Hager v. Comm'r

T.C. Summary Opinion 2007-198
UNITED STATES TAX COURT
HOWARD K. HAGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7431-06S. Filed November 21, 2007.
Howard K. Hager, pro se.
Erika B. Cormier, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
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and all Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined a $3,553 deficiency in petitioner’s
2002 Federal income tax and a section 6651(a) addition to tax for
failure to file timely a Form 1040-SS, U.S. Self-Employment Tax
Return, for 2002. The issues for decision are whether petitioner
is: (1) Entitled to claim business expense deductions; and
(2) liable for a section 6651(a)(1) addition to tax.1
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
was filed, petitioner resided in Holliston, Massachusetts.
Petitioner resided in Puerto Rico during 2002. For part of
2002, petitioner was employed by World Services Telephone, Inc.,
and he also worked as a consultant to Cortelco Systems Puerto
Rico (Cortelco). Cortelco was in San Juan, Puerto Rico, and
moved its operations to Caguas, Puerto Rico, sometime between
September 2002 and February 2003. Petitioner then began working
at home.
During 2002, petitioner shared with his wife a one-bedroom
apartment, which was about 500 square feet. Within the
1
Respondent concedes that petitioner is not liable for
additions to tax under sec. 6654(a) or 6651(a)(2). Petitioner
concedes that he was required to file a Form 1040-SS.
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apartment, petitioner used for business a workbench and desk,
which were in the bedroom; an area for file storage, which was in
the living room; and areas in the dining room for files, storage,
chairs, and his computer, router, and terminals, which he stored
on top of the dining room table.
Petitioner filed a Form 482.0, Individual Income Tax Return,
with the Commonwealth of Puerto Rico for 2002. Petitioner failed
to file timely a Form 1040-SS with the Internal Revenue Service
for 2002. On January 24, 2006, respondent issued a notice of
deficiency to petitioner. Thereafter, petitioner submitted to
respondent a Form 1040-SS and a Form 4562, Depreciation and
Amortization (Including Information on Listed Property), on March
28, 2007. On his Form 1040-SS, petitioner claimed the following
deductions:
Truck purchase (as a section 179 expense) $2,500
Insurance (other than health) 3,552
Legal and professional expenses 2,500
Other business property (as a section 280A 6,300
deduction for the business use of his residence)
Utilities (as a section 280A deduction for the 2,800
business use of his residence)
Repairs and maintenance 800
Supplies 1,000
Taxes and licenses 7,798
Meals and entertainment 5,000
Parking 250
Tolls 100
Oil and gas 480
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Discussion
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer has the burden to prove
that the determinations are in error. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on
factual issues that affect a taxpayer’s tax liability may be
shifted to the Commissioner where the “taxpayer introduces
credible evidence with respect to * * * such issue.” See sec.
7491(a)(1). The burden will shift only if the taxpayer has
complied with the substantiation requirements and has cooperated
with the Commissioner’s reasonable requests for witnesses,
information, documents, meetings, and interviews. See sec.
7491(a)(2). Petitioner has not proven or even alleged that
section 7491(a) applies; accordingly, the burden remains on him
to show that he is entitled to the claimed deductions.
U.S. individuals are subject to Federal income taxation on
their taxable income on a worldwide basis. See sec. 1; Cook v.
Tait, 265 U.S. 47 (1924). But a U.S. individual who is a bona
fide resident of Puerto Rico for the entire taxable year is not
subject to Federal taxation with respect to his items of income
that are sourced within Puerto Rico except for amounts received
for services as an employee of the U.S. Government. See sec.
933(1). Notwithstanding the exemption provided by section
933(1), a U.S. individual residing in Puerto Rico is not exempt
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from self-employment tax. See sec. 1401; sec. 1.1402(a)-9,
Income Tax Regs. Residents of Puerto Rico are required to
compute net earnings from self-employment in the same manner as a
U.S. individual without regard to section 933. See sec.
1402(a)(6); sec. 1.1402(a)-9, Income Tax Regs.; see also sec.
1.1402(a)-1, Income Tax Regs. (defining the term “net earnings
from self-employment” to include the gross income derived in a
taxpayer’s trade or business less the deductions allowed by
chapter 1 that are attributable thereto).
I. Substantiation of Business Expense Deductions
In general, section 162 allows a deduction for all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business. Whether an
expenditure satisfies the requirements of section 162 is a
question of fact. Commissioner v. Heininger, 320 U.S. 467, 475
(1943). The taxpayer must keep records sufficient to establish
the amounts of the items required to be shown on his Federal
income tax return. See sec. 6001; sec. 1.6001-1(a), (e), Income
Tax Regs.
When a taxpayer establishes that he has incurred a
deductible expense but is unable to substantiate the exact
amount, the Court may estimate the deductible amount in some
circumstances (the Cohan rule). See Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930). But the Court can estimate the
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amount of a deductible expense only when the taxpayer provides
evidence sufficient to establish a rational basis for making the
estimate. See Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
A. Legal Expenses, Supplies, Insurance, Taxes and Licenses,
Oil and Gas
With respect to the deductions claimed for legal expenses,
supplies, insurance, taxes and licenses, and oil and gas,
petitioner’s evidence consisted of a spreadsheet listing the
numbers he put on his return.2 Petitioner did not testify as to
these items nor submit any receipts to verify his payment of the
expenses in 2002. See secs. 446(a), (c), 461(a), 6001. Without
more, the Court finds that petitioner has not adequately
substantiated the deductions and that he has failed to provide
sufficient evidence for the Court to make a rational estimate.
Therefore, the deductions are not allowable, and respondent’s
determinations are sustained.
B. Parking and Tolls
Generally, a taxpayer may deduct the cost of operating an
automobile to the extent that it is used in a trade or business.
See Rev. Proc. 2002-61, 2002-2 C.B. 616. Parking fees and tolls
may be deducted as separate items. Id. Petitioner’s evidence
consisted of his spreadsheet. He failed to present any receipts
2
With respect to his spreadsheet, petitioner testified
that he used his expenses from 2004 to generate “reasonable
expenses” for 2002 since his records for 2002 were allegedly
destroyed in a fire in 2006.
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to verify that the expenditures were made in 2002, and he did not
testify as to these claimed expenses. See secs. 446(a), (c),
461(a), 6001. Without more, the Court concludes that he has not
substantiated the deductions nor provided any sufficient evidence
for the Court to make a rational estimate. Therefore, he is not
entitled to the deductions, and respondent’s determinations are
sustained.
C. Expenses Subject to Section 274(d)
Section 274(d) supersedes the Cohan rule, and the Court
cannot estimate a taxpayer’s expenses with respect to certain
items. See Sanford v. Commissioner, 50 T.C. 823, 827, (1968),
affd. per curiam 412 F.2d 201 (2d Cir. 1969). Section 274(d)
provides that no deduction is allowable for expenses related to:
(1) Travel; (2) amusement, recreation, or entertainment;
(3) gifts; or (4) “listed property”, unless the taxpayer complies
with certain strict substantiation requirements. To satisfy the
strict substantiation requirements, the taxpayer must
substantiate the amount, the time and place of the travel or
entertainment, the use of the property or facility, the date and
description of the gift, the business purpose of an expense, and
the business relationship to the taxpayer of the persons
entertained or receiving the gift. See sec. 274(d); sec.
1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985). If the amount is not substantiated by adequate records or
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sufficient corroborative evidence, then it is disallowed. See
sec. 274(d).
In order to substantiate amounts expended for travel, the
taxpayer must prove the: (1) Amount of each expenditure (i.e.,
lodging, meals, gas, and etc.); (2) time (i.e., dates of
departure and return trip and number of days spent on business);
(3) place; and (4) business purpose (i.e., the business reason
for the travel or the nature of the business benefit to be
derived). See sec. 1.274-5T(b)(2)(i) through (iv), Temporary
Income Tax Regs., supra.
Similarly, in order to substantiate amounts expended for
entertainment, the taxpayer must prove the: (1) Amount of each
expenditure (except for incidental items such as taxi fares or
telephone calls that may be aggregated on a daily basis);
(2) time, which means the date of the entertainment; (3) place
(i.e., the name, if any, address or location, and designation of
the type of entertainment, such as dinner or theater, if it is
not apparent from the designation of the place); (4) business
purpose (i.e., the business reason for the entertainment or the
nature of the business benefit to be derived and the nature of
the business discussion or activity); and (5) business
relationship (i.e., name, title, occupation, or similar
information of the persons entertained). See sec.
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1.274-5T(b)(3)(i) through (v), Temporary Income Tax Regs., 50
Fed. Reg. 46015 (Nov. 6, 1985).
Petitioner’s evidence consisted of the spreadsheet listing
the numbers he put on his return. Petitioner did not testify as
to his expenses for travel and meals and entertainment nor submit
any receipts to verify his payment of the claimed expenses in
2002. See secs. 446(a), (c), 461(a). The Court finds that
petitioner has not satisfied the strict substantiation
requirements of section 274(d), and therefore, the expenses are
not deductible. Accordingly, respondent’s determinations are
sustained.
D. Truck Purchase as a Section 179 Expense
Section 179(a) generally allows a taxpayer to elect to treat
the cost of section 179 property as a current expense in the year
the property is placed in service, within certain dollar
limitations. If the property is used for both business and other
purposes, then the portion of the property’s cost that is
attributable to the business use is eligible for expensing under
section 179 but only if more than 50 percent of the property’s
use is for business purposes (the predominant use requirement).
See sec. 1.179-1(d), Income Tax Reg.; see also Whalley v.
Commissioner, T.C. Memo. 1996-533. Moreover, in order to claim a
deduction for listed property, which is defined in section
280F(d)(4) to include a passenger automobile, the taxpayer must
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satisfy the strict substantiation requirements of section 274(d).
See Whalley v. Commissioner, supra; see also sec. 280F(d)(1);
sec. 1.179-1(d)(3), Income Tax Regs. In order to substantiate
the amount of an automobile expense the taxpayer must prove the
following: (1) The amount of the expenditure (i.e., cost of
acquisition); (2) the amount of each business use and the amount
of its total use by establishing the amount of its business
mileage and total mileage; (3) time (i.e., the date of the
expenditure or use); and (4) the business purpose for the
expenditure or use. See sec. 1.274-5T(b)(6)(i) through (iii),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
The taxpayer may substantiate the amount of mileage by adequate
records or sufficient evidence that corroborates his statements.
See sec. 274(d). A record of the mileage made at or near the
time of the automobile’s use that is supported by documentary
evidence has a high degree of credibility not present with a
subsequently prepared statement. See sec. 1.274-5T(c)(1)-(3),
Temporary Income Tax Regs., supra.
Petitioner’s evidence consisted of the spreadsheet listing
the numbers he put on his return and his testimony that he
purchased the Jeep from a bankruptcy trustee for $2,200 to use in
his business. Additionally, petitioner testified that the Jeep
was his only vehicle and that his wife did not own a vehicle.
Petitioner failed to establish his business use. Moreover, he
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did not maintain a mileage log, and he did not attempt to
reconstruct his auto expenses (i.e., by tying his clients’
business cards, which he did possess, to particular dates). The
Court finds that petitioner has satisfied neither the strict
substantiation requirements of section 274(d) nor the predominant
use requirement. Therefore, petitioner is not entitled to
expense the cost of the Jeep under section 179. Accordingly,
respondent’s determination is sustained.
E. Expenses for Business Use of the Home
Expenses for the business use of a taxpayer’s residence are
deductible only under very limited circumstances. The taxpayer
must show that a portion of the residence was exclusively used on
a regular basis as his principal place of business, and in the
case of an employee, the exclusive use must be for the employer’s
convenience. See sec. 280A(c)(1). The term “a portion of the
dwelling unit” refers to “a room or other separately identifiable
space;” a permanent partition marking off the area is not
necessary. Sec. 1.280A-2(g)(1), Proposed Income Tax Regs., 48
Fed. Reg. 33324 (July 21, 1983).3 When section 280A(c) was added
to the Internal Revenue Code by the Tax Reform Act of 1976, Pub.
3
Although proposed regulations carry no greater weight
than a position advanced on brief by the Commissioner, they may
be useful as guidelines where they closely follow the legislative
history of the act. Estate of Wallace v. Commissioner, 95 T.C.
525, 547 (1990), affd. 965 F.2d 1038 (11th Cir. 1992); Miller v.
Commissioner, 70 T.C. 448, 460 (1978); F.W. Woolworth Co. v.
Commissioner, 54 T.C. 1233, 1265-1266 (1970)).
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L. 94-455, sec. 601(a), 90 Stat. 1569, the Senate Finance
Committee report explained the exclusive use requirement as
follows:
Exclusive use of a portion of a taxpayer’s dwelling
unit means that the taxpayer must use a specific part
of a dwelling unit solely for the purpose of carrying
on his trade or business. The use of a portion of a
dwelling unit for both personal purposes and for the
carrying on of a trade or business does not meet the
exclusive use test. Thus, for example, a taxpayer who
uses a den in his dwelling unit to write legal briefs,
prepare tax returns, or engage in similar activities as
well for personal purposes, will be denied a deduction
for the expenses paid or incurred in connection with
the use of the residence which are allocable to these
activities. * * * [Emphasis added.]
S. Rept. 94-938, at 148 (1976), 1976-3 C.B. (Vol. 3) 49, 186; see
also H. Rept. 94-658, at 161 (1975), 1976-3 C.B. (Vol. 2) 695,
853; Staff of Joint Comm. on Taxation, General Explanation of the
Tax Reform Act of 1976, at 140 (1976), 1976-3 C.B. (Vol. 2) 1,
152. Similarly, the Court has declined to find that a specific
portion of a residence had been used exclusively for business
purposes where both business and personal activities permeate an
entire residence. Williams v. Commissioner, T.C. Memo. 1991-567;
Naggar v. Commissioner, T.C. Memo. 1983-559.
The exclusive use requirement is an all-or-nothing standard.
See Hamacher v. Commissioner, 94 T.C. 348, 356 (1990). When a
taxpayer uses a home office in conducting numerous business
activities, each use must be of a type described in section
280A(c)(1); otherwise, the exclusive use requirement is not
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satisfied. Id. And if only one of the uses qualifies, then the
expenses attributable to that use are not deductible even if the
other uses are business related. Id.
1. Other Business Property as a Section 280A Expense
Petitioner’s evidence consisted of the spreadsheet listing
the numbers he put on his return, three canceled checks for rent
paid for September through December at $1,050 per month, a
current photograph of some equipment, a diagram showing the
location of his equipment, furniture, files, and storage; a
letter from Cortelco’s vice president of finance and
administration and chief financial officer, and petitioner’s own
testimony.
Petitioner testified that he and his wife never dined in the
dining room because they had an outside deck to dine on. The
table was designed for dining, but it was not used for that
purpose, he testified. According to petitioner, they ate out
most of the time, and his wife never cooked in the kitchen. The
Court finds that this portion of petitioner’s testimony is
self-serving, and we simply do not accept it. See Geiger v.
Commissioner, 440 F.2d 688, 689 (9th Cir. 1971), affg. per curiam
T.C. Memo. 1969-159; Urban Redev. Corp. v. Commissioner, 294 F.2d
328, 332 (4th Cir. 1961), affg. 34 T.C. 845 (1960).
Petitioner also testified that both he and his wife slept in
the bedroom and that he used his computer equipment and his
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“records” to help a bankruptcy trustee in a lawsuit filed in his
personal capacity and on behalf of a company, of which he was the
chief executive officer. In view of this testimony, the Court
finds that petitioner has not satisfied the exclusive use
requirement since his business areas were used for both personal
and business reasons, they permeated the entire apartment, and
the uses are so intermingled that the Court cannot find that a
specific portion of the apartment was used exclusively for
business purposes. Moreover, merely testifying that “if I lived
there and I worked there and I did business there * * * I must
have had some reasonable expenses” is not sufficient to satisfy
the Code’s substantiation requirements. Accordingly,
respondent’s determination is sustained.4
2. Utilities
Utilities attributable to the taxpayer’s maintenance of a
home office may be deductible as a business expense. See 1.262-
1(b)(3), Income Tax Regs.
4
In view of our disposition of the deductions relating to
petitioner’s business use of his residence, there is no need to
reach the parties’ arguments regarding the issue of whether his
employer had provided petitioner with an office at Cortelco,
which might have precluded the deduction pursuant to Bodzin v.
Commissioner, 509 F.2d 679 (4th Cir. 1975) (distinguishing
between situations where the taxpayer chooses to work from home
and thus the deduction for the business use of the home is not
allowable from the situations where an office is not available or
suitable for the work and the deduction is allowable), revg. 60
T.C. 820 (1973).
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Petitioner’s evidence consisted of the spreadsheet listing
the numbers he put on his return, a water-sewer bill and an
electric bill, which were not for 2002; and a $75 receipt stapled
to a water bill, which was for 2005. Because we have determined
that petitioner is not entitled to a deduction for the business
use of his residence, it follows that he is not entitled to a
deduction for the corresponding utilities. Accordingly,
respondent’s determination is sustained.
II. Section 6651(a)(1) Addition to Tax
Respondent determined an addition to tax under section
6651(a)(1) for 2002, asserting that petitioner failed to timely
file his Form 1040-SS. Initially, respondent has the burden of
production with respect to the addition to tax. See sec.
7491(c). Respondent satisfies his burden by coming forward with
sufficient evidence to indicate that it is appropriate to impose
the addition to tax. See Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Once respondent satisfies his burden, petitioner
must persuade the Court that respondent’s determination is in
error by supplying sufficient evidence of reasonable cause,
substantial authority, or a similar justification. Id.
The parties agree that petitioner did not timely file a
Form 1040-SS. Therefore, respondent has met his burden of
production. Petitioner merely testified that he was a resident
of Puerto Rico, he paid his taxes in Puerto Rico, and “everybody
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said you do not owe the IRS”. Petitioner introduced no other
evidence. Petitioner’s explanation was not a legally sufficient
reason for his failure to file timely; therefore, the Court finds
that petitioner did not have reasonable cause for his failure to
file timely. Accordingly, respondent’s determination is
sustained.
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and
the section 6651(a)(1) addition to
tax and for petitioner as to the
additions to tax under sections
6651(a)(2) and 6654.