TAX COURT OPINION

Case: Bhagwan S. Mann
Docket Number: 29540-09
Judge: Holmes
Opinion Type: bench
Filed: 10/21/2011
Pages: 13

UNITED STATES TAX COURT WASHINGTON, DC 20217 BHAGWAN S . MANN, Pe:itioner, v. COMMISSIONER OF INTERNAL REVENUE, Re 3pondent . ) ) ) ) ) ) ) ) Docket Nos. 29540-09, 5723-10. Order of Service of Transcript Pursuant to Fule 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 Holmes at San Fra:1cisco, California on October 7, 2011, containing his oral the conclusion of trial. the trial of findings of fact and opinion rendered after the above case before Judge Mark V. the pages of the (Signed) Mark V. Holmes Judge Dated: Washingto , D.C. October 2 , 2011 SERVED QCT 2 8 MiÍ 1 2 BENCH OPINION BY JUDGE MARK V. HOLMES MANN V. COMMISSIONER DOCKET NO. 29540-09,. 5723-10 . 3 3. OCTOBER 7, 2011 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE COURT: In the cases of Bhagwan Mann v. Commissioner, Docket Nos. 29540-09 and 5723-10, the Court h2.s decided to render. oral findings of fact and opinion, and the following represents the Court's oral findings of fact and opinion. 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's own Rules of Practice and Procedure. Mr. Mann was a California resident when he filed his petitions in these consolidated cases. The general background is that they involve the 2006, 2007 tax years. In each year there were sharply contested expensen for 2006 from Mann's real estate business and in 2007 both from that business and from a tractor sales business, both of which Mr. Mann reported on Schedule Cs attached to his tax returns. There's no overarching theme here. I just have to go. through each business and each category of contested expenses. Thè parties were.able to stipulate, settle and concede some issues at the last minute. I won't deal with them except in passing. 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 4 For the tractor business that Mr. Mann ran, he took repair expenses of $9,876 in 2006 and $8,756 in 2007. The government made some concessions on these, eaving me to decide about an extra $5,097.66 in expenses that the government did not concede for '06 and $1,726.87 in 2007. On this category, I find in favor of Mr. Mann in 2006 and will allow him the unconceded portion of his original repairs expense as repairs and maintenance, not as cost of goods sold, so that's an extra $5,097.66 for 2006. For 2007, he didn't have the receipts and didn't support it with testimony, so he gets no extraffor 2007. For the category of travel,.meals and entertainment for the tractor business, Mr. Mann claimed $10,768 in '06, $9,887 in 2007. Travel, meals and entertainment expenses however are subject to Internal Revenue Code § 274, which requires strict substantiation of these expenses, and with respect to any listed property as defined by § 280F(d) (4), listed property includes any passenger automobile or other property used as a means of transportation. A taxpaye:: is r,equired by § 274D to substantiate a claimed expense by adequate records or by sufficient evidence corroborating his own statement establishing 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 the amount, time, place and business purpose of the expense. Even if the expense would otherwise be deducti)le, the deduction may still be denied if there is insu-ficient substantiation. See 26 C.F.R. § 1.274-5T(a). The amount of business travel must be substanziated "by the use of a contemporaneous log of busineso travel or by any reasonable means establi hing the number of miles traveled, the date, the pla e and the business purpose of such miles." Mr. Mann provided some bank statements and receipt showing that he had made travel and meal purchas s but did not provide adequate evidence of the busines purpose of this travel. The regulations are quite s rict on this point. For example, he needed to show the start and end dates of his travel, 26 C.F.R. § 1.274 -5T9(b) (2). None of that was present here. I have to sustain the disallowance of these items for both the 2006 and 2007 year. Mr. Mann next claimed car and truck expenses of $9,548 that was disallowed by the government for the 2005 year. Again car and truck expenses are subject to these strict substantiation requirements of § 274, and I'll sustain the government's disallowance of those. The fourth category for his tractor business 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 was an :.nterest expense of $54,675 in '06 and $39,558 in '07. These do relate I find to his residence and to the extent they're deductible should be on his Schedule A, not his Schedule C, and I agree with the Commissnoner on that point. I also agree with the Commissioner that the records involved show that the home was owned by Mr. Mann's wife, to whom he was married for each of the years at issue here. This means that he can't claim head of household filing status. His wife was not a nonresident alien or one of the other somewhat obscure exceptions to the rule that people who are married and living together can't filejhead of household status. usag I will leave the consequences of these findinga to the government and Mr. Mann to work out under the Rule 155 computations. I suspect this means that he has to file,fpay at the married filing separately returns. In addition, I findithat the amount lor 2006 of the interest deduction supported by the records that Mr. Mann produced in court was $55,918.47, which is a little bit more than he had claimed and that the government had disallowed. In addition, for the 2007 tax year, his records support a deduction of only $11,742.50, which is considerably less than he had claimed on his return. 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 The fifth.category of contested deductions for the tractor business was in 2007 a utility expense of $5,4.39. He supplied receipts for $3,645.03 for 200.7. E found this in ·combination with his testimony to be credible, specifically that he did have a separate business area and these utilities were for that separate business area with a separate phone line, separate electricity and sanitation as well. The sixth and last category of expense for the tractor business was a depreciation deduction of $7,985 :hat the government disallowed because, being in the tractor business,tractors are inventory. However, Mr. Mana persuaded me through his credible testimony that thLs particular tractor was one that he used to prepare the grounds or to repair the grounds of his tractor sales business after they got roughed up by people who would use the tractors to. dig long ditches or otherwise molest his real estate. He needed something to put it back into serviceable shape for the nex: potential customer, and I will allow him the depreciation deduction for that particular tractor in the amount that he properly calculated. That leaves the real estate business. There were numerous deductions that were contested for the real es:ate business as well for the 2006 tax year. 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 This.is extraordinarily tedious because most of them are under the category of other expense and some of them were other expenses under the category of other _expense. I'll just go down them. There was a $12 expense for toll calls. This. was ·conceded by the government. A $3,678 cell phone d duction. But for the year in question the use of cell phones is listed property. It is covered by the strict substantiation requirements of § 274, which Mr. Manr. did not meet. Those requirements are very hard for any taxpayer to meet. They require almost a call-by-call log of the cell phone expense involved. Congress has recently changed that to some extent, but for the 2007 year Mr. Mann is just stuck. There were $776 in training expenses. Only $420.16 was still at issue, but with his receipt and the testimony, I find that Mr. Mann prevails on this one and I will allow the extra $420.16. There was an $1,867 deduction for the cost of dry cleaning. Later on there was also a deduction for the cost of uniforms. But these expenses are not deductible. To deduct the cost to purchase and maintai work clothing, a taxpayer must show that the clothing is required or essential in his employment, the clothing is not suitable for general or personal 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 wear and the clothing is not worn for general or persona.L purposes. See Yeomans v. Commissioner, 30 T.C. 757, 767-69 (1958) and Kozera v. Commissioner, T.C. Memo. 1986-604. Mr. Mann presented no evidence that the cost of dry cleaning and his uniforms and his shoes were for clothing or shoes that could not be worn fo: general or personal wear. His testimony that they had Re/Max imprinted on them doesn't indicate he couldn'; wear them other than as a Re/Max salesman. So the $1,867 in dry cleaning expenses for these "uniforns" are disallowed. The next category was $3,200 in promotional expenses. I'll allow $2,399.02 in these promotion expenses. This' represents what Mr. Mann had receipts or othec evidence of payment for. In combination with his credible testimony, I give him a partial allowance in this category. There was a $4,334 deducti.on for multiple listing services. Only $3,345 is stiill in dispute here. However, Mr. Mann had slipped into this category $3,345 of uniform expenses, namely, these shirts with Re/Max on them plus some shoes that he bought that he wears when he's showing homes or working his tractor.business. Again, for the reasons stated on dry cleaning, I sustain the disallowance 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 10 that $3,345 that was still in dispute. The next expense was a lockbox at $360. This is required in the real estate business under modern conditions. It's entirely believable and I allow taat. Donations, $138 to the Registrar of Voters. I disallow that. That's almost certainlµ efinitely by a preponderance of the evidence a cost of one of his political campaigns that year. A $300 deduction to a Sikh temple. I'll allow that, but he has to move it to the Schedule A. That's a charitable expense. There was also a $150 donation of something to Goodwill and $1,870 to.the school which at least one of his kids attends. He had no receipts for those, and in the case of the $1,870 contribution he's over the limit that requires a receipt, so I will disallow the deductions claimed for charitable contributions to Goodwill and to the school for lack of proof. There were then this basket category of still other deductions of $24,401. The government made numerous concessions so that only $8,475 worth were left. Mr. Mann did have receipts, proof of payment, bank statements and some testimony on these. Heritage Reporting Corporation (202) 628-4888 11 They do all seem to be related to his real estate business and reasonable expenses for that business, so I will give Mr. Mann ân additional allowance of the $8,475 in other expenses. There was a car and·truck deduction. This was stipulated to by the parties. I don't need to. discuss that. An advertising expense of $28,765. The Commissioner allowed $21,512.72, leaving over $7,000 still in dispute. There was documentary evidence of this and certainly Mr. Mann runs a business that required advertising. The real estate business is known for that. He had some proofs of payment and good testimony, as I said, so I will slightly increase the allowance of that deduction up to $22,711.67, not quite what he claimed.but a little bit more than the government had conceded. There was an additional deduction. of some kind as evidenced by Exhibit 35-J. This was .disallowed by the.Commissioner and I could find no apparent connection to the real estate business, and . so this was an actually an increase.that Mr. Mann was claiming from what he claimed on his ·tax return, so I'm not going to allow that, meaning.he doesn't get an increase beyond what he claimed for wherever those 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 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 items were reported on his return. For purposes of this record, they're the ones that are claimed under Exhibit Tab 35-J. The last contest between the parties was about the application of penalties. The IRS was asserting two penalties. The first was the addition to tax under Section 6651(a) (1), which provides for an addition to tax for failure to timely file a return. The original due date for Mr. Mann's 2006 tax return was Apr:_1 15, 2007. He had an extension of,time to file until October 15 of that year, but he did not in fact file a return for 2006 until May 12, 2008. This is of course obviously a failure to timely file. He had no ::eal explanation for why he didn't timely file. I sustain the government's addition to tax for failure to timely file for 2006. The due date of his 2007 tax return was April 15, 2008. Again he was granted an extension of time un;il October 15, but again he was late, not filing a return for 2007 until March 23, 2009. This was obviously late as well. Again there was no testimony about why. There was some mention in the pleadings that he was sick or had family health problems, but there was no specification of those, so I find in favor of the government on the penalty for 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 failure to timely file. The second penalty however was a negligence penalty or intentional disregard penalty under Section 6662 itself. Here I find in favor of Mr. Mann. He clearly was a difficult customer for the IRS to deal with, ccnte.sting things, not signing the stipulation until the last minute, mostly I found from suspicion of the.eystem rather than from any deeper malevolence or certainly anything like I saw in the Singh case that approaches the level of fraud. The deductions that he was claiming·he actually had a lot of support for. Ncthing was completely out of the ordinary for a man engaged in the tractor sales or the real estate sales business, nothing that would appear to be so completely unjustified as to show to somebody of Mr. Mann's education and experience as a small bùsinessman that he was taking unjustified positions, and so I find that he had reasonable cause and was taking these positiors in good faith. So even though he didn't get all the deductions he was looking for, he did prevail on quite a few and I will not sustain the penalty under Section 6662 against him on any of these contested items which he did not win. This again is a split decision, and I will issue an order requiring computations under Rule 155 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 when the transcript is ready and goes out to the parties. ·This concludes the Court's oral findings of f act and opinion in this case . (Whe reupon, at 10 : 58 a . m. , the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888