TAX COURT OPINION

Case: Mary-Elizabeth D. Wallenius
Docket Number: 18216-09S
Judge: Colvin
Opinion Type: bench
Filed: 12/03/2010
Pages: 19

UNITED STATES TAX COURT 20217 WASHINGTON, D.C. MARY-ELIZABETH D. WALLENIUS, Petition'er, v. COMMISSIONER OF INTERNAL REVENUE, Respondent . · ) ) ) ) ) ) ) ) ) Docket No. 18216-09S 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 Trial Judge Lewis R. Carluzzo at Los Angeles, California, on October 21, 2010, containing his oral opinion rendered at the above case before Special the conclusion of trial. findings of fact and the trial of In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. December 3, 2010 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 Lewis R. Carluzzo 3 MARY ELIZABETH D. WALLENIUS Docket Number 18216-095 October 21, 2010 Los Angeles, California BENCH OPINION 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. This oral findings of fact and opinion shall not be relied upon as precedent in any other case. And let's go off the record for a minute. (OFF THE RECORD) (BACK ON THE RECORD) THE COURT: We are back on the record in Wallenius. 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 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. Heritage Reporting Corporation (202) 628-4888 I 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 Hereinafter in this bench opinion, unless otherwise specified, section references are to the Internal Revenue Code of 1986, as amended, in effect for 2005. Rule references are to the Tax Court Rules of Practice and Procedure. Mary Elizabeth Wallenius appeared pro se. Nathan C. Johnston appeared on behalf of respondent. In a notice of deficiency dated April 24, 2009, respondent determined a $6,105 deficiency in petitioner's 2005 Federal income tax. In that notice of deficiency, respondent also imposed a $716 section 6651(a) (1) addition to tax and a $1,221 section 6662(a) accuracy-related penalty. The issues for decision are: (1) Whether petitioner is entitled to an itemized deduction for medical expenses; (2) whether petitioner is entitled to a deduction for miscellaneous itemized -- whether the petitioner is entitled to a miscellaneous itemized deduction; (3) whether petitioner's 2005 Federal income tax return (petitioner's 2005 return) was timely filed; (4) whether petitioner and her spouse are now entitled to elect to file a joint 2005 Federal income tax return; and (5) whether the underpayment of tax required to be shown on petitioner's 2005 return is due to negligence, or in the alternative whether the 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 5 underpayment is a substantial understatement of income tax. Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioner resided in California. During 2005 petitioner was employed by Software Management Consultants (Consultants) as a systems analyst. Countrywide Home Loans (Countrywide) was a client of Consultants and, during 2005, petitioner provided services to Countrywide on behalf of Consultants. It appears that at some point during 2005, probably around September of that year, petitioner became employed by Countrywide, although petitioner's recollection on the point is a little stale. From time to time during 2005, petitioner was required to travel between her residence and various of Countrywide's offices. As best as can be determined from the record, she used her own car for such purposes. Sometimes she drove to one or another of Countrywide's offices directly from her residence, and sometimes she drove from one of their offices to another before returning home. On at least one occasion, she traveled by air to a Countrywide office located in Dallas, Texas. To the extent that any 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 6 the above local-or long distance travel took place while an employee of Consultants, petitioner's traveling expenses were not reimbursed or reimbursable by her employer or Countrywide. To the extent that petitioner was employed by Countrywide towards the latter part of 2005, that company's employee expense reimbursement policy has not been made part of the record. Petitioner might have maintained travel receipts/records relating to the Dallas trip, and she might have maintained some form of contemporary log in which she recorded the mileage driven between her residence and Countrywide's offices, etc., but if she did, those documents have not been made part of the record in this case. Petitioner and her husband were married in 1992. For some of the years since their marriage, petitioner filed a joint Federal income tax return with her husband. For other years, petitioner filed a separate return, as she did for 2005, the year in issue here. Although petitioner's 2005 return indicates that it was "self-prepared," in fact, the return was prepared by petitioner's husband. As between them, apparently petitioner's husband assumed the responsibility to prepare and mail each of the Federal income tax returns filed by either of them 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 7 since being married to each other. At least for 2005, petitioner's husband used a computer based tax return preparation program. Petitioner did not accompany her husband when he mailed petitioner's 2005 return, which was not sent by certified or registered mail. Petitioner could not recall why she and her husband did not elect to file jointly for 2005. Petitioner's husband suffered from some chronic illnesses, the details of which have not been made part of the record. Nevertheless, the record demonstrates regular purchases of his prescription drugs. The record also shows that petitioner incurred various expenses for medical services and drugs, including the cost of health and dental insurance provided through Consultants. The receipts placed in the record for such expenditures total slightly more than $1,100. As relevant here, petitioner's 2005 return includes: (1) A Schedule A, Itemized Deductions; and (2) a Form 2106, Employee Business Expenses. The adjusted gross income reported on the petitioner's return is $100,664. On the Schedule A, petitioner claims a $12,271 medical expense deduction computed as follows: medical expenses of $19,821, minus $7,550 (7.5 percent of her adjusted gross income). 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 Petitioner also claimed a $35,318 miscellaneous itemized deduction on the Schedule A. That deduction is computed as follows: Unreimbursed employee business expenses of $15,325, plus tax preparation fees of $49, plus "other expenses" of $21,957, minus $2,013 (2 percent of petitioner's adjusted gross income). The Form 2106, shows the unreimbursed employee business expenses to consist of vehicle expenses totaling $13,470, which amount includes $8,360 of "actual expenses" for "gasoline, oil, repairs, vehicle insurance" plus $5,110 for "vehicle rentals". No substantiating documents relating to these "vehicle expenses" have been presented. During the examination of her 2005 return, petitioner produced a schedule on which she estimated the average number of business-related miles that she drove (petitioner's mileage estimate). The "other expenses" shown as a miscellaneous itemized deduction on the Schedule A are attributable to a lawsuit involving petitioner's husband. Not much information regarding the nature of the lawsuit has been made available here, but it is clear that the lawsuit has, or had nothing to do with petitioner's employment with Consultants or Heritage Reporting Corporation (202) 628-4888 9 1 2 3 4 5 Countrywide. Taking into account an extension to file, petitioner's 2005 return was due on or before October 15, 2006. The return shows February 8, 2008, as the date it was signed. Respondent's records show 6. that petitioner's 2005 return was filed on April 1, 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2008. That date is also shown by stamp as the date received by respondent's service center. Respondent's records also show that the $3,242 refund claimed on petitioner's 2005 return was paid on April 28, 2008. In the above-referenced notice of deficiency respondent: (1) Disallowed the entire medical expense deduction claimed on the Schedule A; (2) disallowed the entire miscellaneous itemized deduction claimed on Schedule A; (3) imposed a late filing addition to tax; and (4) imposed an accuracy-related penalty. Most of the issues in this case involve disallowed deductions, and we will begin our discussion with those issues first by summarizing some fundamental principles generally applicable to all deductions. As we have observed in countless opinions, deductions are a matter of legislative grace, and generally the taxpayer bears the burden of proof to establish entitlement to any claimed deduction. Sec. 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 7491(a); Rule 142 (a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. 10 I Helvering, 292 U.S. 435, 440 (1934). The taxpayer's burden requires the taxpayer (1) to identify a specific statute that allows for the deduction claimed and (2) to substantiate any such deduction by keeping and producing for the Commissioner's inspection adequate records that show the expense has been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976); Menequzzo v. Commissioner, 43 T.C. 824, 831-832 (1965). As a general rule, if, in the absence of such records, a taxpayer provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of such expense and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in order for the Court to estimate the amount of an expense,- we must have some basis upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided 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 11 largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). In the case of certain expenses, section 274(d) overrides the so-called Cohan doctrine. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T (a), Temporary Income Tax Regs. Specifically, section 274(d) provides that no deduction is allowable with respect to (1) traveling expenses (including the cost of meals and lodging while the taxpayer is traveling away from home on business), and (2) any listed property, as defined in section 280F(d) (4), unless the deduction is substantiated in accordance with the strict substantiation requirements of section 274(d) and the regulations promulgated thereunder. As used in section 274(d), "listed property" includes "any passenger automobile". Set against these fundamental principles, we turn our attention to the deductions here in dispute. A taxpayer is entitled to an itemized deduction for medical expenses not compensated by insurance to the extent that the expenses exceed 7.5 percent of the taxpayer's adjusted gross income. Sec. 213(a). Petitioner and her spouse were covered 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 12 medical insurance during 2005. The record contains various receipts for expenses contemplated by section 213, but the total of those receipts falls far short of exceeding 7.5 percent of petitioner's 2005 adjusted gross income. We expect, as petitioner suggested during trial, that other medical expenses were incurred, and it would not be unreasonable to assume that there were physician's fees associated with some or all of the prescriptions evidenced by various receipts in the record. It would seem that substantiation for physician's fees is easily obtainable, and the absence of any such substantiation to some extent undermines petitioner's claim. In any event, we have no basis to estimate the amount of any such fees, or how much of those fees would have been covered under petitioner's or petitioner's spouse's medical insurance. Respondent's disallowance of the medical expense deduction claimed on petitioner's 2005 return is sustained. According to petitioner's return, the $35,318 miscellaneous itemized deduction, all of which has been disallowed, includes $15,325 of unreimbursed employee business expenses. It is well established that a taxpayer may be in the trade or business of being an employee, and as such, entitled to deductions 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 13 pursuant to section 162(a) for all ordinary and necessary expenses paid or incurred by a taxpayer during the taxable year in carrying on a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377 (1970); Christensen v. Commissioner, 17 T.C. 1456 (1952); Abraham v. Commissioner, 9 T.C. 222 (1947). Traveling expenses incurred while away from home in the pursuit of a trade or business, including the trade or business of being an employee, are deductible, sec. 162(a) (2), as are local transportation costs. Commuting expenses, however, are personal expenses and may not be deducted. Sec. 262(a). A portion of the unreimbursed employee business expenses shown on petitioner's 2005 return apparently relate to her trip to Dallas, Texas, and the balance are attributable to the use of her car to travel between her residence and various offices of Countrywide, or between one of Countrywide's offices and another. Petitioner has produced no receipts for the Dallas trip, and no receipts for any of the "actual" vehicle expenses shown on the Form 2106. Petitioner's mileage estimate hardly satisfies the strict substantiation requirements mandated by section 274(d), and by her own testimony some of the trips 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 14 shown on the estimate are attributable to nondeductible commuting expenses. Petitioner is not entitled to a deduction for unreimbursed employee business expenses. The deduction for "other expenses" included in the miscellaneous itemized deduction here in dispute relates to a lawsuit having nothing to do with petitioner, or her trade or business as an employee of Consultants or Countrywide. Otherwise, petitioner has not called our attention to any provision of the Internal Revenue Code that would allow a deduction for the expense, and we are not aware of any. Petitioner is not entitled to an itemized deduction for "other expenses". The remaining portion of the miscellaneous itemized deduction relates to $49 for "tax preparation fees", which if paid, may be deducted as a miscellaneous itemized deduction. See secs. 63, 212(3). Even if allowable as such, the amount hardly exceeds 2 percent of petitioner's adjusted gross income. See sec. 67(a). Respondent's disallowance of the miscellaneous itemized deduction claimed on petitioner's 2005 return is sustained. Spouses who elect to file a joint Federal 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 15 income tax return do so on the return itself. See sec. 6013(a); sec. 1.6013-1(a) (2), Income Tax Regs. At some point during the examination of petitioner's 2005 return, petitioner discussed with respondent's examining agent the possibility of submitting a 2005 joint Federal income tax return with her spouse. The timing of any such discussion is not exactly clear, but it stands that no such joint return was submitted; consequently no election has been made and we need not consider whether she was otherwise entitled to make the election. Petitioner's filing status is properly shown on her 2005 return as "married filing separately". In the notice of deficiency respondent imposed a section 6662(a) accuracy-related penalty. The burden of production with respect to the applicability of that penalty is upon respondent. See sec. 7491(c). Respondent has met that burden. First, as we have observed time after time, the failure of a taxpayer to maintain and produce substantiating records is a ground for the imposition of the penalty upon the ground of negligence. See sec. 6662(b) (1) and (c), Sykes v. Commissioner, T.C. Memo. 2010-84; sec. 1.6662-3(b), Income Tax Regs. Second, the penalty is applicable because the underpayment of tax 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 16 required to be shown on petitioner's 2005 return is a substantial understatement of income tax. See sec. 6662(b) (2), (d). Petitioner readily admits to mistakes made on her 2005 return. She acknowledged that the deduction for vehicle expenses was overstated. According to petitioner, the blame for any mistakes made on her 2005 return lies with the computer program petitioner's husband used to prepare the return, or with petitioner' s husband himself . Her explanations hardly constitute reasonable cause for the underpayment. See sec. 6664(c). Petitioner is liable for the section 6662(a) penalty and respondent's imposition of that penalty is sustained. In the above-referenced notice of deficiency respondent also imposed a section 6651(a) (1) addition to tax because, according to respondent, petitioner's 2005 return was not timely filed. In the case of failure to file a Federal income tax return on the date prescribed for filing (including any extension of time for filing), section 6651(a) (1) provides that there shall be added to the tax required to be shown on the return 5 percent of the amount of such tax if the failure is for not more than one month, with an additional 5 percent for each Heritage Reporting Corporation (202) 628-4888 17 1 2 3 4 5 6 7 8 9 10 11 additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate. The addition to tax is not applicable if the taxpayer demonstrates that the failure was due to reasonable cause and not willfül neglect. Respondent bears the burden of production with respect to the imposition of the section 6651(a) (1) addition to tax. See Sec. 7491(c). Generally, a document is considered filed with the Internal Revenue Service (IRS) when it is received by that agency. United States v. Lombardo, 12 -- 241 U.S. 73, 76 (1916); Jones v. United States, 226 13 14 15 16 17 18 19 20 21 22 23 24 25 F.2d 24, 28 (9th Cir. 1955). Actual receipt of a document by the IRS, however, is not always necessary in order to effectuate its filing. For example, proof that a document was properly mailed gives rise to a presumption that the document was deiivered to, and received by, the person to whom it was addressed even if as in this case the document was not sent by certified or registered mail. See Lewis v. United States, 144 F.3d 1220 (9th Cir. 1998); Anderson v. United States, 966 F.2d 487 (9th Cir. 1992); Estate of Wood v. Commissioner, 92 T.C. 793, 798 (1989), affd. 909 F.2d 1155 (8th Cir. 1990) . According to petitioner, her 2005 return Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 1-2 13 14 15 16 17 18 19 20 21 22 23 24 25 18 was mailed prior to the time it was due to be filed. Her testimony on the point, which was short on details, was based upon habit and belief and not a description of the actual mailing event. Furthermore, her claim of timely mailing was undermined by the date on the return itself, a date more consistent with the April 1, 2008, date shown on respondent's records as the date the return was received and filed. In this case, petitioner's testimony regarding the manner in which her 2005 return was filed is less than compelling. Relying upon respondent's records rather than petitioner's testimony, we find that her 2005 return was filed on the date that respondent's records show it to have been received, that is, April 1, 2008. That being so, the return was not filed when due. Petitioner's failure to file a 1998 Federal income tax return continued for a period that exceeded four months. Respondent need not establish that such failure was due to willful neglect and not due to reasonable cause. Higbee v. Commissioner, 116 T.C. 438, 447 (2001). Other than to claim the return was timely filed, Petitioner has offered no reasonable cause for the failure to timely file the return. Respondent's imposition of the section 6651(a) (1) 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 19 addition to tax is sustained. In closing we think it appropriate to comment on petitioner's claim that the case had been previously settled, or at least that it now should be settled according to the terms previously proposed. According to petitioner, at some point prior to trial she received an offer to settle the case which came in the form of a proposed stipulated decision document. Being somewhat informed on the manner in which respondent proceeds in the pretrial stages of deficiency proceedings pending before this Court, we are not surprised to hear that settlement negotiations preceded trial, or that a settlement proposal was made to her. For reasons known better to petitioner, however, the proposed decision document was neither signed nor returned to respondent. Under the circumstances, her failure to sign the decision document and return it to respondent in a timely fashion effectively caused any settlement offer contemplated in that document to have lapsed, as respondent contends. See FPL Group, Inc. v. Commissioner, T.C. Memo. 2008-144. To reflect the foregoing, decision will be entered for respondent. This concludes the Court's oral findings of Heritage Reporting Corporation (202) 628-4888 i 2 3 4 s 6 7 8 9 io 11 12 13 14 is 16 17 18 19 20 21 22 23 24 2s fact and opinion in this case. (Whereupon, at 3:44 p.m., the bench opinion in the above-entitled matter was concluded.) 20 // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888