TAX COURT OPINION

Case: Travis Anthony Branch & Laureen Cunha-Branch
Docket Number: 9304-11S
Judge: Kroupa
Opinion Type: bench
Filed: 07/10/2012
Pages: 7

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 TRAVIS ANTHONY BRANCH AND LAUREEN CUNHA-BRANCH Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ORD ER Docket No. 9304-11S Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of proceedings of this case before Judge Diane L. Kroupa at Honolulu, Hawaii on June 18, 2012, containing her oral findings of fact and opinion rendered after the trial. In accordance with the oral findings of fact and opinion, decision will be entered pursuant to Rule 155. I (Signed) Diane L. Kroupa Judge Dated: Washington, DC July 10, 2012 SERVÉD JUL 1 3 2012 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 Diane L. Kroupa June 18, 2012 Branch v. Commissioner Docket No. 9304-11S 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. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding.was conducted as a Small Tax Case under § 7463 and Rules 170 through 175. This bench opinion is made pursuant to the authority granted by § 7459(b) and Rule 152. All section references are to the Internal Revenue Code for 2007, and all rule references are to the Tax Court Rules of Practice and Procedure. Petitioner Travis Branch appeared on behalf of Petitioners, and David Lau appeared on behalf of Respondent. Findings of Fact. Certain facts have been stipulated. The stipulation of facts the parties filed, with accompanying exhibits, is incorporated by this reference. The facts are so found. Petitioners resided in Hawaii at the time they filed the petition. Petitioner husband is an insurance agent and 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 securities broker. Petitioners filed a joint individual income tax return for 2007 and claimed certain expenses on Schedule C, Profit or Loss From Business. Respondent issued Petitioners a deficiency notice disallowing certain expenses Petitioners claimed on Schedule C for 2007. Petitioners later submitted an amended joint individual income tax return for 2007, claiming certain "advertising" expenses on Schedule C. The parties have resolved all issues other than $15,133 of advertising expenses for membership to Mid Pacific County Club (country club fees). Opinion. After concessions, there are two issues for decision. The issues are whether Petitioners are entitled to deduct the country club fees and whether Petitioners are liable for an accuracy-related penalty under § 6662(a). We begin with the burden of proof. The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). Petitioners argue that they are entitled to deduct the country club fees as business expenses. We disagree. Taxpayers may deduct ordinary and necessary expenses paid or incurred during the taxable year in 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 5 carrying on a trade or business. Sec. 162(a). The term "ordinary and necessary business expenses" means only those expenses that are ordinary and necessary and are directly attributable to the trade or business. Sec. 1.162-17(a), Income Tax Regs. The term does not include personal, living or family expenses. Id.; See Sec. 262(a). Simply because an expense would not have been incurred but for the taxpayer engaging in a trade pL4 or business is insufficient to allow a deduction. The nature of the expense must not be personal or otherwise nondeductible. Drake v. Commissioner, 52 T.C. 842, 844 (1969). There are several exceptions to the deductibility of ordinary and necessary expenses incurred in carrying on a trade or business. Sec. 274. Expenses paid or incurred for membership in any club organized for business, pleasure, recreation or other social purpose are not deductible. Sec. 274 (a) (3). More specifically, expenses paid for country club dues are not deductible. Sec. 1.274-2(a) (2) (iii) (a), Income Tax Regs. In addition, the legislative history to § 274 (a) (3) emphasizes that it·is a strict nondeductibility rule. See H. Rept. 103-111 at 646 PLA 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 (1993), 1993-3 C.B. 167, 222. No one, including golf professionals or instructors, may deduct club dues. See e.g. Garcia v. Commissioner, T.C. Summary Opinion 2005-2. Congress explained that the non-deductibility rule eased compliance with former law that required determining whether the primary purpose of belonging to the country club was personal. Id. Accordingly, Petitioners are not entitled to deduct the country club fees. The second issue we address is whether Petitioners are liable for the accuracy-related penalty under § 6662(a) for 2007. A penalty applies to any underpayment of tax that is due, among other things, to a substantial understatement of income tax. See Sec. 6662(a), (b) (2). A substantial understatement is one that exceeds the greater of 10 percent of the tax required to be shown on the return, DU p $5,000. Sec. 6662(d) (1). The Commissioner bears the burden of production under § 7491(c), and the taxpayer bears the burden of proof with respect to reasonable cause. Higbee v. Commissioner, 116 T.C. 438 (2001). Respondent has met his burden of production that there was a substantial understatement of income tax for 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 2007 as the amount Petitioners reported on the return substantially understated the amount of tax required to be shown on the return. The accuracy-related penalty under § 6662Ñ(cid:0)570P does not apply, however, to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer's position and shown that the taxpayer acted in good faith with respect to that portion. Sec. 6664(c) (1); Sec. 1.6664-4(b), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and good faith is made on a case-by-case basis. As stated previously, taxpayers bear the burden of proof as to reasonable cause and willful neglect. Higbee v. Commissioner, 116 T.C. at 447. Petitioners have failed to show reasonable cause for the underpayment for 2007 and have not shown that they acted in good faith with respect to any portion of the underpayment. The record reflects that Petitioner husband was fairly educated and sophisticated. The Court finds compelling that Petitioner husband indicated that he regularly prepares Êederal tax returns for others and advises them that country club membership fees are not 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 deductible for ederal tax purposes. Moreover, the Court finds it egregious that Petitioners claimed $217,000 of business expenses while only reporting $50,000 of taxable income. Particularly egregious was Petitioners' claimed business expenses of $30,902 for a luxury esuèee 44 DLK Portugal and Spain. Petitioner husband first admitted at trial that he was not entitled to this claimed expense. Petitioners' attempt to cloak personal expenses as business expenses shows an intentional disregard for the rules and regulations. We hold that Petitioners are liable for the accuracy-related penalty under § 6662 for 2007. OL To give effect to the foregoing and Respondent's concessions, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:05 a.m. the bench opinion in the above-entitled matter was concluded.) // // // // Heritage Reporting Corporation (202) 628-4888