., the above- entitled matter was concluded.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com