TAX COURT OPINION

Case: Jason B. Carroll
Docket Number: 5859-15S
Judge: Kerrigan
Opinion Type: bench
Filed: 11/09/2016
Pages: 9

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 JASON B. CARROLL, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket No. ) ) ) ) ORD E R 5859-15S. 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 the pages of the transcript of the trial in the above case before Judge Kathleen Kerrigan at Wichita, Kansas on October 28, 2016, containing her oral Findings of Fact and Opinion rendered at the conclusion of the trial session at which this case was heard. In accordance with the oral Findings of Fact and Opinion, a decision will be entered under Rule 155, Tax Court Practice and Procedure. (Signed) Kathleen Kerrigan Judge Dated: Washington, D.C. November 9, 2016 SERVED Nov 09 2016 Capital Reporting Company 3 1 Bench Opinion by Judge Kathleen Kerrigan 2 October 28, 2016 3 4 5 6 7 8 9 10 11 12 Jason B. Carroll v. Commissioner Docket No. 5859-15S THE COURT: THE COURT HAS DECIDED TO RENDER IN THIS CASE THE FOLLOWING AS ITS ORAL FINDINGS OF FACT AND OPINION WHICH SHALL NOT BE RELIED UPON AS PRECEDENT IN ANY OTHER CASE. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of 13 Practice and Procedure. 14 15 16 17 This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, 18 all section references are to the Internal Revenue 19 20 21 22 23 24 25 Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Respondent determined deficiencies of $6,884, $7,628, and $5,090 for tax years 2010, 2011, and 2012, respectively. After concessions, the issue for consideration is whether Petitioner is entitled 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 to deduct expenses for his multi-level marketing enterprise for tax years 2011 and 2012. Trial of this case was conducted on October 28, 2016, in Wichita, Kansas. Petitioner represented himself, and Britton G. Wilson represented Respondent. The parties' stipulation of facts and exhibits were admitted into evidence. Background A petition was timely filed. During the tax years at issue Petitioner worked as an engineer for Hawker Beechcraft. In 2011 Petitioner became involved with Life Team, a marketing enterprise. Petitioner was a customer of life leadership monthly prescription in 2010 and he started receiving publications about leadership. He was asked to join a team at Life Team in March 2011. Before he became involved with Life Team, Petitioner made inquiries and he found out no information that would prohibit him from joining. WoVemloan 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 The Life Team Company officially began in 2011. 21 Petitioner received compensation when he recruited 22 members to his team. He also received compensation 23 24 when members of his team recruited other members. Petitioner attended monthly and quarterly 25 meetings held by Life Team. Petitioner became 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 fascinated with what he learned and decided to become part of Life Team. He recruited individuals to become part of his Life Team and his team sold Life Team products. As a way to recruit members to his team, Petitioner purchased Life Team products and other products that spread the Life Team message. He gave away these products to potential recruits. 8 Petitioner testified that the giving away of products 9 helped him become successful. Petitioner later 10 11 12 13 14 15 became disillusioned with Life Team and left the organization in 2013. On his 2011 income tax return, Petitioner reported expenses in connection with his Life Team activities of $2,237 for advertising and $432 for other expenses. On his 2012 income tax return, 16 Petitioner reported the following expenses: $6,309 17 for advertising; $2,654 for travel expenses; $918 for 18 meals and entertainment; and $752 for other expenses. 19 20 21 22 23 24 25 Petitioner kept records and receipts for his expenses related to Life Team. Discussion Generally, a taxpayer bears the burden of proving the Commissioner's determination in a notice of deficiency are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 has neither claimed nor shown that he meets the specifications of section 7491(a) to shift the burden of proof to Respondent and to any relevant factual issue. Section 162(a) allows a taxpayer to deduct 6 all ordinary and necessary expenses paid or incurred 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in carrying on a trade or business. Any ordinary expense is one that commonly or frequently occurs in the taxpayer's business, Deputy v. du Pont, 308 U.S. 495 (1940), and a necessary expense is one that is appropriate and helpful in carrying on the taxpayer's business, Welch v. Helvering, 290 U.S. 111, 113 (1933). The expense must directly connect with or pertain to the taxpayer's business. Sec. 1.162-1(a), Income Tax Regs. A taxpayer may not deduct a personal, living, or family expense unless the Code expressly provides otherwise. Sec. 262(a). Deductions are a matter of legislative grace, and a taxpayer must prove his or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). To that end, taxpayers are required to substantiate each claimed deduction by maintaining record sufficient to establish the amount of the deduction and to enable 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 the Commissioner to determine the correct tax liability. Sec. 6001; see also Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Normally, the Court may estimate the amount of a deductible expense if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is often referred to as the Cohan rule. See e.g., Estate of Reinke v. Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff'g T.C. Memo. 1993- 197. Certain expenses specified in section 274 are subject to strict substantiation rules such as travel expenses, including meals and lodging. Sec 274(d)(1). To meet the heightened substantiation requirements, a taxpayer must substantiate the amount, time.of use, and business purpose of the expense. Sec. 274(d); see also sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016(Nov. 6, 1985). To substantiate by adequate records, the taxpayer must provide both an account book, a log, or a similar record, as well as documentary evidence, 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 which are together sufficient to establish each 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 element of an expenditure. Id. at sec. 1.274- 5T(c)(2)(i), 50 Fed. Reg. 46017 (Nov. 6, 1985). 3 Notably, section 274(d) overrides the Cohan rule. 4 5 6 7 8 9 10 11 Boyd v. Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-5T(a) Temporary Income Tax Regs., 50 Fed. Reg. 46014(Nov.6, 1985)(flush language)(noting that section 274 supersedes the Cohan rule). Therefore, this Court is precluded from estimating any expenses that are covered by section 274(d). Whether an expenditure is ordinary or necessary is a question of fact. Commissioner v. 12 Heininger, 320 U.S. 467, 475 (1943). Respondent 13 14 15 16 17 18 19 20 21 22 23 24 25 conceded other expenses related to Life Team and therefore it is not at issue whether Life Team is a business. However, Respondent contends that the reported expenses for tax years 2011 and 2012 were not ordinary and necessary. Respondent further contends that these expenses were related to personal use. Petitioner kept records of his expenses for tax year 2011 and testified about his use of books and materials that he purchased. Since Life Team was not established until November 2011, we cannot determine from the evidence which expenses were related to Life Team and which were related to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 Petitioner's own use. Numerous expenses occurred 2 3 4 5 prior to the establishment of Life Team. Petitioner is not entitled to deduct advertising and other expenses for tax year 2011. During 2012, Life Team was operating and 6 Petitioner was successful. Petitioner was a credible 7 witness and he explained how he used products that he 8 9 purchased to gain members. In 2012, he traveled and attended Life Team leadership conferences and kept 10 receipts related to the conferences. Petitioner 11 maintained records related to meals, including the 12 13 14 receipts. Even though the exact business of Life Team is unclear, and it may have been a Ponzi scheme, 15 Petitioner attended conferences held by Life Team and 16 17 18 19 20 kept accurate records. In addition, Petitioner testified credibly that he believed Life Team was a legitimate business. We conclude that Petitioner is entitled to deduct expenses for advertising, other expenses, 21 meals, and traveling for tax year 2012, except for 22 23 24 25 $24.93. This amount was for a book that was erroneously ordered. Any contentions we have not addressed are irrelevant, moot, or meritless. A decision will be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 entered pursuant to Rule 155. This concludes the 2 Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 3:36 p.m., the above- entitled matter was concluded.) 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