Suresh Hatte v. Commissioner

T.C. Memo. 2019-109
UNITED STATES TAX COURT
SURESH HATTE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13738-18. Filed August 28, 2019.
Suresh Hatte, pro se.
Stephen C. Welker and Bartholomew Cirenza, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LAUBER, Judge: With respect to petitioner’s Federal income tax for 2014
and 2015, the Internal Revenue Service (IRS or respondent) determined deficien-
cies and accuracy-related penalties under section 6662(a) as follows:1
1
All statutory references are to the Internal Revenue Code in effect for the
(continued...)
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[*2] Year Deficiency Penalty
2014 $14,266 $2,853
2015 31,132 6,226
Most issues were resolved in a stipulation of settled issues submitted before trial.
In his post-trial brief respondent conceded the accuracy-related penalties in light
of the Court’s Opinion in Clay v. Commissioner, 152 T.C. __ (Apr. 24, 2019),
which was released shortly after this case was tried. The sole question remaining
for decision is whether petitioner is entitled to deduct car and truck expenses re-
ported on Schedule C, Profit or Loss From Business, for his real estate appraisal
business. We resolve this issue in respondent’s favor.
FINDINGS OF FACT
The parties filed a stipulation of facts with accompanying exhibits that is
incorporated by this reference. Petitioner resided in Maryland when he filed his
petition.
During 2014 and 2015 petitioner worked as a taxi driver and as a real estate
appraiser in the Washington, D.C., metropolitan area. He reported income and ex-
penses for these two businesses on separate Schedules C. For the taxi business,
1
(...continued)
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
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[*3] his Schedule C for 2014 reported gross profit of $12,413 and expenses of
$8,125 for gasoline, oil, carwash, licenses, insurance, and supplies. He wound
down his taxi business during 2014. For 2015 he reported gross profit of zero
from the taxi business and expenses of $2,365, which resembled the expenses he
had reported for 2014. He reported no mileage-based vehicle expenses on the
Schedules C for his taxi business.
Petitioner’s appraisal business was more robust. On his 2014 Schedule C
for the appraisal business he reported gross profit of $111,610 and expenses of
$95,176, including $45,153 of car and truck expenses. For 2015 he reported gross
profit of $183,770 and expenses of $154,979, including $64,303 of car and truck
expenses.
Petitioner owned three vehicles allegedly used in his appraisal business: a
Ford Crown Victoria (his taxicab), a Honda Accord, and a Nissan Maxima. For
2014 he reported on Form 4562, Depreciation and Amortization, the following
mileage on these vehicles:
Type Ford Honda Nissan Total
Business 55,800 24,830 -0- 80,630
Personal 2,200 600 -0- 2,800
For 2015 he reported on Form 4562 the following mileage on these vehicles:
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[*4] Type Ford Honda Nissan Total
Business -0- 65,250 46,580 111,830
Personal -0- 3,000 230 3,230
Petitioner calculated vehicle expenses for his appraisal business by multi-
plying the business mileage shown above by the applicable standard mileage rates.
See Notice 2013-80, 2013-52 I.R.B. 821 ($0.56 per mile for 2014); Notice 2014-
79, 2014-53 I.R.B. 1001 ($0.575 per mile for 2015). In addition to these mileage-
based costs, he separately reported, on the Schedule C for his appraisal business,
expenses for oil changes and carwash.2
The IRS selected petitioner’s 2014 and 2015 returns for examination. It dis-
allowed all deductions for car and truck expenses related to his appraisal business
on the ground that he had not adequately substantiated them. On May 2, 2018, the
IRS sent petitioner a timely notice of deficiency, and he timely sought redetermi-
nation in this Court.
At trial petitioner testified that extensive driving was required for his ap-
praisal business. He said that he conducted this business from a friend’s house in
2
Petitioner’s Schedules C for the appraisal business reported expenses of
$32,000 and $51,200 for “contract labor” for 2014 and 2015, respectively. These
amounts were apparently paid to Muktayi Hatte, who shared a home (and a last
name) with petitioner. Although Ms. Hatte is listed as his spouse on an insurance
policy, he testified that the two were not married and that she was a friend who
helped him by visiting appraisal sites and preparing documents.
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[*5] Silver Spring, Maryland, and that he commuted there almost daily from his
residence in Hyattsville, Maryland. He did not keep contemporaneous mileage
logs or other records of the mileage he drove for the appraisal business. Rather, he
created spreadsheets during the IRS examination by using Google maps to
calculate the round-trip distance from Silver Spring to each of his alleged
destinations. There is no evidence showing where petitioner actually started each
trip, and the spreadsheets do not show which vehicle was used for any of the
travel.
According to petitioner’s spreadsheet for 2014, he visited at least one ap-
praisal site every day but one between January and October, with no trips in No-
vember or December. The spreadsheet for 2015 shows a substantially identical
pattern. Many of these alleged trips were repeat visits to the same property. Peti-
tioner testified that repeat trips were often necessary because the realtor failed to
show up, the customer canceled and rebooked, or the exterior lighting was too
poor for him to take photographs. We did not find this testimony credible.
Petitioner testified that the Honda was the primary vehicle he used for his
appraisal business. During 2014 he allegedly used the Ford (his taxicab) to visit
appraisal sites in between trips with taxi customers. He testified at trial that he
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[*6] discarded the Nissan in 2015 and reported no miles on it, but his return
clearly shows otherwise.
OPINION
The IRS’ determinations in a notice of deficiency are generally presumed
correct, though the taxpayer can rebut this presumption. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Petitioner does not contend that the burden
of proof should shift to respondent under section 7491(a); had he advanced this
contention, it would lack merit. He thus bears the burden of proof.
Deductions are a matter of legislative grace. The taxpayer bears the burden
of proving that reported business expenses were actually paid and were “ordinary
and necessary.” Sec. 162(a); Rule 142(a). The taxpayer bears the burden of sub-
stantiating the expenses underlying his claimed deductions by keeping and pro-
ducing records sufficient to enable the IRS to determine the correct tax liability.
Sec. 6001; INDOPCO v. Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a),
(e), Income Tax Regs. The failure to keep and present such records counts heavily
against a taxpayer’s attempted proof. Rogers v. Commissioner, T.C. Memo. 2014-
141, 108 T.C.M. 39, 43.
Section 274(d) imposes relatively strict substantiation requirements for de-
ductions claimed for (among other things) “listed property.” Listed property in-
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[*7] cludes (with exceptions not relevant here) “any passenger automobile” and
“any other property used as a means of transportation.” Sec. 280F(d)(4)(A). No
deduction is allowed under section 274(d) unless the taxpayer substantiates, by
adequate records or by sufficient evidence corroborating his own statements, the
amount, time and place, and business purpose for each expenditure. Sec. 1.274-
5T(a), (b), and (c), Temporary Income Tax Regs., 50 Fed. Reg. 46014, 46016
(Nov. 6, 1985); see sec. 1.274-5(j)(2), Income Tax Regs. (noting that a taxpayer
using a mileage rate in lieu of actual costs is not relieved of the substantiation
requirement).3
Because petitioner’s three automobiles constituted “listed property,” his re-
ported car and truck expenses are subject to the heightened substantiation require-
ments described above. See Fernandez v. Commissioner, T.C. Memo. 2011-216.
To satisfy these requirements, the taxpayer generally must keep a contemporane-
3
A vehicle used in the trade or business of transporting persons or property
for compensation generally is not classified as a “personal automobile.” Sec.
280F(d)(5)(B)(ii). But as “property used as a means of transportation,” such a
vehicle will nevertheless constitute listed property unless “substantially all” of its
use is connected to that trade or business. Id. para. (4)(C). For 2014 petitioner
reported that 55,800 of the 58,000 miles driven on his Ford were related to his
appraisal business; he therefore did not carry his burden of proving that “sub-
stantially all” of that vehicle’s use was connected to his taxi business. The Ford
was thus listed property during 2014 whether or not it is considered a personal
automobile.
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[*8] ous mileage log or similar record, such as a diary or trip sheets, that
substantiates the extent to which the vehicle was actually used for business rather
than personal purposes. See Michaels v. Commissioner, 53 T.C. 269, 275 (1969);
Flake v. Commissioner, T.C. Memo. 2014-76; sec. 1.274-5T(c), Temporary
Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Lacking contemporaneous
records, the taxpayer must produce other credible evidence sufficient to
corroborate his or her own statements concerning business use. See sec. 1.274-
5T(a), (b), and (c), Temporary Income Tax Regs., supra.
For a variety of reasons we did not find petitioner’s spreadsheets or his testi-
mony to be credible. He did not prepare these spreadsheets contemporaneously
with (or near to the time of) his alleged travel. Rather, he created them several
years later, during the IRS examination. He did not produce at trial any notes, cal-
endars, or other contemporaneous documents to support the entries on the spread-
sheets. Although he produced invoices associated with some of his appraisal
work, these only cover January and February of 2014. It is implausible that he
could have recalled the details of more than 600 trips so long after the fact.
Petitioner’s testimony concerning the cars that he used at different times for
his appraisal business contradicted the mileage reported on his returns. He testi-
fied that he discarded the Nissan in 2015 and reported no miles on it, but his return
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[*9] clearly shows otherwise. And while he testified that he used the Ford
primarily in his taxi business, he reported that 96% of the miles driven in that
vehicle during 2014--55,800 miles out of 58,000--were connected with his
appraisal business.
Petitioner’s spreadsheet for 2014 shows entries for every single day--except
one--from January through October, including holidays and weekends. His
spreadsheet for 2015 likewise has daily entries from January through October. We
find it implausible that petitioner drove for his appraisal business with such regu-
larity. It is also peculiar that each spreadsheet shows daily entries for the first ten
months of each year and no entries for the last two months. Petitioner testified
that he visited appraisal sites during November and December but that the “mile-
age [for those trips] had been taken into consideration before.” This statement
constitutes an admission that the mileage shown for the earlier trips was inflated.
Petitioner’s spreadsheets allege several trips that he could not possibly have
taken. The record includes certificates showing that he completed at least five
full-day continuing education courses during 2014-2015. On May 7, 2015, for ex-
ample, he flew to Detroit, Michigan, to complete a seven-hour training course.
His spreadsheet asserts that, on the same day, he made three trips totaling 334
miles to conduct appraisals in Maryland and Virginia. It is beyond implausible
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[*10] that he flew to Michigan, completed a seven-hour course, flew back to
Maryland, and then drove 334 miles to take photographs in the dark. The
spreadsheets allege multiple appraisal trips on four other days on which he
attended seven-hour continuing education classes in Maryland. On cross-
examination he admitted that the mileage he recorded for those days could not
possibly be correct.
During 2014-2015 petitioner reported on the Schedule C for his appraisal
business aggregate expenses of $83,200 for “contract labor.” See supra note 2.
He testified that he paid these sums to an assistant who helped him (inter alia) by
making visits to appraisal sites. His assistant did not testify. There is no evidence
as to whether the spreadsheets included her trips or (if so) whether she used his car
to make the journeys.
Although petitioner’s spreadsheets calculate all round-trip mileage from
Silver Spring, it is unlikely that his 600 alleged appraisal trips all originated there.
He lived in Hyattsville and efficiency would surely have dictated starting certain
trips from home. During 2014 almost 70% of his appraisal-related mileage was
recorded for the Ford, his taxicab, which he supposedly used to visit appraisal
sites between trips with taxi customers. If that is so, it is unlikely that those trips
all began in Silver Spring.
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[*11] Finally, petitioner’s spreadsheets reveal many internal inconsistencies that
make them unreliable. For example:
• On at least six occasions, the spreadsheets implausibly show two round
trips to the same address on the same day. And some of these entries lack credi-
bility for other reasons. On January 3, 2014, petitioner alleges that he made two
trips--one of 34 miles and the other of 36 miles--to the same address in Hyattsville,
Maryland. Since petitioner lived in Hyattsville, these numbers are highly suspect.
And even if we assume that petitioner drove from Hyattsville to Silver Spring and
then back to Hyattsville--and did so twice on the same day--the distance from
Silver Spring to Hyattsville is less than 10 miles.
• On many occasions the spreadsheets show that petitioner made, on the
same day, separate round trips to distant locations fairly close to each other. On
June 12, 2014, for example, the spreadsheet asserts that he took separate round
trips, each of 70 miles, to two addresses in Baltimore. We find it unlikely that
petitioner drove from Silver Spring to Baltimore and back to Silver Spring, only to
turn around and drive back to Baltimore.
• On back-to-back days in January 2015, the spreadsheet shows a 289-mile
round trip to Cumberland, Maryland, and a 371-mile round trip to Oakland, Mary-
land. Cumberland is on the way from Silver Spring to Oakland. It is wholly im-
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[*12] plausible that petitioner made separate trips of over six hours to these two
destinations.
These examples only scratch the surface of the improbabilities that pervade
petitioner’s spreadsheets. He offered no credible testimony or other evidence to
support the mileage he claimed. We have no doubt that he used one or more of his
vehicles in his appraisal business. But because vehicle costs are subject to the
strict substantiation requirements of section 274(d), we are not at liberty to esti-
mate his costs under Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). See Sanford v. Commissioner, 50 T.C. 823, 827-829 (1968), aff’d, 412
F.2d 201 (2d Cir. 1969). Given petitioner’s failure to submit any credible substan-
tiating evidence, we have no alternative but to sustain respondent’s disallowance
of his deductions for car and truck expenses in their entirety.
To reflect the foregoing,
Decision will be entered under
Rule 155.