TAX COURT OPINION

Case: Samuel S. & Laura M. Pinkney
Docket Number: 8761-05S
Judge: Panuthos
Opinion Type: summary
Filed: 10/16/2006
Pages: 12

T .C . Summary Opinion 2006-164 UNITED STATES TAX COUR T SAMUE COMM S . AND LAURA M . PINKNEY , Petitioners v . SSIONER OF INTERNAL REVENUE, Responden t Docket No . 8761-05S . Filed October 16, 2006 . Samuel S . and Laura M . Pinkney, pro sese . AlexanderjD . DeVitis , for respondent . PANUTHOS, Chief Special Trial Judge : This case was heard pursuant to th provisions of section 7463 of the Internal Revenue Code i effect at the time the petition was filed . Th e decision to be entered is not reviewable by any other court, and this opinion s ould not be cited as authority . Unless otherwis e indicated, subsequent section references are to the Internal Revenue Code in effect for the year in issue, and all Rul e references are to the Tax Court Rules of Practice and Procedure . er- RVED OCT 1 6 2006 - 2 - Respondent determined a $7,073 deficiency in petitioners' 2002 income tax and a $1,414 .60 accuracy-related penalty pursuant to section 6662, a) . After concessions,' the issues for decision are : (1) Wheth r petitioners can deduct (a) $246 for charitable cash contributi ns, (b) $24,510 .89 of other expenses , (c) $55 of bad debt expens , and (d) $3,506 for home office expense ; and (2 ) whether petitioners are liable for an accuracy-related penalty under section 6662 (a) . Some of th facts have been stipulated and are so found . Petitioners Sam el Pinkney and Laura Pinkney are married and resided in Los geles, California, at the time their petition was filed . Petitioners have a son, Roderick Pinkney (Roderick), who was approxi ately 41 years old during the year at issue . For convenience, we combine our findings and discussion herein . Unless otherwis indicated, all references to petitioner are to Samuel Pinkney . ' ' Respondetit concedes deductions for $2,825 of charitabl e ons and $314 .94 of other expenses . Petitioners ross income includes $1,063 of gambling winnings , cash contribut' concede their $14 of interest of gross recei disallowance o expenses ; $2,9 car and truck meals and ent e expense . Adjustments not addressed in this opinion are computational .' 8 of charitable noncash contributions ; $1,730 of xpenses ; $4 ,149 .72 of travel expense ; $1,340 .52 of tainment expenses ; and $2,135 .16 of advertising income from Fiscal Federal Credit Union, and $185 is from Nuways, Inc . Petitioners also concede the deductions for $6,964 .45 of medical and denta l Burden of Proof - 3 - In general the Commissioner ' s determinations set forth in a notice of defic ency are presumed correct , and the taxpayer bears the burden of s owing that the determinations are in error . Rul e 142(a ) ; Welch v~ Helvering , 290 U .S . 111, 115 (1933 ) . Pursuan t to section 7491 a), the burden of proof as to factual matter s shifts to the Commissioner under certain circumstances . Petitioners have neither alleged that section 7491 ( a) applies nor established their compliance with the requirements of sectio n 7491 (a) (2) (A) a d (B) to substantiate items, maintain records, and cooperate f illy with respondent ' s reasonable requests . Petitioners the efore bear the burden of proof . 1 . Petitioner s Claimed Deduction s Deductions are a matter of legislative grace, and th e taxpayer bears the burden of proving that he is entitled to any deduction clai ed . Rule 142(a) ; New Colonial Ice Co . v . Helvering , 292 U .S . 435, 440 (1934 ) . The taxpayer is required to maintain recor s that are sufficient to enable the Commissione r to determine hi s correct tax liability . See sec . 6001 ; sec . 1 .6001-1 ( a), Income Tax Regs . A . Ch ari ~able Cash Contribution s In genera , section 170 ( a) allows as a deduction any charitable con ribution made within the taxable year . A charitable contribution means a contribution or gift to or for 4 - the use of, inter alia, a State, possession of the United States, or any politic 1 subdivision of the foregoing . Sec . 170(c)(1) . On their Joint 2002 Federal income tax return, petitioner s deducted chari able cash contributions of $5,456 . Respondent initially allo ed $2,385 of that amount and later conceded an additional $2, 25, leaving $246 in dispute . At trial, petitioners introduced a copy of a check for $25 to the City of Carson . The face of the check bears no indication that the $25 represents a c ntribution,or gift, and petitioners offered no testimony with respect to this item . Accordingly, respondent's determination is sustained to the extent of $246 . B . Other Ex ense s Section 162(a) generally allows a deduction for ordinary and necessary business expenses . To qualify as an allowable deduction under section 162(a), an item must be : (1) Paid or incurred during the taxable year ; (2) for carrying on any trad e or business ; an expense ; ( 4) a necessary expense ; and (5) an ordinary expen e . Commissioner v . Lincoln Say . & Loa n Association , 4 3 U .S . 345, 352 (1971) ; FMR Corp . & Subs . v . Commissioner , ]10 T .C . 402, 414 (1998) . Petitioners attached to their return a Schedule C, Profit or i Loss From Busirl ess, for a business described as real estat e consulting . Petitioners deducted $29,132 of other expenses on Schedule C, consisting of items such as supplies expense, tax - 5 - preparation expense, and professional business expense . Respondent ini Tally allowed $4,306 .17 of that amount and later conceded an additional $314 .94, leaving $24,510 .89 in dispute . At trial, petitioners introduced : (1) A receipt for $447 related to Get tis .com ; (2) receipts totaling $888 .75 from Pre- Paid Legal Services, Inc . ; (3) a Form 1099-MISC, Miscellaneous Income, indicating that petitioner paid his son, Roderick, $5,460 of nonemployee compensation ;2 (4) receipt stubs and checks drawn on petitioner' account to Roderick ; and (5) a Form 1096, Annual Summary and Transmittal of U .S . Information Returns, used to transmit the Form 1099-MISC to the Internal Revenue Service . With respect to the receipt for $447, it is not clear from the document what type of expense this represents or how Getotis .com reltes to the real estate consulting business . Petitioners offered no testimony on this matter, and, therefore, they have failed to prove the $447 is an ordinary and necessary business expense . With resp e t to the receipts for $888 .75 from Pre-Paid Lega l Services, Inc ., legal fees generally are deductible if they ar e sufficiently connected with the taxpayer's trade or business . See, e .g ., Kenton v . Commissioner , T .C . Memo . 2006-13 . i 2 Petitioners did not report any amount as wage expense on their Schedule C . It appears that petitioners instead reported the alleged payments to their son as a component of othe r expenses . Petitioners, h wever, offered no testimony or other evidence to demonstrate th t the $888 .75 was a deductible legal expense or otherwise cons ituted an ordinary and necessary business expense . Accordingly, p titioners are not entitled to a deduction for this amount . With resp ct to the purported payments to Roderick, compensation is deductible as a trade or business expense only i f it is (1) reasonable in amount, (2) based on services actuall y rendered, and ( 3) paid or incurred . See O'Connor v . Commissioner , ' .C . Memo . 1986 - 444 ; sec . 1 .162-7( a), Income Tax Regs . When the compensation is paid to a family member, the Court carefull scrutinizes the transaction . Denman v . Commissioner , 48 T .C . 439, 450 (1967) ; Hamdi v . Commissioner , T .C . Memo . 1993-38, affd . without published opinion 23 F .3d 407 (6th Cir . 1994)' . In deciding whether payments to a family member are deductible, we examine all the facts and circumstances . Eller v . Commissioner, 77 T .C . 934, 962 (1981) . Facts that militate agains the deductibility of such payments include failing to main ain adequate records of the family member's hours, duties, and earnings, and failing to file appropriate information ret'rns . See Haeder v . Commissioner , T .C . Memo . 2001-7 ; Martens v . Commissioner, T .C . Memo . 1990-42, affd . without publish d opinion 934 F .2d 319 (4th Cir . 1991) ; O'Connor v . Commissioner su ra . I - 7 - Petitions testified that Roderick performed a number of tasks for him n 2002 , such as recruiting clients, setting up meetings , and aking presentations . Petitioner typically paid Roderick in ca h , although Roderick sometimes received payment by check . Petiti ner testified that he recorded the payments in a notebook , whic was not made part of the record . Petitioner and Roderick later'created receipts to correspond to the payments, including receipts created at the end of 2002 . The receipts were made on preprinted, numbered forms . Some of the receipts were not written in chronological order . For example, receipt No . 804201 is dated April 30, 2002, while receipt No . 804202 is dated January 14, 200 . Petitioner filed a Form 1099-MISC for Roderick , as well as a Form 1096 . How ver, both the Form 1099 - MISC and the Form 1096 were filed late . Roderick did not report the $5,460 as income . Petitioner contends Roderick was not required to file a 2002 tax return because lie had little or no additional income that year . Respondent intr duced evidence, however, indicating that Roderic k earned $8,136 of wage income from United Airlines Inc ., $675 o f gambling winnings, $8,541 of unemployment benefits, and $295 of nonemployee compensation from Nuways, Inc . Examining a' 11 the facts and circumstances, we conclude tha t petitioners cannot deduct the $5,460 as a trade or busines s expense . The receipts introduced to substantiate the payments to I -8- Roderick are o doubtful accuracy . To the extent such payments were made, pet tioner did not keep a written log of Roderick's hours or dutie , nor did he explain how he determined Roderick's compensation . As a result, it is not clear whether the payments represent reas nable compensation for the services, if any, that Roderick perfo ed . Roderick's failure to report the $5,460 casts further oubt on the deductibility of the payments , as does petitioner's f ilure to timely file information returns . See Haeder v . Commissioner, supra ; Martens v . Commissioner , supra . Accordingly, petitioners have failed to meet their burden of proof, and resp ndent's determination is sustained to the extent of $24,510 .89 . C . Bad De t E ens e In general section 166(a)(1) allows as a deduction any debt which becomes worthless within the taxable year . Business debts may be deducted against ordinary income to the extent that such debts become wholly or partially worthless during the year . Nonbusiness deb s also may be deducted, but only in the same manner as short term capital losses, and only if the debts ar e wholly worthles in the year claimed . Sec . 166(d) ; sec . 1 .166-5(a) (2), ncome Tax Regs . Section 166(d)(2) provides generally that "nonbusiness debt" means a debt other than a debt created or cquired in connection with a trade or business - 9 - of the taxpaye or a debt the loss from the worthlessness o f which is incur ed in the taxpayers trade or business . Petitione s did not claim a deduction for bad debt expens e on their retur Shortly before trial, however, petitioner s asserted they ere entitled to a $55 deduction for bad deb t expense incurr d in connection with a trade or business . Petitioners int roduced a check for $55 to Phillip Peterson . In the memo sectio of the check is written "Loan" . Even if we assume that the $55 represents a loan made in connection with a trade or busine s, there is no evidence that the debt became wholly or parti illy worthless within the taxable year 2002 . Accordingly, pe itioners are not entitled to a deduction . D . Home 0 fice Expens e Section 2 8 A(c)(1) permits the deduction of expense s allocable to a ~ortion of a dwelling unit that is used exclusively and on a regular basis as either (1) the principal place of business for the taxpayer's trade or business, or (2) a place of busine s that is used by clients or customers in meeting or dealing with the taxpayer in the normal course of the taxpayer's trad or business . The deduction cannot exceed the gross income de ived from the business use of the residence over the sum of cert in deductions allocable to such income . Sec . 280A(c)(5) ; Cun 'n ham v . Commissioner, T .C . Memo . 1996-141, affd . without pu lished opinion 110 F .3d 59 (4th Cir . 1997) . - 10 - Petitione s attached to their return a Form 8829, Expenses for Business U e of Your Home, but did not claim a deduction for home office ex ense on Schedule C . Shortly before trial, petitioners as erted they were entitled to deduct $3,506 of home office expense Petitioners offered no evidence, however, that any portion of their home meets the requirements of section 280A(c)(1) . A cordingly, they are not entitled to a deduction . 2 . Accurac -R lated Penalty Under Section 6662(a ) Section 6662(a) provides that a taxpayer may be liable for a penalty of 20 rcent of the portion of an underpayment of tax attributable to negligence or disregard of rules or regulations . Sec . 6662(a) an (b)(1) . Negligence includes any failure by the taxpayer to kee adequate books and records or to substantiate items properly . Sec . 1 .6662-3(b)(1), Income Tax Regs . Disregard of rules or regulations includes any careless, reckless, o r intentional dis egard . Sec . 1 .6662-3(b)(1), Income Tax Regs . An exception to th section 6662(a) penalty applies when th e taxpayer demons rates (1) there was reasonable cause for the underpayment, a d (2) the taxpayer acted in good faith with respect to th e nderpayment . Sec . 6664(c) . Respondent determined a $1,414 .60 penalty against petitioners purs ant to section 6662(a) . Under section 7491(c), the Commissioner bears the burden of production with respect t o the accuracy-related penalty . To meet this burden, the Commissioner must come forward with sufficient evidence indicating that it is appropriate to impose the penalty . Higbee - 11 - v . Commiss ions , 116 T .C . 438, 446 (2001) . Under Rule 34(b), however, the t xpayer is required to assign error in the petition to each and ev ry error alleged to have been committed by the Commissioner, ncluding issues with respect to which the Commissioner bars the burden of proof . Any issue not raised in the assignment of error is deemed to be conceded . Id . ; see also Swain v . Commi sioner, 118 T .C . 358, 363-364 (2002) . Petitions s did not assign error to the determination of the penalty in their petition . Nor did they dispute the determination t trial . Accordingly, the penalty is deemed to be conceded . See Rule 34(b) ; Swain v . Commissioner , supra . Even i f petitioners had, challenged the penalty, petitioners failed t o keep adequate books or records or to properly substantiate the disallowed expense deductions . See sec . 1 .6662-3(b)(1), Incom e Tax Regs . Petitioners introduced no evidence to indicate their failure was due to reasonable cause or good faith . See sec . 6664 (c) . Accordingly, respondent 's determination is sustained . Reviewed a~d adopted as the report of the Small Tax Case Division . To reflect the foregoing, Decision will be entere d under Rule 155 .