TAX COURT OPINION

Case: Mariatu T. Kalokoh
Docket Number: 29859-13
Judge: Gustafson
Opinion Type: bench
Filed: 03/18/2015
Pages: 6

UNITED STATES TAX COURT WASHINGTON, DC 20217 MARIATU T. KALOKOH, Petitioner, v. PA ) ) ) ) Docket No. 29859-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Washington, D.C., on March 4, 2015, it is 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 in the above case before the undersigned judge at Washington, D.C., 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 under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. March 18, 2015 SERVED Mar 19 2015 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 March 4, 2013 3 Mariatu T. Kalokoh 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. 29859-13 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in this case. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code, and Tax Court Rule 152. By notice of deficiency dated September 23, 2013 (Ex. 2 J), the Internal Revenue Service ("IRS") determined a deficiency in the Federal income tax of petitioner Mariatu T. Kalokoh for the year 2012. By stipulation the parties have resolved most of the issues underlying that notice, including Ms. Kalokoh's entitlement to exemption deductions for dependents. However, in dispute is her entitlement to the earned income credit under section 32, the amount of which depends in part on the amount of her income, and that sole issue--the amount of her net income--remains in dispute. Trial of this case was conducted on March 2, 2015, in Washington, D.C. Ms. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Kalokoh represented herself, and Andrew K. Glover represented the Commissioner. We find the following facts: 4 FINDINGS In the year 2012, as in prior and subsequent years, Ms. Kalokoh conducted a hair- cutting business in the basement of her home. Ms. Kalokoh's gross receipts from the business were $15,900. Most of her customers paid cash, and she often spent the cash without first depositing it in the bank, so her bank deposits do not reflect that total revenue. In her business she incurred and paid expenses for threads and gels totaling $500. She also spent $1,074 to purchase hair. (Ex. 8-J.) Ms. Kalokoh's house had three levels, and the business exclusively occupied half of the lowest level, so about one-sixth of the area of the house. For the house Ms. Kalokoh paid for the year 2012 a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 water bill totaling $1,449, a gas bill totaling 20 21 22 23 24 25 $1,523, and rent totaling $20,400. (Ex. 12 J.) The grand total of these house-related expenses was $23,372, of which one-sixth allocable to the business was $3,895. With her tax return for 2012, Ms. Kolokoh filed a Schedule C on which she reported the hair- 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 cutting revenue and $500 of her expenses. However, she did not report and deduct the $1,074 expense for purchasing hair nor any home office expense. Thus, she reported net income of $15,400. She also claimed earned income tax credit ("EITC") in an amount enhanced by the amount of her claimed net income, thereby claiming and receiving a tax refund (despite having paid no tax). The IRS examined Ms. Kalokoh's return and determined, among other things, that she had no income and was therefore not entitled to the EITC. The IRS issued the notice of deficiency on September 23, 2013. On Monday, December 23, 2013, Ms. Kalokoh timely filed a petition in this Court, challenging the IRS's determinations. At that time she resided in Virginia. I. General evidentiary principles OPINION The IRS's determination is presumed correct, see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992), and the taxpayer generally bears the burden of proof, see Rule 142(a). II. Gross revenue The IRS disputes Ms. Kalokoh's claim that she earned revenue of $15,900. However, we are 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 convinced by her testimony, her records, and her corroborating witness that she did conduct the business and earn the revenue. Her records leave something to be desired, but they are not wildly out of keeping with the modest scale of this home-based business. III. Expenses The amount of the EITC to which Ms. Kalokoh is entitled depends on the amount of her "earned income". Sec. 32(a)(1). Her earned income is not her gross income unreduced by related expenses but rather is "the amount of the taxpayer's net earnings from self-employment for the taxable year (within the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 meaning of section 1402 (a))". Sec. 32(c)(2) (A)(ii). 15 The term "net earnings from self employment" is 16 explicitly defined as "the gross income derived by an 17 18 19 20 21 22 23 24 25 individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business". Sec. 1402(a). Thus, for this purpose deductions are not elective but in effect mandatory, since to waive deductions would be to overstate one's earned income and potentially exaggerate her EITC claim. Consequently, Ms. Kalokoh's EITC must be 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 recomputed after taking all of her deductions into account in figuring her net income. Those deductions consist not only of the $500 expense deduction that she took but also the additional hair expense deduction of $1,074 and, pursuant to section 280A(c)(1), the home office deduction of $3,895. She admitted that a sixth of her home was used exclusively for her business; she stipulated the rent and utilities for the home; and she demonstrated no reason that she was not eligible for the home office deduction. So that Ms. Kalokoh's liability can be recalculated, a decision will be entered pursuant to Rule 155. This .concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 2:44 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 25 866.488.DEPO www.CapitalReportingCompany.com