Farber v. Comm'r

T.C. Memo. 2010-37
UNITED STATES TAX COURT
GEORGIA C. FARBER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14681-07. Filed February 24, 2010.
Clark Garen, for petitioner.
Michael S. Hensley, for respondent.
MEMORANDUM OPINION
FOLEY, Judge: The issues for decision are whether, relating
to 2003, petitioner is: (1) Entitled to deduct expenses relating
to her retail activity, (2) entitled to certain itemized
deductions, and (3) liable for an accuracy-related penalty
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pursuant to section 6662(a).1 The parties submitted this case
fully stipulated pursuant to Rule 122.
Background
In 2003 petitioner was employed as a professor of nursing at
Santa Monica Community College and began a retail activity
selling candles. Petitioner did not maintain a general ledger,
financial statements, records of insurance, records of appraisal,
records of advertising, or a separate bank account relating to
her retail activity. Further, petitioner did not create income
and expense worksheets, business or marketing plans, operating
budgets, cost-benefit analyses, or financial projections relating
to the activity, nor did she obtain a business license or
fictitious business name relating to her retail activity.
Expenses relating to petitioner’s retail activity were billed to
her and paid out of her personal accounts.
On August 13, 2004, petitioner filed her 2003 Federal income
tax return (2003 return), which included a Schedule C, Profit or
Loss From Business, and a Schedule A, Itemized Deductions. On
Schedule C petitioner reported $2,351 of gross receipts and
claimed $33,475 of expense deductions for advertising, insurance,
taxes, licenses, travel, utilities, and other expenses relating
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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to her retail activity (Schedule C expenses). On Schedule A
petitioner deducted charitable contributions, tax preparation
fees, and unreimbursed employee expenses. In 2007 respondent
conducted an examination of petitioner’s 2003 return.
In a notice of deficiency dated June 15, 2007, and relating
to petitioner’s 2003 return, respondent stated:
It is determined that you realized neither a gain nor
loss from the operation of your candle activity for the
tax year ending December 31, 2003. Since you failed to
maintain adequate book [sic] and records, we have
determined that you have not established that you were
carrying on a business within the provisions of the
Internal Revenue Code. We are eliminating your
reported gross receipts of $2,351.00 and disallowing
all of your operating expenses of $33,475.00.
Accordingly, your taxable income is increased
$31,124.00 for tax year 2003. * * *
Respondent further disallowed, for lack of substantiation,
deductions relating to charitable contributions, tax preparation
fees, and unreimbursed employee expenses; determined a $5,688
deficiency; and determined a $1,138 section 6662(a)
accuracy-related penalty.
On June 27, 2007, petitioner, while residing in California,
filed her petition with the Court. Respondent, in his answer
filed December 26, 2007, asserted primary and alternative
positions which took into account the $2,351 of gross receipts,
increased the deficiency to $6,326, and increased the accuracy-
related penalty to $1,265. As his primary position, respondent
asserted that petitioner’s retail activity was a business. As
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his alternative position, respondent asserted that petitioner’s
retail activity “was an activity not engaged in for profit
pursuant to * * * [section] 183”.
Discussion
We note at the outset that respondent’s determinations in
this matter, in both the notice of deficiency and the answer, are
confusing and, in certain respects, conflicting. In the notice
of deficiency, respondent determined that petitioner was “not
* * * carrying on a business”. Respondent also stated that he
was “eliminating * * * [petitioner’s] reported gross receipts of
$2,351.00 and disallowing all of * * * [petitioner’s] operating
expenses of $33,475.00.” Respondent’s determination was, in
essence, a section 183 adjustment (i.e., tantamount to including
the gross receipts as income but allowing expenses to the extent
of that income). In the answer, however, respondent alleged, as
his primary position, that petitioner’s retail activity was a
business and asserted, as an alternative position, a section 183
adjustment. The parties stipulated a number of issues which
relate to whether petitioner was engaged in an activity for
profit, yet respondent’s primary position is that petitioner’s
retail activity was a business. We must address both
respondent’s primary and alternative positions.
Respondent’s primary position (i.e., that petitioner was
engaged in a business, had gross receipts, and failed to
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substantiate her Schedule C expenses) is a new theory that is
inconsistent with the original determination and increases the
deficiency. Therefore, respondent’s primary position is a new
matter with respect to which respondent has the burden of proof.
See Rule 142; Va. Educ. Fund v. Commissioner, 85 T.C. 743, 751
(1985), affd. per curiam 799 F.2d 903 (4th Cir. 1986); McSpadden
v. Commissioner, 50 T.C. 478, 492-493 (1968). Petitioner, on her
2003 return, included gross receipts relating to her retail
activity. While respondent met his burden with respect to the
gross receipts, he did not establish that petitioner failed to
substantiate her Schedule C expenses. Thus, we turn to
respondent’s alternative position that petitioner was not engaged
in an activity for profit.
Various factors may indicate whether a taxpayer had an
intent to make a profit. See sec. 1.183-2(b)(1), Income Tax
Regs. Petitioner failed to maintain books and records, financial
statements, or other documents relating to her retail activity
and did not conduct her activity in a businesslike manner. In
short, petitioner did not have the requisite intent to make a
profit. As previously stated, respondent bears, and has met, his
burden with respect to the inclusion of the gross receipts. See
Rule 142(a)(1). Petitioner, however, substantiated her expenses
relating to her retail activity. Accordingly, pursuant to
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section 183(b)(2), she is entitled to deduct these expenses to
the extent of the gross income derived from the activity.
Respondent disallowed, for lack of substantiation,
petitioner’s deductions relating to charitable contributions, tax
preparation fees, and unreimbursed employee expenses.2 With
respect to petitioner’s claimed charitable contributions,
petitioner verified $815 of contributions and is entitled to a
deduction of that amount. See sec. 170(a)(1); sec. 1.170A-
13(a)(1)(ii), Income Tax Regs. With respect to the tax
preparation fees and unreimbursed employee expenses, petitioner’s
records set forth a number of payments but fail to identify to
whom or for what purpose those payments were made. Because the
evidence relating to the payment of these expenses is
insufficient, petitioner is not entitled to deductions. See sec.
6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. 540
F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
Respondent also determined that petitioner is liable for an
accuracy-related penalty pursuant to section 6662(a). Respondent
bears, and has met, the burden of production relating to this
penalty. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Petitioner failed to exercise due care in reporting
2
Pursuant to sec. 7491(a), taxpayers have the burden of
proof unless they introduce credible evidence relating to an
issue that would shift the burden to the Commissioner. See Rule
142(a).
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her expenses and failed to show that she acted with reasonable
cause and in good faith. See secs. 6662(b) and (c), 6664(c);
Neely v. Commissioner, 85 T.C. 934, 947 (1985); secs. 1.6662-
3(b)(1), 1.6664-4(b)(1), Income Tax Regs. Accordingly,
petitioner is liable for the section 6662(a) accuracy-related
penalty.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.