DocketNumber: Docket No. 24377-09
Citation Numbers: 2013 T.C. Memo. 20, 105 T.C.M. 1127, 2013 Tax Ct. Memo LEXIS 24
Judges: MARVEL
Filed Date: 1/17/2013
Status: Non-Precedential
Modified Date: 11/21/2020
An appropriate order will be issued, and decision will be entered under
MARVEL,
Some of the facts have been stipulated and are so found. The stipulations of fact are incorporated herein by this reference. Petitioners resided in Arizona when they petitioned this Court.
Petitioners formed Desert Academy in 2003 to operate a private early-elementary school. Petitioners elected to treat Desert Academy as a partnership for Federal income tax purposes. 42013 Tax Ct. Memo LEXIS 24">*27 Desert Academy did not indicate whether it was using an accrual or a cash method of accounting on its 2003 Form 1065, U.S.*23 Return of Partnership Income, but it indicated that it was using an accrual method of accounting on its 2004-06 Forms 1065. The school closed in 2008.
During 2005-06 petitioners had three minor children. Their two oldest children attended Desert Academy's school during 2005-06, and their youngest child was born in 2005 and did not attend Desert Academy's school during 2005-06.
During the years at issue Ryan Cvancara was employed as a special agent in respondent's Criminal Investigation Division and Aimee Cvancara, who had earned a degree in political science from the University of Arizona, managed the day-to-day activities of, and occasionally taught classes for, Desert Academy. Mrs. Cvancara also maintained Desert Academy's records and prepared its returns.
At some point before the years at issue, Mr. Cvancara filed with respondent a Form 7995, Outside Employment or Business Activity Request, requesting permission to be involved in Desert Academy's financial management. Respondent denied Mr. Cvancara's request, and accordingly, Mr. Cvancara did not participate in Desert Academy's financial management 2013 Tax Ct. Memo LEXIS 24">*28 or prepare its returns. However, Mr. Cvancara did teach an afterschool science club for Desert Academy.
Petitioners reported the ordinary income or loss from Desert Academy on Schedules E, Supplemental Income and Loss, attached to their Forms 1040, U.S.*24 Individual Income Tax Return, for 2003-07. 5 Petitioners reported losses of $64,413 and $50,135 from Desert Academy on their Schedules E for 2003 and 2004, respectively.
Petitioners claimed passthrough losses from Desert Academy of $41,497 and $10,073 for 2005 and 2006, respectively. Mrs. Cvancara filed Desert Academy's 2005 and 2006 returns on or about May 19, 2008. 6 Desert Academy reported the following amounts on its Forms 1065 for 2005 and 2006:
2005 | $195,873 | $46,822 | $190,548 | ($41,497) |
2006 | 203,565 | 38,451 | 175,188 | (10,073) |
Mr. Cvancara authorized Mrs. Cvancara to prepare and file 2013 Tax Ct. Memo LEXIS 24">*29 their joint 2005 and 2006 returns, but he did not review those returns before signing them.
On August 21, 2009, respondent issued to petitioners a notice of deficiency for 2005 and 2006. With respect to Desert Academy, respondent included a Form 4605-A, Examination Changes—Partnerships, Fiduciaries, S Corporations, and Interest Charge Domestic International Sales Corporations. The Form 4605-A made the following adjustments and determinations with respect to Desert Academy's 2005 and 2006 returns:
2005 | -0- | ($46,822) | $46,822 | $5,325 |
2006 | $21,025 | 42 | 20,983 | 10,910 |
Respondent adjusted Desert Academy's gross receipts for 2006 after respondent's revenue agent performed a bank deposits analysis of Desert Academy's bank accounts and determined that it had not reported all payments it received in 2006, but respondent did not adjust Desert Academy's gross receipts for 2005 because respondent's revenue agent erroneously determined that Desert Academy had reported all payments it received in 2005. Additionally, on the Form 4605-A, respondent determined 2013 Tax Ct. Memo LEXIS 24">*30 that Desert Academy's corrected income constituted net earnings from self-employment to petitioners.
*26 With respect to petitioners, respondent included a Form 4549-A, Income Tax Discrepancy Adjustments, for 2005 and 2006. The Form 4549-A adjusted petitioners' 2005 and 2006 income to reflect respondent's adjustments to Desert Academy's 2005 and 2006 returns.
After trial we held the record open to allow petitioners to produce to respondent documents underlying certain summary exhibits and to substantiate Desert Academy's cost of goods sold for 2005. Petitioners timely produced certain documents which were later included as exhibits in a supplemental stipulation of facts and admitted into evidence. On February 22, 2011, respondent lodged an amended answer with the Court and moved to amend the answer to conform the pleadings to the evidence.
In the lodged amended answer, respondent asserted (1) that both petitioners had bases of zero in Desert Academy at the end of 2005 and 2006 and were thus not entitled to deductions for any of Desert Academy's losses during 2005 and 2006; (2) that Desert Academy was entitled to claim cost of goods sold of only $30,548 for 2005; and (3) that 2013 Tax Ct. Memo LEXIS 24">*31 Desert Academy had gross receipts of $220,356 for 2005. Accordingly, respondent asserted an increased adjustment to petitioners' Schedule E income of $41,497 and a revised income tax deficiency of $5,259 for *27 2005. Additionally, respondent asserted an increased adjustment to petitioners' Schedule E income of $21,318 and a corresponding increase in the
With respect to Desert Academy respondent included an amended Form 4605-A for 2005 and 2006. The amended Form 4605-A made the following adjustments and determinations with respect to Desert Academy's 2005 and 2006 returns:
2005 | $24,483 | ($16,274) | $40,757 | ($740) |
2006 | 21,360 | 42 | 21,318 | 11,245 |
With respect to petitioners respondent included a Form 5278, Statement—Income Tax Changes, for 2005 and 2006. The Form 5278 adjusted petitioners' 2005 and 2006 income to reflect respondent's adjustments to Desert Academy's 2005 and 2006 returns and to reflect respondent's assertion that petitioners had bases of zero in Desert Academy at the end of 2005 and 2006 and were thus 2013 Tax Ct. Memo LEXIS 24">*32 not entitled to deductions for Desert Academy's losses in 2005 and 2006.
By order dated January 27, 2012, we denied respondent's motion to amend the answer to conform pleadings to the evidence because we concluded that granting the amendment at such a late stage would prejudice petitioners.
The parties dispute the amount of Desert Academy's gross receipts for 2005 and 2006. The parties' contentions can be summarized as follows:
2005 | $195,873 | 1$220,356 | 2$188,588 |
2006 | 203,565 | 3224,925 | 4206,805 |
1This is the amount that respondent asserted in the amended answer. On brief, however, respondent contends that Desert Academy had gross receipts of $221,766 for 2005.
2Included in this amount are: (1) $4,213 in advance payments received in 2004 but included in income for 2005; (2) $211,297 in total payments received in 2005; and (3) less $26,921 in advance payments to be included in income for 2006. Desert Academy's records for 2005 show receipts received of only $191,660. Accordingly, petitioners concede that Desert Academy's records for 2005 omit receipts of $19,637. Petitioners' concession is based on their contention that they deposited $211,297 into Desert Academy's accounts in 2005. Respondent contends that petitioners deposited $211,298 into Desert 2013 Tax Ct. Memo LEXIS 24">*34 Academy's accounts (not including amounts petitioners paid to Desert Academy) in 2005, leaving omitted receipts of $19,638. This $1 dispute is computational and should be resolved as part of the
3A review of respondent's bank deposits analysis and Desert Academy's records reveals that respondent erroneously included $380 as receipts recorded in Desert Academy's records for 2006 but not deposited into its accounts. In fact, the item in question was deposited into Desert Academy's accounts and was thus already included in respondent's bank deposits analysis.
4Petitioners stipulated an exhibit in which they calculated Desert Academy's gross receipts to be $210,319 for 2006. Respondent subsequently identified returned checks of $2,673, leaving gross receipts of $207,646. Included in this amount are: (1) $26,921 in advance payments received in 2005 but included in income for 2006, (2) $218,345 in total payments received in 2006, and (3) less *30 $37,620 in advance payments to be included in income for 2007. Desert Academy's records for 2006 show receipts received of only $214,264. Desert Academy thus omitted receipts of $4,081. However, petitioners contend on brief that 2013 Tax Ct. Memo LEXIS 24">*35 Desert Academy had gross receipts of $206,805 for 2006. This $841 difference appears to be computational and should be resolved as part of the
The parties have two principal disputes with respect to Desert Academy's gross receipts for 2005 and 2006: (1) whether Desert Academy properly accounted for advance payments it received in 2005 and 2006; and (2) whether amounts petitioners paid to Desert Academy in 2005 and 2006 were tuition for petitioners' children.
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper.
The U.S. Court of Appeals for the Ninth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary,
With respect to the unreported income adjustment for 2005, respondent concedes that he bears the burden of proof because that issue was not raised in the notice of deficiency.
Respondent contends that advance payments of $26,922 and $37,620 received by Desert Academy in 2005 and 2006, respectively, should be included in Desert Academy's income for the years of receipt. Petitioners contend that these payments were properly included in income for 2006 and 2007, respectively, under Desert Academy's accrual method of accounting.
In a trilogy of cases, the Supreme Court 2013 Tax Ct. Memo LEXIS 24">*40 upheld the Commissioner's determinations that unrestricted, advance payments for services were to be included in income for the year of receipt.
Recognizing that limited deferral of advance payments for services is sometimes appropriate, the Commissioner has permitted accrual method taxpayers to defer certain prepaid services income for up to one year. must — (i) include the advance payment in gross income for the taxable year of receipt * * * to the extent provided in section 5.02(3) of this revenue procedure, and (ii) * * * include the remaining amount of the advance payment in gross income for the next succeeding taxable year. (a) * * * a taxpayer using the Deferral Method must — (i) include the advance payment in gross income for the taxable year of receipt * * * to the extent recognized in revenues in its applicable financial statement * * * for that taxable year, and (ii) include the remaining amount of the advance payment in gross income in accordance with section 5.02(1)(a)(ii) of this revenue procedure. (b) If the taxpayer does not have an applicable financial statement * * *, a taxpayer using the Deferral Method must include the advance payment in gross income for the taxable year of receipt * * * to the extent earned in that taxable year and include the remaining amount of the advance payment in gross income in accordance with section 5.02(1)(a)(ii) of 2013 Tax Ct. Memo LEXIS 24">*43 this revenue procedure. The *37 determination of whether an amount is earned in a taxable year must be made without regard to whether the taxpayer may be required to refund the advance payment upon the occurrence of a condition subsequent. * * * financial statement listed in paragraphs (1) through (3) of this section 4.06 that has the highest priority (including within paragraph (2)). A taxpayer that does not have a financial statement described in paragraphs (1) through (3) of this section 4.06 does not have an applicable financial statement for purposes of this revenue procedure. The financial statements are, in descending priority — (1) a financial statement required to be filed with the Securities and Exchange Commission * * *; (2) a certified audited financial statement that is accompanied by the report of an independent CPA * * * that is used for — (a) credit purposes, (b) reporting to shareholders, or (c) any other substantial non-tax purpose; or (3) a financial statement (other than a tax return) required to be provided to the federal or a state government or any federal or state agencies (other than the SEC or the Internal Revenue Service).
Petitioners contend that Desert Academy elected to use an accrual method of accounting and that it was thus entitled to defer recognizing the advance *38 payments it received in 2005 and 2006. Further, petitioners contend that Desert Academy should be allowed to use its accrual method of accounting because respondent's revenue agent, Pauline Cox, testified that an accrual method of accounting would more clearly reflect Desert Academy's income.
Respondent contends that he was entitled to compute Desert Academy's gross receipts using the bank deposits method because (1) Desert Academy's records were "unreliable, inaccurate, and incomplete"; (2) Desert Academy accounted for its expenses on a cash basis; and (3) Desert Academy was ineligible to use the deferral method provided for in
Mrs. Cvancara credibly testified that she intended from the beginning for Desert Academy to use an accrual method of accounting because the school year spans two calender years. Desert Academy did not check the box indicating whether it was using an accrual or a cash method of accounting on its 2003 Form 1065, but it affirmatively stated on its 2004-06 Forms 1065 that the information reported on those forms was calculated using an accrual method of accounting.
*39 And although Mrs. Cvancara testified that she mistakenly included advance payments received in 2005 for services to be rendered in 2006 on Desert Academy's 2005 Form 1065, she also included advance payments received in 2004 for services to be rendered in 2005 on Desert Academy's 2005 Form 1065. She also included advance payments received in 2005 for services to be rendered in 2006, and excluded advance payments received in 2006 for services to be rendered in 2007, on Desert Academy's 2006 Form 1065. Desert Academy's records for 2005 and 2006, although imperfect, clearly indicate which payments were to be deferred to the following year. Moreover, Revenue Agent Cox testified that she probably would have used 2013 Tax Ct. Memo LEXIS 24">*46 an accrual method in determining Desert Academy's gross receipts had petitioners provided her with Desert Academy's records during the examination and that an accrual method was a more appropriate method of accounting for the advance payments at issue in this case. We find that Desert Academy (1) elected to use an accrual method of accounting, (2) elected to use the deferral method with respect to any advance payments it received,
We accordingly reject respondent's first contention that Desert Academy did not use an accrual method because its records were "unreliable, inaccurate, and *40 incomplete". Although far from perfect, Desert Academy's records were sufficient to allow respondent to verify the amounts deferred.
Respondent's 2013 Tax Ct. Memo LEXIS 24">*47 second contention is that Desert Academy was not using an accrual method because, although it may have accounted for its income under an accrual method, it accounted for its expenses under the cash method. 112013 Tax Ct. Memo LEXIS 24">*48 Respondent, however, did not exercise his discretion under
Respondent's final contention is that the advance payments were subject to a condition subsequent,
*42 In short, we conclude that Desert Academy properly accounted for advance payments it received under the deferral method allowed under
Respondent contends that payments of $10,468 and $6,200 made by petitioners to Desert Academy during 2005 and 2006, respectively, represented tuition for two of petitioners' children. 122013 Tax Ct. Memo LEXIS 24">*50 Petitioners contend that those payments were capital contributions and not tuition.
*43 Generally, no gain or loss is recognized to a partnership or its partners upon the contribution of property to a partnership in exchange for a partnership interest.
In certain instances the Code treats transactions between a partnership and a partner as transactions between the partnership and a third party. [a] partner who engages in a transaction with a partnership other than in his capacity as a partner shall be treated as if he were not a member of the partnership with respect to such transaction. Such transactions include, for example, loans of money or property by the partnership to the partner or by the partner to the partnership, the sale 2013 Tax Ct. Memo LEXIS 24">*52 of property by the partner to the partnership, the purchase of property by the partner from the partnership, and the rendering of services by the partnership *44 to the partner or by the partner to the partnership. * * * However, transfers of money or property by a partner to a partnership as contributions, or transfers of money or property by a partnership to a partner as distributions, are not transactions included within the provisions of this section. In all cases, the substance of the transaction will govern rather than its form. * * *
Petitioners were the only members of Desert Academy. Over the years, petitioners made significant capital contributions to Desert Academy. Mrs. Cvancara credibly testified that petitioners never 2013 Tax Ct. Memo LEXIS 24">*53 intended for Desert Academy to charge tuition for their children and that all of their payments to Desert Academy were intended to be capital contributions. Desert Academy did not record petitioners' payments to it as tuition received. Additionally, the timing of petitioners' payments to Desert Academy indicates that the payments were not tuition for petitioners' children but, rather, capital contributions to cover shortfalls *45 in Desert Academy's operating accounts. Accordingly, we find that, in substance, these payments were capital contributions and not tuition.
Because petitioners' payments to Desert Academy were capital contributions, any amounts that Desert Academy paid on account of petitioners' children should be treated as distributions from Desert Academy to petitioners. Respondent, however, does not contend that Desert Academy distributed money or property to petitioners by not charging petitioners tuition. Rather, respondent contends that petitioners' capital contributions to Desert Academy should be recast as tuition payments because Desert Academy was required to charge petitioners tuition.
To support this contention respondent cites cases in which we sustained the disallowance 2013 Tax Ct. Memo LEXIS 24">*54 of charitable contribution deductions on the grounds that the payments in question were not charitable contributions under
The reasoning of these cases, however, is inapplicable here 2013 Tax Ct. Memo LEXIS 24">*55 for two reasons. First,
Accordingly, we conclude that petitioners' payments to Desert Academy 2013 Tax Ct. Memo LEXIS 24">*56 in 2005 and 2006 were capital contributions and not tuition.
As we have concluded that Desert Academy properly accounted for advance payments it received in 2005 and 2006 under the deferral method,
Respondent concedes that Desert Academy was entitled to cost of goods sold of $30,548 for 2005. Petitioners contend that Desert Academy was entitled to cost of goods sold of $47,266 for 2005.
*48 We note at the outset that it does not appear that Desert Academy maintained inventories of merchandise that it sold to customers. The amount that Desert Academy claimed as cost of goods sold in reality consists of expenses paid or incurred in carrying on Desert Academy's 2013 Tax Ct. Memo LEXIS 24">*57 educational business. We analyze petitioners' claim for additional cost of goods sold accordingly.
Generally, a taxpayer must maintain adequate records to substantiate the amounts of his or her income and entitlement to any deductions or credits claimed.
For certain kinds of business expenses,
To deduct these expenses, the taxpayer 2013 Tax Ct. Memo LEXIS 24">*59 must "substantiate[] by adequate records or by sufficient evidence corroborating the taxpayer's own statement": (1) the amount of the expense or other item; (2) the time and place of travel, *50 entertainment, or use of the property; (3) the business purpose of the expense or other item; and (4) the business relationship of the taxpayer to the persons entertained or using the property.
Generally, the taxpayer bears the burden of proving that he is entitled to any claimed deduction.
Initially, respondent disallowed Desert Academy's 2005 cost of goods 2013 Tax Ct. Memo LEXIS 24">*61 sold in its entirety. Petitioners introduced into evidence a document purporting to be a summary of Desert Academy's cost of goods sold for 2005. Mrs. Cvancara testified that this document was initially created during 2005 and the beginning of 2006 but that it had been amended several times since. Mrs. Cvancara further testified that she retained the original summary document as well as the receipts and bank statements that she used to create the summary document. We held the record open after trial to allow petitioners to submit to respondent and, through a *52 supplemental stipulation, to the Court, the original summary document and any supporting documents. After trial, petitioners submitted an additional amended summary document and various supporting receipts and bank statements but did not submit the original summary document. After receiving the supporting receipts and bank statements, respondent conceded that Desert Academy had cost of goods sold of $30,548 for 2005. The amended summaries and the supporting documents were included in a supplemental stipulation of facts filed on April 11, 2011, and the attached documents were admitted into evidence without objection, but petitioners 2013 Tax Ct. Memo LEXIS 24">*62 have offered no specific testimony to explain the business purpose of the various disputed items. Without testimony or other evidence as to the business purpose of the disputed items, we cannot know whether many of the disputed items had a business purpose. Moreover, we cannot assume that certain disputed items had a business purpose because some of the receipts that petitioners introduced appear to show that some of the expenses were for Mrs. Cvancara's personal expenses. Accordingly, as petitioners bear the burden of proof, we can allow only those items the business purpose of which is apparent.
The parties refer to the disputed items by the number assigned to each item in the summary document petitioners introduced, and for the convenience of the parties, we will refer to them accordingly. The disputed items fall into three *53 general categories: (1) items respondent disallowed because petitioners failed to satisfy the
Respondent disallowed several items that relate to expenses for meals, entertainment, cellular telephones, and the use of a passenger automobile. To deduct these expenses, petitioners are required to satisfy the strict substantiation requirements of
Items 8, 9, 111, 226, 235, 239, 245, and 315 are charges totaling $259 incurred at various restaurants and eateries. Petitioners failed to produce credible evidence with respect to the persons entertained or the business purpose of these items. Accordingly, we sustain respondent's disallowance of these items.
Items 22, 52, 115, 153, 171, 204, 223, 246, 292, 337, 379, and 406 are charges totaling $850 for cellular telephone services and accessories. Petitioners *54 failed to produce credible evidence with respect to the business purpose of these items. Accordingly, we sustain respondent's disallowance of these items.
Items 26, 104, 112, 227, 261, 262, 278, 340, 352, 357, 2013 Tax Ct. Memo LEXIS 24">*64 and 408 are charges totaling $415 incurred at various gas stations. Petitioners failed to produce credible evidence with respect to the business purpose of these items. Accordingly, we sustain respondent's disallowance of these items.
Respondent disallowed several items, or parts thereof, that he deemed personal, or otherwise not business, expenses. Petitioners contend that the disallowed expenses were business expenses and should have been allowed.
After reviewing these disputed items, we find that some of the items had a business purpose and some were personal expenses. We are unable to determine whether the rest of the items had a valid business purpose. Because petitioners bear the burden of proof, we cannot allow those items, or parts thereof, the business purpose of which is not apparent.
11 | $13.78 | $8.97 | 1$13.78 | -0- |
17 | 50.67 | -0- | 22.49 | 3$4.24 |
18 | 64.38 | -0- | -0- | -0- |
25 | 48.14 | 32.54 | 32.54 | -0- |
62 | 97.28 | -0- | 497.28 | -0- |
81 | 7.61 | -0- | -0- | -0- |
91 | 178.38 | 151.83 | 5170.19 | -0- |
94 | 40.38 | 31.89 | 633.64 | 7668 |
123 | 31.22 | 17.64 | 17.64 | 82.78 |
125 | 43.28 | 9.96 | 9.96 | 914.65 |
128 | 42.28 | 27.34 | 27.34 | 102.99 |
155 | 15.26 | 12.48 | 1113.27 | 121.99 |
169 | 85.36 | 75.00 | 75.00 | 136.37 |
190 | 17.25 | -0- | -0- | 142.11 |
191 | 13.70 | -0- | 1513.70 | -0- |
210 | 33.66 | 23.69 | 1633.66 | -0- |
216 | 9.72 | -0- | -0- | -0- |
232 | 15.65 | 12.20 | 12.20 | 173.67 |
241 | 93.70 | 50.81 | 50.81 | -0- |
243 | 93.73 | 49.53 | 49.53 | 1822.32 |
247 | 2.48 | -0- | 191.49 | -0- |
253 | 9.27 | 2.97 | 203.21 | 216.06 |
260 | 171.29 | 82.51 | 2288.22 | 230.44 |
268 | 90.20 | 63.82 | 63.82 | 2414.64 |
277 | 23.51 | 15.47 | 15.47 | 251.04 |
284 | 5.98 | -0- | 265.98 | -0- |
285 | 28.82 | -0- | -0- | -0- |
301 | 37.63 | 31.47 | 31.47 | -0- |
317 | 18.98 | -0- | -0- | -0- |
319 | 10.15 | 5.48 | 279.15 | 281.00 |
322 | 153.04 | 97.86 | 97.86 | 2910.25 |
324 | 31.78 | 29.00 | 29.00 | -0- |
325 | 63.86 | 29.16 | 3031.52 | 311.26 |
328 | 32.43 | 25.10 | 3227.87 | -0- |
333 | 36.64 | 21.13 | 21.13 | 332.00 |
338 | 49.29 | 40.85 | 3444.16 | -0- |
341 | 24.99 | 11.00 | 3513.67 | -0- |
351 | 61.78 | 43.79 | 3645.17 | 372.16 |
356 | 31.38 | -0- | 3827.50 | -0- |
361 | 36.72 | 29.02 | 29.02 | 393.14 |
364A | 49.98 | 41.90 | 4046.52 | 413.74 |
365 | 51.60 | -0- | -0- | -0- |
377 | 23.69 | 15.76 | 15.76 | -0- |
380 | 7.77 | -0- | 427.77 | -0- |
407 | 18.38 | -0- | -0- | -0- |
409 | 10.81 | -0- | -0- | -0- |
Total | 2,077.88 | 1,090.17 | 1,308.79 | 113.53 |
1Respondent 2013 Tax Ct. Memo LEXIS 24">*66 did not include the markup of this receipt, and we see no reason not to allow the full amount.
2We allow the milk. Respondent's notes on several receipts indicate that Desert Academy served snacks and drinks to its students. Accordingly, we allow expenses that serve this business purpose. All adjustments in this table reflect tax shown on the receipt.
3We find that the children's medicine is a personal expense.
4We allow the router as a business expense.
*57 5We allow the training pants as a business expense.
6We allow the pop tarts.
7We find that the drinks are personal.
8We find that the coffee and water are personal.
9We find that the candy, drinks, and medicine are personal.
10We find that the coffee is personal.
11We allow the tax on the allowed items.
12We find that the coffee is personal.
13We find that the nursing pads are personal.
14We find that the coffee is personal.
15We allow the résumé paper as a business expense, and respondent disallowed the remaining items only because the cost of the résumé paper was illegible. Accordingly, we allow this item in full.
16We allow the plants as a business expense.
17We find that the coffee is personal.
18We find that the infant 2013 Tax Ct. Memo LEXIS 24">*67 formula and cookies are personal.
19We allow the milk.
20We allow the tax on the allowed item.
21We find that the coffee and the coffee cake are personal.
22We allow the tax on the allowed items.
23We find that the chocolate is personal.
24We find that the backpack and the soda are personal.
25We find that the infant bottle is personal.
26We allow the fruit snacks,
27We allow the plates as a business expense.
28We find that the mocha drink is personal.
29We find that the shampoo is personal.
30We allow the tax on the allowed items.
31We find that the gum and chocolate are personal.
32We allow the popcorn.
33We find that the Mars Snickers bar is personal.
34We allow the tax on the allowed items.
35We allow the oatmeal.
36We allow the milk.
37We find that the Sunday paper is personal.
*58 38We allow the Incredibles DVD as a business expense. We also allow the juice and the popcorn.
39We find that the coffee is personal.
40We allow the milk and the juice.
41We find that the medicine is personal.
42We allow the 2013 Tax Ct. Memo LEXIS 24">*68 plastic cutlery, the cups, and the whipped cream.
Respondent disallowed several items for which there were no receipts or the receipts were illegible. 16 Petitioners failed to provide documentation showing that items 49, 55, 138, 146, 186, and 349, which are expenses totaling $688, were paid by Desert Academy, and we accordingly sustain respondent's disallowance of these items. 17 Petitioners, however, have shown that Desert Academy paid the rest of these disputed items.
Items 36, 93, 158, 209, 212, and 266 are expenses totaling $3,215. Respondent disallowed item 36 because petitioners provided only an invoice from 2013 Tax Ct. Memo LEXIS 24">*69 Xerox. But the bank statement for January shows that the claimed amount was *59 paid. Item 93 is a check to Great American for fundraising activities. Item 158 is a check for golf lessons for some of Desert Academy's students. Item 209 is a receipt for postage. Item 212 is a check to AZ Images for advertising services. Respondent disallowed item 212 because no receipt or invoice was provided; but the invoice for item 176, which respondent allowed, shows that Desert Academy entered into a three-month contract with AZ Images for a one-quarter-page ad, and item 212 appears to be the payment for the third month of that contract. Item 266 is a check for legal fees paid to Boates & Crump. Respondent disallowed item 266 because no documentation was provided, but the bank statement for September shows that a check in the amount claimed was paid on September 21, 2005, and respondent allowed other related legal expenses. Accordingly, we allow these items.
Items 68, 69, 269, and 270 are payments totaling $6,128. Petitioners contend that these items represent payments on Desert Academy's credit cards. Petitioners have not introduced the credit card statements into evidence, and we cannot determine 2013 Tax Ct. Memo LEXIS 24">*70 whether these payments are for expenses properly deducted in prior years. Accordingly, we sustain respondent's disallowance of these items.
The rest of these items are expenses totaling $4,175. With respect to these items petitioners have shown that Desert Academy paid the amounts claimed.
*60 Petitioners, however, have not produced legible, itemized receipts for these items. Because we have sustained some of respondent's determinations with respect to the items that petitioners have substantiated with legible, itemized receipts, we cannot allow these items in full. We will, however, apply the
Generally, a partner may deduct the partner's distributive share of losses of a partnership in which the partner is a member.
*61 Respondent made no determinations in the notice of deficiency with respect to whether petitioners had sufficient bases in Desert Academy to deduct Desert Academy's losses for 2005 and 2006. Accordingly, respondent concedes that he bears the burden of proving that petitioners lacked sufficient bases in Desert Academy to deduct those losses.
Respondent contends that petitioners each had a basis of zero in Desert Academy during 2005 and 2006. Petitioners contend that they had sufficient bases in Desert Academy to deduct the claimed losses. Specifically, petitioners contend that they made net contributions to Desert Academy of $104,205, $45,150, 2013 Tax Ct. Memo LEXIS 24">*72 $25,107, and $8,097 for 2003, 2004, 2005, and 2006, respectively.
Respondent contends that petitioners introduced evidence showing only that they made capital contributions to Desert Academy of $72,980 and $8,136 during 2003 and 2005, respectively. Respondent contends that petitioners presented no evidence to support their position that they made any capital contributions to Desert Academy during 2004 and 2006. Respondent further contends that petitioners had bases of zero in Desert Academy at the end of 2005 and 2006 because petitioners had already claimed losses from Desert Academy of $64,413 and $50,135 for 2003 and 2004, respectively.
*62 Respondent's contentions miss the mark. Respondent bears the burden of proving that petitioners lacked sufficient bases to deduct Desert Academy's losses for 2005 and 2006. Respondent has produced no evidence supporting his adjustments to petitioners' claimed net capital contributions for 2003 and 2005. 18 Respondent has produced no evidence supporting his contention that petitioners made no capital contributions in 2004 and 2006. Additionally, we have concluded that petitioners' payments to Desert Academy in 2005 and 2006 were capital contributions 2013 Tax Ct. Memo LEXIS 24">*73 and not tuition.
The term "negligence" includes any failure to make a reasonable attempt 2013 Tax Ct. Memo LEXIS 24">*74 to comply with the provisions of the internal revenue laws, and the term "disregard" includes any careless, reckless, or intentional disregard.
The accuracy-related penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that there was reasonable cause and that the taxpayer acted in good faith.
The Commissioner bears the burden of production with respect to the taxpayer's liability for the
Respondent contends that petitioners are liable for the
Petitioners contend that Desert Academy's records were generally accurate and sufficient and that Mr. Cvancara's employment with respondent should not be held against petitioners because respondent prohibited Mr. Cvancara from participating in Desert Academy's finances and tax return 2013 Tax Ct. Memo LEXIS 24">*77 preparation.
Mrs. Cvancara failed to record significant amounts of Desert Academy's receipts for 2005 and 2006. We find that Mrs. Cvancara was negligent in failing to accurately maintain Desert Academy's records with respect to the receipts omitted from Desert Academy's records.
For 2005 Mrs. Cvancara (1) did not satisfy the strict substantiation requirements of
However, with respect to the rest of the items, where we have sustained, in whole or in part, respondent's determinations, a different conclusion obtains. We sustained respondent's determinations with respect to these items because the *68 business purpose of the expenses in question was not obvious from the substantiation offered, and petitioners did not fill that gap with any testimony. Respondent, however, bears the burden of production with respect to penalties.
Alternatively, to the extent that the
We have considered the parties' remaining arguments, and to the extent not discussed above, conclude those arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.↩
2. Petitioners concede that they failed to report on their 2005 Federal tax return a 2004 State income tax refund of $1,315. Respondent concedes that (1) petitioners are entitled to a deduction for educator expenses of $250 for 2005 and 2006; (2) petitioners did not receive unreported taxable income from Desert Academy in the form of fringe benefits (i.e., reduced tuition for petitioners' children) for 2006; and (3) petitioners are entitled to a deduction for home mortgage interest of $29,633 for 2006.↩
3. Respondent concedes that Desert Academy is entitled to deduct $30,548 of the disallowed cost of goods sold for 2005.
4. The unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, sec. 402, 96 Stat. at 648, do not apply to Desert Academy. Desert Academy qualifies as a small partnership under
5. Petitioners used a Schedule C, Profit or Loss From Business, attached to their Form 1040 for 2008.↩
6. On the returns, Mrs. Cvancara wrote that they were "recreated per IRS request"; however, Mrs. Cvancara testified that she did not recall filing the original returns.↩
7. "'Credible evidence is the quality of evidence which, after critical analysis, the court would find sufficient upon which to base a decision on the issue if no contrary evidence were submitted (without regard to the judicial presumption of IRS correctness).'"
8. The term "Secretary" means the Secretary of the Treasury or his delegate.
9. Petitioners did not introduce Desert Academy's financial statements, and we infer that it did not prepare applicable financial statements within the meaning of
10. Moreover, contrary to respondent's contention,
11. The regulations specifically disallow accounting for income on the cash method and expenses on an accrual method,
12. Respondent belatedly contends on brief that petitioners have treated these payments inconsistently because they claimed a tax credit of $109 for child and dependent care expenses of $3,960 paid to Desert Academy in 2005.
We note that petitioners did not claim child and dependent care credits on their Forms 1040 for tax years 2003 and 2004 and 2006-08, even though at least one of their children attended Desert Academy's school during at least some of those years. We further note that respondent raised this issue for the first time on brief, and petitioners were not afforded an opportunity to produce additional evidence to support their contention. Accordingly, to the extent that respondent is asserting that petitioners cannot claim the amount they reported as a child and dependent care expense on their 2005 Form 1040 as a capital contribution to Desert Academy, we decline to consider the argument because doing so would prejudice petitioners.
13. We therefore need not decide whether Mr. Cvancara is a limited partner under
14. Additionally, Desert Academy's records show item 16 as an expense of $2.81, but the receipt provided by petitioners shows $2.19. We accordingly sustain respondent's adjustment to item 16.↩
15. We specifically find that some of the disallowed expenses were personal expenses because, as discussed
16. These are items 2, 5, 6, 12, 20, 23, 24, 27, 28, 32, 36, 39, 40, 45, 48, 49, 51, 55, 56, 57, 58, 63, 66, 67, 68, 69, 73, 74, 82, 84, 89, 92, 93, 95, 98, 103, 105, 118, 138, 140, 141, 146, 158, 179, 181, 182, 186, 192, 196, 203, 208, 209, 212, 219, 220, 230, 231, 240, 254, 257, 266, 269, 270, 281, 291, 297, 321, 330, 335, 349, 358, 360, 367, 372, 378, 396, 399, 401, 402, 405, 410, and 411.↩
17. Although petitioners did not identify item 84, a corresponding charge, dated March 3, is noted on Desert Academy's bank statement.↩
18. Respondent determined that $404 and $1,049 of petitioners' claimed capital contributions for 2003 and 2005, respectively, were personal expenses. Even if we were to agree with these adjustments, petitioners would still have more than sufficient bases in Desert Academy to deduct the claimed losses for 2005 and 2006.↩
19. As we have concluded that Desert Academy properly accounted for advance payments it received in 2005 and 2006 under the deferral method,
20. These are the items discussed
21. These are the items we found to be personal expenses
22. These are items 68, 69, 269, and 270, discussed
23. We note that, to the extent that we find that petitioners are liable for the
Jacob Oppewal v. Commissioner of Internal Revenue , 468 F.2d 1000 ( 1972 )
William F. Sanford v. Commissioner of Internal Revenue , 412 F.2d 201 ( 1969 )
W. Horace Williams, Sr., and Viola Bloch Williams v. United ... , 245 F.2d 559 ( 1957 )
Joseph R. Dileo, Mary A. Dileo, Walter E. Mycek, Jr., ... , 959 F.2d 16 ( 1992 )
Frank J. Hradesky v. Commissioner of Internal Revenue , 540 F.2d 821 ( 1976 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Johnny Weimerskirch v. Commissioner of Internal Revenue , 596 F.2d 358 ( 1979 )
Diane S. Blodgett v. Commissioner of Internal Revenue , 394 F.3d 1030 ( 2005 )
William H. And Avilda L. Edwards v. Commissioner of ... , 680 F.2d 1268 ( 1982 )
Harold Dejong and Marjorie J. Dejong v. Commissioner of ... , 309 F.2d 373 ( 1962 )
Artnell Company v. Commissioner of Internal Revenue , 400 F.2d 981 ( 1968 )
Sklar v. Commissioner , 549 F.3d 1252 ( 2008 )
Cathy Miller Hardy v. Commissioner of Internal Revenue , 181 F.3d 1002 ( 1999 )
rameau-a-johnson-phyllis-a-johnson-thomas-r-herring-karon-s-herring-dfm , 184 F.3d 786 ( 1999 )
Schulde v. Commissioner , 83 S. Ct. 601 ( 1963 )
Estate of Morgens v. Commissioner , 678 F.3d 769 ( 2012 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Commissioner v. Heininger , 64 S. Ct. 249 ( 1943 )
Thor Power Tool Co. v. Commissioner , 99 S. Ct. 773 ( 1979 )
Automobile Club of Mich. v. Commissioner , 77 S. Ct. 707 ( 1957 )