Brent Katusha v. Commissioner , 2019 T.C. Summary Opinion 31 ( 2019 )

T.C. Summary Opinion 2019-31
UNITED STATES TAX COURT
BRENT KATUSHA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6879-17S. Filed October 10, 2019.
Brent Katusha, pro se.
Elizabeth F. Rodoni and Victoria Z. Gu, for respondent.
SUMMARY OPINION
PANUTHOS, 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.1 Pursuant to section 7463(b), the decision to be entered is not
1
Unless otherwise indicated, section references are to the Internal Revenue
(continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined a deficiency of $4,090 in petitioner’s Federal
income tax for tax year 2014 as a result of unreported income. In a joint
stipulation of settled issues filed with this Court, petitioner agreed that he did not
report $10,081 of nonemployee compensation. Having agreed to the adjustment
for omitted income, petitioner now asserts he is entitled to additional expense
deductions on Schedule C, Profit or Loss From Business. The sole issue for
decision is whether petitioner is entitled to deduct certain purported business
expenses in excess of those respondent allowed.
Background
Some of the facts have been stipulated and are so found. The stipulations of
fact and the attached exhibits are incorporated herein by this reference. Petitioner
resided in California when the petition was timely filed.
I. Petitioner’s Business Activity
Petitioner has worked as a professional automobile racing mechanic in
California since 1999, specializing in car fabrication and maintenance. During tax
1
(...continued)
Code in effect for the year in issue, Rule references are to the Tax Court Rules of
Practice and Procedure, and dollar amounts are rounded to the nearest dollar.
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year 2014 petitioner worked as a contract race mechanic for several professional
IndyCar racing teams.2 He also worked for an engineering firm where he built
robotic machines for use in vehicle manufacturing overseas.
In his work for the racing teams petitioner attended training days and “race
weekends” at various raceways in California and elsewhere in the western United
States. His racing business consisted of hauling race cars to and from the
raceways and maintaining the cars before, during, and after the races. Petitioner
estimates that he worked approximately 20 race weekends and an additional 30 to
50 practice days during 2014. Petitioner regularly had meals and coffee with
members of race teams, including mechanics and engineers. He often discussed
his business activity at these meals. He also attended or arranged various
entertainment events at which he networked with clients and colleagues.
II. Petitioner’s Tax Return and Respondent’s Determination
Petitioner timely filed a 2014 Form 1040, U.S. Individual Income Tax
Return. He hired a professional tax return preparer. On Schedule C petitioner
reported nonemployee compensation of $61,399 and expenses of $13,146 related
to his self-employment activity.
2
Petitioner explained that IndyCar racing is a discipline of car racing in the
United States.
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As indicated, petitioner conceded that he received and did not report
$10,081 of nonemployee compensation. Petitioner now contends that he is
entitled to deduct business expenses of $7,355 in excess of those that he
previously reported on the 2014 Schedule C. The additional expenses include
$7,171 for meals and entertainment, $69 for gifts, and $115 for office.
III. Petitioner’s Business Records
Petitioner hired a certified public accountant (C.P.A.) based in Santa Rosa,
California, to assemble the receipts and other documents needed to substantiate his
business-related expenses for tax year 2014. Many of the documents were lost
when the C.P.A.’s house was destroyed in a wildfire in October 2017. Because of
the damage to his business and home, the C.P.A. was unable to assist petitioner in
reconstructing and assembling documents needed to support the claimed expense
deductions before trial.
As a result of these events petitioner’s business expense records are limited.
The Court received into evidence 49 pages of monthly checking account
statements for 2014 from Wells Fargo Bank, N.A. The checking account
statements provide the name of the vendor, the date, and the amount of each
charge. Petitioner marked the checking account statements with handwritten
abbreviations noting various companies and individuals that he worked with in the
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racing industry, e.g., “SPT” for Small Precision Tool, “Send-It” for Send-It
Motorsports, and “Worldspeed” for World Speed Motorsports. Petitioner also
produced an email dated February 18, 2014, from World Speed Motorsports that
details the 2014 schedule for its racing team. Petitioner asserts that he either
attended test days or the race weekends related to 5 of the 10 racing events listed
on the World Speed Motorsports schedule. To support this assertion he offered
digital copies of race results and schedules related to those events into evidence.
Discussion
I. Burden of Proof
In general, the Commissioner’s determination set forth in a notice of
deficiency is presumed correct, and the taxpayer bears the burden of proving that
the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Pursuant to section 7491(a), the burden of proof as to factual matters
shifts to the Commissioner under certain circumstances. Petitioner has not
asserted or otherwise shown that section 7491(a) applies. See sec. 7491(a)(2)(A)
and (B). Therefore, petitioner bears the burden of proof.
II. Petitioner’s Schedule C Deductions
Deductions are a matter of legislative grace, and the taxpayer generally
bears the burden of proving he is entitled to any deduction claimed. Rule 142(a);
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INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction on a
Federal income tax return must demonstrate that the deduction is allowable
pursuant to some statutory provision and must further substantiate that the expense
to which the deduction relates has been paid or incurred. See 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); sec.
1.6001-1(a), Income Tax Regs.
A taxpayer may deduct ordinary and necessary expenses paid in connection
with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C.
305, 313 (2004). Generally, no deduction is allowed for personal, living, or family
expenses. See sec. 262(a). The taxpayer must show that any deducted expenses
were incurred primarily for business rather than personal reasons. See Rule
142(a); Walliser v. Commissioner, 72 T.C. 433, 437 (1979). A proximate
relationship between each deducted expense and the business is required. See
Walliser v. Commissioner, 72 T.C. 437.
The taxpayer is required to maintain records sufficient to substantiate
expenses underlying deductions claimed on his return. Sec. 6001; sec. 1.6001-
1(a), (e), Income Tax Regs.; see New Colonial Ice Co. v. Helvering, 292 U.S. at
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440. If the taxpayer is able to establish that he paid or incurred a deductible
expense but is unable to substantiate the precise amount, the Court generally may
approximate the deductible amount, but only if the taxpayer presents sufficient
evidence to establish a rational basis for making the estimate. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). The failure to keep and produce
appropriate records counts heavily against a taxpayer’s attempted proof. Rogers v.
Commissioner, T.C. Memo. 2014-141, at *17.
Section 274(d) imposes stricter substantiation requirements for certain kinds
of expenses otherwise deductible under section 162(a). No deduction is allowed
for travel expenses, gifts, meals, and entertainment, or for listed property as
defined by section 280F(d)(4), unless the taxpayer substantiates by adequate
records or corroborates by sufficient evidence the taxpayer’s own statements as to:
(1) the amount of the expense, (2) the time and place the expense was incurred,
(3) the business purpose of the expense, and (4) the recipient’s business
relationship for each expenditure. Sec. 274(d); sec. 1.274-5T(a), (b), and (c),
Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016 (Nov. 6, 1985). Section
274(d) substantiation requirements supersede the Cohan test. See Sanford v.
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Commissioner, 50 T.C. 823, 827-828 (1968), aff’d, 412 F.2d 201 (2d Cir. 1969);
sec. 1.274-5T(a), Temporary Income Tax Regs., supra.
Substantiation by adequate records requires the taxpayer to maintain an
account book, a diary, a log, a statement of expense, trip sheets, or a similar record
prepared contemporaneously with the expenditure and documentary evidence
(e.g., receipts or paid bills) of certain expenditures. Sec. 1.274-5(c)(2)(iii), Income
Tax Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s statement
specifically detailing the required elements. Sec. 1.274-5T(c)(3), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
“Where the taxpayer establishes that the failure to produce adequate records
is due to the loss of such records through circumstances beyond the taxpayer’s
control, such as destruction by fire, flood, earthquake, or other casualty, the
taxpayer shall have a right to substantiate a deduction by reasonable
reconstruction of his expenditures or use.” Id. subpara. (5), 50 Fed. Reg. 46022.
The burden is on the taxpayer to show that the documentation was actually lost or
destroyed because of circumstances beyond his control. See McClellan v.
Commissioner, T.C. Memo. 2014-257, at *13.
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The Court received credible evidence to corroborate the fact that
petitioner’s C.P.A.’s home was destroyed in a wildfire. Petitioner, however, did
not provide evidence by means of testimony or documents as to his usual business
recordkeeping practices and specifically what records were destroyed.
Petitioner contends that he should be allowed deductions for gifts, meals,
entertainment, and office expenses related to his business as a race mechanic. He
claims business expense deductions for Christmas gifts to his business associates.
He also seeks to deduct office expenses in the form of books, magazines, and
music he purchased for his mechanic’s shop.
Accepting petitioner’s testimony that his records were destroyed in a
wildfire, we review this record in the light of these particular circumstances.
Where records have been lost because of circumstances beyond a taxpayer’s
control, he must still undertake a “reasonable reconstruction”, which includes
substantiation through secondary evidence. See, e.g., Boyd v. Commissioner, 122
T.C. 320; Probandt v. Commissioner, T.C. Memo. 2016-135, at *28 (and cases
cited thereat).
Petitioner presented 49 pages of checking account statements with notations
providing partial but inadequate details on the business purpose of each expense
deduction claimed. Petitioner’s testimony was vague and unspecific as to the
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business expenses for meals, events, gifts, and purchases for his mechanic’s shop.
Petitioner’s attempts to specifically identify persons and business purposes related
to the purported expenses were not sufficient. While petitioner identified
individuals with whom he dined and attended social events, he later indicated that
his attempts at identification were speculative and acknowledged that his
reconstruction of expenses did not specifically identify the business conducted on
these occasions. Likewise, petitioner’s recall of purchases from music stores,
book stores, and other vendors was only general, and it was not clear whether the
expenditures were incurred primarily for business rather than personal reasons.
Petitioner acknowledged the difficulty in associating any expense paid in 2014
with a specific business purpose. On numerous occasions at trial petitioner
indicated that his notations could be inaccurate because he was attempting to piece
together his purchases years after charges were incurred.
Moreover, petitioner’s checking account statements appear to contradict the
email detailing the World Speed Motorsports race weekends he purported to have
attended. Petitioner indicated that he attended 5 of the 10 race weekends listed in
the email: two at Thunderhill Raceway in Willows, California, and three at
Laguna Seca Raceway in Salinas, California. Petitioner’s checking account
statements appear to indicate petitioner’s involvement in one race weekend at
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Laguna Seca Raceway. For that weekend, March 28 through 30, 2014, petitioner
incurred $47 of charges at vendors near the raceway. For each of the other race
weekends petitioner’s checking account statements either do not reflect any
charges noted as business expenses or show multiple charges near petitioner’s
home and workplace and are marked with a variety of different notations in
addition to “Worldspeed”. On the basis of this evidence it is not possible for the
Court to ascertain which of petitioner’s meals and entertainment expenses he
incurred while attending World Speed Motorsports races.
We note that the Internal Revenue Service allowed $109 in meals and
entertainment expenses as originally reported on the 2014 Schedule C. This
amount exceeds the $47 in charges that petitioner has been able to specifically
associate with a racing event. Petitioner was unable to produce testimony or other
evidence as to whether any business expenses recorded on his checking account
statements relate to amounts previously reported and allowed. Therefore, we
cannot conclude that any given charge for meals or entertainment is an additional
business expense rather one previously reported and allowed.
Petitioner was similarly unable to adequately substantiate the reported gift
expense. Petitioner was charged $69 for a purchase at Kendall-Jackson on
December 17, 2014. Petitioner offered only vague testimony that the purchase
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was for gifts which he bought for “all the guys” for Christmas. This testimony is
insufficient to prove that the gifts were related to petitioner’s business or
purchased for any specific business contact.
Finally, petitioner was unable to adequately substantiate the claimed
deduction of $115 for office expenses. He attempted to substantiate the expenses
by identifying charges incurred at Barnes & Noble and Ken Watts Music as
indicated on his checking account statements. However, petitioner offered only
vague testimony that these charges were for music, books, and magazines that he
purchased for his mechanic’s shop. Petitioner did not provide any evidence or
testimony indicating that he had not previously included the music, book, and
magazine expenses on Schedule C.
Although the Court is sympathetic to the fact that many of the business
records petitioner needed to substantiate his claimed deductions were destroyed,
he has not undertaken a detailed reconstruction of them. Accordingly, we hold
that petitioner is not entitled to deduct additional gift, meals, entertainment, or
office expenses for tax year 2014.
We have considered the parties’ arguments and, to the extent not addressed
herein, we conclude that they are moot, irrelevant, or without merit.
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To reflect the foregoing,
Decision will be entered for
respondent.