TAX COURT OPINION

Case: Joan Haynesworth
Docket Number: 4148-11S
Judge: Gustafson
Opinion Type: bench
Filed: 12/21/2011
Pages: 20

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM JOAN HAYNESWORTH, Petitioner, Docket No. 4148-11S. 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 petitioner and to respondent a copy of transcript of Gustafson at Washington, D.C., on November 18, 2011, containing his oral of in the above case before Judge David fact and opinion rendered at the pages of the the conclusion the trial findings of the trial. In accordance with the oral decision will be entered in part findings of for the respondent. fact and opinion, (Signed) David Gustafson Judge Dated: Washington, D.C. December 21, 2011 SERVED Dec 21 2011 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 Bench opinion by Judge David Gustafson November 18, 2011 Haynesworth v. Commissioner Docket No. 4148-11S THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case . The following represents the Court's oral Findings of Fact and Opírion, which shall not be relied on as precedent in any cther case. 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. By a notice of deficiency dated November 23, 2010 (E>:. 1-J) , the Internal Revenue Service (IRS) determined deficiencies in the Federal income tax of petitioner Joan Haynesworth for the years 2007 and 2008. :The notice also determined an accuracy-related penalty under section 6662 (a) , which the IRS conceded at the conclusion of the trial of this case.) For the reasons explained hereafter, we will sustain the tax deficiencies. Trial of this case was conducted on Novembe:: 16 , 2011, in Washington, D . C . Ms . Haynesworth and her paid return preparer testified. The par:ies' Stipulation of Facts was admitted into 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 evidence, along with its Exhibits 1-J through 10-J, and additional exhibits were of fered by the parties and were also admitted into evidence. We find the following facts: FINDINGS Ms. Haynesworth resided in Maryland when she filed the petition in this case. Petitioner's work at iPBGC: Ms. Haynesworth is the owner of "J L Hayneswcrth Consulting Services, LLP". Since 2004, Ms. Hayresworth has been employed as an independent contractor. by the Pension Benefit Guaranty Corporation ("PBGC") . Her tax returns describe her Schedule C business as consulting, and PBGC is the sole client or cus tomer of that consulting busines s . Ms . Hayne sworth works ir. the PBGC's Disclosure Division and processes Freedom of Information Act ("FOIA") requests . The PBGC provides Ms . Haynesworth with an of f ice and related equipment (computer, telephone, and office supplies) at a building on K Street in Washington, D.C. PDGC requires that Ms. Haynesworth perform her FOIA work at the K Street office and does not permit her to take work out of that office to be performed elsewhere . Ms . Haynesworth works 40 hours per week for PBGC and reports her time. She is permitted to 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 use her K Street'office and equipment to report that time and does some of her work on her timesheets in the K St.reet office. She spends about an hour a week reporting her time. The K Street office is Ms. Haynesworth's principal place of business. Ms. Haynesworth's contracts with PBGC have one year terms which end in June each year. About 60 days before the end of each term, the PBGC advertises the pos:_tion and solicits bids for it, so Ms. Haynesworth must bid and compete for her job every year. During that 60-day period she prepares and submits a proposal that she be rehired as a contractor. The preparation of this proposal takes 12 or more hours each year. Petitioner's commute Ms. Haynesworth's home in Waldorf, Maryland, is more than 20 miles from the PBGC office in downtown Washington, D.C. Each work day in 2007 and 2008 she drove one of her two cars to a train station, parked the car at that station and rode the train to the station nearest the K Street office. For this commute, she thus incurred the expense of operating the vehicle, parking expense, and the cost of train fare. // 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 Petitior.er's home office Ms. Haynesworth maintained an office in her home during 2007 and 2008. In April 2007 Ms. Haynesworth moved from one house to another, so that her home office was in the first house for only four months of 2007, and her home office was in the second house for the remaining eight months of 2007 and all of 2008. The home office in the first house was in its finished basement, but the record does not show what percentage of the first house (by square feet) was devoted to the home office. The one-room home office :.n the second house took up 5.78 percent of the area of the home (which we round up to 6 percent, for ease of reference). . Ms. Haynesworth did not testify about how the home office was furnished. However, she described placing phone calls and emails from the office and stated that she prepared her proposals and time sheets there, no we infer that the office had a desk, a chair, a computer (with Internet connection) and a phone. . The only business activities that Ms. Haynesworth conducted in the home office were preparing her proposals each Spring for the renewal of her.con:ract and the preparation of some of her time 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 sheets. She also used the home office to phone or email PBGC to advise them if she needed to vary from her regular schedule (for sickness or otherwise). Ms. Hayneswcrth did not testify that she ever used the home office. to meet business contacts, to look for other prospective clients, to do reading, correspcndence, or record-keeping related to her businese, to store business-related records, or to do her work for PBGC (since PBGC did not allow her to take work home with her). Petitior.er's jewelry business In 2008 Ms. Haynesworth had a second businese activity, involving the sale of jewelry. She reported that activity on a Schedule C separate from her consulting business, and claimed for the jewelry business a separate home-office deduction based on the claimed use of 11 percent of the house for that jewelry business. The IRS did not disallow the deductions for the jewelry business on the notice of deficiency nor challenge them at trial, and we therefore do not consider the propriety of those deductions. Petitioner's tax returns Beginning in 2005 Ms. Haynesworth hired a return preparer to prepare her tax returns, and that Heritage Reporting Corporation (202) 628-4888 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 preparer prepared her returns thereafter, including for 2007 and 2008. The preparer visited Ms. Haynesworth in her home (and made such home visits annually), and she thus personally observed Ms. Haynesworth's home office and the rest of the house. Upon being hired, the preparer reviewed Ms. Haynesworth's 2004 return and noted that she had not claimed deductions for a home office or commuting expense. The preparer advised Ms. Haynesworth that, because she was an independent contractor, she was entitled to deduct those expenses. She therefore assisted Ms. Haynesworth in filing an amended return for 2000 on which she reported such deductions and claimed the resulting tax refund. Upon receiving the amended return for 2004, the IRS mailed Ms. HayneswÜrth a request for substantiation of her 17. vehicle expense; and.when Ms. Haynesworth provided 18 19 20 21 22 23 24 25 that indormation, the IRS processed the requested refund. This action made Ms. Haynesworth confident that the position reflected on the amended return was proper. To each of Ms. Haynesworth's returns for 2007 and 2008, she attached a Schedule C on which she reported the income from her consulting business (i.e., her compensation from PBGC) and claimed 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 9 deducticns from that income, including "car and truck expense" (from her commute) and "Expenses for business use of your home" (for the home office). On the 2007 return, the preparer proposed a home office expense deduction on a Form 8829 for the first home based on 20 percent usage of the home, and then carried that 20 percent figure over to a Form 8829 for the second home, thus claiming a 20 percent usage for the entire year. On the 2008 return, the preparer proposed a home office expense deduction on Form 8859 (for the second home) based on a 25 percent usage. The preparer testified that she made this allocation based on "number of rooms" (i.e., that the home office was one of four rooms in the house), but it is completely unclear what she counted as "rooms". On cross-examination, Ms. Haynesworth testified that the house consists of approximately 2,600 square feet. The part.ies have stipulated that the home office took up only 6 percent of the area of the house, and it is highly unlikely that the remainder of the house consisted of only three rooms. The car and truck expenses reported on the returns included both a mileage charge (for the distance from home to the train) and gas costs, car repairs and maintenance, and interest on car payments. Heritage Reporting Corporation (202) 628-4888 The car and truck expense also included parking (at the train station) and train fares into town and back. Ms. Haynesworth signed the returns as proposed by the preparer and timely filed them with 10 the IRS. IRS exanination The IRS examined Ms. Haynesworth's returns for 2005 and 2008. On November 23, 2010, the IRS issued the notice of deficiency. The notice reflected the IRS's disallowance of the home office expense deductions and the commuting expense deductions, and determined the resulting tax deficiencies and penalties. Ms. Haynesworth timely filed her petition in this Court on February 18, 2011. . OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove any adjustment to the income the IRS determined and to prove h s.entitlement to any deductions he claims. Rule 142(a); We].ch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are strictly a matter of legisla ive grace, and taxpayers must satisfy the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 . specific requirements for any deduction claimed. See 24 25 INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain 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 records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 11 1(a). I. Hone office expense Section 280A(c) (1) (A) allows a taxpayer to deduct expenses for the business use of their residence but only to the extent the expenses are allocable to a portion of the residence which is exclusively used on a regular basis as the principal place o:! business for a trade or business of the taxpayer. As a result, Ms. Haynesworth would be entitled to the home office deduction only if the home office was exclusively used on a regular basis as the principal place of her business. There are generally two alternative standards available for determining a taxpayer's principal place of business -- the so-called Soliman standard and the general provisions of section 280A(c) (1). A. Soliman standard Where, as here, a taxpayer's business is conducted in part at the taxpayer's residence and in part at another location, the Supreme Court has held that there are two primary considerations in deciding whether the home office qualifies as the taxpayer's Heritage Reporting Corporation (202) 628-4888 12 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 principal place of business: (i) The relative importance of the functions or activities performed at each location; and (ii) the time spent at each location. Commissioner v. Soliman, 506 U.S. 168, 177 (1993). 1. Relative importance of activities The primary responsibility of Ms. Hayneswcrth's employment was to process FOIA requests for PBGC. Pursuant to her contract with PBGC, all of Ms. Hayresworth's substantive work product was required. to be performed at the PBGC offices on K Street. In contrast, Ms. Haynesworth testified that she used. her home office to prepare her time sheets and prepare her proposals to be re-hired as a contractor for the following year. No substantive work was done from her home office, but merely incidental activities related to her consulting business. 2. Time spent at each location Ms. Haynesworth spent at least 40 hours per . week at the K Street office. In contrast, she spent on average only a very few hours per week working in her home office. Given that her primary duties were carried out, and the majority of her time was spent, at the K 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 Street office, we find that under the Soliman standard Ms. Haynesworth's principal place of business was at the K Street office in 2007 and 2008. B. General 280A(c) (1) standard After the Supreme Court's decision in Soliman. Congress added the flush language following section 280A(c) (1) (C) to expand the scope of the home office deduction. That flush language was intended to permit self-employed taxpayers who manage business activitïes from their homes to claim a home office deduction even if they would not qualify under the Soliman standard. However, Congress did not change the requirement that, in order to qualify as the principal place of business, the home office must be regularly and exclusively used for business purposes. Thus, a home office of a self-employed individual generalLy qualifies as a principal place of business under the general section 280A(c) (1) standard if: (i) it is used exclusively and regularly for adminis:rative or management activities of a trade or business; and (ii) the taxpayer has no other fixed location where she conducts such activities. 1. Administrative or management activities The Code does not specifically define what 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 constitttes "administrative or managerial activities", but the Service has identified the following examples of such activities: Billing customers, clients, or patients ; keeping books and records; ordering supplies ; setting up appointments; and forwarding orders 2nd writing reports. IRS Pub. 587, "Business Use of Your Home * * *". The only business activities that Ms. Haynesworth conducted in the home office were preparing her proposals each Spring for the renewal of her cont.ract and preparing of some of her time sheets. These activities do not rise to the level of "administrative or managerial activities". Despite being an independent contractor, Ms. Haynesworth was not, so far as our record shows, actively managing a business from her home office. In fact, during 2007 and 200H, PBGC was Ms. Haynesworth's only consulting client, and her work took her to the same location (on K Street) each day. We find that the activities performed by Ms. Haynesworth in her home office were merely ncidental to her substantive work performed at the PBGC offices, and that her home office was, at most, an ancillary place of business. 2. Regular and exclusive use Even assuming that Ms. Haynesworth used her 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 home office regularly for legitimate "administrative or managerial activities" of her consulting business, she did not provide any testimony or other evidence that her home office was used exclusively to run her consulting business. This omission alone is sufficient to defeat her entitlement to any deduction under section 280A(c) (1). we therefore conclude that Ms. Haynesworth's home office was not her principal place of business in 2007 or 2008. As a result, she is not entitled to deduct any "business.use of home" expenses for those years. II. Conmuting expenses In general, the cost of daily commuting to and fron work is a nondeductible personal expense. See Comnissioner v. Flowers, 326 U.S. 465, 473-474 (1946); 26 C.F.R. sec. 1.162-2(e), Income Tax Regs. To this general rule there are two exceptions that are relevant here: 1) the home office exception -- i.e., the expenses incurred traveling between a taxpayer's residence and a place of business are deductible if the res dence is the taxpayer's principal place of business; see Curphey v. Commissioner, 73 T.C. 766, 777-778 (1980); Rev. Rul. 99-7, 1999-1 C.B. 361, 362; and 2) the temporary employment exception -- i.e., 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 travel expenses between a taxpayer's residence and temporary work locations outside of the metropolitan area where the taxpayer lives and normally works are deductible. Rev. Rul. 99-7, 1999-1 C.B. at 361. A. Home office exception If an office in the taxpayer's residence satisfies the principal place of business requirements of section 280A(c) (1) (A), then the residence is considered a business location. In these circumstances, the daily transportation expenses incurred in going between the residence and other work locations in the same trade or business are ordinary and necessary business expenses deductible under section 162(a). See Curphey, 73 T.C. at 777-778. In contrast, if an office in the taxpayer's residence does not satisfy the principal place of business requiren.ents of section 280A(c) (1) (A), then the business activity there (if any) is not sufficient to overcome the inherently personal nature of the residence. and the daily transportation expenses incurred in going between the residence and regular work locations. In these circumstances, the daily transportation expenses incurred in going between the residence and regular work locations are non- deductible personal expenses. See Green v. Heritage Reporting Corporation (202) 628-4888 17 1 2 3 4 5 6 7 8 9 Commissioner, 59 T.C. 456 (1972). Since we have already determined above that Ms. Hayr.esworth's home office is not her principal place of business, it necessarily follows that any commuting expenses between her residence and the PBGC offices do not fit within the home office exception and are therefore non-deductible personal expenses. B. Temporary employment exception Rev. Rul. 99-7, 1999-1 C.B. at 361, provides 10. that » [L] taxpayer * * * may deduct daily 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 transportation expenses incurred in going between the taxpayer's residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works". (Emphasis added.) A temporary work location is one that "is realistically expected to last (and does in fact last) for 1 year or less". Id. Employment that is initially temporary may become indefin:.te due to changed circumstances. See Norwood v. Comm:.ssioner, 66 T.C. 467 (1976). Ms. Haynesworth has worked for PBGC since 2004. ::n or about June of each year, she entered into a one-year contract that lasted until June of the following year. Ms. Haynesworth's initial term of employment with PBGC may have been "temporary", because it was expected to last for one year or less. 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 18 However, as soon as Ms. Haynesworth's employment with PBGC was re-contracted for the second year, which presumably occurred sometime in 2005, her total length of expected employment with PBGC extended to more than 1 year. With that change in circumstance, her employment changed from temporary to indefinite and remainec that way for the duration of her employment with PBCC. Given that Ms. Haynesworth was in her third ard fourth years of employment with PBGC in 2007 and 200E, it follows that her employment with PBGC was not temporary at that time. As a result, she is not entitlect to deduct any transportation expenses incurred in going between her residence and the PBGC office. Because we conclude that Ms. Haynesworth is not ent:.tled to deduct her commuting expenses, we need not exanine the particular expenses she claimed. However we note that she claimed both a mileage charge and the actual expenses of operating her vehicle (i.e., gas, repairs and maintenance, and interest). A taxpayer who (unlike Ms. Haynesworth) is entitled to deduct vehicle expenses is entitled to deduct only the actual expenses or a mileage charge. 26 C.F.R. sec. 1.274-5(j) (2), Income Tax Regs.; Nash v. CommLssioner, 60 T.C. 503, 520 (1973). Thus, under 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 any circamstances Ms. Haynesworth would not have been entitled to the full deduction she claimed. III. Reliance on the return preparer and on the 2004 refund In her testimony, Ms. Haynesworth stressed that she relied on the.advice of her return preparer, that her return preparer cited IRS publications in support of the positions she recommended, and that those positions were validated by the IRS's allowance of her refund for 2004 when the issues were squarely stated in the amended return that she filed for that year. These considerations evidently prompted the IRS (with the Court's encouragement) to concede at trial the acctracy-related penalty that was determined in the notice of deficiency, because section 6664 (c) (1) provides that an accuracy-related penalty is not imposed when "there was reasonable cause" for the underpayment and "the taxpayer acted in good faith". However, reasonable cause and good faith do not reduce one's liability for tax. Tax return preparers do not have the power to decree what deductions the courts must allow taxpayers to claim. Rather, the courts must apply the law that Congress passed to the actual facts that the courts find. If a return preparer advises a deduction 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 20 that reflects an error of law or a mistake of fact -- even a cood-faith error or mistake -- a taxpayer does not become entitled to that erroneous deduction. Ms. Haynesworth's return preparer appears to have made her recommendations on the legally mistaken assumption that an independent contractor may always claim a home office deduction or commuting expenses, or the factually mistaken assumption that the home office was Ms. Haynesworth's principal place of business. In fact, the K Street office was Ms. Haynesworth's principal place of business; and even as an independent contractor she must demonstrate her actual entitlement to these deductions, but she cannot do so. The return preparer's advice does not influence the outcome of this case. Neither does the IRS's allowance of the 2004 refund. We dò not know why the IRS personnel who processed Ms. Haynesworth's 2004 refund claim determined that she was entitled to the deductions. They had virtually no information about the home office expense and little information about the commuting expense. However, even if they made their decision with comprehensive information and after due deliberation, the IRS was not bound to concede those deductions for every year thereafter. The IRS and 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 21 taxpayer are both allowed to change their positions from year to year. Ms. Haynesworth originally did not claim these deductions; but she was allowed to change her position and begin to claim them. Likewise, the IRS was entitled to change its position and begin to disallow them. The issues must be resolved not by sticking one of the parties with its prior position but rather deciding what the law really allows. The IRS's notices of deficiency for ~2'995 and CO~/ eseé wi 1 be upheld as to the tax deficiencies; but, pursuant to the IRS' s concession, the accuracy-related penalty will not be upheld. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 11:03 a.m., the bench opinion in the aoove-entitled matter was concluded.) // // // // // // // // // Heritage Reporting Corporation (202) 628-4888