t c memo united_states tax_court ernestine forrest petitioner v commissioner of internal revenue respondent docket no filed date after p failed to file a tax_return for the tax_year r filed a substitute for return and issued a notice_of_deficiency determining a deficiency in p’s federal_income_tax and additions to tax under sec_6651 and and i r c held p is liable for a portion of the deficiency to the extent decided herein held further p is liable for the applicable additions to tax ernestine forrest pro_se michael k park for respondent memorandum findings_of_fact and opinion wherry judge this case is before the court on a petition for redetermination of petitioner’s liability for income_tax and additions to tax for as determined by respondent after concessions by petitioner and respondent of certain income items and deductions the issues left for decision are whether petitioner is entitled to a deduction on schedule a itemized_deductions for meal expenses whether petitioner is entitled to a schedule a deduction for vehicle mileage expenses whether petitioner is entitled to a schedule a deduction for telephone expenses whether petitioner is entitled to a schedule a deduction for an employment-related legal fee of dollar_figure whether petitioner is entitled to a schedule a deduction for a casualty_loss 1responded conceded meal expense deductions of dollar_figure leaving dollar_figure of meal expense deductions at issue petitioner concedes that she received dollar_figure of pension distributions a separate taxable_distribution from her retirement account of dollar_figure interest_income of dollar_figure savings bond interest_income of dollar_figure dividends of dollar_figure unemployment_compensation of dollar_figure and dollar_figure of wage income all in the parties have agreed that petitioner is entitled to schedule a deductions for as follows state income taxes of dollar_figure real_estate_taxes of dollar_figure personal_property_tax of dollar_figure mortgage interest of dollar_figure charitable_contributions of dollar_figure and miscellaneous_itemized_deductions of dollar_figure before any consideration of the adjusted_gross_income limitation on miscellaneous_itemized_deductions whether petitioner is liable for the 10-percent additional tax under sec_72 on the distribution of dollar_figure from her individual_retirement_plan whether petitioner is liable for the sec_6651 addition_to_tax for the failure_to_file a timely return whether petitioner is liable for the sec_6651 addition_to_tax for the failure to timely pay tax and whether petitioner is liable for the sec_6654 addition_to_tax for the failure to pay estimated income_tax findings_of_fact some of the facts have been stipulated and the stipulation of settled issues the stipulated facts and the accompanying exhibits are hereby incorporated by this reference at the time she filed her petition petitioner resided in california during january and the first days of date petitioner was a securities lawyer employed by the california department of corporations although her employment was terminated in date she continued receiving pay through 2all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the tax_year at issue and all rule references are to the tax_court rules_of_practice and procedure 3the amounts of all the additions to tax will be determined in the rule_155_computations to be made in accordance with this opinion date after petitioner’s employment was terminated she commenced a lawsuit for reinstatement and backpay in connection with that litigation in date petitioner flew from her home to sacramento and while in the sacramento area consumed three meals at some time in petitioner was involved in an automobile accident with an uninsured motorist at the time of the accident petitioner was insured by state farm insurance which has yet to resolve her claim petitioner did not file a tax_return for the tax_year respondent prepared a substitute for return for petitioner’s tax_year which respondent filed on date on date respondent issued petitioner a statutory_notice_of_deficiency determining an income_tax deficiency for of dollar_figure and the following additions to tax dollar_figure under sec_6651 for failure_to_file a tax_return on time an amount to be determined under sec_6651 for failure_to_pay_tax on time and dollar_figure under sec_6654 for failure to pay estimated_tax petitioner timely filed a petition with this court on date in the petition petitioner disputed the deficiency 4we note that petitioner had previously been terminated from her employment with the california department of corporations in and was subsequently reinstated in date after filing suit against the state of california in of which we take judicial_notice see forrest v commissioner tcmemo_2009_228 and argued that a tax of more than dollar_figure has been proposed in connection with the year with which the taxpayer does not agree and that the taxpayer desires to preserve her rights and position with regard to the year relief from the proposed tax is requested after concessions the issues left for determination are those listed above a trial was held in los angeles california on date opinion i burden_of_proof the commissioner’s determination_of_a_deficiency is presumed correct and the taxpayer bears the burden of proving that the determination is improper see rule a 290_us_111 however pursuant to sec_7491 the burden_of_proof as to a factual issue that affects the taxpayer’s tax_liability may be shifted to the commissioner this occurs where the taxpayer introduces credible_evidence with respect to such issue and the 5petitioner has been given sufficient time to file a brief she has continually tested this court’s patience with motions to extend time to file and then ultimately failed to submit a brief petitioner is a member of the california state bar and as such should be sensitive to any actual or perceived abuse of the judicial process the court directs petitioner’s attention to sec_6673 which allows the court in its discretion to require the taxpayer to pay to the united_states a penalty not in excess of dollar_figure whenever it appears that a proceedings before it have been instituted or maintained by the taxpayer primarily for delay b the taxpayer’s position in such proceeding is frivolous or groundless or c the taxpayer unreasonably failed to pursue available administrative remedies taxpayer has inter alia complied with substantiation requirements pursuant to the code and maintained all records required under this title and has cooperated with reasonable requests by the secretary for witnesses information documents meetings and interviews sec_7491 petitioner did not argue that the burden should shift and she failed to maintain required records or comply with the substantiation and cooperation requirements accordingly the burden_of_proof remains on petitioner ii expense deductions a general rules deductions are a matter of legislative grace and the taxpayer must maintain adequate_records to substantiate the amounts of any deductions or credits claimed sec_6001 the taxpayer shall keep such records 503_us_79 sec_1_6001-1 income_tax regs taxpayers must maintain records relating to their income and expenses and must prove their entitlement to all claimed deductions credits and expenses in controversy see sec_6001 sec_162 authorizes a deduction for all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying on any trade_or_business a trade_or_business expense is ordinary for purposes of sec_162 if it is normal or customary within a particular trade business or industry and is necessary if it is appropriate and helpful for the development of the business 320_us_467 308_us_488 in contrast personal living or family_expenses are generally nondeductible sec_262 in certain circumstances the taxpayer must meet specific substantiation requirements to be allowed a deduction under sec_162 see eg sec_274 the heightened substantiation requirements of sec_274 apply to any traveling expense including meals_and_lodging away from home any item with respect to an activity in the nature of entertainment amusement or recreation an expense for gifts or the use of listed_property as defined in sec_280f including any passenger automobiles to deduct such expenses the taxpayer must substantiate by adequate_records or sufficient evidence to corroborate the taxpayer’s own statement the amount of the expense or other item the time and place of the travel entertainment amusement recreation or use of the property the business_purpose of the expense or other item and the business relationship to the taxpayer of the persons entertained or receiving the gift sec_274 to satisfy the adequate_records requirement of sec_274 a taxpayer must maintain records and documentary_evidence that in combination are sufficient to establish each element of an expenditure or use sec_1_274-5t and temporary income_tax regs fed reg date although a contemporaneous log is not required corroborative evidence to support a taxpayer’s reconstruction of the elements of the expenditure or use must have a high degree of probative value to elevate such statement to the level of credibility of a contemporaneous record sec_1_274-5t temporary income_tax regs supra where the heightened requirements discussed above do not apply however the court may allow the deduction of a claimed expense even where the taxpayer is unable to fully substantiate it provided the court has an evidentiary basis for doing so 245_f2d_559 5th cir 39_f2d_540 2d cir 85_tc_731 but see sec_1_274-5t temporary income_tax regs fed reg date in these instances the court is permitted to approximate the allowable expense bearing heavily against the taxpayer whose inexactitude is of his or her own making cohan v commissioner supra pincite b schedule a deduction for meal expenses the heightened or strict substantiation requirements of sec_274 discussed above apply to meal expenses to satisfy sec_274 petitioner must present sufficient evidence in addition to her testimony to satisfy the three aspects of this requirement the taxpayer must prove the amount the time and place and the business_purpose of each expenditure sec_1_274-5t temporary income_tax regs fed reg date after respondent’s concessions dollar_figure of petitioner’s meal expense deductions remains at issue this amount stems from three meals petitioner consumed during a trip she made to sacramento in date in connection with her employment litigation petitioner claims that she is entitled to deductions for meals purchased including dollar_figure at denny’s inc on date dollar_figure at the bootlegger restaurant on date and dollar_figure at awful annies on date all in the sacramento and auburn california area petitioner presented a credit card statement showing the above amounts and an airline receipt showing that she had purchased a round-trip ticket from los angeles to sacramento on date and returning on date we find that petitioner has produced enough evidence in conjunction with her testimony to meet the first two parts of the heightened sec_274 burden she has shown both the amount of the expenditure and the time and place of the travel remaining is the third required business_purpose showing petitioner testified that she incurred these expenses during a trip to sacramento to confer with the attorney working on her reinstatement litigation this litigation can be characterized as an attempt to reestablish petitioner’s business of earning her pay and therefore a business_expense see kenton v commissioner tcmemo_2006_13 therefore petitioner has met the three requirements under the heightened burden of substantiation with respect to the three meal expense deductions and is entitled to a schedule a deduction of dollar_figure c schedule a deduction for vehicle mileage expenses the strict substantiation requirements of sec_274 also apply to away-from-home business mileage expenses 80_tc_1165 the taxpayer must prove the amount time place and business_purpose of each expenditure sec_1_274-5t temporary income_tax regs supra the amount of the business travel may be substantiated by the use of a contemporaneous log or by any reasonable means establishing the number of miles traveled the date the place 6we note that under sec_62 as amended effective date attorney fees and court costs paid_by the taxpayer in connection with discrimination lawsuits paid after date with respect to any judgment or settlement occurring after that date are allowed as a deduction in computing adjusted_gross_income with the result that they are not subject_to the amt and are not subject_to the 2-percent floor kenton v commissioner tcmemo_2006_13 however as petitioner is deducting meal expenses here not attorney’s fees and court costs these expenses do not fall within the favorable treatment of sec_62 and are subject_to the amt and the 2-percent floor see sec_56 sec_67 and the business_purpose of such miles smith v commissioner supra pincite congress has chosen to impose a rigorous test of deductibility in the area of travel_expenses each of the foregoing elements must be proved for each separate expenditure general vague proof whether offered by testimony or documentary_evidence will not suffice id pincite2 although petitioner claimed to have regularly used her personal vehicle in connection with her reinstatement litigation the record is practically devoid of any evidence related to her claimed mileage deduction evidence which is vague or significantly incomplete is not credible harris v commissioner tcmemo_2010_248 weaver v commissioner tcmemo_2004_108 petitioner asserted that she has always maintained a log of her vehicle travels but could not locate it and the only evidence accepted at trial was an exhibit consisting of photocopies of parking receipts although we 7at trial petitioner attempted to introduce a typed list of expenses and places that did not include miles traveled she explained that this exhibit describes taxpayer’s activities in relation to some of the expenses that are being questioned written transcripts parking fees in connection with trying to get the back pay awarded to her similarly there is another chart referring to the copies and other things that are incurred related to travel to accomplish these things to go to the airport to do a variety of business activities respondent objects to the exhibit as clearly prepared in anticipation of this litigation we agreed with respondent continued agree with petitioner that she had to drive to someplace to park she did not even attempt to explain at trial where she had driven when she received the parking receipts or that the miles driven to the parking lots were in fact deductible petitioner was unable to provide any substantiation for her claimed mileage deduction let alone meet the heightened requirements under sec_274 therefore she is not entitled to a schedule a deduction for her claimed vehicle mileage expenses for the tax_year d schedule a deduction for telephone expenses as discussed above a taxpayer is generally permitted to deduct ordinary and necessary business_expenses but is required to keep sufficient records to substantiate the amount of any deduction sec_162 sec_6001 under the cohan doctrine the court is permitted to estimate expenses however there must be sufficient evidence that the expense was in fact incurred williams v united_states f 2d pincite continued and refused to admit the evidence this exhibit does not constitute the kind of evidence contemplated by sec_274 and required to satisfy the higher burden of substantiation we also note that generally taxpayers may not deduct the daily cost of commuting to and from work as such expense is considered to be personal and nondeductible brockman v commissioner tcmemo_2003_3 citing 326_us_465 petitioner’s offered exhibit listed under mileage included entries such as kinko mail copy and buy supplies that denote local and possibly personal errands at trial petitioner testified that she had more than one telephone to support a dial-up modem and fax machine she did not present any evidence testimonial or otherwise regarding the percentage of business use of the telephone we note that in the case of an individual any charge including taxes thereon for basic local_telephone_service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal_expense sec_262 petitioner also did not produce any telephone bills to substantiate a deduction petitioner clearly has not met her burden and is not entitled to a schedule a deduction for her claimed telephone expenses for the tax_year e schedule a deduction for dollar_figure legal fee petitioner claims to have made a dollar_figure payment to her attorney for filing a writ petition to try to get the employer to pay three years of back pay as we decided above petitioner’s litigation fees are ordinary and necessary business_expenses see kenton v commissioner supra however petitioner is still required to maintain adequate_records to substantiate those expenses under sec_6001 petitioner did not present either a receipt for the dollar_figure or a canceled check evidencing such payment even though the court allowed her time after the trial with numerous extensions to gather evidence of this payment petitioner has not met her burden and is therefore not entitled to a schedule a deduction for a claimed employment- related legal fee of dollar_figure for the tax_year f schedule a deduction for casualty_loss sec_165 allows as a deduction any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise see also sec_165 casualty_loss deductions for individual taxpayers a taxpayer may deduct a casualty_loss resulting from damage to his or her automobile whether used for a business or personal purpose sec_1_165-7 income_tax regs the amount of the deduction in the case of property not used for business or held_for_the_production_of_income is the lesser_of either i the fair_market_value of the property before the casualty minus the fair_market_value after the casualty or ii the adjusted_basis of the property sec_1_165-7 income_tax regs petitioner explained that her bmw was totaled while she was stalled on the pasadena freeway at some time during while petitioner might qualify for a casualty_loss deduction we conclude that she failed to establish her adjusted tax basis in the car and that she claimed this deduction prematurely petitioner admitted that her claim for damages with her automobile insurance_company has yet to be resolved she acknowledged there still exists a claim for reimbursement with a reasonable prospect for recovery although she was unsure whether the insurance_company would pay her at all as we have previously held a taxpayer must establish the amount of the loss before she may claim a casualty_loss deduction clem v commissioner tcmemo_1991_414 citing 24_tc_199 affd 247_f2d_233 2d cir affd sub nom 247_f2d_237 2d cir see also sec_1_165-1 income_tax regs this is especially true in a case involving insurance sec_165 prohibits a taxpayer from deducting any amount compensated by insurance since petitioner did not know by the close of the year in issue how much if anything she would receive from her insurance_company as reimbursement for the damages to her car she cannot ascertain the amount of her casualty_loss petitioner is not entitled to a casualty_loss deduction g ten percent additional tax under sec_72 on the distribution from petitioner’s retirement_plan in general sec_4974 defines qualified_retirement_plans as including individual_retirement_accounts ira sec_408 governs the treatment of iras specifically sec_408 provides that distributions from an ira are generally taxable in the manner directed in sec_72 sec_72 provides for an additional tax on premature distributions petitioner concedes that when she withdrew dollar_figure from her ira at the washington mutual bank in she wa sec_55 years old she testified that the reason she withdrew the money was that she needed it for some major expense or something it required at no time has petitioner contended that any of the exceptions set forth in sec_72 are applicable to her circumstance nor has she explained why she believed the sec_72 additional tax did not apply petitioner is liable for the 10-percent additional tax under sec_72 on the distribution of dollar_figure from her retirement_plan for the tax_year iii additions to tax respondent determined that petitioner is liable for additions to tax under sec_6651 and and for the tax_year pursuant to sec_7491 respondent has the burden of production with respect to these additions to tax and is therefore required to come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty see 116_tc_438 however once the commissioner meets his burden of production the taxpayer must come forward with evidence sufficient to persuade a court that the commissioner’s determination is incorrect id pincite a sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for failure_to_file a timely return unless the taxpayer proves that such failure is due to reasonable_cause and not willful neglect see 469_us_241 petitioner concedes that she did not file a federal_income_tax return for her tax_year she has not argued or introduced any evidence suggesting that her failure_to_file was due to reasonable_cause and not willful neglect accordingly we sustain respondent’s imposition of the addition_to_tax under sec_6651 b sec_6651 addition_to_tax sec_6651 imposes an addition_to_tax for failure to timely pay the amount of tax shown on a return this court has stated the commissioner’s burden of production with respect to the sec_6651 addition_to_tax requires that the commissioner introduce evidence that a return showing the taxpayer’s tax_liability was filed for the year in question in a case such as this where the taxpayer did not file a return the commissioner must introduce evidence that an sfr substitute for return satisfying the requirements of sec_6020 was made see cabirac v commissioner t c 127_tc_200 affd 521_f3d_1289 10th cir the sec_6651 addition_to_tax is not imposed if the taxpayer proves that the failure to pay is due to reasonable_cause and not willful neglect under sec_6651 a return prepared by the secretary pursuant to sec_6020 is treated as a return filed by the taxpayer for the purpose of determining the amount of an addition_to_tax under sec_6651 to constitute a sec_6020 return the return must be subscribed it must contain sufficient information from which to compute the taxpayer’s tax_liability and the return form and any attachments must purport to be a ‘return’ spurlock v commissioner tcmemo_2003_ petitioner concedes that respondent prepared a substitute for return for her tax_year under sec_6020 because petitioner did not pay the tax_liability as shown on the sec_6020 return respondent has met the burden of production with respect to the sec_6651 addition_to_tax petitioner has not argued or introduced any evidence suggesting that her failure to pay was due to reasonable_cause and not willful neglect we therefore sustain respondent’s imposition of the addition_to_tax under sec_6651 c sec_6654 addition_to_tax sec_6654 imposes an addition_to_tax for underpayment of estimated income_tax by an individual taxpayer the addition_to_tax is computed by reference to the four required_installment payments of the taxpayer’s estimated_tax liability each constituting percent of the required_annual_payment sec_6654 for taxpayers whose adjusted_gross_income for the preceding year was dollar_figure or less the required_annual_payment is equal to the lesser_of percent of the tax shown on the individual's return for the year or if no return is filed percent of his or her tax for such year or if the individual filed a return for the immediately preceding_taxable_year percent of the tax shown on that return sec_6654 and b petitioner failed to file a federal_income_tax return and made no estimated_tax payments for petitioner did have a tax_liability for her taxable_year consequently petitioner was required to make a payment of estimated_tax see sec_6654 respondent has met his burden of producing evidence that petitioner had a required_annual_payment of estimated_tax for the court also concludes that petitioner does not qualify for any of the exceptions to a sec_6654 addition_to_tax provided in sec_6654 under sec_6654 a sec_6654 addition_to_tax does not apply if the tax shown on the taxpayer’s return for the year in question or if no return is filed the taxpayer’s tax for that year reduced by the credit allowable by sec_31 is less than dollar_figure the addition_to_tax will also not apply if the taxpayer’s tax for a full immediately preceding 12-month taxable_year was zero and the taxpayer was for the entire taxable_year a citizen or resident_of_the_united_states the court has 8respondent was unable to present petitioner’s tax_liability at trial because it was the subject of another tax_court case that has since been decided in forrest v commissioner tcmemo_2009_228 we sustained respondent’s determination that in addition to the dollar_figure of tax shown on her tax_return petitioner had a federal_income_tax deficiency of dollar_figure determined that petitioner had a liability for income_tax for that exceeded dollar_figure net of any sec_31 credit and has taken judicial_notice of the fact that petitioner had a tax_liability in therefore the court sustains respondent’s determination of the addition_to_tax pursuant to sec_6654 the court has considered all of petitioner’s contentions arguments requests and statements to the extent not discussed herein we conclude that they are meritless moot or irrelevant to reflect the foregoing decision will be entered under rule


t c summary opinion united_states tax_court peter h hofinga and margaret m wong petitioners v commissioner of internal revenue respondent docket no 21704-09s filed date shannon gallagher for petitioners sebastian voth for respondent summary opinion carluzzo special_trial_judge this case was heard pursuant to the provisions of sec_7463 of the internal_revenue_code in effect when the petition was filed pursuant to sec_7463 the decision to be entered is not reviewable by any other court and this opinion shall not be treated as precedent for any other case in a notice_of_deficiency dated date respondent determined deficiencies of dollar_figure and dollar_figure in petitioners’ and federal_income_tax respectively the issue for decision for each year is whether petitioners are entitled to a deduction for a rental real_estate loss the resolution of the issue depends upon whether peter h hofinga petitioner is a taxpayer described in sec_469 for either year in issue background some of the facts have been stipulated and are so found at the time the petition was filed petitioners resided in california over the years after they married in petitioners purchased and as necessary renovated and remodeled residential real_estate properties that they held for rent as of the close of petitioners owned eight rental properties as of the close of petitioners owned nine rental properties collectively rental properties because of an election they made for federal_income_tax purposes unless otherwise indicated section references are to the internal_revenue_code_of_1986 as amended in effect for the year in issue rule references are to the tax_court rules_of_practice and procedure petitioners’ interests in the rental properties are treated as one activity see sec_469 before retiring in petitioner was employed as a soccer coach and professor of physical education by the university of california irvine uci he was not employed in any capacity during either year in issue at all times relevant margaret m wong mrs wong was also employed by uci as between the two of them petitioner was more responsible for the management of the rental properties for the most part he did so from his den office in petitioners’ residence routinely and regularly he reviewed and paid various bills considered and made arrangements for repairs arranged for the purchase of supplies reviewed rental applications from time to time inspected a rental property for various reasons and supervised and or made the arrangements for renovating and remodeling a rental property when necessary neither petitioner however kept any sort of contemporaneous log or record that shows the amount of time either spent or specific services either provided with respect to any specific rental property on any specific date petitioners also employed property managers for some of the rental properties routinely the property managers were responsible for collecting rent responding to inquiries or complaints from tenants and making supervising repairs the costs of which did not exceed a designated amount set by petitioners in addition to the fees paid to the property managers a review of petitioners’ federal_income_tax returns for the years in issue shows deductions for expenses attributable to the rental properties for cleaning maintenance gardening pest control plumbers electricians and commissions on their and federal_income_tax returns petitioners deducted losses of dollar_figure and dollar_figure respectively attributable to the rental properties rental property losses if the rental property losses are not taken into account then petitioners’ adjusted_gross_income as reported on each of those returns would exceed dollar_figure the rental property losses are disallowed in the notice_of_deficiency according to respondent’s explanation r ental activities of any kind regardless of material_participation are considered passive activities unless the requirements of sec_469 of the internal_revenue_code are met in tax years beginning after date according to respondent those requirements which will be more fully discussed below have not been met other adjustments made in the notice_of_deficiency are computational and will not be discussed discussion the explanation for the disallowances of the rental property losses provided in the notice_of_deficiency includes terms of art such as material_participation and passive activities which are used and defined in sec_469 and its corresponding regulations in an article published in the date edition of tax notes professor george s jackson states that sec_469 contains almost big_number words we did not count and exemplifies why federal tax law is incomprehensible for most citizens george s jackson passive_activity limitations time for a new paradigm tax note sec_447 describing sec_469 as incomprehensible is probably an overstatement that section however is hardly uncomplicated the dispute between the parties in this case however allows us to avoid a discussion of many of the complexities of sec_469 and a summarization of the relevant provisions of that section is sufficient sec_469 was enacted as part of the tax_reform_act_of_1986 pub_l_no sec_501 stat pincite to prevent affected taxpayers from using deductions from a passive_activity to shelter wages or other active income see generally staff of j comm on taxation general explanation of the tax_reform_act_of_1986 pincite j comm print in general and as relevant here an individual is not entitled to a deduction for a passive_activity_loss incurred during the taxable_year see sec_469 a passive_activity is any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate see sec_469 material_participation is defined generally in the statute and more specifically in the regulations see sec_469 sec_1_469-5t temporary income_tax regs fed reg date in general a rental_activity is treated as a passive_activity regardless of whether the taxpayer materially participates see sec_469 there are two exceptions to this general_rule each subject_to a variety of limitations and conditions if the taxpayer’s rental_activity is a real_estate rental_activity one of those exceptions which allows a limited deduction if a taxpayer actively participates in the rental real_estate activity is not relevant here because petitioners’ adjusted_gross_income as that term is defined in sec_469 exceeds dollar_figure for each year in issue see sec_469 and a the relevant exception is found in sec_469 if a taxpayer is described in that section sometimes that taxpayer is referred to as a real_estate_professional then sec_469 does not apply and the taxpayer’s rental real_estate activity if conducted as a trade_or_business or for the production_of_income is not treated as a passive_activity if the taxpayer materially participates in the activity sec_469 fowler v commissioner tcmemo_2002_223 sec_1_469-9 income_tax regs we need not get into the complicated definition of the term material_participation set forth in sec_469 and its corresponding regulations keeping that definition in mind and because petitioners elected to treat the rental properties as a single activity we are satisfied that they materially participated in the rental property activity during each year in issue and respondent does not seem to suggest otherwise instead the disagreement between the parties focuses on whether petitioner is a taxpayer described in sec_469 according to petitioners he is according to respondent he is not sec_469 contains two tests that a taxpayer must satisfy to be described in that section one requires that the taxpayer perform more than hours of services during the taxable_year in real_property trades_or_businesses in which the taxpayer materially participates see sec_469 the other requires that more than one-half of the personal services performed in trades_or_businesses by the taxpayer during such taxable_year are performed in real_property trades_or_businesses in which the taxpayer materially participates see sec mrs wong does not claim to be a taxpayer so described c b i because petitioner was not otherwise employed during either year in issue we need turn our attention only to the first test the 750-hour test ideally a taxpayer who claims to be described in sec_469 would maintain a contemporaneous log or record showing with particularity the amount of time devoted to the rental real_estate activity on an event-by-event basis see sec_1_469-5t temporary income_tax regs fed reg date ideally the log would be detailed enough to allow for someone who reviewed it to make an informed judgment as to the accuracy of the information reported the creation and availability of a detailed log is important especially if that reviewing someone is an internal_revenue_service employee considering the log in connection with an examination of the taxpayer’s return on which rental real_estate losses are deducted apparently petitioners were not aware of the importance of keeping such a log and as noted neither kept a log during either year in issue recognizing that many taxpayers might not be aware of the importance of keeping a contemporaneous log of time devoted to the taxpayer’s rental real_estate activity the commissioner’s regulations provide a second-best alternative sec_1_469-5t temporary income_tax regs supra provides methods of proof the extent of an individual’s participation in an activity may be established by any reasonable means contemporaneous daily time reports logs or similar documents are not required if the extent of such participation may be established by other reasonable means reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during such period based on appointment books calendars or narrative summaries although petitioners did not maintain contemporaneous logs of the time devoted to their rental real_estate activity they tried to establish petitioner’s participation by other reasonable means eg noncontemporaneous logs based on petitioners’ records in compliance with sec_1_469-5t temporary income_tax regs supra during the examination of the years here in dispute and in response to a request by the examining agent mrs wong prepared several sets of logs showing estimates of time spent on various events according to mrs wong she used calendars bank statements credit card records property trip files bills receipts and other records to construct the logs according to petitioners these logs establish that petitioner has satisfied the 750-hour test according to respondent they do not for the following reasons we agree with respondent the estimates of time shown for some entries on the first set of logs mrs wong prepared include a combination of time spent by both petitioners for purposes of the 750-hour test however only the hours petitioner spent are taken into account see sec_469 having had this problem pointed out to her during the examination she prepared a second set of logs using a generalized allocation of time spent by each of them for the most part she supported the allocation of time on the basis of the amount of time petitioner spent in his den office at their residence the logs contain generalized entries such as hours hours address week of petitioner mrs wong description all propertie sec_2 --- payment of bills filing of bills paperwork monthly statement reviews cross-checking keeping in touch with property management companies all propertie sec_2 payment of bills filing of bills paperwork monthly statement reviews cross-checking keeping in touch with property management companies petitioner’s health prevented his appearance at trial the trial was continued twice to allow for the possibility that his health would improve so that he could be called as a witness but petitioner’s health did not improve and as it turned out only mrs wong testified on petitioners’ behalf when the matter was tried her testimony as to what he was doing while in his den office and out of her presence might very well have been objectionable under fed r evid and see sec_7453 but for petitioners’ sec_7463 election because this case is subject_to that election evidence deemed by the court to have probative value shall be admissible see rule b probative value however does not necessarily equate to persuasive effect all propertie sec_1 payment of bills filing of bills paperwork monthly statement reviews cross-checking keeping in touch with property management companies all propertie sec_1 payment of bills filing of bills paperwork monthly statement reviews cross-checking keeping in touch with property management companies on the other hand some of the entries in the logs reference specific properties and provide a distinct description such as hours hours address week of petitioner mrs wong description rpt-25 park city --- discuss winter rentals hot tub repair roof repair miraflore sec_4 --- walk-through inspection assess patio cover painting needs odlum --- work with handyman to identify repairs window coverings installation although we expect petitioners in their role of landlords expended significant time during each year in issue providing services in connection with the rental properties we are unable from what has been submitted to quantify the total time that petitioner spent doing so and we cannot ignore the deductions attributable to others’ providing management and maintenance services in connection with the rental properties simply put the logs do not allow for a review of activity related to the rental properties on an event-by-event basis to the extent necessary to establish that the 750-hour test has been satisfied petitioners have failed to establish that petitioner satisfied the 750-hour test for either year in issue consequently petitioner is not a taxpayer described in sec_469 for either of those years that being so petitioners’ rental real_estate activity is treated as a passive_activity for both of those years it follows that respondent’s disallowances of the rental property losses attributable to that activity are sustained to reflect the foregoing decision will be entered for respondent giving petitioners the benefit of the doubt and keeping in mind the infirmities of time logs prepared after the fact see 135_tc_365 we are not required to accept a postevent ballpark guesstimate bailey v commissioner tcmemo_2001_296 the regulations do not allow a postevent ballpark guesstimate to the extent that the logs reference specific properties or events at best they show that petitioner spent hours during and hours during performing services in connection with the rental properties


sp iogg i internal_revenue_service national_office technical_advice_memorandum index numbers control number tam-105292-98 taxpayer's name taxpayer's id number taxpayer's address tax years ended date of conference legend taxpayer state x date date a issues w n when is the liability for payment of deferred sales_tax associated with the acquisition of an asset incurred by the taxpayer for purposes of sec_461 of the internal_revenue_code lf the deferred sales_tax is not incurred by the taxpayer under sec_461 of the code until the year s of payment and thus not includible in the basis of the asset until tam-105292-98 the year s of payment then how is the deferred sales_tax taken into account for purposes of depreciation under sec_168 conclusions the liability for payment of deferred sales_tax associated with the acquisition of an asset is incurred by the taxpayer under sec_461 of the code in the year s in which payment is made and not in the year in which the asset is purchased the taxpayer must redetermine its depreciable basis in an asset in each taxable_year in which a deferred sales_tax payment is made with respect to that asset facts the taxpayer is a company that manufactures electronic components in state x and uses an accrual_method of accounting in the early 1990's taxpayer constructed a manufacturing and research facility and pursuant to state x’s sales and use_tax deferral program for certain manufacturing or research_and_development investment projects taxpayer was able to defer payment of sales_taxes related to the acquisition of qualifying buildings and equipment specifically the taxpayer applied for and received several deferral certificates by state x which enabled the taxpayer to defer state and local retail_sales_tax and use_tax due on the construction of buildings as well as the acquisition of qualified machinery and equipment to be used therein as an integral and necessary part of the manufacturing or research_and_development operation the taxpayer's payment of the deferred sales_taxes is due in five installments the first payment of the total_tax deferred was due on december of the third year after the construction_project was operationally complete and four subsequent annual payments and respectively are due on december of the following four years thus the taxpayer's first installment_payment was due on date at the time the taxpayer purchased an asset eligible under state x's deferral program the taxpayer included the deferred sales_tax in the determination of the asset's basis and began depreciating the asset at the time it was placed_in_service the taxpayer's first installment_payment of the deferred sales_taxes was made on or before date thus the taxpayer's net amount of deferred sales_taxes due was dollar_figurea for the taxable_period ending on date the agent has questioned whether the economic_performance rules under sec_461 preclude the taxpayer from taking the deferred sales_tax into account in determining the basis of an asset until the time when payment is made the taxpayer argues that tam-105292-98 the deferred sales_taxes at issue were properly added to the basis of depreciable assets to which they relate as of the date_of_acquisition and that the economic_performance rules should not apply to acquisition costs of depreciable assets moreover if the deferred sales_taxes are not properly added to basis until payment is made the taxpayer questions the correct method for computing depreciation_deductions under sec_168 law and analysis sec_461 a of the code provides generally that the amount of any deduction or credit shall be accounted for in the taxable_year which is the proper taxable_year under the method_of_accounting used in computing taxable_income sec_1_263_a_-1 of the income_tax regulations provides that the amount of any cost required to be capitalized under sec_263 may not be included in inventory or charged to capital accounts or basis any earlier than the taxable_year during which the amount is incurred within the meaning of sec_1_446-1 sec_461 of the code generally provides that in determining whether an amount has been incurred with respect to any item during any taxable_year the all_events_test shall not be treated as met any earlier than when economic_performance with respect to such item occurs sec_461 of the code provides that the all_events_test is met if all events have occurred which determine the fact of liability and the amount of such liability can be determined with reasonable accuracy sec_1_461-1 of the regulations provides that under the cash_receipts_and_disbursements_method of accounting amounts representing allowable deductions shall as a general_rule be taken into account for the taxable_year in which paid further a taxpayer using this method may also be entitled to certain deductions in the computation of taxable_income which do not involve cash disbursements during the taxable_year such as deductions for depreciation depletion and losses under sec_167 sec_611 and sec_165 respectively sec_1_461-1 of the regulations provides in part that under an accrual liability as defined in sec_1_446-1 is incurred and method_of_accounting a generally is taken into account for federal_income_tax purposes in the taxable_year in which all the events have occurred that establish the fact of the liability the amount of the liability can be determined with reasonable accuracy and economic_performance has occurred with respect to the liability applicable provisions of the code the income_tax regulations and other guidance published by the secretary prescribe the manner tam-105292-98 in which a liability that has been incurred is taken into account for example sec_162 provides that a deductible_liability is generally taken into account in the taxable_year incurred through a deduction from gross_income as a further example under sec_263 or sec_263a a liability that relates to the creation of an asset having a useful_life extending substantially beyond the close of the taxable_year is taken into account in the taxable_year incurred through capitalization within the meaning of 263a-1t a and may later affect the computation of taxable_income through depreciation or otherwise over a period including subsequent taxable years in accordance with applicable code sections and guidance published by the secretary sec_1_446-1 of the regulations provides in part that the term liability includes any item allowable as a deduction cost or expense for federal_income_tax purposes in addition to allowable deductions the term includes any amount otherwise allowable as a capitalized cost as a cost taken into account in computing cost_of_goods_sold as a cost allocable to a long-term_contract or as any other cost or expense thus for example an amount that a taxpayer expends or will expend for capital improvements to property must be incurred before the taxpayer may take the amount into account in computing its basis in the property sec_461 of the code provides that in the case of a liability not described in sec_461 a b or c economic_performance occurs at the time determined under regulations prescribed by the secretary sec_1_461-4 of the regulations provides that in the case of liabilities described in paragraphs g through of this section economic_performance occurs when and to the extent that payment is made to the person to which the liability is owed sec_1_461-4 of the regulations provides in part that if the liability of a taxpayer is to pay a tax economic_performance occurs as the tax is paid to the governmental authority that imposed the tax sec_1_461-4 of the regulations provides that the term payment has the same meaning as is used when determining whether a taxpayer using the cash_receipts_and_disbursements_method of accounting has made a payment thus for example payment includes the furnishing of cash or cash equivalents and the netting of offsetting accounts payment does not include the furnishing of a note or other evidence_of_indebtedness of the taxpayer whether or not the evidence is guaranteed by any other instrument including a standby_letter_of_credit or by any third party including a governmental agency tam-105292-98 sec_167 of the code provides that there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion and wear_and_tear including a reasonable allowance for obsolescence of property_used_in_the_trade_or_business or held_for_the_production_of_income for tangible depreciable assets placed_in_service after sec_168 provides that the depreciation deduction provided by sec_167 shall be determined by using the applicable_depreciation_method recovery_period and convention generally a taxpayer using an accrual_method of accounting may not take an sec_1_263_a_-1 and sec_1_446-1 the regulations under sec_461 amount into account in computing its basis in acquired property until that amount is incurred provide a three prong test to determine when an item is incurred and can be taken into account by taxpayers using an accrual_method specifically sec_1_461-1 of the regulations provides that a liability is incurred and taken into account in the taxable_year in which i all events have occurred to establish the fact of the liability ii the amount of the liability can be determined with reasonable accuracy and iii economic_performance has occurred with respect to the liability the agent has not questioned whether the first two prongs have been met but has questioned whether economic_performance occurs in the year in which the asset is purchased or in the year s in which the deferred sales_tax is paid neither the agent nor the taxpayer dispute the fact that the deferred sales_tax liability is a liability that relates to the creation of an asset having a useful_life extending substantially beyond the close of the taxable_year within the meaning of sec_263 and thus is taken into account in the taxable_year incurred through capitalization we believe sec_1_461-4 of the regulations clearly provides that taxes are among the liabilities requiring payment to another person in order for economic_performance to occur moreover the deferred sales_taxes at issue are clearly the type of taxes covered by the regulations thus economic_performance does not occur for the deferred sales_taxes until the taxes are actually paid_by the taxpayer to state x and thus the taxpayer may not take the deferred sales_tax into account in computing its basis in the depreciable assets until payment is made the taxpayer argues that notwithstanding the literal language of the code and regulations underlying sec_461 the deferred sales_taxes at issue should be included in the determination of its basis in acquired assets as of the date_of_acquisition for several reasons first the taxpayer argues that the economic_performance rules effectively place accrual_method taxpayers on a cash_method and since cash_method taxpayers can add acquisition costs to the basis of assets even if the asset was purchased on credit or with a debt_instrument le even if payment for the asset was not made accrual_method taxpayers such as the taxpayer should be allowed similar treatment for support the taxpayer cites sec_1_461-1 of the regulations which states that tam-105292-98 under the cash_method_of_accounting amounts representing allowable deductions as a general_rule shall be taken into account for the taxable_year in which paid and a taxpayer using the cash_method may also be entitled to certain deductions which do not involve cash disbursements during the taxable_year such as deductions for depreciation depletion and losses under sec_167 sec_611 and sec_165 respectively further the taxpayer cites 331_us_1 as authority for its assertion that property acquired by purchase has a basis equal to its cost and cost includes money paid plus liabilities assumed thus the taxpayer argues that depreciation is an exception to the general_rule that a cash-basis taxpayer cannot deduct amounts not actually paid accordingly the taxpayer argues that since the payment rule effectively places an accrual_method taxpayer on par with a taxpayer on the cash_method_of_accounting it is reasonable to allow an accrual_method taxpayer to capitalize all costs associated with the acquisition of an asset regardless of when payment for the asset is made we do not agree with the taxpayer's basic premise that the economic_performance rules effectively place accrual_method taxpayers on a cash_method under sec_1_461-1 expenditures are to be deducted under the cash_method for the taxable_year in which paid thus taxpayers using the cash_method must simply make payment in order to deduct an expense in contrast however a liability is only incurred and is taken into account for federal_income_tax purposes by a taxpayer using an accrual_method in the taxable_year in which i all the events have occurred that establish the fact of the liability ii the amount of the liability can be determined with reasonable accuracy and iii economic_performance has occurred with respect to the liability sec_1_446-1 and sec_1_461-1 we believe the standards applicable to cash_method and accrual_method taxpayers are different standards and there is no indication in sec_461 that congress intended to provide uniform rules and results for all taxpayers using cash and accrual methods_of_accounting moreover we do not believe the taxpayer's characterization of the tax treatment of depreciation_deductions by cash_method taxpayers is correct the taxpayer argues that depreciation is an exception to the general_rule that a cash-basis taxpayer cannot deduct amounts not actually paid although a taxpayer using the cash_method who finances the purchase of an asset is entitled to depreciate the full purchase_price of the asset that taxpayer is only entitled to do so because the taxpayer has incurred a current obligation and so payment has been made within the meaning of sec_1 a and thus that taxpayer is entitled to include the full purchase_price of the asset in its depreciable basis in contrast a taxpayer who has not yet paid deferred sales_taxes associated with the acquisition of an asset has not incurred the obligation and is not in the same position as a taxpayer who has paid for an asset but has paid with borrowed funds under the cash_method actual payment is required before an expense can be deducted and payment through a financing_transaction meets the payment requirement thus we do not agree that depreciation_deductions are an tam-105292-98 exception to the general_rule that a cash_method taxpayer cannot deduct amounts not actually paid rather depreciation_deductions are allowed because in the case of a financed acquisition there was a disbursement of borrowed cash moreover although sec_1_461-4 of the regulations provides that the term payment has the same meaning as is used when determining whether a taxpayer using the cash_receipts_and_disbursements_method of accounting has made a payment the regulations specifically provide that payment does not include the furnishing of a note or other evidence_of_indebtedness of the taxpayer whether or not the evidence is guaranteed by any other instrument including a standby_letter_of_credit or by any third party including a governmental agency thus even if the taxpayer were correct in its characterization of the tax treatment of cash_method taxpayers these regulations clearly require actual payment by accrual_method taxpayers without borrowed funds second the taxpayer argues that if the taxpayer is not allowed to take the deferred sales_taxes into account in determining basis until payment is made depreciation_deductions in taxable years before payment of deferred taxes will not match the time period in which an asset is used to generate revenue nor will the deductions match the cost of the asset with the time period in which the asset is used to generate revenue the taxpayer argues that in 418_us_1 the supreme court expressed two matching principles regarding depreciation first depreciation represents the exhaustion of an asset as it is actually consumed in a business and second depreciation_deductions should correspond with the time period in which an asset is used to generate income thus the taxpayer argues that if depreciation_deductions are not allowed until actual payment has been made then the matching principle could be completely eliminated especially in situations for example where an asset may have a useful_life of three years but payment is deferred for four years we do not dispute the purpose of depreciation_deductions as stated by the supreme court however we do not believe these matching principles are relevant to the issue at hand regulations under sec_461 and sec_446 specifically provide that a liability is not incurred and cannot be taken into account in the determination of the basis of an asset until payment is made these authorities do not provide any different or special rules for depreciable assets moreover it is not uncommon for the depreciable basis of an asset to be redetermined for a variety of reasons after the year of acquisition where there is a subsequent adjustment to the purchase_price of an asset that changes the amount of depreciation that should have been taken we do not require a taxpayer to readjust its purchase_price and depreciation_deductions as of the date_of_acquisition but instead allow the taxpayer to account for the adjustment in the year the adjustment occurs accordingly despite the taxpayer's arguments we believe the literal language of both the code and regulations under sec_461 supports the conclusion that economic_performance for the liability for payment of the deferred sales_tax occurs as payments tam-105292-98 are made in satisfaction of the liability accordingly the taxpayer may not take into account the deferred sales_taxes in determining its basis of acquired assets until such payments are made because we conclude that the taxpayer may not include the deferred sales_tax in the basis of related assets until the year s in which payment is actually made to state x the taxpayer questions what is the appropriate method for computing depreciation_deductions for the assets in questions the taxpayer must treat the payment s of the deferred sales_taxes as a redetermination of the sales_price thus for each of the taxable years in which the adjusted_basis of an asset is redetermined because of a payment of the deferred sales_taxes the recovery allowance is the amount determined by multiplying the redetermined adjusted_basis by the redetermined applicable_percentage for this purpose the redetermined adjusted_basis is the unadjusted_basis reduced by the recovery allowance previously allowed_or_allowable to the taxpayer with respect to the property and adjusted to reflect the redetermination the redetermined applicable_percentage is the percentage determined by dividing the applicable_percentage computed under either the method set out in section of revproc_87_57 1987_2_cb_687 or by use of the optional tables set out in section of that revenue_procedure by an amount equal to the unrecovered percentage le minus the applicable_percentage for recovery years prior to the year in which the basis is redetermined thus the increase or decrease in basis shall be accounted for over the remaining recovery years beginning with the recovery year in which the basis is redetermined caveat a copy of this technical_advice_memorandum is to be given to the taxpayer sec_6110 of the code provides that it may not be used or cited as precedent - end -


t c memo united_states tax_court michael a and karyn e schmitt petitioners v commissioner of internal revenue respondent docket no filed date lawrence m lebowsky for petitioners michelle or for respondent memorandum findings_of_fact and opinion gerber judge respondent determined deficiencies in petitioners’ federal_income_tax in and of dollar_figure and dollar_figure respectively the petition in this case seeks a redetermination only of the deficiency for the issue for our consideration is whether petitioners had unreported schedule c income in taxable_year findings of fact1 at the time the petition was filed petitioners resided in woodland hills california petitioners are cash_basis taxpayers michael a schmitt petitioner is a law professor at southwestern university school of law in los angeles california and is licensed to practice law in the state of california from through the time of trial petitioner operated a sole_proprietorship under the name legal education conference center lecc lecc offered a full-service bar review course and supplemental workshops to law school graduates who were preparing to take the california bar examination the full service bar review course covered substantive areas of law tested on the california bar examination including both the national multistate law and california state law components of the bar examination lecc also offered three supplemental workshops that each focused on a specific area of testing on the california bar examination essay writing performance skills and the multistate law component the bar review course and workshops were offered twice a year coinciding with the testing times for the california bar examination which is given in february and july of each year lecc also offered a preliminary bar review the stipulation of facts and the attached exhibits are incorporated herein by this reference course for third-year law students who were planning to take the bar examination after graduation petitioner was an instructor for the bar review courses lecc’s bar review course was offered on either a guaranteed or nonguaranteed basis under the guaranteed program students were entitled to a full refund of their tuition if they failed the bar examination the same course material and instruction were provided for the guaranteed and nonguaranteed review courses however students in the nonguaranteed course were not eligible to receive a refund of any portion of their tuition if they failed the bar examination also the tuition for the guaranteed course guaranteed tuition was higher than the tuition for the nonguaranteed course the supplemental workshops were offered only on a guaranteed basis students enrolled in the guaranteed bar review course could attend the supplemental workshops without paying an additional_charge alternatively students could enroll in a workshop without enrolling in the bar review course class sizes for the bar review course and supplemental workshops were limited the cost of the guaranteed bar review course and guaranteed supplemental workshops included a registration fee and tuition the registration fee for the guaranteed course and workshops was nonrefundable the costs of the nonguaranteed and guaranteed review courses and the guaranteed workshops were as follows course nonguaranteed review course guaranteed bar review guaranteed performance skills guaranteed essay writing guaranteed multistate registration fee tuition total --- dollar_figure --- dollar_figure big_number dollar_figure the record in this case does not indicate whether the cost of the nonguaranteed course comprised a registration fee and tuition or the amounts thereof the registration fee and tuition had to be paid in full before the first day of review classes the course for the february examination winter course began in the preceding january and the course for the july examination summer course began in june accordingly students who were enrolled in the winter bar review course paid their tuition in date there were students enrolled in lecc’s winter guaranteed course the guaranteed tuition from the winter course was approximately dollar_figure and was subject_to a refund in to any student who failed the date bar examination lecc promised to pay the tuition refunds to guaranteed students who failed the bar examination within weeks of the release of the results petitioner has given certain guaranteed students the option of reenrolling in lecc’s bar review course free of charge instead of obtaining a tuition refund petitioner had discretion over whether to permit a student to reenroll in an lecc course after failing the bar examination if he thought that a failing student had not made an effort to pass the bar examination during the previous review course he would not permit that student to reenroll additionally lecc’s brochure stated that a failing student had to have received a score of at least big_number on the prior bar examination to reenroll in the guaranteed course according to the brochure students who had less than a big_number score on the previous bar examination could reenroll in the nonguaranteed course when a failing student who had not obtained a tuition refund reenrolled in an lecc course petitioner provided additional materials and services to the student without additional compensation from the student also because the lecc class sizes were limited a repeating student reduced petitioner’s ability to generate revenue from the lecc courses lecc had a checking account at sanwa bank sanwa account during petitioner deposited the registration fees and the tuition from both the guaranteed and nonguaranteed bar review courses and the supplemental workshops into the sanwa account during petitioner deposited dollar_figure into the sanwa account petitioner’s deposits into the sanwa account included the dollar_figure tuition from the winter guaranteed review course during petitioner also paid refunds from the sanwa account to guaranteed students who failed the bar amounts are rounded to the nearest dollar examination in that year petitioner paid refunds of dollar_figure from the sanwa account overall petitioner withdrew dollar_figure from the sanwa account during petitioner also had a term savings account at world savings and loan association world savings he opened the account on date with a dollar_figure deposit the savings account was in petitioner’s name and was not designated a_trust account after making the initial dollar_figure deposit in petitioner did not deposit any additional money into the world savings account in particular he did not deposit any of the tuition from the summer or winter guaranteed review courses into the account petitioner deposited the tuition paid during into the sanwa account and did not transfer any money between the two accounts petitioner maintained the account at world savings until throughout the term of the account petitioner never made any withdrawals from it he did not pay any refunds to guaranteed students who failed the bar examination from the world savings account nor did petitioner withdraw money from the account when guaranteed students passed the bar examination petitioner allowed the interest earned on the account to accumulate and did not pay the interest over to the guaranteed students petitioners reported the interest_income from the account on their tax returns respondent computed petitioners’ schedule c gross_receipts from lecc using the bank_deposits method on the basis of deposits into the sanwa account during and determined that petitioners underreported their gross_receipts by dollar_figure respondent allowed petitioners a deduction for the dollar_figure in refunds that were paid to failing students during which petitioners had not claimed on their tax_return accordingly respondent determined that petitioners had unreported schedule c net_income of dollar_figure in opinion respondent determined that petitioners had unreported schedule c net_income for in the amount of dollar_figure from bar review courses that petitioner offered through lecc petitioners have the burden of showing that they did not have income in the amount determined by respondent rule a petitioners have conceded that they underreported their schedule c net_income by dollar_figure petitioners have not offered any explanation for dollar_figure in unreported net_income determined by respondent accordingly we find that petitioners have unreported their taxable_income in these amounts unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure with respect to the remaining dollar_figure in unreported net_income determined by respondent petitioners contend that they were not required to report dollar_figure of tuition from lecc’s winter guaranteed review course that was deposited into the sanwa account during the guaranteed students paid the tuition in and the tuition was refundable to students in if they failed the bar examination petitioner contends that there were substantial restrictions on his receipt of the tuition during because he was required by the lecc contract with the guaranteed students to place the dollar_figure tuition into a set-aside escrow account until the students passed the bar and pursuant to the contract he established a_trust account at world savings for deposit of the refundable tuition in this regard petitioner argues that the guaranteed tuition should not be reported as income until the guaranteed students passed the bar examination petitioner however failed to establish a_trust either in form or in substance for the guaranteed tuition petitioner deposited dollar_figure into a savings account at world savings however he was not required to do so by lecc's guaranty agreement with the students rather petitioner personally chose to put money in the world savings account and could have decided to withdraw and spend the money at any time without restriction or recourse from the guaranteed students petitioner’s failure to properly structure a_trust for the receipt of the tuition payments is especially difficult to excuse because he is an attorney and law professor and taught trust law for the lecc review courses petitioner’s arguments which are addressed below that he was contractually obligated to create an escrow trust and in fact created a_trust with the guaranteed tuition are without merit taxpayers who use the cash_method_of_accounting such as petitioners in this case must report income when it is actually or constructively received sec_451 sec_1_451-1 income_tax regs income is constructively received by a taxpayer when it is credited to his account set apart for him or otherwise made available so that he may draw upon it at any time sec_1_451-2 income_tax regs where the taxpayer’s control of the receipt of income is subject_to substantial limitations or restrictions the income is not constructively received by the taxpayer sec_1_451-2 income_tax regs the doctrine_of constructive receipt requires taxation of income that is subject_to a taxpayer’s unfettered command and that the taxpayer is free to enjoy at his own option even though he chooses not to 281_us_376 petitioners have the burden of establishing that they did not have actual or constructive receipt of the dollar_figure in tuition from the winter guaranteed course rule a petitioner has argued that the lecc agreement with the guaranteed students required that the guaranteed tuition be placed into a set-aside escrow account however there is no credible_evidence that the agreement between petitioner and the guaranteed students required petitioner to create an escrow or trust arrangement there was no written escrow agreement between petitioner and the guaranteed students the only reliable evidence of the terms of the guaranteed review course is the lecc brochure the lecc brochure contains the statement that petitioner will refund tuition to students enrolled on the guaranteed basis if they fail the bar examination there is nothing in the brochure that indicates in any way that petitioner intended to place the tuition into an escrow or trust account or would not use the tuition before the students passed the bar examination we hold that petitioner was not required by his agreement with the guaranteed students to establish an escrow or trust account to hold the tuition payments there was no contractual restriction on petitioner’s use of the dollar_figure tuition during and any restriction on petitioner’s use of the tuition was imposed by petitioner himself petitioner contends that he created an oral trust to hold the guaranteed tuition until the students took the bar examination under california law an express trust in personal_property may be made by an oral declaration of trust cal prob code sec west a_trust may be created by a declaration by the owner of property by the transfer of property to a third person as trustee or by an enforceable promise to create a_trust cal prob code sec west the essential elements of a_trust under california law are a manifestation of an intention by the settlor to create a_trust trust property a lawful purpose for the trust and an identified beneficiary cal prob code secs west osswald v anderson cal app 4th cal rptr 2d the creation of a_trust is not determinative of whether or not petitioner had constructive receipt of the guaranteed tuition when paid_by the students a cash_basis taxpayer has constructive receipt of funds paid into an escrow or trust account upon deposit unless the taxpayer’s control_over the money in the account is subject_to substantial limitations or restrictions 69_tc_558 sec_1_451-2 income_tax regs petitioner did not establish a_trust account with the dollar_figure guaranteed tuition petitioner contends that he created a_trust account at world savings and that he held the tuition in that account until the students passed the bar examination the world savings account was in petitioner’s name and was not designated as a_trust account no deposits were made to that account after petitioner never deposited the tuition from the winter course into the account at world savings rather he deposited the dollar_figure into the sanwa account and did not transfer any money from sanwa to world savings consequently the dollar_figure tuition from the winter guaranteed course was not held in trust in the world savings account petitioner also continued to pay refunds to failing students from the sanwa account during and he did not withdraw money from the account when students passed the bar examination and under his argument he would have been entitled to the tuition in fact petitioner did not make any withdrawals from the world savings account until petitioner’s actions in connection with the world savings account and his treatment of the tuition are entirely inconsistent with his claim that he held the tuition payments in trust at world savings he did not place the dollar_figure of guaranteed tuition in an escrow or trust account rather he placed all of the tuition into the sanwa account and spent the tuition to pay operating_expenses of the review courses we hold that petitioner had actual receipt of the money upon deposit accordingly petitioner must report the tuition as income in petitioner contends that before he reported the tuition from the guaranteed course as schedule c gross_receipts in the year the tuition was paid_by the students petitioner maintains that in he opened a_trust account at world savings for the purpose of deferring the reporting of the guaranteed tuition as income until the students passed the bar he contends that he deposited dollar_figure of refundable tuition from the guaranteed course offered during into the world savings account to be held in trust for the guaranteed students until they took the bar examination petitioner has attempted to explain his failure to deposit the purported trust property ie the dollar_figure in tuition from the winter guaranteed course into the alleged trust account he contends that because he had previously deposited dollar_figure into the world savings account and did not withdraw the money to pay refunds to failing students in the previous year there was sufficient money in the account to cover tuition refunds for the winter courses petitioner argues that it was unnecessary for him to deposit the dollar_figure in tuition from the winter guaranteed course into the alleged trust account there was some confusion at trial as to which parties petitioner or the guaranteed students were the settlors and beneficiaries of the alleged trust petitioner argues that both he and the guaranteed students are the settlors under california law a_trust is created only if the settlor manifests an intention to create a_trust cal prob code sec petitioner contends that he intended to create a_trust petitioner's intention as the trustee or a beneficiary if the students passed the bar examination of the trust to establish a_trust is irrelevant petitioner’s position that he was the settlor of the purported trust presupposes that he was the owner of the trust property at the time of the declaration of trust because only an owner of property is able to declare an intent to hold that property in trust see cal prob code sec a it has not been shown that the guaranteed students were the settlors of the trust and transferred the tuition payments with the intention that the tuition would be held in trust until the bar examination results were announced petitioner has not presented any evidence that the guaranteed students intended to create a_trust or escrow for future payment of the dollar_figure tuition to petitioner if they passed the bar examination the guaranteed students paid the tuition for the lecc course during there has been no showing of an intention to restrict petitioner’s use of the tuition money until the students passed the bar examination rather the students expected that petitioner would refund the money if they failed finally we note that we are not certain that the dollar_figure deposited into the world savings account was tuition held in trust for an lecc course offered during petitioner contends that he withdrew dollar_figure of tuition payments from the sanwa account and deposited the money into the alleged trust account at world savings that testimony is not supported by evidence in the record such as a check issued on sanwa or a bank statement from the sanwa account that shows that petitioner withdrew dollar_figure from sanwa petitioner produced bank statements from the sanwa account for only the months of may june and date the deposit was made on date and did not coincide with the payment of tuition by guaranteed students during that year tuition for the summer course was generally paid in date petitioner has not explained his delay in establishing the alleged trust account the logical conclusion is that petitioner used his own money to open the world savings account rather than refundable tuition from the lecc's review courses as he contends there is no documentary support of petitioner’s or the guaranteed students’ alleged intent to create a_trust account or escrow arrangement petitioner failed to deposit the tuition into the world savings account petitioner’s oral testimony that he intended to create a_trust is not credible petitioner’s right to retain the tuition from the guaranteed courses was in some respects contingent on the students' performance on the california bar examination however the possibility that petitioner might have had to pay failing students refunds is not a substantial restriction on his use of the tuition the world savings account was not a_trust account that created a substantial restriction on petitioner’s use and control of the tuition payments to reflect the foregoing decision will be entered for respondent