Court Opinion

ID: 9409307
Source: CourtListenerOpinion
Date Created: 2023-07-17 19:02:56.668458+00
Date Added: 2024-06-11T17:20:49.842907
License: Public Domain

United States Tax Court

                               T.C. Memo. 2023-87

            CASSANDRA TUCKER AND EDWARD BRODIE,
                         Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     —————

Docket No. 7896-19.                                             Filed July 17, 2023.

                                     —————

Cassandra Tucker and Edward Brodie, pro sese.

Paul Colleran and Carlton W. King, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

       ASHFORD, Judge: By statutory notice of deficiency dated
February 14, 2019, the Internal Revenue Service (IRS or respondent)
determined deficiencies in petitioners’ federal income tax, additions to
tax pursuant to section 6651(a)(1), 1 and accuracy-related penalties
pursuant to section 6662(a) for the 2015–17 taxable years (years at
issue) as follows:

        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 07/17/23
                                           2

[*2]                                             Additions to Tax/Penalties

        Year               Deficiency           § 6651(a)(1)            § 6662(a)

        2015                 $3,711                   —                   $742

        2016                 28,754                $2,930                 5,751

        2017                 17,177                   —                   3,435

       After certain concessions by the parties, 2 the issues remaining for
decision are whether petitioners 3 are entitled to (1) deductions for
certain expenses they reported on 2015–17 Schedules C and cost of goods
sold (COGS) they reported on 2015 and 2016 Schedules C; (2) a
deduction for cash charitable gifts they claimed on their 2017
Schedule A in an amount greater than respondent has allowed; and
(3) additional deductions for purported mortgage interest paid that they

        2  By way of a Stipulation of Settled Issues (and reiterated in the First
Stipulation of Facts), the parties made numerous concessions for the years at issue.
They are as follows. Petitioners now agree that they have additional income
attributable to state income tax refunds for 2016 and 2017, and income attributable to
qualified dividends and individual retirement account (IRA) distributions for 2016.
Additionally, petitioners now agree that they are subject to the section 72(t) 10%
additional tax with respect to the IRA distributions, but the parties agree that the
amount of the additional tax should be reduced by $1,000. Petitioners also now agree
that they are not entitled to deduct on their 2016 and 2017 Schedules A, Itemized
Deductions, home mortgage interest paid to the extent of $18,526 and $14,736,
respectively. Finally, petitioners now agree that they are liable for the section
6651(a)(1) addition to tax for 2016. Respondent now agrees that petitioners are
entitled to deductions they claimed on (1) their 2015–17 Schedules E, Supplemental
Income and Loss, for mortgage interest paid with respect to certain real property (as
discussed infra pp. 3–4, 7), (2) their 2016 Schedule A for cash charitable contributions
of $9,250, and (3) their 2017 Schedule A for cash charitable contributions of $13,050 to
a certain church (as discussed infra pp. 5–6). Respondent also now agrees that there
is no additional income reported on Schedule C, Profit or Loss From Business,
attributable to gross receipts or sales of Ms. Tucker’s sole proprietorship (as discussed
infra pp. 3−5) for 2017. Finally, respondent now agrees that petitioners are not liable
for section 6662(a) accuracy-related penalties for the years at issue.
       At trial (by way of Ms. Tucker’s testimony), because of a “mistake” petitioners
now agree that they are not entitled to $2,676 of the $3,200 deduction they claimed on
the 2017 Schedule C for Ms. Tucker’s sole proprietorship for advertising expenses.
       3 Mr. Brodie did not appear in Court at trial, but the Court’s decision will be

binding upon both spouses.
                                          3

[*3] did not claim on their 2015–17 Schedules E. With respect to the
first issue, we uphold in part the IRS’s determinations, and with respect
to the second and third issues, we uphold the IRS’s determinations.

                             FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The First
Stipulation of Facts, the Second Stipulation of Facts, and the attached
Exhibits are incorporated herein by this reference. Petitioners resided
in Massachusetts when they timely filed their Petition with the Court.

I.     Petitioners’ Educational and Professional Backgrounds

       Petitioners are a married couple and have been married since at
least 2012. During 2015 their marital residence was a 1,500-square-foot
apartment in West Newbury, Massachusetts (West Newbury residence),
that they rented; during 2016 and 2017 (and continuing up to at least
the time of trial) their marital residence was a 2,700-square-foot, four-
bedroom single-family home in Dorchester, Massachusetts (Dorchester
residence), that they owned.

      Ms. Tucker is a college graduate, having received her
undergraduate degree in computer science from Framingham State
College (now Framingham State University) in Framingham,
Massachusetts. Up until sometime in 2010 she worked as a software
engineer. In 2010, while still working as a software engineer, she
started a sole proprietorship named “Camarbre,” and since at least 2012
she has operated Camarbre full time. Camarbre is a “fashion lifestyle
brand,” but Ms. Tucker has struggled to make it successful as reflected
by the Schedules C for Camarbre that petitioners attached to their
2012–19 federal income tax returns.

      The record is silent as to Mr. Brodie’s educational background,
but professionally during at least the years at issue he was employed as
a “W−2 wage earner” at Enernoc, Inc., and owned and operated a sole
proprietorship named “Eddie’s Consultanting” that provided computer
consulting services. 4 Additionally, as discussed infra p. 7, since at least
2012 Mr. Brodie owned real property in Manchester, New Hampshire

        4 For at least the years at issue petitioners reported the income and expenses

from Mr. Brodie’s computer consulting activity on Schedules C, but the only Schedules
C that are at issue in this case are the 2015–17 Schedules C for Camarbre.
                                   4

[*4] (Manchester property) with his friend Martin Nassy that they
rented and received rental income.

II.   Ms. Tucker’s Fashion Activities—Camarbre

      Ms. Tucker has “been in the fashion industry” pretty much her
whole life. Her mother had her own fabric store; she learned to sew
when she was six years old, using her mother’s sewing machine; and she
did some modeling when she was younger.

      The name Camarbre is a combination of Ms. Tucker’s and her two
daughters’ names. Ms. Tucker intends Camarbre to sell both high- and
low-end clothing, shoes, handbags, accessories, and makeup for women
with the hopes of extending the brand to men as well; she likens
Camarbre to be a fashion house such as Ralph Lauren.

       Ms. Tucker has always operated Camarbre out of petitioners’
marital residence, dedicating certain space in the residence to store
Camarbre’s materials, such as fabric and packaging. To that end,
during at least the years at issue, Ms. Tucker purchased materials with
no particular orders in mind. For example, during 2016 she purchased
15,000 lip gloss containers and 12,000 paper boxes for future lip gloss
sales; indeed, Camarbre did not begin to sell lip gloss until the end of
2019 or early 2020. Additionally, she did not have on hand clothing or
other products that were ready for purchase; instead, she had samples
of Camarbre clothing and other products stored at petitioners’ marital
residence to show potential customers and would make items “custom”
as they were ordered.

       Ms. Tucker created a website (or had one created) for Camarbre
that was operable during the years at issue. In 2016 she promoted
Camarbre by appearing, together with models wearing Camarbre
samples, on a television show called Hidden Gemz on SMAC TV, a local
public access cable channel. Although there was no charge to appear on
the television show, she incurred $5,180 in expenses for models, a hair
stylist, and a makeup artist, paying that amount directly to the host of
the show (and from whom she received a receipt). As noted infra p. 9,
petitioners claimed a deduction for that amount as advertising on the
2016 Schedule C for Camarbre. Additionally, Ms. Tucker held two trunk
shows—one in 2015 and another in 2017, with each trunk show
generating the only income for Camarbre for those years ($1,542 for
2015 and $1,498 for 2017, amounts, as noted infra pp. 8−9, petitioners
reported as gross receipts or sales on the Schedules C for Camarbre for
                                  5

[*5] 2015 and 2017, respectively). She believed trunk shows, fashion
shows, and the like to be useful forms of advertising.

       During the years at issue Ms. Tucker maintained a business bank
account for Camarbre at Central One Federal Credit Union (Central
One). Often there were not enough funds in the Central One account
and so she paid for purported Camarbre expenses from other bank
accounts, including an account Mr. Brodie had at Eastern Bank and
joint accounts that she shared with him at Bank of America and TD
Bank.

       Ms. Tucker kept spreadsheets documenting Camarbre’s gross
receipts or sales and purported expenses. Those spreadsheets show that
Camarbre had gross receipts or sales and net losses for 2012–19 as
follows:

          Year      Gross Receipts or Sales       Net Loss
          2012             $2,368                 $39,424
          2013                -0-                  26,223
          2014               1,107                 28,576
          2015               1,542                 20,229
          2016                -0-                  21,486
          2017               1,498                 23,261
          2018                -0-                  23,098
          2019                 813                 37,044

Ms. Tucker blames the slow start of Camarbre on a lack of funding and
marketing, but her stated intention is to continue to develop Camarbre.
In 2020, just before the onset of the COVID-19 pandemic, Camarbre had
“started to take off” in her eyes; she had secured two brand
ambassadors, former NFL player Johnathan Cyprien and singer/actor
Montell Jordan, and she estimated that Camarbre’s gross receipts or
sales for that year were between $4,000 and $5,000.

III.   Petitioners’ 2017 Purported Charitable Endeavor

      Petitioners annually choose a community-focused charity to
support. In 2017 Ms. Tucker became aware that International Outreach
Ministries (IOM), a church in Stoughton, Massachusetts, was facing
financial hardship and was in danger of shutting down. As a result,
                                     6

[*6] petitioners decided to support IOM that year and chose to raise
money for IOM by putting on a fashion show. The fashion show took
place on November 26, 2017. Ms. Tucker paid all fashion show expenses,
from models, hairstylists, and makeup artists to food. She paid all of
these expenses in cash (to the church coordinator) or by credit card (to
third parties). IOM charged the public to attend the fashion show and
kept all those proceeds.

       Before the fashion show took place, Ms. Tucker received a letter
dated November 5, 2017, from IOM that was signed by Pastor Isaac
Adeyemi. The letter thanked her for her donation of $25,000. The letter
also stated that IOM was a section 501(c) religious organization duly
registered in Massachusetts and “licensed” by the IRS in 1995 and that
she could use the letter “for tax purposes including write offs.” The letter
contained no statement regarding any goods and services that may have
been received in exchange for the donation.

       Ms. Tucker also received two unsigned documents from IOM.
One document was dated November 26, 2017, and titled “IOM 2017
RECEIPT STATEMENT.” This document indicated a “Payment”
totaling $2,026 for “Models for Fashion Show,” “Make-up,” “Hair,” and
“Food.” This document contained no statement regarding any goods and
services that may have been received in exchange for the “Payment.”
The other document was dated December 31, 2017, and titled “IOM 2017
BENEFIT FASHION SHOW RECEIPT STATEMENT” (Fashion Show
Receipt Statement). This document indicated a “Payment” totaling
$14,050 for “Models for Fashion Show (cash),” “Food Fashion Show
(visa),” “Make-up Fashion Show (visa),” “Make-up Fashion Show (cash),”
“Hair Fashion Show (cash),” and “DMT Models Fashion Show (visa).”
This document also indicated that of the $14,050, $12,500 was
purportedly paid in cash with the remaining $1,550 purportedly paid by
Visa credit card. This document contained no statement regarding any
goods and services that may have been received in exchange for the
“Payment.”

      Separate and apart from the fashion show, petitioners made
recurring cash charitable gifts to IOM in 2017. Those gifts totaled
$11,500.

      As noted infra p. 10, petitioners deducted $25,000 for cash
charitable gifts to IOM on their 2017 Schedule A.
                                   7

[*7] IV.   Mr. Brodie’s Rental Real Estate Activities: The Manchester
           Property

       By warranty deed dated March 30, 2007, Messrs. Brodie and
Nassy purchased as tenants in common the Manchester property. In
connection with the purchase, they secured two separate mortgages on
the Manchester property from Wachovia Mortgage Corp.—one for an
original principal amount of $28,000 (smaller mortgage) and the other
for an original principal amount of $224,000 (larger mortgage).

       Since at least 2012 Messrs. Brodie and Nassy have rented the
Manchester property to individuals, some of whom are “Section 8
tenants,” and thus collected rental income from those individuals and/or
from the New Hampshire Housing Finance Authority (Housing
Authority) via New Hampshire’s “Section 8” program. For 2015, for
example, in the record is a Form 1099–MISC, Miscellaneous Income,
issued by the Housing Authority to Mr. Brodie at the West Newbury
residence reflecting $10,467 in Box 1 of the form (Rents). With respect
to the Manchester property, as noted infra pp. 8–10, petitioners reported
rents received of $39,267, $14,967, and $15,642, and certain expenses
paid, including mortgage interest paid of $3,202, $3,170, and $16,199,
on their Schedules E for 2015–17, respectively.

       With respect to the larger mortgage, in the record are 2015 and
2016 Forms 1098, Mortgage Interest Statement, that were issued in the
names of Messrs. Brodie and Nassy and sent to a post office box in
Milford, New Hampshire, the same post office box that is listed on the
first page of the warranty deed as the address of Messrs. Brodie and
Nassy and to which it was indicated that the filed copy should be
returned in care of Mr. Nassy. The 2015 Form 1098 reflects mortgage
interest paid of $16,615 and real estate taxes paid of $5,675. The 2016
Form 1098 reflects mortgage interest paid of $16,244 and real estate
taxes paid of $5,584. With respect to the smaller mortgage, in the record
is a 2017 Form 1098 that was issued in the names of Messrs. Brodie and
Nassy and sent to the Dorchester residence. It reflects mortgage
interest paid of $3,133 and no real estate taxes paid.

V.    Petitioners’ Tax Reporting for the Years at Issue

      Ms. Tucker prepared and filed petitioners’ federal income tax
returns (with the assistance of unnamed software) for the years at issue.
                                    8

[*8]   A.     2015

       On their 2015 federal income tax return petitioners reported total
income of $130,910, consisting of wages attributable to Mr. Brodie of
$154,054; ordinary dividends of $313; taxable refunds, credits, or offsets
of state and local income taxes of $1,017; a $22,455 business loss,
$20,229 of which was from Camarbre (with the remaining $2,226 from
Mr. Brodie’s computer consulting activities), which they detailed on a
Schedule C attached to the 2015 return; a capital gain of $421; and a
$2,440 loss from the rental of the Manchester property, which they
detailed on a Schedule E attached to the 2015 return.

       On the 2015 Schedule C for Camarbre petitioners reported gross
income of –$4,968 and total expenses of $15,261. The gross income
consisted of gross receipts or sales of $1,542 and COGS of $6,510. The
total expenses consisted of $4,066 for advertising; $976 for depreciation
and section 179 expenses; $1,068 for legal and professional services;
$126 for office expenses; $616 for rent or lease of vehicles, machinery,
and equipment; $215 for supplies; $2,787 for travel expenses; $281 for
meals and entertainment expenses; and $5,126 for utilities.

       On the 2015 Schedule E petitioners reported rents received of
$39,267 and total expenses of $5,339, which consisted of mortgage
interest paid of $3,202 and another item not relevant here.

      Ultimately, on their 2015 return petitioners claimed a refund of
$12,980.

       B.    2016

       On their 2016 federal income tax return petitioners reported total
income of $111,797, consisting of wages attributable to Mr. Brodie of
$148,488; taxable refunds, credits, or offsets of state and local income
taxes of $2,102; a $23,206 business loss, $21,486 of which was from
Camarbre (with the remaining $1,720 from Mr. Brodie’s computer
consulting activities), which they detailed on a Schedule C attached to
the 2016 return; a capital loss of $3,000; and a $12,587 loss from the
rental of the Manchester property, which they detailed on a Schedule E
attached to the 2016 return. Petitioners also attached to their 2016
return a Schedule A, claiming $44,466 of itemized deductions.

       On the 2016 Schedule C for Camarbre petitioners reported gross
income of −$162 and total expenses (before expenses for business use of
their home) of $20,385. The gross income consisted of COGS of $162.
                                    9

[*9] The total expenses (before expenses for business use of their home)
consisted of $5,180 for advertising; $260 for commissions and fees; $734
for depreciation and section 179 expenses; $128 for office expenses;
$8,460 for supplies; $260 for taxes and licenses; $1,267 for travel
expenses; $411 for meals and entertainment expenses; and $3,685 for
utilities. Petitioners also reported on this schedule expenses for
business use of their home of $939, attaching Form 8829, Expenses for
Business Use of Your Home, to their 2016 return. In Part I of this form
petitioners reported that 264 square feet of the 2,700-square-foot
Dorchester residence (i.e., 9.78%) was used for Camarbre, and in Part II
of this form they reported as indirect expenses, among other items not
relevant here, utilities of $3,200.

      On the 2016 Schedule E petitioners reported rents received of
$14,967 and total expenses of $27,554, which consisted of, among other
items not relevant here, mortgage interest paid of $3,170.

       On the 2016 Schedule A petitioners reported taxes paid totaling
$7,978; home mortgage interest paid of $26,171; and gifts to charity
totaling $10,317, consisting of cash charitable gifts of $9,250 and
noncash charitable gifts of $1,067.

      Ultimately, on their 2016 return petitioners claimed a refund of
$17,036.

      C.     2017

       On their 2017 federal income tax return petitioners reported total
income of $129,685, consisting of wages attributable to Mr. Brodie of
$160,246; taxable interest of $14; ordinary dividends of $51, taxable
refunds, credits, or offsets of state and local taxes of $2,139; a $27,863
business loss, $23,261 of which was from Camarbre (with the remaining
$4,602 attributable to Mr. Brodie’s computer consulting activities),
which they detailed on a Schedule C attached to the 2017 return; a
capital loss of $3,000; taxable IRA distributions of $4,870; and a $6,772
loss from the rental of the Manchester property, which they detailed on
a Schedule E attached to the 2017 return. Petitioners also attached to
their 2017 return a Schedule A, claiming $68,388 of itemized deductions.

       On the 2017 Schedule C for Camarbre petitioners reported gross
income of –$6,588 and total expenses (before expenses for business use
of their home) of $12,077. The gross income consisted of gross receipts
or sales of $1,498 and COGS of $8,086. The total expenses (before
expenses for business use of their home) consisted of $3,200 for
                                  10

[*10] advertising; $562 for depreciation and section 179 expenses; $500
for legal and professional fees; $486 for office expenses; $1,578 for
repairs and maintenance; $260 for supplies; $379 for meals and
entertainment expenses; and $5,112 for utilities. Petitioners also
reported on this schedule expenses for business use of their home of
$4,596, attaching a Form 8829 to their 2017 return. In Part I of this
form petitioners reported that 567 square feet of the 2,700-square-foot
Dorchester residence (i.e., 21%) was used for Camarbre.

      On the 2017 Schedule E petitioners reported rents received of
$15,642 and total expenses of $33,985, which consisted of, among other
items not relevant here, mortgage interest paid of $16,199.

      On the 2017 Schedule A petitioners reported taxes paid of $7,736;
home mortgage interest paid of $35,652; and gifts to charity totaling
$25,000, consisting of purported cash charitable gifts to IOM.

      Ultimately, on their 2017 return petitioners claimed a refund of
$19,380.

VI.   Tax Court Proceedings

      At trial (by way of the Second Stipulation of Facts and Ms.
Tucker’s testimony) petitioners took the position that they are entitled
to additional Schedule E deductions for mortgage interest paid with
respect to the Manchester property that they did not claim on their
2015–17 Schedules E.

                              OPINION

I.    Burden of Proof

       In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears the
burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Tax deductions are a matter of legislative grace, and
the taxpayer bears the burden of proving entitlement to any deduction
claimed. Segel v. Commissioner, 89 T.C. 816, 842 (1987). This burden
requires the taxpayer to demonstrate that the deductions claimed are
allowable pursuant to some statutory provision and to substantiate the
expenses giving rise to the deductions claimed by maintaining and
producing adequate records that enable the Commissioner to determine
                                          11

[*11] the taxpayer’s correct liability. 5 § 6001; Higbee v. Commissioner,
116 T.C. 438, 440 (2001); Hradesky v. Commissioner, 65 T.C. 87, 89–90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Treas. Reg.
§ 1.6001-1(a).

II.     Schedule C Issues

        A.     Expenses

       Section 162 allows a taxpayer to deduct all ordinary and
necessary expenses paid or incurred during the taxable year in carrying
on a trade or business. § 162(a); Treas. Reg. § 1.162-1(a). A business
expense is “ordinary” if it is “normal, usual, or customary” in the
taxpayer’s trade or business or arises from a transaction “of common or
frequent occurrence in the type of business involved.” Deputy v. du Pont,
308 U.S. 488, 495 (1940). An expense is “necessary” if it is “appropriate
and helpful” to the development and operation of the taxpayer’s
business, but it need not be absolutely essential. Commissioner v.
Tellier, 383 U.S. 687, 689 (1966) (quoting Welch v. Helvering, 290 U.S.
at 113). A taxpayer may not deduct a personal, living, or family expense
unless the Internal Revenue Code expressly provides otherwise.
§ 262(a). The determination of whether an expense satisfies the
requirements of section 162 is a question of fact. Cloud v. Commissioner,
97 T.C. 613, 618 (1991) (citing Commissioner v. Heininger, 320 U.S. 467,
473–75 (1943)).

      As we have previously indicated, the burden of substantiating
expenses rests with the taxpayer. To this end, under the Cohan rule, if
the taxpayer establishes that an expense is deductible but is unable to
substantiate the precise amount, the Court may estimate the amount of
the deductible expense, bearing heavily against the taxpayer whose
inexactitude is of his or her own making. See Cohan v. Commissioner,
39 F.2d 540, 543–44 (2d Cir. 1930); see also Vanicek v. Commissioner, 85

        5 If the taxpayer produces credible evidence with respect to any factual issue

relevant to ascertaining his or her federal income tax liability and meets certain other
requirements, the burden of proof shifts from the taxpayer to the Commissioner as to
that factual issue. § 7491(a)(1) and (2). On brief petitioners allege that the burden of
proof should shift to respondent pursuant to section 7491(a) because of “the documents
supplied.” We do not need to decide whether petitioners have met all of the
requirements under section 7491 to shift the burden of proof to respondent; the
outcome of this case is based on a preponderance of the evidence and thus is unaffected
by section 7491. In any event, on the basis of the record before us, we have doubts as
to whether petitioners have established that all of the requirements for shifting the
burden of proof under that section have been met.
                                           12

[*12] T.C. 731, 742–43 (1985). In order for the Court to estimate the
amount of a deductible expense, the taxpayer must establish some basis
upon which an estimate may be made. Norgaard v. Commissioner, 939
F.2d 874, 879 (9th Cir. 1991), aff’g in part, rev’g in part T.C. Memo. 1989-
390; Vanicek, 85 T.C. at 742–43. Otherwise an allowance would amount
to “unguided largesse.” 6 Norgaard v. Commissioner, 939 F.2d at 879
(quoting Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957)).

       Petitioners continue to maintain that they should be allowed their
claimed Schedule C deductions for Camarbre in the following categories:
(1) supplies for 2016, (2) advertising for 2016 and 2017, and (3) utilities
for the years at issue. Below we address each category in turn.

                 1.      Supplies

       On the 2016 Schedule C for Camarbre petitioners deducted
$8,460 for supplies. In support of the underlying expense petitioners
rely on a spreadsheet Ms. Tucker kept showing items purchased totaling
$8,460 (2016 supplies spreadsheet), $640 for eight different purchases
of fabric at various retail stores and $7,820 for a single purchase of lip
gloss cases and packaging. At trial Ms. Tucker proffered and the Court
admitted into evidence copies of a packaging label from a Chinese
cosmetics packaging company and an invoice from that company dated
July 1, 2016, for $7,800 for the purchase of 15,000 empty plastic cases
and 12,000 paper boxes designed to hold lip gloss. Although Ms. Tucker
was unable to provide bank records showing that she paid for these cases
and boxes and she could not remember how she paid for them, she did
show the Court while testifying a few of the cases and boxes she had
purchased. 7 The bank records from Ms. Tucker’s Central One account
and the Bank of America account she shared with Mr. Brodie
substantiate five of the eight purchases of fabric and other related items
shown on the 2016 supplies spreadsheet—on January 28, 2016, of $241
and $152; on November 15, 2017, of $24; on November 21, 2017, of $38;
and on December 31, 2017, of $160. 8

       6  The Cohan rule is superseded—that is, estimates are not permitted—for
certain expenses specified in section 274, and instead those types of expenses are
subject to strict substantiation rules. In this case, none of the expenses specified in
section 274 are at issue and thus they are not subject to strict substantiation rules.
       7   The trial was conducted virtually.
       8 Ms. Tucker’s 2016 supplies spreadsheet shows the two November 2017

purchases and the one December 2017 purchase as having been made in 2016.
                                           13

[*13] Section 263A requires that both direct and indirect costs of
property produced by the taxpayer should be capitalized. 9 § 263A(a) and
(b)(1). The Treasury regulations accompanying section 263A state that:

        If property is held for future production, taxpayers must
        capitalize direct and indirect costs allocable to such
        property (e.g., purchasing, storage, handling, and other
        costs), even though production has not begun. If property
        is not held for production, indirect costs incurred prior to
        the beginning of the production period must be allocated to
        the property and capitalized if, at the time the costs are
        incurred, it is reasonably likely that production will occur
        at some future date. Thus, for example, a manufacturer
        must capitalize the costs of storing and handling raw
        materials before the raw materials are committed to
        production.

Treas. Reg. § 1.263A-2(a)(3)(ii).

       On the basis of the record before us, for 2016 petitioners
substantiated supplies expenses of $241 and $152. Additionally for
2016, we conclude, pursuant to the Cohan rule, that they substantiated
supplies expenses of $7,800. However, Ms. Tucker testified that at least
during the years at issue, she purchased materials with no particular
orders in mind, storing them at petitioners’ marital residence; indeed,
Camarbre did not begin selling lip gloss until the end of 2019 or early
2020, and she made Camarbre clothing only to order, i.e., nothing was
ready for purchase. Given that Camarbre had no reported gross receipts
or sales for 2016 and it is apparent from Ms. Tucker’s testimony that the
substantiated supplies were purchased and stored for future use,
petitioners cannot deduct their costs as current expenses but must
capitalize them pursuant to section 263A and the accompanying
Treasury regulations.

      Accordingly, petitioners are not entitled to the deduction claimed
on the 2016 Schedule C for Camarbre for supplies expenses in any
amount, and we sustain the IRS’s determination in this regard.

         9 There is an exception to the requirement to capitalize costs for small business

taxpayers, § 263A(i), but this exception is not applicable for the years at issue in this
case as the exception is applicable for taxable years beginning after December 31, 2017,
Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, § 13102(e), 131 Stat. 2054, 2104.
                                   14

[*14]        2.    Advertising

        On the 2016 Schedule C for Camarbre petitioners claimed a
deduction of $5,180 for advertising expenses. Ms. Tucker credibly
testified that this amount was solely for expenses she incurred to
promote Camarbre when she appeared, together with hired models
wearing Camarbre samples, on the Hidden Gemz television show on
SMAC TV. Additionally, documentary evidence, i.e., a receipt that Ms.
Tucker received from the host of Hidden Gemz, shows that Ms. Tucker
indeed paid this amount.

       Nowadays, advertising through media comes in many different
forms, from traditional forms, such as broadcast (i.e., television and
radio) and print (i.e., newspapers, magazines, signs, and billboards), to
new forms, such as websites, apps, emails, podcasts, blogs, and social
networks. We view Ms. Tucker’s appearance promoting Camarbre on
the Hidden Gemz television show as the equivalent of an extended, live
television commercial, more along the lines of a traditional form of
advertising through media. Furthermore, it is apparent that Ms.
Tucker’s primary motive or purpose in appearing on the show was to
increase Camarbre’s visibility and in turn generate sales of Camarbre
products. Thus, on the basis of the record before us, we conclude that
the expenses Ms. Tucker incurred by appearing on the show had a
reasonably proximate relationship to Camarbre and Ms. Tucker’s
primary motive or purpose for incurring the expenses, see Whalley v.
Commissioner, T.C. Memo. 1996-533, slip op. at 16–17 (citing Henry v.
Commissioner, 36 T.C. 879, 884 (1961)); thus, petitioners are entitled to
deduct advertising expenses on the 2016 Schedule C for Camarbre.

       On the 2017 Schedule C for Camarbre petitioners deducted
$3,200 for advertising expenses. Referencing certain documentary
evidence, i.e., a spreadsheet she kept for Camarbre’s purported 2017
advertising expenses and debit card entries on bank records from Mr.
Brodie’s Eastern Bank account, at trial Ms. Tucker testified that
petitioners were mistaken in claiming a deduction for $2,676 of the
$3,200 amount and that the remaining $524 was for maintaining the
Camarbre website and “internet service[s].”

      With respect to the remaining disputed amount, the documentary
evidence is sufficient to substantiate deductible advertising expenses of
$316—the total cost to Ms. Tucker in 2017 to maintain the Camarbre
                                         15

[*15] website through Wix.com and Amazon Web Service. 10 Although
the documentary evidence also substantiates total payments of $208
(the remainder of the $524), these payments are for internet, cable, and
telephone services provided by Comcast and RCN to the Dorchester
residence, which are inherently personal expenses. See § 262(a).
Petitioners have neither shown what portion of those expenses should
properly be allocated to Camarbre as deductible advertising expenses
nor provided a reasonable basis for the Court to estimate the amount
deductible under the Cohan rule. Thus, petitioners are entitled to a
2017 Schedule C deduction with respect to Camarbre of only $316 for
advertising.

       Accordingly, we do not sustain the IRS’s determination with
respect to the deduction claimed on the 2016 Schedule C for Camarbre
for advertising, and we sustain in part the IRS’s determination with
respect to the deduction claimed on the 2017 Schedule C for Camarbre
for advertising.

               3.      Utilities

        On the 2015–17 Schedules C petitioners claimed deductions for
utilities of $5,126, $3,685, and $5,112, respectively, which they assert
are for expenses such as water, propane, electricity, and internet and
cellular phone service for their personal residence (i.e., the West
Newbury residence in 2015 and the Dorchester residence in 2016 and
2017). Referencing certain documentary evidence, i.e., spreadsheets she
kept for Camarbre’s purported utilities for the years at issue and bank
records from Mr. Brodie’s Eastern Bank account and their shared Bank
of America and TD Bank accounts, at trial Ms. Tucker testified that she
arrived at these respective amounts by taking the total amount paid in
each year ($10,717, $8,134, and $9,471, respectively) and multiplying
the amount by the portion or percentage of petitioners’ residence that
she used for Camarbre, which she estimated to be approximately one-
third each year.

       Section 280A prohibits business expense deductions related to the
use of a dwelling unit which is used by the taxpayer during the taxable
year as his or her residence, unless an exception applies. As relevant

         10 On brief, it appears that respondent may concede in any event that

petitioners are entitled a Schedule C deduction of this amount for 2017, stating that
“[o]f the remainder, respondent agrees that Tucker paid $315.55 toward upkeep of the
camarbre.com website, which would seem to respondent to be related to the fashion
activity.”
                                    16

[*16] here, two exceptions are for areas of the residence used exclusively
as the taxpayer’s principal place of business or for business storage (but
only if the dwelling unit is the sole fixed location of such trade or
business). See § 280A(c)(1)(A), (2). These exceptions, however, are not
without limitation. To that end, as relevant here, section 280A(c)(5)
limits a taxpayer’s deductions for the business use of his or her residence
to the amount that the gross income generated from the business
activity conducted in the residence exceeds the amount of deductions
attributable to such activity that are allowable regardless of whether
the residence was used for business (such as mortgage interest and real
estate taxes) plus deductions attributable to such activity that are not
allocable to the business use of the residence itself. See also Tobin v.
Commissioner, T.C. Memo. 1999-328, slip op. at 19. In other words, no
deduction for use of a residence may be claimed if the deduction would
give rise to, or increase, a net loss from the business to which the
deduction relates. Visin v. Commissioner, T.C. Memo. 2003-246, slip op.
at 9, aff’d, 122 F. App’x 363 (9th Cir. 2005).

       On the basis of the record before us, it is apparent that
petitioners’ claimed 2015–17 Schedule C deductions for utilities in
connection with the use of their residence for Camarbre are subject to
the section 280A(c)(5) limitation. Applying that limitation with respect
to 2015, we conclude that petitioners are not entitled to the deduction
claimed. For 2015 Camarbre’s reported gross receipts or sales were
$1,542; petitioners did not have any “non-Camarbre” residential
deductions for the West Newbury residence, such as mortgage interest
or real estate taxes, as they rented this residence; and they claimed
Schedule C deductions for Camarbre unrelated to the residence that
exceed Camarbre’s reported gross receipts or sales. For 2016 Camarbre
had no reported gross receipts or sales. For 2017 Camarbre’s reported
gross receipts or sales were $1,498; the parties now agree that
petitioners are entitled to a Schedule A deduction for home mortgage
interest paid with respect to the Dorchester residence of $20,916; any
allocable 2017 home mortgage interest plus petitioners’ claimed
Schedule C deductions for Camarbre unrelated to this residence exceed
Camarbre’s reported gross receipts or sales.

       Even if the section 280A(c)(5) limitation was not applicable here,
petitioners would not be entitled to deduct utilities expenses on the
2015–17 Schedules C for Camarbre because of their failure to properly
substantiate the expense amounts (and on the basis of the record before
us we would be unable to make estimates of their deductibility under
the Cohan rule). At trial Ms. Tucker’s testimony with respect to these
                                    17

[*17] expenses and the use of petitioners’ marital residence during the
years at issue for Camarbre was at best imprecise and at worst
contradictory. For example, she testified that she used about one-third
of petitioners’ marital residence for Camarbre; but when the Court
pointed out that using that measure for 2015 resulted in an improbably
high amount of utilities expenses allocable to Camarbre given the size
of the West Newbury residence, she could not explain why the amount
was so high. A comparison of the amounts shown on Ms. Tucker’s
spreadsheets for total utilities paid for petitioners’ marital residence for
the years at issue to the amounts they claimed for utilities on the 2015–
17 Schedules C for Camarbre reveals an actual claimed percentage use
of the residence for Camarbre of 47.82% for 2015, 45.30% for 2016, and
53.97% for 2017, but she did not provide an explanation at trial
regarding these discrepancies. Neither did she explain at trial why on
the 2016 Form 8829 for Camarbre, petitioners reported using 264
square feet of the 2,700-square-foot Dorchester residence (i.e., 9.78%) for
Camarbre and that they incurred $3,200 of utilities expenses, in
addition to the claimed Schedule C deduction for utilities.

        Accordingly, we sustain the IRS’s determinations with respect to
the deductions claimed on the 2015–17 Schedules C for Camarbre for
utilities.

      B.     COGS

       On the 2015 and 2017 Schedules C for Camarbre petitioners
reported COGS of $6,510 and $8,086, respectively. In support of these
costs petitioners rely on spreadsheets Ms. Tucker kept showing items
purchased totaling $6,510 (2015 COGS spreadsheet) and $9,003 (2017
COGS spreadsheet). The 2015 COGS spreadsheet shows multiple
purchases of fabric totaling $3,744; packaging materials, including
“bags, tissue, ribbon and boxes,” totaling $2,703; and a single purchase
of “tags” for $64. The 2017 COGS spreadsheet shows multiple purchases
of “lifestyle flooring” totaling $6,676 and “lifestyle closet” totaling
$2,327. Other documentary evidence, i.e., receipts and debit card
entries from Ms. Tucker’s Central One bank account, Mr. Brodie’s Bank
of America account, and their shared TD Bank account, substantiate
purchases made totaling $4,430 and $4,804 for 2015 and 2017,
respectively.

      COGS is not a deduction within the meaning of section 162(a) but
is subtracted from gross receipts to compute gross business income.
Richmond Patients Grp. v. Commissioner, T.C. Memo. 2020-52, at *14
                                   18

[*18] (first citing Max Sobel Wholesale Liquors v. Commissioner, 69 T.C.
477 (1977), aff’d, 630 F.2d 670 (9th Cir. 1980); and then citing Treas.
Reg. § 1.162-1(a)); see also BRC Operating Co. v. Commissioner, T.C.
Memo. 2021-59, at *8; Singh v. Commissioner, T.C. Memo. 2018-132,
at *7, aff’d, 812 F. App’x 579 (9th Cir. 2000). COGS is the cost of
acquiring inventory through either production or purchase. Richmond
Patients Grp., T.C. Memo. 2020-52, at *14. COGS cannot be claimed
unless the taxpayer has gross receipts or sales of goods in the taxable
year for which COGS is claimed. BRC Operating Co., T.C. Memo. 2021-
59, at *13 (citing Weaver v. Commissioner, T.C. Memo. 2004-108).
Furthermore, any amount claimed as COGS still has to be
substantiated. Id. at *10.

       COGS is generally determined under section 471 and its
accompanying Treasury regulations. Richmond Patients Grp., T.C.
Memo. 2020-52, at *14 (citing Treas. Reg. §§ 1.471-3, 1.471-11). Section
471 and its accompanying Treasury Regulations direct taxpayers to
section 263A for additional rules. Richmond Patients Grp., T.C. Memo.
2020-52, at *15. To that end, as indicated supra p. 13, under section
263A(a) and (b)(1) and accompanying Treasury Regulation § 1.263A-
2(a)(3)(ii), if property is held for future production, taxpayers must
capitalize the direct and indirect costs allocable to such property.

       With respect to 2015, on the basis of the record before us,
petitioners substantiated COGS for purchased materials of $4,430 (but
no more, and we are unable to make an estimate of additional amounts
under the Cohan rule). Camarbre reported gross receipts or sales of
$1,542 for 2015, but Ms. Tucker testified that she purchased materials
with no particular orders in mind and stored them at petitioners’ marital
residence; therefore, petitioners are entitled to COGS of $1,542 (the
amount equal to Camarbre’s 2015 reported gross receipts or sales). The
remaining substantiated amount of $2,887 must be capitalized pursuant
to section 263A and the accompanying Treasury regulations, and the
remaining unsubstantiated amount of $2,081 is not allowable as COGS
and is neither capitalizable nor currently deductible.

       With respect to 2017, on the basis of the record before us,
petitioners substantiated purchases of “lifestyle flooring” and “lifestyle
closet” totaling $4,804. Regarding these purchases, Ms. Tucker testified
that they were for interior design work she did on behalf of two clients,
an unnamed individual and a business called Salon Monet. Ms. Tucker
further testified that she did this work as part of Camarbre’s “lifestyle
brand,” but when also asked to describe Camarbre she described it
                                    19

[*19] (consistently with how it is described on the Schedules C for
Camarbre) as a business engaged in fashion (and not one that offers or
provides interior design services). Given this self-serving testimony
(which we are not bound to accept, see Shea v. Commissioner, 112 T.C.
183, 189 (1999) (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)),
and which was conflicting in any event), we conclude that petitioners
failed to demonstrate that the substantiated purchases were of types
that are ordinary and necessary business expenses of Camarbre. Thus,
despite Camarbre having reported gross receipts or sales of $1,498 for
2017, petitioners are neither entitled to COGS in any amount in
computing Camarbre’s gross income, nor entitled to capitalize or
currently deduct those 2017 purchases.

      Accordingly, we sustain in part the IRS’s determination with
respect to COGS for 2015, and we sustain in full the IRS’s determination
with respect to COGS for 2017.

III.   Schedule A Issue

       Taxpayers are allowed as a deduction any charitable contribution
made during the taxable year. § 170(a)(1). A charitable contribution is
defined as “a contribution or gift to or for the use of” a charitable
organization. § 170(c). There are substantiation and recordkeeping
requirements for certain charitable contributions. See § 170(f)(8). As
relevant here, no charitable contribution deduction is allowed for any
contribution of $250 or more unless the taxpayer substantiates the
contribution with a “contemporaneous written acknowledgment” (CWA)
from the charitable organization. § 170(f)(8)(A). For cash contributions
the CWA must include: (1) the amount of cash contributed; (2) whether
the charitable organization provided any goods or services in
consideration for the contribution; and (3) a description and good-faith
estimate of the value of any goods or services provided by the charitable
organization, or if such goods and services consist solely of intangible
religious benefits, a statement to that effect. § 170(f)(8)(B); Treas. Reg.
§ 1.170A-13(f)(2); see also Oatman v. Commissioner, T.C. Memo. 2017-
17, at *13−14.       Additionally, expenses incurred incident to the
performance of services for a charitable organization may be deductible,
but they are subject to similar substantiation requirements. Treas. Reg.
§ 1.170A-13(f)(10). Furthermore, no charitable contribution is generally
allowed for any contribution of a cash, check, or other monetary gift
unless the taxpayer maintains as a record of such contribution (1) a bank
record (i.e., canceled check), (2) a written communication (i.e., receipt or
letter) from the charitable organization showing the organization’s
                                         20

[*20] name and the date and the amount of the contribution, or
(3) “other reliable written records” showing the taxpayer’s name, and
the date and amount of the contribution. § 170(f)(17); Treas. Reg.
§ 1.170A-13(a).

      On their 2017 Schedule A petitioners claimed a deduction for cash
charitable gifts to IOM totaling $25,000. In the February 14, 2019,
notice of deficiency issued to them, the IRS determined that this
deduction should be disallowed. Later, before trial, respondent conceded
that petitioners substantiated (and thus are entitled to a Schedule A
charitable contribution deduction for) cash charitable gifts to IOM of
$13,050. Petitioners contend that they are entitled to an additional
Schedule A charitable contribution deduction for cash charitable gifts to
IOM of $14,050, the total amount Ms. Tucker purportedly spent for
putting on the fashion show for IOM in 2017. 11

       Petitioners have failed to properly substantiate the $14,050
amount. Ms. Tucker merely provided self-serving testimony in this
regard (that was also conflicting in any event). Although she received
three different written communications from IOM with respect to the
fashion show (primarily relying on the Fashion Show Receipt
Statement), all three communications are woefully inadequate for
purposes of satisfying the section 170(f)(8)(B) CWA requirements, which
are applicable here because each separate amount listed in the Fashion
Show Receipt Statement is greater than $250.                  To wit, each
communication fails to indicate whether IOM provided any goods or
services in consideration for Ms. Tucker’s purported contribution. See
§ 170(f)(8)(B)(ii); Treas. Reg. § 1.170A-13(f)(2)(ii). Although a CWA need
not take any particular form, it must meet the requirements of section
170(f)(8)(B). French v. Commissioner, T.C. Memo. 2016-53, at *7–8. The
doctrine of substantial compliance does not apply to excuse compliance
with these strict substantiation requirements. Id. at *8; see also Addis
v. Commissioner, 118 T.C. 528, 536 (2002), aff’d, 374 F.3d 881 (9th Cir.
2004); Big River Dev., L.P. v. Commissioner, T.C. Memo. 2017-166,
at *8–9.

      Accordingly, petitioners are not entitled to a 2017 Schedule A
deduction for cash charitable gifts to IOM in an amount greater than
respondent has allowed.

        11 If petitioners were to prevail on the fashion show issue, they would be

entitled to a 2017 Schedule A charitable contribution deduction of $27,100, an amount
exceeding the amount they originally claimed on their 2017 Schedule A.
                                    21

[*21] IV.    Schedule E Issue

        During the years at issue Mr. Brodie owned the Manchester
property as tenants in common with Mr. Nassy, and they were jointly
liable for two mortgages on the property. On their 2015–17 Schedules E
petitioners claimed deductions for mortgage interest paid of $3,202,
$3,170, and $16,199, respectively, with respect to the Manchester
property. In the February 14, 2019, notice of deficiency issued to
petitioners, the IRS determined that these deductions should be
disallowed. Later, before trial, respondent conceded that petitioners
should be allowed these deductions. Then at trial, relying on a 2015
Form 1099–MISC and three Forms 1098—one for each year at issue—
petitioners took the position that they are entitled to additional 2015–
17 Schedule E deductions for mortgage interest paid of $16,615, $16,244,
and $3,133, respectively, with respect to the Manchester property. Ms.
Tucker testified that due to a miscommunication with Mr. Brodie, they
failed to report these amounts and reported mortgage interest paid with
respect to just one mortgage, instead of both mortgages, on the
Manchester property. Ms. Tucker further testified that they should be
entitled to deduct these additional amounts because Mr. Brodie, not Mr.
Nassy, had been handling the Manchester property on his own with no
involvement by Mr. Nassy during the years at issue, including Mr.
Brodie’s making all mortgage interest payments with respect to the
Manchester property.

       Section 163(a) allows a deduction for all interest paid or accrued
within the taxable year on indebtedness, and section 212(1) and (2)
allows a deduction for ordinary and necessary expenses for (1) the
production or collection of income or (2) for the management,
conservation, or maintenance of property held for the production of
income (albeit not as part of a trade or business). See Robinson v.
Commissioner, T.C. Memo. 2014-120, at *16–19 (discussing in pertinent
part section 212(1) and (2) in the context of Schedule E deductions), aff’d,
615 F. App’x 147 (4th Cir. 2015). Where a mortgaged property is jointly
owned and the co-owners are jointly liable on the mortgage, each owner
is entitled to a deduction for the mortgage interest that he or she
actually pays out of his own funds. Shilgevorkyan v. Commissioner, T.C.
Memo. 2023-12, at *6 (first citing Jolson v. Commissioner, 3 T.C. 1184,
1186 (1944); and then citing Castaneda-Benitez v. Commissioner, T.C.
Memo. 1981-157); see also Daya v. Commissioner, T.C. Memo. 2000-360,
slip op. at 40−41, 44−45.
                                  22

[*22] Again, we need not, and do not, accept Ms. Tucker’s self-serving
testimony when petitioners fail to present credible, corroborative,
documentary evidence. See Shea, 112 T.C. at 189. Indeed, the 2015
Form 1099–MISC and the 2015–17 Forms 1098 fail to show how much
mortgage interest Mr. Brodie actually paid with respect to the
Manchester property or what mortgage interest amounts, if any, were
paid by Mr. Nassy. Neither do the various bank records in the record
substantiate Mr. Brodie’s payments with respect to the Manchester
property.

      Accordingly, petitioners are not entitled to additional Schedule E
deductions for purported mortgage interest paid that they did not claim
on their 2015–17 Schedules E.

       We have considered all of the arguments made by the parties and,
to the extent they are not addressed herein, we find them to be moot,
irrelevant, or without merit.

      To reflect the foregoing,

      Decision will be entered under Rule 155.