Tara Patrice Moore & David Moore v. Commissioner , 2018 T.C. Memo. 58 ( 2018 )

T.C. Memo. 2018-58UNITED STATES TAX COURT
TARA PATRICE MOORE AND DAVID MOORE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 740-17. Filed April 30, 2018.
Tara Patrice Moore and David Moore, pro sese.
Richard L. Wooldridge, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
RUWE, Judge: The Commissioner determined deficiencies in petitioners’
Federal income tax and accuracy-related penalties under section 6662(a) as
follows:1
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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[*2] Accuracy-related penalty
Year Deficiency sec. 6662(a)
2013 $8,634 $1,726.80
2014 12,752 2,209.80
2015 12,711 2,516.20
After concessions by the parties,2 the issues remaining for decision are: (1)
whether petitioners are entitled to various deductions claimed on Schedules C,
Profit or Loss From Business, for 2013, 2014, and 2015; (2) whether petitioners
are entitled to noncash charitable contribution deductions of $20,590, $11,372,
and $21,566 for 2013, 2014, and 2015, respectively; and (3) whether petitioners
are liable for accuracy-related penalties for 2013, 2014, and 2015.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts and the attached exhibits are incorporated herein by this reference.
Petitioners resided in Ohio when they filed their petition.
1
(...continued)
Revenue Code in effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
2
The parties stipulated that petitioners: (1) failed to report cancellation of
indebtedness income of $3,070 and $671 for 2013 and 2014, respectively; (2)
failed to report wages of $25 and $1,260 for 2014 and 2015, respectively; and (3)
failed to report retirement income of $7,304 for 2014.
The parties further stipulated that petitioners did not receive wages of
$2,520 from the Lakota School District in 2014.
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[*3] During the years in issue petitioner wife taught classes as a part-time online
instructor at Dunlap-Stone University. She testified that she did not have a profit
motive for teaching these classes. Petitioner wife derived gross income from her
teaching activity of $6,375, $7,005, and $7,005 in 2013, 2014, and 2015,
respectively. During the years in issue petitioner wife was also employed by
General Electric (GE).
Petitioners timely filed Federal income tax returns for 2013, 2014, and
2015. Petitioners claimed various Schedule C deductions, which they attributed to
petitioner wife’s teaching activity. They claimed Schedule C deductions of
$13,911, $26,381, and $23,800 for 2013, 2014, and 2015, respectively. The
claimed Schedule C deductions resulted in petitioners’ claiming net losses for the
teaching activity of $7,536, $19,376, and $16,795 for 2013, 2014, and 2015,
respectively. Petitioners also claimed deductions for noncash charitable
contributions of $20,590, $11,372, and $21,566 for 2013, 2014, and 2015,
respectively. All of the claimed charitable deductions were for items contributed
to Goodwill Industries (Goodwill) except for a single contribution to Dress for
Success Cincinnati (Dress for Success) in 2014. The parties stipulated that
petitioners do not have reliable written records for the noncash contributions.
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[*4] The Commissioner selected petitioners’ returns for examination. Internal
Revenue Agent Vanessa Sanders was assigned to examine petitioners’ returns.
She disallowed almost all of petitioners’ claimed Schedule C expense deductions
and all of their claimed noncash charitable contribution deductions.3 Agent
Sanders’ immediate supervisor, Acting Group Manager Beth A. Hagley,
personally approved the imposition of the section 6662(a) penalties in writing. On
October 4, 2016, the Commissioner issued petitioners a notice of deficiency.
Petitioners timely filed a petition with this Court.
OPINION
The Commissioner’s determinations in a notice of deficiency are generally
presumed correct, and the taxpayer bears the burden of proving that they are
incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioners
do not contend, and the evidence does not establish that the burden of proof shifts
to respondent under section 7491(a) as to any issue of fact.
I. Petitioners’ Claimed Deductions
Deductions are a matter of legislative grace, and the taxpayer bears the
burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO,
3
The only claimed Schedule C expense deductions allowed by the
Commissioner were amounts for depreciation of $50, $29, and $103 for 2013,
2014, and 2015, respectively.
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[*5] Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice. Co. v.
Helvering, 292 U.S. 435, 440 (1934). Section 6001 requires the taxpayer to
maintain records sufficient to establish the amount of each deduction claimed. See
also sec. 1.6001-1(a), Income Tax Regs.
A. Schedule C Deductions
A taxpayer may not fully deduct expenses regarding an activity under
section 162 or 212 if the activity is not engaged in for profit. Sec. 183(a), (c); see
also Keanini v. Commissioner, 94 T.C. 41, 45 (1990). Pursuant to section 183(a),
if an activity is not engaged in for profit, no deduction attributable to the activity is
allowed except to the extent provided by section 183(b). In relevant part, section
183(b) allows deductions that would have been allowable had the activity been
engaged in for profit but only to the extent of the gross income derived from the
activity (reduced by deductions attributable to the activity that are allowable
without regard to whether the activity was engaged in for profit). Section 183(c)
defines an activity not engaged in for profit as “any activity other than one with
respect to which deductions are allowable for the taxable year under section 162 or
under paragraph (1) or (2) of section 212.”
Petitioner wife testified that she did not have a profit motive for her
teaching activity. Accordingly, pursuant to section 183(b)(2), any deductions that
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[*6] petitioners may be entitled to related to petitioner wife’s teaching activity are
limited to the extent of the gross income derived from the activity.
Section 162(a) allows a deduction for “all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business”. See Boyd v. Commissioner, 122 T.C. 305, 313 (2004). A trade or
business expense is ordinary for the purposes of section 162 if it is normal or
customary within a particular trade, business, or industry and is necessary if it is
appropriate or helpful for the development of the business. Commissioner v.
Heininger, 320 U.S. 467, 471-472 (1943); Deputy v. du Pont, 308 U.S. 488, 495
(1940). In contrast, section 262(a) disallows deductions for personal, living, or
family expenses.
If a taxpayer establishes that an expense is deductible but is unable to
substantiate the precise amount, we may estimate the amount, bearing heavily
against the taxpayer whose inexactitude is of his or her own making. See Cohan
v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The taxpayer must present
sufficient evidence for the Court to form an estimate because without such a basis,
any allowance would amount to unguided largesse. Williams v. United States, 245
F.2d 559, 560-561 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-
743 (1985).
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[*7] However, section 274 overrides the Cohan rule with regard to certain
expenses. See Sanford v. Commissioner, 50 T.C. 823, 828 (1968), aff’d per
curiam, 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax
Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Under section 274(d), the taxpayer
must meet stricter substantiation requirements to be allowed a deduction under
section 162. The heightened substantiation requirements of section 274(d) apply
to: (1) any traveling expense, including meals and lodging away from home;
(2) any item with respect to an activity in the nature of entertainment, amusement,
or recreation; (3) an expense for gifts; or (4) the use of “listed property” as defined
in section 280F(d)(4), including any passenger automobiles. To deduct these
expenses, the taxpayer must substantiate by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement: (1) the amount of the
expense; (2) the time and place of the expense; and (3) the business purpose of the
expense. Sec. 274(d); see also Oswandel v. Commissioner, T.C. Memo. 2007-
183, 2007 Tax Ct. Memo LEXIS 185, at *7. Even if such an expense would
otherwise be deductible, section 274 may still preclude a deduction if the taxpayer
does not present sufficient substantiation. Sec. 1.274-5T(a), Temporary Income
Tax Regs., supra.
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[*8] 1. Meals and Entertainment Expenses
Petitioners reported meals and entertainment expenses of $85 and $100 for
2013 and 2014, respectively. The only evidence of these expenses in the record is
receipts for meals purchased in 2013 during trips to Rockford, Illinois, and East
Lansing, Michigan.
Petitioner wife seems to have testified that she traveled to Rockford for a
seminar related to her teaching activity, and she submitted a vehicle mileage log
that states that she was there for a seminar. However, petitioners also submitted a
“Report of Interview Travel Expense” to Hamilton Sundstrand for expenses that
petitioner wife incurred during the same period as the seminar. Petitioner wife
testified that she went to Rockford for the seminar but she had a job interview in
Rockford and was reimbursed for some expenses. The record is void of any
documentation proving that petitioner wife attended the seminar.
Petitioner wife testified that she traveled to East Lansing for training, and
she submitted a mileage log that states that she was there for training. Petitioner
wife submitted an expense report for this same trip to GE. She testified that she
probably put these expenses on her GE credit card that she uses for business
expenses but that she processed the expenses as personal expenses. However, the
report states that none of the expenses were personal. Further, the report states
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[*9] that the purpose of the trip was to attend a Michigan State University
diversity career fair. Petitioner wife testified that she attended the diversity career
fair but attended training there. However, she has not produced documentation of
the training.
Petitioners have not demonstrated that petitioner wife paid all of the meals
and entertainment expenses that they reported. For the expenses that they can
demonstrate petitioner wife did actually pay, they have not shown a business
purpose and they did not comply with the heightened substantiation requirements.
Accordingly, we conclude that petitioners are not entitled to any deductions for
meals and entertainment expenses for 2013 or 2014.
2. Car and Truck Expenses
Petitioners reported car and truck expenses of $7,371, $10,405, and $13,842
for 2013, 2014, and 2015, respectively. To substantiate the car and truck
expenses, petitioners submitted a mileage log, various receipts, and vehicle
maintenance bills. Petitioner wife testified that some of the miles accounted for in
the log are actually miles that she traveled through air travel and not in her
vehicle. On Schedules C of their 2013 and 2014 tax returns, petitioners checked
the “[n]o” box to the question of whether they had evidence to support their
vehicle expense deductions.
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[*10] Petitioners’ car and truck expense deductions are subject to the heightened
substantiation requirements of section 274(d). See secs. 274(d)(4),
280F(d)(4)(A)(i). As applicable to vehicle expenses, section 274(d) requires the
taxpayer to substantiate by adequate records: (1) the mileage; (2) the time and
place of use; and (3) the business purpose of the use. See Solomon v.
Commissioner, T.C. Memo. 2011-91, 2011 Tax Ct. Memo LEXIS 90, at *8.
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 use or expenditure and documentary
evidence (e.g., receipts or bills) of certain expenditures. See 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). A log that is kept on a weekly basis is
considered contemporaneous for this purpose. See sec. 1.274-5T(c)(2)(ii)(A),
Temporary Income Tax Regs., 50 Fed. Reg. 46017-46018 (Nov. 6, 1985). The
level of detail required for substantiating by adequate records the business use of
listed property depends on the facts and circumstances of such use. See id. subdiv.
(ii)(C), 50 Fed. Reg. 46018-46019.
The mileage log that petitioners submitted is not entirely accurate.
Additionally, with respect to the miles that petitioner wife actually drove, it is
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[*11] unclear whether the log was prepared contemporaneously because
petitioners indicated on their 2013 and 2014 tax returns that they did not have
evidence to support the miles that they drove. The documentation that petitioners
provided does not meet the heightened substantiation requirements. Accordingly,
petitioners are not entitled to any deductions for car and truck expenses for 2013,
2014, or 2015.
3. Legal and Professional Services Expenses
Petitioners reported legal and professional services expenses of $525, $660,
and $700 for 2013, 2014, and 2015, respectively. Petitioners appear to have
reported hair salon expenses as professional services expenses for 2013 and 2014.
These expenses are clearly personal. Petitioners have not provided any testimony
or substantiating documentation for any of the other expenses. Accordingly,
petitioners are not entitled to any deductions for legal and professional services
expenses for 2013, 2014, or 2015.
4. Supplies Expenses
Petitioners reported supplies expenses of $2,260, $2,300, and $3,140 for
2013, 2014, and 2015, respectively. It is not clear what expenses petitioners are
reporting as supplies expenses. They submitted a receipt without a price for
batteries purchased in 2014 and a printed receipt with a handwritten price for two
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[*12] iPhone cases purchased in 2015. Petitioners have not established a business
purpose for these purchases. Petitioners have not provided any testimony or
substantiating documentation for any other supplies expenses. Accordingly,
petitioners are not entitled to any deductions for supplies expenses for 2013, 2014,
or 2015.
5. Office Expenses
Petitioners reported office expenses of $870, $2,319, and $1,025 for 2013,
2014, and 2015, respectively. Petitioners have not provided any testimony or
substantiating documentation for these expenses. Accordingly, petitioners are not
entitled to any deductions for office expenses for 2013, 2014, or 2015.
6. Other Expenses
Petitioners reported other expenses of $1,750, $8,786, and $1,100 for 2013,
2014, and 2015, respectively. They attributed the expenses to internet provider
fees, printing and faxing, membership dues for professional associations, and a
section 465(d) carryover loss. Petitioners have not provided any testimony or
substantiating documentation for these expenses. Accordingly, petitioners are not
entitled to any deductions for other expenses for 2013, 2014, or 2015.
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[*13] 7. Repairs and Maintenance Expenses
Petitioners reported repairs and maintenance expenses of $1,000, $500, and
$750 for 2013, 2014, and 2015, respectively. Petitioners have not provided any
testimony or substantiating documentation for these expenses. Accordingly,
petitioners are not entitled to any deductions for repairs and maintenance expenses
for 2013, 2014, or 2015.
8. Utilities Expenses
Petitioners reported utilities expenses of $1,282 and $3,140 for 2014 and
2015, respectively. Petitioners have not provided any testimony or substantiating
documentation for these expenses. Accordingly, petitioners are not entitled to any
deductions for utilities expenses for 2014 or 2015.
B. Noncash Charitable Contribution Deductions
Generally, section 170(a) allows a deduction for any charitable contribution
made by the taxpayer during the taxable year. If a taxpayer makes a charitable
contribution of property other than money (noncash), the amount of the
contribution is generally equal to the fair market value of the property at the time
of the contribution. See sec. 1.170A-1(c)(1), Income Tax Regs. The nature of the
required substantiation depends on the size of the contribution and on whether it is
a cash or noncash gift.
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[*14] Under section 1.170A-13(b)(1), Income Tax Regs., a taxpayer is required to
substantiate each noncash contribution with a receipt from the donee organization
unless doing so is impractical. The donee receipt must contain: (1) the name of
the donee organization; (2) the date and location of the contribution; and (3) a
description of the property in detail reasonably sufficient under the circumstances.
Id. A taxpayer who lacks a receipt is required to keep reliable written records
containing among other things: (1) the name and address of the donee
organization to which the contribution was made; (2) the date and location of the
contribution; (3) a description of the property in detail reasonable under the
circumstances (including the value of the property); and (4) the fair market value
of the property at the time the contribution was made and the method used to
determine fair market value. Id. subpara. (2)(ii); see also Van Dusen v.
Commissioner, 136 T.C. 515, 532 (2011).
It is clear that petitioners made noncash charitable contributions to
Goodwill and Dress for Success, as evidenced by donation receipts. However, the
receipts do not contain descriptions of the donated items. Petitioners would still
be able to substantiate the noncash contributions had they kept reliable written
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[*15] records of the contributions, but they stipulated that they failed to do so.4
They therefore have not substantiated the noncash contributions. Accordingly,
petitioners are not entitled to any noncash charitable contribution deductions for
2013, 2014, or 2015.
II. Section 6662(a) Accuracy-Related Penalties
Section 6662(a) imposes a penalty of 20% on the portion of an
underpayment attributable to any one of various factors, including “[n]egligence
or disregard of rules or regulations” and “[a]ny substantial understatement of
income tax.” Sec. 6662(a) and (b)(1) and (2). Only one section 6662 accuracy-
related penalty may be imposed with respect to any given portion of an
underpayment, even if that portion is attributable to more than one type of conduct
listed in section 6662(b). See New Phoenix Sunrise Corp. v. Commissioner, 132
T.C. 161, 187 (2009), aff’d, 408 F. App’x 908 (6th Cir. 2010); sec. 1.6662-2(c),
Income Tax Regs. Under section 7491(c), the Commissioner bears the burden of
production with respect to any liability of any individual for any penalty. See
Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner has
met his burden of production, the burden of proof remains with the taxpayer,
4
The stipulation states: “Petitioners do not have reliable written records, as
defined in Treas. Reg. § 1.170A-13(b)(2)(ii), for the property allegedly donated
for any of the taxable years at issue.”
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[*16] including the burden of proving that the penalties are inappropriate. See
Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.
Compliance with section 6751(b)(1) is part of the Commissioner’s burden
of production for those penalties to which the section applies. See Graev v.
Commissioner 149 T.C. , (slip op. at 13-14) (Dec. 20, 2017), supplementing
147 T.C. 460 (2016). Section 6751(b)(1) provides, subject to certain exceptions,
that no penalty shall be assessed unless the initial determination of such
assessment is personally approved in writing by the immediate supervisor of the
individual making such determination or such higher level official as the Secretary
may designate. The section 6662(a) accuracy-related penalties were properly
approved as required by section 6751(b)(1), and respondent has proven sufficient
facts to satisfy the burden of production as to that issue.
Negligence includes any failure to make a reasonable attempt to comply
with the internal revenue laws and the failure to exercise due care or the failure to
do what a reasonable and prudent person would do under the circumstances. Sec.
6662(c); see also Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-
3(b)(1), Income Tax Regs. 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), Income Tax Regs. Petitioners exhibited a lack of due care by failing to
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[*17] substantiate their Schedule C expenses and noncash charitable contributions.
Thus, respondent has met his burden of production with respect to the section
6662(a) penalties for negligence.5
The accuracy-related penalty does not apply with respect to any portion of
the underpayment for which it is shown that the taxpayer had reasonable cause and
acted in good faith. Sec. 6664(c)(1). Petitioners have not adequately explained
their failure to properly substantiate their Schedule C expenses and noncash
charitable contributions.
In reaching our decision, we have considered all arguments made by the
parties, and to the extent not mentioned or addressed, they are irrelevant or
without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
5
The sec. 6662(a) accuracy-related penalties are based on the amounts of
any underpayments of tax, which will be determined in a Rule 155 computation.