TAX COURT OPINION

Case: Octavia Nakia McClain
Docket Number: 22393-14
Judge: Morrison
Opinion Type: bench
Filed: 08/11/2016
Pages: 10

ALS UNITED STATES TAX COURT WASHINGTON, DC 20217 OCTAVIA NAKIA MCCLAIN, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. 22393-14. ) ) ) ) ) ) ) ) ) ORDER OF SERVICE OF TRANSCRIPT Pursuant to Rule 152(b), Tax Court Rules of Practice of Procedure, there is transmitted herewith to petitioner and to respondent a copy of the pages of the transcript of the trial of the above case before Judge Richard T. Morrison, at Los Angeles, California, on June 16, 2016, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, an appropriate order and decision will be entered. (Signed) Richard T. Morrison Judge Dated: Washington, D.C. August 11, 2016 SERVED Aug 22 2016 Capital Reporting Company 3 1 2 Bench Opinion by Judge Richard T. Morrison June 16, 2016 3 Octavia Nakia McClain v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 22393-14 THE COURT: The Court has decided to render oral findings of fact and opinion in this case (a bench opinion), and the following represents the Court's oral findings of fact and opinion. References to sections are to sections of the Internal Revenue Code of 1986, as amended. References to rules are to the Tax Court Rules of Practice and Procedure. This bench opinion is made under the authority of Internal Revenue Code Section 7459(b) and Rule 152. McClain resided in California when she filed her petition. Her petition contests a notice of deficiency issued by respondent, the IRS, determining a deficiency in tax of $3,760 for the tax year 2011. 1. Dependency exemption deduction McClain claimed a dependency exemption deduction for her son. In the notice of deficiency, the IRS determined that she was not entitled to the deduction. However, at trial, the IRS conceded that she was entitled to the deduction. 2. Head-of-household status 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 McClain filed her return as the head of a household. In the notice of deficiency, the IRS determined that her filing status was single, not head of household. For a taxpayer to be considered the head of a household, the taxpayer must maintain a household. To be considered to maintain a household, the taxpayer must furnish over half of the cost of 8 maintaining the household during the tax year. The 9 cost of maintaining the household is defined as the 10 11 12 expenses incurred for the mutual benefit of the occupants of the household by reason of their living in the household. Such expenses include rent, 13 utilities, and food consumed on the premises. 14 15 During 2011, McClain's mother rented a three-bedroom house. Five persons resided there: 16 McClain's mother, McClain's brother, McClain, 17 McClain's son, and McClain's mother's cousin. The 18 19 20 21 22 23 24 25 rent was approximately $750 per month. McClain paid $200 of the rent. McClain paid all the gas bills for the house. The amount of these payments is found in her bank statements. McClain's mother paid all bills for water and electricity. The amount of these payments is not in the record. McClain paid for groceries for the house. The cost of groceries is not in the record. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 In order to determine whether McClain furnished more than half the cost of maintaining the household, we need to determine the total cost of 4 maintaining the household. McClain bears the burden 5 6 7 8 9 10 11 12 13 14 15 of proof regarding all issues in the case, including the cost of maintaining the household. The record does not reveal the cost of the groceries. Nor does it reveal the cost of water and electricity. We have no reasonable evidentiary basis for estimating these costs; therefore, McClain has failed to satisfy her burden of proof that she maintained a household during the 2011 year. She is not entitled to head- of-household status. 3. American Opportunity Credit The American Opportunity Credit is a 16 mathematical function of the "qualified tuition and 17 18 19 20 21 22 23 24 25 related expenses" incurred by the taxpayer during the tax year. McClain reported that she incurred qualified tuition and related expenses of $3,500 during 2011. In the notice of deficiency, the IRS determined that McClain incurred no qualified tuition and related expenses during 2011. At trial, McClain claimed that the qualified tuition and related expenses she incurred during 2011 consisted of the following: the cost of a laptop computer; the cost 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 of various books; and the tuition for summer school. The IRS contends that McClain failed to prove she actually paid these costs. In addition, the IRS contends that any payment for the laptop is not 5 within the definition of qualified tuition and 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 related expenses because McClain's school did not require her to buy the laptop. McClain testified credibly that she purchased the laptop with $1,200 to $1,400 of cash. We find that she paid $1,200 for the laptop. McClain also testified credibly that the school required her to use the specific model of laptop that she purchased, a MacBook Pro, in order to complete her journalism coursework, that she was able to use a school MacBook Pro at a computer lab until the last year of her studies, 2011, and that during 2011 she would have been unable to use a school MacBook Pro during the computer lab's hours and also care for her child. The phrase "qualified tuition and related expenses" is defined as the tuition, fees, and course 21 materials required for the enrollment or attendance 22 23 24 25 of the taxpayer at a school for courses of instruction of the taxpayer at the school. We hold that the MacBook Pro was required for the attendance of McClain at her school. She was unable to use a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 school MacBook Pro at the school's computer lab in 2011. She had to buy her own MacBook Pro for $1,200. The laptop she purchased was therefore a required course material. McClain testified that the following amounts, recorded as debits to her bank account in her bank statements, were purchases of books or test- taking materials required by her coursework: $180, $330.60, $40, $41.71, $55.66, $160.07, $33.70, $56.17, and $16.26. The sum of these amounts is $914.17. Although the bank statements do not show exactly what items she paid for, McClain was able to describe the items when asked to do so under examination by IRS counsel. Her testimony was credible. We find that she indeed purchased the $914.17 of books and test-taking materials. McClain credibly testified that she paid her school $1,595 for tuition for summer school for 2011. Her testimony is corroborated by her bank statement, which demonstrates that she paid the school $1,595 in 2011. We find that she paid $1,595 in tuition for summer school during 2011. In summary, we hold that for 2011, McClain paid qualified tuition and related expenses of $1,200 for the computer, $914.17 for books and test-taking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 materials, and $1,595 for summer tuition. This is a 8 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 total of $3,709.17. 4. Earned income McClain reported that she received gross receipts of $10,450 from her businesses. She reported no business expense deductions. Consequently, her return showed $10,450 of business income. She reported this amount as includable in her gross income in computing her liability for the Section 1 tax and includable in her gross income in computing her liability for the Section 1401 self- employment tax. She also used the $10,450 amount in the computation of her earned income for purpose of the earned income credit. In the notice of deficiency, the IRS determined that her business income was zero. As a result, the notice of deficiency made corresponding reductions to McClain's reported liability for the Section 1 tax and the Section 1401 self-employment tax. The notice disallowed the earned income credit for lack of earned income. At trial, the IRS continued to take the position that McClain's business income was zero. 24 McClain was unable to come up with records or provide 25 testimony to give us a reasonable basis for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 estimating the amount of her business income. She testified credibly that she worked as a nanny for the first two months of the tax year 2011, but the record does not reveal how much she was paid for her work as a nanny. She credibly testified that she worked as. an assistant to a photographer during 2011, and explained that she received payments for this work in both cash and through the use of the photographer's debit card. But she did not explain what the amounts of the payments were. Nor are we able to piece together this information from the record. She identified a few entries on her bank statements that corresponded to business expenses for her work assisting the photographer, but in no way are we assured that the record shows all such business expenses. She testified credibly that she sdld jewelry as a business. She identified several deposit entries in her bank statements that corresponded to PayPal receipts for the sale of her jewelry. She also guessed that each piece of jewelry cost her about $100 to make. Finally, she testified that the gross receipts she reported on her return, $10,450, was a roughly correct estimate of the total gross receipts from all three of her businesses: being a nanny, assisting the photographer, and making 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.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 jewelry. Even if we were to believe that $10,450 was the correct amount of the gross receipts for the three businesses, a proposition of which we are dubious given the time that has elapsed since 2011, we are unable to determine the net, or taxable, income from the three businesses. Taxable income is equal to gross income minus deductions. Cost of goods sold is subtracted in calculating gross income. It is not a deduction. Cost of goods sold is the cost of buying or manufacturing a product. For example, cost of goods sold includes McClain's costs of buying and making the jewelry that she sold in 2011. Deductions include the expenses of carrying on a business. For example, McClain paid business expenses while carrying on her business of assisting the photographer. McClain's litigating position is that the taxable income from her businesses is $10,450, which, if her gross receipts is $10,450, means that her cost of goods sold and deductions are zero. The IRS's litigating position is that 22 McClain's taxable income from her businesses is $0, 23 which, if gross receipts if $10,450, means that the 24 cost of goods sold and deductions are $10,450. 25 Neither zero or $10,450 may be the correct amount. 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 But if we were to choose an amount between the two numbers, the amount so chosen would be a wild guess rather than an estimate with a reasonable basis in the record. Under these circumstances, we determine that the taxable income from McClain's three businesses is $0, the amount determined in the notice of deficiency. The determination in the notice of deficiency is presumed correct, and the taxpayer, 10 McClain, has the burden of persuading the Court that the determination is incorrect. Rule 142(a). In addition, Section 6001 imposes on the taxpayer the duty to keep records to establish gross income and deductions. 26 C.F.R. sec. 1.6001-1(a). The remaining issues are computational. The Court will later enter an order requiring the parties to file with the Court proposed computations in accordance with this bench opinion under Rule 155. This concludes the bench opinion. (Whereupon, at 8:43 a.m., the above- entitled matter was concluded.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com