Moussa I. Kourouma v. Commissioner

T.C. Summary Opinion 2008-120UNITED STATES TAX COURT
MOUSSA I. KOUROUMA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 20515-06S. Filed September 11, 2008.
Moussa I. Kourouma, pro se.
Harry J. Negro and JoAnn F. Zidanic, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
at the time the petition was filed. Pursuant to section 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. Subsequent section references are to the Internal Revenue
Code (Code) as amended, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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Respondent determined deficiencies of $11,649 and $11,209,
respectively, in petitioner’s 2003 and 2004 Federal income tax.1
In addition, respondent determined that petitioner is liable for
accuracy-related penalties under section 6662 of $2,329.80 for
2003 and $2,241.80 for 2004. After concessions by petitioner,
the issues remaining for decision are: (1) Whether an activity
carried on by petitioner (operated under the name Excelix)
constituted a trade or business within the purview of section
162, and if so, whether petitioner is entitled to deduct certain
expenses he claims he incurred with respect to the Excelix
activity in 2003 and/or 2004; (2) whether petitioner is entitled
to charitable contribution deductions for 2003 and/or 2004;2 and
(3) whether petitioner is liable for accuracy-related penalties
under section 6662 for 2003 and/or 2004.
1
Respondent determined that petitioner’s correct tax
liability for 2003 is $10,962, rather than $227 as reported on
petitioner’s 2003 tax return. Also, respondent disallowed an
additional child tax credit of $914; thus, the deficiency
determined for 2003 is $11,649.
Respondent determined that petitioner’s correct tax
liability for 2004 is $10,209, rather than zero as reported on
petitioner’s 2004 tax return. Also, respondent disallowed an
additional child tax credit of $1,000; thus, the deficiency
determined for 2004 is $11,209.
2
Respondent, in his notice of deficiency, disallowed various
other claimed deductions. Petitioner either explicitly conceded
those items or did not address them at trial. Consequently,
petitioner is deemed to have conceded entitlement to such
deductions pursuant to Rule 34(b)(4).
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Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time petitioner
filed his petition, he resided in Delaware.
Petitioner, a native of Guinea, is an electrical engineer.
From 2002 to 2007 petitioner worked full time as an
analyst/trader for PHI Service Co. (PHI), a company which trades
(i.e., purchases and sells) electrical power.
Commencing in 2002, petitioner attempted to interest
electric companies in acquiring software that he had developed
which could be used to predict the future price of electricity.
Accurately predicting the price of electricity enabled the
electric company to purchase electricity when prices were low and
sell electricity when prices were high. In 2004 the State of
Delaware issued a business license to petitioner to conduct this
activity under the name Excelix.
Petitioner’s Excelix activity did not generate any revenues
in 2002. Petitioner’s Excelix activity generated $750 of
revenues, from one customer, in 2003. Petitioner’s Excelix
activity did not generate any revenues in 2004. Excelix did not
have any employees during 2003 or 2004. Petitioner’s Excelix
activity was ultimately unsuccessful, generating $5 million of
unpaid liabilities and/or losses by the time of trial.
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Petitioner timely filed Forms 1040, U.S. Individual Income
Tax Return, for 2003 and 2004, reporting $750 of income from
Excelix in 2003 and no income from Excelix in 2004. On a
Schedule C, Profit or Loss from Business, attached to each
return, petitioner claimed an array of deductions stemming from
his Excelix activity amounting to $43,473 in 2003 and $35,787 in
2004.
On Schedules A, Itemized Deductions, petitioner claimed
charitable contribution deductions of $22,180 in 2003 and $10,500
in 2004. Petitioner reported tax of $227 on his 2003 return and
no tax obligation on his 2004 return. After taking into account
wage withholdings and child tax credits, petitioner claimed that
he was entitled to tax refunds of $16,049 for 2003 and $14,207
for 2004.
Respondent asserts that: (1) Petitioner’s Excelix activity
in 2003 and 2004 did not constitute a trade or business for which
deductions under section 162 are available; and (2) even if
petitioner’s Excelix activity constituted a trade or business,
petitioner failed to substantiate his claimed deductions with
respect thereto.
Respondent contends that any contributions petitioner made
in 2003 and 2004 were not deductible under section 170 because
they were not made to an organization created or organized in the
United States. Respondent further claims that petitioner did not
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adequately substantiate his claim that he made deductible
charitable contributions. Finally, respondent asserts that
petitioner is liable for the section 6662 accuracy-related
penalty for 2003 and 2004 for substantial understatements of
income tax.
Discussion
As a general rule, the Commissioner’s determinations in the
notice of deficiency are presumed correct, and the burden of
proving an error is on the taxpayer. Rule 142(a). However,
pursuant to section 7491(a), the burden of proof with respect to
any factual issue relating to ascertaining the liability for tax
shifts to the Commissioner if the taxpayer: (1) Maintained
adequate records; (2) satisfied the substantiation requirements;
(3) cooperated with the Commissioner’s agents; and (4) during the
Court proceeding introduced credible evidence with respect to the
factual issue involved. The taxpayer bears the burden of proving
that he has met the requirements of section 7491(a)(2). Miner v.
Commissioner, T.C. Memo. 2003-39; Nichols v. Commissioner, T.C.
Memo. 2003-24, affd. 79 Fed. Appx. 282 (9th Cir. 2003).
Although neither party has directly raised section 7491(a)
as an issue, for the reasons discussed infra we conclude that
petitioner has neither complied with all substantiation
requirements of the Code nor maintained all required records.
See secs. 6001, 7491(a)(2). Consequently, petitioner has the
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burden of proof respecting factual issues relevant to his
liability for the deficiencies in tax determined by respondent.
Petitioner’s Excelix Activity
Respondent determined that petitioner’s Excelix activity did
not constitute an active trade or business for which deductions
under section 162 are available.
To be engaged in a trade or business within the meaning of
section 162(a), an individual taxpayer must be involved in the
activity with continuity, regularity, and the primary purpose of
deriving a profit. Commissioner v. Groetzinger, 480 U.S. 23, 35
(1987). Whether the taxpayer is carrying on a trade or business
requires an examination of all of the facts in each case. Id. at
36.
Although a reasonable expectation of profit is not required,
the taxpayer’s profit objective must be actual and honest.
Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.
without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.
1.183-2(a), Income Tax Regs. Whether a taxpayer has an actual
and honest profit objective is a question of fact to be answered
from all of the relevant facts and circumstances. Hastings v.
Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a), Income Tax
Regs.
The pertinent regulations set forth a nonexhaustive list of
factors that may be considered in deciding whether a profit
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objective exists. These factors include: (1) The manner in
which the taxpayer carries on the activity, (2) the expertise of
the taxpayer or his advisers, (3) the time and effort expended by
the taxpayer in carrying on the activity, (4) the expectation
that assets used in the activity may appreciate in value, (5) the
success of the taxpayer in carrying on other similar or
dissimilar activities, (6) the taxpayer’s history of income or
losses with respect to the activity, (7) the amount of occasional
profits, if any, which are earned, (8) the financial status of
the taxpayer, and (9) the elements of personal pleasure or
recreation. Golanty v. Commissioner, 72 T.C. 411, 426 (1979),
affd. without published opinion 647 F.2d 170 (9th Cir. 1981);
sec. 1.183-2(b), Income Tax Regs. No single factor or group of
factors is determinative. Golanty v. Commissioner, supra at 426.
A final determination is made only after a consideration of all
of the relevant facts and circumstances.
We do not believe it necessary to analyze each of the
factors enumerated in section 1.183-2(b), Income Tax Regs., in
determining whether petitioner engaged in the Excelix activity
with an actual and honest objective of making a profit. Rather,
we focus on the factors we believe more important and applicable
in this case. Our analysis of those factors leads to the
conclusion that petitioner’s Excelix activity was not a trade or
business for purposes of section 162.
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The record shows that petitioner’s Excelix activity
generated $750 of revenue in 2003, and no revenue in 2002 or
2004. Moreover, it appears that the Excelix activity did not
generate revenues in any subsequent year. Consequently, the
Excelix activity generated a substantial amount of debt and/or
losses.
It does not appear that petitioner kept contemporaneous or
methodical records of any kind with respect to his Excelix
activity. The scant documentation that petitioner submitted at
trial in support of his claim that he incurred deductible
business expenses was unreliable and contradictory.3 Petitioner
did not hire any employees or advisers in connection with his
Excelix activity, with the possible exception of one person, in
2002.4 In sum, petitioner failed to carry his burden of proving
3
For example, petitioner attempted to substantiate claimed
travel expenses by submitting a mileage summary showing that in
2003 he made sixty-seven 64-mile trips to Valley Forge, Pa.,
fourteen 72-mile trips to Baltimore, Md., four 283-mile trips to
Albany, N.Y., twelve 316-mile trips to Pittsburgh, Pa., twelve
283-mile trips to Rensselaer, N.Y., and fourteen 295-mile trips
to Holyoke, Mass. Petitioner submitted a calendar which
purported to reflect meetings he attended in pursuit of his
Excelix activity. We do not find this evidence credible because
in our opinion the timing and frequency of such meetings would
have been incompatible with contemporaneous full-time employment
at PHI.
4
Petitioner did not sufficiently investigate the background
of that person, also a native of Guinea, to determine whether
that person was in the United States lawfully. Following the
arrest of that person, petitioner posted a bond, and thereafter
the person absconded. While these events do not reflect on the
(continued...)
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that he was involved in the Excelix activity with the requisite
continuity and regularity and with the primary purpose of
deriving a profit. See Commissioner v. Groetzinger, supra at 35.
Because we agree with respondent’s determination that
petitioner’s Excelix activity was not a trade or business for
purposes of section 162, we hold that petitioner is not entitled
to the deductions for expenses he claims he incurred with respect
to the Excelix activity in 2003 and 2004.
Respondent’s determination with respect to this issue is
sustained.
Petitioner’s Charitable Contribution Deductions
Petitioner claimed charitable contribution deductions of
$22,180 in 2003 and $10,500 in 2004.
Section 170 (a)(1) allows a deduction for charitable
contributions during the taxable year if verified as provided in
the regulations. The term “charitable contribution” includes a
contribution or gift to a corporation, trust, or community chest,
fund, or foundation, with certain provisos. Sec. 170(c). For
example, the recipient organization must have been “created or
organized in the United States or in any possession thereof, or
4
(...continued)
expertise of the person as an adviser to petitioner with respect
to his Excelix activity (if, as petitioner claims, the person did
actually advise petitioner with respect to the Excelix activity),
they highlight petitioner’s lack of a businesslike approach to
his selection of an adviser as well as to his Excelix activity
generally.
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under the law of the United States, any State, the District of
Columbia, or any possession of the United States”. Sec.
170(c)(2)(A). Furthermore, no part of the net earnings of a
qualified organization may inure to the benefit of any private
shareholder or individual. Sec. 170(c)(2)(C).
The charitable contribution deduction is subject to certain
substantiation requirements. Sec. 170(f)(8). No deduction is
allowed for any contribution of $250 or more unless the taxpayer
substantiates the contribution by a contemporaneous written
acknowledgment of the contribution from the qualified donee
organization. Sec. 170(f)(8)(A). This written acknowledgment
must state the amount of cash and a description (but not
necessarily the value) of any property other than cash the
taxpayer donated and whether any consideration was given to the
taxpayer. Sec. 1.170A-13(f)(2), Income Tax Regs.
It appears that the charitable contributions petitioner
claimed in 2003 and 2004 related to an organization in Guinea,
and not to an organization described in section 170(c)(2)(A).
Petitioner did not provide any documentary evidence, such as
checks or wire transfers, of having made payments to any
charitable organization, either in the United States or
elsewhere. Therefore, we hold that petitioner did not carry his
burden of proving his entitlement to the claimed charitable
contribution deductions.
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Respondent’s determination with respect to this issue is
sustained.
Petitioner’s Liability for Accuracy-Related Penalties
Under section 7491(c) the Commissioner has the burden of
production with respect to any penalty. Once the Commissioner
meets the burden of production, the taxpayer continues to have
the burden of proof with respect to whether the Commissioner’s
determination of the penalty is correct. Rule 142(a); Higbee v.
Commissioner, 116 T.C. 438 (2001).
Respondent determined that petitioner is liable for the
section 6662(a) penalty because he underpaid his tax for both
2003 and 2004 and that those underpayments are attributable to
substantial understatements of income tax within the meaning of
section 6662(b)(2). For purposes of section 6662(b)(2), an
understatement is equal to the excess of the amount of tax
required to be shown in the tax return over the amount of tax
shown in the return, sec. 6662(d)(2)(A), and is substantial in
the case of an individual if the amount of the understatement for
the taxable year exceeds the greater of 10 percent of the tax
required to be shown in the return for that taxable year or
$5,000, sec. 6662(d)(1)(A).
Petitioner’s 2003 return reported tax of $227. Respondent
determined, and we agree, that the tax required to be shown on
the return was $10,962. Petitioner’s 2004 return reported no
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tax. Respondent determined, and we agree, that the tax required
to be shown on the 2004 return was $10,209. The understatement
for each year exceeds 10 percent of the tax required to be shown
in the returns and for each year the amount of the understatement
is greater than $5,000. There are substantial understatements
for both 2003 and 2004. See sec. 6662(d)(1)(A).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination of whether the taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and
circumstances, including the taxpayer’s efforts to assess the
taxpayer’s proper tax liability, the knowledge and experience of
the taxpayer, and the reliance on the advice of a professional,
such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Reliance on the advice of a professional, such as an accountant,
does not necessarily demonstrate reasonable cause and good faith
unless, under all the circumstances, such reliance was reasonable
and the taxpayer acted in good faith. Id. In this connection, a
taxpayer must demonstrate that his/her reliance on the advice of
a professional concerning substantive tax law was objectively
reasonable. Chamberlain v. Commissioner, 66 F.3d 729, 732-733
(5th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1994-
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228; Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994),
affg. T.C. Memo. 1993-480.
Petitioner has not carried his burden of proving that he had
reasonable cause and acted in good faith with respect to the
underpayment for either 2003 or 2004. Petitioner testified that
he relied on a person who lived in the same housing complex as he
did as his “tax and legal assistant” and later discovered that
person was not qualified to render legal or accounting advice.
There is no corroborating evidence to substantiate petitioner’s
claim that he relied on the assistance or collaboration of
another person in connection with the preparation of either his
2003 or his 2004 tax return. Assuming that petitioner relied on
another person, petitioner admitted that person was not qualified
to render legal or accounting advice. In any event, there is
nothing in the record to enable us to hold that petitioner’s
reliance on that other person was reasonable. Finally, we are
mindful that neither the 2003 nor the 2004 tax return was signed
by a tax return preparer. Therefore, we cannot hold that
petitioner reasonably relied on the informed and studied advice
of a competent tax professional.
Although petitioner does not have a background in taxation,
he is an educated professional. We doubt that petitioner
reasonably and in good faith could have believed that he was
entitled to the deductions which respondent disallowed. Because
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petitioner has failed to prove that he is entitled to relief
under section 6664(c)(1), we reject petitioner’s arguments that
he should be relieved of the section 6662 penalties.
Respondent’s determination with respect to this issue is
sustained.
To reflect the foregoing and concessions by petitioner,
Decision will be entered
for respondent.