TAX COURT OPINION

Case: Oluwatoyin O. Atala
Docket Number: 9620-18
Judge: Buch
Opinion Type: bench
Filed: 11/04/2019
Pages: 15

JRB UNITED STATES TAX COURT WASHINGTON, DC 20217 OLUWATOYIN O. ATALA, Petitioner, v. ) ) ) ) Docket No. 9620-18. 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 with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Dallas, Texas, 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) Ronald L. Buch Judge Dated: Washington, D.C. November 4, 2019 SERVED Nov 05 2019 3 1 2 3 4 5 6 7 8 9 Bench Opinion by Judge Ronald L. Buch October 17, 2019 Oluwatoyin O. Atala v. Commissioner of Internal Revenue Docket No. 9620-18 THE COURT: The following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied on as precedent in any other case. This opinion is in conformity with Internal Revenue Code section 7459(b) and Rule 152(a) of the Tax 10 Court Rules of Practice and Procedure. Any section 11 references refer to the Internal Revenue Code or the 12 Treasury regulations in effect during the year at issue, 13 and Rule references are to the Tax Court Rules of Practice 14 15 and Procedure. The Commissioner issued a notice of deficiency 16 for 2014 to Ms. Atala. Ms. Atala filed a petition 17 challenging the deficiency. After concessions, the issues 18 that remain for us to decide are whether Ms. Atala 19 qualifies as head of household, whether she may claim her 20 niece and nephew as dependents, whether she must claim her 21 half share of marital community income, whether she may 22 deduct certain business expenses, and whether she may 23 deduct charitable contributions beyond those already 24 allowed. 25 I. Background In 2014, Ms. Atala was married and resided in the 4 Dallas area with her husband. She had two children who lived with her and her husband. Her niece and nephew also resided with her from late 2013 until November 2014. Although we find that Ms. Atala provided housing for her niece and nephew, we have no evidence of the extent to which Ms. Atala provided support for them. Ms. Atala had three sources of income. She shared in her husband's community property income. She 1 2 3 4 5 6 7 8 9 10 worked for Computer Science Corporation. And she 11 attempted to operate a business whereby she would buy sale 12 13 14 or clearance merchandise and then resell it for more than she paid for it. Ms. Atala's work for CSC required that she 15 travel. Ms. Atala often traveled to New Jersey for work. 16 She would stay with family in Brooklyn and commute to New 17 18 Jersey. To some unknown extent, she paid family for staying with them. She drove from Brooklyn to New Jersey, 19 but there is no evidence of how much she drove or what 20 expenses she might have incurred. CSC reimbursed Ms. 21 Atala for her travel expenses. We have no evidence of the 22 extent of that reimbursement or what was not reimbursed. 23 We also have no evidence whether CSC's reimbursement 24 policy denied reimbursement for any of Ms. Atala's 25 expenses. 1 2 3 4 5 6 7 8 9 Ms. Atala's resale business was not successful. She reported cost of goods sold and various expenses for the business, but no sales. She did not provide any substantiation of any amounts paid in furtherance of this business. In 2014, Ms. Atala made both cash and noncash contributions to charity. The Commissioner has conceded that Ms. Atala made $8,050 of cash contributions. Ms. Atala did not provide any substantiation of 10 her noncash contributions other than a generic receipt 11 from Community Storehouse. That receipt does not itemize 12 what Ms. Atala provided or provide an itemized value of 13 14 15 16 17 18 19 the items; it contains a gross amount based on Ms. Atala's own estimate. Ms. Atala used a return preparer to prepare her 2014 return. Ms. Atala provided the information to the return preparer, includÉÜthe gross numbers for 1 Ådy unreimbursed employee expenses, for charitable contributions, and for her resale business. The return 20 preparer did not request any detail backing up these 21 22 23 24 numbers. Although Ms. Atala was married during 2014, the return preparer indicated "head of household" filing status and did not include any community property items on the return. The record is silent as to what information 25 Ms. Atala might have provided to the return preparer cribers 6 regarding her marital status at the time. II. Burden of proof As a general matter, the Commissioner's determinations in the notice of deficiency are presumed correct, and the taxpayer bears the burden of proving an error. aule 142(a); welch v. Helvering, 290 U.S. 111, 115 (1933). In limited situations, the burden can shift to the Commissioner under section 7491(a), but the record does not establish that the criteria under section 7491 have been established, therefore, the burden of proof remains on Ms. Atala. III. Head of household Section 1 provides varying tax rates for taxpayers, including a rate for head of household taxpayers. Sec. 1(b). Section 2(b) provides that a head 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 of household must not be married, not be a surviving 17 SPouse, and must not be legally separated under a divorce 18 or separate maintenance decree. Sec. 2(b)(1), (b)(2). 19 Head of household also must maintain her home as a 20 principle place of abode for a qualifying child. Sec. 21 2 (b) (1) (A) (i) . 22 In 2014, Ms. Atala was married to her husband. 23 As a married individual at the end of 2014, she is not 24 eligible for head of household filing status. 25 II. Dependency exemption Section 151(c) allows a taxpayer additional 7 exemption deductions for dependents if the individual qualifies as a dependent under section 152. Section 152(a) provides that a dependent is either a qualifying child or a qualifying relative. Section 152(c)(1) provides that five requirements must be met in order for an individual to be a qualifying child. First, the child in question must bear a specific relationship to that taxpayer. Sec. 152(c)(1) (A). That is, the child must be the taxpayer's child, stepchild, foster child, sibling, step-sibling, or a decedent of them. Sec. 152(c)(2). Second, the child 1 2 3 4 5 6 7 8 9 10 11 12 13 must live with the taxpayer for more than one-half of the 14 taxable year. Sec. 152(c)(1) (B). Third, the child must 15 meet certain age requirements. Sec. 152(c)(1)(C). 16 SPecifically, the child must be younger than the taxpayer 17 who is claiming the child as a qualifying child. Further 18 the child must be under age 19 or a student under age 24 19 at the end of the year. Sec. 152(c)(1)(C). Fourth, the 20 child must not have provided over one-half of his or her 21 own support for the taxable year at issue. Sec. 22 152(c)(1)(D). Finally, the child must not have filed a 23 joint tax return with a spouse for the taxable year at 24 25 issue. Sec. 152(c)(1) (E). Ms. Atala claimed her niece and nephew as < nner dependents on her 2014 return. Ms. Atala's niece and nephew bore the appropriate relationship with her and lived at the house she shared with her husband until late 8 November 2014. While Ms. Atala satisfied these requirements of dependency, she did not show that she provided support for her niece and nephew aside from providing housing, as required by section 152(c)(1)(D). Because we are missing proof of this support, we cannot allow Ms. Atala's dependency exemptions for her niece and 1 2 3 4 5 6 7 8 9 10 nephew in 2014. Ms. Atala's niece and nephew also do not 11 meet the definition of a qualifying relative for the same 12 13 14 15 reason, she did not establish that she provided over half their support. See sec. 152(d)(1)(C). III. Child tax credit Section 24(a) provides that a taxpayer is 16 allowed a credit against his or her income tax for any 17 qualifying child for whom the taxpayer was allowed a 18 deduction under section 151, the dependency exemption 19 deduction. Sec. 24(a). A qualifying child is defined by 20 the requirements in section 152(c) and who has not 21 attained age 17. Sec. 24(c)(1). 22 Because Ms. Atala did not meet her burden of 23 proof showing that her niece and nephew met the 24 requirements in section 152(c), she is not allowed the 25 child tax credit for her niece and nephew. 1 2 3 4 IV. Community property income Texas, where Ms. Atala lives, is a community Property state. See Tex. const. art. 16, sec. 15. In Texas, property owned before marriage or acquired during 5 marriage by gift, devise, or descent is separate property. 9 6 7 8 9 10 11 12 Tex. Fam. Code Ann. sec. 3.001. All property acquired by a spouse during the marriage that is not separate property is community property. Tex. Fam. Code Ann. Sec. 3.002. In Texas, community property includes wages of an individual spouse. McClary v. Thompson, 65 S.W. 3d 829, 834 (Tex. APP. 2002). Because each spouse is considered to own half of 13 all community property, each spouse is required to report 14 half the community income on their federal tax returns. 15 U.S. v. Mitchell, 403 U.S. 190, 196-197 (1971); Kimes v. 16 Commissioner, 55 T.C. 774, 778 (1971); Hill v. 17 Commissioner, 32 T.C. 254, 255-256 (1959). 18 In 2014, Ms. Atala lived in Texas - a community 19 Property state-with her husband. She is thus liable for 20 one half of her share of community taxable income. This 21 22 23 includes an addition of income of $7 in interest and $72,187 from Schedule C net profits, and a reduction of income of ($47,182) for a one-half reduction in her wages. 24 Half of her withholdings - $5,333 - will also be allocated 25 to her husband. crner; 10 V. Schedule C substantiation Taxpayers can deduct "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." Sec. 162(a). However, they are not allowed a deduction for personal, living, or family expenses except where specifically allowed in the Code. Sec. 262(a). Taxpayers are required to maintain sufficient records to "show whether or not such person is liable to tax". Sec. 6001. 1 2 3 4 5 6 7 8 9 10 These records must be retained for as long as the contents 11 may become material and must be kept available for 12 13 14 15 inspection. Sec. 280F(d)(4). Certain expenses require strict substantiation under section 274(d). Such expenses include those related to car and truck expenses, travel, meals and 16 entertainment, gifts, and listed property under section 17 18 280F(d)(4). To satisfy strict substantiation requirements, the taxpayer must have adequate records or 19 sufficient evidence to corroborate (1) the amount of the 20 expense, (2) the time and place the expense was incurred, 21 (3) the business purpose of the expense, and (4) the 22 business relationship of the taxpayer to any others 23 benefitted by the expense. Sec. 274(d). To substantiate 24 by adequate records, the taxpayer must maintain an account 25 book, a log, a diary, or a similar record and documentary cr ners evidence to establish each element of an expense. Sec. 1.274-5T(c)(2)(I), Temporary Income Tax Regs., 50 Fed. 11 Reg. 46017 (Nov. 6, 1985). In some instances the Court may approximate the amount if the taxpayer can establish a deductible expense but cannot substantiate the precise amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d. Cir. 1930). However, the taxpayer must provide some basis for that estimate. vanicek v. Commissioner, 85 T.C. 731, 742-743 1 2 3 4 5 6 7 8 9 10 (1985). And, the Court is precluded from making estimates 11 of expenses that are subject to section 274(d) strict 12 13 substantiation rules. Deely v. Commissioner, 73 T.C. 1081, 1101 (1980); sec. 1.274-5T(a), Temporary Income Tax 14 Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). 15 The Commissioner here disallowed Ms. Atala's 16 Schedule C expenses for her resale apparel business. On 17 her Schedule C, Ms. Atala reported expenses for 18 renting/leasing machinery or equipment, car and truck 19 expense, repairs and maintenance, cost of goods sold, and 20 other expenses. However, she did not provide the 21 documentation required to substantiate these business 22 expenses at trial. As a result, they are disallowed. 23 VI. Schedule A itemized deductions 24 Income tax deductions are considered a "matter 25 of legislative grace," and the taxpayers bear the burden 12 of Proving that they are entitled to any deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Ms. Atala did not prove that she was entitled to claim expenses beyond those allowed. The Commissioner allowed all substantiated expenses. To be allowed any further deduction, Ms. Atala would need to prove that she incurred expenses above and beyond what the Commissioner allowed. She has not. Regarding charitable contributions, section 170(a)(1) allows a deduction for any charitable contribution, as defined in section 170(c), as long as the contribution can be verified under regulations prescribed 1 2 3 4 5 6 7 8 9 10 11 12 13 by the Secretary. To substantiate charitable 14 15 contributions, the taxpayer must maintain one of the following: (1) a cancelled check; (2) a receipt from the 16 donee charitable organization showing the name of the 17 18 donee, the date of the contribution, and the amount of the contribution; or (3) other reliable written records 19 showing the name of the donee, the date of the 20 21 22 contribution, and the amount of the contribution. Van Dusen v. Commissioner, 136 T.C. 515, 533 (2011); sec. 1.170A-13(a)(1), Income Tax Regs. Contributions of 23 property exceeding $5,000 in value require the taxpayer to 24 obtain a "qualified appraisal" of the contributed property 25 and attach an appraisal summary to their return. Sec. 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 170(f)(11)(C). The Commissioner has conceded $8,050 of the $8,280 of charitable cash contributions claimed by Ms. Atala. Ms. Atala failed to substantiate the remaining $130 of cash contributions at trial. Ms. Atala did not substantiate her non-cash contributions. She provided no evidence of a qualified appraisal and no sufficient documentation of the contributions. Because she did not substantiate these non-cash contributions, we disallow this charitable deduction. Regarding unreimbursed employee business expenses, we have held that "an individual may be in the trade or business of being an employee." Deely v. 15 Commissioner, 73 T.C. 1081, 1101 (1980). For unreimbursed 16 employee expenses to be deductible, the employee must show 17 that she was not entitled to reimbursement from her 18 employer for the expenses. She must also show that the 19 expenses were "ordinary and necessary" and have proper 20 21 substantiation. Sec. 274(e)(3). The strict substantiation requirements of section 274(d) apply to 22 employee business travel expenses. To properly 23 substantiate travel away from home, the taxpayer must 24 provide "adequate records" or evidence of the amount, 25 time, place and business purpose of each expenditure. . Cuners Sec. 274(d); Sec. 1.274-5T(b)(2), Income Tax Regs. 14 Ms. Atala claimed over $19,000 in unreimbursed employee expenses, including transportation and travel costs. She did not provide documents or evidence to support these claimed expenses she incurred as an employee. Because Ms. Atala did not substantiate these expens she may not take the deduction. VII. Accuracy-related penalties for substantial understatement 1 2 3 4 5 6 7 8 9 10 Section 6662(a) and (b) impose a 20 percent 11 accuracy-related penalty on any portion of an underpayment 12 of tax that is due to, among other things, negligence or 13 disregard of rules or regulations or a substantial 14 15 understatement of income tax. The term "negligence" includes any failure to 16 make a reasonable attempt to comply with provisions of the 17 Code, and the term "disregard" includes any careless, 18 reckless, or intentional disregard. Sec. 6662(c). 19 Additionally, a taxpayer is negligent if she fails to 20 maintain sufficient records to substantiate the items in 21 question. Higbee v. Commissioner, 116 T.C. 438, 449 22 23 24 25 (2001); sec. 1.6662-3(b)(1), Income Tax Regs, An understatement of income tax is substantial if the understatement exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. t973}406-2250| opeutens+m ±en ne t ; www.escribers.net 6662(d)(1)(A). However, if the taxpayer has substantial 15 authority for the tax treatment of an item, then the Portion of the tax attributable to that item is not included in the understatement. Sec. 1.6662-4(d)(1), Income Tax Regs. A taxpayer has substantial authority only if the weight of authority supporting the tax treatment of the item outweighs the contrary authority. Sec. 1.6662-4(d)(3)(i), Income Tax Regs. The Commissioner bears the burden of production 1 2 3 4 5 6 7 8 9 10 as to Ms. Atala's penalties. Sec. 7491(c). The penalties 11 will not apply to any portion of the underpayment for 12 which a taxpayer establishes that he or she had reasonable 13 14 15 cause and acted in good faith. Sec. 6664(c)(1). At trial, the Commissioner met his burden regarding a penalty for substantial understatement of tax. 16 If Rule 155 computations establish a substantial 17 understatement of income tax for any year, the accuracy- 18 related penalty does not apply to any portion of 19 underpayment where Ms. Atala establishes that she had 20 reasonable cause and acted in good faith. Although Ms. 21 Atala used a return preparer, the deficiencies principally 22 relate to failure to substantiate expenses, and she 23 testified that she provided the information that was 24 reported to the return preparer. Ms. Atala did not 25 establish reasonable cause for her understatement. 16 Decision in this case will be entered under Rule 155. (Whereupon, at 9:20 a.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 (mners