TAX COURT OPINION

Case: Chanel D. Rutherford & Lawrence A. Rutherford
Docket Number: 21517-18S
Judge: Guy
Opinion Type: bench
Filed: 12/30/2019
Pages: 9

CT UNITED STATES TAX COURT WASHINGTON, DC 20217 CHANEL D. RUTHERFORD & LAWRENCE A. RUTHERFORD, Petitioners, v. ) ) ) ) ) Docket No. 21517-18S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ORDER 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above captioned case before Special Trial Judge Daniel A. Guy, Jr., at San Francisco, California, on November 20, 2019, 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, a decision will be entered pursuant to Rule 155, Tax Court Rules of Practice and Procedure. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. December 30, 2019 SERVED Dec 30 2019 Bench Opinion by Judge Daniel A. Guy, Jr. November 20, 2019 Chanel D. Rutherford & Lawrence A. Rutherford v. 3 Commissioner Docket No. 21517-18S THE COURT: 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 proceeding for the redetermination of 1 2 3 4 5 6 7 8 9 10 11 12 deficiencies is a small tax case conducted pursuant to the 13 Provisions of section 7463 of the Internal Revenue Code of 14 1986, as amended, and Rules 170 through 174 of the Tax 15 Court Rules of Practice and Procedure. 16 This bench opinion is made pursuant to the 17 authority granted by section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. Hereinafter in 20 this bench opinion, section references are to the Internal 21 Revenue Code of 1986, as amended, in effect for 2015 and 22 2016, and Rule references are to the Tax Court Rules of 23 Practice and Procedure. 24 Respondent determined deficiencies of $5,344 and 25 $8,460 in petitioners' Federal income tax for the taxable 4 years 2015 and 2016 (years in issue), respectively, and accuracy-related penalties under section 6662(a) for both of those years. Petitioners, husband and wife, filed a timely petition for redetermination with the Court. They resided in California at the time the petition was filed. Petitioner Chanel D. Rutherford appeared at trial and was represented by Beth H. Hodess, who filed a limited entry of appearance with the Court. Mrs. Rutherford informed the Court that Mr. Rutherford was aware of, but was unable to attend, the trial, and that he had agreed that Mrs. Rutherford could prosecute the case on his behalf. Daniel J. Kleid appeared on behalf of 1 2 3 4 5 6 7 8 9 10 11 12 13 respondent. The parties filed with the Court a 14 stipulation of facts with exhibits attached. 15 16 17 18 19 20 Respondent concedes that petitioners are (1) not liable for accuracy-related penalties under section 6662(a) and (2) not liable for self-employment tax of $4,260 for the taxable year 2016. In connection with the latter concession, the parties agree that petitioners are not entitled to a corresponding deduction for one-half of 21 additional self-employment tax for 2016. The issues 22 remaining for decision are whether petitioners are 23 entitled to deductions for various expenses claimed on 24 Schedules C, Profit or Loss From Businesses, for the years 25 In issue. 5 1 2 3 4 5 6 7 8 9 10 11 Background During the years in issue Mrs. Rutherford (hereinafter petitioner) engaged in a "coaching" activity which she described as an effort to assist other individuals in "drop-shipping" -- a reference to rapid shipping and delivery of merchandise sold by third-party vendors. During the years in issue petitioner made frequent round trips by vehicle from her home to sacramento, California, where she attempted to market her coaching services. Petitioner also made a few long- 12 distance trips to destinations such as Los Angeles and Las 13 Vegas in connection with the activity. Petitioner 14 15 recorded information about the above-referenced trips on an electronic calendar, a note pad, and a spreadsheet. 16 Although petitioner normally recorded the date of the 17 18 19 20 21 22 23 24 travel, destination, and number of miles that she drove in the note pad shortly after completing a trip, she did not transfer that information to the spreadsheet until much later. Some of the information that petitioner entered on the spreadsheet conflicted with information recorded in the note pad and limited odometer readings for the vehicle that petitioner used for the majority of the trips. In October 2015 petitioner paid $6,900 for 25 online drop-ship training. It appears that the online 6 training program was a scam. Petitioner offered testimony at trial about many of the other expenses that she paid or incurred in connection with the coaching activity during the years in issue. Petitioner and Mr. Rutherford filed joint Forms 1040,* U.S. Individual Income Tax Return, for the years in issue. Petitioner completed and attached Schedules C to those returns. With regard to the coaching activity, she reported no gross receipts for 2015 and gross receipts of $200 for 2016. Petitioner claimed the following expenses on 1 2 3 4 5 6 7 8 9 10 11 12 Schedule C for 2015: $2,536 for advertising, $22,151 for 13 14 15 16 17 vehicle expenses, $982 for office expenses, $638 for supplies, $40 for travel, and $9,200 for other expenses comprising $7,700 for training, $1,200 for cell phone services, and $300 for internet services. Petitioner claimed the following expenses on 18 Schedule C for 2016: $3,691 for advertising, $19,741 for 19 20 21 22 vehicle expenses, $1,349 for office expenses, $465 for supplies, $1,534 travel, $348 for meals and entertainment, 3 and $3,369 for cell phone services. Respondent disallowed all of the deductions that 23 Petitioner claimed on the Schedules C for lack of 24 substantiation of the underlying expenses. 25 Discussion cribers As a general rule, the Commissioner's 7 determination of a taxpayer's liability in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Deductions and credits are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction or credit claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial'Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer must substantiate deductions claimed 1 2 3 4 5 6 7 8 9 10 11 12 13 by keeping and producing adequate records that enable the 14 Commissioner to determine the taxpayer's correct tax 15 16 17 18 liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is 19 allowable pursuant to a statutory provision and must 20 21 further substantiate that the expense to which the deduction relates had been paid or incurred. Sec. 6001; 22 Hradesky v. Commissioner, 65 T.C. at 89-90. 23 24 25 When a taxpayer establishes that he or she paid or incurred a deductible expense but fails to establish the amount of the deduction, the Court normally may apply ribers the Cohan rule to estimate the amount allowable as a deduction. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742- 8 743 (1985). There must be sufficient evidence in the record, however, to permit the Court to conclude that a deductible expense was paid or incurred in at least the amount allowed. Williams v. United States, .245 F.2d 559, 560 (5th Cir. 1957). Under section 162(a), a deduction is allowed for 1 2 3 4 5 6 7 8 9 10 ordinary and necessary expenses paid or incurred during 11 12 13 14 15 the taxable year in carrying on any trade or business. A deduction is not allowed, however, for personal, living, or family expenses. Sec. 262(a). Whether an expenditure satisfies the requirements for deductibility under section 162 is a question of fact. See Commissioner v. Heininger, 16 320 U.S. 467, 475 (1943). 17 18 19 20 Section 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel (including meals and lodging), entertainment, and gifts, and with respect to "listed property". Sanford v. 21 Commissioner, 50 T.C. 823, 826-829 (1968), aff'd per 22 23 24 curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs. As relevant here, the term "listed property" includes passenger automobiles. Sec. 25 280F(d)(4)(A)(i). To satisfy the requirements of section 1 2 3 4 5 6 7 8 9 274(d), a taxpayer generally must maintain adequate records and documentary evidence which, in combination, are sufficient to establish the amount, date, and business purpose for a covered expenditure or business use of listed property. Sec. 1.274-5T(b)(6),(c)(1), Temporary Income Tax Regs. Section 1.274-5T(c)(2), Temporary Income Tax Regs., provides in relevant part that "adequate records" generally consist of an account book, a diary, a log, a 10 statement of expense, trip sheets, or a similar record 11 made at or near the time of the expenditure or use, along 12 with supporting documentary evidence. Section 1.274- 13 5(j)(2), Income Tax Regs., provides that the strict 14 15 substantiation requirements of section 274(d) for vehicle expenses must be met even where the optional standard 16 mileage rate is used. 17 18 19 Petitioner offered various records including her note pad and a spreadsheet in an effort to substantiate the number of miles that she drove for business purposes 20 during the years in issue. Given the number and variety 21 of discrepancies in petitioner's mileage records, they are 22 23 insufficient to satisfy the strict substantiation requirements of section 274(d) for vehicle expenses. 24 Petitioner did not offer adequate evidence to substantiate 25 travel and meals and entertainment expenses. cribers Consequently, 10 respondent's disallowance of deductions for those expenses is sustained. Despite petitioner's shortcomings as a record keeper, she impressed the Court as a sincere, honest, and forthright witness. On this record, applying the Cohan rule, and excluding expenses that appear to be nondeductible personal or living expenses, the Court concludes that petitioner adequately substantiated that she paid or incurred expenses of $10,300 and $4,400 for 1 2 3 4 5 6 7 8 9 10 the taxable years 2015 and 2016, respectively. 11 Petitioners are entitled to deductions for the same. Consistent with the forgoing, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:22 a.m., the above-entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25