Court Opinion

ID: 7797886
Source: CourtListenerOpinion
Date Created: 2022-08-04 19:01:21.17153+00
Date Added: 2024-06-11T16:28:42.234204
License: Public Domain

United States Tax Court

                                 T.C. Memo. 2022-83

                               NNABUGWU C. EZE,
                                   Petitioner

                                            v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                       —————

Docket No. 21425-19.                                            Filed August 4, 2022.

                                       —————

Nnabugwu C. Eze, pro se.

Samuel M. Warren and Sarah A. Herson, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       LAUBER, Judge: With respect to petitioner’s Federal income tax
for 2015 and 2016, the Internal Revenue Service (IRS or respondent)
determined deficiencies of $39,241 and $45,735, respectively, plus
accuracy-related penalties under section 6662(a). 1 Respondent has con-
ceded the penalties for inability to demonstrate adequate supervisory
approval. See § 6751(b)(1). Petitioner has conceded receiving unre-
ported interest income of $24 and $13 in 2015 and 2016, respectively.
The chief issues remaining for decision are whether petitioner has sub-
stantiated expenses allegedly incurred in conducting two sets of sole pro-
prietorship activities. With one exception, we resolve these questions in
respondent’s favor.

        1 Unless otherwise indicated, all statutory references are to the Internal Reve-

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

                                   Served 08/04/22
                                     2

[*2]                      FINDINGS OF FACT

       These findings are based on the parties’ pleadings and the docu-
ments and testimony admitted into evidence at trial. We reserved ruling
on the admissibility of certain documents proffered by petitioner; our
rulings on those matters are set forth in the relevant portions of this
Opinion. Petitioner resided in Maryland when his Petition was timely
filed and when the case was tried.

A.     Petitioner’s Business Activities

       Petitioner graduated from Rutgers University in 1996. He did not
have a definite career path and gravitated toward information technol-
ogy consulting. He submitted no evidence about his jobs before 2015–
2016, the tax years at issue. During 2015–2016 he reported income and
expenses from two sets of activities on Schedules C, Profit or Loss From
Business. The first involved consulting in the electronic healthcare
(EHC) field (Schedule C1 business). The second involved residential
construction (Schedule C2 business).

        In his Schedule C1 business petitioner worked as an independent
contractor for National Computer Services Consultants (NCSC), which
was a subcontractor for Northrup Grumman. NCSC paid him by direct
deposit to his bank account. His job included visiting clients and poten-
tial clients—e.g., doctors’ offices and clinics—and helping them assess
their “system requirements” for participating in the EHC program. He
also assisted clients in getting updates to the EHC software and “docu-
ment[ing] any bugs that would arise.” This allegedly entailed additional
in-person visits to clients’ business premises.

       On his tax returns petitioner described his Schedule C2 business
as “home improvement.” He allegedly did handyman, construction, and
residential rehabilitation projects for individual customers. He offered
no specific testimony about his business arrangements with his custom-
ers or the terms on which he was paid. He said that he had written
contracts with his customers, but he introduced no such contracts into
evidence. He supplied no documentary evidence of invoices to his cus-
tomers. He supplied no banking records to substantiate the income or
expenses reported for his Schedule C2 business. None of his alleged cus-
tomers reported payments to him on Forms 1099–MISC, Miscellaneous
Income. His reported expenses for this activity vastly exceeded his re-
ported income.
                                   3

[*3] Petitioner owned three vehicles: a 2008 Mercedes Benz, a 2002
Ford SUV, and a 2004 Chrysler. He testified that he used the Mercedes
exclusively in connection with his Schedule C1 business; that he used
the Ford exclusively in connection with his Schedule C2 business; and
that he used the Chrysler exclusively for personal and family purposes.
We did not find that testimony credible.

B.    Petitioner’s Tax Reporting and IRS Examination

       Petitioner filed timely returns on Forms 1040, U.S. Individual In-
come Tax Return, for 2015 and 2016, using head-of-household filing sta-
tus and claiming two dependents. For 2015 he reported taxable income
of $3,314 and claimed a refund of $774. For 2016 he reported taxable
income of zero and claimed a refund of $744. For his Schedule C1 con-
sulting business he reported income and expenses as follows:

                       Item            2015           2016
           Consulting Fees              $114,140      $142,675
           Car/Truck Expenses            (21,490)      (30,533)
           Insurance                          (480)    —
           Travel                       —               (2,815)
           Other Expenses                (12,501)       (9,662)
           Net Profit                    $79,669      $99,665

For his Schedule C2 construction business he reported income and ex-
penses as follows:

                       Item             2015          2016
           Gross Receipts                $20,355       $27,875
           Car/Truck Expenses              (6,667)       (9,655)
           Other Expenses                 (77,013)      (99,275)
           Net Loss                     ($63,325)     ($81,055)

      The IRS selected petitioner’s returns for examination and issued
him a timely notice of deficiency making numerous adjustments. For
2016 the IRS disallowed an itemized deduction of $2,847 for a mortgage
insurance premium. For both years the IRS disallowed, for lack of sub-
stantiation, deductions for all car/truck expenses claimed for the Sched-
ule C1 and C2 businesses. For both years the IRS disallowed, for lack
of substantiation, deductions for roughly 90% of the other expenses
                                         4

[*4] claimed for the Schedule C1 business and for all of the other ex-
penses claimed for the Schedule C2 business. 2

C.     Tax Court Proceedings

       The Petition was filed on petitioner’s behalf by an attorney in Cal-
ifornia. Presumably for that reason, petitioner’s attorney requested Los
Angeles as the place of trial. The case was originally calendared for trial
during the Court’s February 8, 2021, Los Angeles, California, session.

      Two months before the scheduled trial petitioner’s attorney
moved to withdraw, citing a “breakdown in the attorney-client relation-
ship” and petitioner’s “refusal to follow counsel’s advice.” After we
granted that Motion, petitioner requested a continuance, stating that he
had retained a new attorney to represent him before the IRS. We
granted petitioner’s Motion, and the case was rescheduled on the Court’s
October 4, 2021, Los Angeles calendar. Petitioner’s alleged new attor-
ney never entered an appearance in our Court.

       At petitioner’s request the case was continued a second time, for
reasons related to the COVID-19 pandemic, and was rescheduled on the
Court’s March 28, 2022, Los Angeles trial session, which was expected
to be conducted in person. One month before trial petitioner filed a Mo-
tion to Proceed Remotely, noting that he was representing himself, that
he lived in Maryland, and that trial in Los Angeles would be inconven-
ient. We granted his Motion and set the case for a remote trial on March
29, 2022.

       Ten days before the scheduled trial petitioner submitted a letter
requesting that the place of trial be changed to Baltimore, Maryland.
We denied that request, noting that a change of venue would require a
third continuance, which respondent opposed. Continuances are
granted “only in exceptional circumstances,” Rule 133, and the Standing
Pretrial Order informed petitioner that continuances should be re-
quested at least 31 days before the date of trial. Petitioner did not timely
request a continuance; rather, he moved for a remote trial, and we
granted his Motion. Finding that petitioner had supplied no justifica-
tion for deferring the trial, we informed him that the case would proceed

       2 These Schedule C adjustments produced computational adjustments to other

items on petitioner’s returns, e.g., to his liability for self-employment tax and his
earned income credits. These were essentially automatic, as corollaries of the upward
adjustments to his Schedule C income, and they are not otherwise at issue here.
                                    5

[*5] to trial as scheduled on March 29, 2022. We tried the case via
Zoomgov at that time.

                               OPINION

A.    Burden of Proof

        The Commissioner’s determinations in a notice of deficiency are
generally presumed correct, and the taxpayer bears the burden of prov-
ing them erroneous. See Rule 142(a). Section 7491(a) provides that the
burden of proof may shift to respondent if the taxpayer “introduces cred-
ible evidence with respect to [a relevant] factual issue” and satisfies
three additional conditions. Those conditions are that the taxpayer
must have “complied with the requirements under this title to substan-
tiate any item,” must have “maintained all records required under this
title,” and must have “cooperated with reasonable requests by the [IRS]
for witnesses, information, documents, meetings, and interviews.”
§ 7491(a)(2)(A) and (B).

       Contrary to the argument advanced in petitioner’s post-trial brief,
he does not meet the statutory conditions for shifting the burden of
proof. As we explain below, he did not introduce “credible evidence” re-
garding any factual issue in this case. And he did not “maintain[] all
records” required to substantiate his claimed deductions.

B.    Governing Legal Principles

      Deductions are a matter of legislative grace, and taxpayers bear
the burden of proving their entitlement to any deduction claimed. Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A tax-
payer must show that he has met all requirements for each deduction
and keep books or records that substantiate the expenses underlying it.
§ 6001; Roberts v. Commissioner, 62 T.C. 834, 836 (1974). Failure to
keep and present such records counts heavily against a taxpayer’s at-
tempted proof. Rogers v. Commissioner, T.C. Memo. 2014-141, 108
T.C.M. (CCH) 39, 43.

       Under Cohan v. Commissioner, 39 F.2d 540, 543–44 (2d Cir.
1930), if a taxpayer claims a deduction but cannot fully substantiate the
underlying expense, the Court in certain circumstances may approxi-
mate the allowable amount, “bearing heavily if it [so] chooses upon the
taxpayer whose inexactitude is of his own making.” The Court must
have some factual basis for its estimate, however, else the allowance
                                    6

[*6] would amount to “unguided largesse.” Williams v. United States,
245 F.2d 559, 560 (5th Cir. 1957).

       Section 274(d)(4) sets forth heightened substantiation require-
ments (and overrides the Cohan rule) with respect to “listed property.”
As in effect during 2015–2016, “listed property” included “any passenger
automobile.” § 280F(d)(4)(A)(i); Treas. Reg. § 1.280F-6(b)(1)(i). No de-
duction is allowed for vehicle expenses unless the taxpayer substanti-
ates, by adequate records or sufficient evidence corroborating his own
statements, the amount, time and place, and business purpose for each
expenditure. See Temp. Treas. Reg. § 1.274-5T(c). Substantiation by
“adequate records” generally requires the taxpayer to “maintain an ac-
count book, diary, log, statement of expense, trip sheets, or similar rec-
ord” prepared contemporaneously with the use of the vehicle, as well as
evidence documenting the expenditures. Id. subpara. (2). An actual
contemporaneous log is not strictly required, but records made at or near
the time of the expenditure have greater probative value than records
created subsequently. Id. subpara. (1).

C.    Itemized Deduction

       For 2016 petitioner claimed on Schedule A, Itemized Deductions,
a deduction of $2,847 for a mortgage insurance premium. The IRS re-
ceived from CENLAR FSB a Form 1098, Mortgage Interest Statement,
reporting in box 5 that petitioner during 2016 had paid a mortgage in-
surance premium of $2,846. (The $1 difference seems to reflect a round-
ing error.) The notice of deficiency disallowed this deduction without
explaining why. At trial petitioner showed that the mortgage insurance
premium was associated with the home that was his principal residence
during 2016. See § 163(h)(3)(E)(i). We will allow this deduction.

D.    Schedule C1 Business

      1.     Car/Truck Expenses

       Section 162(a) permits a taxpayer to deduct all ordinary and nec-
essary expenses paid or incurred during the taxable year in carrying on
his trade or business. In connection with his Schedule C1 consulting
business petitioner claimed deductions for vehicle expenses of $21,490
and $30,533 for trips allegedly driven in his Mercedes during 2015 and
2016 to visit EHC clients. Vehicle expenses are subject to the strict sub-
stantiation requirements set forth in section 274(d)(4). Petitioner has
wholly failed to satisfy these requirements.
                                   7

[*7] In support of his claimed deductions petitioner submitted anno-
tated calendars for the first seven months of 2015 and all of 2016. The
annotations show the locations petitioner allegedly visited in connection
with either his Schedule C1 or his Schedule C2 business. For several
reasons we did not find this evidence credible:

       ● None of the calendar entries was made contemporaneously
with the alleged travel. These were not all-purpose calendars recording
various appointments in petitioner’s daily life. Rather, he created them
solely for use in the IRS examination. He offered no clear explanation
as to when he made these entries, and he could not explain how he could
have remembered these granular details many months or years after
the fact.

       ● Petitioner supplied no evidence linking the locations shown on
the calendars to the addresses of his EHC consulting clients. He did not
identify a single client who resided or worked at any particular address.
Thus, he supplied no evidence that, if he actually made trips to these
locations, the journeys were business trips.

       ● The calendar entries on their face seem questionable in many
respects. For example, if one compares the entries for January 2015 and
January 2016, petitioner asserts that he visited the same address in
Manhattan on January 1 of each year; that he visited the same address
in Brooklyn on January 4 of each year; and that he visited the same
address near LaGuardia Airport on January 13 of each year. We did not
find this plausible.

       In support of his Schedule C1 vehicle expenses petitioner also
submitted alleged odometer readings for his Mercedes. These were not
contemporaneous; rather, he prepared them during the IRS examina-
tion, keying the dates and mileage to the dates and destinations shown
on the calendars discussed above. When asked how he kept track of
start and finish odometer readings for hundreds of trips, he said that he
jotted them down on scraps of paper (since discarded). We did not find
this testimony credible.

       In several respects the purported odometer readings on their face
lack indicia of reliability:

      ● Virtually every event, for more than 100 entries, is described
simply as “client meeting.”
                                   8

[*8] ● The mileages shown do not seem consistent. For many trips to
New York City, petitioner shows the miles driven as between 354 and
362. For other trips to New York City, he shows the mileage driven as
between 448 and 450. For a trip to Albany, New York—further from his
home in Maryland than Manhattan—he shows the mileage driven as
344. He could not satisfactorily explain these apparent inconsistencies.

       ● The number of long trips allegedly taken in a single month
seems implausible. For example, in November 2016 petitioner allegedly
drove 8,231 business miles, including four round trips to Buffalo, New
York, and three round trips to Charleston, South Carolina. He could not
satisfactorily explain why his EHC consulting business would have re-
quired repeated round-trip visits to the same client in such rapid suc-
cession.

       ● For most of the 2015 odometer readings, petitioner showed a
portion of the mileage as being for personal travel. For the 2016 odom-
eter readings—for alleged trips to many of the same locations—he
showed no portion of the mileage as being for personal travel. He offered
no credible explanation about this. Moreover, the purported readings
for 2015 contradicted his testimony that he never used the Mercedes for
personal purposes.

       For these reasons, we find that petitioner has not “substanti-
ate[d], by adequate records or sufficient evidence corroborating his own
statements, the amount, time and place, and business purpose” of his
alleged travel. See Temp. Treas. Reg. § 1.274-5T(c). We therefore sus-
tain the disallowance of his claimed Schedule C1 car/truck expenses for
failure to satisfy the strict substantiation requirements of section
274(d). Petitioner may well have incurred some travel expenses in con-
ducting his consulting business. But we are not authorized to estimate
expenses under the Cohan rule for deductions governed by section 274.
And even if we were authorized to estimate vehicle expenses, we would
need a reliable basis for doing so, which petitioner has not supplied.

      2.     “Other Expenses”

       For his Schedule C1 business, petitioner claimed deductions for
“other expenses” as follows:
                                     9
[*9]                   Item              2015          2016
            Professional Education          $9,574       $6,019
            Laptop Computer               —               1,039
            Computer Software             —                 255
            Cell Phone                       2,927        2,349
            Total                          $12,501       $9,662

The IRS examiner allowed $1,050 of the claimed deductions for 2015 and
$1,083 for 2016, disallowing the rest. We find that petitioner has not
substantiated deductions in excess of the amounts the IRS allowed. He
conceded at trial that he incurred no professional education expenses in
either year. The amounts reported on his returns were for his daugh-
ter’s school tuition, not for his own education. He offered no evidence to
substantiate his reported computer and software expenses, nor any evi-
dence to show that such expenses, if incurred, were business rather than
personal.

       To substantiate his claimed cell phone expenses petitioner sub-
mitted statements from AT&T. These are irrelevant because they cover
TV and internet service, not cell phone service. He also submitted copies
of eight alleged receipts from Cricket Wireless. These show four pay-
ments of $308.25 for 2015 (totaling $1,233) and four payments of
$291.75 for 2016 (totaling $1,167). However, these are the exact
amounts that he reported as cell phone expenses for his Schedule C2
business. See infra p. 10. He produced no distinct evidence to substan-
tiate cell phone expenses for his Schedule C1 business.

E.     Schedule C2 Business

       1.     Car/Truck Expenses

       For his Schedule C2 construction business, petitioner claimed de-
ductions for vehicle expenses of $6,667 and $9,655 for trips allegedly
driven in his Ford SUV during 2015 and 2016 in connection with home
improvement projects. By way of support, he offered the annotated cal-
endars discussed previously, which showed travel he allegedly under-
took for both businesses. We find these calendars to lack reliability for
the reasons discussed above.

       Petitioner also submitted two documents captioned “mileage log,”
which supply data only for 2015. The first lists by month the jobsites he
allegedly visited and the work he allegedly performed. The work de-
scriptions are repetitive (e.g., “repair roof and deck boards,” “install
                                   10

[*10] hardwood floor,” “install cabinets and paint living room”). Many
of the alleged jobsites—in Virginia, Delaware, New Jersey, Pennsylva-
nia, and New York—are quite distant from petitioner’s home in Mary-
land. The second document purports to show odometer readings for
these trips.

       Neither document was prepared contemporaneously with peti-
tioner’s alleged travel. They thus suffer from the same flaws as the pur-
ported odometer readings for his Schedule C1 business. These docu-
ments also lack indicia of reliability on their face. For example, the
starting odometer reading for virtually every trip is the same as the end-
ing odometer reading for the previous trip. This would mean that peti-
tioner during 2015 did not drive a single mile in his Ford SUV that was
not connected with his construction business. We did not find that plau-
sible.

       For these reasons, we find that petitioner has not “substanti-
ate[d], by adequate records or sufficient evidence corroborating his own
statements, the amount, time and place, and business purpose” of his
alleged travel. See Temp. Treas. Reg. § 1.274-5T(c). We therefore sus-
tain disallowance of deductions for his claimed Schedule C2 car/truck
expenses for failure to satisfy the strict substantiation requirements of
section 274(d).

      2.     “Other Expenses”

       For his Schedule C2 construction business petitioner reported
“other expenses” as follows:

                        Item            2015           2016
           Materials                      $67,930       $83,783
           Tools                            7,850        14,325
           Cell Phone                       1,233         1,167
           Total                          $77,013       $99,275

As noted earlier, petitioner submitted copies of eight alleged receipts
from Cricket Wireless showing four payments of $308.25 for 2015 (total-
ing $1,233) and four payments of $291.75 for 2016 (totaling $1,167). At
trial respondent objected to the admissibility of these documents on au-
thenticity grounds, and we reserved ruling on those objections. We will
                                          11

[*11] sustain respondent’s objections and exclude these documents from
evidence. 3

        There is nothing on these receipts linking them to petitioner, and
he supplied no contracts, bills, or invoices showing that he received cell
phone service from Cricket Wireless. He testified that he received no
invoices from the company but “knew” what he owed each month. He
testified that he would go to the vendor’s location, pay his bill in cash,
and receive a receipt.

       We found this story line somewhat implausible, and petitioner
supplied no evidence that he used, for business rather than personal
purposes, the cell phone for which these payments were allegedly made.
More importantly, the receipts do not appear authentic. The amounts
shown as “payments” do not align with the other numerical entries in
the same column, and they are in a different font from all other numbers
on the receipts. We conclude that these documents were photoshopped,
with fictitious numbers being inserted as payments. Because these doc-
uments are not authentic, they must be excluded from evidence. Peti-
tioner thus has no substantiation for his Schedule C2 cell phone ex-
penses.

       Most of the “other expenses” petitioner reported—totaling almost
$175,000 for the two years—were allegedly incurred to purchase con-
struction materials and tools. To substantiate these purchases peti-
tioner submitted numerous receipts from Home Depot, Lowe’s, and 84
Lumber. The Home Depot receipts show purchases from at least seven
different store locations, all in Maryland reasonably close to petitioner’s
residence.

      At trial respondent objected to the admissibility of these receipts
on authenticity grounds. He does not contend that these documents
were photoshopped or tampered with. Rather, he contends that they
were issued to persons other than petitioner. Having reserved ruling on
respondent’s objections at trial, we will now sustain them and exclude
these documents from evidence. 4

     We do not know how petitioner came into possession of these doc-
uments, but he has failed to convince us that he was the purchaser of

       3   These documents were petitioner’s Proposed Trial Exhibits 8-P and 17-P.
        4 These documents were petitioner’s Proposed Trial Exhibits 22-P, 23-P, 24-P,

27-P, 28-P, and 29-P.
                                    12

[*12] the items listed on them. Indeed, he admitted that he did not per-
sonally purchase all the items, acknowledging that some purchases were
made by “another person.” Pressed on who the “other person” was, he
mentioned his wife “and maybe somebody else.” For numerous reasons
we do not believe that the items listed on these receipts were purchased
for petitioner’s Schedule C2 home improvement business:

       ● Every single receipt is for a cash purchase, in amounts often
exceeding $5,000. Petitioner testified that he got cash from his bank,
either from a bank teller or by withdrawing from the ATM. But he did
not provide to the IRS bank statements or other bank records that would
substantiate these transactions. And he declined to introduce any bank
records into evidence at trial.

       ● Petitioner allegedly paid almost $175,000 for materials and
tools in 2015–2016, and it is hard to see how he had the financial ability
to do that. Ignoring all disallowed expense deductions, his total income
was about $144,000 in 2015 and $170,000 in 2016. He filed as head of
household with two dependents, had a good-sized mortgage, and paid
private school tuition for at least one child. It is implausible that some-
one in his financial position would pay $175,000 in cash for materials
and tools for use in a business that was utterly unprofitable.

       ● The receipts for materials often show large-volume purchases—
on the order of 200 pieces of lumber, 50 sheets of gypsum wallboard, and
100 gallons of paint. These volumes vastly exceeded what would have
been needed for the projects shown on petitioner’s mileage log.

       ● Apart from reflecting implausibly large volumes, the receipts
often show purchases of items that petitioner could not possibly have
used in any project that he allegedly undertook during the ensuing
months. For example, the receipts show purchases of bathtubs, shower
units, and refrigerators, but petitioner could not identify any project
that would have required installation of such items. He testified that
he made advance purchases of these materials and stored them in his
garage until he needed them. We did not find this testimony plausible.

       ● Virtually all of the receipts show purchases from stores near
petitioner’s home in Maryland. But many of his alleged jobsites were in
New York, Delaware, Pennsylvania, and New Jersey. He could not ex-
plain why he would have chosen to transport large quantities of huge
items to distant locations on interstate highways rather than purchase
them locally. And he could not explain how he fit these truckloads of
                                   13

[*13] materials into his Ford SUV. He backtracked by asserting that he
would often leave some materials at the store and make multiple trips.
Given the far-away locations of his alleged jobsites, we did not find this
testimony credible.

        ● Petitioner allegedly spent more than $21,000 on tools, but he
was unable to explain the function or intended operation of many ma-
chines and tools listed on the receipts. He said that he could not remem-
ber what these things were used for, having purchased them years ago.
If petitioner was genuinely engaged in the residential construction busi-
ness, this testimony was surprising.

       By the end of trial, we had serious doubts whether petitioner ever
did engage in the residential construction business. If he did, he would
have incurred some expenses for construction materials and tools, and
these are expenses theoretically subject to estimation under the Cohan
rule. But the Court must have some factual basis for such an estimate,
lest the allowance amount to “unguided largesse.” Williams, 245 F.2d
at 560. Petitioner failed to supply the necessary factual basis. If his
residential construction business existed, he provided no evidence that
would enable us to determine its actual scope and scale. And while he
may have purchased some of the items listed in the receipts, there is no
way for the Court to ascertain which those were. We will accordingly
sustain respondent’s disallowance of his Schedule C2 other expense de-
ductions.

      To implement the foregoing,

      Decision will be entered under Rule 155.