Court Opinion

ID: 9942298
Source: CourtListenerOpinion
Date Created: 2024-02-20 20:02:08.301534+00
Date Added: 2024-06-11T13:47:55.631722
License: Public Domain

United States Tax Court

                         T.C. Summary Opinion 2024-1

        SCOTT PAULSON AND MELISSA LOWERY PAULSON,
                        Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 23230-21S.                                     Filed February 20, 2024.

                                     —————

Scott Paulson and Melissa Lowery Paulson, pro sese.

Massimiliano Valerio and James P.A. Caligure, for respondent.

                              SUMMARY OPINION

       SIEGEL, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 1 of the Internal Revenue Code in effect
when the Petition was filed. Pursuant to section 7463(b), 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.

       Respondent determined a deficiency in petitioners’ 2017 federal
income tax and a section 6662(a) accuracy-related penalty. Petitioners
lived in New York when they timely filed their Petition.

        1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure.

                                 Served 02/20/24
                                       2

       Respondent now concedes the section 6662(a) penalty, and the
case is before the Court on respondent’s Motion for Summary Judgment
regarding the deficiency.

                                 Background

       Petitioners attached Schedule C, Profit or Loss From Business, to
their federal income tax return for 2017. The Schedule C reported
$25,012 of “Other expenses” against $1,200 of “Gross receipts or sales.”
These expenses consisted of rent ($4,800), refuse disposal ($512),
business phone ($2,400), vehicle expenses ($7,200), auto insurance
($4,100), business supplies ($1,000), tolls ($4,800), and “tax prep” ($200).

       As relevant here, the Internal Revenue Service issued a notice of
deficiency dated March 17, 2021 (Notice), disallowing deductions for all
of the expenses reported on the Schedule C. 2 The Notice explained that
the deductions were being disallowed because the Paulsons failed to
submit documents substantiating their expenses when asked to provide
them.

       In their Petition, the Paulsons assert that “[e]ach deduction listed
is valid” and that they have receipts to substantiate them. Those
receipts were not provided at any time during the pendency of this case.

      The case was originally calendared for trial on the Court’s
December 19, 2022, New York City, New York, trial session.
On November 30, 2022, respondent filed a Motion for Continuance to,
among other things, give the Paulsons an opportunity to provide
documents to substantiate their position. The Court granted the Motion
and continued the case. No further documents were provided to
respondent or to the Court.

      On May 5, 2023, respondent filed a Request for Admissions. The
matters therein were deemed admitted when the Paulsons failed to
respond. See Rule 90(c). Included among the Admissions were
affirmative statements that the Paulsons do not have any documents
substantiating their expenses.

       2 In addition to the now-conceded penalty, there were other computational

adjustments stemming from the disallowance of the expenses reported on the
Schedule C.
                                    3

     On July 26, 2023, respondent filed a Motion for Summary
Judgment, and the Court directed the Paulsons to respond. They did
not.

      By Order served September 15, 2023, the Motion was calendared
for a hearing at the Court’s January 8, 2024, New York City trial
session. A reminder notice was sent to the Paulsons on December 5,
2023. The Paulsons did not appear for the hearing.

                               Discussion

I.    Summary Judgment

       Summary judgment serves to “expedite litigation and avoid
unnecessary and expensive trials.” Fla. Peach Corp. v. Commissioner,
90 T.C. 678, 681 (1988). We may grant summary judgment when there
is no genuine dispute of material fact and a decision may be rendered as
a matter of law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner,
98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).

       In deciding whether to grant summary judgment, we construe
facts and inferences drawn from them in the light most favorable to the
nonmoving party. Sundstrand, 98 T.C. at 520. But the nonmoving
party may not rest upon mere allegations or denials in its pleadings but
must set forth specific facts showing there is a genuine dispute for trial.
Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).

       The Paulsons did not set forth any facts showing there is a
genuine dispute for trial: They did not respond to the allegations made
or dispute the facts respondent established. The Paulsons repeatedly
asserted that they had documents to establish their entitlement to
deduct the reported expenses, but they never provided them to the
Court. The Paulsons did not respond to the Motion despite being
ordered to do so—and despite being advised that their failure to respond
might result in the granting of respondent’s Motion. They did not
appear at the hearing. The Motion being well made, it is clear we may
issue a decision as a matter of law.

II.   Schedule C Expenses

      As a general rule, the Commissioner’s determination of a
taxpayer’s federal income tax liability in a notice of deficiency is
presumed correct, and the taxpayer bears the burden of proving that the
determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.
                                   4

111, 115 (1933). The Paulsons do not claim, and the record does not
otherwise demonstrate, that respondent should bear the burden of proof
on the issues in dispute. See § 7491(a).

       As we have observed in countless opinions, deductions are a
matter of legislative grace, and the taxpayer bears the burden of proving
entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering,
292 U.S. 435, 440 (1934). This burden requires the taxpayer to
substantiate expenses underlying deductions by keeping and producing
adequate records that enable the Commissioner to determine the
taxpayer’s correct tax liability. § 6001; Hradesky v. Commissioner, 65
T.C. 87, 89–90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976);
Meneguzzo v. Commissioner, 43 T.C. 824, 831–32 (1965). A taxpayer
claiming a deduction on a federal income tax return must demonstrate
that the deduction is allowable pursuant to some statutory provision and
must further substantiate that the expense to which the deduction
relates has been paid or incurred. See § 6001; Hradesky, 65 T.C.
at 89–90; Treas. Reg. § 1.6001-1(a).

       The Paulsons deducted expenses reported on the Schedule C
attached to their 2017 federal income tax return. Taxpayers may deduct
ordinary and necessary expenses paid in connection with operating a
trade or business. § 162(a); Boyd v. Commissioner, 122 T.C. 305, 313
(2004). An ordinary expense is one that commonly or frequently occurs
in the taxpayer’s business, Deputy v. Du Pont, 308 U.S. 488, 495 (1940),
and a necessary expense is one that is appropriate and helpful in
carrying on the taxpayer’s business, Commissioner v. Heininger, 320
U.S. 467, 471 (1943); Treas. Reg. § 1.162-1(a).

       Some of the Paulsons’ reported expenses, such as their “vehicle
expenses,” are subject to strict substantiation requirements. See
§ 274(d); Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per
curiam, 412 F.2d 201 (2d Cir. 1969); Temp. Treas. Reg. § 1.274-5T(a).
In the absence of any records, it is clear the Paulsons did not meet this
burden.

       Other expenses they reported, such as “business supplies,” are not
subject to such strict substantiation requirements. For these other
expenses, if a taxpayer provides sufficient evidence that the taxpayer
has incurred a trade or business expense contemplated by section 162(a)
but is unable to adequately substantiate the amount, the Court may
estimate the amount and allow a deduction. Cohan v. Commissioner,
                                    5

39 F.2d 540, 543–44 (2d Cir. 1930). For the Court to estimate the
amount of an expense, however, there must be some basis upon which
an estimate may be made. Vanicek v. Commissioner, 85 T.C. 731,
742–43 (1985). The record in this case does not allow us to even estimate
the amount of any of the Paulsons’ reported expenses.

       The Paulsons had many opportunities to provide documents, even
if imperfect, to respondent and to the Court. They also had the
opportunity to appear and be heard as to their reported expenses. They
availed themselves of none of these opportunities. The record here is
devoid of any kind of substantiation, and the admissions confirm that
the Paulsons have none. Accordingly, we hold that the Paulsons are not
entitled to deduct expenses reported on the Schedule C, and respondent
is entitled to judgment as a matter of law with respect to the deficiency.

      To reflect the foregoing,

      An appropriate order and decision will be entered.