TAX COURT OPINION

Case: Rafi & Annie Makerian
Docket Number: 6106-10S
Judge: Colvin
Opinion Type: bench
Filed: 03/14/2011
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 CLC RAFI & ANNIE MAKERIAN, Petitioners, v. ) Docket No. 6106-10 S COMMISSIONER OF INTERNAL REVENUE, Respondent. O R D E R Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of transcript of February 16, 2011, containing her oral opinion rendered in this case. the above case before Judge Diane L. Kroupa on the pages of the findings of fact and In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. March 14, 2011 SERVEDMar162011 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 3 Bench Opinion by Judge Diane L. Kroupa February 16, 2011 Rafi & Annie Makerian v. Commissioner Docket No. 6106-10S 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. These oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding was conducted as a Small Tax Case under section 7463 and Rules 170 through 175. All section references are to the Internal Revenue Code for 2006 and 2007 and all Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. Petitioners appeared pro se, and Priscilla Parrett appeared on behalf of respondent. FINDINGS OF FACT Certain facts have been stipulated. The stipulation of facts filed by the parties, with accompanying exhibits, is incorporated by this reference. The facts are so found. Petitioners resided in California at the Heritage Reporting Corporation (202) 628-4888 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 4 time they filed the petition. Petitioner husband worked as a part time teacher for the Los Angeles Community College District and had a sole proprietorship, Schedule C, real estate business. Petitioner wife worked as an accountant for Metrocities Mortgage, LLC. Both petitioners claimed unreimbursed employee expenses on Schedule A and Schedule C expenses. Respondent disallowed all the Schedule A and Schedule C expenses for lack of substantiation. During the examination, respondent allowed certain Schedule A and Schedule C expenses for both of the years determining that petitioners adequately substantiated those amounts. Other expenses were denied either because they were not reimbursable by petitioners' employer, they were personal in nature or petitioners lacked substantiation for such expenses. Respondent made these determinations in a deficiency notice in which respondent determined a $2,077 deficiency in income tax against petitioners for 2006 and a $1,117 deficiency for 2007. This is primarily a substantiation case involving whether petitioners are entitled to deduct certain expenses beyond those allowed by respondent. // Heritage Reporting Corporation (202) 628-4888 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 OPINION 5 We begin with several fundamental principles of tax litigation. First, the Commissioner's determinations are presumed correct, and taxpayers bear the burden of proving that those determinations are erroneous. Rule 142(a). This principle is not affected by section 7491(a) because petitioners failed to comply with statutory substantiation requirements or maintain all required records. See sec. 7491(a) (2) (A) and (]B); see also Higbee v. Commissioner, 116 T.C. 438 (2001). Second, deductions are a matter of legislative grace, and taxpayers must show that they are entitled to each deduction claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976). Substantiation means that a taxpayer shall keep such permanent records or books of account as are sufficient to establish the amount of deductions claimed on the return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. The Court need not accept a taxpayer's self-serving testimony when the taxpayer fails to present other probative evidence. Beam v. Heritage Reporting Corporation (202) 628-4888 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 6 Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)). If, however, such records provide 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 he or 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) . For the Court to estimate the amount of an expense, however, we must have some basis 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) - Certain expenses, such as those for listed expenses, which includes an automobile and cell phone, may not be estimated because of the strict substantiation requirements mandated by section 274 (d) . See sec . 280F (d) (4) (A) , Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969) ; seets. 1.274-5T (a) and 1. 280F-6T (b) (2) , Temporary Income Tax Regs . For such expenses, only documentary substantiation will Heritage Reporting Corporation (202) 628-4888 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 7 suffice. The taxpayer must provide the business purpose, the amount, and the time and place of expenditure. Sec. 1.274-5T(b) (2), Temporary Income Tax Regs, 50 Fed. Reg. 46014 (Nov. 6, 1985). Third, personal living expenses are not deductible. Secs. 162(a) and 262(a). In fact, there are many expenses that are helpful, even essential, to one's business, but which are not deductible in our tax system. See Carroll v. Commissioner, 51 T.C. 213, 215 (1968), affd. 418 F.2d 91 (7th Cir. 1969). Expenses for driving to and from work, for example, are not deductible as personal expenses . &t-r-ehma-l-e-e v. Commissioner, 113 T.C. 106, 113 (1999); sec. 1.162(e), Income Tax Regs. In addition, clothing expenses are generally not deductible as a business expense even when specific types of clothing are a necessary condition of the business or employment. Hynes v. Commissioner, 74 T.C. 1266, 1290 (1980). A recognized exception exists for clothing that is not suitable for general or personal wear and the clothing is not so worn. Id. This test has been held to be an objective standard. Pevsner v. Commissioner, 628 F.2d 467, 470-471 (5th Cir. 1980). We first consider the $14,000 amount Heritage Reporting-Corporation (202) 628-4888 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 8 petitioners claimed as Schedule C sole proprietorship expenses of their real estate business in 2006 and the $9,000 they claimed in 2007 an then we consider the amounts petitioners claimed as unreimbursed employee business expenses of approximately $7,000 each year. In doing so, we note that services performed by an employee constitute a trade or business. O'Malley v. Commissioner, 91 T.C. 352, 363-364 (1988); sec. 1.162- 17(a), Income Tax Regs. The taxpayer must, however, prove that the expenses are legitimate business expenses, and such expenses are ordinary and necessary, to the employer's business. Sec. 1.212-1, Income Tax Regs. Based on the record as a whole, petitioners have not substantiated that they meet any of the requirements to deduct any of the Schedule C or Schedule A other than the amounts respondent already allowed. The only evidence petitioners provided regarding these expenses were various letters and receipts that respondent reviewed and allowed to the extent they substantiated the expenses claimed. For the remaining expenses at issue, there is no separate documentation to explain how the items relate to petitioners' business of being a part time teacher for petitioner-husband or of being an accountant for Heritage Reporting Corporation (202) 628-4888 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 9 petitioner-wife. In addition, travel receipts to Houston, Michigan and Las Vegas lacked any notation how they were business related.and failed to satisfy the strict substantiation requirements. Further, many, if not all of the expenses petitioners claimed on their returns appear to be personal, nondeductible expenses. Petitioner husband admits that there was personal use of the iphone, especially the cell purchased for their teenage son, and the Court finds that petitioners had some personal use of their automobiles. Petitioner also admitted that the dry cleaning expenses included laundering silk pants worn by petitioner-wife for personal wear and some receipts were for their son's clothing. We find that petitioners failed to present sufficient evidence that these expenses were related to any trade or business. In conclusion, we find that petitioners are not entitled to any of expenses beyond those respondent already allowed. To give effect to the foregoing and the parties' concessions, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. // Heritage Reporting Corporation (202) 628-4888 I 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 (Whereupon, at 2:31 p.m., the bench opinion in the above-entitled matter was concluded.) 10 // // // // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888