TAX COURT OPINION

Case: Sean Liu & Xijie Yang
Docket Number: 29121-14S
Judge: Guy
Opinion Type: bench
Filed: 06/17/2016
Pages: 11

CMS UNITED STATES TAX COURT WASHINGTON, DC 20217 SEAN LIU & XIJIE YANG, Petitioners, v. ) ) ) ) Docket No. 29121-14S. 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 herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the abovecaptioned case before Special Trial Judge Daniel A. Guy, Jr., at Los Angeles, California, on May 20, 2016, 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, a decision will be entered for respondent. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. June 17, 2016 SERVED Jun 17 2016 Capital Reporting Company 3 Bench Opinion·by Judge Daniel Guy, Jr. May 20, 2016 Sean Liu & Xijie Yang v. Commissioner Docket No. 29121-14S 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 on as precedent in any other case. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of Section 7463 of the Internal Revenue Code of 1986 as amended, and Rules 170 through 174 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, section references are to the Internal Revenue Code of 1986 as amended in effect for 2011, and Rule references are to the Tax Court Rules of Practice and Procedure. Petitioners, husband and wife, resided in 866.488.DEPO www.CapitalReportingCompany.com 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 I Capital Reporting Company 4 1 California at the time the petition was filed. Mr. 2 Liu appeared at trial pro se and he informed the 3 Court that Ms. Yang was unable to appear at trial and 4 5 6 7 8 that she consented to Mr. Liu prosecuting this case on her behalf. Daniel V. Triplett, Jr. appeared on behalf of respondent. The parties filed with the Court a 9 Stipulation of Facts with accompanying exhibits that 10 11 12 13 14 15 16 17 is incorporated herein by this reference. Respondent determined that petitioners are liable for an income tax deficiency of $9,852 and an accuracy-related penalty under Section 6662(a) of $1,970.40 for the taxable year 2011. Petitioners concede that they failed to report taxable interest income of $1,284. The issues remaining for decision are 18 whether petitioner.Sare (1) entitled to deductions for A 0 19 20 21 22 23 24 25 travel and vehicle expenses that they reported on separate Schedules C, Profit or Loss From Business, and (2) liable for an accuracy-related penalty under 6662(a). Petitioners are technology consultants and in 201'1, they provided technology support services for CW Plus, a cable television provider. 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company Mr. Liu testified that in order to maximize 5 onsite technology support for CW Plus, he and Ms. Yang worked different shifts and drove separately each day to CW Plus's headquarters in Los Angeles, 1 2 3 4 5 California. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 At trial he produced a schedule that he had prepared shortly before trial indicating that CW Plus's headquarters. was 34.5 miles from the couples' residence and that he and Mrs. Yang made 319 and 302 round trips, respectively, to that location during 2011. Mr. Liu further testified that he and Ms. Yang traveled around the country by car and commercial airlines to attend various training seminars and technology conferences in 2011. Mr. Liu did not offer any objective evidence to substantiate that he or his wife paid or incurred travel expenses. Petitioners filed a timely joint Form 1040, U.S. Individual Income Tax Return, for 2011. Mr. Liu testified that he prepared the return himself. 21 Petitioners reported wages of $58,108 and 22 23 24 25 unemployment compensation of $14,400. They also reported business income of $11,196, a figure that represents the sum of the net profits that they reported on separate Schedules C related to their 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 technology consulting activities. They each reported receiving gross receipts of $41,025. Among other expenses, Mr. Liu claimed deductions for vehicle expenses of $16,893 and travel expenses of $6,053, and Ms. Yang claimed a deduction for vehicle expenses of $12,445. Respondent disallowed these deductions for lack of proper substantiation. The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally is presumed correct and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a), Nelch v. Helvering, 290 U.S. 111, 115 (1933). Because, as discussed below, petitioners have not complied with the Code's substantiation requirements and have not maintained all required records, the burden of proof as to any relevant factual issue does not shift to respondent under Section 7491(a). See Sec 7491(a) (1) and (2); Higbee v. Commissioner, 116 T.C. 438, 442-443 (2001). Deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. Rule 142(a), INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 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 7 84 (1992), New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction on a federal income tax return must demonstrate that the deduction is allowable pursuant to a statutory provision and must keep and produce adequate records to substantiate that the expense to which the deduction relates has been paid or incurred, and enable the commissioner to determine the taxpayer's correct tax liability. Sec 6001, Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd per curiam 540 F.2d 821 (5th Cir. 1976). Under Section 162(a), a deduction is allowed for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. A deduction normally is not available, however, for personal, living, or family expenses. Sec 262(a). Whether an expenditure satisfies the requirements for deductibility under Section 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). Section 274(d) prescribes more stringent substantiation requirements to be met before a taxpayer may deduct certain categories of expenses, 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 8 including travel expenses and expenses related to the use of listed property as defined in Section 280F(d) (4)(A). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd 412 F.2d 201 (2nd Cir. 1969). As relevant here, the term "listed property" includes passenger automobiles. Sec 280F(d)(4)(A)(i). To satisfy the requirements of Section 274(d), a taxpayer generally must maintain adequate records or produce sufficient. evidence corroborating his or her own statement, which in combination are sufficient to establish the amount, date, and time, and business purpose for each expenditure or business use of listed property. Sec 1.274-5(T) (b) (2), (6), (c)(1), Temporary Incomes Tax Regs., 50 Fed. Reg. at 46014, 46016-46017, (Nov. 6, 1985). Section 1.274-5(T)(c)(2), Temporary Income Tax Regs., 50 Fed. Register 46017-46018 provides in relevant part that "adequate records" generally consist of an account book, a diary, a log, a statement of expense, trip sheets, or a similar record made at or near the time of the expenditure or use, along with supporting documentary evidence. Section 1.274-5(j)(2). Income Tax Regs. provides that the strict substantiation requirements of Section 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 9 1 2 3 4 5 6 7 8 9 10 11 12 274(d) for vehicle expenses must be met, even where the optional standard mileage rate is used. Moreover, the Court may not use the rule established in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2nd Cir. 1930) to estimate expenses covered by Section 274(d), Sanford v. Commissioner, 50 T.C. 827; Sec 1.274-5 T(a), Temporary Income Tax Regs. 50 Fed Register 46014. Petitioners did not maintain contemporaneous records of their vehicle expenses, wh-i-c-h-e-r-e required to satisfy the strict substantiation requirements of Section 274(d). 13 Moreover, as a general rule, a taxpayer's costs of 14 15 16 17 18 19 20 21 22 23 24 25 commuting between his residence and his place of business or employment are nondeductible personal expenses. See Fausner v. Commissioner, 413 U.S. 838, 839 (1973), Commissioner v. Flowers, 326 U.S. 465, 473-474 (1946), Sec 1.262-1(b)(5) Income Tax Regs. The record reflects that petitioners regularly drove from their home to CW Plus, worked a regular shift, and then drove home. On the record presented, we conclude that petitioners' vehicle expenses constituted nondeductible commuting expenses. See e.g. Heuer v. Commissioner, 32 T.C. 947 (1959), affd 283 F.2d 865 (5th Cir. 1960). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Although Mr. Liu testified credibly that he 10 and Ms. Yang traveled to technology seminars and conferences, he failed to produce any objective evidence at trial, such as airline itineraries, travel logs, credit card statements, or similar records, to establish the amount, date and time, and business purpose for any travel expenses. As previously mentioned, the Court may not use the rule established in Cohan v. Commissioner, 39 at F.2d4543-544 to estimate travel expenses such as p G-. those at issue in this case covered by Section 274(d). On this record the Court sustains respondent's determination disallowing the deductions that petitioners claimed for vehicle expenses and travel expenses. Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty equal to 20 percent of the amount of any underpayment of tax that is due to the taxpayer's negligence or disregard of rules or regulations, or that is attributable to any substantial understatement of income tax. By definition an understatement means the excess of the amount of the tax required to be shown 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 on the return over the amount of the tax imposed, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 which is shown on the return, reduced by any rebate. 11 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Sec 6662 ( d) (2) (A) . An understatement is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. Sec 6662(d)(1)(a). The understatement of tax in this case satisfies the definition of a substantial understatement of income tax. With respect to an individual taxpayer's liability for any penalty, Section 7491(c) places on the Commissioner the burden of production, thereby requiring the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2000). Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Id. at 447, See Rule 142(a). Respondent met his burden of production in this case inasmuch as we have sustained respondent's 25 determination that petitioners are not entitled to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 deductions for the expenses in dispute. Mr. Liu did not offer a defense to the imposition of the accuracy-related penalty in this case, other than to assert that respondent erred in determining a deficiency. That matter having been resolved against petitioners, respondent's determination that they're liable for an accuracy- related penalty under section 6662(a) is sustained. Consistent with the foregoing, decision 10 will be entered for respondent. 11 12 13 14 15 16 17 18 19 20 21 22 23 2 4 25 (Whereupon, at 10:51 a.m., the above- entitled matter was concluded.) 866.488.DEPO www.CapitalReportingCompany.com