TAX COURT OPINION

Case: Denise R. Parish
Docket Number: 19364-11S
Judge: Armen
Opinion Type: bench
Filed: 10/24/2012
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 DENISE R. PARISH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 19364-11St Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of transcript of Judge Robert N. Armen, Jr. at Las Vegas, Nevada, on September 10, 2012, containing oral the trial session at which the case was heard. in the above case before Special Trial fact and opinion rendered at the pages of the the trial findings of In a_ccordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Robert N. Armen, Jr. Special Trial Judge Dated: Washington, D.C. October 24, 2012 e6RVED OCT 2 5 2012 Capital Reporting Company Denise R. Parish 09-12-2012 1 Bench Opinion by Judge Robert N. Armen, Jr. 3 2 DENISE R. PARISH 19364-11S 3 September 12, 2012 4 5 6 7 8 THE COURT: I. THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FA'CT AND OPINION IN THIS CASE, AND THE FOLLOWING REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND 9 OPINION. THE ORAL FINDINGS OF FACT AND OPINION SHALL 10 NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. 11 12 II. This proceeding was heard as a Small Tax Case 13 pursuant to the provisions of section 7463 of the 14 15 Internal Revenue Code of 1968, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and 16 Procedure. 17 18 III. This bench opinion is made pursuant to the 19 authority granted by section 7459 (b) of the Internal 20 Revenue Code of 1986, as amended, and Rule 152 of the 21 Tax Court Rules of Practice and Procedure. 22 Hereinafter in this bench opinion, and unless 23 otherwise indicated, all section numbers refer to the 24 Internal Revenue Code, as amended and in effect for the 25 taxable year in issue, and all Rule numbers refer to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 the Tax Court Rules of Practice and Procedure. 4 IV. Denise R. Parish (hereinafter, petitioner) appeared on her own behalf. Suzanne M. Warren appeared on behalf of respondent. V. Respondent determined a deficiency in 1 2 3 4 5 6 7 8 petitioner's Federal income tax for 2010 of $1,990. 9 10 IV. The issue for decision by the Court is 11 whether petitioner is entitled to an earned income 12 credit and a making work pay credit. The resolution of 13 14 15 ' 16 17 18 this issue turns on whether petitioner ha.d earned income for the year in issue. VII. Some of the facts have been stipulated, and they are so found. Petitioner resided in the State of Nevada at 19 the time that the petition was filed with the Court. 20 21 22 The taxable year at issue in this case is the calendar year 2010. Petitioner filed an income tax return, Form 23 1040, for 2010. The only item of income that 24 petitioner reported on her return was business income 25 of $9,144. In that regard, petitioner attached to her (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 5 1 2 return a Schedule C, Profit or Loss From Business. On the Schedule C, petitioner described her 3 principal business or profession as "antiques sales." 4 Petitioner reported gross receipts and gross income of 5 6 7 8 9 10 11 12 13 $10,915, total expenses of $1,771, and net profit of $9,144. Listed expenses included car expenses of $1,316, depreciation of $33, legal and professional services of $100, supplies of $118, and other expenses ("12 ISP") of $204. Petitioner reported negative taxable income on page 2 of her Form 1040. However, she did report self-employment tax, the liability for which she reduced in part by a $400 making work pay credit. 14 Petitioner then eliminated the balance of her 15 self-employment tax liability by an earned income 16 credit and requested a refund of the remaining portion 17 of such credit that remained unutilized. 18 At trial, petitioner described her "business" 19 as an effort to assist an elderly and long-time friend 20 who had fallen on hard times sell his antiques and 21 other valuables . According to petitioner, she plac.ed 22 ads on Craigslist, conducted garage sales, and 23 otherwise helped her friend sell his property in order 24 to raise funds for him to pay his bills and provide for 25 his continued care. In exchange for her efforts, (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 1 petitioner testified that she received a commission of 6 2 3 4 5 6 10, 20, or 30 percent of the sales price of what was sold. Petitioner did not otherwise meaningfully engage in sales of antiques or other property. When she completed the task of helping her friend liquidate 7 his estate, she ceased engaging in her, "sales" 8 activity. 9 In the notice of deficiency respondent 10 determined that petitioner had no business income and 11 12 therefore lacked earned income. Accordingly, respondent disallowed the earned income credit and the 13 making work pay credit and "froze" petitioner's 14 requested refund. The "frozen" refund represents the 15 deficiency in this case, as petitioner does not 16 otherwise have any tax liability (either regular income 17 18 tax or self-employment tax) for 2010. At trial, petitioner testified on her own 19 behalf but did not call any third-party witness, nor 20 did she offer any documentary evidence that was 21 contemporaneous to her activity in 2010. Petitioner 22 testified that most transactions were in cash, for 23 which there was no supporting·documentation such as 24 bills of sale or receipts. Petitioner also testified 25 that although she maintained a checking account in (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 1 2 3 4 2010, she did not typically deposit her commissions in her account. VIII. We begin with several fundamental principles 5 of tax litigation that inform our decision in this case. 6 7 First, as a general rule, the Commissioner's 8 determinations are presumed correct, and the taxpayer 9 bears the burden of proving that those determinations 10 are erroneous. See Rule 142 (a); INDOPCO, Inc. v. 11 Commissioner, 503 U.S. 79, 84 (1992); Welch v. 12 Helvering, 290 U.S. 111, 115 (1933). 13 Pursuant to section 7491(a) (1), the burden of 14 proof as to factual matters shifts to the Commissioner 15 under certain circumstances. However, that section 16 applies only if, inter alia, the taxpayer has complied 17 with the substantiation and recordkeeping requirements 18 of the Internal Revenue Code. See section 19 20 7491(a) (2) (A) and (B). Petitioner never alleged that section 7491 (a) (1) was applicable, nor did she 21 demonstrate compliance with the substantiation and 22 recordkeeping requirements of section 7491(a) (2). 23 Accordingly, the burden. of proof remains on petitioner. 24 25 Second, credits are a matter of legislative grace, and the taxpayer bears the burden of proving (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 8 1 entitlement to any credit claimed. See Rule 142(a); 2 Deputy v. du Pont, 308 U.S. 488, 493, (1940); New 3 Colonial Ice Company v. Helvering, 292 U.S. 435, 440, 4 5 (1934); Welch v. Helvering, 290 U.S. at 115. This includes the burden of substantiation. Hradesky v. 6 Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per 7 8 9 curiam, 540, F.2d 821 (5th Circuit 1976.) Third, taxpayers must maintain adequate records to substantiate the credits claimed on their 10 Federal income tax returns. Thus, for example, section 11 12 6001 provides that "[e]very person liable for any tax imposed by this title, or for the collection thereof, 13 shall keep such records...and comply with such rules 14 and regulations as the Secretary may from time to time 15 prescribe . " Section 1. 600-1 (a) , Income Tax Regs . , 16 provides that "any person subject to tax...shall keep 17 18 such permanent books of account or records...as are suf ficient to establish the amount of . . . credits . " And 19 section 1. 6001-1 (e ) , Income Tax Regs . , provides that 20 "[t]he books or records required by this section shall 21 be kept at all times available for inspection by 22 authorized internal revenue officers or employees, and 23 shall be retained so long as the contents thereof may 24 become material in the administration of an internal 25 revenue law . " (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 Fourth, a taxpayer may choose to conduct his 9 or her business in cash, but that choice does not relieve the taxpayer of the duty to maintain adequate records and substantiate the basis for credits claimed on the taxpayer's return. IX. We turñ now to the substantive law. Section 32 authorizes the earned income 1 2 3 4 5 6 7 8 9 credit, and section 36A authorizes the making work pay 10 credit. It is axiomatic that a taxpayer must have 11 12 13 14 earned income before either credit comes into play. For purposes of the earned income credit and as relevant herein, section 32 (c) (2) (A) (ii) defines earned income as the amount of the taxpayer's net 15 earnings from self-employment within the meaning of 16 17 section 1402(a). Section 36A(d) (2) defines earned income similarly for purpose of the making work pay 18 credit. 19 As relevant herein, section 1402 (a) defines 20 the term "net earnings from self-employment" as the 21 gross income derived by an individual from any trade or 22 business carried on by such individual, minus allowable 23 deductions that are attributable to such trade or 24 business. Also as relevant herein, section 1402(c) 25 provides that the term "trade or business" has the same (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 1 meaning as when used in section 162 relating to trade 10 2 3 4 5 6 or business expenses. The Supreme Court has held that in order to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity and the taxpayer's primary purpose for engaging in the 7 activity must be for income or profit. Commissioner v. 8 Groetzinger, 480 U. S. 23, 35 (1987) . Thus, "not every 9 income-producing and profit-making endeavor constitutes 10 11 12 a trade or business." Id. It is equally clear that a sporadic activity, a hobby, or an amusement diversion does not quantify. Id. Whether a taxpayer is, or is 13 not, engaged in a trade or business is a question of 14 fact that depends on the particular facts and 15 circumstances of each individual case. Higgins v. 16 Commissioner, 312 U.S. 212, 217 (1941) . 17 18 X. On the record before us, petitioner has not 19 demonstrated that her "antiques sales" activity was a 20 business within the meaning of the applicable 21 authorities. 22 First, petitioner has not determined that her 23 primary purpose for engaging in the activity was for 24 25 income or profit, as opposed to doing a kindness for a cherished friend. In this regard, petitioner impressed (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 11 1 us as an individual who would go the extra mile to 2 assist anyone in need of help, but particularly a 3 long-time friend for whom she felt both personal 4 affection and distress owing to his financial straits. 5 Thus, we think that petitioner was motivated primarily 6 7 8 by a noble and unselfish concern for the welfare of her friend, rather than by the prospect of making a buck. But even if petitioner were motivated 9 primarily by monetary gain and not by altruism, 10 petitioner has not demonstrated that her activity was 11 sufficiently continuous and regular, and not sporadic 12 or single-purposed, given the fact that she did not 13 meaningfully engage in sales of antiques or other 14 property other than by helping her friend sell his 15 belongings. In addition, when petitioner completed the 16 task of helping her friend she ceased engaging in her 17 18 "sales" activity. Finally, even Q petitioner were motivated 19 primarily by monetary gain and even 1 her activity 20 could be characterized as continuous and regular as 21 contemplated by the Supreme Court, the complete lack of 22 contemporaneous documentation for a sales activity 23 would not support the disputed credits given the 24 recordkeeping requirements that are woven throughout 25 the tax law. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Denise R. Parish 09-12-2012 In conclusion, and on the record before us, 12 we are constrained to sustain respondent's 1 2 3 determination. 4 5 XI. In order to give effect to the foregoing, 6 decision will be entered for respondent. XII. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 8:56 a.m., the bench opinion was concluded.) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012