TAX COURT OPINION

Case: Scott H. Carper & Monica C. Ferrell
Docket Number: 25543-08S
Judge: Colvin
Opinion Type: bench
Filed: 07/08/2009
Pages: 14

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 SCOTT H . CARPE R AND MONICA C . FERRELL, Petitioners v . COMMISSIONER OF INTERNAL REVENUE , Respondent Docket No . 25543-08S . O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 hearing of the above case before Special Trial Judge Robert N . Armen, Jr . at Cincinnati, Ohio, on June .10, 2009, containing his oral findings of fact and opinion rendered at the conclusion of the hearing . In accordance with the oral findings of fact and opinion, a Decision will be entered for respondent . (Signed) Robert N . Armen, Jr. Special Trial Judg e Dated : Washington, D .C . July 8, 2009 SERVED Jul 09 2009 3 1 Bench Opinion by Special Trial Judge Robert N . Armen 2 June 10, 200 9 3 Carper and Ferrell v . Commissioner of Internal Revenue 4 Docket No . : 25543-08 5 5 I . 6 The Court has decided to render oral findings 7 of fact and opinion in this case, and the followin g 8 represents the Court's oral findings of facts and 9 opinion .The oral findings of fact and opinion shall not 10 be relied upon as precedent in any other case . 11 II . 12 This proceeding was heard as a Small Tax Case 13 pursuant to the provisions of section 7463 of th e 14 Internal Revenue Code of 1986, as amended, and Rules 15 170 through 175 of the Tax Court Rules of Practice and 16 Procedure . 17 III . 18 This bench opinion is made pursuant to th e 19 authority granted by section 7459(b) of the Internal 20 Revenue Code of 1986, as amended, and Rule 152 of the 21 Tax Court Rules of Practice and Procedure . 22 Hereinafter in this bench opinion, and unless 23 otherwise indicated, all section numbers refer to the 24 Internal Revenue Code, as amended and in effect for 25 2006, the taxable year in issue, and all Rule number s Heritage Reporting Corporation (202) 628-4888 4 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 refer to the Tax Court Rules of Practice and Procedure . IV . Petitioner Monica C . Ferrell appeared on he r own behalf . Petitioner Scott H . Carper did not appear , although he did execute the stipulation of facts . Emily J . Giometti appeared on behalf of Respondent . V . For the taxable year 2006, Responden t determined a deficiency in Petitioner's Federal incom e tax in the amount of $19,010 . VI . The issues for decision by the Court are a s follows : (1) Whether, for the taxable year 2006 , petitioners are entitled to deductions for employe e business expenses . (2) Whether, for the taxable yea r 2006, Petitioner Monica, C . Ferrell was in the trade o r business of being an acting and singing manager for he r minor children . Other adjustments to petitioners' taxable wer e either not pursued by petitioners and are therefor e deemed conceded, see Rule 34(b)(4), or are purel y mechanical in nature . VII . Some of the facts have been stipulated, an d they are so found . Petitioners resided in the State o f Heritage Reporting Corporation (202) 628-4888 5 1 Ohio at the time that the petition was filed with the 2 Court . For the sake of convenience, we shall refer to 3 Petitioner Monica C . Ferrell as Ms . Ferrell and t o 4 Petitioner Scott H . Carper as Mr . Carper ; collectively, 5 we shall refer to Ms . Ferrell and Mr . Carper a s 6 petitioners . 7 Petitioners are married individuals . In 2006, 8 s . Ferrell was employed by Procter & Gamble and worked 9 a minimum of 40 hours per week as a financia l 10 coordinator, earning about $41,000 for the year . For 11 most of 2006, Mr . Carper was employed by John A . Becker 12 Co . on a full-time basis in 'outside sales' and earned 13 nearly $75,0-00 ; for the balance of the year, Mr . 14 Carper was employed by Consolidated Electrical on a 15 full-time basis and earned about $23,000 . 16 In the course of his employment with John A . 17 Becker Co ., Mr . Carper incurred expenses on behalf of 18 his employer . Mr . Carper was entitled to receive, and 19 did in fact receive, reimbursement from his employer 20 upon presentation . of both a 'Monthly Expense an d 21 Mileage Summary' and a 'Detailed Expense Description 22 Report' . Reimbursement included expenses incurred for 23 entertainment, telephone, and business mileage . Mr . 24 Carper's initial 'Monthly and Mileage Summary' for 2006 25 shows that Mr . Carper requested reimbursement of $1,11 6 Heritage Reporting Corporation (202) 628-4888 6 1 and that his request was approved by his manager on 2 February 16, 2006 . 3 The record does not disclose whether Mr . Carper 4 incurred expenses in the course of his employment with 5 Consolidated Electrical and, if so, whether suc h 6 expenses were reimbursable upon presentation of a 7 voucher or other documentation . 8 Petitioners have four children, two daughter s 9 and two sons . In 2006, the daughters were about 11 and 10 14 years old and the younger son was about 6 years old . 11 The age of the other son, who was the oldest of the 4 12 children, is not disclosed in the record, but i t 13 appears that he was a minor . 14 Petitioners' daughters and younger son have a 15 talent for, and are interested in, singing and/o r 16 acting . Petitioners' oldest child has a talent for, 17 and is interested in, athletics . 18 Petitioners timely filed a Federal income tax 19 return for 2006 . On their return, petitioners properly 20 reported their wages in the total amount o f 21 approximately $139,000, as well as other items of 22 income, most notably a taxable distribution in the 23 amount of some $46,000 . On Schedule A, petitioners 24 claimed deductions for 'unreimbursed employe e 25 expenses' . In support of the deduction, petitioner s Heritage Reporting Corporation (202) 628-4888 7 1 attached (1) a Form 2106, Employee Business Expenses, 2 for Mr . Carper that claimed a deduction of $16,052 and 3 (2) a Form 2106-EZ for Ms . Ferrell that claimed a 4 deduction of $1,996 . Mr . Carper's Form 2106 did not 5 disclose any reimbursement of expenses for either of 6 his employers . 7 Petitioners also attached to their return a 8 Schedule C, Profit or Loss from Business . The Schedule 9 C identified Ms . Ferrell as the proprietor an d 10 described the nature of the business as acting and 11 singing management . 12 Ms . Ferrell's Schedule C reported gros s 13 receipts in the amount of $1,340 and claimed a variety 14 of deductions in the aggregate amount $57,424 . Th e 15 resulting net loss of $56,084 was carried to page 1 of 16 the petitioners' Form 1040 and set off against their 17 other income . (At trial, Ms . Ferrell testified that 18 reported gross receipts of $1,340 represented som e 19 percentage, unknown to her, of what her children earned 20 in 2006 . ) 21 In the notice of deficiency, Responden t 22 disallowed the deductions claimed by petitioners for 23 employee business expenses for lack of substantiation . 24 Also in the notice, Respondent effectively disallowed 25 the loss claimed by Ms . Ferrell on her Schedule C b y Heritage Reporting Corporation (202) 628-4888 8 1 disallowing all of the expenses claimed and eliminating 2 reported gross receipts . In this regard, the notic e 3 determined that Ms . Ferrell's activity of serving as 4 acting and singing manager for her children was not a 5 'business for profit' because the expenses incurre d 6 were personal in nature . 7 VIII . 8 We begin with a few words about the burden of 9 proof . 10 Generally, the Commissioner's determination s 11 are presumed correct, and the taxpayer bears the burden 12 of proving that those determinations are erroneous . 13 Rule 142(a) . This principle was firmly established by 14 the United States Supreme Court as early as 1933 an d 15 has been reaffirmed by the Supreme Court as recently as 16 1992 . See INDOPCO Inc . v . Commissioner , 503 U .S . 79, 17 84 (1992) ; Welch v . Helvering , 290 U .S . 111, 11 5 18 (1933) . 19 Although the enactment of section 7491(a) in 20 1998 may serve to shift the burden of proof to th e 21 Commissioner under certain circumstances, that section 22 has no application to the present case in view of the 23 fact that : (1) Petitioners have not asserted it' s 24 applicability ; (2) petitioners have failed t o 25 demonstrate that they maintained all requisite records , Heritage Reporting Corporation (202) 628-4888 9 1 see sec . 7491(a)(2) ; and (3) petitioners failed t o 2 introduce credible evidence sufficient to establish a 3 prima facie case, see sec . 7491(a)(1) . Accordingly, 4 the burden of proof remains on petitioners . 5 IX . 6 We turn now to the issue involving th e 7 deductibility of the employee business expenses claimed 8 by petitioners . Of these expenses,, nearly 90 percen t 9 was claimed by Mr . Carper . Unfortunately fo r 10 petitioners, Mr . Carper chose not to attend the trial, 11 so we do not have the benefit of his testimony . 12 Without it, the record does not permit us to conclude 13 that Mr . Carper incurred any actual expense in excess 14 of the amounts for which he was reimbursed . See Heidt 15 v . Commissioner , 274 F .2d 25, 28 (7th Cir . 1959), affg . 16 T .C . Memo . 1959-31 ; Podems v . Commissioner , 24 T .C . 21, 17 22-23 (1955) . Further, it would appear that most, and 18 perhaps all, of the expenses claimed by him are of the 19 type requiring strict substantiation under the mandate 20 of section 274(d) . See Sanford v . Commissioner , 5 0 21 T .C . 823, 827 (1968), affd . per curiam F .2d 205 (2d 22 Cir . 1969) ; sec . 1 .274-5T(a), Temporary Income Tax 23 Regs . 24 Insofar as Ms . Ferrell's claimed expenses are 25 concerned, Ms . Ferrell offered little testimony and n o Heritage Reporting Corporation (202) 628-4888 1 0 1 hard documentary proof . Other than possible cell phone 2 use, she was not able to clearly identify the nature of 3 the claimed expenses . Here we might note that cel l 4 phones are a species of 'listed property' and therefore 5 subject to strict substantiation mandated by sectio n 6 274(d) . See sec . 280F(d) (4) . 7 In sum, we hold that petitioners failed to 8 carry their burden of proof . Respondent' s 9 determination is therefore sustained . 10 X . 11 We turn now to the remaining issue, i .e ., 12 whether Ms . Ferrell was in the trade or business of 13 serving as an acting and singing manager . In thi s 14 regard, Ms . Ferrell candidly admitted at trial that she 15 has never served as an acting and singing manager for 16 anyone other than her three youngest children, nor has 17 she ever sought to serve as an acting and singin g 18 manager for anyone other than her three youngest 19 children . (For the sake of convenience, we shall 20 henceforth refer to petitioners' three youngest 21 children as the children . ) 22 Section 262 sets forth the general rule that no 23 deduction shall be allowed for personal, living, o r 24 family expenses . Further, section 183 specifically 25 precludes deductions for activities not engaged in fo r Heritage Reporting Corporation (202) 628-4888 1 1 1 profit (except to the extent of the gross income 2 derived from such activities) . 3 Whether a taxpayer engages in an activity for 4 profit is, of course, a factual issue to be resolved 5 based on an analysis of all of the relevant facts and 6 circumstances . See Dreicer v . Commissioner , 78 T .C . 7 642, 645 (1982) affd . without opinion 702 F .2d 120 5 8 (D .C . Cir . 1983) ; Hulter v . Commissioner , 91 T .C . 371, 9 393 (1988) . In making the analysis, greater weight is 10 given to objective facts than to a taxpayer's mer e 11 statement of intent . Deicer v . Commissioner , supra at 12 645 ; sec . 1 .183-2(a), Income Tax Regs . As previously 13 discussed, the taxpayer bears the burden of provin g 14 that he or she had the requisite profit objective . See 15 also Keanini v . Commissioner , 94 T .C . 41, 46 (1990) ; 16 cf . sec . 183(d), which is inapplicable to the instant 17 case because it's conditions have not been satisfied . 18 We are willing to accept that Ms . Ferrell is a 19 devoted parent eager to do everything in her power to 20 ensure her children's success . We are also willing to 21 accept that Ms . Ferrell's children are talente d 22 individuals . Furthermore, it is clear that Ms . Ferrell 23 has made sacrifices, both personal and financial, i n 24 order to further her children's prospects fo r 25 successful careers . But we remain unconvinced that Ms . Heritage Reporting Corporation (202) 628-4888 1 2 1 Ferrell is fundamentally different from other parent s 2 who are ambitious for their children to succeed and who 3 personally sacrifice toward that end . After all , 4 encouraging a child to fully develop his or her natural 5 abilities and talents in order to be all you can be , 6 is an important part of good parenting . State d 7 otherwise, nurturing by a parent is a child's due, and 8 such nurturing is the parent's legal, and moral , 9 responsibility . See sec . 1 .183-2(b)(9), Income Tax 10 Regs . 11 Were we to further analyze this issue b y 12 reference to the factors enumerated in section 1 .183- 13 2(b) of the Income Tax Regulations, we might mention 14 the following matters as informing our judgment . 15 Ms . Ferrell has a history of losses wit h 16 respect to her activity,of serving as the acting and 17 singing manager for her children . See sec . 1 .183- 18 2(b)(6), Income Tax Regs . In 2005, the first year for 19 which Ms . Ferrell treated her activity as a business, 20 she reported a net loss of $14,734 . In 2006, sh e 21 reported a net loss of $56,084 ; and in 2007, she 22 reported a net loss of $49,020 . 23 At trial, Ms . Ferrell admitted that she had 24 incurred a net loss in 2008, but she did not know the 25 amount, stating that an income tax return for that yea r Heritage Reporting Corporation (202) 628-4888 1 3 1 had yet to be filed . But one would think that a 2 taxpayer who carries on an activity in a business-like 3 manner and who maintains complete and accurate book s 4 and records would know the financial state of his or 5 her activity on a monthly, or at least quarterly , 6 basis, and absolutely would know on an annual basis . 7 See sec . 1 .183-2(b)(1), Income Tax Regs . Thus, for Ms . 8 Ferrell not to know where she stood financially as of 9 the end of the calendar year belies a profit objective . 10 Also remarkable is the fact that Ms . Ferrell 11 did not seem to know the percentage of her children's 12 earnings to which she was 'contractually' entitled in 13 2006 . Once again, this belies a profit objective . See 14 sex . 1 .183-2(b)(1), Income Tax Regs . 15 At trial, when asked by Respondent's counse l 16 what questions Ms . Ferrell posed to the friend that she 17 consulted about being a talent manager, Ms . Ferrell's 18 first response was : 'What's deductible?' This belies a 19 profit objective . See sex . 1 .183-2(b)(8), Income Tax 20 Regs . ; Surloff v . Commissioner , 81 T .C . 210, 23 3 21 (1983), holding that profit means an economic profit 22 apart from any tax consequences . 23 At trial, Ms . . Ferrell candidly testified that 24 she had no prior experience or special training as a 25 talent manager, see sec . 1 .183-2(b)(2) and (5), Income Heritage Reporting Corporation (202) 628-4888 1 4 1 Tax Regs ., and, as previously mentioned, that she has 2 only ever sought to serve as a talent manager for her 3 own children . Ms . Ferrell also admitted that she had 4 no formal business plan and performed no forma l 5 financial analysis in 2006 . See sec . 1 .183-2(b)(1), 6 Income Tax Regs . Further, Ms . Ferrell testified that 7 she worked a minimum of 40 hours per week for he r 8 employer, Procter & Gamble, throughout 2006 . See sec . 9 1 .183-2(b)(3), Income Tax Regs . 10 In view of the foregoing, we hold tha t 11 petitioners failed to prove that for the taxable year 12 2006, Ms . Ferrell was in the trade or business of being 13 an acting and singing manager for her children . 14 Respondent's determination is therefore sustained . 15 XI . 16 In order to give effect to our disposition of 17 the disputed issue, decision will be entered fo r 18 Respondent . 19 XII . 20 This concludes the Court's oral findings of 21 fact and opinion in this case . 22 And, with the reading of this bench opinion, 23 this also concludes the Court's trial session i n 24 Cincinnati . Court is adjourned . 25 Heritage Reporting Corporation (202) 628-4888 1 (Whereupon, at 2 :21 p .m ., the bench opinion i n 2 the above-entitled matter were concluded .) 15 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2 1 22 2 3 2 4 25 Heritage Reporting Corporation (202) 628-4888