DocketNumber: No. 22563-97
Citation Numbers: 2001 T.C. Memo. 140, 81 T.C.M. 1749, 2001 Tax Ct. Memo LEXIS 169
Judges: \"Dawson, Howard A.\",\"Pajak, John J.\"
Filed Date: 6/15/2001
Status: Non-Precedential
Modified Date: 4/18/2021
2001 Tax Ct. Memo LEXIS 169">*169 Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
DAWSON, JUDGE: This case was assigned to Special Trial Judge Pajak pursuant to
OPINION OF THE SPECIAL TRIAL JUDGE
PAJAK, SPECIAL TRIAL JUDGE: Respondent determined a deficiency of $ 5,977 in petitioners' Federal income tax for 1995 and a
Respondent, in an answer to the amended petition filed herein, claims an increased deficiency of $ 12,030 and an increased
We must decide: (1) Whether petitioners are entitled to deduct the remaining disallowed Schedule C expenses of $ 19,976 ($ 22,866 total disallowed minus $ 2,890) for the locksmith business; (2) whether petitioners had $ 19,640 of unreported income for 1995 in the form of unexplained bank deposits; (3) whether petitioners had $ 14,093 of additional unreported income in the form of unexplained bank deposits, an issue raised for the first time on brief; (4) whether petitioners are entitled to a casualty loss of $ 15,800 for the seizure and destruction of the guns held for their alleged firearms business; and (5) whether petitioners are liable for the
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioners resided in Poinciana, Florida, at the time they filed their petition.
In 1995, petitioner and Kathy Krist (Mrs. Krist) resided in Hazel Crest, Illinois. They filed their 1995 Federal income tax return electronically on2001 Tax Ct. Memo LEXIS 169">*171 May 14, 1996. On April 16, 1999, they filed an amended return for 1995. The notice of deficiency was timely mailed to petitioners on August 13, 1997.
During 1995, petitioner operated BK Locksmith, a locksmith business. His brother Brett Krist (Brett) worked for the locksmith business in 1995. Petitioner also had a Federal firearms license in the name of Illinois Firearms Service, owned a rental property, operated a limousine business, and was in the process of rehabilitating a house for sale. Petitioner was engaged part-time in these activities. However, during 1995, he spent more time rehabilitating the house than he spent working in his locksmith business.
Mrs. Krist was employed full-time as a receptionist at Baker & McKenzie, a law firm, and part-time at Archibald Candy Corp., where she worked for Fannie May Candies during the Easter holiday.
Petitioners had four bank accounts: one was Mrs. Krist's personal account; one was an account for the locksmith business and firearms service (locksmith account); one was for the rehabilitation of the house and the limousine business (rehabilitation account); and one was for the rental activity (rental account). Receipts from the locksmith2001 Tax Ct. Memo LEXIS 169">*172 business and the firearms service were deposited in the locksmith account and receipts from the rental activity were deposited in the rental account.
Petitioners took out a bigger loan than was required for the purchase of the house because they needed money to restore it. They put the borrowed money in an account that belonged to petitioner's mother so that it would earn interest. His mother would apportion their borrowed money as they needed it. In 1995, they received $ 10,200 of their borrowed money from the mother's account and deposited it in the rehabilitation account along with deposits from the limousine business.
As part of the locksmith business, petitioner made keys for houses, businesses, and cars, and also made keys for repossessed automobiles for one of his clients. Much of petitioner's work was done in the evenings after regular business hours. BK Locksmith was located in petitioner's garage (apparently not detached) at his house in Hazel Crest, Illinois. Because one of his clients was the management company of an apartment building located near his house, petitioner had customers who would come to his house. The management would bring the locks over to be rekeyed2001 Tax Ct. Memo LEXIS 169">*173 whenever a tenant moved out. If someone lost a key, petitioner would make it at his house. Two other car dealer clients would bring automobiles by his house for him to rekey. Much of petitioner's work was done onsite such as at a client's house where a lockout occurred or at a car dealership. Petitioner kept some machines and equipment in his garage. Petitioner kept records of his daily sales and of his supplies in a checkbook and in a business journal. Petitioner did not place his business journal in evidence. Petitioner provided his customers with invoices, but he used the type that were duplicates, and, to get more for his money, he used both parts for different jobs, essentially making 100 invoices out of what should have been 50. Therefore, he kept no copy of the invoices. Petitioner kept some inventory on hand, but usually bought it when needed.
Petitioner's brother, Brett, did work for the locksmith business in 1995. However, petitioner did not file a Form 1099 reporting income he paid to his brother. He claimed he did not know what to file, and he figured it did not matter because his brother was family. Petitioner claimed he kept a ledger of how much Brett was paid, but the2001 Tax Ct. Memo LEXIS 169">*174 ledger was not produced. Respondent calculated that in the check register about $ 3,600 was recorded as paid to Brett. Petitioner stated that the complete records were in a spiral notebook. However, he destroyed the pages in the notebook on a weekly basis.
In the notice of deficiency respondent disallowed the following expenses claimed by petitioners on Schedule C of their 1995 Federal income tax return that pertained to the locksmith business:
Advertising $ 5,350
Commissions 12,105
Telephone 1,252
Home office 960
Supplies 1,704
Car/truck 1,495
OPINION
We find petitioner's testimony to be truthful. It is clear that petitioner operated a locksmith business in 1995. In the operation of such a business he would have incurred expenses for advertising, telephone, supplies, car and truck, and commissions. Deductions are strictly a matter of legislative grace.
1. Claimed Expenses for Advertising, Telephone, Supplies, and
Commissions
Petitioner's check register, for the most part, showed his expenses in a consistent manner. Thus, we are able to estimate some of the claimed expenses. In addition to the allowance of the $ 2,890 for the advertising and telephone expenses agreed to by the parties, we find that petitioners are entitled to deduct also find that they are entitled to deduct $ 852 as expenses for supplies.
The amount of $ 12,105 claimed as "commissions" paid to Brett for his work in the locksmith business is allowed only to the extent of $ 3,600, the amount recorded in the check register. No other evidence was provided by petitioners.
2. CLAIMED CAR AND TRUCK EXPENSES
The record does not contain any documentary evidence to support petitioner's claimed car and truck expenses. Petitioner failed to maintain adequate records such as a diary, log book, or trip sheets to show the distances he purportedly traveled in furtherance of his locksmith business. Therefore, in view of the strict substantiation rules of
3. CLAIMED HOME OFFICE EXPENSES
In
Here petitioner provided limited testimony regarding his use of the garage office. While he introduced into evidence a hand drawn sketch of the alleged office, it is not possible to determine from the drawing whether the garage unit is a detached garage. But even if the garage was detached, the drawing shows that the garage was used for both personal and business purposes.
Accordingly, on the basis of the facts in the record, we sustain respondent's disallowance of the claimed home office deduction.
4. UNREPORTED INCOME USING BANK DEPOSITS ANALYSIS
Respondent alleged in the answer that petitioners had $ 19,640 of bank deposits that were unaccounted for. On brief, respondent requested that we address whether an additional $ 14,093 of unexplained bank deposits, the amount of Mrs. Krist's wages, should be included in petitioners' income because of petitioner's testimony that his wife maintained her2001 Tax Ct. Memo LEXIS 169">*181 own bank account.
It is well settled that this Court will not consider issues raised for the first time on brief when to do so prevents the opposing party from presenting evidence that that party might have introduced if the issue had been timely raised.
As to the $ 19,640 of unexplained bank deposits raised by the answer, respondent bears the burden of proof. Rule 142(a).
In this case petitioners' return did not clearly reflect the activity in their bank accounts. Respondent used a bank deposit analysis to determine the amount of income. Under the bank deposit analysis, the total of all the deposits is treated as petitioners' income.
As previously stated, petitioners had borrowed $ 10,200 that was deposited in an account held for them by2001 Tax Ct. Memo LEXIS 169">*183 petitioner's mother. That amount is not income to petitioners. On this record we find there were no other nonincome items to reduce the remaining $ 9,440. Consequently, we find that petitioners had unreported additional income of $ 9,440 under the bank deposits method.
We agree with respondent that this additional $ 9,440 is subject to self-employment tax under section 1401, and petitioners are entitled to a corresponding 50-percent deduction under section 164(f).
5. CLAIMED CASUALTY LOSS
Respondent contends that petitioners are not entitled to a casualty loss of $ 15,800 for the seizure and destruction of the guns held for their alleged firearms business. Petitioners claimed this loss on their amended return filed on April 16, 1999. No evidence was presented regarding this issue. Accordingly, we deem petitioners to have abandoned it.
6. ADDITION TO TAX FOR FAILURE TO FILE TIMELY RETURNS
Petitioners filed their 1995 Federal income tax return electronically on May 14, 1996. They did not testify as to why they did not file their return on time. They failed to prove that they had reasonable cause for their late filing and that there was a lack of willful neglect. Therefore, we hold that petitioners are2001 Tax Ct. Memo LEXIS 169">*185 liable for the
To reflect the foregoing,
Decision will be entered under Rule 155.
William F. Sanford v. Commissioner of Internal Revenue , 412 F.2d 201 ( 1969 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
New Colonial Ice Co. v. Helvering , 54 S. Ct. 788 ( 1934 )
United States v. Boyle , 105 S. Ct. 687 ( 1985 )
Frank J. Hradesky v. Commissioner of Internal Revenue , 540 F.2d 821 ( 1976 )
Commissioner v. Heininger , 64 S. Ct. 249 ( 1943 )
Indopco, Inc. v. Commissioner , 112 S. Ct. 1039 ( 1992 )
Commissioner v. Soliman , 113 S. Ct. 701 ( 1993 )
Estate of Horvath v. Commissioner , 59 T.C. 551 ( 1973 )