TAX COURT OPINION

Case: John Walter Owen
Docket Number: 8608-08
Judge: Colvin
Opinion Type: bench
Filed: 07/02/2010
Pages: 12

UNITED STATES TAX COUR T WASHINGTON, DC 2021 7 JOHN WALTER OWEN , Petitione r V . Docket No . 8608-08 . COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R 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 in the above case before Judge L . Paige Marvel at Memphis, Tennessee, on June 24, 2010, containing her oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155 . (Signed) L. Paige Marvel Judge Dated : Washington, D .C . July 2, 2010 SERVED JUL - 6 2010 3 1 Bench Opinion by Judge L . Paige Marvel June 24, 201 0 2 John Walter Owen v . Commissioner Docket No . 8608-08 3 THE COURT : THE COURT HAS DECIDED TO RENDER 4 ORAL FINDINGS OF FACT AND OPINION IN THIS CASE, AN D 5 THE FOLLOWING REPRESENTS THE COURT ' S ORAL FINDINGS OF 6 FACT AND OPINION . THE ORAL FINDINGS OF FACT AND 7 OPINION (HEREINAFTER BENCH OPINION ) SHALL NOT BE 8 RELIED UPON AS PRECEDENT IN ANY OTHER CASE . 9 This Bench Opinion is rendered pursuant t o 10 section 7459 ( b), Internal Revenue Code , and Rule 152, 11 Tax Court Rules of Practice and Procedure . Unless 12 otherwise indicated , all section references made i n 13 this Bench Opinion are to the Internal Revenue Code in 14 effect for the relevant period and all Rule references 15 are to the Tax Court Rules of Practice and Procedure . 16 By statutory notice of deficiency dated January 17 7, 2008, respondent determined an income ta x 18 deficiency of $8,639 and additions to tax unde r 19 sections 6651 ( a)(1) and (2), and 6654 with respect to 20 petitioner's 2003 taxable year . Petitioner timely 21 contested respondent ' s determinations by filing a 22 petition in this Court . On the date petitioner filed 23 his petition , he resided in Tennessee . Any appeal in 24 this case will lie to the United States Court o f 25 Appeals for the Sixth Circuit absent a stipulation t o 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 4 the contrary . Sec . 7482 (b) (1) . After concessions, the issues for decision ar e (1) whether petitioner is entitled to deduct variou s business expenses associated with his sol e proprietorship in 2003, and (2) whether petitioner i s liable for additions to tax pursuant to section 6651(a)(1) and (2) . Petitioner concedes that he had reportable gros s income in 2003 and that such income is subject to the self-employment tax imposed by section 1401(a) and (b) . Respondent concedes that petitioner is entitle d to deduct costs of goods sold in computing his gros s income and that petitioner is not liable for a n addition to tax pursuant to section 6654 . A trial was held on June 21, 2010, in Memphis, TN at which petitioner testified . Respondent wa s represented by Caroline R . Krivacka . FINDINGS OF FAC T Some of the relevant facts have been stipulated . The stipulation of facts is incorporated herein b y this reference . During 2003-petitioner conducted a busines s activity known as Real World Audio Video as a sol e proprietorship . Although petitioner was attempting t o acquire the right to sell certain lines of video an d Heritage Reporting Corporation (202) 628-4888 5 1 audio equipment during 2003 , he had no such rights 2 during 2003 and never was able to acquire them . 3 Petitioner's business activity during 2003 was limited 4 to buying certain merchandise from retailers and 5 reselling the merchandise to Hilton Hotels Corp . ,jkec.k ~.PM 6 e Paid Real World Audio Vide o t-P en 7 $18,098 . 90 in 2003 . Petitioner had a total cost of 8 goods sold for 2003 of $ 11,922 . 9 Petitioner did not timely file a Federal income 10 tax return for 2003 . (Although petitioner filed a 11 2003 return on June 19 , 2010, the filing was made 12 after respondent had already issued the notice o f 13 deficiency and just before the trial in this cas e 14 commenced .) On October 1, 2007, respondent prepared a 15 Substitute for Return ( SFR) for 2003 under sectio n 16 6020 ( b) . The SFR and the notice of deficiency reflect 17 the double inclusion of the income from Hilton Hotels 18 Corp . Respondent conceded in his pretrial memorandum 19 that the income was duplicated in the notice o f 20 deficiency and that the correct amount of petitioner's 21 self-employment gross receipts for 2003 is $18,098 .90 . 22 At trial petitioner contended that he wa s 23 entitled to certain business expenses , such as a home 24 office deduction that he calculated should be 2 4 25 percent of his housing costs including electricity , Heritage Reporting Corporation (202) 628-4888 6 1 rent and related items, a deduction for high-speed 2 internet that he calculated at 50 percent of hi s 3 monthly cost, miscellaneous office expenses, a land- 4 line phone that petitioner maintained was solely for 5 business, and various transportation expenses . 6 Petitioner conceded that he did not maintain th e 7 records to support a deduction of transportation costs 8 that he claims he incurred during 2003, and he did not 9 produce documents to substantiate most of th e 10 deductions he was claiming at trial . Althoug h 11 petitioner testified that he used two areas of his 12 home for business, he later acknowledged that one of 13 the areas, the study, was used for both office an d 14 personal purposes (such as paying personal bills) and 15 that the demonstration room he set up to demonstrate 16 certain audio and video equipment for potential 17 customers was not used to demonstrate any equipment 18 lines he had the right to sell . 19 OPINION 20 The Commissioner's determinations in a notice of 21 deficiency are presumed correct, and the taxpaye r 22 bears the burden of proving they are incorrect . Rule 23 142(a) ; Welch v . Helvering , 290 U .S . 111, 115 (1933) . 24 I . Petitioner's Business Expenses and Deduction s 25 Petitioner does not dispute that he ha d Heritage Reporting Corporation (202) 628-4888 7 1 reportable gross income with respect to Real Worl d 2 Audio Video in 2003, see sec . 61(a)(2), and respondent 3 does not dispute that petitioner is entitled t o 4 subtract costs of goods sold in computing gross 5 income, see sec . 1 .61-3(a), Income Tax Regs . 6 Petitioner asserts, however, that in addition to the 7 offset for costs of goods sold he is entitled t o 8 deduct various business expenses related to Real World 9 Audio Video, including the costs of maintaining a home 10 office, high-speed internet and telephone expenses , 11 and transportation expenses . 12 Section 162(a) provides that a taxpayer may 13 deduct all ordinary and necessary expenses paid or 14 incurred during the taxable year in carrying on a 15 trade or business . However, deductions are a matter 16 of legislative grace, and a taxpayer bears the burden 17 of proving he is entitled to the deductions claimed . 18 INDOPCO Inc . v . Commissioner , 503 U .S . 79, 84 (1992) . 19 The taxpayer is required to maintain record s 20 sufficient to enable the Commissioner . to determine the 21 taxpayer's correct liability . Sec . 6001 ; sec . 1 .6001- 22 1(a)(1), Income Tax Regs . 23 With respect to petitioner's claimed home office 24 expenses, section 280A(a) and (c) provides that a 25 taxpayer may not deduct expenses attributable to a Heritage Reporting Corporation (202) 628-4888 8 1 home office unless such home office is use d 2 exclusively on a regular basis (1) as the principal 3 place of business for a trade or business, (2) as a 4 place of business that is used by patients, clients, 5 or customers in meeting with the taxpayer in th e 6 ordinary course of his trade or business, or (3) in 7 the case of a separate structure not attached to th e 8 taxpayer's dwelling, in connection with the taxpayer's 9 trade or business . Petitioner testified that he used 10 his study for personal as well as business purposes in 11 2003 and that his demonstration room was not used to 12 demonstrate merchandise that he had any right to sell 13 in 2003 . Accordingly, petitioner has not satisfie d 14 the requirements of section 280A and is not entitled 15 to deduct expenses relating to the business use of his 16 home in .2003 . 17 With respect to petitioner's other claime d 18 business expenses, such as electricity, high-speed 19 internet, telephone and transportation costs , 20 petitioner maintained no business records and did not 21 introduce any evidence to substantiate such expenses 22 or to permit the Court even to estimate the amount of 23 such expenses . Petitioner has therefore failed t o 24 carry his burden of proving that he is entitled to 25 deduct these business expenses under section 162 o r Heritage Reporting Corporation (202) 628-4888 9 1 any other section of the Code in 2003 . 2 II . Additions to Ta x 3 Section 7491(c) provides that notwithstanding any 4 other provision of the Internal Revenue Code, th e 5 Commissioner shall have the burden of production in 6 any court proceeding with respect .to the liability of 7 any individual for any penalty, addition to tax, o r 8 additional amount . In order to satisfy his burden , 9 the Commissioner must come forward with evidence that 10 it is appropriate to impose the relevant penalty , 11 addition to tax, or additional amount . Higbee v . 12 Commissioner , 166 T .C . 438, 446 (2001) . Responden t 13 has determined that petitioner is liable for additions 14 to tax pursuant to section 6651(a)(1) and (2) . 15 Section 6651(a)(1) provides that in the case of a 16 failure to file a tax return on the date prescribed 17 for filing, there shall be added to the tax required 18 to be shown on the return an addition to tax equal to 19 5 percent of such tax for each month or fractio n 20 therefore that the failure continues, not to exceed 25 21 percent in the aggregate . The section 6651(a)(1 ) 22 addition to tax .does not apply if the late filing is 23 due to reasonable cause and not willful neglect . Sec . 24 6651(a) ; Wheeler v . Commissioner , 127 T .C . 200, 207 25 (2006), affd . 521 F .3d 1289 (10th Cir. . 2008) . Heritage Reporting Corporation (202) 628-4888 1 0 1 Reasonable cause for the failure to timely file a 2 return exists if the taxpayer exercised ordinar y 3 business care and prudence but was nevertheless unable 4 to file the return within the . time prescribed by law . 5 Niedringhaus v . Commissioner , 99 T .C . 202, 221 (1992) ; 6 sec . 301 .6651-1(c)(1), Proced . & Admin . Regs . 7 Section 6017 provides that every individual who 8 has net earnings from self-employment of $400 or more 9 for the taxable year shall file a return with respec t 10 to the self-employment tax imposed by Chapter 2 of the 11 Internal Revenue Code, secs . 1401-1403 . Sectio n 12 1402(a) defines "net earnings from self-employment" as 13 the gross income derived by an individual from any 14 trade or business carried on by such individual, less 15 allowable deductions attributable to such trade or 16 business . The record establishes that even afte r 17 subtracting costs of goods sold, petitioner had net 18 earnings from self-employment in excess of $400 in 19 2003, triggering petitioner's obligation to file a 20 Federal income tax return for 2003 . 21 Respondent introduced evidence showing tha t 22 petitioner failed to file a Federal income tax return 23 for 2003 by its due date . Such evidence is sufficient 24 to satisfy respondent's burden of production unde r 25 section 7491(c) . Because respondent has met hi s Heritage Reporting Corporation (202) 628-4888 1 1 1 burden of production, petitioner must come forward 2 with sufficient evidence to persuade the Court that 3 respondent's determination is incorrect . See Higbee 4 v . Commissioner , supra at 446-447 . Petitione r 5 testified at trial that he did not file a return for 6 2003 because he did not believe he would have an y 7 liability after his costs of goods sold and expense s 8 were taken into account . However, petitioner's belief 9 that he was not requied to file a return does no t 10 demonstrate the ordinary business care and prudence 11 necessary to prevent application of the sectio n 12 6651(a)(1) addition to tax . We conclude, therefore, 13 that petitioner is liable for the section 6651(a)(1) 14 addition to tax-. 15 Section 6651(a)(2) provides that in the case of a 16 failure to pay the tax shown as due on a return, there 17 shall be added to the tax required to be shown on the 18 return an addition to tax equal to 0 .5 percent of such 19 tax for each month or fraction thereof that th e 20 failure continues, not to exceed 25 percent in the 21 aggregate, unless such failure is due to rasonabl e 22 cause . Reasonable cause for the failure to pay exists 23 if the taxpayer demonstrates that he exercise d 24 ordinary business care and prudence in providing for 25 the payment of the liability but was nevertheles s Heritage Reporting Corporation (202) 628-4888 1 2 1 unable to pay the tax or would suffer undue hardship 2 if he paid on the due date . Sec . 301 .6651-1(c)(1), 3 Proced . & Admin . Regs . The addition to tax unde r 4 section 6651 ( a)(2) applies only in the case of an 5 amount of tax shown on a return . Cabirac v . 6 Commissioner , 120 T .C . 163 , 170 (2003) . 7 Petitioner did not file a return in 2003 . 8 However , respondent prepared an SFR for petitioner for 9 2003 pursuant to section 6020 ( b) that qualifies as a 10 return for purposes of section 6651 ( a)(2) . Sec . 11 6651 (g) . See Wheeler v . Commissioner , supra at 209- 12 210 ; Cabirac v . Commissioner , supra at 170 . In doing 13 so, respondent satisfied his burden of productio n 14 pursuant to section 7491 ( c) . Petitioner introduced no 15 evidence with respect to his failure to pay the ta x 16 shown on the SFR for 2003 . Accordingly , we conclude 17 that petitioner is liable for the section 6651(a)(2) 18 addition to tax . 19 CONCLUSION 20 Petitioner has failed to prove that he i s 21 entitled to any deductions other than the deduction 22 for cost of goods sold to which the partie s 23 stipulated . Petitioner has failed to convince this 24 Court that he is entitled to a home office deduction 25 or to prove what the amount of the home office Heritage Reporting Corporation (202) 628-4888 13 1 deduction should be if we were to conclude that such a 2 deduction is allowable . In addition , petitioner di d 3 not maintain the business records necessary to 4 substantiate his claim to additional busines s 5 deductions , nor did he introduce sufficient evidence 6 to permit this Court to estimate business expense s 7 that might otherwise have been deductible if he had 8 maintained the necessary records . Consequently, we 9 find that petitioner has not proven he is entitled to 10 deduct business expense deductions in excess of those 11 allowed by respondent . 12 Respondent has introduced evidence that it is 13 appropriate to impose additions to tax under section 14 6651 ( a)(1) and ( 2) and petitioner has failed t o 15 persuade the .Court that imposition of the additions to 16 tax is incorrect or inappropriate . 17 Because a Rule 155 computation is necessary, 18 decision will be entered under Rule 155 . 19 THIS CONCLUDES THE COURT ' S ORAL FINDINGS OF FACT 20 AND OPINION IN THIS CASE . 21 (Whereupon , at 3 :32 p .m ., the bench opinion 22 in the above - entitled matter was concluded . ) 23 2 4 25 Heritage Reporting Corporation (202) 628-4888