Greatest Common Factor

United States Tax Court
T.C. Memo. 2023-39GREATEST COMMON FACTOR,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 22299-21. Filed March 23, 2023.
—————
Glenn C. Fyfe (an officer), for petitioner.
Tiffany A. Loewenstein, Deborah R. Kelessidis, and Michael K. Park for
respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Chief Judge: Respondent determined the following
deficiencies, penalties, and additions to tax with respect to petitioner’s
federal income tax returns for 2013 and 2014 (years in issue).
Year Deficiency Penalties/Additions to Tax
§ 6662(a) § 6651(a)(1)
2013 $49,817 $9,963 $12,454
2014 38,479 7,696 9,620
After concessions the issues for consideration are whether
petitioner is (1) entitled to deduct expenses related to a home office,
several vehicles, and depreciation reported on Forms 1120, U.S.
Served 03/23/23
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[*2] Corporation Income Tax Return, and (2) liable for accuracy-related
penalties pursuant to section 6662(a). 1
Unless otherwise indicated, all section references are to the
Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times,
all regulation references are to the Code of Federal Regulations, Title 26
(Treas. Reg.), in effect at all relevant times, and all Rule references are
to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
FINDINGS OF FACT
Some of the facts are stipulated and so found. The Stipulation of
Facts and the attached Exhibits are incorporated herein by this
reference. Petitioner was treated as a C corporation for Federal income
tax purpose for the years in issue. Its principal place of business was in
California when the Petition was timely filed.
During the years in issue Glenn Fyfe and his ex-wife Rhonda Fyfe
were each 50% shareholders of petitioner. Mr. Fyfe represents
petitioner as an authorized officer in accordance with Rule 24(b)(1).
Petitioner reported total gross receipts from Kinsey Technical Services
(Kinsey) of $274,448 and $265,126 for 2013 and 2014, respectively. For
the years in issue, Kinsey provided engineering services for the U.S.
military. Mr. Fyfe was a subcontractor for Kinsey, and he provided
technical consulting on classified projects at the Los Angeles Air Force
Base. He was not permitted to take documents from the premises.
Petitioner’s Forms 1120 for the years in issue claimed deductions
and reported various expenses. Petitioner claimed home office
deductions of $13,747 and $13,615 for 2013 and 2014, respectively.
Petitioner reported car and truck expenses of $17,785 and $16,412 for
2013 and 2014, respectively. Petitioner reported depreciation expenses
of $8,558 and $67,706 for 2013 and 2014, respectively. Respondent
disallowed these deductions and expenses in a notice of deficiency dated
March 30, 2021.
1 Respondent conceded the additions to tax pursuant to section 6651(a)(1) after
the Stipulation of Settled Issues was agreed to by the parties.
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[*3] OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and taxpayers bear the burden
of showing the determinations are erroneous. Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). Petitioner did not contend that
the burden of proof should shift to respondent under section 7491(a).
Deductions are a matter of legislative grace, and a taxpayer must
prove his or her entitlement to a deduction. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer claiming a deduction
on a federal income tax return must demonstrate that the deduction is
allowable pursuant to a statutory provision and must further
substantiate that the expense to which the deduction relates has been
paid or incurred. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).
Section 162 permits taxpayers to deduct all ordinary and
necessary business expenses paid or incurred during the taxable year.
An ordinary expense is one that commonly or frequently occurs in the
taxpayer’s business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a
necessary expense is one that is appropriate and helpful in carrying on
the taxpayer’s business, Commissioner v. Heininger, 320 U.S. 467, 471
(1943); Treas. Reg. § 1.162-1(a).
II. Home Office Deduction
Generally, section 280A disallows deductions related to a
dwelling used by taxpayers as a residence. The section 280A
disallowance applies in the case of a taxpayer who is an individual or an
S corporation. § 280A(a). Because petitioner is a C corporation, section
280A is inapplicable. See Christopher C.L. Ng MD, Inc. APC v.
Commissioner, T.C. Memo. 2018-14, at *8.
A C corporation “may deduct payments made to lease home office
space from an employee (or from its owner) as rent if they are ordinary
and necessary expenses [under section 162] directly connected with or
pertaining to the corporation’s trade or business.” Id. Here there is no
evidence in the record indicating that there was any such rental
agreement. Further, there is no evidence that petitioner expended any
of its funds in maintaining the alleged home office. There are therefore
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[*4] no grounds on which petitioner, a C corporation, could deduct the
expenses related to Mr. Fyfe’s home office under section 162.
We also note that even if Mr. Fyfe were the taxpayer, he would
not be entitled to home office deductions because the dwelling was not
“exclusively used on a regular basis . . . as the principal place of business
for any trade or business of the taxpayer.” § 280A(c)(1)(A). During the
years in issue petitioner’s only income was from Kinsey. Mr. Fyfe’s work
for Kinsey was performed at the Los Angeles Airforce Base. Because of
the classified nature of his work for Kinsey, Mr. Fyfe was not allowed to
take home any work. Accordingly, we sustain respondent’s disallowance
of petitioner’s home office deduction.
III. Car and Truck Expenses
Normally, the Court may estimate the amount of a deductible
expense if a taxpayer establishes that an expense is deductible but is
unable to substantiate the precise amount. See Cohan v. Commissioner,
39 F.2d 540, 543–44 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C.
731, 742–43 (1985). This principle is often referred to as the Cohan rule.
See, e.g., Estate of Reinke v. Commissioner, 46 F.3d 760, 764 (8th Cir.
1995), aff’g T.C. Memo. 1993-197.
Certain expenses specified in section 274 are subject to strict
substantiation rules. No deductions under section 162 shall be allowed
for “listed property,” as defined in section 280F(d)(4), “unless the
taxpayer substantiates [them] by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement.” § 274(d). Listed
property includes passenger automobiles and other property used for
transportation. § 280F(d)(4)(A)(i) and (ii).
To meet these strict substantiation rules, a taxpayer must
substantiate by adequate records or by sufficient evidence corroborating
the taxpayer’s own statement: (1) the amount of the expense, (2) the
time and place the expense was incurred, and (3) the business purpose
of the expense. § 274(d). To substantiate by adequate records, the
taxpayer must provide (1) an account book, a log, or a similar record,
and (2) documentary evidence, which together are sufficient to establish
each element of an expenditure. Temp. Treas. Reg. § 1.274-5T(c)(2)(i).
Documentary evidence includes receipts, paid bills, or similar evidence.
Treas. Reg. § 1.274-5(c)(2)(iii). To substantiate by sufficient evidence
corroborating the taxpayer’s own statement, the taxpayer must
establish each element by his or her own statement and by documentary
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[*5] evidence or other direct evidence. Temp. Treas. Reg. § 1.274-
5T(c)(3)(i).
Car and truck expenses are subject to the strict substantiation
rules of section 274(d). §§ 274(d)(1), (4), 280F(d)(4)(A)(i) and (ii).
Petitioner deducted Mr. Fyfe’s car and truck expenses. Mr. Fyfe has
provided information regarding his car and truck expenses including
mileage logs; however, the receipts and logs do not show that there was
a business purpose. His logs include commuting from his home to the
Los Angeles Air Force Base. A taxpayer’s choice about where to live is
personal. Cf. Commissioner v. Flowers, 326 U.S. 465, 473–74 (1946)
(reasoning that commuting expense are not deductible because the
taxpayer makes a personal choice about where to live). The costs of
commuting between one’s residence and one’s workplace are not
deductible. See Treas. Reg. § 1.162-2(e). We sustain respondent’s
disallowance of petitioner’s car and truck expenses.
IV. Depreciation
For property used in a trade or business or held for the production
of income, a depreciation deduction is allowed for reasonable exhaustion
and wear and tear. § 167(a). To substantiate entitlement to a
depreciation deduction, a taxpayer must establish the property’s
depreciable basis by showing the cost of the property, its useful life, and
the previously allowable depreciation. Cluck v. Commissioner, 105 T.C.
324, 337 (1995). A claimed deduction with respect to any “listed
property,” a category including “any passenger automobile,” is subject to
heightened substantiation requirements under section 274(d)(4). See
§ 280F(d)(4) (defining “listed property”).
Petitioner claimed depreciation deductions related to three
different vehicles for the years in issue. Petitioner did not provide
supporting documents to show the purchase prices of the vehicles and
documents supporting its ownership of the vehicles. Furthermore,
petitioner did not prove the extent to which the vehicles were used for
business purposes. We sustain respondent’s disallowance of petitioner’s
depreciation deductions.
V. Accuracy-Related Penalties
Respondent determined accuracy-related penalties under section
6662(a) for the years in issue. The burden of production as to the
penalties remains with petitioner because section 7491(c) does not apply
to corporations. See NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006).
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[*6] We have held previously that the Commissioner does not have the
burden of production as to supervisory approval under section 6751(b)
for a penalty determined against a corporation in a notice of deficiency.
Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 231–32
(2018).
Section 6662(a) imposes a 20% accuracy-related penalty on any
portion of an underpayment of tax required to be shown on a return if,
as provided by section 6662(b)(1), the underpayment is attributable to
“[n]egligence or disregard of rules or regulations.” Negligence includes
“any failure to make a reasonable attempt to comply” with the internal
revenue laws, and “disregard” includes “any careless, reckless, or
intentional disregard.” § 6662(c). Negligence also includes any failure
by the taxpayer to keep adequate books and records or to substantiate
items properly. Treas. Reg. § 1.6662-3(b)(1).
The accuracy-related penalty does not apply with respect to any
portion of the underpayment for which the taxpayer shows reasonable
cause and good faith. § 6664(c)(1); see Higbee v. Commissioner, 116 T.C.
438, 446–47 (2001). Petitioner did not show reasonable cause.
Accordingly, petitioner is liable for the section 6662(a) penalty.
To reflect the foregoing,
Decision will be entered under Rule 155.