Tyson v. Comm'r , 98 T.C.M. 66 ( 2009 )

T.C. Memo. 2009-176
UNITED STATES TAX COURT
ROB AND SHIRLEY TYSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
RS TYSON AND ASSOCIATES, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6879-07, 6880-07. Filed July 29, 2009.
Kathryn E. Barnhill, for petitioners.
Catherine S. Tyson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: In these consolidated cases respondent
determined the following deficiencies in and penalties on
petitioners’ 2003 Federal income taxes:
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Rob and Shirley Tyson, docket No. 6879-07
Penalty
Deficiency Sec. 6662(a)
$5,199 $1,039.80
RS Tyson & Associates, Inc., docket No. 6880-07
Penalty
Deficiency Sec. 6662(a)
$8,027 $1,605.40
Pursuant to a joint motion, these cases have been consolidated
for trial, briefing, and opinion. The following issues remain
for decision regarding 2003:1 (1) Whether RS Tyson & Associates,
Inc. (RS Tyson), is entitled to deductions claimed for alleged
business expenses; (2) whether Rob and Shirley Tyson (Mr. and
Mrs. Tyson) are entitled to deductions claimed for alleged
expenses on Schedule E, Supplemental Income and Loss; (3) whether
Mr. and Mrs. Tyson received constructive dividends from RS Tyson;
and (4) whether petitioners are liable for accuracy-related
penalties pursuant to section 6662(a).2
1
Mr. and Mrs. Tyson deducted on Schedule E, Supplemental
Income and Loss, interest of $6,176 and depreciation of $12,611
for 2003. In their brief (they did not file a reply brief), they
failed to address the disallowance of those deductions.
Accordingly, we conclude that they have abandoned these issues.
See Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989).
2
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, the supplemental stipulation of facts,
and the attached exhibits are incorporated herein by this
reference. At the time they filed the petitions, Mr. and Mrs.
Tyson resided in Oklahoma, and RS Tyson had its principal place
of business in Oklahoma.
I. RS Tyson
During 2003 RS Tyson, a C corporation, had two business
activities: Tyson Painting and a Shaklee distributorship.3 Mr.
and Mrs. Tyson each owned 50 percent of the outstanding shares of
RS Tyson. Mrs. Tyson sold Shaklee products on behalf of RS
Tyson.4
Mr. and Mrs. Tyson were not employees of RS Tyson.5 Mr. and
Mrs. Tyson reported $89 of wages and salaries from Southern Hills
Baptist Church on their 2003 return. They reported no other
wages or salaries on that return. RS Tyson did not report (1)
3
See Chaney v. Commissioner, T.C. Memo. 2009-55 (Shaklee
distributors sell nutritional and cleaning products from Shaklee
Corp.).
4
Respondent concedes that Mrs. Tyson conducted an active
trade or business as a distributor of Shaklee products.
5
It is unclear from the record whether Mr. and Mrs. Tyson
were independent contractors of RS Tyson or worked for RS Tyson
in some other capacity.
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any compensation to officers or (2) salaries or wages to any
employees.
For 2003 RS Tyson deducted the following expenses on its
Form 1120, U.S. Corporation Income Tax Return:
Expense Amount
Rent of Mr. and Mrs. Tyson’s home $24,000
Lease of equipment 12,000
Employee benefit program 8,919
Laundry 1,893
Travel 4,209
Meals and entertainment 1,119
Automobile 8,695
Respondent disallowed these deductions.
A. Rent of Mr. and Mrs. Tyson’s Home and Equipment Leasing
Expense
On Schedule E, Mr. and Mrs. Tyson reported $36,000 of rents
received from RS Tyson. They reported that the $36,000 consisted
of $24,000 for the use of Mr. and Mrs. Tyson’s home for Shaklee
business purposes and $12,000 for the lease of office and
painting equipment.
RS Tyson deducted as a business expense alleged rent of
$12,000 paid to Mr. and Mrs. Tyson to lease Mr. and Mrs. Tyson’s
office equipment and painting equipment. The record is silent as
to what specific equipment was leased.
RS Tyson deducted as a business expense alleged rent of
$24,000 paid to Mr. and Mrs. Tyson to lease space in Mr. and Mrs.
Tyson’s home. RS Tyson allegedly rented space in Mr. and Mrs.
Tyson’s home for $2,000 per month. Mr. and Mrs. Tyson arrived at
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this rental amount after estimating the number of hours per month
RS Tyson would need to rent meeting space (100 hours per month)
and after taking into account the hourly rates of local
establishments that rented meeting space/rooms by the hour. The
local Marriott Hotel and other places that rented meeting
space/rooms were called, and Mr. and Mrs. Tyson learned that the
rates these establishments received for rental of meeting
space/rooms were between $75 and $100 per hour. Mr. and Mrs.
Tyson decided that RS Tyson should rent meeting space in their
home at a cost of $20 per hour.
Petitioners claimed that Mr. and Mrs. Tyson’s living room
was the meeting room, the dining room was where training and
makeovers took place, the kitchen was where Mrs. Tyson made
“Shaklee shakes”, and the bathroom by the office also was used
for makeovers. The dining room was where Mr. and Mrs. Tyson ate
dinner.
In a notice of deficiency issued to RS Tyson, respondent
disallowed the total deductions of $36,000. In a notice of
deficiency issued to Mr. and Mrs. Tyson, respondent “determined
that the Schedule E listed did not exist during the tax year
ended December 31, 2003”, decreased rents received by $36,000,
and increased constructive dividends received by $36,000.
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B. Employee Benefit Program
RS Tyson deducted $8,919 as employee benefit program
expenses. Mr. and Mrs. Tyson each signed a document entitled
“Corporate Resolution Establishing Self-Insured Medical Payment
Plan” which established the employee benefit program of RS Tyson.
The plan provided that RS Tyson would pay or reimburse, directly
or indirectly, certain medical and dental expenses of its
employees. The employee benefit program was intended to qualify
as one under which payments to employees are excludable from
their gross income under section 105(b).
Under the employee benefit program the medical and dental
expenses to be paid or reimbursed would be those for which the
employee was not compensated by insurance or otherwise and which
would be treated as medical expenses under section 213. The
amount that would be paid or reimbursed was limited to $10,000
per person per calendar year. The employee benefit program
covered reimbursements for medical or medical-related insurance,
medical or medical-related services, life insurance, disability
insurance, dental or dental-related services, and chiropractic or
chiropractic-related services.
During 2003 RS Tyson paid the following amounts: $2,276 for
term life insurance for Mr. Tyson, $626 for term life insurance
for Mrs. Tyson, and $3,091 to Christian Care Medi-Share for
“Affordable, Biblical Healthcare” for Mr. and Mrs. Tyson. During
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2003 RS Tyson made reimbursements as follows: $1,578 to Mr.
Tyson for medical expenses and $1,324 to Mrs. Tyson for medical
expenses.
C. Laundry Expenses
RS Tyson deducted $1,893 as laundry expenses. RS Tyson
deducted the cost of laundering the uniforms that Mr. Tyson used
for painting. To substantiate this expense petitioners submitted
receipts and payments for the purchase of Mr. Tyson’s painting
uniforms, including the purchase of shirts, boots, and socks, and
one check for $36 that contained “alter paint pants” in the memo
section of the check.
D. Travel Expenses
RS Tyson deducted $4,209 as travel expenses. RS Tyson
deducted the cost of a trip by Mr. and Mrs. Tyson to Disneyland
and a personal trip for Mr. and Mrs. Tyson to Branson, Missouri.
Mr. and Mrs. Tyson took their son, daughter-in-law, and grandson
with them on the trip to Disneyland.
E. Meals and Entertainment Expenses
RS Tyson deducted $1,119 as meals and entertainment
expenses. RS Tyson deducted the cost of meals to celebrate Mr.
and Mrs. Tyson’s daughter’s graduation and Mrs. Tyson’s birthday.
Additionally, RS Tyson deducted the cost of numerous meals that
Mr. and Mrs. Tyson had with their family. RS Tyson also deducted
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the cost of a small number of meals with Shaklee business
clients.
To substantiate the meals and entertainment expense
deductions, petitioners submitted photocopies of receipts from
restaurants. The receipts contained notations identifying the
persons who consumed the meals and indicating that the purpose of
the meals regarded Shaklee business such as discussing various
Shaklee products, Shaklee business plans and strategy, Shaklee
business volume, or the layout of Shaklee advertisements.
F. Automobile Expenses
RS Tyson deducted $8,695 as automobile expenses. To
substantiate this expense, RS Tyson submitted a spreadsheet
listing “car charge” and insurance; a document from Shaklee
entitled “bonus statement” that listed “car program activity”; RS
Tyson’s bank statements; photocopies of toll receipts; a
spreadsheet for “gas, repairs, insurance, and lease, etc.”; gas
receipts, many of which are illegible; and copies of insurance
payment schedules. RS Tyson kept track of only the personal use
mileage of the automobiles.
II. Mr. and Mrs. Tyson
For 2003 Mr. and Mrs. Tyson deducted the following expenses
on their Schedule E:
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Expense Amount
Legal and professional fees $350
Insurance 502
Repairs 32
Taxes 982
Utilities 1,361
Respondent disallowed these deductions.
A. Legal and Professional Fees
Mr. and Mrs. Tyson deducted legal and professional fees of
$350 for 2003. The record does not contain any information about
this deduction.
B. Insurance, Repairs, Taxes, and Utility Expenses
Mr. and Mrs. Tyson deducted insurance expenses of $502,
repair expenses of $32, taxes of $982, and utility expenses of
$1,361. These expenses arose from the alleged rental arrangement
for their home. The record does not contain any further
information about these deductions.
C. Constructive Dividends: Automobile Purchase
In December 2003 RS Tyson paid $15,000 to Reliable Toyota.
The $15,000 was a deposit on a vehicle purchased for Mr. and Mrs.
Tyson. Mr. and Mrs. Tyson got a loan for the balance of the cost
of the vehicle.
OPINION
The Commissioner’s determinations are generally presumed
correct, and the taxpayer bears the burden of proving the
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determinations erroneous.6 Rule 142(a). The taxpayer bears the
burden of proving that he is entitled to the deduction claimed,
and this includes the burden of substantiation. Id.; Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). A taxpayer must substantiate amounts
claimed as deductions by maintaining the records necessary to
establish he or she is entitled to the deductions. Sec. 6001.
Section 162(a) provides a deduction for certain business
expenses. In order to qualify for the deduction under section
162(a), “an item must (1) be ‘paid or incurred during the taxable
year,’ (2) be for ‘carrying on any trade or business,’ (3) be an
‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’
expense.” Commissioner v. Lincoln Sav. & Loan Association, 403
U.S. 345, 352 (1971); see also Commissioner v. Tellier, 383 U.S.
687, 689 (1966) (the term “necessary” imposes “only the minimal
requirement that the expense be ‘appropriate and helpful’ for
‘the development of the [taxpayer’s] business” (quoting Welch v.
Helvering, 290 U.S. 111, 113 (1933))); Deputy v. du Pont, 308
U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense must
relate to a transaction “of common or frequent occurrence in the
type of the business involved”). Whether an expense is ordinary
is determined by time, place, and circumstance. Welch v.
6
Petitioners have not established that they satisfied the
requirements of sec. 7491(a). Accordingly, the burden of proof
does not shift to respondent.
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Helvering, supra at 113-114. Respondent has not challenged the
existence of a trade or business.7
If a taxpayer establishes that he or she paid or incurred a
deductible business expense but does not establish the amount of
the expense, we may approximate the amount of the allowable
deduction, bearing heavily against the taxpayer whose
inexactitude is of his or her own making. Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930). However, for the Cohan rule
to apply, there must be sufficient evidence in the record to
provide a basis for the estimate. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985). Certain expenses may not be estimated
because of the strict substantiation requirements of section
274(d). See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C.
823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969).
1. Rent of Mr. and Mrs. Tyson’s Home
RS Tyson deducted rental expenses for the use of Mr. and
Mrs. Tyson’s home of $24,000 for 2003. RS Tyson claims that
during 2003 it rented most of Mr. and Mrs. Tyson’s home for
Shaklee business purposes. Supposedly, Mr. and Mrs. Tyson’s
living room was the meeting room, the dining room was where
training and makeovers took place, the kitchen was where Mrs.
Tyson made “Shaklee shakes”, and the bathroom by the office also
7
In other words, respondent concedes that both Tyson
Painting and the Shaklee distributorship were legitimate
businesses carried on by RS Tyson.
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was used for makeovers. The dining room was where Mr. and Mrs.
Tyson ate dinner.
“A close relationship between a lessor and lessee * * *
[requires] a careful examination of the circumstances surrounding
the arrangement to determine whether the payments are, in fact,
for the rental of the property.” Feldman v. Commissioner, 84
T.C. 1, 5 (1985), affd. 791 F.2d 781 (9th Cir. 1986). There is a
lack of proof of a bona fide rental. See Chaney v. Commissioner,
T.C. Memo. 2009-55. The amount claimed as rent was a
guesstimate--both as to the cost and as to the amount of time RS
Tyson used the property. The purported rental agreement has
little reality beyond tax planning. See id. The purported
rental was not at arm’s length, and we disregard it for lack of
economic substance.8 Accordingly, we sustain respondent’s
determination on this issue.
2. Employee Benefit Program
RS Tyson deducted employee benefit program expenses of
$8,919 for 2003. Mr. and Mrs. Tyson each signed up for the
employee benefit program offered by RS Tyson.
“The deductibility of employee benefit plan expenses
generally requires proof, in the first instance, of an
8
Additionally, Mr. and Mrs. Tyson made personal use of the
alleged rented space. Furthermore, we note that respondent
reduced Mr. and Mrs. Tyson’s rental income to zero in the notice
of deficiency.
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employer-employee relationship.” Francis v. Commissioner, T.C.
Memo. 2007-33. Mr. and Mrs Tyson reported $89 of wages and
salaries from Southern Hills Baptist Church on their 2003 return.
They reported no other wages or salaries on that return. RS
Tyson did not report (1) any compensation to officers or (2)
salaries or wages to any employees. No evidence of an employment
agreement was presented. Mr. and Mrs. Tyson were not employees
of RS Tyson. See Haeder v. Commissioner, T.C. Memo. 2001-7.
Accordingly, we sustain respondent’s determination disallowing
the employee benefit plan expense deduction.
3. Laundry Expenses
RS Tyson deducted laundry expenses of $1,893 for 2003. This
allegedly consisted of the cost of laundering the uniforms Mr.
Tyson painted in. The evidence petitioners presented consisted
of receipts and payments for the purchase of Mr. Tyson’s painting
uniforms including the purchase of shirts, boots, and socks.
Petitioners also submitted one for $36 with “alter paint pants”
in the memo section of the check.
RS Tyson must prove that the laundry expenses claimed for
the year in issue were ordinary and necessary expenses. Sec.
162(a); see Deputy v. du Pont, supra at 495 (deductibility under
section 162(a) is dependent upon the taxpayer’s establishing that
an expense is “normal, usual or customary” in the taxpayer’s
trade or business); see also sec. 1.162-1(a), Income Tax Regs.
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(expenditures must be “directly connected with or pertaining to
the taxpayer’s trade or business”). In order to satisfy that
burden in this instance, RS Tyson must establish that Mr. Tyson
was a bona fide employee of RS Tyson for the year in issue. See
Haeder v. Commissioner, supra; see also Neonatology Associates,
P.A. v. Commissioner, 115 T.C. 43, 93 (2000) (“Neonatology
contributed money to the Neonatology Plan for the benefit of Mr.
Mall. Mr. Mall was neither an employee of Neonatology nor an
individual who was eligible to participate in Neonatology’s Plan.
We conclude that these contributions served no business purpose
of Neonatology, and, hence, that they were not ordinary and
necessary expenses paid to carry on Neonatology’s business.”),
affd. 299 F.2d 221 (3d Cir. 2002); Love Box Co. v. Commissioner,
T.C. Memo. 1985-13, (“‘before expenses will be considered
ordinary and necessary under section 162, it must be established
that they bear a proximate and direct relationship to the
taxpayer’s trade or business.’” (quoting Carroll v. Commissioner,
51 T.C. 213, 218 (1968), affd. 418 F.2d 91 (7th Cir. 1969)),
affd. 842 F.2d 1213 (10th Cir. 1988). Mr. Tyson was not an
employee of RS Tyson. Accordingly, these were not proper
expenses of RS Tyson, and we sustain respondent’s determination
disallowing the laundry expenses.
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4. Travel Expenses
RS Tyson deducted travel expenses of $4,209 for 2003. A
deduction is allowed for ordinary and necessary traveling
expenses while away from home in the pursuit of a trade or
business. Sec. 162(a)(2). If a taxpayer travels to a
destination at which he engages in both business and personal
activities, the traveling expenses to and from the destination
are deductible only if the trip is related primarily to the
taxpayer’s trade or business. Sec. 1.162-2(b)(1), Income Tax
Regs. If the trip is primarily personal, the traveling expenses
to and from the destination are not deductible. Id.; see also
sec. 262.
In addition to satisfying the criteria for deductibility
under section 162, certain categories of expenses also must
satisfy the strict substantiation requirements of section 274(d)
in order for a deduction to be allowed. The expenses to which
section 274(d) applies include, among other things, travel
expenses (including meals and lodging while away from home).
Sec. 274(d)(1). We may not use the Cohan doctrine to estimate
expenses covered by section 274(d). See Sanford v. Commissioner,
50 T.C. 827; sec. 1.274-5T(a), Temporary Income Tax Regs., 50
Fed. Reg. 46014 (Nov. 6, 1985). To substantiate a deduction
attributable to travel, a taxpayer must maintain adequate records
or present corroborative evidence to show the following: (1) The
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amount of the expense; (2) the time and place of the travel; (3)
the business purpose of the expense; and (4) the business
relationship to the taxpayer. Sec. 274(d) (flush language). “To
meet the ‘adequate records’ requirements of section 274(d), a
taxpayer shall maintain an account book, diary, log, statement of
expense, trip sheets, or similar record * * *, and documentary
evidence”. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs.,
50 Fed. Reg. 46017 (Nov. 6, 1985).
RS Tyson deducted the cost of a family trip for Mr. and Mrs.
Tyson to Disneyland and a personal trip for Mr. and Mrs. Tyson to
Branson, Missouri, as travel expenses. For traveling expenses to
be deductible, they must be in pursuit of the trade or business.
Secs. 162-1(a), 162-2, Income Tax Regs. Section
1.274-5T(b)(2)(iv) and (c)(2)(ii)(B), Temporary Income Tax Regs.,
50 Fed. Reg. 46015, 46018 (Nov. 6, 1985), provides that the
taxpayer must record the business reason for the travel or the
nature of the business benefit derived or expected to be derived
on account of the travel unless the business purpose is evident
from the surrounding facts and circumstances.
RS Tyson has not established how the cost of a family trip
for Mr. and Mrs. Tyson to Disneyland and a personal trip for Mr.
and Mrs. Tyson to Branson, Missouri, were ordinary or necessary
to its businesses. Furthermore, RS Tyson has failed to
substantiate the claimed travel expenses in accordance with
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sections 162 and 274. Accordingly, we sustain respondent’s
determination on this issue.
5. Meals and Entertainment Expenses
RS Tyson deducted meals and entertainment expenses of $1,119
for 2003. Section 162 permits the deduction of food and beverage
expenses if they are ordinary, necessary, and reasonable expenses
incurred by the taxpayer in its business. No deduction is
allowed with respect to personal, living, or family expenses.
Sec. 262.
In addition to satisfying the criteria for deductibility
under section 162, this category of expenses also must satisfy
the strict substantiation requirements of section 274(d) in order
for a deduction to be allowed. This includes establishing the
business purpose of the expenditure or use and the business
relationship to the taxpayer of the persons entertained. See
sec. 1.274-5T(a) and (b), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985).
Section 274(a) further restricts the deduction of business
food and beverage expenses. An expenditure must be directly
related to the conduct of the taxpayer’s trade or business or
associated with the active conduct of the taxpayer’s trade or
business. Sec. 274(a)(1)(A). An expenditure is considered
associated with the active conduct of the taxpayer’s trade or
business if the taxpayer establishes that he had a clear business
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purpose in making the expenditure, such as to obtain new business
or to encourage the continuation of an existing business
relationship. Sec. 1.274-2(d)(2), Income Tax Regs. In order to
establish a substantial and bona fide business discussion, it
must be shown that the taxpayer actively engaged in a business
meeting, negotiation discussion, or other bona fide business
transaction, other than entertainment, for the purpose of
obtaining income or other specific trade or business benefit.
Sec. 1.274-2(d)(3)(i)(a), Income Tax Regs. Additionally, it must
be established that this business meeting, negotiation,
discussion, or transaction was substantial in relation to the
entertainment. Id.
RS Tyson deducted numerous meals Mr. and Mrs. Tyson had with
their family. For example, RS Tyson deducted meals for Mr. and
Mrs. Tyson’s daughter’s graduation and Mrs. Tyson’s birthday
celebration. RS Tyson has not established how these expenditures
were ordinary or necessary to its businesses. Additionally, some
of the receipts are redundant, and many of the receipts are
illegible other than Mrs. Tyson’s notes and/or re-creation of the
amounts spent. Furthermore, RS Tyson has failed to substantiate
the claimed meals and entertainment expenses in accordance with
sections 162 and 274. See sec. 1.274-5T(b)(3)(iv) and (v),
Temporary Income Tax Regs., 50 Fed. Reg. 46015 (Nov. 6, 1985)
(requiring proof of the name, title, or other designation of the
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persons entertained sufficient to establish the business
relationship to the taxpayer).
After eliminating the aforementioned nondeductible food and
beverage expenses claimed by RS Tyson, a few legible receipts
remain. These are:
Date Amount Client(s)
4/27/03 $22.52 Claude and Janet West
9/9/03 20.18 Charles Amos
9/18/03 18.06 Kathy Huffman
9/23/03 28.68 Jeanette Carter
10/8/03 6.49 Dan Cramer
11/6/03 8.23 Sandy Brown
11/11/03 14.74 Charles Amos
12/2/03 12.98 Charles Amos
12/4/03 12.32 Karen Anderson
12/20/03 29.89 Jeanette and Charles Amos
Total 174.09
Each of the listed persons was a Shaklee business client of RS
Tyson. During each of these meals Shaklee business matters and
discussions were held. Mrs. Tyson and the other person(s)
present discussed various Shaklee products, Shaklee business
plans and strategy, Shaklee business volume, and/or the layout of
Shaklee advertisements. Accordingly, we conclude that the costs
of buying meals for these specific clients were ordinary and
necessary business expenses.
Further, we conclude that these meals were associated with
the active conduct of RS Tyson’s Shaklee business and that the
meals directly preceded or followed substantial and bona fide
business discussions. The meals purchased were associated with
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the active conduct of RS Tyson’s Shaklee business because there
was a clear business purpose in purchasing the meals for the
clients. RS Tyson had an existing business relationship with
these individuals, and meals were used to discuss the sale of
Shaklee products to customers and to encourage and increase the
distribution of Shaklee products. Further, at each meal,
substantial and bona fide business discussions occurred. At the
top of each receipt Mrs. Tyson listed what sort of business
discussion and transactions occurred at the meal.
Accordingly, we allow RS Tyson a deduction of $87.05 for
meals and entertainment expenses. Sec. 274(n)(1) (the amount of
the deduction for allowable food and beverages expenses shall not
exceed 50 percent of the amount of such expense).9
6. Automobile Expenses
RS Tyson deducted automobile expenses of $8,695 for 2003.
In addition to satisfying the criteria for deductibility under
section 162, this category of expenses also must satisfy the
strict substantiation requirements of section 274(d) in order for
a deduction to be allowed. Secs. 274(d)(4), 280F(d)(4)(A)(i) and
(ii) (automobiles are listed property). To substantiate a
deduction attributable to listed property, a taxpayer must
maintain adequate records or present corroborative evidence to
9
Total meals and entertainment expenses of $174.09 divided
by 2 equals $87.05.
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show the following: (1) The amount of the expense; (2) the time
and place of use of the listed property; and (3) the business
purpose of the use. Sec. 1.274-5T(b)(6), Temporary Income Tax
Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
RS Tyson neither kept a diary, log, trip sheet, or similar
record regarding the business use of the listed property nor
established the time and place of the business use of the listed
property; i.e., RS Tyson did not submit a business mileage log to
establish the amount of business miles driven. See id.; sec.
1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). Mrs. Tyson explained:
most of the time that we’re in the car, we’re doing
business, because every time we go -- I shouldn’t say
every time we go and drop our grandchild off at
mother’s day out or go to church, we’re usually handing
out our catalog. We’re always prospecting. * * *
So when we’re out and about, we’re in business.
RS Tyson failed to establish the time and place of business
use of the listed property and the business purpose of the use of
the listed property. RS Tyson has failed to substantiate the
claimed automobile expenses in accordance with sections 162 and
274. Accordingly, we sustain respondent’s determination on this
issue.
7. Equipment Leasing Expenses
RS Tyson deducted $12,000 for amounts paid to Mr. and Mrs.
Tyson to allegedly lease Mr. and Mrs. Tyson’s office equipment
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and painting equipment for 2003. Section 162 allows a deduction
as an ordinary and necessary business expense for “rentals or
other payments required to be made as a condition to the
continued use or possession, for purposes of the trade or
business, of property to which the taxpayer has not taken or is
not taking title or in which he has no equity.” Sec. 162(a)(3).
To substantiate this expense RS Tyson introduced bank statements.
The Court reviewed the bank statements and found no checks or
other evidence indicating that this amount was paid to lease
equipment. RS Tyson has failed to substantiate a deduction for
the claimed lease of equipment expenses. Accordingly, we sustain
respondent’s determination on this issue.
8. Legal and Professional Fees
A taxpayer may deduct under section 162 legal fees paid in
obtaining legal advice with respect to the taxpayer’s trade or
business. Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694,
720-721 (1977). Mr. and Mrs. Tyson deducted legal and
professional fees of $350 for 2003. To substantiate this expense
they introduced bank statements. The Court reviewed the bank
statements and found no checks or other information related to
legal and professional fees. Mr. and Mrs. Tyson have failed to
substantiate this amount. Accordingly, we sustain respondent’s
determination on this issue.
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9. Insurance, Repairs, Taxes, and Utility Expenses
These expenses (insurance expenses of $502, repair expenses
of $32, taxes of $982, and utility expenses of $1,361) are
related to the alleged rental of Mr. and Mrs. Tyson’s residence
to RS Tyson. As we previously determined, there is a lack of
proof of a bona fide rental. See supra p. 12. The purported
rental agreement has little reality beyond tax planning. The
purported rental was not at arm’s length, and we disregard it for
a lack of economic substance.10 Accordingly, we sustain
respondent’s disallowance of a deduction for the insurance,
repairs, taxes,11 and utility expenses.
10. Constructive Dividends
Respondent determined Mr. and Mrs. Tyson received $61,812 in
constructive dividends from RS Tyson. This amount consisted of
alleged rent expenses of $24,000, lease expenses of $12,000,
image12 expenses of $1,893, employee benefit plan expenses of
$8,919, and an automobile downpayment expense of $15,000.
Generally, where a shareholder diverts corporate funds to
his own use, those funds constitute constructive dividends to him
10
Additionally, Mr. and Mrs. Tyson made personal use of
the alleged rented space.
11
The taxes related to Mr. and Mrs. Tyson’s residence may
be deductible as expenses on Schedule A, Itemized Deductions.
12
Mrs. Tyson testified that the image expense was for the
cost of purchasing and laundering Mr. Tyson’s uniforms.
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and are ordinary income to the extent of the corporation’s
earnings and profits. See secs. 301(c), 316; Truesdell v.
Commissioner, 89 T.C. 1280, 1295 (1987). “Where a corporation
provides an economic benefit to a shareholder with no expectation
of reimbursement, the benefit is a ‘constructive dividend’ and is
taxable income.” Benson v. Commissioner, 560 F.3d 1133, 1134
(9th Cir. 2009) (citation omitted), affg. T.C. Memo. 2004-272 and
T.C. Memo. 2006-55.
Mr. and Mrs. Tyson each owned 50 percent of RS Tyson. When
individuals are in substantial control of a corporation, special
scrutiny of their transactions with the corporation may be
necessary. Haber v. Commissioner, 52 T.C. 255, 266 (1969), affd.
422 F.2d 198 (5th Cir. 1970); Roschuni v. Commissioner, 29 T.C.
1193, 1202 (1958), affd. 271 F.2d 267 (5th Cir. 1959); see Tulia
Feedlot, Inc. v. United States, 513 F.2d 800, 805 (5th Cir. 1975)
(“Transactions between related taxpayers or between a close
corporation and its principals * * * must be subject to close
scrutiny.” (citing United States v. Ragen, 314 U.S. 513 (1942))).
RS Tyson paid $15,000 to Reliable Toyota in December 2003.
This money was a deposit on a vehicle purchased for Mr. and Mrs.
Tyson. Mrs. Tyson admitted that “all the money is in RS Tyson”.
She testified that she has a tendency to write checks out of that
account for personal items. The evidence established
distributions from RS Tyson to Mr. and Mrs. Tyson or on behalf of
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Mr. and Mrs. Tyson including the $15,000 RS Tyson paid as a
downpayment on Mr. and Mrs. Tyson’s car. Petitioners have failed
to prove that any of the $61,812 in question was not diverted
from RS Tyson for Mr. and Mrs. Tyson’s own use. Accordingly,
respondent’s determination regarding the constructive dividends
is sustained.13
11. Accuracy-Related Penalty for Mr. and Mrs. Tyson
Section 7491(c) provides that the Commissioner will bear the
burden of production with respect to the liability of any
individual for additions to tax and penalties. “The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount”. Swain v.
Commissioner, 118 T.C. 358, 363 (2002); see Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). The Commissioner,
however, does not have the obligation to introduce evidence
regarding reasonable cause or substantial authority. Higbee v.
Commissioner, supra at 446-447.
Respondent determined that RS Tyson and Mr. and Mrs. Tyson
are liable for the section 6662 penalty for 2003. Pursuant to
section 6662(a) and (b)(1) and (2), a taxpayer may be liable for
13
We note that respondent did not argue that RS Tyson did
not deserve to be recognized as a separate taxpaying entity, and
petitioners do not argue that RS Tyson’s earnings and profits
were insufficient to cover the constructive dividends.
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a penalty of 20 percent on the portion of an underpayment of tax
due to negligence or disregard of rules or regulations or a
substantial understatement of income tax. Negligence “includes
any failure to make a reasonable attempt to comply with the
provisions of this title”, and disregard “includes any careless,
reckless, or intentional disregard.” Sec. 6662(c). “Negligence”
includes any failure by the taxpayer to keep adequate books and
records or to substantiate items properly. Sec. 1.6662-3(b)(1),
Income Tax Regs. Respondent met his burden of production as to
Mr. and Mrs. Tyson14 as they failed to substantiate the expenses
claimed.15 See sec. 6001; sec. 1.6662-3(b)(1), Income Tax Regs.
RS Tyson overstated expenses by deducting personal expenses of
Mr. and Mrs. Tyson. RS Tyson also failed to substantiate
expenses (e.g., laundry expenses, travel expenses, meals and
entertainment expenses, and automobile expenses). See sec. 6001;
sec. 1.6662-3(b)(1), Income Tax Regs.
14
Sec. 7491(c) imposes on the Commissioner a burden of
production respecting “the liability of any individual” (emphasis
added) for a penalty, addition to tax, or additional amount.
Accordingly, respondent has no burden of production with respect
to RS Tyson.
15
Additionally, as we have sustained all of respondent’s
deficiency determinations against Mr. and Mrs. Tyson, there is a
“substantial understatement of income tax”. See sec.
6662(d)(1)(A) and (B). A “substantial understatement” exists if
the understatement exceeds the greater of (1) 10 percent of the
tax required to be shown on the return for a taxable year or (2)
$5,000 ($10,000 in the case of a corporation). Id.
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The accuracy-related penalty is not imposed with respect to
any portion of the underpayment as to which the taxpayer acted
with reasonable cause and in good faith. Sec. 6664(c)(1). The
decision as to whether the taxpayer acted with reasonable cause
and in good faith depends upon all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Mr. and Mrs. Tyson attempted to use RS Tyson as a vehicle to
turn their nondeductible personal expenses into deductible
business expenses. Petitioners’ tax return preparer was not
called as a witness. We infer that his testimony would not have
been favorable to petitioners. See Wichita Terminal Elevator Co.
v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513
(10th Cir. 1947). Petitioners have failed to prove that they
acted with reasonable cause and in good faith. See sec.
6664(c)(1). Accordingly, we sustain the section 6662(a) penalty
against RS Tyson and Mr. and Mrs. Tyson.
In reaching our holdings herein, we have considered all
arguments made by the parties, and to the extent not mentioned
above, we find them to be irrelevant or without merit.
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To reflect the foregoing,
Decision will be entered
for respondent in docket No.
6879-07.
Decision will be
entered under Rule 155 in
docket No. 6880-07.