TAX COURT OPINION

Case: Margaret A. Martin
Docket Number: 10881-13
Judge: Gustafson
Opinion Type: bench
Filed: 05/09/2014
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 PA MARGARET A. MARTIN, Petitioner, v. ) ) ) ) Docket No. 10881-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORD ER Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Pittsburgh, Pennsylvania, on April 8, 2014, containing his oral findings of fact and opinion, 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 Gustafson at Pittsburgh, Pennsylvania, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. May 9, 2014 SERVED May 09 2014 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 April 8, 2014 3 Margaret A. Martin v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 Docket No. 10881-13 THE COURT: The Court has decided to render the following, as its oral Findings of Fact and Opinion in this case. This Bench Opinion shall hot be relied on as precedent in any other case. It is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152. By a notice of deficiency dated February 8, 2013, the Internal Revenue Service (IRS) determined a deficiency in the Federal income tax of petitioner 15 Margaret A. Martin for the year 2010. The deficiency 16 17 18 arose from disallowance of deductions (and from other items either not in dispute or computational in nature). On May 9, 2013, Ms. Martin timely mailed a 19 petition to this Court, asking us to redetermine the 20 deficiency. At the time she filed her petition, Ms. 21 Martin resided in Pennsylvania. (Stip. 1.) 22 23 24 25 Trial of this case was conducted on April 7, 2014, in Pittsburgh, Pennsylvania. Ms. Martin represented herself, and respondent was represented by Julia L. Wahl. Before and during triÃl the 866.488.DEPO www.CapitalReportingCompany.comSERVED MAY 0 9 2014 Capital Reporting Company 4 parties stipulated to various dollar amounts relevant to this case, leaving in dispute only Ms. Martin's entitlement to deduct on Schedule C: (1)1 $1,708 of expenses incurred at hardware stores, and (2) $493 of the $986 she incurred for cable TV and Internet service purchased from Comcast. For the reasons explained hereafter, we will sustain the IRS's adjustments. FINDINGS OF FACT Commencement of the sewing business Until August 2010 Ms. Martin was employed as a nurse. However, since childhood Ms. Mar in has been a prodigious seamstress. As a child she was known for her speed and skill in sewing. When as an adult she volunteered to assist in sewing for tage performances, she was assigned the use of a difficult and speedy piece of sewing equipment, and others remarked at the almost frightening speed at which she 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 worked. In her testimony she volunteered that "I 20 21 22 23 24 25 love what I do" and that "I love the process of" dyeing and sewing cloth. In 2009 she commenced a business of customized sewing that became her sole employment in August 2010. The IRS does not contend under section 183 that the sewing activity was an activity not engaged 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 in for a profit, and in this opinion we pherefore call the sewing activity a "business" and assume that Ms. Martin did have a profit motive for he sewing activity. However, as we will explain, an absence of 5 profit-oriented discipline in her conduct of her 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 business affects our judgment of the business character of the disputed expenditures. Ms. Martin's house No home office expense is at issue in this case, but the layout of Ms. Martin's house is relevant. Her house has a basement and three above1ground levels. The basement is unfinished, and she uses it for storage. In addition, there is a large table in the basement, which she sometimes has used for cutting cloth for larger projects. The entry level of the house has: a living room; a small dining room with a table and chairs and a china closet; a sewing room; and a kitchen with a table and chairs and with cupboards. A second sewing 21 machine is set up in the kitchen. The kibchen 22 23 24 25 cupboards contain dishes as well as canned goods and spices. Ms. Martin's good china is kept in the china closet in the dining room. She admits thät at least on occasion she has served meals on the first floor. 866.488.DEPO www.CapitalReportingCompany.cdm Capital Reporting Company 1 2 The second above-ground floor has: Ms. Martin's bedroom; a second living room; and a secpnd kitchen 3 with a table and chairs, cooking utensils, a 4 microwave, and a toaster oven. Ms. Martïn most often l 6 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 prepares food and eats in the second-floor kitchen. The third floor consists essentially of a single large room which has been empty since Ms Martin's daughter moved out. The nature of the sewing business In her sewing business, Ms. Martin makes clothes of various kinds and sews other items sudh as curtains. She meets with a prospective customer, learns what the customer wants, designs the item, and then executes her design. She charges $30 per hour, but she does not charge for the time thatl she spends consulting with the client. She does some teaching in the form of a one-hour sewing lesson for $30, but she sometimes teaches the student an additional hour for no extra charge. Ms. Martin's gross revenue for 2010 was $1,670 (Stip. 5), which constitutes the pay of 56 hours at $30 per hour. This is slightly more than one paid hour per week. Her gross revenue in subsequent years has increased somewhat, but her best year so far has been 2013, in which she estimates that her gross 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 revenue totaled about $3,000, i.e., 100 hours of paid work, which is less than 2 paid hours per week. In a minority of instances, Ms. Martin's jobs involve dyeing the cloth for a given prodect and sometimes employ the technique of batik. Since 2009 she has experimented with dyeing and batik when she had no paying job that called for it, so that she could improve her skills at these functions. Lowe's expenditures In 2010 Ms. Martin spent $343.68 at Lowe's to purchase a door. (Ex. 3-J.) Her house had experienced some settling, and the existing door did not shut or lock properly. She therefore purchased and installed a new door. Also at Lowe's she purchased a stove top and refrigerator-freezer for a combined cost of $986.48 (Ex. 3-J), not allocated in any evidence in our record between the two appliances. She installed them in the first-floor kitchen. To an extent we cannot quantify, she used the stove top for dyeing fabric and batik (a task for which she had formerly needed to borrow a friend's stove top); but she also used the stove top to some extent for personal use. To an extent we cannot quantify, she also used the refrigerator and freezer in the process of dyeing and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company batik; but she also used it for personal purposes, 8 such as storing beverages. Comcast In 2010 Ms. Martin paid $986 to Comcast for combined cable TV and Internet service. To an extent we cannot quantify, Ms. Martin watched television shows relevant to fashion and sewing. She did not prove the extent to which she watched other television shows. To an extent we cannot quantify, Ms. Martin used the Internet for communication related to her sewing business and for educating herself about matters related to sewing. She did not prove the extent to which she used the Internet for other purposes. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Dispute with the IRS 16 17 18 19 20 21 22 23 24 On Schedule C attached to her Federal income tax return, Ms. Martin claimed a deduction of $1,708 for "LOWES HDEPOHARDWARE", which included the expense for the door and for the stove top and refrigerator, and she claimed a deduction of $986 for "COMCAST". The IRS examined her return and, in its notiöe of deficiency issued to her, disallowed thosè deductions. (The IRS also made other adjustments not now in dispute.) Ms. Martin timely filed her 25 petition challenging the IRS's determination. Those 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 issues were the subject of the trial of this case. I. Burden of proof OPINION The IRS's determination is presumed correct, and the taxpayer generally bears the burden to prove her entitlement to any deductions she claims. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions are strictly a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992) . Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 1(a). II. Failure to allocate This case requires allocating some expenses between business (i.e., sewing) and personal. Ms. 19 Martin' s testimony concerning such allocations was 20 21 22 23 24 25 evidently sincere but was not convincing, for several reasons: First, Ms. Martin's testimony about allocation between business and personal was entirely uncorroborated by any other evidence, documentary or testimonial. Second, Ms. Martin's persisdence in 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 contending that the purchase of an exterior door for her house was a non-personal, business expenditure showed that her perspective exaggerates the business character of an expenditure and overlooks the personal character. Third, she gave only vague testimony about the quantum of business use, insisting that it was exclusive but often unable to say how often a given use (such as batik) actually occurred. Fourth, the amount of possible business use was minimal, in light of the mere 56 hours of paid work that she did in the course of a year. 12 Fifth, her personal delight in sewing and her evident 13 manner of pursuing the activity even when it was not 14 15 16 17 18 19 20 21 22 23 24 25 really profitable show that her decisions about spending were not likely motivated by rea!1 business considerations. Sixth, she insisted on exclusive business use and therefore offered no basis for any allocation other than 100 percent business and zero personal. III. Disputed deductions A. Lowe's expenditures On her return Ms. Martin deducted hardware store expenditures totaling $1,708, but at trial she put on evidence only as to expenditures totaling $1,330. To the extent of the difference of $378, the IRS's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 disallowance is sustained for a total lack of proof, and we turn to the expenditures as to which Ms. 3 Martin did offer evidence. 4 5 6 7 8 9 10 11 12 1. Door In Pennsylvania's climate and culture, every house must have a door. When Ms. Martin bought the house in 1993, long before she started her sewing business, the house had a door. She testified that she needed a new door in order to be able to lock up her business-related assets, but she alsö acknowledged that the door was necessary to provide safety for herself and to keep out the weather. 13 Plainly the door was a personal expenditure, 14 15 16 17 18 19 20 21 22 23 24 25 necessary whether or not she operated a sewing business from her home. 2. Stove top and refrigerator Most of Ms. Martin's testimony on the business nature of the disputed expenditures related to the stove top. But since it was installed in the kitchen where she kept dishes and foodstuffs, and on the same level of the house as her dining room and good china, it is surprising that she claims virtually 100 percent business, non-personal use of the stove top. We cannot say it is impossible that someone could use such an appliance in the manner she describes; but 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 for the six reasons stated above, we cannot say that she carried her burden to prove that it is likely that she did so in fact. Moreover, we do not know what portion of the purchase price was allocable to the stove top as opposed to the refrigerator; and as to the refrigerator she said relatively little, and she said almost nothing about the number of times it was used for business purposes. Again, we cannot say she carried her burden of proof. B. Comcast For the six reasons stated above, we do not find persuasive Ms. Martin's testimony about the supposedly exclusive business use of her cable TV and Internet access. Moreover, for reasons we cannot tell, IRS Appeals agreed with Ms. Martin that 50 percent of the Comcast expense should be allowed as a deduction. (The parties stipulate that Appeals "agreed" that 50 percent was deductible, but the stipulation does not say whether the agreement was in 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 writing or was binding.) The IRS did not retract 22 23 24 25 that largesse at trial and we do not dist¢rb it. As a result, however, Ms. Martin faced the burden of proving that her business use of cable TV and Internet was greater than 50 percent, and she 866.488.DEPO www.CapitalReportingCompany.coin Capital Reporting Company 13 1 2 certainly did not so prove. In view of respondent' s concessions, decision 3 will be entered under Rule 155, so that the parties can conduct the necessary computations (including the recomputation of the taxable portion of social security benefits) . This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 10:18a.m., the above- Entitled matter was concluded.) 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