Tory M. Watson v. Commissioner

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2014-108
UNITED STATES TAX COURT
TORY M. WATSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26032-11S. Filed December 8, 2014.
E. Rhett Buck, Jr., for petitioner.
Portia Neomi Rose, for respondent.
SUMMARY OPINION
MORRISON, Judge: This case was heard pursuant to section 7463 of the
Internal Revenue Code in effect when the petition was filed. Pursuant to section
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7463(b), the decision to be entered is not reviewable by any other court, and this
opinion shall not be treated as precedent for any other case.1
The respondent (referred to here as the “IRS”) issued a notice of deficiency
to the petitioner, Tory M. Watson (referred to here as “Watson”), for the 2005 and
2006 tax years determining: (1) income-tax deficiencies of $2,2822 for 2005 and
$26,257 for 2006; (2) additions to tax for 2006 of $5,633 under section 6651(a)(1)
and $6,259 under section 6651(a)(2); and (3) an accuracy-related penalty for 2006
of $5,251 under section 6662(a).
After trial the parties settled many of the issues. The remaining issues to be
resolved involve the tax treatment of certain business expenses of LLCs Watson
owned. Specifically, the remaining issues are:
(1) The amount of the rental-expense deduction for Skyline Motion Pictures,
LLC, for 2005. We hold that the amount is $16,605.
(2) The amount of the contract-labor-expense deduction for Skyline Motion
Pictures, LLC, for 2005. We hold that the amount is $75,153.
1
All subsequent section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
2
All dollar amounts are rounded to the nearest dollar.
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(3) The amount of the contract-labor-expense deduction for Skyline Movement,
LLC, for 2006. We hold that the amount is $14,778.
(4) The amount of the contract-labor-expense deduction for Liberation
Financial, LLC, for 2006. We hold that the amount is $8,900.
Background
The stipulated facts and the supplemental stipulation of facts are
incorporated by this reference. Watson resided in Texas at the time he filed the
petition.
From 2002 through 2006 Watson was an employee in the mortgage
industry. During 2005 Watson was employed by DSG Mortgage, LLC, and First
Capital Mortgage Corp. as a loan originator. During 2006 Watson was employed
by First Capital Mortgage Corp. as a loan originator.
Watson prepared his own federal-income-tax returns for 2005 and 2006. He
filed these returns late. Watson’s 2005 return included Schedules C, “Profit or
Loss From Business,” for two LLCs that he owned and operated: Britt and
Skyline Motion Pictures. Through Britt, Watson engaged in the business of
making and selling clothing. Through Skyline Motion Pictures, Watson engaged
in the business of producing films and other entertainment.
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During 2006 Watson abandoned Skyline Motion Pictures’ business of
producing films and other entertainment. He changed the name of the LLC to
Skyline Movement. Through Skyline Movement, Watson engaged in website
design and other consulting services. On his 2006 return he included a Schedule
C for Skyline Movement. He also included a Schedule C for Liberation Financial,
LLC, another LLC that he owned and operated. Through Liberation Financial,
Watson advised mortgage companies on improving their overall performance and
the performance of their loan officers. All three LLCs (Skyline Motion
Pictures/Skyline Movement, Britt, and Liberation Financial) were disregarded
entities for federal tax purposes. Therefore, Watson is treated for federal tax
purposes as if he operated the LLCs as sole proprietorships. The IRS does not
challenge the existence of the businesses the LLCs conducted or that the
businesses were operated for profit.
On the Schedule C for Skyline Motion Pictures for 2005 Watson claimed
business-expense deductions of $291,558. On the Schedule C for Britt for 2005
Watson claimed business-expense deductions of $10,839. Watson reported that
neither business had gross income for 2005. On the Schedule C for Skyline
Movement for 2006 Watson claimed business-expense deductions of $152,940.
On the Schedule C for Liberation Financial for 2006 Watson claimed business-
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expense deductions of $208,426. Watson reported gross income for both Skyline
Movement and Liberation Financial for 2006.
On August 9, 2011, the IRS mailed a notice of deficiency to Watson for
both 2005 and 2006. In the notice of deficiency, the IRS disallowed:
C all business-expense deductions that Watson claimed on the Schedule
C for Skyline Motion Pictures for 2005,
C all business-expense deductions that Watson claimed on the Schedule
C for Britt for 2005,
C $70,016 of the business-expense deductions that Watson claimed on
the Schedule C for Skyline Movement for 2006, and
C $97,973 of the business-expense deductions that Watson claimed on
the Schedule C for Liberation Financial for 2006.
The IRS also determined that for 2005 Watson had earned $67 in interest and
received $1,376 attributable to a refund from the State of Illinois Revenue
Department. The IRS also made computational adjustments for both years to
Watson’s self-employment taxes, adjusted gross income, itemized deductions, and
net operating losses. The IRS determined: (1) income-tax deficiencies of $2,282
for 2005 and $26,257 for 2006; (2) additions to tax for 2006 of $5,633 under
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section 6651(a)(1) and $6,259 under section 6651(a)(2); and (3) an accuracy-
related penalty for 2006 of $5,251 under section 6662(a).
The case was tried in Houston, Texas. After trial the parties reached a
partial settlement. The parties agreed that: (1) Watson’s income for 2005 is
increased by $67 for interest and $1,376 for the refund from the State of Illinois
Revenue Department; (2) any adjustments to Watson’s self-employment taxes,
adjusted gross income, itemized deductions, and net operating losses for 2005 and
2006 are computational; and (3) for 2006 Watson is liable for additions to tax
under section 6651(a)(1) and (2) and a penalty under section 6662(a) for any
underpayment that is determined. As for the Schedule-C adjustments, it appears to
us that the settlement agreement resolved all Schedule-C adjustments except for
the following four categories:
C a rental-expense deduction for Skyline Motion Pictures for 2005,
C a contract-labor-expense deduction for Skyline Motion Pictures for
2005,
C a contract-labor-expense deduction for Skyline Movement for 2006,
and
C a contract-labor-expense deduction for Liberation Financial for 2006.
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The following tables summarize: (1) the categories of Schedule-C expenses that
Watson reported; (2) the amounts Watson claimed on his returns for each
category; (3) the amounts allowed in the notice of deficiency for each category;
and (4) the parties’ positions regarding the deductible amounts for each category,
as reflected in the pleadings, the concessions made at trial, the settlement
agreement, and the briefs.
Skyline Motion Pictures (2005)
Amount
Amount allowed in
per notice of
Item return deficiency Parties’ positions
Advertising $20,734 -0- $20,565 (as settled)
Business use of home 16,877 -0- -0- (as settled)
Car and truck expenses 8,489 -0- 2,430 (as settled)
1
78,861 (Watson)
Contract labor 85,843 -0- -0- (IRS)
Depreciation 8,621 -0- 4,625 (as settled)
Legal & professional
services 15,822 -0- 8,480 (as settled)
Office expense 2,901 -0- 11,767 (as settled)
Rent or lease of “[o]ther 23,055 (Watson)
business property” 22,769 -0- -0- (IRS)
2
Supplies 15,392 -0- -0-
2
Travel 26,491 -0- -0-
2
Meals and entertainment 12,287 -0- -0-
Utilities 10,035 -0- 794 (as settled)
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“Other expenses” 45,297 -0- 15,431 (as settled)
64,092 (settled as deductible)
plus
Total 291,558 -0- 101,916 (still sought by Watson)
1
2
This amount is explained infra Discussion part 2.a.
Watson did not argue for any deduction at trial or on brief. These are deemed conceded.
See, e.g., Hedrick v. Commissioner, 63 T.C. 395, 396-397 (1974).
Britt (2005)
Amount
Amount allowed in
per notice of
Item return deficiency Parties’ positions
Supplies $421 -0- $5,420 (as settled)
“Other expenses” 10,418 -0- -0- (as settled)
Total 10,839 -0- 5,420 (settled as deductible)
Skyline Movement (2006)
Amount
Amount allowed in
per notice of
Item return deficiency Parties’ positions
1
Advertising $1,643 $1,643 $1,643
1
Car and truck expenses 33,225 33,225 33,225
2
$14,778 (Watson)
Contract labor 26,870 -0- -0- (IRS)
1
Depreciation 13,056 13,056 13,056
Legal & professional
1
services 4,350 4,350 4,350
Rent or lease of “[o]ther
1
business property” 2,100 2,100 2,100
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1
Supplies 9,235 9,235 9,235
Travel 6,912 5,169 1,237 (as settled)
Meals and entertainment 26,135 1,565 486 (as settled)
1
Utilities 6,289 6,289 6,289
“Other expenses” 23,125 6,292 8,617 (as settled)
3
80,238
plus
Total 152,940 82,924 14,778 (still sought by Watson)
1
Neither party sought an amount different than the amount allowed in the notice of
deficiency.
2
3
This amount is explained infra Discussion part 2.b.
This consists of: (1) amounts agreed to in settlement and (2) amounts determined in
notice of deficiency in categories for which neither party sought an amount different than the
amount allowed in the notice of deficiency.
Liberation Financial (2006)
Amount
Amount allowed in
per notice of
Item return deficiency Parties’ positions
1
Advertising $27,125 $27,125 $27,125
260,582 (Watson)
Contract labor 45,548 -0- -0- (IRS)
Legal & professional
1
services 3,875 3,875 3,875
1
Office expenses 36,030 36,030 36,030
1
Supplies 13,516 13,516 13,516
1
Taxes and licenses 1,350 1,350 1,350
Travel 4,291 552 2,480 (as settled)
Meals and entertainment 38,513 3,779 2,672 (as settled)
1
Utilities 18,393 18,393 18,393
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“Other expenses” 19,785 5,833 7,111 (as settled)
3
112,552
plus
Total 208,426 110,453 60,582 (still sought by Watson)
1
Neither party sought an amount different than the amount allowed in the notice of
deficiency.
2
This amount is explained infra Discussion part 2.c.
3
This consists of: (1) amounts agreed to in settlement and (2) amounts determined in
notice of deficiency in categories for which neither party sought an amount different than the
amount allowed in the notice of deficiency.
Discussion
Generally, the taxpayer bears the burden of proving, by a preponderance of
the evidence, that the determinations in the notice of deficiency are erroneous.
Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a)
imposes the burden of proof on the IRS with respect to fact issues for which the
taxpayer: (1) complied with the substantiation requirements of the Internal
Revenue Code; (2) maintained all records required under the Internal Revenue
Code; (3) cooperated with reasonable requests by the IRS for witnesses,
information, documents, meetings, and interviews; and (4) introduced credible
evidence. Credible evidence is the quality of evidence which the Court would find
sufficient upon which to base a decision on the issue in the taxpayer’s favor,
absent any contrary evidence. See, e.g., Higbee v. Commissioner, 116 T.C. 438,
442 (2001). Watson argues that he has satisfied the conditions required to impose
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the burden of proof on the IRS. We need not decide whether section 7491(a)
imposes the burden of proof on the IRS. This is because our findings are
supported by the preponderance of the evidence. See Knudsen v. Commissioner,
131 T.C. 185, 189 (2008).
Section 162(a) authorizes a deduction for ordinary and necessary expenses
that were paid or incurred during the taxable year in carrying on the taxpayer’s
trade or business, including rental payments, section 1.162-1(a), Income Tax
Regs., and payments for services, section 1.162-7(a), Income Tax Regs. An
expense is “ordinary” if either it is customary or usual within the particular trade,
business, or industry or it relates to a transaction “of common or frequent
occurrence in the type of business involved.” Deputy v. du Pont, 308 U.S. 488,
495 (1940). An expense is “necessary” if it is both appropriate and helpful to the
taxpayer’s trade or business, see, e.g., Welch v. Helvering, 290 U.S. at 113, and it
is directly connected with or pertains directly to the taxpayer’s trade or business,
sec. 1.162-1(a), Income Tax Regs. Being an employee is considered a trade or
business, and thus the ordinary and necessary expenses of employment are
deductible under section 162(a), provided, however, that the employee cannot seek
reimbursement of the expenses from the employer. See, e.g., Benson v.
Commissioner, T.C. Memo. 2007-113, 93 T.C.M. 1199, 1201 (2007)
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(citing Podems v. Commissioner, 24 T.C. 21, 23 (1955)). Personal, family, and
living expenses are generally not deductible. Sec. 262(a).
If the taxpayer establishes that the taxpayer paid or incurred a deductible
expense but does not establish the amount of the expense, then the court may
estimate the amount of the allowable deduction if there is sufficient evidence in
the record to provide a rational basis for the estimate. Cohan v. Commissioner, 39
F.2d 540, 542-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-
743 (1985). If the evidence in the record does not provide a rational basis for the
estimate, the claimed deduction must be disallowed. Vanicek v. Commissioner,
85 T.C. 731 at 742-743.
1. Rental-expense deduction for 2005
Watson claimed a rental-expense deduction of $22,769 on the Schedule C
for Skyline Motion Pictures for 2005. In the notice of deficiency, the IRS
disallowed that deduction. At trial and on brief Watson asserted that he is entitled
to a rental-expense deduction of $23,055 for Skyline Motion Pictures for 2005
consisting of:
C $4,500 that Watson allegedly paid to Gerry Licea to rent a unit
in an unidentified building as an office for Skyline Motion
Pictures for February, March, and April 2005,
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C $15,605 that Watson allegedly paid to Sarah Bajwa to rent Unit 711
as an office for Skyline Motion Pictures for June through December
2005, and
C $2,950 that Watson allegedly paid to lease a house in Los Angeles for
one week for business meetings for Skyline Motion Pictures.
The IRS disputes the deductibility of any rental expense for Skyline Motion
Pictures for 2005.
As discussed more fully below, we hold that Watson is entitled to a total
rental-expense deduction of $16,605 for Skyline Motion Pictures for 2005, which
consists of:
C Zero of the $4,500 allegedly paid to Gerry Licea,
C $13,655 of the $15,605 allegedly paid as rent for Unit 711, and
C $2,950 of the $2,950 paid to lease the house in Los Angeles.
a. Rental-expense deductions for rental of an office from Gerry Licea
Watson testified that he paid $4,500 to Gerry Licea to lease “a unit in a
different building” (i.e., different from 125 East 13th Street, Chicago, Illinois,
which was the office of Skyline Motion Pictures beginning in June 2005) at the
rate of $1,500 per month for February, March, and April 2005. The documentary
evidence confirms that Watson made one $1,500 payment to Gerry Licea.
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However, Watson’s testimony about the alleged office was vague and tentative.
He did not tell us the address of the “different building”. He supplied no other
details about the office or what he used it for. No documents in the record
corroborate Watson’s testimony. His vague, uncorroborated testimony was too
weak to be credible on this point. Consequently, Watson is not entitled to any
deduction for rental payments to Gerry Licea for an office for Skyline Motion
Pictures for 2005.
b. Rental-expense deduction for rental of Unit 711
Unit 711 was a condominium loft with a kitchen and a bedroom in a
residential building at 125 East 13th Street, Chicago, Illinois. During 2005,
Watson owned and lived in Unit 1406, also at 125 East 13th Street, Chicago,
Illinois.
Watson explained in detail how he used Unit 711: He kept audiovisual
equipment in the unit, he wrote movie scripts in the unit, and he met there with
Skyline Motion Pictures’ contractors. Watson’s testimony was credible. We hold
that the rent payments for Unit 711 were an ordinary and necessary business
expense.
To prove the amount of rent he paid for Unit 711, Watson provided a copy
of the signed lease agreement for Unit 711. The agreement required Watson to
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pay a monthly rent of $1,950 per month and $50 per month for a parking space.
The term of the lease was from June 4, 2005, to June 4, 2006. Watson also
provided copies of these checks and cleared-check images written on Skyline
Motion Picture’s bank account, written to Sarah Bajwa:
C a check dated May 26, 2005, for $1,950 for “deposit” for “Unit
1406”,
C a check dated May 26, 2005, for $1,755 for “June 2005 rent”,
C a check dated July 18, 2005, for $1,950 for “July Rent #711”,
C a check dated August 1, 2005, for $1,950 for “August Rent #711”,
C a check dated September 2, 2005, for $2,000 for “Sept ‘05 Rent and
Parking”, and
C a check dated October 4, 2005, for $2,000 for “Oct Rent - Apt #711”.
Watson testified that the first check, which was noted as “deposit” for “Unit
1406”, actually related to Unit 711, not Unit 1406. We take this to be true.
However, the check appears to be a payment of a security deposit, not rent.
Security deposits are not deductible, if at all, until the year actually forfeited.
Williams v. Commissioner, T.C. Memo. 1998-93, 75 T.C.M. 1933, 1938
(1998).
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On the basis of Watson’s testimony, copies of checks and cleared-check
images, and the signed lease agreement, we find that Watson paid $1,755 for rent
for June 2005, $1,950 for rent for July 2005, $1,950 for rent for August 2005,
$2,000 for rent for September 2005, and $2,000 for rent for October 2005.
Watson testified that he paid rent for November and December 2005, but he
could not find checks or other documents to substantiate the payments. We found
his testimony credible. We find that he paid $2,000 for rent for each of these two
months. Consequently, Watson is entitled to deduct $13,655 for renting Unit 711
for Skyline Motion Pictures for 2005.
c. Rental-expense deduction for lease of a house in Los Angeles
Watson claimed a rental-expense deduction for Skyline Motion Pictures for
a $2,950 payment made in 2005. At trial Watson testified that the purpose of the
payment was to lease a furnished, single-family house for Skyline Motion Pictures
to be used for one week of business meetings while he attended the Los Angeles
International Film Festival. We found Watson’s testimony credible.
Consequently, Watson is entitled to deduct the $2,950 payment as a rental expense
for Skyline Motion Pictures for 2005.3
3
Watson testified that he stayed at the house during the week. Thus, the
expense could arguably be a “lodging” expense subject to the “strict-
(continued...)
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2. Contract-labor-expense deductions for 2005 and 2006
As discussed more fully below, we hold that Watson is entitled to contract-
labor-expense deductions of:
C $75,153 for Skyline Motion Pictures for 2005,
C $14,778 for Skyline Movement for 2006, and
C $8,900 for Liberation Financial for 2006.
a. Contract-labor-expense deduction for Skyline Motion Pictures for
2005
Watson claimed a contract-labor-expense deduction of $85,843 on the
Schedule C for Skyline Motion Pictures for 2005. The IRS disallowed the
deduction in full. At trial and on brief Watson asserted that he is entitled to a
contract-labor expense deduction of $81,767 for Skyline Motion Pictures for 2005.
However, during trial Watson conceded that four expenses included in the $81,767
totaling $2,906 are not deductible. These expenses included: (1) a check dated
January 4, 2005, written to Ben Goldhirsh for $353; (2) a check dated April 10,
2005, written to Commercial Edison for $141; (3) a check dated October 11, 2005,
written to A B Chicagoland for $500; and (4) a check dated June 22, 2005, written
3
(...continued)
substantiation” requirements of sec. 274(d)(1) and sec. 1.274-5T(b)(2), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). However, the IRS did not
challenge the deduction on this ground.
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to Duo Consulting for $1,912, which was counted twice in the $81,767 total. We
therefore consider that it is Watson’s position that the deductible amount of this
category of expenses is $81,767 minus $2,906, or $78,861. The IRS disputes the
deductibility of any contract-labor expenses for Skyline Motion Pictures for 2005.
To document those expenses Watson provided numerous copies of checks,
cleared-check images, partial bank statements, and a few invoices. Watson also
provided copies of the non-disclosure agreements that he entered into with some
of the contract laborers for Skyline Motion Pictures. The copies of checks,
cleared-check images, bank statements, and invoices that Watson provided
substantiate the amounts he paid as contract-labor expenses for Skyline Motion
Pictures for 2005. Furthermore, Watson credibly testified to the business purpose
for nearly all of the contract-labor expenses for Skyline Motion Pictures for 2005
for which he seeks a deduction; only a few of the expenses reported for Skyline
Motion Pictures appear to be nondeductible.
On the basis of Watson’s credible testimony and the corroborating
documentary evidence, we hold that he is entitled to a contract-labor-expense
deduction of $75,153 for Skyline Motion Pictures for 2005. The following table
summarizes the deductibility of the contract-labor expenses for Skyline Motion
Pictures for 2005:
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Skyline Motion Pictures (2005)
Contract-labor expenses
($81,767 claimed on brief)
Amount
claimed Amount
Payee on brief deductible Reasoning
AB $500 -0- Watson conceded at trial
Chicagoland
Ben Goldhirsh 353 -0- Watson conceded at trial
Brian Bubser 1,750 $1,750 Expense of designing Skyline’s website
Com Ed 141 -0- Watson conceded at trial
Design 4 U 585 -0- Watson testified that the expense was to install 17
curtains in Unit 1406, which was his personal
residence at the time. This is a non-deductible
personal expense.1
Duo 3,824 1,913 Expense was included twice
Consulting
Jelena Zanko 27,575 27,575 Consulting, promotional, marketing, creative, and
writing services
Jelena Zanko 104 104 Reimbursement to Jelena Zanko for her payment
of Skyline Motion Pictures’ business expenses
Jonathan 4 -0- Watson could not remember purpose
Jacobs
M W Design 600 600 Design services and print coordination
Mike Laha 5,084 5,084 Consulting services; provided advice on the film
industry, including production, budgeting, and
screenwriting
Mike Laha 170 170 Reimbursement to Mike Laha for his payment of
Skyline Motion Pictures’ business expenses
Nicole Cavallo 21,025 21,025 Consulting services
Nicole Cavallo 20 20 Reimbursement to Nicole Cavallo for her
payment of Skyline Motion Pictures’ business
expenses
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Patrick 1,250 1,250 Consulting service for the film industry
Loughman
Patrick 1,500 -0- The memo line on the check reads “Personal
Loughman loan” and Watson did not present evidence
sufficient to overcome the implication that this is
not deductible.1
Paul Niemeyer 5,750 5,750 Artwork services, designed a movie poster
of Niemeyer
Illustrations
Proline 158 158 Service call to balance the bulb in a projector
Mechanical Watson used for business presentations
Inc.
Quist 7,500 7,500 Web design and development services
Interactive
SPOT 1,000 1,000 Animation services; created a marketing trailer
Animation
Tony Gonzalez 1,620 -0- Watson testified that this expenses was for
electrical work done in Unit 1406, which was his
personal residence at the time. This is a non-
deductible personal expense.1
Tony Gonzalez 1,255 1,255 Electrical work for communications in Unit 711,
which was Watson’s office at the time.
Total 81,767 75,153
1
See sec. 262(a).
b. Contract-labor-expense deduction for Skyline Movement for 2006
Watson claimed a contract-labor-expense deduction of $26,870 on the
Schedule C for Skyline Movement for 2006. The IRS disallowed the deduction in
full. At trial and on brief Watson contended that he is entitled to a contract-labor
expense deduction of only $14,778 for Skyline Movement for 2006. The IRS
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disputes the deductibility of any contract-labor expenses for Skyline Movement
for 2006.
To document the contract-labor expenses for Skyline Movement for 2006,
Watson submitted numerous copies of checks, cleared-check images, and bank
statements from his personal bank account. These substantiate the amounts
Watson paid as contract-labor expenses for Skyline Movement for 2006.
Furthermore, Watson credibly testified to the business purpose for all of the
contract-labor expenses for Skyline Movement for 2006 for which he seeks a
deduction.
On the basis of Watson’s credible testimony and the corroborating
documentary evidence, we hold that Watson is entitled to a contract-labor-expense
deduction of $14,778 for Skyline Movement for 2006. The following table
summarizes the deductibility of the contract-labor expenses for Skyline Movement
for 2006:
Skyline Movement (2006)
Contract-labor expenses
($14,778 claimed on brief)
Amount
claimed Amount
Payee on brief deductible Reasoning
Jacob Watson $630 $630 Business artwork services; creation of artwork for
She Beads, which was a business Watson
consulted for in 2005.
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Jelena Zanko 13,425 13,425 Business marketing, writing, and consulting
services
Kurt Kroeck 400 400 Business artwork services
Nicole Cavallo 323 323 Business marketing and consulting services
Total 14,778 14,778
c. Contract-labor-expense deduction for Liberation Financial for 2006
Watson claimed a contract-labor-expense deduction of $45,548 on the
Schedule C for Liberation Financial for 2006. The IRS disallowed the deduction
in full. At trial and on brief Watson contended that he is entitled to a contract-
labor-expense deduction of $60,582 for Liberation Financial for 2006. The IRS
disputes the deductibility of any contract-labor expenses for Liberation Financial
for 2006.
To document the contract-labor expenses for Liberation Financial for 2006,
Watson provided numerous copies of checks, cleared-check images, and bank
statements. These substantiate some of the amounts that Watson claims he paid as
contract-labor expenses for Liberation Financial for 2006. Furthermore, Watson
credibly testified to the business purpose for some of the contract-labor expenses
for Liberation Financial for 2006 for which he seeks a deduction.
However, for many of the contract-labor expenses that Watson reported for
Liberation Financial for 2006, it appears to us, on the basis of his testimony and
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the memorandum lines on several of the checks that he provided as proof of
payment, that all the payments he made to Melissa DeSitter, Ben Goldhirsh,
Dominic Garner, Jonathan Jones, Reginald Ray, and Tony Gonzalez are related to
his employment. In 2006 Watson was employed as a loan originator by First
Capital Mortgage. Liberation Financial was in the business of management
consulting and advised primarily mortgage companies, including First Capital
Mortgage, in order to help improve the overall performance of each company and
its loan officers. Watson asserted that none of the expenses he claims as
deductions for Liberation Financial were related to his employment as a loan
originator for First Capital Mortgage. The payments that Watson made to Melissa
DeSitter, Ben Goldhirsh, Dominic Garner, Jonathan Jones, Reginald Ray, and
Tony Gonzalez all appear to be for services these individuals performed in
connection with his employment as a loan originator. These expenses are
deductible only if Watson could not seek reimbursement from his employer. See
Podems v. Commissioner, 24 T.C. 23. The record does not support the
proposition that Watson could not seek reimbursement for these expenses.
Therefore they are not deductible.
On the basis of Watson’s credible testimony with respect to some of these
expenses and corroborating documentary evidence, we hold that he is entitled to a
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contract-labor-expense deduction of $8,900 for Liberation Financial for 2006.
The following table summarizes the deductibility of the contract-labor expenses
that Watson reported for Liberation Financial for 2006:
Liberation Financial (2006)
Contract-labor expenses
($60,582 claimed on brief)
Amount
claimed Amount
Payee on brief deductible Reasoning
Ben Goldhirsh $663 -0- Watson testified that Ben Goldhirsh provided
loan-processing services in the mortgage loan
business and that expenses paid to Goldhirsh
were incurred on behalf of his employer.
These expenses appear to be related to Watson’s
employment as a loan originator and not his
Schedule-C business of management consulting.
Brian Bubser 2,000 $2,000 Website and graphic design
Dominic 14,650 -0- Watson testified that Dominic Garner performed
Garner “[l]ead generation, communication with
borrowers, going and getting applications signed,
picking up documents”. The memo lines on all
the checks read “Advance”. These expenses
appear to be related to Watson’s employment as a
loan originator and not his Schedule-C business
of management consulting.
Holly Bartle 250 250 Promotional work
Jacob Watson 1,200 1,200 Marketing, design, and artwork services
Jelena Zanko 3,000 3,000 Marketing and writing services
Jennifer 250 250 Promotional work
McCullah
Jonathan Jones 8,065 -0- Watson testified that Jonathan Jones performed
services that were “very similar to Dominic
Garner”. The memo lines on the checks read
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either “Commissions” or “advance”. These
expenses appear to be related to Watson’s
employment as a loan originator and not his
Schedule-C business of management consulting.
Kurt Kroeck 1,700 1,700 Marketing, design, and artwork services
Leticia Winn 250 250 Promotional work
Melissa 26,554 -0- Watson testified that Melissa DeSitter was like an
DeSitter executive assistant for his consulting business
and that she “sent out and confirmed that lead
mailing campaigns were going out, dealt with
borrowers, dealt with lead companies” and
“communicat[ed] with borrowers, lenders, title
companies, prospects, closing agents in the
mortgage consulting business”. The few memo
lines available read “[Month] Bonus”. These
expenses appear to be related to Watson’s
employment as a loan originator and not his
Schedule-C business of management consulting.
Nicole Cavallo 500 -0- The memo line on this check reads “repayment of
loan”. This suggests that the payment was the
repayment of loan principal, which is
nondeductible. Watson did not testify what this
payment was for.
Reginald Ray 350 -0- Watson testified that Reginald Ray “provided
some sort of closing activities with a borrower”.
These expenses appear to be related to Watson’s
employment as a loan originator and not his
Schedule-C business of management consulting.
Satin Grable 250 250 Promotional work
Tony Gonzalez 900 -0- Watson testified that this expense was to have
electrical work done, but he could not remember
where it was done; the work may have been done
at Unit 711 or at his employer’s office. These
expenses appear to be expenses Watson paid on
behalf of his employer.
Total 60,582 8,900
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In reaching our holdings, we have considered all arguments made, and, to
the extent not mentioned, we conclude that they are moot, irrelevant, or without
merit.
To reflect the foregoing,
Decision will be entered under Rule
155.