TAX COURT OPINION

Case: Olivia Jen
Docket Number: 26264-14
Judge: Kerrigan
Opinion Type: bench
Filed: 01/12/2016
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 OLIVIA JEN, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. ) ) ) ) 26264-14. ORD 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 to petitioner and respondent a copy of the pages of the transcript of trial in the above case before Judge Kathleen Kerrigan at San Francisco, California, on December 11, 2015, containing her oral findings of fact and opinion rendered at the conclusion of the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered for respondent. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. January 12, 2016 SERVEDJan 132016 Capital Reporting Company 3 1 2 Bench Opinion by Judge Kathleen Kerrigan December 11, 2015 3 Olivia Jen 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. 26264-14 THE COURT: The Court has decided to render in this case the following as its oral findings of facts and opinion, which shall not be relied upon as precedent in any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice & Procedure. All section references are to the Internal Revenue Code in effect for the years in issue, and all rule references are to Tax Court Rules of Practice & Procedure. By notice of deficiency dated September 17, 2014, the Internal Revenue Service determined a deficiency in the federal income tax of Petitioner for tax years 2011 and 2012, along with accuracy- related penalty under section 6662(a) for the tax year 2012. The notice of deficiency disallows expenses on Petitioner's Schedule C, profit or loss from business, for tax year 2011 and 2012, including income of 14,976 for tax year 2011 and $59,034 for 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 tax year 2012, and included income of $34 for a state refund for tax year 2011. After concessions made by Petitioner, the issues for our consideration are whether Petitioner is entitled to deduct expenses for business use of home for tax years 2011 and 2012, office expenses for tax years 2011 and 2012, and health insurance expenses for 2011 and 2012, and whether Petitioner is liable for the accuracy-related penalty. Trial of this case was conducted on December 9th and 11th, 2015, in San Francisco, 12 California. Petitioner represented herself, and 13 14 Joseph E. Nagy represented Respondent. The parties' stipulation of facts was admitted into evidence along 15 with the attached exhibits. Only Petitioner 16 17 18 testified. We find the following facts. Petitioner resided in California when she filed her petition. 19 During 2011 and 2012 Petitioner was self-employed as 20 21 22 23 24 25 an insurance agent. She sold insurance on behalf of approximately 30 insurance companies. Petitioner had an office at her residence. Petitioner filed a US individual income tax return, form 1040, for tax year 2011 and '-Pf. zon__ For tax years 2011 and '-kf, Petitioner reported office 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 expenses and expenses for business use of home. Employing the legal principles and the burden of proof discussed below, we find the following as to the reported expenses. Office expenses Respondent allowed for a portion of office expenses and disallowed the remainder for both tax years 2011 and 2012. 8 Petitioner testified that she had office expenses 9 beyond those allowed by Respondent. Petitioner did 10 11 12 13 14 not produce any new documents to substantiate office expenses. Expenses for business use of home Respondent allowed for an additional amount of expenses for business use of home than reported on 15 Petitioner's Schedule C. Respondent allowed some 16 17 18 19 20 21 22 23 24 25 expenses for business use of home and disallowed the remainder for tax year 2012. Petitioner testified that she had additional home office expenses for both 2011 and 2012. Petitioner testified that some of the disallowed office expenses should have been allowed as home office expenses. Petitioner offered no documentary evidence of additional expenditures. Petitioner had health insurance with Blue Shield of California. The monthly premium was $315 from January 1st, 2011, till May 1st, 2012. For the 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 remainder of 2012 the premium was $353 a month. Respondent allowed medical expenses of 4742 on Petitioner's Schedule A, itemized deductions, for tax year 2011. Respondent allowed medical expenses of 9620 on Petitioner's Schedule A for 2012. Generally, the Commissioner's determination in a notice of deficiency are presumed correct, and a taxpayer bears the burden of proving those determinations are incorrect. Rule 142(a); Welch v. 10 Helvering, 290 US 111, 115 (1933). 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Section 6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses. See section 1.6001-1(a) and -(e), Income Tax Regs. Section 162 allows a taxpayer to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. An ordinary expense is one that commonly or frequently occurs in the taxpayer's business. Deputy v. duPont, 308 US 488, 4¢5 (M (1940) . L And a necessary expense is one that is appropriate and helpful in carrying on the taxpayer's business. Welch v. Helvering, 290 US 111, 113 (1933). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The expense must directly connect with ör pertain to the taxpayer's business. Section 1.162- 1(a), Income Tax Regs. A taxpayer may not deduct a personal, living, or family expense unless the Code expressly provides otherwise. Sec. 262(a). Whether an expenditure is ordinary and necessary is generally a question of fact. Commissioner v. Heininger, 320 US 467, 475 (1943). A taxpayer must show a bona fide purpose for the expenditure; there must also be a proximate relationship between the expenditure and his or her business. Challenge Mfg. Co. v. Commissioner, 37 TC 650 (1962). Office expenses; Petitioner failed to provide documents to substantiate any additional expenses. Her records were disorganized and included receipts for personal items. Respondent's disallowance of additional office expenses for tax years 2011 and 2012 is sustained. Business expenses for use of home' section 280A(c)(1) (A) allows a taxpayer to deduct expenses for the business use of his or her residence. 24 Petitioner contends that she had more expenses than 25 those Respondent allowed. Petitioner provided no 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 documentation showing additional expenses. 2 Respondent's disallowance of additional business 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 expenses for use of home is sustained. Health insurance expenses section 162(1) K allows self-employed individuals to deduct amounts paid during the taxable year for insurance that constitutes medical care for the taxpayer, the taxpayer's spouse, the taxpayer's dependents, and any child, as defined in section 152(f)(1), of the taxpayer who as of the end of the taxable year has not attained age 27. Sec. 162(1)(1). Section 162(1) (2) (A) limits the amount of deductions allowed to the taxpayer's earned income, as defined by section 401(c), derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage 1s established. Petitioner was allowed deductions for 19 medical expenses on her Schedule A for tax years 2011 20 21 22 23 24 25 2011 and '-FT. The amounts allowed were greater than the annual cost of her health care insurance. Petitioner did not provide evidence to support additional expenses for health care insurance. Accuracy-related penalty section 6662 imposes an accuracy-related penalty of 20 percent of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 the portion of the underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of tax. The Commissioner bears the burden of production 6 with respect to this penalty. Sec. 7491(c). 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. See Rule 142(a); Higbee v. Commissioner, 116 TC 438, 446-447 (2001). Negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and is the failure to exercise due care or the failure to do what a reasonable, prudent person would do under the circumstances. Sec. 6662(c); Neely v. Commissioner, 85 TC 934 (1985); sec. 1.6662-3(b) (1), Income Tax Regs. Negligence also includes any failure by the taxpayer to keep adequate books and records to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. Petitioner was unable to properly substantiate office expenses, expenses for business 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 use of home, and additional health insurance expenses. Respondent carried its burden of production with respect to section 6662(a) penalties for negligence. The accuracy-related penalty does not apply with respect to any portion of the underpayment for which it is shown that the taxpayer had reasonable cause and acted in good faith. Sec. 6664 (c) (1) . Petitioner has not shown reasonable cause 10 or good faith. We hold that for the tax year 2012, 11 Petitioner is liable for a section 6662(a) penalty for negligence. A decision will entered for Respondent. This concludes the Court's oral findings of fact and opinion in this case. This concludes the Court's trial session. Thank you. (Whereupon, at 10:42 a.m., the above- entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.Capita1ReportingCompany.com