TAX COURT OPINION

Case: Liberty Sebastian Harper & Josh A. Simonsen
Docket Number: 15740-14S
Judge: Leyden
Opinion Type: bench
Filed: 01/09/2017
Pages: 13

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 LIBERTY SEBASTIAN HARPER & JOSH A. SIMONSEN, Petitioners, v. ) ) ) ) ) Docket No. 15740-14S. 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 case before Special Trial Judge Diana L. Leyden at San Diego, California, on November 17, 2016, containing her oral fimdings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diana L. Leyden Special Trial Judge Dated: Washington, D.C. January 9, 2017 SERVED Jan 10 2017 Capital Reporting Company Bench Opinion by Special Trial Judge Diana L. Leyden November 17, 2016 Liberty Sebastian Harper & Josh A. Simonsen v. 3 Commissioner Docket No. 15740-14S I. 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. SEE RULE 152(c), TAX COURT RULES OF PRACTICE AND PROCEDURE. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of Section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Practice and Procedure. 20 21 22 23 24 25 III. 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. Hereinafter in this bench opinion, and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 unless otherwise indicated, all section numbers refer to the Internal Revenue Code, as amended and in effect for the taxable year in issue, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure. T IV. The trial of this case was conducted on November 1/, 2016, in San Diego, California. 1 2 3 4 5 6 7 8 9 10 Petitioner appeared on his own behalf. Clint T. Hale 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 appeared on behalf of respondent. V. For the taxable year 2010, respondent determined a deficiency in petitioner's federal income tax of $6,512, together with an addition to tax under Section 6651(a)(1) of $1,099.25 and an accuracy-related penalty under Section 6662(a) of $1, 302. 40. For the taxable year 2011, respondent determined a deficiency in petitioner's federal income tax of $11,452 together with an addition to tax under Section 6651(a)(1) of $2,104.75 and an accuracy-related penalty under Section 6662(a) of $2,290.40. For the taxable year 2012, respondent 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 determined a deficiency in petitioner's federal income tax of $19,167 together with an addition to tax under Section 6651(a)(1) of $3,388.95 and an addition to tax under Section 6651(a)(2) of $903.72 (such amount calculated through April 1, 2014). VI. The issues for decision by the Court are as follows: (1) For 2010.'(a) whether petitioner had unreported taxable interest income of $100; (b) whether petitioner is entitled to Schedule C deductions for 12 utilities of $7,308, for travel of $5,255, and for 13 14 15 16 17 18 19 20 21 22 23 car and truck expenses of $10,730; (c) whether petitioner is liable for the late-filing addition to tax; and (d) whether petitioner is liable for the accuracy-related penalt;y under Section 6662(a). (2) For 2011; (a) whether petitioner is entitled to Schedule C deductions for utilities of $8,275, for travel of $13,459, and for car and truck expenses of $23,225; (b) whether petitioner is liable for the late-filing addition to tax; and (c) whether petitioner is liable for the accuracy-related penalty under Section 6662(a); and / 24 (3) For 2012| (a) whether petitioner had unreported 25 Schedule C gross receipts or sales of $76,581; (b) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 whether half of petitioner's then spouse's wages in the amount of $31,805.50 is properly allocable to petitioner under California community property laws; (c) petitioner's filing status is single; (d) whether petitioner is liable for the late-filing addition to tax; and (e) whether petitioner is liable for the late-payment addition to tax. For reasons discussed, the Court sustains respondent's determinations on all the issues. VII. Some of the facts have been stipulated, and they are so found. Petitioner resided in California at the time the petition was filed with the Court. When the petition in this case was filed, it was signed by both petitioner and Josh A. Simonsen, her spouse during the tax years 2010, 2011, and 2012. Petitioner and Mr. Simonsen attached to their petition a joint statutory notice of deficiency for 2010 and 2011 and an individual notice of deficiency for 2012 for petitioner. While the case was in the IRS Appeals Office jurisdiction, the appeals officer assigned to the case discovered that the IRS had issued a separate notice of deficiency to 25 Mr. Simonsen for 2012, with the same date as the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I 7 1 2 3 4 5 6 7 8 individual notice of deficiency for 2012 issued to petitioner. Respondent has conceded that Mr. Simonsen timely petitioned the Court with respect to his 2012 notice of deficiency. However, Mr. Simonsen failed to contact respondent's counsel despite numerous attempts. Before the trial in bhée this case, respondent filed a Motion to Dismiss for Lack of Prosecution As To 9 Petitioner Josh A. Simonsen and the Court granted 10 11 12 13 14 respondent's motion on the date of this trial, November 16, 2016. Trial proceeded in this case only as to petitioner, Ms. Harper. During 2010 and 2011, petitioner was 15 married to Mr. Simonsen. For 2012, petitioner 16 17 18 19 20 21 22 testified that they were separated, but not legally separated. She also testified that while they began divorce proceedings in 2012, she did not know when the divorce was final. Petitioner did not provide or obtain any documentation as to the date her divorce to Mr. Simonsen was final. The Court concludes that as of December 31, 2012, petitioner was married to 23 Mr. Simonsen. 24 25 For 2012, the IRS made substitutes for returns for petitioner and Mr. Simonsen. Both 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 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 petitioner and Mr. Simonsen filed separate original tax returns for 2012. Petitioner elected the filing status of single. Mr. Simonsen elected the filing status of married filing separately. During 2010, 2011, and 2012, petitioner operated a business of consulting to franchisors that included supporting and training franchisees. She ran this business out of her home and was paid as an independent contractor. She testified that she did a lot of traveling. Petitioner did not provide any documentation with respect to the expenses that were claimed on Schedule C of the joint 2010 and 2011 tax returns for utilities, travel, or car and truck expenses. After the individual notice of deficiency was issued, petitioner filed an original tax return for 2012. At trial petitioner asserted that for 2012, she was entitled to claim the following deductions: (1) a deduction for self-employed health insurance of $3,142; (2) car and truck expenses of $833; (3) rent or leash payments of $7,200; (4) supplies of $300; (5) travel of $1,933; (6) deductible meals (after the 50% reduction) of $589; (7) dues and subscriptions of $718; (8) laundry and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 cleaning of $579; (9) parking and tolls of $400; (10) postage of $240; and (11) telephone of $901. Petitioner did not provide any documents to support the deductions she asserted for 2012. Petitioner testified at trial that she traveled a lot for her business and that for 2012 she rented an apartment in Los Angeles rather than have to commute between San Diego and Los Angeles. She did not provide a copy of a lease or canceled checks 10 and she did not testify as to how this rented 11 12 13 14 15 16 17 18 19 20 21 apartment was necessary for her business. VIII. We turn now to the substantive law. The Commissioner's determination of a taxpayer's liability in a Notice of Deficiency normally 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). Petitioner does not dispute that she received the items of income determined in the 22 Notices of Deficiency. : Further the Court finds that 23 24 25 for 2012 she was still married to Mr. Simonsen and thus, under the operation of California community property tax laws, petitioner must include in her 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 gross income one-half of Mr. Simonsen's wages for that year. Also, as petitioner was still married to 3 Mr. Simonsen as of December 31, 2012, she may not 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 elect the filing status of single for 2012. Sec. 7703(a)(1). Nor does petitioner dispute the application of the additions to tax under Section 6651(a)(1) for 2010, 2011, and 2012 and under Section 6651(a)(2) for 2012. The only challenge that petitioner raised is the disallowance of the Schedule C deductions in 2010 and 2011 and whether she was entitled to the deductions she raised at trial for 2012. Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that she is entitled to any deduction claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). 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. The determination of whether an expenditure satisfies the requirements for deductibility under Section 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). In general, an expense is ordinary if it 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 is considered normal, usual, or customary in the context of the particular business out of which it arose. See Deputy v. du Pont, 308 U.S. 488, 495 (1940). Ordinarily, an expense is necessary if it is appropriate and helpful to the operation of the taxpayer's trade or business. See Commissioner v. 7 Tellier, 383 U.S. 687 (1966); Carbine v. 8 9 Commissioner, 83 T.C. 356, 363 (1984), aff'd, 777 F.2d 662 (11th Cir. 1985). Section 262(a) generally 10 disallows a deduction for personal, living, or family 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 expenses. Section 6001 'and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses. See Sec. 1.6001-1(a) and (e), Income Tax Regs. As a general rule, if, in the absence of such records, a taxpayer provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which she is otherwise entitled, the Court may estimate the amount of such expense and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, in order for the Court to estimate the amount of an expense, we must have some basis 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 upon which an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). In the case of certain expenses, Section 274(d) overrides the so-called Cohan doctrine. Sanford v. Commissioner, 50 T.C. 823, 827 (1968), 9 aff'd per curiam 412 F.2d 201 (2d Cir. 1969); Sec. 10 1.274-5T(a), Temporary.Income Tax Regs. 11 Specifically, Section 274(d) provides that no 12 13 14 15 16 deduction is allowable with respect to any listed property, as defined in Section 280F(d)(4), unless the deduction is substantiated in accordance with the strict substantiation requirements of Section 274(d) and the regulations promulgated thereunder. Included 17 within the definition of listed property in Section 18 280F(d) (4) is any four-wheeled vehicle that is 19 manufactured primarily for use on public streets, 20 21 22 23 24 25 roads, and highways, and which is rated at 6,000 il pounds gross vehicle weight. Sec. 280F(d)(4) (A) and (5); Sec. 1.280F-6(b) and (c), Income Tax Regs.; see Sec. 1.274-5T(k), Temp. Income Tax Regs. Thus, under Section 274(d), no deduction is allowable for expenses incurred in respect of listed 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 property on the basis of any approximation or the unsupported testimony of the taxpayer. See e.g., 3 Golden v. Commissioner, T.C. Memo. 1993-602. In 4 5 6 7 8 9 10 11 12 13 14 15 16 other words, in order to obtain a deduction in respect of listed property, a taxpayer must substantiate the amount of the expense, the time and place of the use, and the business purpose of the use. Sec. 274(d); Sec.: 1.274-ST(c), Temporary Income Tax Regs. Otherwise, the deduction is proscribed. Petitioner failed to keep any records or produce any records that would allow the Court to apply the Cohan rule for the expenses not subject to the stricter substantiation requirements under Section 274(d). Likewise the petitioner did not keep or provide any documents for those deductions subject to the stricter substantiation requirements. 17 Accordingly, the Court sustains respondent's 18 19 20 21 22 23 24 25 disallowance of the deductions set forth in the notices of deficiency for 2010 and 2011 and 2012 and rejects petitioner's claims for deductions for 2012 that she raised at trial. Turning our attention to the accuracy- related penalty, we note that the underpayment of tax for each year is computed in the same manner and equal to the deficiencies determined in the notices 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 of deficiency for years 2010, 2011, and 2012. For 2 all three years, the underpayment of tax is a 3 4 5 6 7 8 9 10 11 substantial understatement of income tax because it exceeds the relevant statutory threshold. See Section 6664(b)(2), (d). We agree that respondent has met his burden of production with respect to the imposition of the accuracy-related penalty for 2010, 2011, and 2012, upon the ground that the underpayment of tax required to have been shown on petitioner's 2010, 2011, and 2012 tax returns is for each of those years a substantial understatement of income tax. 12 Petitioner did not offer any evidence to establish that she had reasonable cause for the underpayments. See Sec. 6664(c); Higbee v. Commissioner, 116 T.C. 438 (2001) . IX. In order to give effect to our disposition of the disputed issues, decision will be entered for respondent. X. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:27 a.m., the above- entitled matter was concluded.) 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com