TAX COURT OPINION

Case: James M. Smith & Julie Smith
Docket Number: 2756-18
Judge: Buch
Opinion Type: bench
Filed: 10/09/2019
Pages: 10

CT UNITED STATES TAX COURT WASHINGTON, DC 20217 JAMES M. SMITH & JULIE SMITH, Petitioners, v. ) ) ) ) Docket No. 2756-18. 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 Los Angeles, California, 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 s uuy,c Dated: Washington, D.C. October 9, 2019 SERVED Oct 11 2019 RECEIVED 10/7/19 IN THE UNITED STATES TAX COURT In the Matter of: JAMES M. SMITH & JULIE SMITH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 2756-18 ) ) ) ) ) ) ) ) Pages: 1 through 8 Date: September 12, 2019 Place: Los Angeles, California 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 IN THE UNITED STATES TAX COURT In the Matter of: JAMES M. SMITH & JULIE SMITH, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) Docket No. 2756-18 ) ) ) ) ) ) ) ) Edward R. Roybal Center & Fed. Bldg. 255 East Temple Street Room 1167, 11th Floor Los Angeles, California 90012 September 12, 2019 The above-entitled matter came on for bench opinion, pursuant to notice at 9:03 a.m. BEFORE: HONORABLE RONALD L. BUCH Judge APPEARANCES: For the Petitioners: No Appearance For the Respondent: No Appearance coners P R O C E E D I N G S 2 (9:03 a.m.) THE CLERK: Recalling docket number 2756-18, James M. Smith and Julie Smith. (Whereupon, a bench opinion was rendered.) 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 3 1 2 3 4 5 6 7 8 9 10 11 12 13 Bench Opinion by Judge Ronald L. Buch September 12, 2019 James M. Smith & Julie Smith v. Commissioner Docket No. 2756-18 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 the Tax Court Rules of Practice and Procedure. Any section references refer to the Internal Revenue Code or the Treasury Regulations in effect during the year at issue, and Rule references are to the Tax Court Rules of 14 Practice and Procedure. 15 16 17 18 Facts Mr. Smith grew up in Malibu, California and longed to return there as an adult. He and his wife settled in Claremont, California where he developed a 19 successful insurance business. Having grown up in Malibu, 20 he attempted to build a client base there. He opened an 21 office in Malibu in 2002, advertised on an Adopt-a-highway 22 23 sign and developed some clients there. In 2005 he purchased a condominium in Malibu and 24 moved his Malibu office to the condominium. His family 25 also used it as living accommodations. In 2013, the year 4 in issue, Mr. Smith principally used the condominium when he was visiting clients in the Malibu area, and principally for lodging on those occasions. There is no evidence that he ever saw clients at the Malibu condominium. The Smiths claimed expenses relating to the 1 2 3 4 5 6 7 Malibu condominium as business expenses on Schedule C. 8 9 These expenses include real estate taxes, mortgage interest, homeowners' association dues, and depreciation. 10 On November 2, 2017 the Commissioner issued a notice of 11 deficiency to the Smiths disallowing the business expenses 12 13 14 relating to the Malibu condominium, but allowing most of those same expenses as Schedule A, itemized deductions. The Commissioner made several other adjustments, most of 15 which the parties have resolved by agreement. 16 17 18 Other than the condominium expenses, the other items remaining in dispute, are non-mortgage interest relating to credit card debt, and advertising expenses. 19 The credit card interest relates to one or more credit 20 cards containing a co-mingling of personal and business 21 expenses. The disallowed advertising expenses relate to 22 $3,120 of advertising on an Adopt-a-highway sign and other 23 advertising expenses, including at least $400 for internet 24 marketing. 25 While residing in Claremont, California the Smiths filed a timely petition and after the parties narrowed the issues, trial was held on September 9, 2019. 5 Discussion As a general matter, the Commissioner's determinations in the notice of deficiency are presumed correct, and the taxpayer bears the burden of proving an error. Rule 142(a). Welch v. Helvering, 290 U.S. 111, 115 (1933). In limited situations the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established. Therefore, the burden of proof remains on Mr. and Mrs. Smith. Taxpayers can deduct ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 162(a). An 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 ordinary expense is one that is normal, usual, or 17 18 customary in the taxpayer's business. Deputy v. du Pont, 308 U.S. 488, 495 (1940). However, a taxpayer is not 19 allowed a deduction for personal, living, or family 20 expenses except where specifically allowed in the code. 21 Section 262(a). 22 Taxpayers are required to maintain sufficient 23 records to show whether or not such person is liable to 24 tax. Section 6001. These records must be retained for as 25 long as the contents may become material, and must be kept 6 1 2 3 4 5 6 7 8 9 available for inspection. Expenses related to Mr. Smith's Malibu condominium are not deductible as business expenses. The condo is not an ordinary and necessary expense as defined in section 162(a). A condo is not a customary or a usual expense in the business of insurance sales. Furthermore, Mr. Smith did not use the condo primarily for business purposes. Mr. Smith and his family used the condo as living accommodations when they were in Malibu. While Mr. 10 Smith did have a home office in the Malibu condo, he used 11 the condominium principally as a home base when he visited 12 13 14 clients in Malibu. Because the condo itself is not a business asset, Mr. Smith's taxes, interest, HOA dues, and 15 depreciation expenses are not allowable as deductions 16 under section 162. 17 The Malibu condominium is not a business asset, 18 but it is Mr. Smith's second residence. As such, Mr. 19 Smith may deduct his 2013 real estate taxes and mortgage 20 21 interest as Schedule A deductions. Mr. Smith substantiated some, but not all, of 22 the advertising expenses he previously deducted. Mr. 23 Smith substantiated and may deduct $3,120 of expenses 24 relating to the Adopt-a-highway sign and other advertising 25 expenses. He's also allowed a $400 deduction for internet 1 marketing expenses. Mr. Smith did not substantiate his 7 other advertising expenses and thus, may not take those deductions. A decision will be entered under Rule 155. (Whereupon, at 9:08 a.m., the above-entitled matter was concluded.) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 c.rinem CERTIFICATE OF TRANSCRIBER AND PROOFREADER 8 CASE NAME: James M. Smith & Julie Smith v. Commissioner DOCKET NO.: 2756-18 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 8 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Troy Ray on September 12, 2019 before the United States Tax Court at its session in Los Angeles, CA, in accordance with the 1 2 3 4 5 6 7 8 9 10 applicable provlslons of the current verbatim reporting 11 12 contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript 13 against the verbal recording. 14 6 17 18 19 20 21 22 23 24 25 Meribeth Ashley, CET-507 Transcriber 9/29/19 Date Frances Marcu, CDLT-136 Proofreader 9/29/19 Date c unen