(2) Whether petitioners are entitled to deduct all or any part of their claimed "investor expenses" for 1978.
(3) Whether petitioner-husband is liable for excise taxes (see n.2, supra) for 1976, 1977, and 1978 on account of excess contributions under his Keogh plan.
FINDINGS OF FACT
Some of the facts have been stipulated; the stipulations and the stipulated exhibits are incorporated herein by this reference.
When the petitions were filed in the instant cases, petitioners C. Frederick Frick (hereinafter sometimes referred to as "Frick") and Patricia B. Frick, husband and wife, resided in Wauwatosa, Wisconsin.
On the schedule Cs attached to their tax returns for 1976, 1977, and 1978, petitioners reported income and expenses ">*93 for an advertising activity, named Frick Service, as shown in table 1.
Table 1
| 1976 | 1977 | 1978 |
| Gross receipts | $600.00 | $2,345.00 | $1,688.85 |
| Total income | $600.00 | $2,345.00 | $1,688.85 |
|
| Auto expense | $3,782.45 | $5,230.00 | $5,686.35 |
| Home office | 800.50 | 861.00 | 1,170.00 |
| Sublet expense | | 745.00 | 449.80 |
| Permits | | 10.00 | 57.70 |
|
| Total deductions | 4,582.95 | 6,846.00 | Net loss | $3,982.95 | $4,501.00 | | Year | Dividends | Interest | | Amount | Payors | Amount | Payors | | 1976 | $1,579.68 | 20 | $26,679.10 | 19 | | 1977 | 1,861.37 | 22 | 27,759.66 | 19 | | 1978 | 1,879.80 | 24 | 18,980.54 | 21 | |
Of this interest income, 97 percent is allocable to Frick. 1985 Tax Ct. Memo LEXIS 90">*94
The interest income shown in table 2 includes interest on a Continental Motel mortgage, which interest amounts to $4,816.58 for 1976, $4,767.59 for 1977, and $4,715.58 for 1978. Frick bought land in 1957 1985 Tax Ct. Memo LEXIS 90">*95 schedule D attached to their 1978 tax return, petitioners reported a long-term capital gain of $653.80 from the sale of stock (acquired in 1968). All of this income is allocable to Frick.
On the schedule Es attached to their tax returns for 1976, 1977, and 1978, petitioners reported rental income from commercial property located at 7131 West Capitol Drive (hereinafter sometimes referred to as "the rental property"). Petitioners report the rental property as having been acquired on "7-1-54". The amounts of rental income so reported are as follows: 1976--$11,514.28; 1977--$12,348.00; and 1978--$12,671.41. In 1978, there were three tenants in the rental property. Petitioners did not furnish any services to the tenants on a regular basis in 1978.
Petitioners did not report any liability for self-employment tax for any of the years 1976, 1977, and 1978.
Frick is the owner-employee participant in a tax-qualified employee plan (hereinafter sometimes referred to as "the Keogh Plan"). The Keogh Plan is not a defined benefit plan. Petitioners made contributions under the Keogh Plan in the amounts of $7,500 in 1976, $7,500 in 1977, and $5,000 in 1978. The Keogh Plan did not distribute ">*96 any money to petitioners.
Petitioners' tax home in 1978 was in Wauwatosa, Wisconsin. Frick was away from home on a trip to Arizona from March 5 to March 19, 1978. Frick owned land in Tucson, Arizona, at that time, and an area usage plan was being proposed which might have affected his holding. Except for a short time when there was a squatter on it, Frick's land in Tucson was vacant in 1978. Frick did not earn any income from this land in 1978.
Frick was away from home on a trip to South Carolina from May 23 to May 31, 1978. Frick understood that a computer firm wanted bank financing for software to be used in connection with the computer firm's hardware to be distributed through Radio Shack stores.
Frick was away from home on a trip to Nevada and Arizona from November 6 to November 28, 1978. Frick understood that Southern California Edison was interested in negotiating for easements for lines carrying electrical energy from a new Palo Verde nuclear plant.
* * *
The only trade or business with respect to which the Keogh Plan was established is Frick Service--the activity, the income and the expenses of which are reported on the schedule Cs attached to petitioners' 1976, 1977, ">*97 and 1978 tax returns (see table 1, supra).
OPINION
I. Keogh Plan--Trade or Business
Under section 404(e)(1)1985 Tax Ct. Memo LEXIS 90">*98 , the maximum amount deductible for a year for contributions under the Keogh Plan for that year is the lesser of $7,500 or "15 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established". (The $7,500 was raised to $15,000 for years beginning after 1981. The whole provision was revised for years beginning after 1983.) The only dispute between the parties is the amount of the relevant earned income to be used in determining the maximum deductible contribution to the Keogh Plan.
Respondent maintains that the relevant trade or business is Frick Service, which produced a loss in 1978 (see table 1, supra). As a result, respondent contends, Frick's earned income from his trade or business for 1978 is zero, and the maximum amount deductible for contributions to the Keogh Plan for 1978 is zero. 1985 Tax Ct. Memo LEXIS 90">*99
Petitioners maintain that Frick's earned income includes not only the income of Frick Service, but also the interest reported on schedule B, the gains on the sales of property reported on schedule D, and the rental income reported on schedule E; the sum of these items of income is asserted to be more than enough to support the deductibility of the entire contribution to the Keogh Plan. 1985 Tax Ct. Memo LEXIS 90">*100
We agree with respondent.
Whether a taxpayer is carrying on a trade or business requires an examination of all the facts in each case. Higgins v. Commissioner,312 U.S. 212">312 U.S. 212, 312 U.S. 212">217-218 (1941); Simonsen Industries Inc. v. Commissioner,243 F.2d 407">243 F.2d 407 (CA7 1957). The Supreme Court has held that investing, in itself, does not constitute ">*101 a trade or business. See Whipple v. Commissioner,373 U.S. 193">373 U.S. 193 (1963); 312 U.S. 212">Higgins v. Commissioner,supra.
In Higgins, the taxpayer had a large sum invested in real estate, bonds, and stock. He made permanent investments and hired a staff to help him oversee his fortune. The staff kept records, collected dividends and interest, made deposits, and reported to Higgins. After reviewing these facts, the Circuit Court of Appeals for the Second Circuit stated that "[b]y the common speech of men, a person who does nothing beyond looking after his own investments and receiving the income from them is not conducting a trade or business." Higgins v. Commissioner,111 F.2d 795">111 F.2d 795, 111 F.2d 795">796 (CA2 1940). In affirming the Second Circuit's opinion, the Supreme Court concluded that no matter what the size of an estate or the staff required to oversee it, the mere keeping of records and collecting investment income does not constitute a trade or business as a matter of law. In reaching its conclusion, the Supreme Court set forth a facts and circumstances test for determining what constitutes carrying on a trade or business and pointed out that no particular fact or set of facts was sufficient, by itself, to ">*102 satisfy that test. See also United States v. Pyne,313 U.S. 127">313 U.S. 127 (1941), and City Bank Farmers Trust Co. v. Helvering,313 U.S. 121">313 U.S. 121 (1941).
Frick, like the taxpayer in Higgins, did nothing except collect interest and dividends earned on his savings accounts and his stock portfolio. The fact that he carried on these activities for his own account is not crucial to our determination; rather, it is the relatively passive nature of his activities that controls. See Ditunno v. Commissioner,80 T.C. 362">80 T.C. 362 (1983). Sec. 404(e)(1).
In Groetzinger v. Commissioner,82 T.C. 793">82 T.C. 793 (1984), affd. 771 F.2d 269">771 F.2d 269 (CA7 1985), we pointed out that an active "trader" might be treated as being in a trade or business. We summarized the state of the law as follows (82 T.C. 793">82 T.C. 801):
It is now clear that an active "trader", who looks to profit from short-term market swings and does not simply hold securities for long-term appreciation, will be deemed ">*103 to be engaged in a trade or business provided that his trading is frequent and substantial. Fuld v. Commissioner,139 F.2d 465">139 F.2d 465 (2d Cir. 1943); Commissioner v. Nubar,185 F.2d 584">185 F.2d 584 (4th Cir. 1950); Levin v. United States,220 Ct. Cl. 197">220 Ct. Cl. 197, 597 F.2d 760">597 F.2d 760 (1979). Compare Purvis v. Commissioner,530 F.2d 1332">530 F.2d 1332 (9th Cir. 1976); Moller v. United States,721 F.2d 810">721 F.2d 810 (Fed. Cir. 1983). We previously described this distinction between "investing" and "trading" as follows:
"in the former, securities are purchased to be held for capital appreciation and income, usually without regard to short-term developments that would influence the price of securities on the daily market. In a trading account, securities are bought and sold with reasonable frequency in an endeavor to catch the swings in the daily market movements and profit thereby on a short-term basis. [Liang v. Commissioner,23 T.C. 1040">23 T.C. 1040, 23 T.C. 1040">1043 (1955).]" [Fn. ref. omitted.]
The five or six capital transactions reported by petitioners on their tax returns over the 1976-1978 period do not qualify Frick as a trader. Nothing in the record suggests that the activities resulting in the gains reported on petitioners' schedule Ds--and reported as ">*104 long-term capital gains--arose from any activity that qualifies as a trade or business.
We conclude that petitioners' schedule D long-term capital gains income is not "earned income derived by [Frick] from the trade or business with respect to which the [Keogh Plan] is established." Sec. 404(e)(1).
The question of whether Frick's activities with regard to the rental property constitute a trade or business (see generally Curphey v. Commissioner,73 T.C. 766">73 T.C. 766, 73 T.C. 766">774-775 (1980)) is a question of fact, as to which petitioners have the burden of proof. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice & Procedure. In particular, petitioners must show us the level and scope of Frick's activities with regard to the rental property and then they must persuade us that this level and scope of activities justify a conclusion that his activities amounted to a trade or business. O'Donnell v. Commissioner,62 T.C. 781">62 T.C. 781, 62 T.C. 781">785 (1974), affd. without published opinion 519 F.2d 1406">519 F.2d 1406 (CA7 1975).
Petitioners did not present any evidence with regard to the rental property, other than the little that was elicited by respondent's cross examination of Frick and the Court's examination ">*105 of Frick. Essentially, it appears that Frick did not furnish any services to the tenants on a regular basis in 1978. Frick did not recall what the situation was in 1977 or 1976.
We conclude that petitioners have failed to carry their burden of proving that their schedule E rental income is "earned income derived by [Frick] from the trade or business with respect to which the [Keogh Plan] is established". Sec. 404(e)(1).
Since the relevant trade or business is only Frick Service (the business described on the schedule C attached to petitioners' tax return), and since that business produced a loss, we conclude that petitioners are not entitled to deduct any 1978 contributions to the Keogh Plan.
On brief, petitioners state their position as follows:
Again, it is the sincerest belief of the petitioner that the Keogh Plan was established with its goal to motivate the citizens of our country to put a percentage of their income aside for the purpose of keeping their independence in later years and not having to feel the need to ask for the support from others. It is with this intent the petitioner has made his contributions to his Keogh Plan. As stated in petitioners [sic] brief, petitioner ">*106 does not have a retirement plan or pension fund to look forward to. His Keogh Plan is it, and this petitioner has worked hard for it and is very proud of it.
Petitioners persist in misunderstanding the law, notwithstanding the Court's efforts to explain the matter in chambers at the session when the instant cases were tried, and notwithstanding the explanation of this same point in Frick v. Commissioner,T.C. Memo. 1983-733, affd. by order (CA7 Aug. 20, 1985). As the Supreme Court put it in New Colonial Ice Co. v. Helvering,292 U.S. 435">292 U.S. 435, 292 U.S. 435">440 (1934), "Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed." The Congress determined to allow deductions for contributions to Keogh plans, but the Congress also determined that any such deduction must "not exceed * * * 15 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established" (sec. 404(e)(1)). Petitioners failed to qualify under the statute. Petitioners' "sincere belief" is irrelevant.
On brief, petitioners point to a proceeding in an earlier case ">*107 before this Court ( Frick v. Commissioner,T.C. Memo. 1972-71) in which it was indicated that Frick was in a trade or business in 1966. That activity involved a joint venture between Frick and another person. On December 1, 1966, the joint venturors agreed that the joint venture would be dissolved and Frick's interest would be bought out by his co-venturor, effective April 12, 1967.This does not help petitioners show that Frick was in any trade or business in 1976,1977, or 1978.
We hold for respondent on this issue. II. Investor Expenses
Petitioners contend that they are entitled to deduct in full their claimed $2,490 of "investor ">*108 expenses". In particular, they maintain that they are entitled to deduct $2,150 as the expense of three trips undertaken in 1978. Petitioners calculated the $2,150 portion of the claimed investor expenses deduction by multiplying the aggregate number of trip days (43) by a flat per diem ($50).
Respondent contends that (1) no deductions are allowable under section 162 because petitioners were not in any trade or business in connection with the expenses, (2) no deductions are allowable under section 212 because petitioners failed to show that the expenses were ordinary or necessary or bore a reasonable and proximate relation to the production of income or to the management of property held for the production of income, and (3) as to the travel expenses, petitioners failed to comply with the substantiation requirements of section 274(d).
We agree with respondent's conclusion.
We will consider first the $2,150 that petitioners seek to deduct as travel expenses, calculated as 43 days times $50 per day.
Personal expenses are not deductible unless the contrary is "expressly provided" in chapter 1 (sec. 262). Section 162(a)(2)1985 Tax Ct. Memo LEXIS 90">*110 expressly permits a taxpayer to deduct what might otherwise ">*109 be personal expenses if all the following requirements are met ( Commissioner v. Flowers,326 U.S. 465">326 U.S. 465, 326 U.S. 465">470 (1946)):
(1) The expense is a traveling expense (this includes which items as transportation fares and food and lodging expenses incurred while traveling);
(2) The expense is incurred while "away from home"; and
(3) The expense is an ordinary and necessary expense incurred in pursuit of a trade or business.
Under section 212, section 274(d)1985 Tax Ct. Memo LEXIS 90">*112 provides that no deduction shall be allowed under section 162 for any traveling expense, including meals and lodging while away from home, unless the taxpayer substantiates certain matters by adequate records or by sufficient evidence corroborating his own statement. Under section 1.274-5(c)(2), Income Tax Regs., in order to meet the "adequate records" requirement, a taxpayer is to maintain an account book, diary, statement of expense, or similar record and documentary evidence (such as receipts, paid bills, or similar evidence) which, when combined, establish each element of the expense set forth in section 274(d). If the taxpayer lacks adequate records, a detailed written or oral statement by the taxpayer and sufficient other corroborative ">*111 evidence is required. Sec. 1.274-5(c)(3), Income Tax Regs.
Section 274(d) was enacted in part with the specific intent of overruling the application of the "Cohan rule" ( Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (CA2 1930)), under which courts had allowed deductions even in the absence of specific substantiation, where it appeared likely that the taxpayers had paid or incurred some deductible expenses. Sanford v. Commissioner,50 T.C. 823">50 T.C. 823, 50 T.C. 823">827-828 (1968), affd. 412 F.2d 201">412 F.2d 201 (CA2 1969).
Petitioners failed to produce any evidence from which we could conclude that each of the requirements of section 274(d) (final flush language) was satisfied as to any specific expense.
Under these circumstances, it is not necessary to examine into the details of sections 162(a) and 212.
Petitioners have failed to describe the remaining $340 of deductions for "investor expenses" that they claim in addition to $2,150 of travel expenses.
We conclude that petitioners have failed to carry their burden of proving their entitlement to any deductions for "investor expenses".
We hold for respondent on this issue.
III. Keogh Plan--Excess Contributions
Respondent determined that Frick made excess contributions under the Keogh Plan ">*113 as follows: $7,500 for 1976, $7,150 for 1977, and $4,755.33 for 1978. By amended answers respondent asserts that some greater amounts may be excess contributions for 1977 and for 1978.
Petitioners contend that they did not make excess contributions for any of the three years.
We agree with respondent.
Section 4972(a)1985 Tax Ct. Memo LEXIS 90">*114 ">*115 ">*116 ">*117 imposes an excise tax in an amount equal to 6 percent of excess contributions under the Keogh Plan. Section 4972(b) defines "excess contributions", for purposes of the instant cases, as the excess of (1) the amounts contributed under the Keogh Plan for the current year and the prior years (back to 1976) over, (2) the amounts deductible for these years. In other words, the provision is cummulative. As applied to the instant cases, for 1977 the excess contributions include the 1976 and 1977 amounts, and for 1978 the excess contributions include the 1976, 1977, and 1978 amounts. See also Johnson v. Commissioner,74 T.C. 1057">74 T.C. 1057 (1980), affd. 661 F.2d 53">661 F.2d 53 (CA5 1981).
Frick contributed under the Keogh Plan $7,500 in 1976, $7,500 in 1977, and $5,000 in 1978.
Petitioners' only meaningful contentions on this issue relate to the breadth of Frick's trade or business during 1976, 1977, and 1978. We have examined into these contentions as to 1978, the purposes of determining the amount of petitioners' 1978 income tax deficiency (Issue I, supra), and concluded that: (1) the only relevant trade or business is Frick Service; (2) Frick Service produced a loss for 1978; and (3) petitioners are not entitled to deduct any 1978 contributions. Nothing in the record in the instant case persuades us that the result is any different for 1977 or 1976.
Accordingly, on the basis of the record in the instant cases, we conclude that the entire amount of the contributions made for each of the years constitutes excess contributions and that petitioner-husband is liable for the 6-percent excise taxes thereon under section 4972. 1985 Tax Ct. Memo LEXIS 90">*118
We hold for respondent on this issue.
To take into account the parties' settlement of numerous issues in docket number 12717-82, as well as the matters referred to in note 14, supra,
Decisions will be entered under Rule 155.
Document Info
Docket Number： Docket Nos. 18651-81, 12716-82, 12717-82.
Filed Date： 10/28/1985
Precedential Status： Non-Precedential
Modified Date： 11/21/2020
