Alka Sham v. Commissioner

T.C. Memo. 2020-119UNITED STATES TAX COURT
ALKA SHAM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10531-17. Filed August 12, 2020.
In 2010 P was unemployed after leaving work in the
investment management field and experienced medical problems
requiring treatment. In 2011 P became an independent business
consultant in the medical industry. From 2011 through part of 2015,
P was retained by an anesthesiologist to expand his practice and
perform basic business management. P did not accurately report or
maintain records of her gross receipts.
P filed late her income tax returns for the years 2010 through
2015. On those returns P claimed significant medical expense
deductions and other miscellaneous deductions on Schedules A,
“Itemized Deductions”, of her returns, some of which she could not
substantiate. P also claimed business deductions on Schedules C,
“Profit or Loss From Business”, of her returns for tax years 2011
through 2015 that she could not substantiate. P did not report a
refund of State tax on her return for 2014.
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[*2] By a statutory notice of deficiency (“SNOD”) issued in 2017, R
determined that P did not report all of her income and that some of
her claimed deductions should be disallowed. R also determined that
P is liable for accuracy-related penalties for the years 2010 through
2013 and additions to tax for the years 2013 through 2015.
Held: P failed to include certain amounts in gross income that
should have been reported on her tax returns.
Held, further, with few exceptions, P failed to substantiate her
entitlement to deductions for medical expenses and business expenses
beyond those R already allowed in the SNOD or conceded at or after
trial.
Held, further, P is liable for accuracy-related penalties for the
years 2010 through 2013 and additions to tax for the years 2013
through 2015.
Alka Sham, for herself.
Christopher D. Davis, for respondent.
CONTENTS
I. FINDINGS OF FACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B. Unemployment in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
C. Self-employment in 2011-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
D. Apartment 16A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
E. Dr. Kukreja’s finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
F. Self-employment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
G. Self-employment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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[*3] 1. The claimed expense deductions generally. . . . . . . . . . . . . . . 14
2. Travel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
a. Car and truck expenses . . . . . . . . . . . . . . . . . . . . . . . . . 16
b. Local transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
c. Travel for medical conferences. . . . . . . . . . . . . . . . . . . 17
d. Other travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3. Meals and entertainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4. Expenses paid by Dr. Kukreja . . . . . . . . . . . . . . . . . . . . . . . . . 20
5. Reimbursed expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
H. Medical expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1. Deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2. Reimbursements from health insurance . . . . . . . . . . . . . . . . . 26
a. 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
b. 2011-13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
c. 2014-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
I. State income tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
J. Taxable interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
K. Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
L. Tax returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
M. Examination and SNOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
II. OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
A. Applicable legal principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
1. Burden of proof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2. Record-keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
B. Income issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
1. Schedule C income for 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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[*4] 2. State tax refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3. Interest and dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4. Capital gain/loss for 2014 and 2015 . . . . . . . . . . . . . . . . . . . . 47
C. 2010 Schedule A miscellaneous expenses . . . . . . . . . . . . . . . . . . . . 48
D. Schedule A itemized deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1. Medical expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
a. Medical expenses generally . . . . . . . . . . . . . . . . . . . . . 50
b. Self-employed health insurance expense . . . . . . . . . . . 51
c. Unreimbursed itemized deductible medical expenses . 52
d. Summary of deductible medical expenses . . . . . . . . . . 54
2. Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
E. Schedule C expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
1. Rent/lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
2. Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3. Office expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
4. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5. Car/truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6. Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
7. Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
a. “Local transport” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
b. “Dues and subscriptions” . . . . . . . . . . . . . . . . . . . . . . . 65
c. “IT and technology” . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
d. “Telephone and internet” . . . . . . . . . . . . . . . . . . . . . . . 66
e. “Business research and establishment”. . . . . . . . . . . . . 67
f. “Professional development”, “conferences”, and
“continuing education” . . . . . . . . . . . . . . . . . . . . . . . . . 67
g. “Meals and entertainment” . . . . . . . . . . . . . . . . . . . . . . 69
h. “Outside/professional services” . . . . . . . . . . . . . . . . . . 70
i. “Promotion” and “gifts” . . . . . . . . . . . . . . . . . . . . . . . . 71
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[*5] F. Penalties and additions to tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
1. Additions to tax under section 6651(a)(1) and (2) . . . . . . . . . 71
2. Addition to tax under section 6654 . . . . . . . . . . . . . . . . . . . . . 76
3. Accuracy-related penalty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Appendix A: Income items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Appendix B: Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
MEMORANDUM FINDINGS OF FACT AND OPINION
GUSTAFSON, Judge: The Internal Revenue Service (“IRS”) issued to
petitioner, Alka Sham, a statutory notice of deficiency (“SNOD”) pursuant to
section 62121 on February 17, 2017, determining deficiencies in Ms. Sham’s
Federal income tax (plus penalties and additions to tax) for the years 2010 through
2015, as follows:
1
Unless otherwise indicated, all citations of sections refer to the Internal
Revenue Code of 1986 (26 U.S.C.) in effect at all relevant times, and all citations
of Rules refer to the Tax Court Rules of Practice and Procedure.
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[*6] Penalty Additions to tax
Sec. Sec. Sec. Sec.
Year Deficiency 6662 6651(a)(1) 6651(a)(2) 6654
2010 $14,804 $2,961 --- --- ---
2011 17,716 3,543 --- --- ---
2012 18,749 3,750 --- --- ---
2013 21,520 4,304 $969 --- ---
2014 54,979 --- 12,370 (1 ) 2
$987
2015 21,436 --- 4,823 (1 ) 386
1
To be determined.
2
Before trial, the Commissioner conceded the section 6654 addition to tax
for 2014.
Ms. Sham filed a timely petition under section 6213(a) for redetermination of the
deficiencies, penalties, and additions to tax. After the parties’ concessions of
various issues, we must decide: the amount of Ms. Sham’s income for the year
2014, whether she is entitled to certain deductions she claimed for the years 2010
through 2015, and whether she is liable for the penalties and additions to tax
determined by the IRS (with the exception of the section 6654 addition to tax for
2014, which was conceded). We uphold the IRS’s adjustments in large part, and
we mostly deny the additional deductions that Ms. Sham claims. We uphold the
additions to tax and the imposition of the accuracy-related penalties under section
6662.
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[*7] On the evidence before us, and employing the burden-of-proof principles set
out below, we find the following facts.
I. FINDINGS OF FACT
A. Background
Ms. Sham has two master’s degrees. She was an investment manager for
several years, managing three portfolios.
B. Unemployment in 2010
In 2009 Ms. Sham had a dispute with her then employer that precipitated a
serious illness. Ms. Sham left work for that employer in 2009 and had major
surgery in 2010. She had many medical appointments in 2010 and often used a
taxi or public transit to travel to and from her appointments. That same year she
paid a lawyer $6,100 to negotiate a settlement with her former employer and
eventually reached an agreement, pursuant to which she remained at home,
unwound positions in the portfolios she managed for her former employer, and
collected $136,154 in settlement of a dispute that required her former employer to
compensate her “like an executive” during that time. Also in 2010 Ms. Sham paid
a different law firm a retainer of $1,250 to represent her in a matter entitled MH
Residential I, LLC v. Robert Haney, Alka Sham, which did not pertain to her
dispute with her former employer.
-8-
[*8] During 2010 Ms. Sham resided at an apartment in New York, New York, in
a residential building known as the Manhattan House.
Ms. Sham collected unemployment benefits from the State of New York at a
rate of $354 per week from December 2009 through January 2011. In 2010 those
benefits totaled $18,440, which she reported on her 2010 tax return. We find that
Ms. Sham was in fact unemployed for all of 2010.
C. Self-employment in 2011-15
In 2010 Ms. Sham experienced medical problems that caused her to seek
employment in a new field. Having had significant experience with the health
care industry, she began to work as a self-employed business consultant for
Dr. Navrajan Kukreja, an anesthesiologist with whom she had a 15-year personal
relationship. Dr. Kukreja did business through three entities--Anesthesiology
Consultants, LLC, Perioperative Consultants, LLC, and SMKM Investments,
LLC--to which we sometimes refer as Dr. Kukreja’s “entities”. Dr. Kukreja’s
medical business was limited to anesthesiology.
In her work for Dr. Kukreja, Ms. Sham was to negotiate contracts by which
the entities would provide anesthesiology services to “ambulatory surgical
centers” in New Jersey. Dr. Kukreja engaged her to expand into the unpenetrated
parts of the New Jersey and New York markets, but no business ever materialized
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[*9] there. Ms. Sham also functioned to some extent as a business manager for
Dr. Kukreja and his entities. From 2011 to 2015 Dr. Kukreja (through his entities)
was Ms. Sham’s only paying client. Ms. Sham did not identify any prospect with
whom she successfully negotiated a contract for Dr. Kukreja’s business or any
prospects whom she pursued for that purpose (and neither did Dr. Kukreja).
During the time that Ms. Sham worked for Dr. Kukreja and his entities, she
worked approximately 20 hours per week, which included time spent speaking
with specialists, visiting their facilities, traveling to meetings, chit-chatting, and
reading. She was also an active member of the Financial Women’s Association of
New York and attended networking events with Young Jewish Professionals,
where she engaged with other financial professionals. Ms. Sham ceased working
for Dr. Kukreja in 2015 and, as of the date of trial, remained unemployed.
D. Apartment 16A
In November 2010 Ms. Sham signed a lease on a new apartment in New
York (“Apartment 16A”). She vacated her previous apartment at the Manhattan
House and rented and resided in Apartment 16A from 2011 to 2015; during those
years she paid rent on no other residence. (Ms. Sham says that during these years,
she lived with friends and rented Apartment 16A only for business purposes, but
for reasons we explain below in part II.E.1, we conclude otherwise.) To an extent
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[*10] that we cannot quantify, she sometimes used Apartment 16A for business
meetings, though she also conducted business meetings at other locations, such as
restaurants. She did not use any portion of Apartment 16A exclusively for
business purposes.
Through 2013 Ms. Sham paid rent on her apartment from bank accounts in
her name. In 2014 Dr. Kukreja made a direct payment to the rental company of
$35,000 toward the rent on Apartment 16A. In 2015 Dr. Kukreja made another
direct payment of $15,000 toward the rent on Apartment 16A.
E. Dr. Kukreja’s finances
No financial records of Dr. Kukreja and his entities were offered into
evidence, but from the evidence that was offered we conclude that his financial
matters were handled in an unorthodox manner, with which Ms. Sham cooperated.
Dr. Kukreja used his personal and business bank accounts to pay expenses that
were apparently Ms. Sham’s (which she reimbursed to an extent we cannot
determine); he simultaneously deposited business receipts of the entities (and his
own money) into accounts that belonged to Ms. Sham and had her make, from her
accounts, payments of his expenses. Before 2014 Ms. Sham was using her
personal account ending in -0964 to deposit checks from Dr. Kukreja and also to
pay his business and non-business expenses.
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[*11] In February 2014 at Dr. Kukreja’s request, and using a $100,000 deposit
from Perioperative Consultants, LLC, Ms. Sham opened in her own name and with
herself as the sole signatory a TD Bank checking account ending in -9232 (“TD
checking account”). In May 2014, using a $25,000 deposit from the TD checking
account, she opened in her own name and with herself as the sole signatory a TD
Ameritrade securities trading account ending in -2245 (“TD Ameritrade account”).
Records of the TD Ameritrade account show short-term capital losses of $157,600
in 2014 and $353,729 in 2015 resulting from trades in that account. In 2015
Ms. Sham also had a short-term capital loss of $35,542 and a net long-term capital
loss of $255 resulting from trading activity in another TD Ameritrade account
ending in -4516 and titled solely in her name (“personal Ameritrade account”).
Even though Ms. Sham had legal title to these three accounts, Dr. Kukreja
had primary control over two of the accounts--the TD checking account and the
TD Ameritrade account--and was solely responsible for the activities in those two
accounts. Ms. Sham had opened the TD checking account, left Dr. Kukreja with a
book of blank checks that she had signed, and then left the country to travel to
India. Ms. Sham thereafter signed checks at Dr. Kukreja’s direction, but she
otherwise had insignificant oversight of the activities on the TD checking account
and the TD Ameritrade account.
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[*12] With the exception of the initial $25,000 deposit Ms. Sham made from the
TD checking account to open the TD Ameritrade account, she was not responsible
for the activity on either account. Dr. Kukreja used the TD checking account for
his personal use and for the business needs of his entities. He had obtained the
password and online login information and performed the securities trades on the
TD Ameritrade account. Thereafter in 2014 and 2015, checks from the TD
checking account were written for the benefit of Dr. Kukreja and his entities.
After trial the Commissioner conceded that only Dr. Kukreja traded with or
withdrew proceeds from the TD Ameritrade account. The transfers to the TD
Ameritrade account were all either deposits from the TD checking account or wire
transfers initiated by Dr. Kukreja. The wire transfers by Dr. Kukreja totaled
$119,000.
F. Self-employment income2
Ms. Sham’s arrangement with Dr. Kukreja apparently called for her to
receive compensation as a percentage of the business income she generated, but it
does not appear that she was ever paid on that basis or on any other coherent basis.
Her compensation came sometimes in the form of checks payable to herself and
2
A summary of all of Ms. Sham’s income items for the years at issue is
included as Appendix A to this Memorandum Opinion.
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[*13] sometimes by checks paid by Dr. Kukreja or one of his entities to cover
Ms. Sham’s expenses (for example, the $35,000 payment in 2014 and the $15,000
payment in 2015 towards the rental of Apartment 16A).
For 2011-13, the parties have agreed, and we find, that Ms. Sham’s gross
receipts from self-employment reported on Schedule C, “Profit or Loss From
Business”, were $6,451 for 2011, $162,283 for 2012, and $98,790 for 2013.3 On
Schedules C accompanying her returns for 2014 and 2015, Ms. Sham reported that
her gross receipts from self-employment were $71,4514 for 2014 and $36,000 for
3
At trial Ms. Sham showed (on Exhibit 71-P) her computation of these
amounts of gross receipts for 2011-13, and the Commissioner accepted them in his
post-trial answering brief. The agreed gross receipts are not the same as the
amounts that Dr. Kukreja reported for 2014 on untimely Forms 1099-MISC,
“Miscellaneous Income”--i.e., $72,355 for 2011, $86,600 for 2012, and $117,300
for 2013--and that Ms. Sham reported on her tax returns. Regardless of whether
the compensation had been paid by Dr. Kukreja or any of his entities, all of those
amounts were included on the Forms 1099-MISC issued by Anesthesia
Consultants. The amounts on the Forms 1099-MISC did not include any amounts
that Dr. Kukreja paid “again[s]t [Ms. Sham’s] income” in any given year for
expenses such as office supplies and car repairs, nor did they include any amounts
consisting of reimbursements for expenses Ms. Sham paid on behalf of
Dr. Kukreja or his entities. Ms. Sham reported the amounts from the Forms 1099-
MISC on the Schedules C-1 attached to her tax returns for those years--which she
filed late, as we explain below in part I.L. (It appears that some amounts reported
for 2011 may not have actually been paid until 2012; but the Commissioner does
not dispute her gross receipts for those years, and we make no adjustment.)
4
Ms. Sham contends in her post-trial brief that her gross receipts for 2014
should be further reduced to $51,562 by subtracting $20,838, an amount that is the
(continued...)
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[*14] 2015.5 In his post-trial answering brief, the Commissioner accepts these
amounts, and we find that her gross receipts were as reported.
G. Self-employment expenses
1. The claimed expense deductions generally
In her tax returns for the years 2011, 2012, 2013, 2014, and 2015 (described
below in part I.L), Ms. Sham claimed deductions for expenses on Schedules C for
being in the business of marketing and business development. For 2011, 2012,
and 2013, Ms. Sham claimed deductions for expenses on two different
Schedules C (without differentiating between the type of business described on
each schedule). The expenses for which she claimed deductions include, inter
alia, rent, utilities, depreciation, travel, office supplies, local transit, telephone,
4
(...continued)
sum of two alleged mortgage payments made for Dr. Kukreja’s benefit from
$72,400 (the sum of the amounts she contends were gross receipts). For the
reasons explained below in part II.B.1, we reject this contention and find that her
Schedule C gross receipts for 2014 are $71,451, as she reported on her 2014
return.
5
As with 2011-13, these amounts for 2014 and 2015 vary from what
Dr. Kukreja reported on Forms 1099-MISC. Anesthesia Consultants reported
Ms. Sham’s compensation on Forms 1099-MISC that were not filed until 2017.
Those forms reported compensation of $157,336 for 2014 and $72,800 for 2015.
The Commissioner has conceded $85,885 of the $157,336 in Schedule C gross
receipts for the year 2014 and $36,800 of the $72,800 in Schedule C gross receipts
for the year 2015.
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[*15] business development, meals and entertainment, professional services, and
promotional expenses.
The Commissioner has either conceded or did not disallow many of the
Schedule C expense deductions claimed on Ms. Sham’s returns. Ms. Sham has
attempted to substantiate business expenses even where it appears from the record
that such expenses are not at issue, and in those instances we do not allow her any
additional deduction.6
In general, Ms. Sham has established that she paid for many of the items for
which she claims expense deductions (though not always in the amounts she
claimed on her returns or in this litigation). However, where she has failed to
prove a business purpose for those expenditures, we find that she has not proved a
deductible expense.
We discuss the disputed expenses below in parts I.G.2 through I.H and
explain which categories or items of business and non-business expenses that
Ms. Sham was able to substantiate. In part II we discuss the legal principles that
6
For 2013 Ms. Sham did substantiate that the amount of her self-employed
health insurance was greater than the amount she reported on her return and that
the Commissioner did not challenge in the SNOD (and we allow the higher
amount). While the availability of this so-called “above-the-line” deduction does
depend on her being self-employed, it is not a business expense to be reported on
Schedule C.
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[*16] we apply in making our holding, and in Appendix B we tally the allowed
items.
2. Travel expenses
a. Car and truck expenses
Ms. Sham reported business car and truck expenses of $9,821 for 2011;
$7,372 for 2012; and $7,577 for 2013. She provided invoices related to
automobile maintenance and repairs for each of those years of $6,455 for 2011;
$5,640 for 2012; and $5,521 for 2013. We find that the amounts on the invoices
for automobile maintenance and repairs were expenses paid by Dr. Kukreja, as we
explain below in part I.G.4, and we deny those amounts on that basis. Ms. Sham
asserts that the remaining amounts of the deduction claimed for each year--$3,366
for 2011; $1,732 for 2012; and $2,056 for 2013--were mileage expenses, but she
did not maintain any vehicle mileage logs as a contemporaneous record of her
miles driven, the destination reached, or the business purpose of the use of a
vehicle during any of the years at issue. We find that she did not substantiate the
car and truck expenses. See infra pt. II.E.5.
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[*17] b. Local transportation
During the years at issue Ms. Sham often traveled by taxi, shuttle service,
and public transportation. As we explain below in part II.E.7.a, Ms. Sham did not
offer any specific evidence of the claimed business purpose of this transit other
than her own conclusory assertions. We find that she did not substantiate local
transit expenses beyond what the Commissioner conceded as deductible not
because of the established business purpose of the expenses, but rather as
unreimbursed expenses incurred to facilitate her medical care. See infra pt. I.H.1.
c. Travel for medical conferences
During the years at issue, Ms. Sham traveled to Montauk, New York, and
Napa, California, to attend conferences that targeted executives in the medical
industry, for which she paid expenses totaling $5,981 in 2012, $2,000 in 2013,
$12,743 in 2014, and $554 in 2015.7 The Commissioner has conceded on brief
7
This business-related travel consisted of: for 2012, $5,981 for a program
on business negotiations, including the program fee, hotel, and flight expense; for
2013, $2,000 for “MPF Coaching” targeted at executives; for 2014, $2,000 for
“MPF Coaching”, $6,833 for a conference in Napa, California, on healthcare and
investing, $770 for a program on negotiations in Montauk, New York; and $3,140
for an additional conference on negotiations for executives in the medical industry
(conferences inclusive of meals and travel); and for 2015, $554 for a conference
for medical industry professionals (with associated travel and hotel). On her
returns Ms. Sham classified each of these Schedule C expenses as either “Other
(Conferences)” or “Other (Professional Development)”.
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[*18] that Ms. Sham met her burden to establish the business purpose for her
attendance at conferences and training specific to executives in the medical
industry, and we find that these conferences were related to her self-employment.
See infra pt. II.E.7.f.8
d. Other travel
Ms. Sham also paid substantial travel expenses flying to Amritsar, India;
Amsterdam, Netherlands; Paris, France; and Charlotte, North Carolina, and these
expenses were not related to her self-employment. See infra pts. II.E.6, II.E.7.f.
Some of this travel was to attend classes and presentations in the areas of
Ericksonian hypnosis, neuro-linguistic programming, boundaries training, and
mind-resonance processing (“MRP”). This training focused on the development
of “soft skills” and gave general self-help guidance; it did not develop professional
skills specific to Ms. Sham’s self-employment (and for that reason, in addition to
Ms. Sham’s failure to meet the heightened substantiation requirements for these
8
As we explain below in part II.E.6, we do not find that Ms. Sham met the
heightened substantiation requirements applicable to deduct her travel expenses as
a business expenditure. In light of the Commissioner’s concession of a portion of
these travel expenses deducted for conferences related to professional
development (detailed below in part II.E.7.f), we allow those conceded items. But
because the Commissioner conceded none of the “other travel”--presumably
because, as we find, it was not related to the business of Ms. Sham’s self-
employment--we disallow those expenses.
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[*19] items, we do not allow deductions sought for this training for the proffered
reason of “professional development”, as we explain below in part II.E.7.f).
Dr. Kukreja did not have any business use for the development of skills involving
Ericksonian hypnosis, neuro-linguistic programming, or MRP, nor was he seeking
to expand his medical practice into these areas. Over the period that Ms. Sham
traveled to attend training for Ericksonian hypnosis, neuro-linguistic
programming, and MRP, she was also recovering from trauma and, in 2014 and
2015, separating her affairs from those of Dr. Kukreja, who she believed had a
negative psychological impact on her.
Other of Ms. Sham’s travel in these years included visits with relatives, and
we do not find that these trips related substantially to her business or to
developing client prospects. Ms. Sham has not established that the remaining
travel or other expenditures for training relating to soft skills development have a
business purpose, and we find that these were not related to her self-employment.
3. Meals and entertainment
Ms. Sham reported deductible expenses for meals and entertainment of
$1,255 for 2014 and $433 for 2015. The parties agree that Ms. Sham paid $1,255
in 2014 (the amount she reported on her return) and $1,000 in 2015 (more than she
- 20 -
[*20] reported on her return) for business-related meals and entertainment. But
see infra pt. II.E.7.g.
4. Expenses paid by Dr. Kukreja
With regard to deductions claimed for expenses that were paid by
Dr. Kukreja “again[s]t [Ms. Sham’s] income” for any given year, we find that
Ms. Sham is not entitled to these deductions because she did not incur the
expenses associated therewith. Rather, we find that as a result of the method she
employed to calculate her gross receipts, in which the amounts she paid (or repaid)
to (or on behalf of) Dr. Kukreja were subtracted from her gross receipts, she was
not ever charged with the income that was used to purchase these particular items
that she claims were her expenses.
Moreover, the Commissioner does not now argue that Ms. Sham should be
charged with gross income in the amount of the expenses Dr. Kukreja paid on her
behalf.9 The nature of the arrangement in which Dr. Kukreja paid for items
Ms. Sham contends were for the use of her business eliminated the possibility of
deducting those items; they were either already subtracted from her gross receipts
9
There is one exception: the rent that Dr. Kukreja paid on Apartment 16A.
However, this is a specifically identified expenditure that both parties agree was
gross income to Ms. Sham. The dispute is whether the amount of rent paid is
deductible on Schedule C.
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[*21] (by Dr. Kukreja) or, if not so subtracted, had no effect on the calculation of
her income in the first instance. These expenses consist of: $6,455 in automobile
maintenance and repairs, $5,257 in office furniture, and $2,523 in office repair for
2011; $4,308 in office supplies and hardware, $1,438 in marketing, and $5,640 in
automobile repairs for 2012; and $7,630 in office supplies and hardware and
$5,521 in auto repairs for 2013. We find that, to the extent the expenses were
incurred, they were not expenditures of amounts included in Ms. Sham’s gross
receipts; we accordingly find that Ms. Sham did not incur these expenses for
which deductions were disallowed in the SNOD.10
5. Reimbursed expenses
There are also occasions on which it appears that Dr. Kukreja paid
Ms. Sham as purported reimbursements of expenses she had paid. For example,
Ms. Sham deposited a $25,000 check from Anesthesia Consultants on March 4,
2013, with the memo line notation “Exp Reimb.” With the exception of tax year
2014, her gross receipts have been established by stipulation; and it appears that
the payments that Dr. Kukreja made to Ms. Sham and that he characterized as
10
The invoices that Ms. Sham has offered for the expenses paid by
Dr. Kukreja contain neither the precise categories of expense described on her
returns nor the precise amount of each deduction claimed on the returns. Some of
the amounts reflected on the invoices represent claimed deductions that the
Commissioner has not disallowed.
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[*22] reimbursements were accounted for in the parties’ stipulated method of
deriving Ms. Sham’s income for these years. Thus, if she had showed that the
reimbursement was indeed for a deductible expense that she had actually paid,
then she might be entitled to a deduction, notwithstanding the reimbursement.
However, Ms. Sham has not established for any of the years at issue any specific
expenditures from her own income that correspond with any particular expense
repayment. Accordingly, we find that she is entitled to no additional deductions
on the supposed basis that she had included in her gross income reimbursements
for deductible expenses that she had paid.
H. Medical expenses
1. Deductible expenses
2010. In 2010 Ms. Sham had a major surgery that was very complex,
requiring three separate surgeons. During 2010 and the years thereafter, Ms. Sham
was very depressed, received much heavy medication, and was treated by multiple
psychologists and psychiatrists. Ms. Sham also hired and paid $2,870 to a
Ms. Garcia, who assisted Ms. Sham at home during her illness but was not a
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[*23] medical professional.11 Ms. Sham paid $436 for edible aromatic oils from
“Original Swiss Aromati” that were not medically prescribed to her.
The parties agree as to $54,404 in deductible medical expenses that
Ms. Sham paid for 2010. Relevant to Ms. Sham’s claim for local transportation
expenses, see supra pt. I.G.2.b, the Commissioner’s concession included
transportation expenses of $1,002 that Ms. Sham originally sought to claim as a
business expense deduction and then distinguished from her other reported
transportation expenses as transportation to and from medical appointments. The
Commissioner disputes the deductibility of the $436 for aromatic oils and the
$2,870 paid to Ms. Garcia, and he disputes that Ms. Sham has substantiated $600
worth of medical expense payments for services he agrees are deductible.12 As we
explain below in part II.D.1.c, these additional amounts are not deductible, so she
substantiated medical expenses totaling $54,404. In part I.H.2.a below we discuss
11
In 2012 Ms. Sham paid $2,675 to Ms. Garcia, which she claimed was an
expense for office help/maintenance.
12
The $600 difference appears to arise from aritmetic errors in adding up
various services for two medical care providers, and in both instances we agree
with the Commissioner’s addition, finding that Ms. Sham substantiated only
$7,290 in payments to Irena Ginsberg for acupuncture (not $7,490) and $1,800 in
payments to Maria Iager (not $2,200).
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[*24] reimbursement of a portion of those 2010 expenses by Ms. Sham’s insurance
provider(s).
2011. For 2011 Ms. Sham reported on her return itemized deductible
medical expenses of $21,272, and the Commissioner concedes that amount.
2012. Ms. Sham proved at trial that in 2012 she paid $27,602 in medical
expenses, an amount slightly larger than the amount of itemized deductible
medical expenses of $26,582 that she reported on her return and that the
Commissioner concedes.
2013. For 2013 Ms. Sham reported on her return itemized deductible
medical expenses of $16,552, and the Commissioner conceded this amount at trial.
(Without the benefit of this concession, we would find that she proved only $5,584
in itemized deductible medical expenses, consisting of $2,579 in co-payments and
$3,005 for acupuncture, because she took a separate deduction for the expense of
self-employed health insurance.)
For 2013 Ms. Sham claimed a separate deduction of $12,561 for the
expense of her self-employed health insurance (instead of including that expense
among her other itemized medical expenses on Schedule A, “Itemized
Deductions”). The Commissioner did not challenge that deduction in the SNOD.
At trial Ms. Sham substantiated additional payments for health insurance with
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[*25] copies of checks she wrote for the premiums, the total amount and purpose
of which the Commissioner does not dispute, which bring the total substantiated
amount to $18,996. We find she paid this amount for health insurance.
2014. For 2014 Ms. Sham reported on her return itemized deductible
medical expenses of $12,017. At trial Ms. Sham argued that she paid $4,095 for
insurance co-payments and $2,780 for acupuncture, totaling $6,875. The
Commissioner has conceded that Ms. Sham paid the acupuncture expense and that
it is deductible, and he has also conceded $520 of the co-payment expense,
totaling $3,300 in itemized deductible medical expenses for 2014. Ms. Sham has
not proven any amounts over the Commissioner’s concessions.
The Commissioner does not dispute--and we find--that in 2014 Ms. Sham
paid, in addition to the foregoing medical expenses, $8,605 for self-employed
medical insurance.
2015. For 2015 Ms. Sham did not itemize her deductible medical expenses
on her return but instead took the standard deduction. At trial she proved only
$675 of co-payments for medical services--an amount the Commissioner does not
challenge.
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[*26] The Commissioner does not dispute--and we find--that in 2015 Ms. Sham
paid, in addition to the foregoing medical expenses, $8,831 for self-employed
medical insurance.
2. Reimbursements from health insurance
a. 2010
Ms. Sham originally had an individual health insurance plan with United
Healthcare Oxford (“Oxford plan”) which had high premiums and strict
requirements for covering out-of-network treatment. The policy specified
procedures to make claims for reimbursements for certain types of services. The
Oxford plan required pre-authorization for all hospitalizations and inpatient or
outpatient surgical procedures, which Ms. Sham did not obtain. In 2010 she
switched plans to Horizon Blue Cross Blue Shield (“Horizon plan”), which had a
deductible; later in 2010 she changed insurance plans again to Empire Blue Cross
Blue Shield (“Empire plan”).
During 2010 Ms. Sham submitted her medical expenses to her health
insurance provider for reimbursement and did receive some reimbursement
payments. Beginning in 2011 Ms. Sham’s bank records for her personal checking
accounts ending in -0964 and -4477 reflect that she received reimbursements
under the Horizon plan and then later under the Empire plan. However,
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[*27] Ms. Sham’s bank records in evidence are incomplete and do not contain any
copies of checks deposited in her accounts in the year 2010; they do not contain
copies of any checks deposited in 2011 before July. (Ms. Sham provided her
monthly bank statements for all of the years at issue but separately provided copies
of checks that correspond with certain deposits and withdrawals on the accounts.)
The Commissioner contends that Ms. Sham received reimbursements from
her health insurer in 2010. To support this contention he points to: (1) various
deposits into her account ending in -0964 that appear on the account statements
for 2010, (2) her evident routine, documented for subsequent years, of submitting
reimbursement requests to her insurance companies (and receiving
reimbursements), and (3) her testimony admitting that she did submit some
reimbursement requests in 2010 and did receive some reimbursements. The
Commissioner posits that certain deposits into Ms. Sham’s account ending in
-0964 totaling $14,706 are attributable to reimbursements from insurance.
We find, on the basis of the amounts and frequency of the deposits, the high
level of medical care that Ms. Sham received in 2010, and the absence of any other
credible explanation for the deposits, that deposits into Ms. Sham’s account
ending in -0964 that total $10,149 (not the Commissioner’s larger total) were
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[*28] medical expense reimbursements from her health insurance provider.13 Her
account statements for the -0964 account reflect numerous deposits throughout the
year, including regular unemployment compensation and, in the latter half of the
year, regular deposits for more significant amounts in “round” increments--e.g.,
$6,000, $7,000, $10,000. None of those deposits is included in the $10,149 of
irregular deposits in “odd” amounts consistent with other insurance
reimbursements that Ms. Sham received. Ms. Sham did not show an alternative
source for any of these deposits. The preponderance of the evidence shows that
$10,149 of the deposits reflects those reimbursements. (This $10,149 amount
reduces her $54,404 in deductible medical expenses reported on Schedule A to
$44,255. See infra pt. II.D.1.d.)
b. 2011-13
For the years 2011 through 2013 Ms. Sham’s own bank statements, which
include copies of canceled checks, reflect that the amounts the Commissioner asks
us to find are reimbursements of medical expenses were payments from her health
13
The deposit amounts were $3,755 on January 8, 2010; $1,186 on March 9,
2010; $1,485 on May 27, 2010; $705 on December 6, 2010; $820 on December
13, 2010; and $2,198 on December 30, 2010. The Commissioner argues that an
additional $4,560 on June 10, 2010, also represented a reimbursement of medical
expenses. However, because there was a check withdrawn on the account in the
identical amount of $4,560 one day prior, we find that explanation unlikely.
- 29 -
[*29] insurance deposited in the relevant tax year. Consequently, the
preponderance of the evidence establishes that she received reimbursements for
medical expenses in the amounts of $4,112 in 2011, $6,620 in 2012, and $2,377 in
2013.
c. 2014-15
There is no evidence (nor does the Commissioner contend) that Ms. Sham
received reimbursements for deductible medical expenses reported for 2014 or
2015.
I. State income tax refund
Ms. Sham made payments of New York State income tax totaling $12,022
for the year 2010, and she claimed her State tax paid as a deduction on her Federal
income tax return for 2010. She did not file her New York State income tax return
for 2010 until 2014, and on that State return Ms. Sham claimed a State tax refund
of $12,022. New York paid Ms. Sham the State tax refund in 2014 and submitted
Form 1099-G, “Certain Government Payments”, to the IRS reporting that the
$12,022 had been refunded to Ms. Sham in 2014, but Ms. Sham did not report that
refund on her late Federal income tax return for 2014 (filed in 2017). We find that
Ms. Sham received a refund of New York State income tax in 2014 (and for the
reasons stated below in part II.B.2, the inclusion of that refund in her income for
- 30 -
[*30] 2014 depends on a computational issue regarding her Federal income tax
liability for 2010).
J. Taxable interest and dividends
The parties agreed that Ms. Sham received taxable interest income of $198
in 2011; $104 in 2012; $11 in 2013; and $10 in 2014. The parties also agreed that
Ms. Sham received taxable dividend income of $141 in 2013 and $53 in 2014.
K. Charitable contributions
The Commissioner did not challenge in the SNOD the deductions Ms. Sham
claimed on her returns for charitable contributions for 2010 and 2011. As we
explain below in part I.L, Ms. Sham carried forward all of the amounts she
reported for charitable contributions for the years 2012 through 2014 and did not
claim any charitable contribution deductions for 2015. Her litigating position is
that she is entitled to deduct charitable contributions for each of the years at issue.
Ms. Sham’s credit card statements show various amounts of $500 or more
that were paid to the following entities which she contends were charitable
contributions: on December 1, 2013, a $1,500 payment to “Vipassana Meditation,
Shelburne, MA” (classified on the statement as “other purchases and cash”); on
September 12, 2015, a $500 payment to “Northwest Vipassana, MA” (classified
on the statement as “charities and other organizations”); and on September 13,
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[*31] 2015, a $60 payment to “Pariyatti, WA” (also classified on the statement as
“charities and other organizations”). Ms. Sham did not offer into evidence any
receipt or other written acknowledgment from any of these entities.
L. Tax returns
Ms. Sham filed her Federal income tax returns for 2010-13 on the following
dates:
Year Date
2010 Apr. 19, 2014
2011 Aug. 10, 2015
2012 Aug. 17, 2015
2013 Oct. 19, 2015
After filing her petition, Ms. Sham submitted to the IRS tax returns for 2014 and
2015 on the following dates:
Year Date
2014 July 25, 2017
2015 September 2018
Ms. Sham hired professional accountants to prepare her tax returns for all
six years at issue, spending $300 on tax preparation fees in 2013 and $800 in
2014. Ms. Sham’s tax returns show that four different professionals signed her tax
returns as a “paid preparer” during the years at issue: one in Hauppauge, New
York, for 2010; another in Clifton, New Jersey, for 2011 through 2013; a third in
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[*32] Highland Park, New Jersey, for 2014; and a fourth in Hyde Park, New York,
for 2015. She did not call any return preparer to testify at trial.
When testifying about her return positions, Ms. Sham made repeated
references to “the accountant”, never distinguishing among the various preparers
she used or referring to any of them by name. For example, she asserted that the
accountant included her 2014 State tax refund in her Schedule C gross receipts;
the accountant determined that she should separate her rent expense onto two
different Schedules C and determined how much was “reasonable and customary”
as a deduction; the accountant had “done mileage calculations” to explain
deductions claimed for business use of a personal vehicle. Depreciation
deductions that she could not explain were the accountant’s idea. With respect to
these return positions, Ms. Sham either could not explain how the accountant
postulated the item claimed on the return, or in some instances seemed to disclaim
the items, leaving them unexplained. In her closing argument, referring again to
what she alleged was the accountant’s idea to generate two Schedules C,
Ms. Sham implied that she signed a return that she did not understand, after being
persuaded by the accountant that “this is the way it is done.”
Ms. Sham made only general statements regarding the information she
provided to the accountants to prepare her returns: “I would give them proof of
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[*33] payments like, how [sic] are the invoices and for 2010 because of the year of
the surgery, I was not very well organized. I generally give them a lot of material.
So they organized it in whichever way.” She did not provide specific detail about
the information she provided to the accountants for each of the years at issue, with
one exception: Exhibit 65-P was admitted for the purpose of showing Ms. Sham’s
contentions as to what she believed her allowable deductions were for 2011. That
document contains spreadsheet entries, typewritten and handwritten lists, and
calculations--all apparently composed by Ms. Sham--but no original backup
documentation to substantiate the numbers on those papers. Describing that
document, Ms. Sham stated: “[S]o everything out here is what I would give to the
accountant to do the taxes. This is not what you would see on the tax return.” She
also attributed the delay in filing her 2014 and 2015 returns to uncertainty about
how to treat the TD Ameritrade account and the fact that, while her returns were
under audit, her accountant advised her that she was “in bad shape” whether or not
she filed the returns.
On line 21 of Schedule A in her tax return for 2010, Ms. Sham claimed
“Unreimbursed employee expenses” of $34,563, identified as “Form 2106
Expenses”. On her Form 2106, “Employee Business Expenses”, she reported:
$1,220 of “Parking fees, tolls, and transportation, including train, bus, etc.” on
- 34 -
[*34] line 2; $3,461 of “Travel expense while away from home” on line 3; $8,441
of “Meals and entertainment expenses” on line 4 (reduced by 50% to $4,221 on
line 8); and $25,661 in otherwise unexplained “Business expenses not included on
lines 1 through 3”. This unexplained $25,661 was the largest part of her
miscellaneous Schedule A expenses subject to the so-called “2% Floor”. At trial
and in the parties’ stipulations she disclosed that this unspecified amount included
$10,000 in rent for the Manhattan House apartment (plus utilities, telephone, and
internet expenses associated with that apartment) and the legal fees Ms. Sham paid
to both law firms during the year. Ms. Sham did not attach Form 8829, “Expenses
for Business Use of Your Home”, to any of her tax returns for the years at issue.
On her tax returns for 2012 through 2014,14 Ms. Sham reported on
Schedule A “Gifts to Charity” of $2,370 for 2012, $3,100 for 2013, and $1,072 for
2014.
The amount reported for 2013 exceeds the amount of the payment in 2013
described above in part I.K, and no evidence of payment was offered for 2012 or
14
The Commissioner did not disallow in the SNOD Ms. Sham’s claimed
deductions for “Gifts to Charity” of $845 for 2010 and $2,662 for 2011, so we do
not discuss them. On her 2015 return, Ms. Sham did not report any gifts to charity
because she did not attach Schedule A to that return, but rather took the standard
deduction. Ms. Sham contended at trial that she is entitled to a $560 deduction for
gifts to charity for 2015, which is the sum of the payments described above in
part I.K.
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[*35] 2014. Ms. Sham could not (and did not) actually claim deductions for the
reported amounts because she reported that her adjusted gross income in those
years was negative, and her contribution base therefore zero. See 170(b)(1)(A),
(G). (Ms. Sham now claims deductions, and the Commissioner challenges them.)
On her tax returns Ms. Sham did not report the taxable interest income she
had received in 2011-14 and did not report the taxable dividend income that she
had received in 2013 and 2014.
On her late Federal income tax return for 2014 (filed in 2017), Ms. Sham
did not report the State income tax refund of $12,022 for 2010 that she received in
2014.
Ms. Sham also claimed on her returns losses from the TD Ameritrade
account of $157,600 for 2014 and $353,729 for 2015. Limited by section
1211(b)(1), Ms. Sham reported a $3,000 capital loss for each of those years.
Consistent with her position that she was not responsible for the activity on the TD
Ameritrade account (and was not taxable for its income), Ms. Sham has conceded
the losses attributable to those accounts. She attached to her 2015 return the
statement for her personal Ameritrade account showing the short-term capital loss
of $35,542 and the net long-term capital loss of $255 that we have found she did
incur. See supra pt. I.E. (For the reasons we explain below in part II.B.4,
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[*36] Ms. Sham is entitled to a capital loss deduction of $3,000 for 2015 but not
for 2014.)
M. Examination and SNOD
The IRS commenced an examination for the years 2010 through 2015. A
Civil Penalty Approval Form approving the assertion of penalties for substantial
understatements of income tax and, alternatively, negligence, for the years 2010-
15 was signed on December 15, 2016, by the “Group Manager” for the IRS
examiner who examined Ms. Sham’s returns. On January 24, 2017, having not
received a 2014 return or a 2015 return from Ms. Sham, the IRS prepared a
substitute for return (“SFR”) for each of those years pursuant to section 6020(b).
As we noted above, Ms. Sham thereafter submitted untimely returns for
2014 and 2015, but she has not made any payments toward her tax liability for
2014 or 2015.
On February 17, 2017, the IRS issued to Ms. Sham its SNOD for tax years
2010 through 2015, determining a deficiency in tax for each year, as well as
additions to tax and a penalty.
On May 12, 2017, Ms. Sham timely filed her petition commencing this case.
When she filed her petition, she resided in New York.
- 37 -
[*37] II. OPINION
A. Applicable legal principles
1. Burden of proof
The IRS’s determination is presumed correct, and taxpayers generally bear
the burden to prove incorrect the adjustments made by the IRS in its SNOD. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). A taxpayer’s
statement in a brief does not constitute evidence, Rule 143(c), and cannot
supplement the record, see Niedringhaus v. Commissioner, 99 T.C. 202, 214 n.7
(1992).
The IRS may rely on information returns (Forms W-2, “Wage and Tax
Statement”, and 1099) from third-party payors when determining a taxpayer’s
taxable income. See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 167 (2003),
aff’d, 95 A.F.T.R.2d (RIA) 2004-5490 (3d Cir. 2004). But if “[i]n any court
proceeding * * * a taxpayer asserts a reasonable dispute with respect to any item
of income reported on an information return filed with the Secretary * * * and the
taxpayer has fully cooperated with the Secretary * * *, the Secretary shall have the
burden of producing reasonable and probative information concerning such
deficiency in addition to such information return.” Sec. 6201(d).
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[*38] For the years 2014 and 2015, the Commissioner relied on the Forms 1099-
MISC filed by Anesthesia Consultants to reconstruct Ms. Sham’s income when he
issued the SNOD. At trial Ms. Sham was able to produce credible evidence that
the amounts reported by Anesthesia Consultants were inaccurate, a point the
Commissioner conceded. The precise extent of the Commissioner’s concessions
was to reduce Ms. Sham’s gross Schedule C receipts to the amounts she reported
when she filed her tax return for each of those years, and gross income remains at
issue with respect to only the 2014 return. The Commissioner bears the burden of
proof on the issue of Ms. Sham’s gross income for 2014. He has successfully
sustained that burden, as we show below in part II.B.
The Commissioner bears the burden of proof with respect to “any new
matter, increases in deficiency, and affirmative defenses, pleaded in the answer”.
Rule 142(a)(1). Ms. Sham contends on brief that the Commissioner’s assertion
that the expenses Dr. Kukreja “paid against [her] income” are not deductible from
her income is a “new repayment theory” and argues that the “repayment theory is
unsubstantiated by the evidence on record.” In Wayne Bolt & Nut Co. v.
Commissioner, 93 T.C. 500, 507 (1989), we stated: “A new theory that is
presented to sustain a deficiency is treated as a new matter when it either alters the
original deficiency or requires the presentation of different evidence. * * * A new
- 39 -
[*39] theory which merely clarifies or develops the original determination is not a
new matter in respect of which respondent bears the burden of proof.” See also
Shea v. Commissioner, 112 T.C. 183, 191-197 (1999). The repayment of the
expenses for which Ms. Sham claimed deductions goes to the issue of their
deductible character and does not alter the original deficiency or require different
proof. Accordingly, Ms. Sham retains the burden of proof on the issue of these
deductions.
During these proceedings Ms. Sham has either raised new deductions or
recharacterized the amounts and the nature of the expenses for which she claims
deductions. Even though the newly alleged deductions were not directly
addressed in the SNOD, the Commissioner does not bear the burden of disproving
deductions that a taxpayer belatedly claims. See Rappaport v. Commissioner, T.C.
Memo. 2006-87, 91 T.C.M. (CCH) 1079, 1082 (2006). Ms. Sham therefore
retains the burden of proof on any deductions she claims in addition to those on
her filed returns.
This is not a case where the facts presented on any issue are in equipoise;
rather, here we find that the preponderance of the evidence resolves the issues in
dispute, thereby negating the import of which party bears the burden of proof. See
Dagres v. Commissioner, 136 T.C. 263, 279 (2011).
- 40 -
[*40] 2. Record-keeping
When deductions are in dispute, the taxpayer must satisfy the specific
requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records
sufficient to substantiate items underlying their claimed deductions. See
sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see also id. sec. 1.6001-1(e) (“The
books or records * * * shall be retained so long as the contents thereof may
become material in the administration of any internal revenue law”). The failure
to keep and present accurate records counts heavily against a taxpayer’s attempted
proof. Rogers v. Commissioner, T.C. Memo. 2014-141, at *17.
Section 274(d) establishes higher substantiation requirements for expenses
related to travel, meals, and lodging while away from home, entertainment, gifts,
and “listed property”, defined in section 280F(d)(4) to include passenger
automobiles and computers--i.e., many of the reported expenses at issue here. For
expenses associated with “listed property”, a taxpayer must prove: (1) the amount
of each separate expenditure with respect to such property; (2) the amount of each
business use; and (3) the business purpose for an expenditure or use with respect
to such property. 26 C.F.R. sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50
Fed. Reg. 46016 (Nov. 6, 1985). Section 274(d) provides that no deduction or
- 41 -
[*41] credit under section 162 or 212 shall be allowed for these expenses unless
the taxpayer substantiates these expenses by adequate records or sufficient
evidence corroborating his own statements.15
For travel expenses, not only must a taxpayer substantiate the “[a]mount of
each separate [travel] expenditure” and the time and place of the travel, but also
she must substantiate the “[b]usiness reason for travel or nature of the business
benefit derived * * * as a result of travel.” 26 C.F.R. sec. 1.274-5T(b)(2). A
deduction for business gifts requires the taxpayer to describe the gift, to
substantiate the amount, time, and “business reason for the gift or nature of
business benefit derived or expected to be derived as a result of the gift”, and to
provide information sufficient to establish the business relationship of the gift
recipient, such as “name, title, or other designation”. Id. subpara. (5).
15
Ms. Sham has urged that we apply the “the Cohan rule”, derived from
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Under that rule, if
a taxpayer adequately establishes that she paid or incurred a deductible expense
but does not establish the precise amount, then the Court may in some instances
estimate the allowable deduction, bearing heavily against the taxpayer whose
inexactitude is of her own making. However, section 274(d) sets stricter
substantiation rules that, when they apply, supersede the Cohan doctrine. See
Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d per curiam, 412
F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985).
- 42 -
[*42] Ms. Sham has offered various records in the form of credit card and account
statements to substantiate her expenditures. While she has cross-referenced many
of these expenditures with self-generated spreadsheets that list the date and
amount of certain expenses, her records do not contain any contemporaneous
indication of the business purpose for any given expenditure--whether the expense
was for a taxi, a meal, or something else. At trial Ms. Sham testified to the
business purpose of her attendance at certain conferences, the expenses of which
the Commissioner ultimately conceded had a business purpose. With few
exceptions, see infra pt. II.E, we find that Ms. Sham otherwise failed meet her
burden to establish the deductibility of her business expenses, and we are unable
to apply the Cohan rule in these circumstances.
B. Income issues
1. Schedule C income for 2014
The only year for which the parties have not resolved the issue of Schedule
C gross receipts by agreement is 2014. As we explain below, we find that the
evidence at trial was sufficient to establish that Ms. Sham’s gross receipts were at
least $71,451, which the Commissioner in his answering brief conceded is the
“correct amount”. This is the amount that Ms. Sham claimed on her late-filed
return and that she affirmed at the beginning of the trial was the amount she
- 43 -
[*43] contends is her gross receipts from self-employment. Given her position at
trial, the Commissioner had no reason to pursue further the amount of her 2014
gross receipts.
However, in her post-trial brief Ms. Sham contends that her gross receipts
for 2014 should be further reduced by $20,838, an amount that is the sum of two
alleged mortgage payments made for Dr. Kukreja’s benefit from the account
ending in -0964 on September 15 and October 7, 2014--a contention that the
Commissioner had no occasion to examine at trial. While these payments do
appear to be mortgage payments, this fact alone does not establish that these
payments should be subtracted from Ms. Sham’s 2014 gross receipts of $71,451.
They might instead have been gifts she made to Dr. Kukreja, or payments of a debt
she owed to him, or capital investments in his business; but we see no reason that
they should necessarily reduce her gross receipts.
And if we were to entertain her late retraction of the $71,451 total and were
to reconsider the quantity of her 2014 gross receipts, then we would apparently
find a larger amount to be more probable than not. Deposits into account -0964 in
2014 that total $52,400 evidently constitute business gross receipts.16 Ms. Sham
16
A bank deposit is prima facie evidence of income. Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). The total amount of all of the deposits in
(continued...)
- 44 -
[*44] also conceded at trial and on brief that the $35,000 that Dr. Kukreja paid
toward the rent on Apartment 16A constituted additional business gross receipts.
This addition would yield a total of $87,400 of probable gross receipts. And the
amount might have grown even further if Ms. Sham had not waited until after trial
to disclaim what she reported on her return, and if the Commissioner had had the
incentive and occasion to challenge Ms. Sham’s reduced amount. The evidence
shows other monies deposited in her name in other accounts she had at the time,
which the Commissioner might have contended were additional gross receipts.
Instead, the Commissioner limited himself to contending only what Ms. Sham had
reported on her return and stated at the beginning of trial that only $71,451
constituted gross receipts to her. The preponderance of the evidence shows that
Ms. Sham received at least $71,451 in gross receipts for 2014. Accordingly, we
16
(...continued)
the account ending in -0964 alone in 2014 is $64,400; but of that total, $12,000 is
apparently not taxable income. (It evidently consisted of amounts transferred from
another account in Ms. Sham’s name ending in -4477, and the Commissioner has
not argued that deposits into the account ending in -4477 consist of items of her
taxable income.) This leaves $52,400 of deposits to account -0964 that must be
accounted for. Of that amount, Ms. Sham’s brief characterized one $25,000 check
from Perioperative Consultants as business gross receipts; she concedes that an
additional deposit of $12,400 on October 1, 2014, which appears to correspond
with a separate canceled check from Perioperative Consultants, also consists of
business gross receipts; and she does not explain the source of any of the other
deposits to account -0964. It thus appears that $52,400 of the 2014 deposits to
account -0964 was business gross receipts.
- 45 -
[*45] find that her gross receipts for 2014 are the amount she reported on her tax
return: $71,451.
2. State tax refund
A refund of State tax is taxable to the recipient taxpayer only to the extent
of any Federal tax benefit realized as a result of the deduction claimed for the
State tax in a prior year. See sec. 111(a). The State of New York reported that in
2014 it made a State tax refund to Ms. Sham of $12,022 for State tax paid in 2010.
Ms. Sham’s 2010 Federal income tax return shows that she reported alternative
minimum tax (“AMT”) for 2010, and State income tax is not deductible in
computing the AMT income on which the AMT is based. Sec. 56(b)(1)(A)(ii).
Therefore a taxpayer who itemizes State tax on Schedule A but is also liable for
AMT does not receive a Federal tax benefit for the tax within the meaning of
section 111(a). Ms. Sham raises two issues regarding whether she should include
it in her income for 2014: first, she argues that she did in fact report the refund on
her return for 2014 (but not on the appropriate line of the return); second, she
disputes whether she in fact “received” the refund that New York reported it
issued to her.
Ms. Sham initially took the position at trial that the $12,022 State tax refund
for 2010 was included (in error) in the $71,451 of business gross receipts she
- 46 -
[*46] reported for 2014. However, Ms. Sham properly reported refunds of State
tax on the appropriate line of her tax returns for prior years. Moreover, her
explanation of how she arrived at the amount of her gross receipts for 2014 (by
arguing that only certain deposits into the account ending in -0964 were actually
income to her) did not include a $12,022 deposit of State tax. We find that she did
not include the refund of New York tax on her return for 2014.
Next, she argues that the Commissioner did not prove that she received the
refund. In light of her first argument (that she reported the refund) and the
evidence before us, we doubt the credibility of this assertion. Ms. Sham’s New
York income tax return for 2010 included a claim for a refund of $12,022. The
only New York State tax return in the record is for 2010, so we are unable to
determine whether Ms. Sham may have received, instead of a refund, a credit
against any other New York tax liabilities. We do not find that Ms. Sham, having
insisted that she reported the New York State refund as income for 2014, raised a
reasonable dispute to New York’s 1099-G that reported that refund. The burden
of proof on this item therefore did not shift under section 6201(d). We find that
Ms. Sham has failed to prove that she did not receive a State tax refund of $12,022
in 2014. However, whether she must include the refund in income for 2014 is a
computational issue that depends on whether, on the basis of our findings for
- 47 -
[*47] 2010, she will continue to owe AMT for that year. Ms. Sham will include
the $12,022 in income for 2014 only to the extent (to be resolved in the Rule 155
computation) that she does not owe AMT for 2010. See, e.g., Ashkouri v.
Commissioner, T.C. Memo. 2019-95, at *41.
3. Interest and dividends
The IRS determined from third-party reporting on Forms 1099 that
Ms. Sham received small amounts of interest income in 2011 through 2014 and
small amounts of dividend income in 2013 and 2014. Ms. Sham has conceded
these amounts, which are set forth in detail in Appendix A.
4. Capital gain/loss for 2014 and 2015
The parties have agreed that Ms. Sham is not entitled to deduct capital
losses from the TD Ameritrade account in the amounts of $157,600 for 2014 and
$353,729 for 2015, both years for which she reported a $3,000 capital loss
pursuant to the limitations of section 1211(b)(1). The Commissioner argues that
the effect of Ms. Sham’s concession of the TD Ameritrade account losses is that
she is not entitled to deduct a $3,000 capital loss for either of those years. In her
reply brief, however, Ms. Sham counters that she sustained other capital losses in
her personal Ameritrade account. Ms. Sham has not substantiated any capital
losses for 2014. However she did substantiate a short-term capital loss of $35,542
- 48 -
[*48] and a net long-term capital loss of $255 for 2015 in her personal Ameritrade
account. Pursuant to sections 1211(b)(1) and 1212(b)(1), she is entitled to a
capital loss deduction of $3,000 for 2015, and a corresponding reduction in the
short-term capital loss (i.e., from $35,542 to $32,542) available as a carryforward.
Sec. 1212(b)(2)(A)(i).
C. 2010 Schedule A miscellaneous expenses
For 2010 a taxpayer may claim an unreimbursed employee business expense
as a miscellaneous deduction on Schedule A, pursuant to section 162(a). An
employee is considered to be in the business of being an employee and may deduct
expenses that are: (a) nonreimbursable, (b) related to the employee’s trade or
business of rendering services to the employer, and (c) ordinary and necessary
expenses of such a trade or business. See Lucas v. Commissioner, 79 T.C. 1, 6-7
(1982). Expenses are “ordinary” when they are “normal, usual, or customary” in
the taxpayer’s trade or business. Deputy v. DuPont, 308 U.S. 488, 495 (1940).
Expenses are “necessary” when they are “appropriate” or “helpful,” even if not
“indispensable” or “required.” Ford v. Commissioner, 56 T.C. 1300, 1306 (1971),
aff’d per curiam, 487 F.2d 1025 (9th Cir. 1973). Unreimbursed employee
expenses are subject to the itemized deduction limitation of section 67(a)--i.e., the
2% floor.
- 49 -
[*49] The employee business expense deductions that Ms. Sham claimed must be
disallowed because she did not substantiate the expenses. The preponderance of
the evidence shows that she was unemployed (and collected unemployment
benefits) for the entire duration of 2010. Even if the evidence showed that
Ms. Sham continued to work as an employee for her former employer while she
was at home “unwinding” investment positions in 2010 (which it does not), in
order to be deductible, the expenses she paid would have to have been ordinary
and necessary in the course of her business as an employee. See sec. 162(a). The
expenses she reported for having a home office (rent and utilities) and for parking
tolls, professional supplies and services, promotional gifts, computer expenses,
and legal expenses (other than the $6,210 for the dispute with her prior employer
that the Commissioner has conceded) are simply not substantiated as paid for any
specific business purpose and therefore cannot be characterized as “ordinary and
necessary”. Ms. Sham has not shown that any portion of her apartment was used
exclusively and on a regular basis as the principal place of the business she carried
on as an employee as required by section 280A(c)(1). She has offered no
convincing explanation for any of the other expenses to explain how they are
related to her alleged employer’s business. Personal expenses are not deductible.
Sec. 262; Hamacher v. Commissioner, 94 T.C. 348, 359 (1990). Therefore, other
- 50 -
[*50] than those deductions the Commissioner has conceded, we find that
Ms. Sham is not entitled to deduct Schedule A unreimbursed employee expenses
for 2010.
D. Schedule A itemized deductions
1. Medical expenses
a. Medical expenses generally
Medical expenses which are “not compensated for by insurance or
otherwise” are deductible, subject to computational limitations. See sec. 213(a)
(for tax years 2010 through 2012, such expenses are deductible to the extent they
exceed 7.5% of a taxpayer’s adjusted gross income; for tax years 2013 through
2015, such expenses are deductible to the extent that they exceed 10% of the
taxpayer’s adjusted gross income).17 Ms. Sham bears the burden to prove that she
paid any expense and that it was not reimbursed. See Weaver v. Commissioner,
T.C. Memo. 1984-634, 49 T.C.M. (CCH) 249 (1984) (burden met where taxpayer
testified that no claim for reimbursement was filed and record contained no
evidence to the contrary).
17
Unless otherwise stated, amounts described here as itemized deductible
medical expenses are the amounts before the application of the section 213(a)
limitation.
- 51 -
[*51] The expense of health insurance for the taxpayer is itself a deductible
medical expense, see sec. 213(d)(1)(D), but a taxpayer who is self-employed is
permitted, to the extent of her earned income from her trade or business, to claim it
as a separate deduction--as an above-the-line adjustment to income, as opposed to
an itemized deduction, see sec. 162(l)(1) and (2)(a). Any amount deducted for
health insurance cannot also be taken into account in computing the medical
expense deduction under section 213(a). Sec. 162(l)(3).
b. Self-employed health insurance expense
Ms. Sham was self-employed in the years 2011 through 2015, and for the
years 2013 through 2015, she claimed separate deductions for the expense of her
self-employed health insurance (instead of including that expense among her other
itemized medical expenses on Schedule A). We have found, see supra pt. I.H.1,
that Ms. Sham paid for health insurance in the following amounts, which she may
deduct above the line (rather than on Schedule A):
Health insurance
Health insurance premiums as
Year premiums as claimed allowed
2013 $12,561 $18,996
2014 8,605 8,605
2015 8,831 8,831
- 52 -
[*52] c. Unreimbursed itemized deductible medical expenses
2010. For 2010 Ms. Sham reported on her return itemized deductible
medical expenses totaling $61,230; her position after trial is that these expenses
totaled $58,309 for 2010. As we noted above, see supra pt. I.H.1, of the $58,309
she claims, the only expenses that the Commissioner challenges on grounds of
deductibility are $436 spent on aromatic oils and $2,870 paid to Ms. Garcia.
Ms. Sham has argued that the edible aromatic oils were prescribed to her, but her
failure to offer proof precludes any deduction. See sec. 213(b). Ms. Garcia’s
services were not medical and therefore were not deductible. See Green v.
Commissioner, T.C. Memo. 2010-109, 99 T.C.M. (CCH) 1444, 1448 (2010)
(housekeeper hired to help preserve mental health of the “meticulous” taxpayer
wife was not a deductible medical expense). Consequently, we hold that
Ms. Sham substantiated medical expenses of $54,404 for 2010. (We found above
in part I.H.1 that the $600 difference between the two amounts is attributable to
Ms. Sham’s arithmetic error.)
However, section 213(a) allows a deduction only for medical expenses “not
compensated for by insurance or otherwise”, and we have found, see supra
pt. I.H.2.a, that $10,149 of those expenses were reimbursed by Ms. Sham’s health
insurer. Her itemized deductible medical expenses for 2010 are therefore $44,255.
- 53 -
[*53] 2011. For 2011 Ms. Sham reported on her return itemized deductible
medical expenses of $21,272, and the Commissioner concedes the amount of the
deduction. See supra pt. I.H.1. We have found that in 2011 she received
reimbursements of $4,112, see supra pt. I.H.2.b, that reduce total medical expenses
to yield the deductible, unreimbursed portion; but since the Commissioner has
conceded the amount of the itemized deductible medical expenses, he has
conceded that the $21,272 is net of reimbursements, so we do not reduce that total
further.
2012. Ms. Sham proved at trial that in 2012 she paid $27,602 in medical
expenses, an amount slightly larger than the deduction of $26,582 that she claimed
on her return and that the Commissioner concedes. We have found, see supra
pt. I.H.2.b, that in 2012 she received $6,620 in reimbursements from her health
insurance company. Such reimbursements would reduce the deductible amount,
and if we subtract that amount from the proven expenses, we would reduce them
from $27,602 to $20,982. However, we hold the Commissioner to his concession
of the amount of itemized deductible medical expenses, and we therefore allow
Ms. Sham the amount she reported and that he conceded: $26,582.
2013. For 2013 Ms. Sham reported on her return itemized deductible
medical expenses of $16,552, and the Commissioner conceded this amount at
- 54 -
[*54] trial.18 See supra pt. I.H.1. Because the Commissioner has thus conceded
the amount of the unreimbursed itemized deductible medical expenses for 2013,
we hold him to that concession and do not make any reductions for
reimbursements of $2,377 for 2013. See supra pt. I.H.2.b.
2014. We have found that for 2014 Ms. Sham paid deductible medical
expenses of $3,300. There were no insurance reimbursements, so she is entitled to
itemized deductible medical expenses of $3,300.
2015. We have found that for 2015 Ms. Sham paid deductible medical
expenses of $675. There were no insurance reimbursements, so she is entitled to
itemized deductible medical expenses of $675.
d. Summary of deductible medical expenses
We hold that the itemized deductible medical expenses that Ms. Sham is
entitled to deduct as unreimbursed medical expenses on Schedule A19 for the tax
18
On brief the Commissioner argues that if we find (as we have) that
Ms. Sham’s self-employed health insurance deduction was higher than the
deduction he did not challenge in the SNOD, then we should not hold him to his
concession in 2013 as to the amount of Ms. Sham’s deductible itemized medical
expenses and should limit Ms. Sham to the lower amount ($5,584, less $2,377 in
reimbursements, totaling $3,207) that she proved at trial. We disagree. These are
distinct items.
19
These amounts exclude health insurance expenses for tax years 2013
through 2015 that Ms. Sham reported as a separate deduction for self-employed
(continued...)
- 55 -
[*55] years 2010 through 2015 are as stated below. We show here the amounts
that she claimed at trial, the amounts that she substantiated, the amounts of
reimbursements that she received, and the net itemized deductible medical
expenses as follows:
Year Claimed Substantiated Reimbursed Allowed1
2010 $61,230 $54,404 $10,149 $44,255
2011 21,272 21,272 4,112 21,272*
2012 26,582 27,602 6,620 26,582*
2013 16,552 16,552 2,377 16,552*
2014 6,875 3,300 --- 3,300
2015 --- 675 --- 675
1
Amounts that are allowed pursuant to a concession or agreement of the
parties are indicated with an “*”.
2. Charitable contributions
Section 170(a) allows as a deduction any charitable contribution made
within the taxable year. To qualify as a deduction, the contribution must be made
to a donee organization described in section 170(c), including, inter alia, “[a]
corporation, trust, or community chest, fund, or foundation * * * organized and
operated exclusively for religious, charitable, scientific, literary, or educational
19
(...continued)
health insurance under section 162(l)). For 2011 and 2012 Ms. Sham did not
claim a separate deduction for self-employed health insurance but rather elected to
include that expense as part of her unreimbursed medical expense deduction.
- 56 -
[*56] purposes”. Deductions for charitable contributions are allowable only if
verified under the regulations prescribed by the Secretary. Sec. 170(a)(1). The
deductibility of a charitable contribution is generally limited to 50% of an
individual taxpayer’s “contribution base” for the taxable year; any excess may be
carried forward for the succeeding five years. See sec. 170(b)(1).
Further, charitable contributions of cash or property of $250 or more must
be substantiated by a contemporaneous written acknowledgment (“CWA”) from
the donee. See sec. 170(f)(8); 26 C.F.R. sec. 1.170A-13(f)(1), Income Tax Regs.
A CWA is “contemporaneous” if it is obtained by the taxpayer on or before the
earlier of the date the taxpayer files the original return for the taxable year of the
contribution or the due date (including extensions) for filing the original return for
the year. Sec. 170(f)(8)(C); 26 C.F.R. sec. 1.170A-13(f)(3). That
acknowledgment, which must be furnished by the donee, must (1) state the amount
of cash and describe other property contributed, (2) indicate whether the donee
organization provided any goods or services in consideration for the contribution,
and (3) provide a description and good faith estimate of the value of any goods or
services provided by the donee. Sec. 170(f)(8)(B); 26 C.F.R. sec. 1.170A-13(f)(2).
There is no evidence that the entities to which Ms. Sham claims she made
charitable contributions are qualifying donee organizations under section 170(c).
- 57 -
[*57] Even if they were, we have no evidence that Ms. Sham’s payments were in
fact donations. Rather, these entities appear to be organizations that offer
meditation services, and that fact suggests, in light of other evidence, that
Ms. Sham’s payments to them were more likely to have been consideration for
goods or services from the organization, which would preclude their deductibility.
See 26 C.F.R. sec. 1.170A-1(h), Income Tax Regs.
Ms. Sham claims deductions for charitable contributions for each of the
years 2012 through 2015. She has provided no documentary evidence other than
her credit card account statements for 2013 and 2015. (She also proffers her tax
returns for the years for which she reported an itemized amount for “Gifts to
Charity” (2012 through 2014), but these returns are not evidence, since the
reporting of an item on a return does not substantiate that item. See Lawinger v.
Commissioner, 103 T.C. 428, 438 (1994) (“Tax returns do not establish the truth
of the facts stated therein”).)
As to the $1,500 payment to Vipassana Meditation in 2013 and the $500
payment to Northwest Vipassana in 2015, we find that Ms. Sham has failed to
meet the substantiation requirements for contributions over $250 set forth above.
With respect to the $60 payment to Pariyatti, WA, she has failed to establish that
this was a charitable donation and not a payment of consideration. We hold that
- 58 -
[*58] she is not entitled to deduct the following amounts she claims were
charitable contribution deductions, or to carry forward any “unused” amounts
thereof: $2,370 for 2012; $3,100 for 2013; $1,072 for 2014; and $560 for 2015.
E. Schedule C expenses
Section 162(a) allows “as a deduction all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business”. To prove entitlement to deduct an expense, the taxpayer must prove
not only the fact of the expenditure but also the business purpose. A taxpayer’s
general statement that expenses were paid in pursuit of a trade or business is
insufficient to establish that the expenses had a reasonably direct relationship to
any such trade or business. Ferrer v. Commissioner, 50 T.C. 177, 185 (1968),
aff’d per curiam, 409 F.2d 1359 (2d Cir. 1969). Personal expenses are generally
not allowed as deductions. Sec. 262(a).
1. Rent/lease
The evidence shows that Ms. Sham used Apartment 16A for personal rather
than business purposes. See supra pt. I.D. In support of her contention that she
used it as an office, she asserts that she did not seek a deduction of 100% of the
rent (but does not state what portion of the apartment was used “exclusively” as an
- 59 -
[*59] office);20 she also claimed deductions for the expense of meetings held
outside of the apartment--in restaurants, for example--and we do not find her
argument that the “smell [associated with using the apartment for other than
business use] lingers” to be a convincing argument that she used the entire space
as an office. When prompted, Ms. Sham was vague about where she lived while
she paid rent on Apartment 16A, and we conclude that it was in fact her residence.
We hold that the rent expense of Apartment 16A was personal, that she did not
prove that any portion of the apartment was used exclusively for her business, and
that she is not entitled to deduct any portion of her rent for any of the years
claimed (2011 through 2013).
2. Depreciation
Ms. Sham did not identify any of the depreciable property for which she
claimed a deduction; she offered no substantiation on this issue. We accordingly
deny any claimed depreciation deduction for each of the years 2011 through 2014.
20
As we noted above in part II.C, section 280A(c)(1) requires that, in order
for an employee to deduct a portion of the cost of her residence as a “home office”
business expense, she must use a portion of the home exclusively and on a regular
basis as the principal place of the business she carries on as an employee.
- 60 -
[*60] 3. Office expense
Ms. Sham claimed office expense deductions of $8,085 for 2011, $6,130 for
2012, and $6,293 for 2013, amounts that largely corresponded with the invoices
she proffered to show the “expenses paid against income” by Dr. Kukreja. As
explained supra part. I.G.4, we find that Ms. Sham did not substantiate that she in
fact paid these expenses. Accordingly, we find that she is not entitled to
deductions for these expenses. With respect to any other amounts reported as
office expenses (including the $1,000 check to herself that Ms. Sham described as
“petty cash” for 2012 and checks in various amounts paid to various persons in
these three years,21 none of whom Ms. Sham has established had any connection to
her business), we can discern no substantiation of the business purpose for any
expense. Accordingly, we deny the office expense deduction for each of the years
claimed (2011 through 2013).
21
In 2012 Ms. Sham paid $2,675 to Ms. Garcia, which she argues is a
deductible expense for “office help/maintenance”. In light of Ms. Sham’s other
unsubstantiated claim that payments of $2,870 to Ms. Garcia in 2010 were for
medical expenses and the complete lack of evidence as to what specific services
Ms. Garcia in fact did provide, we deny any deduction for these payments (as well
as other payments made to other individuals whose alleged services remain
undisclosed, falling far short of being substantiated as a business expense).
- 61 -
[*61] 4. Utilities
The Commissioner did not challenge Ms. Sham’s deductions for utilities for
2011, 2012, and 2013. For 2014 and 2015, Ms. Sham took the position that her
utility expenses were deductible because they were paid for her alleged home
office at Apartment 16A. Because we find that she did not sustain her burden to
prove entitlement to any deductions associated with a home office, we deny the
deductions claimed for utilities for 2014 and 2015.
5. Car/truck
Petitioner claimed car and truck expense deductions of $9,821 for 2011,
$7,372 for 2012, and $7,577 for 2013. Because passenger automobiles constitute
“listed property”, petitioner’s reported car and truck expenses are subject to the
heightened substantiation requirements described above in part II.A.2. See
Fernandez v. Commissioner, T.C. Memo. 2011-216, 102 T.C.M. (CCH) 242, 244
(2011). To satisfy these requirements, “a taxpayer must substantiate each element
of an expenditure or use * * * by adequate records or by sufficient evidence
corroborating * * * [her] own statement.” 26 C.F.R. sec. 1.274-5T(c)(1). A
contemporaneous time log or other record “made at or near the time of the
expenditure or use” is afforded
- 62 -
[*62] a high degree of credibility not present with respect to a statement
prepared subsequent * * * [to the recorded event] when generally
there is a lack of accurate recall. Thus, the corroborative evidence
required to support a statement not made at or near the time of the
expenditure or use must have a high degree of probative value to
elevate such statement and evidence to the level of credibility
reflected by a record made at or near the time of the expenditure or
use supported by sufficient documentary evidence.
Id.; see also Flake v. Commissioner, T.C. Memo. 2014-76, at *11-*12. Lacking
adequate records, the taxpayer must produce other credible evidence sufficient to
corroborate her own statements concerning business use. 26 C.F.R. sec. 1.274-
5T(c)(3).
The automobile expenses Ms. Sham has reported do not relate to a vehicle
that she in fact owned; rather, Dr. Kukreja lent her one of his automobiles and paid
the expenses associated with her using the vehicle, as reflected in the invoices
showing “expenses paid against [Ms. Sham’s] income”. The expenses on those
invoices--$6,455 for automobile maintenance in 2011; $5,640 for automobile
repairs in 2012; and $5,521 for auto repairs in 2013--were less than the amounts
reported on her return in each year. We find that Ms. Sham is not entitled to the
car/truck expense deductions in the amounts set forth in the invoices because she
did not incur these expenses; as to the remaining amounts claimed, we hold on the
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[*63] basis of the heightened requirements of section 274(d) that she failed to
substantiate them.
6. Travel
Travel expenses are also subject to the heightened substantiation
requirements of section 274(d). Ms. Sham conceded travel expenses for 2011, and
for other years the Commissioner has conceded some expenses for travel to
medical conferences for professional development. See supra pt. I.G.2.c.; infra
pt. II.E.7.f. Still at issue are the years 2012 through 2015, for which Ms. Sham
seeks deductions attributable to hotel, meals,22 and airfare for trips to Amritsar,
India (to visit her father); Amsterdam, Netherlands (related to a soft-skills
training); Paris, France; and Charlotte, North Carolina, and other hotel and
transport expenses she submits on brief were to see or meet with professionals in
the fields of Ericksonian hypnosis and MRP. See supra pt. I.G.2.d. Some of the
travel expenses that Ms. Sham reports are different from or greater than the
expenses she reported on her tax returns. Ms. Sham relies primarily on credit card
statements and on her argument in her brief to explain these deductions; she has
not substantiated with evidence a business purpose for any of these trips. None of
22
A small portion of the expenses was claimed for meals, an expense for
which she separately claimed a deduction for each of the years at issue. See infra
pt. II.E.7.g.
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[*64] the trips pertained to marketing or business development undertaken for her
only paying client during the years at issue, whose business interests were focused
in expanding an anesthesiology practice into the yet unpenetrated areas of the New
York and New Jersey markets. Accordingly, other than the travel expense that the
Commissioner conceded as a portion of “Other” expenses related to conferences
for professional development (addressed below), we deny the travel expense
deduction for each of the years claimed (2012 through 2015).
7. Other23
For tax years 2011 through 2015, Ms. Sham reported additional expenses on
her Schedules C classified as “other”, sometimes describing differently in different
years what appear to be the same categories of expenses, as follows:
a. “Local transport”
This expense appears to correspond with taxi, ride-sharing, shuttle, and
other transit payments, for which Ms. Sham provided credit card statements and
some spreadsheets indicating the dates and amounts of the payments, but no
information to support their supposed business purpose. For most years the total
expense reported does not correspond clearly to the amounts Ms. Sham contends
23
Ms. Sham conceded the “Storage” expenses she reported in this category
for 2011, 2012, and 2013.
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[*65] she paid--for instance, for 2012 she claimed $4,647 in local transport on her
return, but her litigating position claimed only $2,450 of local transport. Further,
other than the transportation expenses for medical purposes that Ms. Sham
reported and that the Commissioner conceded for 2010 in the amount of $1,002,
Ms. Sham’s records do not clearly delineate between expenses allegedly made for
business transportation and those made for any other transportation. Other than
the conceded amounts, we hold that Ms. Sham has not substantiated her local
transportation expenses and is therefore not entitled to the deductions she claimed
for them.
b. “Dues and subscriptions”
In support of her deduction for “professional subscriptions”, Ms. Sham’s
credit card statements show expenditures for periodicals that include the New
York Times, the Financial Times, the Economist, and publications regarding
women in finance. She also paid small amounts to Financial Women’s
Association of New York (“FWA”) and Young Jewish Professionals (“YJP”) in
connection with dues and networking events in which she participated with those
associations.
The purchase of general circulation newspapers is a non-deductible personal
expense. Stemkowski v. Commissioner, 690 F.2d 40, 47 (2d Cir. 1982), aff’g in
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[*66] part, rev’g in part 76 T.C. 252 (1981). Other than the expenses Ms. Sham
paid directly to the professional associations in which she participated, her claims
for deductions in this category were largely unsubstantiated. We find that she is
entitled to deductions for only the following amounts: for 2012, $100 (to FWA);
for 2013, $102 (to YJP); for 2014, $165 (to FWA); for 2015, $645 ($543 to FWA
and $102 to YJP).
c. “IT and technology”
Ms. Sham has offered no credible explanation of her deduction
characterized as “IT and technology” for any of the years at issue. She has not
substantiated any expenses underlying these deductions.
d. “Telephone and internet”
The bills for internet service show that they were mailed to the address of
Apartment 16A, which we have found to be Ms. Sham’s personal residence. The
bills for the telephone are apparently for cellular phone service. Ms. Sham
proffered no specific business purpose for these expenses other than her general
statements, and we find that the telephone and internet services were for personal
use. Ms. Sham has failed to meet the strict substantiation requirements of section
274(d) for these deductions.
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[*67] e. “Business research and establishment”
Ms. Sham claimed $4,790 as a deduction for business research and
establishment for 2011 (and none for any other year at issue). She has not
identified, much less substantiated, any expenses that correspond with this
deduction.
f. “Professional development”, “conferences”, and “continuing
education”
The Commissioner has conceded the deductibility of expenses associated
with business travel and attendance at medical conferences, totaling $5,981 for
2012, $10,743 for 2014, and $554 for 2015.
The remaining expenses in this category--paid in the years 2012 through
2015--are in dispute. These relate to programming for Ericksonian hypnosis,
MRP, and other “soft-skills” training that Ms. Sham argues are ordinary and
necessary expenses of her business. As with other expenses at issue, the amounts
reported for this category on Ms. Sham’s tax returns differ from the amounts she
advanced in her litigating position.
Year Item Return position Litigating position
2012 Professional
development $6,825 $2,274
Conferences --- 5,981
- 68 -
[*68] 2013 Professional
development 7,860 8,728
2014 Professional
development 7,524 9,304
Conferences 7,701 15,582
Continuing
education 7,823 ---
2015 Professional
development 6,274 6,244
Conferences 554 554
Continuing
education 9,647 6,902
Much of what Ms. Sham has offered on this point--including the identities of some
of the professionals who have hosted or held these conferences and training
sessions--has been not sworn testimony at trial but argument on brief that, as such,
we cannot consider. See Rule 143(c).
We resolve this issue against Ms. Sham because she has not proved that her
participation in these soft-skills training sessions and programs “[m]aintains or
improves skills required by the individual in his employment or other trade or
business”. 26 C.F.R. sec. 1.162-5(a)(1), Income Tax Regs. The purpose of these
sessions was not to learn from a professional in her field of business how to
improve a specific skill needed in the business, nor was it to meet professionals
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[*69] whom she was pursuing as potential clientele who might hire her as a
business consultant. Rather, she attended these sessions to improve her ability to
make persuasive in-person presentations; and in some sessions, the form of
persuasion undertook unconventional means, such that the content of the courses
did not at all resemble skills she would need to promote the business of her only
client, an anesthesiologist. At the same time Ms. Sham took this training, she was
also recovering from trauma and separating her affairs from those of Dr. Kukreja,
who she believed had a negative psychological impact on her. The greater weight
of the evidence supports the conclusion that these courses lacked business
purposes. We conclude that her principal interest in these conferences was not to
improve her skills as a business consultant but to bolster her sense of wellness and
her ability to engage in interpersonal relationships. Of course a person is free to
attend such events, but they are not primarily business events. Accordingly,
Ms. Sham is not entitled to deductions in excess of those the Commissioner has
conceded.
g. “Meals and entertainment”
The Commissioner did not challenge the deductions that Ms. Sham claimed
for meals and entertainment for 2011, 2012, and 2013. For 2014 and 2015, the
Commissioner conceded Ms. Sham’s reported expenses in this category, but with
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[*70] the caveat that she did not reduce these expenses by 50% as required by
section 274(n), which Ms. Sham admitted. We accordingly hold that Ms. Sham is
entitled to deduct half of the expenses she asserts she had in those two years:
$628 of the agreed amount of $1,255 for 2014 and $500 of the agreed amount of
$1,000 for 2015.
h. “Outside/professional services”
Ms. Sham claimed, in this category, deductions associated with
expenditures at the U.S. Postal Service, Printec, Google Service, and professional
accounting services reflected on her personal credit card statements. She did not
substantiate business purposes for the expenditures, so to the extent they were
disallowed in the SNOD, we find these deductions were properly denied.
However, Ms. Sham’s tax preparation expenses were $300 for 2012 and
$800 for 2014. The Commissioner has opposed these expenses on Schedules C
for lack of business purpose, but we deem Ms. Sham’s dispute of the deductions
for accounting fees to be construed as claiming the deductions where they would
be properly taken, i.e., on Schedules A of her returns. We accordingly find that
Ms. Sham may properly deduct $300 in accounting fees for 2012 and $800 for
accounting fees for 2014 on her returns because she was able to substantiate that
she paid the expenses in connection with her own tax preparation.
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[*71] i. “Promotion” and “gifts”
The “promotion” expenses Ms. Sham reported were synonymous with gift
expenses, and her proof of them consisted of her credit card statements showing
expenditures for fruit, wine, flowers, and other similar items. Because they are
“listed property”, gifts are subject to the heightened substantiation requirements of
section 274(d). Additionally, any deduction for a gift under section 162 is limited
to $25 in cumulative value of all gifts to any individual per year. Sec. 274(b).
Each individual expenditure reported was in excess of $25, and Ms. Sham offered
no evidence regarding the identity, much less the business relationship, of any of
the recipients of the alleged gifts. We hold that any deductions for “gifts” or
“promotion” were properly denied.
F. Penalties and additions to tax
1. Additions to tax under section 6651(a)(1) and (2)
Section 6651(a)(1) authorizes the imposition of an addition to tax for failure
to file a timely return (unless the taxpayer proves that such failure is due to
reasonable cause and is not due to willful neglect). See also United States v.
Boyle, 469 U.S. 241, 245 (1985). The addition consists of 5% per month (up to a
maximum of 25%) of “the amount required to be shown as tax on such return”.
Sec. 6651(a)(1). Section 6651(a)(2) provides for an addition to tax for failure to
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[*72] timely pay “the amount shown as tax on any return specified in paragraph
(1)” unless the taxpayer establishes that the failure was due to reasonable cause
and not willful neglect. The addition consists of 0.5% per month (up to a
maximum of 25%) of “the amount shown as tax on such return”. Sec. 6651(a)(2).
The amount of the addition to tax under section 6651(a)(2) reduces the addition to
tax under section 6651(a)(1) for any month for which both additions to tax apply.
See sec. 6651(c)(1). When a taxpayer has not filed a return, the section 6651(a)(2)
addition to tax may not be imposed unless the Secretary has prepared an SFR that
meets the requirements of section 6020(b). Wheeler v. Commissioner, 127 T.C.
200, 208-209 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008). Pursuant to
section 6651(g)(2), an SFR prepared by the Commissioner under section 6020(b)
is treated as a taxpayer return for purposes of determining the addition to tax under
section 6651(a)(2).
In the SNOD the IRS determined against Ms. Sham additions under
section 6651(a)(1) for failure to timely file only for 2013, 2014, and 2015, and
determined additions under subsection (a)(2) for failure to timely pay only for
2014 and 2015, so we do not consider the other years.
Ms. Sham’s tax return for 2013 was due in April 2014 and was filed on
October 19, 2015; her tax return for 2014 was due in April 2015 and was filed
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[*73] on July 25, 2017; and her tax return for 2015 was due in April 2016 and was
filed in September 2018. These facts are not in dispute and are sufficient to
establish that the Commissioner has met his burden of production to establish
Ms. Sham’s liability under section 6651(a)(1). Ms. Sham’s only available defense
to these additions to tax would be a showing that her failure to file a return for
each year at issue was due to reasonable cause and not willful neglect, for which
she bears the burden of proof. See Higbee v. Commissioner, 116 T.C. 438, 447
(2001). Ms. Sham has generally argued that her health problems prevented her
from being in control of her own affairs to the extent that she could not file her
returns on time, and that for 2014 and 2015 her trepidation about how to resolve
the issue of the ownership of the TD Ameritrade account prevented her from filing
returns because she was unsure about what position to take.
We find these arguments unpersuasive. First, Ms. Sham was able to file her
tax return for 2010 in 2014 when her return for 2013 was due. This fact defeats
her assertion that her health condition made it impossible for her to file tax returns.
Further, the evidence that Ms. Sham has proffered in support of her expense
deductions during these years shows that her physical condition did not prevent
her from traveling frequently and attending various conferences and events during
2014 and 2015. In light of Ms. Sham’s ability to conduct her other affairs, the
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[*74] omission of filing her tax returns appears as one of “selective inability” in
2014 and 2015; we find that she lacked reasonable cause for these years. See
Wright v. Commissioner, T.C. Memo. 1998-224, 75 T.C.M. (CCH) 2536, 2539
(1998) (quoting Tabbi v. Commissioner, T.C. Memo. 1995-463, 70 T.C.M. (CCH)
836, 849 (1995)), aff’d, 173 F.3d 848 (2d Cir. 1999). Ms. Sham’s physical
condition improved after 2015, and therefore we conclude that she remained
capable of filing a tax return in April 2016.
As to her other arguments regarding her uncertainty about the proper
treatment of the TD Ameritrade account, we have held that mistake or ignorance
of the law does not excuse a failure to timely file a tax return. See Joyce v.
Commissioner, 25 T.C. 13, 15 (1955). Ms. Sham is liable for the additions to tax
under section 6651(a)(1) for 2013, 2014, and 2015.
Section 6651(a)(2) imposes an addition to tax for failure to timely pay the
amount of tax shown on a return. The liabilities were due to be paid on the
unextended due dates of Ms. Sham’s returns. See sec. 6151. The addition to tax
under section 6651(a)(2) applies only when an amount of tax is shown on a
return--in this case, on the SFR that the Commissioner prepared for each of the
two years for which the addition was determined. See Wheeler v. Commissioner,
127 T.C. at 210. To constitute a valid SFR under section 6020(b), “the return
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[*75] must be subscribed, it must contain sufficient information from which to
compute the taxpayer’s tax liability, and the return form and any attachments must
purport to be a ‘return’.” Spurlock v. Commissioner, T.C. Memo. 2003-124, 85
T.C.M. (CCH) 1236, 1243 (2003). The SFRs for 2014 and 2015 contain sufficient
information, purport to be returns, and are subscribed as required by section
6020(b). Accordingly, the Commissioner has met his burden to show that tax was
due on the returns (but the additions to tax will need to be recalculated in light of
our other findings. See sec. 6651(c).)
As with the section 6651(a)(1) failure-to-file addition to tax, section
6651(a)(2) provides that the taxpayer is liable for the failure-to-pay addition to tax
“unless it is shown that such failure is due to reasonable cause and not due to
willful neglect”. Ms. Sham must show that she exercised ordinary business care
and prudence in providing for payment of her tax liabilities in light of her financial
situation. See 26 C.F.R. sec. 301.6651-1(c), Proced. & Admin. Regs. Given
Ms. Sham’s continued expenditures on items unrelated to her business--such as
travel, MRP coaching, and costly programs geared toward developing personal
skills--despite her continued lack of business prospects other than Dr. Kukreja, we
hold that she did not exercise ordinary business care and prudence in providing for
payment of her tax liabilities, and we do not find persuasive the reasons she
- 76 -
[*76] advances in support of reasonable cause (the same as under section
6651(a)(1), above).
2. Addition to tax under section 6654
Section 6654 imposes an addition to tax on an individual taxpayer who
underpays her estimated tax. A taxpayer must pay estimated tax for any year in
which she has a “required annual payment”. Sec. 6654(d). A “required annual
payment” is defined in section 6654(d)(1)(B), in pertinent part, as “the lesser of--
(i) 90 percent of the tax shown on the return for the taxable year (or, if no return is
filed, 90 percent of the tax for such year)”, or (ii) if the individual filed a return for
the preceding taxable year, then “100 percent of the tax shown on the return of the
individual for the preceding taxable year.” Thus, the IRS’s burden of production
under section 7491(c) requires it to produce, for each year for which the addition
is asserted (here, 2015), evidence that the taxpayer had a required annual payment
under section 6654(d). Where a taxpayer does not file a return for the year for
which the penalty is asserted, the Commissioner must put forth evidence sufficient
for the court to determine that the taxpayer had an obligation to file an income tax
return for the year for which the penalty is asserted, and either: the amount of tax
shown on the prior year’s return, or evidence sufficient to conclude that the
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[*77] taxpayer did not file a return for the prior year. Sec. 6654(d)(1)(B); see also
Wheeler v. Commissioner, 127 T.C. at 211-212.
The Commissioner met this burden here by showing that Ms. Sham had
taxable income in 2015 and that she had not filed a return for 2014 or 2015 at the
time that the IRS issued the SNOD in February 2017. Consequently, the
Commissioner carried his burden of production to show that Ms. Sham is liable for
the section 6654 addition; Ms. Sham does not contest these facts or argue any
defense. She is therefore liable for this addition for failure to pay estimated tax.
3. Accuracy-related penalty
Section 6662(a) and (b)(1) and (2) imposes an “accuracy-related penalty” of
20% of the portion of the underpayment of tax that is attributable to the taxpayer’s
negligence or disregard of rules or regulations or that is attributable to any
substantial understatement of income tax. The IRS determined penalties for the
first four years at issue--i.e., 2010 through 2013, the years for which Ms. Sham
filed returns before the SNOD was issued. Ms. Sham does not raise any issues
regarding the Commissioner’s compliance with section 6751(b)(1), which requires
“approv[al] (in writing) by the immediate supervisor of the individual making such
determination” of penalty liability. The Civil Penalty Approval Form, which
reflects the signature of the group manager approving both possible alternative
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[*78] grounds for the penalties (i.e., substantial understatement and negligence)
before the issuance of the SNOD to Ms. Sham is sufficient to show that the IRS
complied with the requirement of section 6751(b)(1) for written supervisory
approval of the accuracy-related penalties. See Clay v. Commissioner, 152 T.C.
223, 249 (2019).
It appears that even after reducing the tax liabilities to reflect the
Commissioner’s concessions and our holdings as to additional deductions to
which Ms. Sham is entitled, the understatements that we sustain for the years
2010, 2012, and 2013 are “substantial” under section 6662(d)--i.e., they exceed
the greater of $5,000 and 10% of the tax that should have been reported on each
return. In addition--but most relevant to the return for 2011 (since the 2011
understatement may not be “substantial”)--we hold that Ms. Sham was negligent24
in preparing her returns, since her failure to maintain records to substantiate her
deductions was negligent and that the impropriety of many of the deductions is
obvious and must have been obvious to her. The Commissioner has carried his
burden of production, see sec. 7491(c), to show that petitioner is liable for the
penalties. Accordingly, if Ms. Sham’s recomputed tax liability for 2010, 2011,
24
Section 6662(c) provides: “For purposes of this section, the term
‘negligence’ includes any failure to make a reasonable attempt to comply with the
provisions of this title”.
- 79 -
[*79] 2012, or 2013 shows an underpayment of tax required to be shown on the
return, but not a substantial understatement (after accounting for net operating
losses), we hold that she is liable for the accuracy-related penalty under section
6662(a) and (b)(1) on account of negligence.
However, under section 6664(c)(1), a taxpayer who is otherwise liable for
the accuracy-related penalty may avoid the liability if she can show, first, “that
there was a reasonable cause” for the underpayment and, second, that she “acted in
good faith with respect to” the underpayment, then no accuracy-related penalty
“shall be imposed”. Whether the taxpayer acted with reasonable cause and in
good faith depends on the pertinent facts and circumstances, including her efforts
to assess her proper tax liability, her knowledge and experience, and the extent to
which she relied on the advice of a tax professional. 26 C.F.R. sec.
1.6664-4(b)(1), Income Tax Regs. “Reliance on * * * professional advice, or
other facts, however, constitutes reasonable cause and good faith if, under all the
circumstances, such reliance was reasonable and the taxpayer acted in good faith.”
Id. Ms. Sham contends that she relied on the advice of professionals--i.e., the
accountants who prepared her returns--and that this fact supports a “reasonable
cause” defense.
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[*80] The Court’s caselaw sets forth the following three requirements for a
taxpayer to show reliance on a tax professional to avoid liability for a section
6662(a) penalty: “(1) The adviser was a competent professional who had
sufficient expertise to justify reliance, (2) the taxpayer provided necessary and
accurate information to the adviser, and (3) the taxpayer actually relied in good
faith on the adviser’s judgment.” Neonatology Assocs., P.A. v. Commissioner,
115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002). Ms. Sham failed to
show that she provided necessary and accurate information to the advisers in
support of the income she reported and the deductions she claimed. Even if we
were to accept her assertion that she provided her accountants with all of the
documentary evidence she produced at trial, for each year at issue her proof fell
significantly short of substantiating her numerous reported expenses. We find that
Ms. Sham has not met her burden to prove reliance on a tax professional to
demonstrate reasonable cause and good faith in the preparation of her returns.
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[*81] Conclusion
The determinations in the SNOD are sustained in part, to the extent set out
above. To reflect the foregoing and the parties’ concessions,
Decision will be entered under
Rule 155.
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[*82] APPENDIX A: INCOME ITEMS
The following tables display, for each of the years 2010 through 2015,
(i) the amount of each item of income that should be shown on Ms. Sham’s return;
(ii) the sum of the amounts to which the parties have agreed and the amounts
which have not been disputed; and (iii) any adjustment to the amounts shown on
the return based either on the parties’ agreement or (where the amounts in the third
column are not simply the difference in the first two columns) on our findings in
this Memorandum Opinion:
2010
Item Return Agreed Adjustment
Wages, salaries, tips, etc. $136,154 $136,154 -0-
Taxable interest 1,220 1,220 -0-
Taxable refunds, credits or
offsets of State income tax 1,257 1,257 -0-
Unemployment compensation 18,440 18,440 -0-
The foregoing agreed amounts reflect the Commissioner’s concession of $45 in
unreported interest determined in the SNOD.
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[*83] 2011
Item Return Agreed Adjustment
Schedule C gross receipts $72,311 $6,451 ($65,860)
Taxable interest 694 892 198
Taxable refunds, credits or
offsets of State income tax 627 627 -0-
IRA distributions 19,004 19,004 -0-
Unemployment compensation 11,746 11,746 -0-
The foregoing agreed amounts reflect the Commissioner’s concession of $3 in
unreported State tax refund income determined in the SNOD.
2012
Item Return Agreed Adjustment
Schedule C gross receipts $86,600 $162,283 $75,682
Taxable interest 102 206 104
Taxable refunds, credits or
offsets of State income tax 9,176 9,176 -0-
Other income (12,847) -0- TBD
The !$12,847 net operating loss carryover listed above, which petitioner reported
as “Other income”, will need to be adjusted in accordance with the findings for
2010 and 2011.
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[*84] 2013
Item Return Agreed Adjustment
Schedule C gross receipts $117,300 $98,790 ($18,510)
Taxable interest -0- 11 11
Dividends -0- 141 141
Other income (21,675) -0- TBD
The !$21,675 net operating loss carryover reported as “Other income” will need
to be adjusted in accordance with the findings for 2010 through 2012.
2014
Item Return Agreed Adjustment
Schedule C gross receipts $71,451 $71,451 -0-
Taxable interest 1 11 $10
Dividends 54 107 53
Taxable refunds, credits or
1
offsets of State income tax -0- -0- 12,022
Capital gain or (loss) (3,000) -0- 3,000
Other income (21,675) -0- TBD
1
This adjustment will be made only if Ms. Sham is not liable for AMT for
2010 when her tax liability for that year is recomputed.
The “Agreed” amount of Schedule C gross receipts of $71,451 represents the
Commissioner’s concession of $85,885 of the $157,336 determined in the SNOD.
Ms. Sham reported this amount on her return and did not dispute it at trial (our
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[*85] reason for not revising the label “Agreed”). She disputed it after trial,
asserting it was only $51,562, but we have resolved the dispute in favor of the
Commissioner, resulting in no adjustment to the amount reported on the return.
The !$21,675 net operating loss carryover reported as “Other income” will need
to be adjusted in accordance with the findings for 2010 through 2013. Further,
consistent with our finding that the activity in the TD Ameritrade account in
Ms. Sham’s name was not in fact attributable to Ms. Sham, the capital loss
resulting from the TD Ameritrade account is not allowed on her return.
2015
Item Return Agreed Adjustment
Schedule C gross receipts $36,000 $36,000 -0-
Capital gain or (loss) (3,000) -0- -0-
Other income (8,828) -0- TBD
These amounts reflect the Commissioner’s concession of $45 in unreported
interest determined in the SNOD. The Schedule C gross receipts of $36,000
represent the Commissioner’s concession of $36,800 of the $72,800 determined in
the SNOD. The !$8,828 net operating loss carryover reported as “Other income”
will need to be adjusted in accordance with the findings for 2010 through 2014.
Further, consistent with our finding that the activity in the TD Ameritrade account
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[*86] in Ms. Sham’s name was not in fact attributable to Ms. Sham, the capital
loss resulting from the TD Ameritrade Account is not allowed as a deduction on
her return (but the capital loss of $35,542 resulting from her own account is
allowed).
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[*87] APPENDIX B: DEDUCTIONS
The following tables display, for each of the years 2010 through 2015,
(i) the amount of the expenses for which petitioner seeks deductions on
Schedule A25 or Schedule C of her return for various items at issue (but without
any corresponding computational adjustments); (ii) the amounts to which the
parties have agreed or the Commissioner has conceded petitioner is entitled to
deduct; and (iii) additional amounts that, after trial, we find petitioner paid and for
which she adequately substantiated the requisite business purpose or use:
2010
Additional
Expense Return Agreed amount
Sch A medical1 $61,230 $39,698 $4,557
Sch A employee business expenses
Parking, tolls, transport 1,220 -0- -0-
Travel away from home 3,461 -0- -0-
Meals and entertainment 4,221 -0- -0-
Other 25,661 6,210 -0-
25
For each year Schedule A medical expenses are stated, the finding is the
amount of Ms. Sham’s unreimbursed medical expenses before applying the
limitation of section 213(a).
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[*88] We hold that Ms. Sham is entitled to the foregoing deductions for 2010. We
make no adjustment to the following Schedule A deductions that she claimed and
that were not disallowed in the SNOD or otherwise disputed by the Commissioner:
$18,548 for State and local taxes and $845 for gifts to charity. To the extent the
computation requires Ms. Sham to be liable for AMT, her income items for 2014
will not include the State tax refund of $12,022.
2011
Additional
Expense Return Agreed amounts
1
Sch A medical $21,272 $21,272 -0-
Sch C-2 rent/lease 29,078 -0- -0-
Sch C-1 rent/lease 6,922 -0- -0-
Sch C-1 depreciation 1,246 -0- -0-
Sch C-1 travel 10,083 -0- -0-
Sch C-1 office 8,085 -0- -0-
Sch C-1 car/vehicle 9,821 -0- -0-
Sch C-1 other (local transport) 1,998 -0- -0-
Sch C-1 other (dues and
subscriptions) 773 -0- -0-
Sch C-1 other (IT and technology) 450 -0- -0-
2
Sch C-1 other (storage) 1,500 -0- -0-
Sch C-1 other (telephone and
internet) 3,254 -0- -0-
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[*89]
Sch C-1 other (business research
and establishment) 4,790 -0- -0-
1
This amount included $14,581 of self-employed health insurance premiums
that were not reported on line 29 of the return.
2
Ms. Sham conceded this issue for all years at trial. She later asserted
claims for each of 2012 and 2013 of $239 and for each of 2014 and 2015 of $240,
none of which she substantiated.
We hold that Ms. Sham is entitled to the foregoing deductions for 2011. We make
no adjustment to the following deductions that she claimed and that were not
disallowed in the SNOD or otherwise disputed by the Commissioner: on
Schedule A, $293 for State and local taxes, and $2,662 for gifts to charity; on
Schedule C, $1,223 for advertising, $375 for contract labor, $1,775 for legal and
professional services, $175 for vehicles, machinery, and equipment, $7,270 for
repairs and maintenance, $1,871 for supplies, $454 for taxes and licenses, $4,631
for deductible meals and entertainment, and $1,130 for utilities. The net operating
loss deduction claimed by Ms. Sham for 2011 must be recomputed.
2012
Additional
Expense Return Agreed amounts
1
Sch A medical $26,582 $26,582 -0-
2
Sch A contributions 2,370 -0- -0-
Sch C-2 rent/lease 28,628 -0- -0-
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[*90]
Sch C-1 rent/lease 7,372 -0- -0-
Sch C-1 depreciation 2,164 -0- -0-
Sch C-1 travel 12,403 -0- -0-
Sch C-1 office 6,130 -0- -0-
Sch C-1 car/vehicle 7,372 -0- -0-
Sch C-1 deductible meals and
entertainment 4,062 4,062 -0-
Sch C-1 other (local transport) 4,647 -0- -0-
Sch C-1 other (dues and
subscriptions) 744 -0- $100
Sch C-1 other (IT and technology) 742 -0- -0-
Sch C-1 other (storage) 1,824 -0- -0-
Sch C-1 other (telephone and
internet) 3,254 -0- -0-
Sch C-1 other (professional
development) 6,825 5,981 -0-
1
This amount included $22,626 of self-employed health insurance premiums
that were not reported on line 29 of the return.
2
Even though our findings regarding the income items will raise Ms. Sham’s
contribution base for 2012, we nonetheless find that she is not entitled to the
contribution deduction because she did not substantiate it.
We hold that Ms. Sham is entitled to the foregoing deductions for 2012. We make
no adjustment to the following Schedule C deductions that she reported and that
were not disallowed in the SNOD or otherwise disputed by the Commissioner:
$1,730 for advertising; $4,479 for repairs and maintenance; $1,377 for supplies;
- 91 -
[*91] $459 for taxes and licenses; and $1,216 for utilities. The net operating loss
deduction claimed by Ms. Sham for 2012 must be recomputed.
2013
Additional
Expense Return Agreed amounts
Self-employed health insurance1 $12,561 $12,561 $6,435
Sch A medical 16,552 16,552 -0-
Sch A tax preparation fees -0- -0- 300
Sch A contributions 3,100 -0- -0-
Sch C-2 rent/lease 29,398 -0- -0-
Sch C-1 rent/lease 9,002 -0- -0-
Sch C-1 depreciation 5,527 -0- -0-
Sch C-1 travel 11,517 -0- -0-
Sch C-1 deductible meals and
entertainment 4,149 4,149 -0-
Sch C-1 office 6,293 -0- -0-
Sch C-1 car/vehicle 7,577 -0- -0-
Sch C-1 other (local transport) 2,319 -0- -0-
Sch C-1 other (dues and
subscriptions) 794 -0- 102
Sch C-1 other (IT and technology) 579 -0- -0-
Sch C-1 other (storage) 1,823 -0- -0-
Sch C-1 other (telephone and
internet) 3,279 -0- -0-
- 92 -
[*92]
Sch C-1 other (professional
development) 7,860 2,000 -0-
1
The Commissioner did not disallow in the SNOD Ms. Sham’s self-
employed health insurance deduction of $12,561, the “agreed” amount. At trial
Ms. Sham substantiated $18,996 in payments for self-employed health insurance.
The Commissioner argued that the additional amount should be counted toward
Ms. Sham’s itemized unreimbursed medical expenses (which he did challenge in
the SNOD); but because these are distinct items, we find that Ms. Sham entitled to
deduct an additional $6,435 for self-employed health insurance.
We hold that Ms. Sham is entitled to the foregoing deductions for 2013. We make
no adjustment to the following Schedule C deductions that she reported and that
were not disallowed in the SNOD or otherwise disputed by the Commissioner:
$1,890 for advertising; $3,466 for repairs and maintenance; $1,220 for supplies;
$129 for taxes and licenses; $1,170 for utilities. In accordance with our findings
in prior years, the net operating loss carryforward that Ms. Sham carried to 2013
must be recomputed.
2014
Additional
Expense Return Agreed amounts
Self-employed health insurance $8,605 $8,605 -0-
Sch A medical 12,017 3,300 -0-
Sch A State and local sales tax 248 248 -0-
Sch A tax preparation fees -0- -0- $800
- 93 -
[*93]
Sch A contributions 1,072 -0- -0-
Sch C-1 rent/lease 20,000 -0- -0-
Sch C-1 depreciation 1,202 -0- -0-
Sch C-1 travel 1,356 -0- -0-
Sch C-1 deductible meals and
entertainment 1,255 628 -0-
Sch C-1 other (conferences) 7,701 10,743 -0-
Sch C-1 other (continuing
education) 7,823 -0- -0-
Sch C-1 other (dues and
subscriptions) 1,412 -0- 165
Sch C-1 other (outside services) 800 -0- -0-
Sch C-1 other (professional
development) 7,524 2,000 -0-
Sch C-1 other (promotion) 717 -0- -0-
Sch C-1 other (telephone) 2,848 -0- -0-
In accordance with our findings for prior years, the net operating loss carryforward
that Ms. Sham carried to 2014 must be recomputed.
- 94 -
[*94] 2015
Additional
Expense Return Agreed amounts
Self-employed health insurance $8,831 $8,831 -0-
Sch A medical -0- 675 -0-
Sch C-1 legal and professional
services 654 -0- -0-
Sch C-1 travel 794 -0- -0-
Sch C-1 deductible meals and
entertainment 433 500 -0-
Sch C-1 other (conferences) 554 554 -0-
Sch C-1 other (continuing
education) 9,647 -0- -0-
Sch C-1 other (dues and
subscriptions) 1,172 -0- -0-
Sch C-1 other (professional
development) 6,274 -0- -0-
Sch C-1 other (gifts) 297 -0- -0-
Sch C-1 other (telephone) 2,201 -0- -0-
In accordance with our findings for prior years, the net operating loss carryforward
that Ms. Sham carried to 2015 must be recomputed.