Frank de Bane and Kathleen Naber-de Bane v. Commissioner ( 2002 )

T.C. Summary Opinion 2002-5UNITED STATES TAX COURT
FRANK DE BANÉ AND KATHLEEN NABER-DE BANÉ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5200-00S. Filed January 22, 2002.
Frank de Bané, pro se.
Jeremy L. McPherson, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency in petitioners’ Federal
income tax of $5,277 for the taxable year 1996. The sole issue
for decision is whether petitioners are entitled to numerous
business expense deductions disallowed by respondent.1
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. Petitioners resided in
Ukiah, California, on the date the petition was filed in this
case.
During taxable year 1996, petitioners had combined wage and
salary income of $67,571. Petitioner husband (petitioner) was
employed full time as a professor of physics and astronomy at
Mendocino College and part time as a professor of astronomy at
Santa Rosa Junior College. Petitioner wife was employed full
time as a crisis counselor at Jefferson Elementary School in
Cloverdale, California.
Petitioners filed a joint Federal income tax return for
taxable year 1996. They filed with the return a Schedule C,
Profit or Loss From Business. The schedule listed petitioner as
1
Respondent’s adjustments to petitioners’ itemized
deductions, self-mployment income tax, and self-employment income
tax deduction are computational and will be resolved by our
holding on the issue in this case. We note that respondent
previously corrected two mathematical or clerical errors with
respect to petitioners’ itemized deductions. The increase in the
tax shown on the return resulting from this correction has been
assessed and paid and is not at issue in this case.
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the proprietor of a business called “Schools and Universities
Research Center” which was engaged in the business of “Education
Research and Publication.” Petitioners reported $1,875 in gross
receipts, and claimed the following deductions for expenses:
Advertising $140
Bad debts from sales or services 15
Car and truck 7301
Commissions and fees 340
Depreciation and sec. 179 expense 5,6822
Insurance 1,082
Interest (other than mortgage) 155
Legal and professional services 192
Office 460
Rent or lease of business property 62
Repairs and maintenance 390
Supplies 175
Taxes and licenses 324
Travel 1,670
Meals and entertainment 227
Utilities 620
Wages 5,388
17,652
1
On the Schedule C, petitioners reported business
mileage of 19,900, commuting mileage of 1,500, and other
mileage of 4,400.
2
This deduction is related to the use of a computer and
a Ford Ranger. Petitioners claimed 85 percent business
usage with respect to both items. Here, with respect to the
Ford Ranger, petitioners reported business mileage of
19,900, commuting mileage of 1,500, and other mileage of
2,000.
In the statutory notice of deficiency, respondent disallowed each
of these deductions in full and increased petitioners’ income by
an additional $3 to correct a mathematical error petitioners made
in totaling the expenses.
Ordinary and necessary business expenses generally are
deductible in the taxable year in which they are paid. Sec.
162(a). An ordinary expense is one that relates to a transaction
“of common or frequent occurrence in the type of business
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involved”, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a
necessary expense is one that is “appropriate and helpful” for
“the development of the petitioner’s business,” Welch v.
Helvering, 290 U.S. 111, 113 (1933). Personal, family, and
living expenses, on the other hand, generally are not deductible.
Sec. 262(a).
First, we are not convinced that petitioner was engaged in a
trade or business in the year in issue. The primary evidence
that petitioner was engaged in any business at all is
petitioner’s brief and conclusory testimony. The testimony was
unclear, but it seems that petitioner’s contention is that the
Schedule C was filed not for one business, but for two--an
antique clock business which was not identified on the return in
addition to the research and publication business which was
identified. At one point, however, petitioner testified that the
antique clock business was “dead” and that none of the gross
income on the Schedule C was for that business. As for the
$1,875 of income that was reported, he could not provide
sufficient details concerning its source. He testified that this
amount was the income he received from activity such as reviewing
manuscripts and selling textbooks, but could not name the
publishing companies from which the income was received. The
only other evidence which indicates the existence of a business
consists of checks drawn on two bank accounts. The accounts each
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identified petitioner as the proprietor of a business, one named
“G.F. de Bané Publishing” and the other “Grandfather Time Antique
Clocks”. The checks were written for a variety of expenses,
including mortgage, telephone, water, waste, credit card,
insurance, department of motor vehicles, and taxes. Both
accounts were used alternately for some of the same payees. It
appears that these were used by petitioners as nothing more than
personal banking accounts. Neither the existence of these
accounts nor petitioner’s testimony establishes the existence of
any business.
Even if the record established the existence of a trade or
business, it does not show that the deductions claimed were for
ordinary and necessary business expenses. In addition to the
checks mentioned above, petitioners provided credit card
statements to substantiate the expenses. Notations were made
beside some of the charges, and petitioners, in preparation for
trial, summarized some of the charges and checks as belonging to
certain categories of expenses. From the evidence before the
Court, it appears that, for the most part, petitioner simply
scoured the credit card statements and canceled checks in search
of expenses which could be matched to the amounts on the returns.
For example, with respect to the bad debt expenses of $15,
petitioner testified that: “I find when I was examining all of
the receipts that I have from the charge card, from the two
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accounts, I could not find $15 which could qualify for a bad debt
and I do not have recollection of why I put $15 on that tax
return.” With respect to the advertising expenses of $140, the
summary lists charges of $5.90 at Kmart, $122.13 at Home Depot,
$5.94 at Wal-Mart, and $5.94 at Raley’s. Petitioner could not
explain how these charges were related to advertising, even
though he prepared the summary listing them as such in
preparation for trial. Similarly, with respect to the commission
and fee expenses, the summary lists charges made at Chevron,
Scandinavian Design (for furniture), Wal-Mart, Student Book
Exchange, and Jo-Ann Fabrics, along with the annual credit card
fee of $100.
Finally, certain amounts reported by petitioners on the
return raise suspicion. For example, petitioners reported
exactly 85 percent business and 15 percent personal use with
respect to both the Ford Ranger and the computer. Petitioners
also reported bad debt expenses of $15 and business property
rental expenses of $62. All of these amounts seem to have been
arbitrarily selected by petitioners when filing their tax return.
Petitioners argue that IRS employees had possession of their
“tax receipts” and refused to return them. They provide no
reliable evidentiary support for this contention. In letters
petitioner sent to the IRS in late 1999 and early 2000, he
referred to the existence of missing records which had been given
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to the IRS in 1997. However, an earlier letter, sent in 1998,
made no mention of missing records but stated petitioner would
“come forward with all requested documents and other business
records” upon audit of his return.
Based on the record, we cannot find that any of the expenses
listed on the return were ordinary and necessary in carrying on a
trade or business. We therefore sustain respondent’s
disallowance of the business expense deductions.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.