TAX COURT OPINION

Case: David Arnold Gaeth
Docket Number: 20874-10S
Judge: Armen
Opinion Type: bench
Filed: 12/12/2011
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 DAVID ARNOLD GAÉTH, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) Docket No. 20874-10S. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages of the to petitioner and to respondent a copy of transcript of Judge Robert N. Armen, Jr. at Detroit, Michigan, on November 16, 2011, containing his oral fact and opinion rendered at the above case.before Special Trial the trial of the conclusion of the trial. findings of In accordance with the oral findings of fact and opinion, a Decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Robert N. Armen, Jr. Special Trial Judge Dated: Washington, D.C. December 12, 2011 SERVED DEC 1 3 2011 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 BENCH OPINION BY SPECIAL TRIAL JUDGE ROBERT N. ARMEN DAVID ARNOLD GAETH V. COMMISSIONER 3 DOCKET NO . : 20874-10S NOVEMBER 16, 2011 I. 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. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459 (b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, all section numbers refer to the Internal Revenue Code, as amended and in effect for the taxable year in issue, and all Rule numbers refer to the Tax Court Rules of 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 Practice and Procedure. IV. David Arnold Gaeth (hereinafter, petitioner) appeared on his own behalf. Timothy S. Murphy appeared on behalf of respondent. V. Respondent determined a deficiency in petitioner's Federal income tax for 2008 in the amount of $3,881. VI. The issue for decision by the Court is whether petitioner received, but failed to report on his income tax return, nonemployee compensation of $14,130 from a proprietorship by the name of Pomeroy Construction. Other adjustments to.petitioner's income made by respondent in the notice of deficiency are purely mechanical matters that are computational in nature . VII. Some of the facts have been stipulated, and they are so found. Petitioner resided in the State of Michigan at the time that the petition was filed with the Court . Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1.8 19 20 21 22 23 24 25 5 Petitioner filed an income tax return, Form 1040, for 2008, listing his occupation as laborer. On his return, petitioner reported wages of $10,214, of which $7,896 was received from Grifka Builders and · $2,318 from Pro Plus Roofing. Petitioner also reported on his return business income of $1,103 and attached a Schedule C-EZ, Net Profit From Business (Sole Proprietorship). On the Schedule C-EZ, petitioner reported gross receipts of $1,953 and claimed total expenses of $850, thus resulting in a net profit of $1,103. Having reported a net profit from business, petitioner also attached to his return Schedule SE, Self-Employment Tax, and reported thereon self-employment tax, which he included as part of his total tax on line 61 of his Form 1040. Respondent examined petitioner's 2008 return and ultimately issued a notice of deficiency. In the notice, respondent determined that the gross receipts reported by petitioner on his Schedule C-EZ were received from Pro Plus Roofing but that petitioner received additional nonemployee compensation that was not reported, namely, $14,130 from Pomeroy Construction. Petitioner timely filed a petition with this 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 Court contesting the deficiency determined by respondent. The petition includes the following allegations: "I did not work for Pomeroy Construction in 2008" and "I did not fill out a W-9 for Pomeroy Construction or receive any money or payment from them." VIII. This case illustrates the perils of dealing in cash and maintaining no records. Thus, at trial petitioner admitted that he did in fact work for Pomeroy Construction in 2008, receiving $10. per hour, for which he was paid in cash. However, petitioner insisted that he worked for Pomeroy Construction from only June to mid-July 2008, or approximately 6 weeks, and would therefore have received only $400 to $500 per week, or about $3,000 for the 6-week period. However, petitioner offer no documentary evidence in support of his testimony. To counter petitioner's testimony, respondent called as a witness William Pomeroy, the proprietor of Pomeroy Construction. Mr. Pomeroy testified t.hat petitioner worked for him in 2008 for a period that may have been as long as 28 weeks and that he paid petitioner in cash. At $500 per week, 28 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1.9 20 21 22 23 24 25 7 weeks of work would translate into $14,000, a sum exceptionally close to the $14,130 amount claimed as a deduction by Mr. Pomeroy on his own Schedule C and reported by him on a Form 1099 filed with respondent. However, Mr. Pomeroy offered no documentary evidence in support of his testimony. Respondent suggests that the Form 1099 issued by Pomeroy Construction suffices to demonstrate that petitioner failed to report the amount of income shown on that form. Yet we fail to comprehend why the reporting by Pomeroy Construction on a Form 1099 is inherently more reliable than petitioner's testimony. After all, from a proprietor's point of view, the greater the amount reported.on an information return (such as a Form 1099), the greater the deduction on the proprietor's Schedule C. And, of course, the greater the deduction on the proprietor's Schedule C, the lesser the proprietor's reported net profit and resultant tax liability. What then are we left with? We know, through petitioner's admission and Mr. Pomeroy's testimony, that petitioner did in fact work for Pomeroy Construction in 2008. We also know, again through petitioner's admission and Mr. Pomeroy's testimony, that petitioner was paid $10 per hour by 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 8 Pomeroy Construction. Notably, this hourly wage was in keeping with what petitioner earned from Pro Plus Roofing in 2008 (also $10 per hour) and from Grifka Builders ($12 per hour). In 2008, petitioner worked for Grifka Builders and received wages of $7,896; therefore, he worked for that company for 658 hours ($7,896 -k $12). Also in 2008, petitioner worked for Pro Plus Roofing and received wages of $2,318 and nonemployee compensation of $1,953; therefore, he worked for that company for 427 hours ($2,318 + $1,953 divided by $10). The sum of 658 hours and 427 hours is 1,085 hours. The record also reveals that petitioner received unemployment compensation in 2008. Presumably such compensation was not paid at a rate exceeding petitioner's customary hourly pay. Viewed thusly, petitioner was compensated for about 4 weeks, or 150 hours, of unemployment. We have now accounted for 1,235 hours (1,085 hours + 150 hours) of petitioner's work year, which we regard as 1,920 hours (40 hours/week x 48 weeks), a number that fairly balances the vagaries of the construction industry in 2008 as portrayed by petitioner and William Pomeroy in their testimony at 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 9 trial. This analysis would therefore indicate that in 2008 petitioner worked for Pomeroy Construction for 685 hours (1,920 hours - 1,235 hours). Because petitioner was paid $10 per hour, we therefore conclude that he received $6,850 from Pomeroy Construction, which is the amount that he failed to report on his return. Respondent's determination is sustained to that extent only. Admittedly, our income analysis lacks scientific precision. However, given the complete lack of documentary evidence, the record allows for no better approach. Should petitioner be dissatisfied with our analysis, he has no one to blame but himself, as he maintained no records of his income-producing activities. Finally, but briefly, we consider the matter of deductible expense. Petitioner did not raise this matter either in his petition or at trial; rather, respondent hinted at it during cross-examination. However, we note that petitioner claimed a deduction for expenses on his Schedule C-EZ, which expenses were not disallowed by respondent in the notice of deficiency or subsequently challenged by him. To the extent that petitioner may contemplate a deduction greater than that allowed by respondent, petitioner is 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 10 not entitled to any such deduction for two reasons. · First,.deductions for any traveling expense (including meals and lodging while away from home) and with respect to listed property (such as most commonly-used motor vehicles and cellphones) are subject to the stringent substantiation requirements of section 274 (d). See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); Rodriguez v. Commissioner, T.C. Memo. 2009-22, holding that the strict substantiation requirements of section 274 (d) preclude both the Court and a taxpayer from approximating expenses subject to that section. In other words, section 274 (d) and the regulations thereunder require a taxpayer to substantiate his or her deductions by adequate records or sufficient evidence establishing the amount, time, place, and business purpose of the expense to corroborate the taxpayer's own testimony. In the absence of such records or evidence, no deduction is allowable as a matter of law. Second, if a potential expense is not subject to the stringent substantiation requirements of section 274(d), the law is clear that the Court may only estimate a reasonable allowance where the taxpayer has first presented sufficient evidence upon Heritage Reporting Corporation (202) 628-4888 . 1 2 3 4 5 6 7 8 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 which the Court may base that estimate, for to do otherwise would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).; Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). In the instant case, petitioner has presented no evidence to support any estimate . Accordingly, no deduction other than that claimed by petitioner on Schedule C-EZ is allowable. In order to give effect to our disposition of the disputed issue, decision will be entered pursuant to Rule 155. ' X. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN·THIS CASE. (Whereupon, at .9:17 a.m., the bench opinion in the above-entitled matter was concluded. ) // // // // // // // // Heritage.Reporting Corporation (202) 628-4888