TAX COURT OPINION

Case: Adebayo O. Fayiga & Alejandrina Meraz-Canales
Docket Number: 30336-12
Judge: Goeke
Opinion Type: bench
Filed: 05/19/2014
Pages: 15

UNITED STATES TAX COUR WASHINGTON, DC 20217 ADEBAYO O. FAYIGA & ALEJANDRINA MERAZ-CANALES, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. 30336-12. ) ) ) ) ORD ER 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 Joseph Robert Goeke at Miami, Florida, on May 1, 2014 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, a decision will be entered under Rule 155. (Signed) Joseph Robert Goeke Judge Dated: Washington, D.C. May 19, 2014 SERVED MAY 2 0 2014 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Bench Opinion by Judge Joseph Robert Goeke May 1, 2014 Adebayo O. Fayiga & Alejandrina Meraz-Canales v. Commissioner Docket No. 30336-12 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. This opinion is rendered pursuant to Rule 152 of the Tax Court Rules of Practice and Procedure and section 7459(b) of the Internal Revenue Code. 15 Hereinafter, references to rules are to the Tax Court 16 17 18 19 20 21 22 23 24 25 Rules of Practice and Procedure and section references are to the Internal Revenue Code, unless otherwise stated. The Court has jurisdiction in the present case pursuant to a general jurisdiction to review respondent's determinations of income tax liabilities and notices of deficiency upon the timely filing of petitions after the taxpayer has received a notice of deficiency. That is just the situation in the present casey W J#here the government has determined 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 income tax liabilities for the years 2009 and 2010 against the petitioners and respondent has also determined the addition to tax under section 6662(a) The adjustments that gènerate the income tax liabilities in this case are all related to expenses claimed on petitioner's Federal income tax returns Schedule C of which three Schedule C's were reflected for the years in question. At the time the petitioner's filed their Federal income tax returns for the years in question, they were residents of Florida. The Schedule C's associated with the return relate to petitioner husband's medical practice, petitioner wife's secretarial services for petitioner husband and petitioner's wife's activities as a cosmetologist. The parties have stipulated the facts and petitioner husband testified at trial. Respondent's 19 pre-trial memorandum provides a very good point of 20 21 22 23 24 25 reference as to the multiple issues in dispute and a good summary of the expenses that were disallowed and which were the subject of the trial of the case. These expenses included interest, insurance, car and truck expenses, utilities, legal and professional services, wages which petitioner husband paid to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 petitioner wife for secretarial services, lodging and job search expenses. Aad etitioner has the burden of proof regarding the substantiation of the claimed expenses pursuant to Rule 142(a) (1). Under section 7491(a) if the taxpayer produces credible evidence with respect to any factual issue relevant to ascertaining the taxpayer's liability for tax and meets other requirements, the burden of proof shifts from the taxpayer to the Commissioner of Internal Revenue as to the factual issue subject to the credible evidence. Petitioner has neither alleged nor has petitioner provided any information which would support the shifting of the burden of proof pursuant to section 7491(a) and we find that the burden of proof with respect to all the expenses in the present case remains on the petitioners. We will proceed to address each of the expenses in dispute and discuss the underlying legal principles associated with those expenses as we discuss the expenses and whether or not they should be allowed. Petitioner$claimed significant amount of interest expense in the years 2009 and 2010. 24 Petitioners asserted and petitioner husband testified 25 that these expenses were related to his business 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 activities but he failed to connect the underlying debt with any business activities and we find no basis to allow the interest expense as a section 162 deduction of ordinary and necessary expenses, paid or incurred during the taxable year carrying on a trade or business. Petitioner did incur a significant amount of expense in seeking to claim custody of a child he had outside of his marriage and we will discuss those expenses. We suspect, based upon petitioner husband's testimony that much of the interest expenses associated with his expenses in an attempt to obtain the custody of his child and for the reasons we will discuss hereinafter, those expenses were not of a business nature and would not support an interest deduction. Therefore, based upon the testimony and the records provided by the petitioner? we find the 6 petitioned hee failed to substantiate that the interest expenses in dispute, in the amounts of $31,508, and $37,800 for the years 2009 and 2010 respectively are act deductible. 6- Petitioners also claimed as expenses related to petitioner husband's medical business, insurance, other than health insurance expenses in 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 7 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 the amounts of $6,380 and $3,425 for 2009 and 2010 respectively. Based upon the testimony of petitioner husband, these insurance expenses were not of a professional nature and would not be deductible as related to petitioners' trade or business. We next turn to car and truck expenses claimed for 2009 and 2010 in the respective amounts of $5,353 and $5,731. These expenses are not only subject to scrutiny under section 162, but also section 274(d) which provides that no deduction shall be allowed unless the taxpayer substantiates by adequate records or sufficient corroborating evidence the amount of the expense, the time and place of the expense and the business purpose of the expense. See section 280F(d)(4) which defines property subject to the rules under section 274(d) as including personal automobiles. Petitioners claimed 100 percent business use for five distinct automobiles in the years in question but failed to provide any contemporaneous records which would have established the business use of these automobiles other than petitioner husband's testimony that they were used exclusively in his travels to and from his work as an emergency room 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 physician. The parties have stipulated that the petitioner husband was, in fact, an emergency room physician and worked as such for the years 2009 and 2010. The parties have stipulated that he worked at Palmetto General Hospital in Mialeah, Florida, from February 15, 2008 through Nòvember 1, 2009, and that he worked at North Shore Medical Center in 10 Miami, Florida, from November 1, 2009 through June 1, 2010. 11 12 Finally, the parties have stipulated that 13 Petitioner husband worked at Good Samaritan Medical 14 Center in West Palm Beach, Florida and St. Mary's 15 Medical Center in West Palm Beac , Florida, from June 16 17 1, 2010 through June 1, 2013. These stipulations wou d be inconsistent 18 with petitioner's assertion that he is entitled to 19 automobile expense associated wi h his business 20 activities as he only worked at one hospital or one 21 22 23 24 25 general location for hospitals t rough June 1, 2010 and it appears he would not have traveled between the hospitals in Hialeah and Miami through that date. Petitioner husband did not indicate that he traveled between the hospitals in West Palm Beach at 866.488.DEPO www.CapitalReportingChmpany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 any time during 2010. Rather, his testimony would indicate that he worked exclusively, during any given work day, at one or the other of those two hospitals, not between the hospitals during the work day. He did claim travel expense related to hotels that he stayed at in West Palm Beach, Florida, which will be discussed later. However, there is no indication and no substantiation that would support any automobile related expenses associated with petitioner's work activities given the fact that the expenses associated with those activities would have 12 all the earmarks of commuting expense between 13 14 15 petitioner's place of residence and his work assignment; not between work assignments. And for the reasons we will explain later, his activities in 16 West Palm Beach, Florida do not qualify as a 17 18 19 20 21 22 23 24 25 temporary work assignment which ould potentially provide some basis for automobile expenses, but for the reasons we will explain later, a*e not applicable de m90Ni 5 to petitioner's situation beginning on June 1, 2010. Given the failure of the petitioner to substantiate the car and truck expenses and the fact that we find that these expenses related to commuting activities during the years in qùestion and not deductible business travel, all of the car and truck eyp 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 and depreciation related expenses associated with the vehicles are not allowable. We next turn to the $36,000 in secretarial related expenses which petitioner claimed as wages on the Schedule C, for petitioner husband in both the years 2009 and 2010. Petitioner husband testified that he paid his wife to provide secretarial services. When asked what those services were, he described them as her delivering papers to him at hospitals or other vague activities. We do not find petitioner husband's testimony to be credible, that his wife performed actual, ordinary and necessary business services for him related to his activities as an emergency room physician. And we do not sustain the deductions of wages tc Pctitionets, between Petitioners, husband 926 and wife in 2009 and 2010, which results in the disallowance of the claimed expense and the elimination of the income item to petitioner wife on the Schedule C-2, on which the item was reported. We also determined that there's no credible evidence that she actually engaged in a trade or business of providing secretarial services to petitioner husband. And therefore we disallow all the expenses claimed on the Schedule C associated with her secretarial 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 11 1 2 3 4 5 services in 2009 and 2010 as they are not allowable business expenses under section 162 because there is no credible evidence that she provided these services as an ordinary trade or business L On the Schedule C for petitioner wife's 6 activities as a cosmetologist, she claimed $1,200 as 7 meals and entertainment expense in each of the years 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2009 and 2010. These expenses are also subject to the rigorous substantia ules of section 274 and petitioners have simply failed to meet those rules. And there's no evidence that petitioner's expenses associated with her meals as a cosmetologist, were not in fact, simply personal expenses which are not allowable as described in section 262. There are various computational adjustments included in the notices, the notice of deficiency and discussed at trial, all of which will be allowed to the extent they are determined to be deductible, based upon the outcome of the deficiency determinations based upon the issues we've described. The parties have stipulated certain items which should be transferred from Schedule C to Schedule A, and those computations will be reflected as necessary in the Rule 155 computation. We now turn to travel activities which are 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Còmpany 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 reflected in petitioner husband's Schedule C for lodging in 2010, in the amount of $10,400 and job search expense in the amount of $5,421. The $10,400 represents hotels which were the basis of lodging of petitioner husband when he worked in West Palm, beginning on July 1, 2010. At issue is whether these expenses are allowable as temporary, distant work site expenses. Taxpayers are entitled to deduct travel and lodging expenses stemming from work at a series of temporary work sites during the year. All of which were distant from the taxpayer's residence. Schurer v. Commissioner, 3 T.C. 544 (1944) and Rev. Rule 99- 7, 1999-1 C.B. 361. A taxpayer may deduct travel expenses between the taxpayer's residence and temporary work locations outside the metropolitan area where the taxpayer lives and normally works. Such a temporary assignment, however, is defined as one which realistically is expec ed to last for less than one year. In the present case, the parties have stipulated that beginning on Junþ 1, 2010, petitioner began working in West Palm Beach, Florida, for three 24 more years. Such activities simply would not qualify 25 as temporary, distant work site activities and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 therefore the hotel room claimed by the petitioner would not be allowable on that basis. We note from a review of the stipulated records, however, that petitioner did incur some expenses before his work began in West Palm Beach, but apparently associated with his seeking employment in West Palm Beach. These would be two hotel receipts; one in the amount of $182.87 and the other in the amount of $476.13, which we do believe are allowable as job search expenses related to the transfer of petitioner's employment from the Miami area to West Palm Beach. The fact that petitioner continued to reside in the Miami area, after the transfer of his work activities to West Palm Beach, would not support a deduction, given the permanent nature of the transfer of his work assignments beginning on June 1, 2010. However, he is entitled to the expenses associated with seeking employment in 19 West Palm Beach and arranging that employment and on 20 21 22 23 24 25 that basis we will allow petitioner to deduct the two hotel related expenses described above. We next turn to the job search expenses petitione¢Sclaimp for 2010, in the amount of $5,421. hetitioner husband testified that he claimed those expenses as a business expense associated with his 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 14 1 work because he was trying to seek employment in 2 Africa when he went on a trip with his family to 3 Africa. We find this testimony to fail, as a matter 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 of credibility, because it clearly appears to be a personal expense and not a legitimate business related expense. And therefore the $5,421 claimed as a job search expense is disallowed. Another major expense on the Schedule C's of petitioner husband is legal and professional services in the amounts of $49,593 and $8,066 for 2009 and 2010 respectively. Petitioner husband testified at length that he incurred these expenses in support of litigation to obtain custody of a child he had in a relationship outside of his marriage. These expenses were claimed as business expenses on the Schedule C, as previously noted and petitioner husband's testimony clearly establishes that they were not at all related to his business activities and they cannot be allowed as a business expense, rather they are personal in nature. We have analyzed these expenses, however, to determine if they might provide a basis for deduction under section 23 which applies to adoption related expenses. However, these expenses would not qualify under section 23, based upon a longstanding 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 precedent that custody related expenses are not deductible as adoption related expenses. And we believe these are in fact, based upon the testimony of petitioner husband, to be related to his efforts to obtain custody in a dispute with the mother of the child in question. See Jones v. Commissioner, T.C. Memo. 1989-516. Petitioners also claimed utility expenses associated with the home office. But the testimony of petitioner husband failed to establish any business purpose of the home office, nor any of the other elements necessary for the deduction of a home office expense. Therefore we believe respondent properly disallowed the utility expenses. We believe the remaining items associated 16 with the notice of deficiency would be computatio in 17 18 19 20 21 22 23 24 25 nature, as described previously and a Rule 155 computation will be necessary. We turn now to the additions to tax under section 6662, which provides that where there is negligence or a substantial understatement of income tax there shall be added to the tax an amount equal to 20% of the underpayment. We believe that both negligence and a substantial understatement of income tax follows from 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 16 1 our determinations in this case because the 2 Petitioners claimed personal expenses as business expenses and failed to maintain the appropriate records for the expenses that they claimed. We see no reasonable cause for these errors on the return and petitioners offered none at trial. Therefore we sustain the addition to tax. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 12:54 p.m., the above- entitled matter was concluded.) 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