TAX COURT OPINION

Case: Joszeph Hjalmer Eotvos & Kelly Mae Eotvos
Docket Number: 21450-16S
Judge: Buch
Opinion Type: bench
Filed: 11/09/2017
Pages: 7

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 JOSZEPH HJALMER EOTVOS & KELLY MAE EOTVOS, Petitioners, v. ) ) ) ) ) Docket No. 21450-16S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at St. Paul, Minnesota, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. November 9, 2017 SERVED Nov 09 2017 3 1 .2 3 4 5 6 7 8 9 . Bench Opinion by Judge Ronald L. Buch October 2,. 2017 Joszeph Hjalmer Eotvos & Kellyr Mae.Eotvos Docket No. 21450-14S THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in . any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of 10 the Tax Court Rules of Practice and Procedure. Any 13 12 13 section references refer to the Internal Revenue Code or the Treasury regulations ,in effect during the years at issue, and any Rule references are to the Tax Court Rules 14 of Practice and Procedure. 15 This case was heard pursuant to section 7463. 16 Under section 7463(b), any decision to be entered in this 17 case is not reviewable by any other court, and this 18 opinion may not be treated as precedent for any other case. 19 20 The question before the Court is the extent to 21 which Mr. and Mrs. Eotvos are entitled to deductions 22 stemming from their home-based childcare business beyond . 3 those already allowed by the Commissioner. For 2014, .an 24 accuracy-related penalty is also at issue. 25 BACKGROUND pn)406.2250|operationseescribers.netlwarescribers.net . 4 1 2 3 4 5 6 7 Beginning in 2012, Mrs. Eotvos operated a childcare. business out of her home. On their returns for 2012 through 2014, the Eotvoses claimed depreciation expenses for the use of their home and their personal assets. When called upon to substantiate those expenses, . the Eotvoses did not directly substantiate what was claimed. Instead, they reconstructed those expenses by 8. - photographing a wide array of häusehold assets and 9 estimating their value. Those assets included swords and 10 battle axes, which Mr. Eotvos collects, and Mrs. Eotvos's 11 12 13 14 15 jewelry. In 2014, the Eotvoses claimed substantial repairs and maintenance expenses for improvements made to their garage, driveway, and sidewalk. DISCUSSION Taxpayers are allowed a,deduction for ordinary 16 and necessary business expenses -- section 162 -- and for 17 depreciation, section 167. The allowance of such 18 deductions, however, is not absolute. The property for 19 which the Eotvoses claiméd deductions fall into the 20 21 22 23 24 categories of personal property and real property (use of the home). We take them in turn. PERSONAL PROPERTY Section 262 disallows deductions for personal living expenses. There's a specific rule in section 262 25 that's instructive for how the disallowance rule applies. (973)406-2250|opera i s@estribetsmet|www.escribersnet 5 1 With respect to telephone expenses, a first line is not 2 3 4 5 6 7 8 9 deductible because it is a personal expense; section 262(b). The reason is easy to see: the first line, even if used for business purposes, exists primarily as a personal expense. Thus, it is nondeductible. As we stated in Deihl v. Commissioner, T.C. Memo 2005-287: "When applying sections 162 and 167 in the context of parti,cular items of property, the following general framework has emerged through the case law. Under 10 either section, the initial quest·ion is whether ownership 11 12 and maintenance o.f the property is related primarily to the business or to personal purposes. International 13 Artists, Ltd. v. Commissioner, 55 T.C. 94, 104 (1970) (and 14 cases cited thereat); see also, for example, Richardson v. 15 Commissioner, T.C. Memo. 1996-368; Griffith v. 16 Commissioner, T.C. Memo. 1988-445. The answer to this 17 question determines which of the three approaches is 18 appropriate: (1) If acquisition and maintenance of the 19 property is primarily associated with profit-motivated 20 purposes and any personal use is distinctly secondary and 21 22 incidental, expenses and depreciation are deductible; (2) if acquisition and maintenance is motivated primarily by 23 personal considerations, deductions are disallowed; and $4 (3) if substantial business and personal motives exist, 25 allocation becomes necessary. International Trading (973)406-2250|operati ribetsmet|wwnescribersmet (7+h C ir-. I %oÍ Company v. Commissioner, '275 F.2d 578, 584-587, affirming T.C. Memo. 1958-104; International Artists, Ltd. v. Commissioner, supra at 104-105; Richardson v. Commis3ioner, supra; Griffith v. Commissioner, supra; Kenerly v. Commissioner, T.C. Memo. 1984-117." The Eotvoses pro,vided inadequate evidence to substantiate the business use of what appear, on their face, to be personal hssets. Battle axes were not used as children's playthings, and their acquisition and 1 2 3 4 5 15 7 8 9 10 maintenance was not in furtherance of the day care 11 business. Nor do we believe that the acquisition or 12 maintenance of Mrs. Eotvos's jewelry was for the day care. 13 14 The assets that might plausibly have been used in the day care were acquired for the Eotväses's .children and it is 15 unclear the extent to which they were actually used in the 16 day care. In that regard, we give little credibility to 17 Mr. Eotvos's testimony. He clearly sought out to make even the most tenuous of claims that property was used in the day care. He.made no effort to distinguish those items that are used regularly for the day care business. For example, he claimed that household tools were used for the day care because they might have been used to repair a toy that might have been used in the day care. Even if we accepted this testimony, the causal nexus is too tenuous 18 19 20 21 22 23 24 1 25 to lead to deductibility. And a witness who can testify (973)406-2250|operations@escribersmet|wwwascribersmet 1 2 3 4 5 6 7 8 9 with a straight face about the nexus between a battle axe and a day care business earns no credibility. USE.0F THE HOME As for a taxpayer's residence, section 280A disallows expenses relating to the use of a dwelling that is also used by the taxpayer as a residence. There is an exception to that general rule for day care services provided out of the home. See section 280A(c)(4). Under that exception, a person may deduct the business use of 10 their home in providing day care services using a specific 11 allocation formula. The portion of the home for which a 12 13 14 15 16 17 deduction is permitted is limited to that portion used on a regular basis with a special allocation used for areas used less regularly; section 280A(c)(4)(A) and (c) (4)(C). Mr. Eotvos's testimony was, in efféct, that the day care uses the whole home. This blanket assertion, like the battle axe, strains credulity. We have no doubt 18 that a portion of the home was used for the day care on a 19 20 regular basis. But we do not find credible Mr. Eotvos's testimony that the entire home was used regularly, and Mr. 21 Eotvos made no attempt to allocate the use of any portions 22 of the home. 23 24 We note that the Commissioner allowed deductions for partial use of the home. Mr. and Mrs. Eotvos did not 25 establish that they are entitled to deductions beyond the (973)406-2250|operations@escribers.íiet|wwv,,escribers.net 1 2 3 4 5 6 7 8 9 amount allowed by the Çommissioner. ACCURACY-RELATED PENALTY The Commissioner asserted an accuracy-related penalty under section 6662 for negligence. The deductions for personal property lacked any reasonable basis and the Eotvoses lacked substantiation. The Commissioner satisfied his burden. Mr. and.Mrs. Eotvos offered no evidence in the form of a defense. They apparentlý relied, at least in part, on a program.sold to them to 10 assist with claiming deductions relating to day care 11 12 expenses. The details of this program are not in the record, nor is the nature of any advice that the Eotvoses 13 might have received before they filed their 2014 return. 14 Accordingly, the accuracy-related penalty is sustained. 15 Because of concessions by both sides, decision 16 will be entered under Rule 155. 17 18 19 20 21 22 23 24 25 (Whereupon, at 9:09 a.m., the above-entitled matter was concluded.) (973)406-2250|operations@escribersnet|wwwéscribersmet