TAX COURT OPINION

Case: Gerald F. Kantor & Jean M. Kantor
Docket Number: 17186-13S
Judge: Marvel
Opinion Type: bench
Filed: 05/16/2014
Pages: 14

CLC UNITED STATES TAX COURT WASHINGTON, DC 20217 GERALD F. KANTOR & JEAN M. KANTOR, Petitioner(s), v. ) ) ) ) Docket No. 17186-13S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ORD ER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge L. Paige Marvel at St. Paul, Minnesota, on April 18, 2014, containing the Court's oral findings of fact and opinion rendered at the trial session at which the 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. May 16, 2014 SERVED May 19 2014 Capital Reporting Company 3 1 Bench Opinion by Judge L. Paige Marvel 2 April 18, 2014 3 Gerald F. & Jean M. Kantor v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 17186-13S 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 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 Internal Revenue Code of 1986 as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Unless otherwise indicated, subsequent section references are to the Internal Revenue Code of 1986 ( ode) as amended and in effect for the year in issue, and Rule 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 references are to the Tax Court Rules of Practice and Procedure. Gerald F. Kantor appeared pro se and represented to the Court that he was authorized to represent the interests of his wife in these proceedings. Melissa J. Hedtke appeared on behalf of respondent. Petitioners resided in Minnesota when they petitioned this Court. In a notice of deficiency dated April 29, 2013, respondent determined an income tax deficiency of $3,551 with respect to petitioners' 2010 taxable year. The deficiency arises from respondent's disallowance of a Schedule C loss of $12,683 because respondent determined that petitioner Gerald F. Kantor had not regularly and substantially engaged in a separate Schedule C accounting activity during 2010 17 with the primary purpose of making a profit within 18 19 the meaning of section 183. The sole issue we must decide is whether 20 Mr. Kantor regularly engaged in the Schedule C 21 accounting activity with the primary purpose of 22 making a profit as required by section 183. 23 24 Respondent argues that Mr. Kantor did not conduct any Schedule C activity with the intention of making a 25 profit and that section 183 bars petitioners from 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 claiming the expenses and corresponding loss from the activity. Petitioners disagree with respondent's position and assert that they properly claimed the loss on their 2010 return. We agree with respondent and explain as follows. The parties stipulated to the admissibility of certain facts and exhibits. We incorporate the stipulated facts and facts drawn from stipulated exhibits into this opinion. Findings of Fact Petitioners Gerald F. Kantor and Jean M. Kantor are married and they filed a joint Federal income tax return for 2010, the year at issue. 14 During 2010 both Mr. Kantor and Mrs. Kantor worked 15 16 17 18 19 20 21 22 23 for Riediger & Associates, P.A. (Riediger) as employees. Mrs. Kantor was employed at Riediger as an administrative assistant. Mr. Kantor, an enrolled agent and registered accounting practitioner, provided various accounting services, including the review of Federal income tax returns, to Riediger's clients as Riediger's employee and vice president of operations pursuant to an Employment Agreement executed on January 4, 1994, by Mr. Kantor and Vernon 24 Riediger. Mr. Kantor has been employed by and has 25 worked for Riediger from 1994 to the present. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 Under the Employment Agreement, Mr. Kantor is paid annual compensation of $100,000 plus the "net collected profits of the Corporation per year". Mr. 4 Kantor's duties include running the company, hiring, 5 managing and supervising employees, preparing 6 7 8 9 financial reports and tax returns for the company and for clients, supervising and managing all administrative functions, and promoting company business by increasing sales and profits. Riediger 10 maintained an office manual that provided among other 11 12 13 14 15 16 17 18 things for employee reimbursement of business travel expenses. Under that policy Riediger would reimburse an employee for travel expenses incurred to visit clients at the standard mileage rate if the employee submitted an expense report. Riediger requires that expense reports be submitted monthly. Pursuant to the reimbursement policy, Mr. Kantor submitted monthly expense reports that claimed 19 mileage and related expenses. Some of the mileage 20 21 22 claimed was to transport various race and show cars that Mr. Kantor owned to car races and shows. Mr. Kantor testified that his car racing promoted his and 23 Riediger's accounting business. Some of the expenses 24 25 claimed were for parts, repairs, and supplies for the race cars. during 2010 Riediger reimbursed Mr. 866.488.DEPO www.CapitalReportingCompany.com (cid:16)042 Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Kantor for $4,485, which Mr. Kantor reported as income on a Schedule C attached to the 2010 return. The Schedule C, which was submitted on behalf of "Gerald F. Kantor Accountant" described the principal business activity as accounting. Mr. Kantor also reported as Schedule C income certain rental income totaling $2,000 that he received in 2010 from the rental of certain equipment, specifically a camper, a truck and a trailer owned by petitioners. During 2010, they rented the camper, truck and trailer at various times to Riediger and to Triad Aerospace, Inc. (Triad), an S corporation owned 100% by Mr. Kantor that Mr. Kantor described as a distributor of wire and cable to the aerospace and medical industries. Mr. Kantor spent between 3,000 and 3,600 hours per year working for Riediger and 15 to 20 hours per week working for Triad during 2010. There is no credible evidence in the record to prove that 20 Mr. Kantor advertised his purported Schedule C 21 activity to prospective clients or that he performed 22 any accounting services for any clients other than 23 Riediger clients during 2010. There is no credible 24 25 evidence to support a finding that Mr. Kantor was engaged in a regularly and continuously conducted 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Schedule C accounting activity during 2010 or that 2 Mr. Kantor conducted any Schedule C activity during 3 4 2010 with the intent of making a profit. All or substantially all of Mr. Kantor's accounting 5 activities and services during 2010 were performed by 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 him as an employee of Riediger. Petitioners claimed a substantial Schedule C loss, ranging in size from $7,767 in 2004 to $43,835 in 2009, on their Federal income tax returns for 2003 through and including 2011. On their 2010 return, petitioners claimed total income of $6,485, total deductions of $19,168, and a net loss of $12,683 on Schedule C. Respondent disallowed petitioners' entire claimed Schedule C loss of $12,683 for 2010. Legal Analysis Deductions are a matter of legislative grace, and a taxpayer ordinarily must prove that he is entitled to the claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). In general, section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The term "trade or business" is not precisely defined by the Code or the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 regulations thereunder. However, for an activity to be considered a trade or business for purposes of section 162, the activity must be conducted with "continuity and regularity" and "the taxpayer's primary purpose for engaging in the activity must be for income or profit." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987). Mr. Kantor was employed full time as an accountant and as vice president for operations at 10 Riediger throughout 2010. He received expense 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reimbursements from Riediger and from Triad, a company owned 100% by Mr. Kantor. Mr. Kantor reported those expense reimbursements totaling $6,485 as gross income on a Schedule C that he attached to his 2010 joint return. Mr. Kantor also reported as Schedule C gross income certain rental income that he received from renting a truck and trailer to Triad and a camper to Riediger and Triad. Mr. Kantor claimed Schedule C expenses totaling $19,168 (car and truck expenses, vehicle depreciation, car insurance, repairs and maintenance) and deducted a Schedule C loss of $12,683. Mr. Kantor is quite vehement that he engaged in his Schedule C accounting activity at all times with the intent to make a profit. Respondent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 understandably disputes that Mr. Kantor intended to make a profit because the activity consisted simply of reporting expense reimbursements that he received as an employee of Riediger, expense reimbursements from his closely held corporation, and rental income that should have been reported on a Schedule E so that petitioners could claim a substantial loss against other income. Section 183(a) provides that in the case of an activity engaged in by an individual taxpayer, if the activity is not engaged in for profit, no deduction attributable to such activity shall be allowed except as provid^ in section 183(b). Section 183(b) limits the deductions attributable to an 15 activity not engaged in for profit to (1) deductions 16 17 that would be allowable for the taxable year regardless of whether the activity was engaged in for 18 profit, and (2) deductions that would be allowable if 19 20 21 22 the activity were engaged in for profit by only to the extent that gross income from the activity exceeds the deductions allowable under (1). The test of whether a taxpayer conducted an 23 activity for profit is whether the taxpayer entered 24 25 into and continued the activity with the primary and predominant objective of making a profit. See sec. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1.183-2(a), Income Tax Regs.; Mattfeld v. Commissioner, 15 F.3d 1087 (9th Cir. 1994), aff'g T.C. Memo. 1992-273; Wolf v. Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff'g T.C. Memo. 1991-212; Estate of Power v. Commissioner, 736 F.2d 826, 830 (1° Cir. 1984), aff'g T.C. Memo. 1983-552. Although a reasonable expectation of profit on a taxpayer's part is not required, the profit objective must be bona fide, as determined from a consideration of the surrounding facts and circumstances. Ruben v. Commissioner, 852 F.2d 1290 (9th Cir. 1988), aff'g T.C. Memo. 1986-260; Keanini v. Commissioner, 94 T.C. 41, 46 (1990); Golanty v. Commissioner, 72 T.C. 411, 426 (1979), aff'd without published opinion, 647 F.2d 170 (9th the burden of proving by a preponderance of the evidence that he had an honest objective of making a 18 profit when he engaged in the activity at issue. 19 Filios v. Commissioner, 224 F.3d 16, 21 (1° Cir. 20 21 22 23 2000), aff'g T.C. Memo. 1999-92; Wolf v. Commissioner, 4 F.3d at 713; Estate of Power v. Commissioner, 736 F.2d at 828. Whether a taxpayer engaged in an activity 24 with the primary objective of realizing a profit must 25 be redetermined annually, taking into account all of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 the relevant facts and circumstances. Sec. 1.183- 2(a) and (b), Income Tax Regs.; Filios v. Commissioner, 224 F.3d at 21; Golanty v. Commissioner, 72 T.C. at 426. We give more weight to the objective facts than to the taxpayer's statement of his intent. Sec. 1.183-2(a), Income Tax Regs.; Barkley v. Commissioner, 878 F.2d 1438 (9th 1989), aff'g T.C. Memo. 1987-577; Engdahl v. Commissioner, 72 T. C. 659, 666 (1979) . We examine the following factors in deciding whether a taxpayer is conducting an activity with the primary intent to make a profit: (1) the manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisers; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar 19 activities; (6) the taxpayer's history of income or 20 21 22 23 24 25 losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) elements of personal pleasure or recreation. Sec. 1.183-2(b), Income Tax Regs. No one factor is determinative, and our conclusion with respect to a 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 taxpayer's profit motive does not depend upon merely counting up those factors that support a finding of 3 profit motive and those that do not. See sec. 1.183- 4 5 2(b), Income Tax Regs. Petitioners have failed to convince us that 6 Mr. Kantor conducted an accounting business with 7 8 9 10 11 12 13 regularity and continuity apart from the accounting business he did as an employee of Riediger. Mr. Kantor failed to prove that he provided any accounting services to any clients who were not clients of Riediger during 2010 and we are convinced that he did not. The only income reported on the Schedule C was expense reimbursement payments from 14 Riediger and rental income from the very sporadic 15 16 17 18 19 20 21 22 23 24 25 rental of some personal property owned by the Kantors that should have been reported on a Schedule E. We conclude and find that Mr. Kantor did not conduct a Schedule C accounting activity during 2010. Even if we were to conclude that some aspect of Mr. Kantor's activities during 2010 could arguably qualify as a Schedule C business activity, we are firmly convinced that the activity was not conducted with the intent to make a profit. Rather, the activity was designed to generate losses that could be offset against petitioners' other income. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 2 3 4 5 6 7 8 Among the factors that support our conclusion are the extended history of losses generated by the alleged Schedule C activity from 2003 through 2011, the lack of time spent on the activity by Mr. Kantor, the fact that the losses generated by the Schedule C activity offset petitioners' primary income from employment and other sources, the lack of advertising or any discernable effort to build the alleged Schedule C 9 activity, the lack of clients, and the complete 10 dearth of any income from accounting activities. 11 While we acknowledge that Mr. Kantor has experience 12 13 14 15 16 17 18 19 20 21 22 23 and education in accounting and that he provided accounting services during 2010, Mr. Kantor provided the services as an employee of Riediger to its clients. Mr. Kantor did not engage in any regularly conducted and continuous accounting activity other than in his capacity as an employee of Riediger. Taking into account each of the listed factors and considering the facts and circumstances relating to Mr. Kantor's accounting activity, we are persuaded by a preponderance of the evidence that petitioner did not regularly conduct any substantive accounting activity independent of his work at 24 Riediger as an employee during 2010. Mr. Kantor did 25 not depend on the Schedule C income to support 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 himself and his wife,see sec. 1.183-2(b) (8) Income Tax Regs. The ativit egularly generated losses, see ch'vi4y sec. 1.183-2(b)(6) and (7), Income Tax Regs. Mr. Kantor did not devote substantial time or effort to a 5 meaningful accounting practice outside of his work as 6 7 8 an employee of Riediger. Although he maintained books and records with respect to his Schedule C activity, we give this factor little weight as the 9 maintenance of those books and records simply 10 recorded expenses that bore no relationship to a 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 substantive Schedule C activity conducted with the intent to generate income. After a review of the factors, we conclude that, on balance, petitioner has not proven by a preponderance of the evidence that he was engaged in a Schedule C accounting activity during 2010 or that his alleged Schedule C accounting activity was an activity he conducted regularly and consistently with the intention to make a profit. Consequently, we sustain respondent's deficiency determination. 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 10:49 a.m., the above- 866.488.DEPO www.CapitalReportingCompany.com