TAX COURT OPINION

Case: Roy L. Brock
Docket Number: 25851-07
Judge: Colvin
Opinion Type: bench
Filed: 11/12/2008
Pages: 7

ADM . mc"XIZ473 9zRvlC CAL . STAT . T : JUDGE UNITED STATES TAX COURT WASHINGTON, DC 2021 7 Roy L . Brock Petitioner, v . Docket Nos . 25851-0 7 COMMISSIONER OF INTERNAL REVENUE, Respondent . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 of the above case before Judge Mark V . Holmes at Buffalo, New York on October 27, 2008, containing his oral findings of fact and opinion rendered after the conclusion of trial . In accordance with the oral findings of fact and opinion, a decision will be entered on behalf of both parties under rule 155 . (Signed) Mark V . Holmes Judge Dated : Washington, D .C . November 12, 2008 SERVED Nov 14 2008 3 1 Bench Opinion by Judge Mark V . Holmes October 27, 200 8 2 Roy L . Brock 25851-0 7 3 In the case of Roy L . Brock v . Commissioner o f 4 Internal Revenue , Docket No . 25851-07, the Court has decided 5 to render oral findings of fact and opinion , and th e 6 following represents the Court's oral findings of fact and 7 opinion . 8 This bench opinion is made pursuant to th e 9 authority granted by Section 7459(b) of the Internal Revenue 10 Code of 1986, as amended , and Rule 152 of the Tax Cour t 11 Rules of Practice and Procedure . 12 The parties reached a stipulation, which was 13 admitted and forms part of the record in this case, together 14 with the testimony of Mr . Brock . 15 Mr . Brock is a resident of New York State and was 16 a resident when he filed his petition . 17 The first question that seemed to concern Mr . 18 Brock quite a bit was whether the government was saying that 19 he was in a trade or a business of buying and selling used 20 cars, and I do find in his favor on this . I do believe that 21 Mr . Brock was in the business for the year 2004, and th e 22 government actually conceded this . 23 There is a problem because, of course, he didn't 24 have a license from New York State to be a used car dealer, 25 but he explained that he stayed underneath the threshold an d Heritage Reporting Corporation (202) 628-4888 4 1 hoped to grow the business . 2 The key for someone who is seeking to get trade o r 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 business s tatus is whether he, in fact, is holding himsel f out to be in the business, and I find that Mr . Brock wa s holding himself out to be in the business . It doesn't matter that he didn't have the licens e that New Y ork State might have required if he had sold mor e cars becau se I find, very specifically, that he did have a profit mot ive in buying these cars, getting them fixed up , and then t rying to resell them . He explained that he wasn' t making muc h money at his current job, and this seemed like , based on t he experience of his cousin, a good way of tryin g to break into business on his own . So I believe him o n that . As a result, again, because of the government' s concession but also because of the money at stake, the firs t item was c ost of goods sold, which the government actuall y increased over Mr . Brock's Schedule C, so that, of course , will be su stained as a concession . The second item was the cost of ads . Here , normally, as with every business expense, there would hav e to be proof of payment and a business connection . However , as with all of the records in this case, all I really hav e is Mr . Brock's say-so in testifying . I find him to be a perfectly honest man . He was in business trying to mak e Heritage Reporting Corporation (202) 628-4888 5 1 money, but he needs to show records . 2 On the other hand, he explained that the records 3 that he did have were given to the IRS -- he didn't kee p 4 copies -- and I do note that the IRS didn't produce a 5 witness saying that you were lying about that . 6 So I am operating under the assumption that he had 7 some kind of records that he did give the originals to th e 8 IRS and that the IRS managed to lose them . 9 So going through the individual conteste d 10 expenses , the first was the cost of advertisements . H e 11 claimed $100 and testified, I believe, truthfully that what 12 he did was he just paid cash to the local newspaper to place 13 a couple of classified ads . So I'll allow the $100 expense . 14 As to the taxes and licenses, he testified tha t 15 the taxes were sales taxes on parts and, I strongly suspect, 16 on the mechanics that he hired as well . So I will allow the 17 $190 in sales tax expenses as Schedule C expense . 18 That then leads to a couple of expenses that are 19 different because of the different requirements of the Tax 20 Code . 21 The first is your car expense, the car that you 22 used, both for personal use, but also for the business use 23 of going to these auctions . That use of your car i s 24 governed by a section of the Internal Revenue Code called 25 Section 274, and it has special rules on certain kinds of Heritage Reporting Corporation (202) 628-4888 6 1 property, one of which is using your car for business, and 2 it requires special proof of the amount of ever y 3 expenditure, the use -- that means mileage log, mile by mile 4 -- the time at which you were using it for business use, and 5 a recording somehow that you were using it for busines s 6 rather than personal use for that particular trip . 7 Now, it is true that, under the regulations, "a 8 contemporaneous log is not required, buta record of the 9 elements of an expenditure or of a business use of liste d 10 property made at or near the time of the expenditure or use, 11 supported by sufficient documentary evidence, has a hig h 12 degree of credibility not present with respect to a 13 statement prepared subsequent thereto ." That is Regulation 14 1 .274-5(T) (c) (1) . 15 What that means is that you have to maintain a 16 very detailed log . Now, of course, you said, and I d o 17 believe you, that you kept some kind of log that you gave to 18 the IRS and that the IRS lost . 19 So that kicks me into the next part of th e 20 regulation, which is that "where the taxpayer establishes 21 that the failure to produce adequate records is due to the 22 loss of such records through circumstances beyond the 23 taxpayer's control, the taxpayer shall have a right t o 24 substantiate a deduction by reasonable reconstruction of his 25 expenditures or use ." That is Regulation 1 .274-5(T)(c)(5) . Heritage Reporting Corporation (202) 628-4888 7 1 That's where you have a problem, Mr . Brock , 2 because there wasn't -- perhaps there couldn't have been , 3 really, under the circumstances -- a way for you to tell me, 4 month by month, week by week, where you were going and what 5 the business purpose of attending so many auctions for what 6 turned out to be three or four cars during tax year 200 4 7 was . 8 The result is that I have to disallow the ca r 9 expenses as not being adequately substantiated, even in the 10 absence of a mileage log or other records because of th e 11 IRS's losing the original . 12 Similarly, cell phones are also listed properties 13 subject to this requirement . The requirement is normally 14 met by getting your cell phone bills and just bringing them 15 to Court and recording what part of what cell phone use was 16 business versus personal . Again, cell phone use, whe n 17 you're selling, at the beginning of your business, three to 18 four cars a year, having a cell phone for all 12 months of 19 the year and claiming it all would require substantiation 20 that you just didn't present today . 21 On the other hand, I do believe your testimony 22 that you put up a Web page on the used car sales Web page, 23 so I'll allow the $120 that you said you spent on using a 24 Web pag e 25 So, to summarize, the cell phone expense and the Heritage Reporting Corporatio n (202) 628-4888 8 1 car expense aren't allowed for lack of substantiation . The 2 ads, the sales tax, and the $120 in utilities , which i s 3 really website maintenance , I will allow . 4 So this is a partial victory for both sides . A 5 judgment will be entered under Rule 155, and I'll issue that 6 order in a moment or so . Okay ? 7 This concludes the court ' s oral findings of fact 8 and opinion in this case . 9 (Whereupon , at 2 :28 p .m ., the bench opinion in the 10 above-entitled matter was concluded . ) 11 / / 1 2 13 14 15 / / / / / / 16 / / 17 / / 1 8 1 9 20 2 1 22 23 / / / / / / 24 / / 25 // Heritage Reporting Corporation (202) 628-4888