TAX COURT OPINION

Case: George Munchus & Carolyn Munchus
Docket Number: 13698-16
Judge: Buch
Opinion Type: bench
Filed: 02/15/2018
Pages: 7

RS UNITED STATES TAX COURT WASHINGTON, DC 20217 GEORGE MUNCHUS & CAROLYN MUNCHUS, Petitioners, v. ) ) ) ) ) Docket No. 13698-16. 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 petitioners and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Birmingham, Alabama, 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 for respondent. (Signed) Ronald L. Buch Judge Dated: Washington, D.C. February 15, 2018 SERVED Feb 15 2018 . 3 , 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Ronald L. Buch January 10, 2018 George Munchus and Carolyn Munchus v. Commissioner of .Internal Revenue Docket No. 13698-16 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 10 Revenue Code section 7459(b) and Rule 152(a) of the Tax 11 Court Rules of Practice and Procedure. Any section i 12 references refer to the Internal Revenue Code or the 13 Treasury regulations in effect during the year at issue, 14 15 16 and Rule references are to the Tax Court Rules of Practice and Procedure. The Commissioner issued a notice of deficiency 17 to Mr. and Mrs. Munchus for tax year 2013. The notice of 18 deficiency contained two adjustments. The Commissioner 19 disallowed schedule C business expenses and determined an 20 accuracy-related penalty. We sustain the Commissioner's 21 determinations. 22 23 24 25 I. Background 1 Mr. Munchus is the founder of "Project Results." Even after trial it remains unclear to the Court whether this is a business. Indeed, Mr. Munchus seemed unclear (973)406-2250|operations@escribersmet|mvw.escribersnet . 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 himself. At times he described it in the terms of a charitable organization. But he claimed it as a business and reported it on a Schedule C, Profit or Loss From Business. Mr. Munchus sometimes described Project Results as a consulting organization. The concept is to provide business consulting services to low income people in housing projects to enable them to start or work in a business and become more independent. The concept and goal are laudable, but however laudable the goal, business expenses must be substantiated to be deductible. The Commissioner challenged three business expenses in particular: legal and professional services, travel expenses, and other expenses. Mr. Munchus concedes that he has no documentation of legal or other 15 professional services. Mr. Munchus provided vague and 16 unconvincing testimony about his business purpose for the 17 18 three trips that he 'documented. For his other expenses, Mr. Munchus provided a 19 hodgepodge of carboÂ copies of check he purports to have 20 written. Some of those receipts make little sense to the 21 Court and Mr. Munchus struggled to explain them. For 22 example, for several months, he purports to have written 23 three checks to AT&T on the same date. He claimed club 24 memberships, including the Automobile Club of America, 25 without any meaningful explanation of the business purpose } B5E||||5 (9733406-2250|operations@escribers.net|www.escribers.net 1 2 of the membership. He claimed numerous magazine and newspaper subscriptions, including a zoo magazine and "TV 3 Weekly", as business expenses, also without any 4 5 6 7 8 9 10 11 explanation of how they tie to his business. He claimed checks written to clothing stores as "subscription" expenses. Likewise, Mr. Munchus claimed a payment to "Tru Green" was a business expense. Much of Mr. Munchus's testimony lacked credibility, but his attempt to shovel lawn care expenses into the pile of business expenses demonstrated exactly how deep he was willing to dig. Mr. 12 Munchus listed Tru Green as a "subscription." When 13 pressed about this, he stated that sometimes you need to 14 do business with an organization for it to do business 15 with you. Pressed further, he stated that Tru Green would 16 train people to work in lawn care. Deep into the Court's 17 questioning about what Tru Green was doing to receive the 18 payment, Mr. Munchus mentioned in passing that Tru Green 19 might do work on his property. 20 21 22 23 Overall, Mr. Munchus was neither candid nor credible in his testimony. II. Burden of proof As a general matter, the Commissioner's 24 determinations in the notice of deficiency are presumed 25 correct, and the taxpayer bears the burden of proving an (973) 406-2250 l operations@escribers.net | www.escribers.net 6 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. Munchus. III. Schedule C Business Expenses Taxpayers can deduct "ordinary and necessary business expenses paid or incurred during the taxable year 1 2 3 4 5 6 7 8 9 10 in carrying on any trade or business." Sec. 162(a). 11 However, they are not allowed a deduction for personal, 12 13 14 15 living, or family expenses except where specifically allowed in the Code. Sec. 262(a). Taxpayers are required to maintain sufficient records to "show whether or not such person is liable to tax". Sec. 6001. These records 16 must be retained for as long as the contents may become 17 material and must be kept available for inspection. Sec. 18 19 280F(d) (4). Certain expenses require strict substantiation 20 under section 274(d). Such expenses include those related 21 to travel, meals and entertainment, gifts, and listed 22 property under section 280F(d)(4). To substantiate by 23 adequate records, the taxpayer must maintain an account 24 book, a log, a diary, or a similar record and documentary 25 evidence to establish each element of an expense. Sec. 1973)406-2250 j operations@escribers.net j www.escribers net . 7 1 2 3 4 5 6 7 8 9 1.274-5T(c)(2)(I), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). In some instances the Court may approximate the amount if the taxpayer can establish a deductible expense but cannot substantiate the precise amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d. Cir. 1930). However, the taxpayer must provide some basis for that estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). And, the Court is precluded from making estimates 10 of expenses that are subject to section 274(d) strict 11 12 substantiation rules. Deely v. Commissioner, 73 T.C. 1081, 1101 (1980); sec. 1.274-5T(a), Temporary Income Tax 13 Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). 14 Here, we need not delve into the specifics of 15 the particular deductions. The Court is not convinced 16 that any of the expenses claimed by Mr. Munchus are 17 deductible. Many appear on their face to be 18 nondeductible. Those that might plausibly be deductible 19 did not have sufficient documentary evidence to establish 20 their deductibility. And while testimony alone may be 21 sufficient in some instances, Mr. Munchus's testimony was 22 23 24 not credible. IV. Penalties Neither party introduced any evidence as to 25 penalties. During closing argument, the Court inquired (973)406-2250loperationseescribers.netlwww.escribers.net 8 about the effect of Graev v. Commissioner, 149 T.C. No. 23 (Dec. 20, 2017), on this case. In Graev, we held that the Commissioner's burden of production under section 7491(c) includes establishing supervisory approval of the initial penalty determination under section 6751(b). The Commissioner moved to reopen the record to introduce a document that purports to be the penalty approval required by section 6751(b). We will deny the motion. In Wheeler v. Commissioner, 127 T.C. 200, (2006), we stated: "In a proceeding before this Court, the Commissioner's obligation under section 7491(c) initially to come forward with evidence that it is appropriate to apply a particular penalty to a taxpayer is conditioned upon the taxpayer's assigning error to the Commissioner's penalty determination." Upon review of the record, Mr. Munchus did not challenge the penalty in his petition or at any other time 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 in this case up to and including his closing argument. 21 Because he never assigned error to the penalty, the 22 Commissioner's burden never attached. Accordingly, 23 decision will be entered for the Commissioner. 24 25 (Whereupon, at 10:09 a.m., the above-entitled matter was concluded.) (973)406-2250[operations@escribers.net|www.esc,ibers.net