TAX COURT OPINION

Case: Ramtin Sadighim & Nahal Khani Sadighim
Docket Number: 24342-16S
Judge: Thornton
Opinion Type: bench
Filed: 12/06/2017
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 SEC RAMTIN SADIGHIM & NAHAL KHANI SADIGHIM, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) ) ORDER Docket No. 24342-16S. 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 case before Judge Michael B. Thornton at Los Angeles, California, 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 pursuant to Rule 155. (Signed) Michael B. Thornton Judge Dated: Washington, D.C. December 6, 2017 SERVED Dec 07 2017 . 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Michael B. Thornton October 24, 2017 Ramtin Sadighim and Nahal Khani Sadighim v. Commissioner Docket No. 24342-16S 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. Except as otherwise provided by Rule 152(c) of the Tax Court Rules of Practice and Procedure, the oral 10 findings of fact and opinion shall not be relied upon as 11 12 precedent in any other case. This proceeding for the redetermination of a 13 deficiency is a Small Tax Case conducted pursuant to the 14 provisions of section 7463 of the Internal Revenue Code of 15 1986, as amended, and Rules 170 through 175 of the Tax Court 16 Rules of Practice and Procedure. Pursuant to section 17 18 19 7463(b), the decision to be entered in this case is not reviewable by any other court. This bench opinion is made pursuant to the 20 authority granted by section 7459(b) and Rule 152. 21 Hereinafter in this bench opinion, section references are 22 23 to the Internal Revenue Code in effect for the taxable year at issue. All rule references are to the Tax Court 24 Rules of Practice and Procedure. All monetary amounts are 25 rounded to the nearest dollar. -5M (973)406-2250|operations@escribersnet|www.escribers.net 1 2 3 4 5 6 7 8 9 This case was tried on September 25 and October 23, 2017, in Los Angeles, California. Petitioner husband appeared pro se; there was no appearance by petitioner wife. Mr. Albert B. Brewster appeared on behalf of respondent. By notice of deficiency, respondent determined a deficiency in petitioners' 2013 Federal income tax of $13,308, an addition to tax for failure to timely file the return pursuant to section 6651(a)(1) of $3,023, and an 10 accuracy-related penalty pursuant to section 6662(a) of 11 12 13 14 15 16 17 18 $2,418. In the notice of deficiency respondent determined that petitioners failed to report income from unemployment compensation of $12,918 and interest of $253; petitioners have conceded this issue. Respondent also disallowed deductions claimed on petitioners' Schedule C, Profit or Loss From Business, as follows: (1) $9,765 for other expenses; (2) $2,995 for meals and entertainment; (3) $4,752 for travel; (4) $12,000 for rent/lease of other 19 business property; and (5) $7,090 for car and truck. 20 21 22 While living in California, petitioners timely filed a petition contesting respondent's determination. The issues remaining for decision are: (1) whether 23 petitioners are entitled to the deductions claimed on 24 Schedule C; (2) whether petitioners are liable for the 25 addition to tax pursuant to section 6651(a)(1) for failure (973)406-2250]operations@escribers.net|www.escribers.net 1 2 3 4 5 6 7 8 9 to timely file the return; and ()Ú whether petitioners are liable for the accuracy-related penalty pursuant to section 6662. Petitioners concede that they filed their 2013 tax return late and are subject to the section 6651(a)(1) addition to tax, in an amount to be determined in the Rule 155 computations. Findings Fact Petitioners attached to their 2013 Form 1040 a Schedule C for "Sales" in Mr. Sadighim's name. The 10 Schedule C did not indicate a business name or address. 11 At trial, Mr. Sadighim explained that the business was 12 selling ringtones online. He would either have someone 13 make the ringtones or else pay for a license; he would then 14 15 16 17 release the ringtones for sale online. Petitioners filed their 2013 income tax return on April 2, 2015. Opinion The Commissioner's determinations in a notice of 18 deficiency are generally presumed correct, and the 19 taxpayer bears the burden of proving those determinations 20 erroneous by a preponderance of the evidence. Rule 142(a); 21 Welch v. Helvering, 290 U.S. 111, 115 (1933). 22 23 Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement 24 to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. 25 Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. (973)406-2250|operations@escribers.net|www.escribers.net 6 v. Helvering, 292 U.S. 435, 440 (1934). This burden requires the taxpayer to substantiate claimed deductions by keeping and producing records sufficient to enable the Commissioner to determine the taxpayer's correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), (e), Income Tax Regs. Section 162(a) generally allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. An expense is ordinary if it is a common or frequent occurrence in the type of business involved. Deputy v. du Pont, 308 U.S. 488, 494-495 (1940). An expense is necessary if it is appropriate and helpful to the taxpayer's business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943). If a taxpayer establishes that a deductible expense has been paid but is unable to substantiate the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 precise amount, we generally may estimate the amount of the 20 deductible expense, bearing heavily against the taxpayer 21 22 responsible for the inexactitude. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We cannot estimate 23 deductible expenses, however, unless the taxpayer presents 24 evidence providing a sufficient basis for making an 25 estimate. Vanicek v. Commissioner, 85 T.C. 731, 742-743 cribers (973)406-2250|operationseescribers.net|v.ww.escribers.net (1985). Without such basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 7 559, 560 (5th Cir. 1957). Section 274(d) supersedes the general rule of Cohan and precludes us from estimating the taxpayer's expenses with regard to certain items. See Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff'd per curiam, 412 F.2d 201 (2d Cir. 1969). Section 274(d) imposes strict substantiation requirements for expenses relating to, among other things, travel, entertainment, and "listed property", including automobiles and other 1 2 3 4 5 6 7 8 9 10 11 12 property used as a means of transportation. Sec. 13 14 15 16 17 18 19 280F(d)(4); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). To deduct such items, the taxpayer must substantiate "by [either) adequate records or by sufficient evidence corroborating * * *[his] own statement" the amount of the expense, the business purpose of the expense, and the business relationship to the taxpayer of the person using the property. Sec. 20 274(d)(4); Beale v. Commissioner, T.C. Memo. 2000-158; 21 22 23 24 sec. 1.274-5A(b)(1), Income Tax Regs. To meet the "adequate records test", a taxpayer must maintain an account book, a diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously 25 with the expenditure and documentary evidence of certain (973)406-2250|operations@escribers.net|mvw.escribers.net 8 1 2 3 4 5 6 7 8 9 expenditures, such as receipts or bills. See sec. 1.274- ST(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). In combination, these records must be sufficient to establish each element amount, time and place, business purpose, and business relationship of the expenditure for which a deduction is sought. See sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). In the absence of adequate records to establish 10 each element of an expense under section 274(d), a taxpayer 11 may alternatively establish an element: "(A) By his own 12 13 14 15 statement, whether written or oral, containing specific information in detail as to such element; and (B) By other corroborative evidence sufficient to establish such element." Sec. 1.274-5T(c) (3) (i), Temporary Income Tax 16 Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). 17 18 In the case of listed property, these elements to be established are the amount of the expenditure; the amount 19 of each business use; the date of the expenditure; and the 20 business purpose. Sec. 1.274-5T(b)(6)(i)-(iii), Temporary 21 Income Tax Regs., 50 Fed Reg. 46016 (Nov. 6, 1985). 22 Expenses subject to section 274(d) must be substantiated; 23 they cannot be estimated. See Sanford v. Commissioner, 50 24 25 T.C. 823, 828 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969). A. Other Expenses cribers l973)409-2250loperations@escribersnet|wwvcescribersmet ' 9 1 2 3 4 5 6 7 8 9 On Schedule C petitioners claimed as other expenses royalties of $7,120, delivery and freight of $187, parking and tolls of $106, and telephone of $2,342. Respondent has disallowed all these expenses. Petitioners concede the delivery and freight, parking and tolls, and telephone expenses. Respondent agrees that petitioners have substantiated $2,512.51 of the claimed royalties. At trial, Mr. Sadighim claimed that he paid an additional $3,000 of royalties in cash, but petitioners failed to 10 present sufficient evidence to substantiate, or to provide 11 sufficient basis for the Court to estimate, more than 12 $2,512.51 of royalties. We hold that petitioners are 13 entitled to $2,512.51 of Schedule C other expenses. 14 15 16 17 18 19 20 21 B. Rent On Schedule C petitioners claimed a rent expense deduction of $12,000. At trial, Mr. Sadighim asked for a rent expense deduction of $3,330 for his home office. As a general rule, section 280A(a) denies deductions with respect to the use of a dwelling unit that was used by the taxpayer as a residence during the taxable year. Section 280A(c)(1) (A), however, permits the deduction of expenses 22 allocable to a portion of a dwelling unit that was used 23 exclusively on a regular basis as the principal place of 24 business for a taxpayer's trade or business. 25 Mr. Sadighim testified credibly that he used a p73)406-2250|operations@escribers.net|mwr.escribers.net bedroom in his apartment exclusively for his business. 10 He presented credible evidence that he paid rent of $1,850 per month for a 1,100 square foot apartment, and that the bedroom was about 200 square feet. On the basis of a conservative 15% allocation of rent, he calculated his home office rental expense to be $3,330. We find that petitioners have presented a credible basis for estimating their rent deduction. See Cohan v. Commissioner, 39 F.2d at 543-544. We conclude and hold that petitioners are 1 2 3 4 5 6 7 8 9 10 entitled to a rent expense deduction of $3,330. 11 12 13 C. Travel Expenses On Schedule C petitioners claimed $4,752 of travel expenses. At trial, Mr. Sadighim claimed travel expenses 14 of $508.93, relating to an overnight business trip to Las 15 Vegas on April 6 or 7, 2013. He presented evidence 16 sufficient to satisfy the section 274(d) substantiation 17 18 requirements for this expense. We hold that petitioners are entitled to travel expenses of $508.93. 19 D. Meals and Entertainment 20 21 22 On Schedule C petitioners claimed meals and entertainment expenses of $2,995. At trial, Mr. Sadighim claimed meals and entertainment expenses of $2,872.36. 23 Mr. Sadighim offered detailed, credible evidence with 24 specific information and other corroborative evidence 25 sufficient to establish the elements of section 274(d). (973)406-2250loperations@escribers.net|www.escribers.net . 11 1 2 3 4 5 6 7 8 9 10 11 See sec. 1.274-5T(c)(3)(i), Temporary Income Tax Regs. We hold that petitioners are entitled to deductions of $2,872.36 for meals and entertainment expenses. E. Car and Truck Expenses On Schedule C, petitioners claimed car and truck expenses of $7,090 on the basis of 11,221 business miles. At trial Mr. Sadighim claimed car and truck expenses of $1,579 on the basis of 2,500 business miles. To obtain a deduction for vehicle expenses, 1.e., expenses related to the use of a passenger automobile, a taxpayer must substantiate with adequate records or by 12 sufficient evidence corroborating his own statement: (1) 13 14 the "amount of each separate expenditure" with respect to the passenger automobile; (2) the "amount of each 15 business/investment use * * * based on the appropriate 16 measure (i.e., mileage for automobiles * * *), and the 17 total use of the [passenger automobile] for the taxable 18 period"; (3) the "[d]ate of the expenditure or use" with 19 respect to the passenger automobile; and (4) the "business 20 purpose for an expenditure or use" with respect to the 21 22 23 passenger automobile. Secs. 274(d), 280F(d)(4); sec. 1.274- 5T(b)(6) and (c)(1), Temporary Income Tax Regs. Alternatively, a taxpayer may calculate his 24 deductible passenger automobile expenses by multiplying 25 his business miles by the standard mileage rate for the cribers (973)406-2250|operationseescribersnet|www.escribers.net 12 1 2 3 4 5 year; under this alternate method, however, the taxpayer is not relieved of the requirement to substantiate the amount of each business use (i.e., the business mileage), or the time and business purpose of each use. Sec. 1.274- 5(j)(2), Income Tax Regs. Consequently, substantiation of 6 miles and business purpose is a prerequisite to claiming a 7 8 9 10 deduction whether petitioners meant to claim actual automobile expenses for 2013, or meant to use the alternative standard-mileage-rate method. At trial Mr. Sadighim provided only an estimate 11 of his business miles driven, urging that it would be 12 unfair to disallow mileage expenses altogether. Section 13 14 274(d) does not permit us to estimate car and truck expenses in this manner. Petitioners have failed to 15 satisfy the strict substantiation requirements of section 16 274(d) to show entitlement to any deductions for car and 17 18 19 20 21 truck expenses. F. Section 6662(a) Accuracy-Related Penalty Respondent determined that petitioners are liable for a 20 percent accuracy-related penalty pursuant to section 6662 (a) and (b) (1) and (2) for an underpayment 22 attributable to negligence or a substantial understatement 23 of income tax. Respondent bears the burden of production 24 with respect to this penalty. See sec. 7491(c). To meet 25 this burden, respondent must produce evidence establishing (973)406-2250|operationseescribers.net|www.escribers.net 13 1 2 3 4 5 6 7 8 9 that it is appropriate to impose this penalty. Respondent asserts that his burden of production includes producing evidence of compliance with section 6751(b)(1), which requires written supervisory approval of the initial determination of a penalty. Respondent further asserts that he has satisfied this burden of production by entering into evidence a signed Civil Penalty Approval Form. We conclude that the Civil Penalty Approval Form satisfies any burden of production that the government may have. 10 Once respondent has met his burden of production, the 11 12 13 14 15 16 17 18 burden of proof is upon petitioners to show that they are not liable for the penalty. See Higbee v. Commissioner 116 T.C. 438, 449 (2001). Negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws and is the failure to exercise due care or the failure to do what a reasonable and prudent person would do under the circumstances. Sec. 6662(c); 19 Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 20 21 1.6662-3(b)(1), Income Tax Regs. Negligence also includes any failure by the taxpayer to keep adequate books and 22 records or to substantiate items properly. Sec. 1.6662- 23 3(b)(1), Income Tax Regs. Petitioners exhibited a lack of 24 due care in failing to keep adequate books and records and 25 in failing to properly Substantiate expenses underlying cribers (973)406-2250|operations@escribersnet|www.escribers.net deductions claimed on their 2013 return. Respondent has . 14 carried his burden of production with respect to the section 6662(a) penalty for negligence. The·accuracy-related penalty does not apply with respect to any portion of an underpayment if the taxpayer acted with reasonable cause and in good faith with regard to that portion. Sec. 6664(c)(1). That determination is made case by case, depending on the facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Those circumstances include the experience, knowledge, and education of the taxpayer. Id. Reliance on a professional return preparer may be reasonable and in good faith if the taxpayer establishes: (1) the return preparer had sufficient expertise to justify reliance; (2) the taxpayer 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 provided necessary and accurate information to the return 16 preparer; and (3) the taxpayer actually relied in good 17 faith on the return preparer's judgment. Neonatology 18 Assocs. P.A. v. Commissioner, 115 T.C. 43, 99 (2000), 19 aff'd, 299 F.3d 221 (3d Cir. 2002). 20 At trial, Mr. Sadighim testified that 21 petitioners' 2013 return was prepared by an accountant, but 22 petitioners have not established that they properly relied 23 24 in good faith on a tax return preparer. There is no evidence in the record as to the advice petitioners' tax 25 return preparer might have given them, apart from their $73)406-2250loperationseescribers.net|wwytescribers.net 15 2013 return with many claimed deductions that petitioners acknowledge were overstated; no evidence to support a .determination that petitioners acted reasonably or in good faith in relying upon such advice; no evidence about the tax return preparer's qualifications; no evidence that Petitioners disclosed to their tax return preparer all relevant facts and circumstances; and no evidence that the advice was based on reasonable factual or legal assumptions. See Id. More fundamentally, petitioners have not shown reasonable cause for their failure to keep adequate records to substantiate expenses relating to their claimed deductions. We hold that petitioners are liable for a section 6662(a) penalty for negligence. To give effect to the foregoing, decision will be entered pursuant to Rule 155. This concludes the Court's findings of fact and opinion in this case. (Whereupon, at 1:08 p.m., the above-entitled matter was concluded.) 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 cribers (973)406-2250|operations@escribers.net|www.esaibers.net