TAX COURT OPINION

Case: Williams Castelblanco Herrera
Docket Number: 17009-13S
Judge: Marvel
Opinion Type: bench
Filed: 12/19/2014
Pages: 18

UNITED STATES TAX COURT WASHINGTON, DC 20217 WILLIAMS CASTELBLANCO HERRERA, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) Docket No. 17009-13S. ) ) ) ) ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge L. Paige Marvel at Atlanta, Georgia, on November 21, 2014, containing the Court's oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the Court's oral findings of fact and opinion, decision will be entered for respondent. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. December 19, 2014 SERVED DEC 2 2 2014 K Capital Reporting Company 3 1 2 Bench Opinion by Judge L. Paige Marvel November 21, 2014 3 Williams Castelblanco Herrera v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Docket No. 17009-13S 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. THE ORAL FINDINGS OF FACT AND OPINION SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986 (Code) as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Code as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references are to the Code, and Rule references are to the Tax Court Rules of 25 Practice and Procedure. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Williams Castelblanco Herrera appeared pro se. Jason P. Oppenheim appeared on behalf of respondent. Respondent determined income tax deficiencies of $9,218 and $9,578 for taxable years 2010 and 2011, respectively, and penalties pursuant to section 6662 of $1,843.60 and $1,915.60 for 2010 and 2011, respectively. The deficiencies and penalties were the result of respondent's determination to disallow unreimbursed employee business expenses and tax preparation fee deductions claimed by petitioner on a Schedule A attached to his 2010 return, and business expense deductions claimed on a Schedule C attached to each of his 2010 and 2011 returns. The issues for decision are (1) whether petitioner properly deducted and substantiated a tax preparation fee and unreimbursed employee business expenses he allegedly paid to commute from his home in Atlanta, Georgia, to his job at Howrey, LLP in the 21 Washington, D.C., area during 2010; (2) whether 22 23 24 25 petitioner properly deducted and substantiated purported business expenses with respect to an alleged business activity that petitioner maintains he was conducting during 2010 and 2011; and (3) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 whether petitioner is liable for the section 6662 2 3 penalty for negligently claiming the disallowed deductions or for substantially understating his 4 · Federal income tax liabilities for 2010 and 2011. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Because we find that petitioner failed to substantiate any of the disputed expenses he deducted in 2010 and 2011, and that he would not be entitled to the deductions even if he had substantiated them, we sustain respondent's determinations to disallow the deductions and to impose section 6662 penalties in full. FINDINGS OF FACT Because of petitioner's failure to respond to an order to show cause under Rule 91(f), some of the facts have been found on the basis of deemed stipulations, which are incorporated herein by this reference. Before trial, petitioner and respondent reviewed the deemed stipulations and agreed to a 19 modification of one of them. We accept the deemed 20 21 22 23 24 25 stipulationfas modified by the parties. When he petitioned this Court, petitioner resided in Georgia. In October 2009, Howrey, LLP, a large global law firm, extended a job offer to petitioner for a permanent and full-time job as an information technology professional. The offer required 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 1 petitioner to relocate to the metropolitan DC/VA area 2 within a specified time. Petitioner accepted the 6 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 offer and began working for Howrey in early 2010. However, petitioner did not relocate as agreed for personal reasons. Instead, he commuted weekly from his home in Atlanta, Georgia, to Howrey's offices in Falls Church, Virginia. Petitioner's job at Howrey did not require him to travel more than 50 miles outside of Falls Church, Virginia. In addition, Howrey had an employee business reimbursement policy during 2010 that required employees to obtain pre-authorization for reimbursable work-related expenditures. The record does not contain any credible evidence that petitioner had any work-related travel that was pre- approved by Howrey or for which he was reimbursed by Howrey. In July 2010 Howrey laid off petitioner ostensibly because it was downsizing its support staff. From October 2010 through December 2011, petitioner was employed full-time by IBM as a Senior SAP Management Consultant. Petitioner timely filed Forms 1040, U.S. Individual Income Tax Return, for 2010 and for 2011. On his 2010 return petitioner claimed a tax preparation fee deduction of $56 and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 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 unreimbursed employee business expense deductions of $30,314, on a Schedule A, Itemized Deductions, attached to his return. The expenses he claimed consisted of airfare, lodging, meals, parking and other expenses he allegedly paid in commuting from his home in Atlanta, Georgia, to his job at Howrey. He also claimed Schedule C deductions for the business use of his home, contract labor, utilities, travel and/or car and truck expense, commissions and office expenses for 2010 and/or 2011 with respect to an alleged business activity that petitioner described as an IT consultant activity. Petitioner's 2010 and 2011 returns were selected for examination. Respondent determined that petitioner was not entitled to claim the Schedule A tax preparation fee and unreimbursed employee business expense deductions, and the Schedule C expense deductions. Respondent also determined that petitioner was liable for a section 6662 penalty for both years. In the notice of deficiency and/or at trial respondent contended that petitioner did not substantiate the disallowed Schedule A and C expenses and that he would not be entitled to deduct them in any event because the Schedule A unreimbursed 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 employee expenses were non-deductible personal commuting expenses and the Schedule C expenses were either duplications of expense deductions claimed as unreimbursed employee business expenses or were not actually paid in connection with an ongoing business 6 activity conducted for profit during 2010 and 2011. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 DISCUSSION Ordinarily, the taxpayer bears the burden of proving that he or she is entitled to a claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,84(1992). A taxpayer is required to maintain records to substantiate claimed deductions and to establish his correct tax liability. Higbee v. Commissioner, 116 T.C. 438,440(2001); see also sec. 6001. The taxpayer must produce such records upon the request of the Secretary. Sec. 7602(a); see also sec. 1.6001-1(e), Income Tax Regs. When a taxpayer establishes that he paid or incurred a deductible expense but does not establish the amount of the expense, we may estimate the amount of the deductible expense. Cohan v. Commissioner, 39 F.2d 540,542-544 (2d Cir. 1930). There must be sufficient evidence in the record, however, to permit us to conclude that the taxpayer incurred a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 deductible expense in at least the amount allowed. See Williams v. United States, 245 F.2d 559,560 (5th 3 Cir. 1957). In estimating the amount we bear heavily 9 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 upon the taxpayer who failed to maintain and produce the required records. See Cohan v. Commissioner, 39 F.2d at 544. Generally, a taxpayer is entitled to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business. See sec. 162(a); Am. Stores Co. v. Commissioner, 114 T.C. 458,468 (2000). An expense is ordinary if it is customary or usual within the particular trade, business, or industry or if it relates to a transaction "of common or frequent occurrence in the type of business involved." Deputy v. du Pont, 308 U.S. 488,495 (1940). An expense is necessary if it is appropriate and helpful for the development of the business. See Commissioner v. Heininger, 320 U.S. 467,471(1943). Personal, living, and family expenses generally are not deductible. See sec. 262(a). Commuting Expenses Generally, expenses incurred by a taxpayer commuting between his home and his place of business are personal and non-deductible. See, e.g., Curphey v. Commissioner, 73 T.C. 766,777 (1980). There are 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 at least two exceptions to this general rule. See Rehman v. Commissioner, T.C. Memo, 2013-71, at *5. One exception, the so-called home-office exception, requires that a taxpayer's residence be his or her principal place of business. See Strohmaier v. Commissioner, 113 T.C. 106,113-114(1999). It allows a deduction for commuting expenses incurred between the taxpayer's principal place of business (his or her residence) and another place of business. There is no evidence in the record that petitioner's residence was his principal place of business and petitioner does not so contend. The second exception, the so-called temporary-distant-worksite exception, applies to commuting expenses incurred traveling outside the 16 metropolitan area of the taxpayer's residence. See 17 18 19 Schurer v. Commissioner, 3 T.C. 544,547(1944); Bogue v. Commissioner, T.C. Memo, 2011-164, aff'd per curiam, 522 Fed. Appx. 169 (3d Cir. 2013). 20 Petitioner does not contend that he reasonably 21 22 23 24 25 expected his employment at Howrey to be temporary when he accepted it in 2009 and began working there in 2010 and that he falls within the temporary- distant-worksite exception to the general rule. However, because petitioner, who is from Columbia, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 South America, and moved to the United States in 2008, is representing himself in this case and asserts that he did not understand the complicated and confusing U.S. tax laws, we will nevertheless consider whether petitioner's employment at Howrey was temporary. The determination of whether employment is temporary or indefinite is a question of fact. 9 Peurifoy v. Commissioner, 358 U.S. 59,61(1958). "The 10 11 12 13 14 15 16 17 18 19 20 21 22 23 fact finder must objectively determine the length of employment the taxpayer should have foreseen in the new location." Ellwein v. United States, 778 F.2d 506, 510 ( 8° Cir 1985) . The employment must be dl temporary in contemplation at the time of its acceptance and not indeterminate in fact as it develops. McCallister v. Commissioner, 70 T.C. 505,509 (1978). A taxpayer may meet his burden of proving his employment was temporary, see Rule 142(a), by showing that there was a reasonable expectation that his employment would terminate within a short period. See Albert v. Commissioner, 13 T.C. 129,131 (1949); Broome v. Commissioner, T.C. Memo, 1985-321. 24 Conversely,.the taxpayer will not carry his burden of 25 proof if the evidence indicates that his employment 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 was indefinite, i.e., its termination could have been A foreseen within a fixed or reasonably short period of time. See Stricker v. Commissioner, 54 T.C. 355,361(1970), aff'd, 438 F.2d 1216 (6 Cir. 1971). 5 Finally, the taxpayer must also show that the 6 7 8 commuting expenses in question were incurred while traveling to a temporary worksite unusually distant from the area where he or she lives and normally 9 works. See Bogue v. Commissioner, T.C. Memo 2011-164 10 11 12 13 14 15 (citing Ellwein v. United States, 778 F.2d at 511). There is no credible evidence in the record that petitioner reasonably foresaw, when he accepted the position in 2009, that his employment at Howrey was temporary. In fact, petitioner's contract with Howrey required him to move from his home in Atlanta, 16 Georgia, to the Falls Church, VA area where Howrey's 17 18 19 20 21 22 23 24 25 office was located. Although petitioner testified that he had trouble selling his residence in Georgia, that his supervisor knew he was commuting, and that his employment with Howrey terminated in 2010, these developments do not support a finding that petitioner reasonably understood or expected that his job at Howrey would be temporary in duration at the time he accepted the position. Because petitioner, even if he had 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 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 adequately substantiated the unreimbursed employee expenses he deducted on his 2010 Schedule A, which he did not, has failed to prove that he qualifies for an exception to the general rule that commuting expenses are personal, non-deductible expenses, we sustain respondent's determination disallowing petitioner's Schedule A unreimbursed employee expense business deductions. We also sustain respondent's disallowance of the Schedule A tax preparation deduction as petitioner prepared his return for 2010 and did not substantiate the deduction. Traveling Expenses Giving petitioner the benefit of the doubt, we shall also consider whether the Schedule A unreimbursed employee business expenses are deductible as traveling expenses. Traveling expenses are treated differently from commuting expenses. Some traveling expenses, including amounts expended for meals and lodging, may be deducted if they are incurred while the taxpayer is away from home in the pursuit of a trade or business. Sec. 162(a)(2). To deduct a travel expense, the taxpayer must show that (1) he or she was away from home when he or she incurred the expense, (2) the expense is reasonable and necessary, and (3) the expense was incurred in 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company pursuit of a trade or business. Ctchmaicr v. Strohm<iiw ¹4(Y\ A Commissioner, 113 T.C. at 115. Under the rule of 1 2 3 United States v. Correll, 389 U.S. 299, 302-303 4 (1967), a taxpayer is "away from home" within the 5 meaning of section 162(a)(2) when he or she is on a 6 7 8 9 10 11 12 13 trip that requires stopping for sleep or a substantial period of rest. This Court has held that as a general rule the term "home" for purposes of section 162 means. the vicinity of a taxpayer's principal place of employment rather than the location of his personal residence. See Daly v. Commissioner, 72 T.C. 190,195(1979), aff'd, 662 F.2d 253(4th Cir. 1981). 14 Where a taxpayer's principal place of employment is 15 16 17 18 19 20 21 22 23 24 25 other than his residence and he chooses not to move his residence for personal reasons, the taxpayer's additional living and traveling expenses are a result of a personal choice and are not ordinary and necessary business expenses. Tucker v. Commissioner, 55 T.C. 783,786(1971). However, if a taxpayer's principal place of employment at a distant location is temporary, he may claim his personal residence as his tax home for purposes of section 162. See Peurifoy v. Commissioner, 358 U.S. at 60; Broome v. Commissioner, T.C. Memo. 1985-321. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 The record fails to establish that the unreimbursed employee business expenses at issue were deductible traveling expenses. Neither petitioner's job nor his place of employment with Howrey was temporary under the legal principles discussed above. 6 Moreover, petitioner for personal reasons made the 7 decision not to move his residence from Atlanta, 8 Georgia, to the Falls Church, Virginia, area where 9 his place of employment with Howrey was located. We conclude therefore that the expenses in question were not deductible as traveling expenses under section 162. 10 11 12 13 14 Disallowed Schedule C Expenses 15 16 Petitioner asserts that he was engaged in a business activity for profit during 2010 and 2011. 17 Petitioner testified that he started the business 18 19 20 activity in 2009 but concedes that he did not have any contracts or customers from 2009 through the end of 2011, and that his purported Schedule C business 21 activity did not generate any gross receipts or 22 23 24 25 taxable income at any time during that period. Petitioner claimed substantial amounts of Schedule C deductions for 2010 and 2011 for expenses he claimed to have paid for such things as contract 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 labor, commissions and fees, office expenses, 2 utilities, car and truck expens and travel expenses. 3 4 5 6 7 8 9 But, when asked at trial about the expenses giving rise to the deductions, petitioner conceded that some of the deductions were duplications of the Schedule A deductions respondent had disallowed and, for the others, petitioner could not produce any document or provide any testimony to substantiate the date, amount, or business purpose of the expenditures. 10 Petitioner also could not explain to the Court why 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 his failure to substantiate any of the expenses deducted on his Schedule Cs for 2010 and 2011 should not result in the imposition of the section 6662 penalties asserted by respondent. Accordingly, we conclude that petitioner is not entitled to claim any of the disallowed Schedule C deductions. Section 6662 Penalties Section 6662(a) and (b) (1) authorizes the Commissioner to impose a 20% penalty on an underpayment of tax that is attributable to, among other things, negligence or disregard of rules or regulations. The term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws, and the term "disregard" includes any careless, reckless, or 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 17 intentional disregard. Sec. 6662(c); sec. 1.6662- 3(b) (1) and (2), Income Tax Regs. "Negligence" also includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly. Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position and is reckless if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe. Sec. 1.6662- 3(b) (2), Income Tax Regs.; see also Neely v. Commissioner, 85 T.C. 934,947(1985). The accuracy-related penalty does not apply 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 with respect to any portion of the underpayment for 18 19 20 21 22 23 24 25 which the taxpayer shows that there was a reasonable cause and that he or she acted in good faith. Sec. 6664(c)(1). The decision as to whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all of the pertinent facts and circumstances. See sec. 1.6664-4(b) (1), Income Tax Regs. "Circumstances that may indicate reasonable cause and good faith include 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 18 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 an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer." Id. The Commissioner bears the burden of production with respect to the taxpayer's liability for the section 6662(a) penalty and must produce sufficient evidence indicating that it is appropriate to impose the penalty. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446-447. Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect or that the taxpayer had reasonable cause or substantial authority for the position. See Higbee v. Commissioner, 116 T.C. at 447. Respondent has met his initial burden of production by proving through the deemed stipulations, admitted exhibits, and testimony that petitioner failed to substantiate any of the disallowed deductions and that he was entitled to them in any event. We are persuaded that petitioner was careless in claiming the disallowed deductions on his 2010 and 2011 returns. Petitioner has not shown that he had reasonable cause or acted in good faith 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 19 in failing to properly investigate whether he was entitled to the disallowed deductions. Accordingly, petitioner is liable for the section 6662 penalties for 2010 and 2011 for an underpayment of tax due to negligence. We have considered the parties' remalning arguments and, to the extent not discussed above, conclude that those arguments are irrelevant, moot, or without merit. To reflect the foregoing, decision will be entered for respondent. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 9:28 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com