TAX COURT OPINION

Case: David S. Brandon
Docket Number: 15869-08
Judge: Colvin
Opinion Type: bench
Filed: 07/17/2009
Pages: 9

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 . DAVID S . BRANDON, Petitioner , v, ) Docket No . 15869-0 8 COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Rules of Practice and Procedure of this Court, it i s ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript-of the trial of the above case before Jude Diane L . Kroupa at Houston, Texas on June 24, 2009, containing her ora l .finding of fact and opinion rendered at the,conclusion of trial . In accordance with the oral findings of fact and opinion, an appropriate decision will be entered for respondent . (Signed) Diane L . Kroupa Judge Dated : Washington, D .C . July 17, 2009 SERVED JUL 2 0 2009 3 1 Bench Opinion by Judge Diane L . Kroupa 2 June 24, 200 9 3 Brandon v . Commissioner Docket No . 15869-08 4 The Court has decided to render ora l 5 findings of fact and opinion in this case, and th e 6 following represents the Court's oral findings of fact 7 and opinion . These oral findings of fact and opinion 8 shall not be relied upon as precedent in any othe r 9 case . 10 This bench opinion is made pursuant to the 11 authority granted by Section 7459(b) and Rule 152 . 12 All section references are to the Internal Revenue 13 Code in effect for the years 2004, 2005, and 2006 , 14 which shall be referred to as the years at issue, and 15 all rule references are to the Tax Court Rules o f 16 Practice and Procedure . 17 David Brandon appeared on his own behalf . 18 Gordon Sanz and Benjamin Peeler appeared on,behalf of 19 Respondent . 20 FINDINGS OF FACT 21 Certain facts have been stipulated . The 22 stipulation of facts the parties filed, wit h 23 accompanying exhibits, is incorporated by this 24 reference . The facts are so found . 25 Petitioner filed returns as a single Heritage Reporting Corporation (202) 628-4888 4 1 individual for each of the years at issue, claiming 2 substantial expenses on Schedule C relating t o 3 Petitioner's consulting business in the emergency 4 management business . 5 Before and through part of 2004, Petitioner 6 was employed by Lyondell Chemical Company, earnin g 7 wages of almost $100,000 per year . Petitioner retired 8 from Lyondell Chemical Company in 2004 and bega n 9 volunteering for the San Jacinto County Local 10 Emergency Planning Committee and other countie s 11 because he wanted to help residents in these counties . 12 He was not employed as the emergenc y 13 management coordinator . His only employment was as 14 the committee commissioner for San Jacinto county (an 15 elected position) that he served as from 2005 through 16 2008 . 17 Petitioner had his returns for the years at 18 issue prepared by the same tax preparer or tax 19 preparation group, known as Legacy Tax and Accounting, 20 that prepared the return for another taxpayer claiming 21 to have conducted a business activity for profit . 22 Pate v . Commissioner , T .C . Memo . 2008-272 . The Court 23 denied the taxpayer from deducting the expense s 24 claimed under Section 183 . In addition, tax preparer 25 Richard Ohendalski has been suspended from practicing Heritage Reporting Corporation (202) 628-4888 5 1 before the IRS since June 18, 2008 . 2 Petitioner has reported no gross receipts 3 from his Schedule C activity since 1998, yet he has 4 claimed expenses of approximately $100,000 from 2002 5 through 2006, enabling him to a refund of amount s 6 withheld from his wages for each of the years at 7 issue . 8 The expenses Petitioner claimed regarding 9 his Schedule C activity caused him to lose over a 10 third of the taxable income he reported for 2004, 11 almost half of the taxable income he reported fo r 12 2005, and over half of the taxable income he reported 13 for 2006 . 14 Petitioner claimed expenses for car an d 15 truck expenses, depreciation, office expenses, meals, 16 communication (telephone and pager) and home office . 17 Petitioner has provided little or no documentation to 18 show that he incurred these expenses and failed t o 19 establish the business or nonpersonal use of the items 20 claimed . Moreover, Petitioner failed to comply with 21 the strict substantiation requirements under Section 22 274 . 23 Respondent issued Petitioner a statutory 24 notice of deficiency on March 25, 2008, in which 25 Respondent determined a $6,900 deficiency i n Heritage Reporting Corporation (202) 628-4888 6 1 Petitioner's federal income tax for 2004, a $6,60 9 2 deficiency for 2005, and a $3,066 deficiency for 2006 . 3 Respondent also determined Petitioner was liable for 4 an accuracy-related penalty of $1,380 for 2004, a 5 $1,321 .80 penalty for 2005, and a $613 .20 penalty for 6 2006 . 7 Petitioner timely filed a petition t o 8 contest Respondent's determinations in the deficiency 9 notice . Petitioner resided in Texas at the time he 10 filed the petition . 11 OPINION 12 We must determine whether Petitioner was in 13 the emergency management consulting activity for a 14 profit under Section 183 to see if Petitioner i s 15 entitled to deduct the expenses he claimed for each of 16 the years at issue . Section 183(a) provides generally 17 that if an individual engages in an activity and "if 18 such activity is not engaged in for profit, n o 19 deduction attributable to such activity shall b e 20 allowed under this chapter except as provided in this 21 section . " 22 Deductions that would be allowable without 23 regard to whether the activity is engaged in fo r 24 profit are allowed under Section 183(b)(1) . 25 Deductions that would be allowable only if the Heritage Reporting Corporation (202) 628-4888 7 1 activity were engaged in for profit are allowed under 2 Section 183(b)(2), but only to the extent that th e 3 gross income from the activity exceeds the deductions 4 allowable under Section 183(b)(1) . 5 In sum, Section 183 allows deductions for 6 expenses incurred in an activity not engaged in for 7 profit, but only to the extent of gross income from 8 that activity ; therefore, taxpayers may deduct losses 9 incurred in an activity only if it was engaged in for 10 profit . 11 The existence of the requisite profi t 12 objective is a question of fact that must be decided 13 on the basis of the entire record . Benz v . 14 Commissioner , 63 T .C . 375, 382 (1974) . Greater weight 15 is accorded objective facts than a taxpayer' s 16 statement of intent . Westbrook v . Commissioner , 68 17 F .3d 868, 875-876 (5th Cir . 1995), affg . T .C . Memo . 18 1993-634 . While a taxpayer's expectation of profit 19 need not be reasonable, there must be a good faith 20 objective of making a profit . Allen v . Commissioner , 21 72 T .C . 28, 33 (1979) ; Sec . 1 .183-2(a), Income Tax 22 Regs . 23 We structure our analysis around nin e 24 nonexclusive factors . Sec . 1 .183-2(b), Income Ta x 25 Regs . The nine factors are : (1) The manner in which Heritage Reporting Corporatio n (202) 628-4888 4 .. 8 1 the taxpayer carried on the activity ; (2) the 2 expertise of the taxpayer or his or her advisers ; (3) 3 the time and effort expended by the taxpayer i n 4 carrying on the activity ; (4) the expectation that the 5 assets used in the activity may appreciate in value ; 6 (5) the success of the taxpayer in carrying othe r 7 similar or dissimilar activities ; (6) the taxpayer's 8 history of income or loss with respect to th e 9 activity ; (7) the amount of occasional profits, i f 10 any, which are earned ; (8) the financial status of the 11 taxpayer ; and (9) whether elements of persona l 12 pleasure or recreation are involved . Id . 13 No factor or set of factors is controlling, 14 nor is the existence of a majority of factors favoring 15 or disfavoring a profit objective necessaril y 16 controlling . Hendricks v . Commissioner , 32 F .3d 94, 17 98 (4th Cir . 1994) affg . T .C . Memo . 1993-396 ; Sec . 18 1 .183-2(b), Income Tax Regs . The individual facts and 19 circumstances of each case are the primary test . 20 Allen v . Commissioner , supra , at 34 ; Sec . 1 .183-2(b), 21 Income Tax Regs . 22 Nearly all of the factors in this case 23 indicate that Petitioner did not engage in hi s 24 emergency management consulting activity for profit . 25 First, Petitioner did not conduct his activity in a Heritage Reporting Corporatio n (202) 628-4888 9 1 businesslike manner . For example, he did not have a 2 written business plan, any financial statements, or 3 any financial data pertaining to his emergenc y 4 management consulting activity . He does not have a 5 client list nor has he sent invoices to any "clients ." 6 He also did not have a separate checking account o r 7 credit card from his personal accounts . Thus, it is 8 impossible for the Court to determine which expenses 9 were not personal . 10 In addition, while it appears tha t 11 Petitioner devoted all of his time to the activity, he 12 showed no income from it for over 11 years . His only 13 excuse for not earning a profit is that the IRS asked 14 him to substantiate his expenses . If the IRS hadn't 15 stopped him, he would be earning income . 16 The Court found Petitioner's testimony to be 17 incredible . He reports no income (not some income , 18 but no income) from an activity and expects the Court 19 to find that his failure to generate any income for 20 any of the 11 years he has been in the activity is the 21 IRS's fault . We disagree . 22 Petitioner provided no documentation to show 23 how a profit could be made or how he intended to make 24 a profit . What the Court is faced with is a history 25 of claiming substantial expenses with absolutely n o Heritage Reporting Corporation (202) 628-4888 10 1 income for any of the years he has been engaged in th e 2 activity . Reporting the expenses allowed Petitioner 3 to claim refunds in all the years at issue . We agree 4 with Respondent that Petitioner did not conduct a n 5 emergency management activity during any of the years 6 at issue for a profit . Instead, Petitioner and hi s 7 preparer created this "activity" as a device to avoid 8 taxes on Petitioner's regular income . 9 We further find that Petitioner failed to 10 provide any credible evidence that he is entitled to 11 deduct any of the expenses claimed, including a 12 casualty loss, under any other theory or Code section . 13 Because of the unsubstantiated expenses and 14 losses Petitioner claimed on the returns, we fin d 15 Petitioner is liable for the accuracy-relate d 16 penalties for each of the years at issue . Based upon 17 all the facts and circumstances in the record, w e 18 sustain Respondent's determination in the deficiency 19 notice for each of the years at issue . 20 To reflect the foregoing, decision will be 21 entered for Respondent . 22 THIS CONCLUDES THE COURT'S ORAL FINDINGS OF 23 FACT AND OPINION IN THIS CASE . 24 (Whereupon, at 11 :54 a .m ., the bench opinion 25 was concluded . ) Heritage Reporting Corporation (202) 628-4888