David Keith Winnett, Jr & Teresita Prias Winnett v. Commissioner , 2013 T.C. Summary Opinion 25 ( 2013 )

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2013-25UNITED STATES TAX COURT
DAVID KEITH WINNETT, JR., AND TERESITA PRIAS WINNETT, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 11910-11S, 14449-11S, Filed March 25, 2013.
18393-11S.
David Keith Winnett, Jr., and Teresita Prias Winnett, pro sese.
Catherine G. Chang and Michael Santos (specially recognized), for
respondent.
SUMMARY OPINION
PANUTHOS, Chief Special Trial Judge: These consolidated cases1 were
heard pursuant to the provisions of section 7463 of the Internal Revenue Code in
1
By order dated October 12, 2011, these three cases were consolidated for
trial, briefing, and opinion.
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effect when the petitions were filed.2 Pursuant to section 7463(b), the decisions to
be entered are not reviewable by any other court, and this opinion shall not be
treated as precedent for any other case.
Respondent determined deficiencies in petitioners’ Federal income tax of
$18,381.01, $12,804, and $17,466 for tax years 2008, 2009, and 2010, respectively.
Respondent also determined section 6662 accuracy-related penalties of $3,676.20,
$2,560.80, and $3,493.20 for tax years 2008, 2009, and 2010, respectively.
After concessions,3 the issues for decision are: (1) whether petitioners are
entitled to deductions claimed on Schedules C, Profit or Loss From Business, for
2008, 2009, and 2010; (2) whether petitioners are entitled to deductions on
Schedules A, Itemized Deductions, greater than those respondent allowed for 2008,
2009, and 2010; and (3) whether petitioners are liable for accuracy-related penalties
under section 6662(a).
2
All section references are to the Internal Revenue Code in effect for the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated.
3
By stipulation petitioners conceded that they received $53 of interest income
in 2009 that they did not report on their tax return for that year and that they
miscategorized $1,375 of Schedule C gross receipts as “other income” on their 2010
tax return.
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Background
Some of the facts have been stipulated, and we incorporate the stipulation and
accompanying exhibits by this reference. Petitioners lived in California when they
filed the petitions.
During 2008, 2009, and 2010, the years in issue, David Keith Winnett, Jr.
(petitioner), a retired U.S. Marine Corps captain, was employed full time by the City
of Torrance, where he was a fleet manager for the city and managed all of the
service vehicles. Teresita Prias Winnett was employed at Hillside Enterprises, a
nonprofit organization that represents and assists the interests of the intellectually
disabled.
In addition to his full-time employment, in 2008 petitioner began advocating
on behalf of sick Gulf War veterans, both independently and through the National
Gulf War Resource Center, a nonprofit organization. Petitioner had been approved
to receive benefits from the U.S. Department of Veterans Affairs, and he used his
experience applying for benefits to help other veterans apply for and receive their
disability benefits. Petitioner traveled around the country to help other veterans file
their disability claims. Petitioner began this activity after he traveled to Washington,
D.C., to testify before the Research Advisory Committee on Gulf War Veterans’
Illnesses. After he testified, the National Gulf War Resource Center approached
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petitioner and asked whether he would be interested in joining their efforts.
Separate from the National Gulf War Resource Center, petitioner maintains a
Facebook page on Gulf War illnesses that has several hundred members, some of
whom he has personally helped with their claims.
Petitioner did not receive any compensation for his advocacy activity,
although he did receive an annual honorarium of $1,250 from the Department of
Defense for his participation on a Congressionally Directed Medical Research
Programs panel during at least two of the years in issue, 2009 and 2010.
Participation on the panel required petitioner to travel annually to a meeting in
Washington, D.C. Petitioner did not have to pay for his own travel from California
to Washington, D.C., to participate on the panels, but he did incur other expenses as
a result of his advocacy activity. Although petitioner incurred expenses, he asserted
that the National Gulf War Resource Center was not funded sufficiently to be able
to reimburse volunteers for any expenses incurred from advocating for veterans.
Petitioners timely filed joint Federal income tax returns for taxable years
2008, 2009, and 2010, which they self-prepared using TurboTax. Petitioners
attached Schedules C to their 2008, 2009, and 2010 returns for “Semper Fi
Consulting” (Semper Fi). On the Schedules C petitioners claimed as deductions
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expenses from petitioner’s advocacy activity. At some point in 2010 petitioner
realized that the use of the name Semper Fi “didn’t mean anything”, since he was
not operating Semper Fi for profit, although he continued his advocacy activity after
that time.
For the 2008 through 2010 tax years petitioners reported on their Forms
1040, U.S. Individual Income Tax Return, wages and other income, income and
expenses4 from petitioner’s Schedule C advocacy activity, net profit or loss from the
advocacy activity, adjusted gross income, and itemized deductions as follows:
Net
profit or
Wage and Income Expenses (loss) Adjusted
other from from from gross Itemized
Year income activity activity activity income deductions
2008 $169,801 --- $3,923 ($3,923) $165,878 $106,062
2009 175,221 $3,157 73,757 (70,600) 104,621 28,336
2010 177,155 --- 6,483 (6,483) 170,672 80,855
4
There is a discrepancy in the record in the amount of Schedule C expenses
that petitioners claimed for 2009. In the stipulation of facts the parties stipulated
that petitioners claimed Schedule C expenses totaling $43,999 and that respondent
disallowed Schedule C expenses totaling $43,999. The parties also stipulated the
copy of petitioners’ 2009 return, on which petitioners claimed Schedule C expenses
totaling $73,757. We find that petitioners claimed Schedule C expenses totaling
$73,757 on their 2009 joint Federal income tax return.
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Respondent issued notices of deficiency for petitioners’ 2008, 2009, and
2010 tax years on February 23, May 24, and July 29, 2011, respectively. The
notices of deficiency disallowed the following deductions for lack of substantiation:
Schedule A
Expense 2008 2009 2010
Unreimbursed employee
expenses (subject to 2%
floor) $8,988 --- ---
Charitable contributions 71,370 --- ---
Medical and dental --- --- $36,662
Miscellaneous itemized
deductions (subject to
2% floor) --- --- 8,323
Other miscellaneous
deductions for “handicap
work” --- --- 22,091
Total amount disallowed 80,358 --- 67,076
Schedule C
Expense 2008 2009 2010
Car and truck $3,923 $20,385 ---
Repairs and maintenance --- 7,500 ---
Depreciation --- 16,114 ---
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Office --- --- $1,155
Supplies --- --- 1,700
Travel --- --- 3,350
Meals and entertainment --- --- 278
Total amount disallowed 3,923 43,999 6,483
Respondent also contended at trial that petitioner did not engage in Semper Fi with a
profit objective under section 183. The notices of deficiency imposed accuracy-
related penalties under section 6662(a) for all of the years in issue.
Discussion
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 that
these determinations are 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. Petitioners did not allege
that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore, petitioners
bear the burden of proof. See Rule 142(a).
Deductions are a matter of legislative grace, and the taxpayer bears the
burden of proving entitlement to any claimed deduction. Rule 142(a); INDOPCO,
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Inc. v Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering,
292 U.S. 435 (1934). The taxpayer also bears the burden of substantiating claimed
deductions. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89 (1975).
II. Petitioners’ Schedules C
Respondent contends that petitioners may not deduct the Schedule C
expenses in dispute for the years at issue because Semper Fi, petitioner’s advocacy
activity, was not a trade or business. Respondent also asserts that petitioners failed
to provide substantiation for their Schedule C deductions.
Section 162(a) allows a deduction for ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on any trade or
business. In order for an expense to be “necessary”, it must be “appropriate and
helpful” to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. An
expense will be considered “ordinary” if it is a common or frequent occurrence in
the type of business in which the taxpayer is involved. Deputy v. du Pont, 308 U.S.
488, 495 (1940). To be engaged in a trade or business, an individual must be
involved in an activity with continuity and regularity and the primary purpose for
engaging in the activity must be for income or profit. Commissioner v. Groetzinger,
480 U.S. 23, 35 (1987).
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Under section 183(b)(2), if an individual engages in an activity without the
primary objective of making a profit, deductions attributable to the activity are
allowable only to the extent of gross income from the activity. See Allen v.
Commissioner, 72 T.C. 28, 33 (1979). An activity is engaged in for profit if the
taxpayer’s “predominant, primary or principal objective” in engaging in the activity
was to realize an economic profit independent of tax savings. Wolf v.
Commissioner, 4 F.3d 709, 713 (9th Cir. 1993), aff’g T.C. Memo. 1991-212. The
taxpayer generally bears the burden of establishing that the activity was engaged in
for profit. See Rule 142(a).
Petitioner acknowledged that he did not engage in the advocacy activity for
profit and that his advocacy work was not a direct contribution to a qualified
charitable organization. He also admitted that reporting his advocacy expenses on
the Schedules C filed with the joint Federal income tax returns for the years at issue
was a mistake. Considering the foregoing facts and law, we conclude that the
advocacy activity was not a trade or business under section 162 and that the
Schedule C expenses in dispute for tax years 2008, 2009, and 2010 are not
deductible.5
5
Petitioners reported gross receipts or sales of $3,157 on their 2009 Schedule
C, but we do not consider whether they substantiated any of the disallowed
(continued...)
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III. Petitioners’ Schedules A
Taxpayers must keep sufficient records to substantiate any deductions
claimed. Sec. 6001. As a general rule, if the trial record provides sufficient
evidence that the taxpayer has incurred a deductible expense but the taxpayer is
unable to adequately substantiate the precise amount of the deduction to which he is
otherwise entitled, the Court may estimate the amount of the deductible expense and
allow the deduction to that extent, bearing heavily against the taxpayer whose
inexactitude in substantiating the amount of the expense is of his own making.
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We cannot estimate
the amount, however, unless the taxpayer proves that he or she paid or incurred
some deductible expense and provides some basis from which we can develop a
reasonable estimate. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).
In the case of expenses paid or incurred with respect to listed property, e.g.,
passenger automobiles or other property used as a means of transportation, section
274(d) overrides the Cohan doctrine and provides that these expenses are
deductible only if the taxpayer meets stringent substantiation requirements. Secs.
5
(...continued)
deductions to the extent of that income because respondent allowed Schedule C
deductions in excess of that amount. See sec. 183(b)(2).
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274(d), 280F(d)(4); see Lewis v. Commissioner, 560 F.2d 973, 977 (9th Cir. 1977),
rev’g on other grounds T.C. Memo. 1974-59; Sanford v. 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., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Petitioners did not provide receipts to substantiate any of the disallowed
deductions. Petitioner asserted that he had receipts at one time but that he retained
them only for a couple of months before throwing them away. Instead, petitioners
provided a variety of news articles and medical documents to demonstrate that
petitioner traveled on certain dates for speaking engagements related to his
advocacy activity and that petitioners had medical conditions that would have
caused them to incur the expenses that respondent disallowed as deductions.
Petitioner also provided testimony regarding some of the disallowed deductions.
A. Unreimbursed Employee Expenses (Subject to 2% Floor)
Petitioners claimed, and respondent disallowed, unreimbursed employee
expenses of $8,988 (before application of the 2% floor of section 67(a)) for the
2008 taxable year. The Form 2106, Employee Business Expenses, attached to
petitioners’ 2008 return, shows that the unreimbursed employee expenses consisted
of vehicle expenses, parking fees, travel expenses, and other business expenses.
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Generally, a taxpayer who is an employee may deduct unreimbursed
employee expenses as an ordinary and necessary business expense under section
162. Lucas v. Commissioner, 79 T.C. 1, 6 (1982). An employee, however, cannot
deduct such expenses to the extent that the employee is entitled to reimbursement
from his employer. Id. at 7. In addition, section 6001 requires a taxpayer to
maintain sufficient records to allow the determination of the taxpayer’s correct tax
liability.
Petitioner credibly testified that some of the expenses related to his
employment as fleet manager for the City of Torrance, which required him to drive
to and from various meetings about environmental issues involving diesel vehicles
and meetings with his peers in other cities. When completing the tax returns for the
years in issue petitioner did not separate the expenses incurred from his full-time
employment from those he incurred from his advocacy activity. Petitioner
acknowledged that his employment-related expenses and the expenses from his
advocacy activity were bundled “all up in one tangled mess” on the Schedules A
and C filed with petitioners’ returns for the years in issue.
Although we found petitioner’s testimony to be credible, the testimony by
itself was insufficient to establish that petitioners incurred the unreimbursed
employee expenses claimed for 2008 or to establish whether petitioner received
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reimbursement or had the right to obtain reimbursement from his employer.
Petitioner’s testimony alone does not provide a basis on which we might estimate
those claimed expenses that are not subject to the stricter substantiation
requirements of section 274(d). See Cohan v. Commissioner, 39 F.2d at 543-544.
We sustain respondent’s determination disallowing the deduction for unreimbursed
employee expenses.
B. Charitable Contributions
Petitioners claimed, and respondent disallowed, a charitable contribution
deduction of $71,370 for the 2008 taxable year. Of the total amount claimed,
$36,065 was for gifts by cash or check, $11,250 was for gifts of property other than
money, and $24,055 was for a contribution carryover for a prior year.
Generally, section 170(a) allows a deduction for any charitable contribution
made by the taxpayer. Charitable contribution deductions are subject to the
recordkeeping requirements of section 1.170A-13(a), Income Tax Regs., for
contributions of money, or section 1.170A-13(b), Income Tax Regs., for
contributions of property other than money. Any contribution of $250 or more must
also satisfy the requirement of section 1.170A-13(f)(1), Income Tax Regs., which
provides that to claim a charitable contribution deduction of $250 or more, the
taxpayer must substantiate the contribution with a contemporaneous written
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acknowledgment from the donee organization.6 If a taxpayer makes a charitable
contribution of property other than money in excess of $500, the taxpayer must
maintain written records showing the manner of acquisition of the item and the
approximate date of the acquisition. See sec. 1.170A-13(b)(3), Income Tax Regs.
Petitioner testified that he and his wife donated money and property regularly
but that the contribution carryover amount reported on the 2008 return “seems a
little high”. When respondent questioned petitioner about the $36,065 deduction
claimed for a contribution by cash or check, he asserted that amount “may have
been a typo” and that he could not explain how he arrived at that number.
Petitioners did not provide any receipts to substantiate the claimed contributions,
and petitioner’s testimony does not establish that petitioners are entitled to a
deduction for charitable contributions, nor does it provide a basis on which we
might estimate those claimed contributions. See Cohan v. Commissioner, 39 F.2d at
543-544. We sustain respondent’s determination disallowing the deduction for
charitable contributions.
6
Separate contributions of less than $250 are not subject to the requirements
of sec. 170(f)(8), regardless of whether the contributions made by a taxpayer to a
donee organization during a taxable year total $250 or more. Sec. 1.170-13(f)(1),
Income Tax Regs.
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C. Medical and Dental Expenses
Expenses paid during the taxable year for medical care of the taxpayer, not
compensated for by insurance or otherwise, shall be allowed as a deduction to the
extent that such expenses exceed 7.5% of adjusted gross income. Sec. 213(a). A
deduction is allowed only with respect to medical expenses actually paid during the
taxable year, regardless of when the incident or event which occasioned the
expenses occurred. Sec. 1.213-1(a)(1), Income Tax Regs. A taxpayer who claims a
deduction under section 213 must “furnish the name and address of each person to
whom payment for medical expenses was made and the amount and date of the
payment thereof in each case.” Sec. 1.213-1(h), Income Tax Regs.
Petitioners claimed, and respondent disallowed, a $36,662 deduction for
medical and dental expenses on their 2010 return. Petitioner admitted that the
claimed deduction was a little high but asserted that petitioners did incur medical
expenses that year as a result of Ms. Winnett’s breast cancer diagnosis. To
substantiate this illness, petitioners provided a document from Del Amo Diagnostic
Center dated October 6, 2010, that describes findings from an examination.
Petitioner also asserted that he has physical disabilities which caused him to retire in
November 2011. To document his disabilities and health problems, petitioner
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submitted a pathology report dated September 19, 2011, a letter from a doctor dated
August 1, 2011, and a list of his medications as of February 2012.
While we are sympathetic to petitioners’ health problems and agree that they
likely incurred some medical expenses in 2010, the documents that petitioners
submitted are not medical receipts and they do not indicate the amount of any
medical expense or the year in which any payments were made. Petitioners did not
substantiate their claimed medical and dental expenses for 2010 and did not
introduce any evidence from which we could develop a reasonable estimate. See
Williams, 245 F.2d at 560. Thus, petitioners are not entitled to any deduction for
medical and dental expenses on their Schedule A for tax year 2010.
D. Miscellaneous Itemized Deductions (Subject to 2% Floor)
Petitioners reported miscellaneous itemized deductions of $8,498 (before
application of the 2% floor of section 67(a)) for tax preparation fees, legal expenses,
investment expenses, fees, and a convenience fee on their Schedule A for tax year
2010. Respondent disallowed $8,323 of the deductions claimed because petitioners
did not furnish information needed to support the claimed deduction. After
application of the 2% floor of section 67(a), petitioners were not allowed to deduct
the $175 deduction that was not disallowed.
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Petitioners did not submit any receipts or other documents to substantiate the
miscellaneous itemized deductions claimed on their 2010 return. Petitioner could
not remember what the “fees” were for which petitioners claimed a deduction.
Petitioners did not establish their entitlement to the disallowed miscellaneous
itemized deductions subject to the 2% floor, nor did they introduce any evidence
from which we could develop a reasonable estimate of the miscellaneous itemized
deductions. See Williams, 245 F.2d at 560. Thus, petitioners are not entitled to the
disallowed miscellaneous itemized deductions subject to the 2% floor claimed on
their Schedule A for tax year 2010.
E. Other Miscellaneous Deductions for “Handicap Work”
Petitioners claimed, and respondent disallowed, other miscellaneous
deductions (not subject to the 2% floor) of $22,091 for “handicap work” on their
Schedule A for tax year 2010. Petitioners did not submit any receipts or documents
to verify the expense.
Petitioner’s testimony regarding his advocacy activity on behalf of veterans
was credible, and he no doubt incurred expenses carrying on this important activity.
However, his activity was not a direct contribution to a qualified charitable
organization, and his testimony did not establish petitioners’ entitlement to the
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disallowed other miscellaneous deductions for handicap work. Thus, petitioners are
not entitled to that deduction on their 2010 Schedule A.
IV. Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a penalty of 20% of the portion of
an underpayment of tax attributable to the taxpayer’s negligence, disregard of rules
or regulations, or substantial understatement of income tax. “Negligence” includes
any failure to make a reasonable attempt to comply with the Code, including any
failure to keep adequate books and records or to substantiate items properly. See
sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. A “substantial
understatement” includes an understatement of income tax that exceeds the greater
of 10% of the tax required to be shown on the return or $5,000. See sec. 6662(d);
sec. 1.6662-4(b), Income Tax Regs.
With respect to a taxpayer’s liability for any penalty, section 7491(c) places
on the Commissioner the burden of production, thereby requiring the Commissioner
to come forward with sufficient evidence indicating that it is appropriate to impose
the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the
Commissioner meets his burden of production, the taxpayer must come forward
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with persuasive evidence that the Commissioner’s determination is incorrect. See
id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
Petitioners claimed deductions on their returns for tax years 2008, 2009, and
2010 for expenses that they are unable to substantiate. Furthermore, the
underpayments of tax required to be shown on those returns are due to substantial
understatements of income tax because the understatements exceed the greater of
10% of the tax required to be shown on the return or $5,000. See sec. 6662(b)(2),
(d)(1); sec. 1.6662-4(b)(1), Income Tax Regs. Respondent’s burden of production
under section 7491(c) has been satisfied.
Section 6664(c)(1) provides an exception to the imposition of the accuracy-
related penalty if the taxpayer establishes that there was reasonable cause for, and
the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-
4(a), Income Tax Regs. The determination of whether a taxpayer acted in good
faith and with reasonable cause depends on the facts and circumstances of each case
and includes the knowledge and experience of the taxpayer and the reliance on the
advice of a professional, such as an accountant. Sec. 1.6444-4(b)(1), Income Tax
Regs. Most important in this determination is the extent of the taxpayer’s effort to
determine the proper tax liability. Neonatology Assocs., P.A. v. Commissioner, 115
T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002).
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Petitioners did not maintain records for any of their claimed deductions and
did not offer any argument or other evidence to show that they acted in good faith
with respect to any portion of the underpayments of tax and that any portion of the
underpayments is due to reasonable cause. Respondent’s determinations of the
accuracy-related penalty under section 6662(a) for tax years 2008, 2009, and 2010,
are sustained.
To reflect the foregoing,
Decisions will be entered for
respondent.