John H. Chisolm & Dionne Chisolm v. Commissioner , 2014 T.C. Summary Opinion 45 ( 2014 )

T.C. Summary Opinion 2014-45UNITED STATES TAX COURT
JOHN H. CHISOLM AND DIONNE CHISOLM, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27607-12S. Filed May 7, 2014.
John H. Chisolm and Dionne Chisolm, pro sese.
William John Gregg, for respondent.
SUMMARY OPINION
DEAN, Special Trial Judge: This case was heard pursuant to the provisions
of section 7463 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.
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Unless otherwise indicated, subsequent section references are to the Internal
Revenue Code (Code) in effect for the years in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
In a notice of deficiency dated August 14, 2012, respondent determined
deficiencies in petitioners’ Federal income tax and accuracy-related penalties as
follows:
Penalty
Year Deficiency sec. 6662(a)
2008 $22,328.00 $4,465.60
2009 28,417.09 5,683.42
2010 24,989.00 4,997.80
Respondent concedes that petitioners are entitled to claimed unreimbursed
employee business expense deductions of $9,243 for 2008, $9,548 for 2009, and
$6,848 for 2010 before the reduction required by section 67(a). Respondent also
made concessions with respect to cash charitable contribution deductions and
noncash charitable contribution deductions for the years in issue, but the amounts
are not clear from the transcript and the parties will resolve this in the Rule 155
computations. Additionally, respondent concedes that petitioners are entitled to
certain deductions claimed on Schedules C, Profit or Loss From Business, of $741
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for 2008, $1,861 for 2009, and $816 for 2010 for “other” expenses. Petitioners
did not dispute the unreported income determined in the notice of deficiency for
the years in issue; therefore, these issues are deemed conceded by petitioners. See
Rule 34(b)(4). The adjustments for petitioners’ exemption amounts, self-
employment tax, self-employment tax deduction, and alternative minimum tax are
computational and will be resolved by the determinations of the Court on the other
issues. See secs. 151(d)(3), 1401, 1402, 164(f), 55-59.
The issues remaining for decision are whether petitioners: (1) are entitled to
deductions for charitable contributions in excess of those agreed to or allowed by
respondent; (2) are entitled to deductions claimed on Schedule C in excess of
those agreed to by respondent; and (3) are liable for the accuracy-related penalties
under section 6662(a) for the years in issue.
Background
No stipulation of facts was filed in this case. The exhibits received in
evidence at trial are incorporated herein by reference. Petitioners lived in
Maryland when they filed their petition.
John H. Chisolm and Dionne Chisolm are married individuals who were
employed full time in 2008, 2009, and 2010. Mr. Chisolm worked as a canine
officer for the Department of Homeland Security, and Mrs. Chisolm worked as a
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program analyst. Mrs. Chisolm also engaged in real estate activity and claimed
business expense deductions for this activity for the years in issue.
Petitioners claimed aggregate business expense deductions associated with
Mrs. Chisolm’s real estate activity on Schedules C of $39,669, $31,149, and
$31,046 for 2008, 2009, and 2010, respectively. The expenses reported on
Schedules C include those for advertising, car and truck, insurance, office, meals
and entertainment, and other expenses. Mrs. Chisolm did not report significant
profits during the years in issue with respect to the real estate activity.
Petitioners claimed deductions for cash charitable contributions on
Schedules A, Itemized Deductions, of $27,398, $30,024, and $16,030 for 2008,
2009, and 2010, respectively. Petitioners also claimed deductions for noncash
charitable contributions of $7,100, $10,000, and $4,500 for 2008, 2009, and 2010,
respectively. Forms 8283, Noncash Charitable Contributions, attached to the
returns for the years in issue show that petitioners purported to have made
donations of clothing, toys, shoes, housewares, furniture, electronics, a computer,
and a printer.
Respondent issued a notice of deficiency disallowing all of petitioners’
claimed Schedules C expense deductions and charitable contribution deductions
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for the years in issue and determined that petitioners are liable for the accuracy-
related penalties under section 6662(a).
Discussion
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayers have the burden of proving that those
determinations are erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). In some cases the burden of proof with respect to relevant factual
issues may shift to the Commissioner under section 7491(a). The Court finds that
petitioners have not argued or shown that they have met the requirements of
section 7491(a) and the burden of proof does not shift to respondent.
Charitable Contributions
Section 170(a)(1) provides the general rule that there shall be allowable as a
deduction any charitable contribution which is made within the taxable year and
verified under regulations prescribed by the Secretary. Section 1.170A-13(f),
Income Tax Regs., provides that separate contributions of less than $250 are not
subject to the “contemporaneous written acknowledgment” requirement of section
170(f)(8) regardless of whether the sum of the contributions to a donee
organization equals $250 or more. Rather, monetary charitable contributions of
less than $250 must be substantiated by a canceled check, a receipt from the donee
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organization, or other reliable written records showing the name of the donee, the
date of the contribution, and the amount of the contribution. Sec. 1.170A-
13(a)(1), Income Tax Regs.
Pursuant to section 170(f)(8), deductions for contributions of cash or
property of $250 or more must be substantiated by a contemporaneous written
acknowledgment from the donee organization that includes (1) the amount of cash
and a description (but not necessarily the value) of any property other than cash
contributed, (2) a statement whether the donee organization provided any goods or
services in consideration to the taxpayer in exchange for the donation, (3) a
description and good-faith estimate of the value of any goods or services provided
in consideration for the contribution, and (4) if any intangible religious benefits
were provided, a statement to that effect. Sec. 170(f)(8)(B)(i)-(iii); sec. 1.170A-
13(f)(2)(i)-(iv), Income Tax Regs.
To verify a charitable contribution of property other than money with a
claimed value of $250 or more, the taxpayer must substantiate the contribution
with a contemporaneous written acknowledgment from the donee as required in
the form and detail discussed above. Sec. 170(f)(8)(B)(i)-(iii); sec. 1.170A-
13(f)(2)(i)-(iv), Income Tax Regs. The regulations require that taxpayers who
make contributions of property with a claimed deduction of more than $500, but
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not more than $5,000, maintain receipts showing: (1) the name and address of the
donee; (2) the date and location of the contribution; and (3) the property’s
description in detail reasonably sufficient under the circumstances. Sec.
170(f)(11)(B); sec. 1.170A-13(b)(1), Income Tax Regs. If it is impractical to
obtain a receipt under the circumstances, the taxpayer must maintain reliable
written records with respect to each item of donated property. Sec. 1.170A-
13(b)(1), Income Tax Regs.
Additionally, where a taxpayer claims a deduction in excess of $500 for a
charitable contribution of property other than money, the taxpayer is also required
to attach Form 8283 to the taxpayer’s Form 1040, U.S. Individual Income Tax
Return, and maintain a written record that indicates how the property was acquired
and the taxpayer’s basis in the property. Sec. 1.170A-13(b)(3), Income Tax Regs.
Petitioners did not provide documents substantiating the claimed deductions
for cash charitable contributions for the years in issue or the noncash charitable
contributions reported on the attached Forms 8283. Without other reliable
evidence to substantiate those charitable contributions, petitioners are not entitled
to claim deductions for them. Accordingly, we sustain respondent’s
determinations, to the extent not conceded by respondent, disallowing the cash and
noncash charitable contribution deductions for the years in issue.
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Schedule C Deductions
Taxpayers are allowed a deduction for “ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business”. Sec.
162(a). Income tax deductions are a “matter of legislative grace”, and the taxpayer
bears the burden of proving entitlement to any deduction claimed. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer must
substantiate his deductions by keeping and producing adequate records that enable
the Commissioner to determine the taxpayer’s correct tax liability. Sec. 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, 831-832 (1965).
These records must be retained for as long as the contents may become material
and must be kept available for inspection. Sec. 1.6001-1(e), Income Tax Regs.
In some instances, the Court may approximate the amount of a deduction if
the taxpayer can establish a deductible expense but cannot substantiate the precise
amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek
v. Commissioner, 85 T.C. 731, 742-743 (1985). There must be sufficient evidence
in the record, however, to permit the Court to conclude that a deductible expense
was paid or incurred for at least the amount allowed. Williams v. United States,
245 F.2d 559, 560 (5th Cir. 1957).
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Certain expenses are subject to strict substantiation rules under section
274(d). Such expenses include those relating to travel expenses, meals and
entertainment expenditures, and expenses related to the use of listed property as
defined under section 280F(d)(4)(A). See Sanford v. Commissioner, 50 T.C. 823,
827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969). Listed property
includes passenger automobiles. Sec. 280F(d)(4)(A)(i).
To comply with the strict substantiation rules, the taxpayer must provide
adequate records or sufficient evidence corroborating the amount of the taxpayer’s
claimed expense, the time and place the expense was incurred, the business
purpose of the expense, and the business relationship of the taxpayer to any others
who benefited by the expense. Sec. 1.274-5T(b) and (c), Temporary Income Tax
Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6 1985). To substantiate deductions
using adequate records, the taxpayer must maintain an account book, a log, a
diary, or a similar record and documentary evidence to establish each element of
an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.
Reg. 46017 (Nov. 6, 1985). The Court may not use the Cohan rule to estimate
expenses subject to the strict substantiation requirements under section 274(d).
Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985).
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When a taxpayer shows that his inability to produce adequate records is due
to circumstances beyond his control, such as destruction by fire, flood, earthquake,
or other casualty, the taxpayer is allowed to substantiate deductions through other
credible evidence. Boyd v. Commissioner, 122 T.C. 305, 320 (2004); sec. 1.274-
5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985). A
taxpayer is required to reconstruct pertinent records to the fullest extent possible.
See Chong v. Commissioner, T.C. Memo. 2007-12. If no other documentation is
available, the Court may, but is not obliged to, accept credible testimony of a
taxpayer to substantiate a deduction. See Boyd v. Commissioner, 122 T.C. at 320
(citing Watson v. Commissioner, T.C. Memo. 1988-29); Freeman v.
Commissioner, T.C. Memo. 2009-213.
For the years in issue petitioners deducted Schedule C expenses related to
Mrs. Chisolm’s real estate activity. Petitioners asserted that they were unable to
provide any documents to substantiate their expenses because all relevant
documents needed to prepare their tax returns were provided to their accountant
and the accountant had since passed away. Petitioners asserted that they were
unable to retrieve their documents from the accountant’s family or the estate of the
accountant. Petitioners assert that they did not keep any hardcopies of the
documents because they had scanned them into their computer and that their
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computer subsequently “died”, thereby deleting all their personal and business
data that was stored in the computer.
The Court assumes the truth of petitioners’ assertions; nevertheless; they did
not provide corroborating records or credible testimony that would enable the
Court to allow any deductible expenses. Accordingly, respondent’s disallowance
of the Schedule C deductions for the years in issue, in excess of respondent’s
concessions, is sustained.
Accuracy-Related Penalties
Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty
on “any portion of an underpayment of tax required to be shown on a return” if the
underpayment is due to, among other reasons, negligence, disregard of rules or
regulations, or any substantial understatement of income tax. Respondent bears
the burden of production as to the penalty. See sec. 7491(c).
Negligence is defined as any failure to make a reasonable attempt to comply
with the provisions of the Code, and the term “disregard” includes any careless,
reckless, or intentional disregard. Sec. 6662(c). Negligence also includes any
failure by the taxpayer to keep adequate books and records or to substantiate items
properly. Sec. 1.6662-3(b)(1) and (2), Income Tax Regs.
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The accuracy-related penalty is not imposed with respect to any portion of
an underpayment if a taxpayer demonstrates that there was reasonable cause for
that portion of the underpayment and that he or she acted in good faith with
respect to that portion. See sec. 6664(c). Section 1.6664-4(b)(1), Income Tax
Regs., specifically provides: “Circumstances that may indicate reasonable cause
and good faith include an honest misunderstanding of fact or law that is
reasonable in light of * * * the experience, knowledge, and education of the
taxpayer.” The most important factor is the extent of the taxpayer’s effort to
assess his proper tax liability for the year. Id.On the basis of petitioners’ failure to keep adequate books and records or to
substantiate items properly, the Court concludes that respondent has produced
sufficient evidence of negligence to show that the accuracy-related penalty under
section 6662 is appropriate for the years in issue. Petitioners did not provide any
other evidence at trial to substantiate the deductions disallowed in the notice of
deficiency. In addition, petitioners did not show that there was reasonable cause
for, and that they acted in good faith with respect to, the claimed deductions
disallowed for the years in issue. Therefore, respondent’s determination of the
accuracy-related penalties under section 6662(a) for the years in issue is sustained.
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The Court has considered all of the parties’ arguments, and, to the extent not
addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.