DocketNumber: Docket Nos. 14033-88, 14054-88
Citation Numbers: 62 T.C.M. 712, 1991 Tax Ct. Memo LEXIS 497, 1991 T.C. Memo. 448
Judges: PARR
Filed Date: 9/16/1991
Status: Non-Precedential
Modified Date: 11/21/2020
*497 Decisions will be entered under Rule 155.
MEMORANDUM OPINION
Respondent determined deficiencies in and additions to petitioners' individual Federal income tax as follows:
Dexter L. Minter
Docket No. 14033-88
Tax Year | Additions to Tax | |||
Ended | Deficiency | Sec. 6661 1 | Sec. 6653(b)(1) | Sec. 6653(b)(2) |
December 31, 1983 | $ 54,628 | $ 13,657 | $ 27,314 | * |
Dexter L. and Eleanor Minter
Docket No. 14054-88
Tax Year | Additions to Tax | |||
Ended | Deficiency | Sec. 6661 | Sec. 6653(b)(1) | Sec. 6653(b)(2) |
December 31, 1984 | 25,846 | 6,462 | 12,923 | * |
December 31, 1985 | 34,901 | 8,725 | 17,451 |
The issues for decision are: (1) Whether Dexter Minter (petitioner) received unreported taxable income in 1983 and 1985, and if so, in what amounts; (2) whether petitioner engaged in an accounting, tax return preparation, and notary service business during the years 1983 through 1985, and if so, whether he paid deductible expenses during this period and the amount thereof; (3) whether Eleanor Minter (copetitioner) engaged in a computer-consulting business during 1985, and if so, whether she paid deductible business expenses and the amount thereof; (4) whether petitioner paid deductible expenses for his rental properties during the years 1983 through 1985 and the amount thereof; (5) whether petitioner paid contributions to his individual retirement account (IRA) before the final date for such payments for 1983 and 1985; (6) whether petitioner sustained deductible partnership losses in the years 1983 through 1985 from his interest in *499 a real estate partnership; (7) whether petitioner is entitled to various itemized deductions for the years 1983 through 1985; (8) whether petitioners are liable for the additions to tax for fraud under
For clarity, findings of facts and opinion will be combined issue by issue.
Some of the facts have been stipulated and are found accordingly. The stipulation of facts, together with attached exhibits, are incorporated herein.
Petitioners resided in Los Angeles, California, when they filed their petitions in this case.
A.
Petitioners were married in 1984. Mr. Minter filed a Federal income tax return for 1983, in which he reported the filing status of "single." He reported adjusted gross income of $ -0- after deducting losses from operation of his accounting, *500 tax return preparation, and notary service business; from the rental real estate he owned individually; and from a pass-through loss from a real estate partnership in which he owned a 50-percent interest. Petitioner filed an application for an automatic extension of time to file his 1983 Federal tax return to August 15, 1984. Nevertheless, he did not file the tax return until March 15, 1985.
Petitioners filed Federal income tax returns for 1984 and 1985 in which they reported the filing status of "married, filing joint return." They reported adjusted gross income of $ -0- and $ 14,068, respectively, after deducting losses from operation of petitioner's accounting, tax return preparation, and notary service business; from the rental real estate he owned individually; and from a pass-through loss from a real estate partnership in which he owned a 50-percent interest. In addition, petitioners deducted a loss incurred by copetitioner in 1985 due to the operation of a computer consulting business.
Petitioners filed their 1984 income tax return on April 14, 1985. Their 1985 tax return was not filed until August 15, 1986; they did not file an application for an extension of time to*501 file their 1985 tax return.
Petitioner earned a bachelor's and a master's degree in business. He was employed by the county of Los Angeles during all periods relevant to this proceeding as head of the Fiscal Budget Services Department. In this capacity, he prepared annual budgets for the county, and supervised an accounting staff. He also attended continuing education classes during various periods.
Copetitioner was employed by the county of Los Angeles as a data processing manager.
B.
Respondent determined that petitioner failed to report gross income for the years 1983 and 1985 of $ 15,747 and $ 992, respectively. These amounts of unreported income were determined under the bank deposits method of income reconstruction. Respondent made substantial concessions after petitioners presented evidence of previously unidentified transfers.
1.
Petitioner deposited $ 81,224 into his bank accounts during 1983, not including interaccount transfers of $ 45,378. He reported gross income from the following sources:
a.
b.
c.
d.
Additionally, petitioner deposited proceeds from the following sources, some of which are nontaxable:
a. Federal income tax refund for 1981, deposited on February 15, 1983, in the amount of $ 4,070. (Petitioner received $ 156 of interest on this tax refund. The interest constitutes unreported taxable income.) Further, petitioner received a refund of his 1981 State income tax in 1983. However, since he was unable to prove that he did not itemize his deductions on his 1981 Federal tax return, we cannot find that this State tax refund is nontaxable.
b. Proceeds of loan from Mr. Edward Law in the amount of $ 8,500. Respondent contests the receipt and deposit of the proceeds from this loan. The copy of the check from Mr. Law to petitioner, and the bank statement, clearly reflect that it was deposited into petitioner's account at Public*503 Services Federal Credit Union, No. S-543829, on April 22, 1983.
2.
Petitioners deposited $ 108,274 into their bank accounts during 1985, not including inter-account transfers of $ 22,430. Petitioners and respondent stipulated to inter-account transfers of $ 20,288 for 1985. In accord with the evidence, we accept the larger amount. 2 Petitioners reported gross income from the following sources in 1985:
a.
b.
c. *504
d.
e.
Additionally, petitioners deposited proceeds from the following nontaxable sources:
a. Federal income tax refunds for 1983 and 1984, deposited on August 16, 1985, and September 19, 1985, respectively, in the amounts of $ 4,672 and $ 9,576, respectively.
b. State income tax refunds for 1983 and 1984, deposited on August 16, 1985, and September 19, *505 1985, respectively, in the amounts of $ 1,137 and $ 2,506, respectively. As petitioners derived no benefit from the deduction for State income taxes on their 1983 and 1984 Federal tax returns, the refunds do not constitute taxable income for 1985.
c. Loan proceeds in the amount of $ 5,000. Petitioners asserted that they deposited the proceeds of a loan from Mr. Michael Clayvon, in the amount of $ 6,000, into account number 564800481-01 at Public Services Federal Credit Union, on August 16, 1985. The deposit on this date included the 1983 Federal and State tax refunds noted above, and a deposit of $ 5,000. Because petitioners did not establish the account to which the additional $ 1,000 of the loan was deposited, and because, as petitioner testified, Mr. Clayvon "deals in cash," we find that only $ 5,000 of the loan was deposited by petitioners and should therefore be subtracted in determining their gross income for 1985.
Every taxpayer is required to maintain records sufficient to enable him or her to determine taxable income.
Petitioners admittedly did not maintain a formal set of books and records, but instead opted to use file folders to capture the information needed to determine their taxable income. These file folders included many items which petitioner, as an accountant who prepared income tax returns for others, knew not to be deductible in determining taxable income. Petitioner testified that he used bank statements in*507 the place of a cash receipts journal, and was able to identify supposed nonincome items from memory. He vaguely referred to cards on which he maintained records of rental income received from each tenant, but did not produce them.
Therefore, we find petitioners' records to be wholly inadequate in determining taxable income. Respondent's use of the bank deposit method to reconstruct petitioners' gross income is appropriate.
Once respondent has determined a deficiency based on the bank deposit method, his conclusions are presumed to be correct, and petitioner has the burden to show that various deposits do not constitute income.
Petitioner partially relied on his own testimony to prove the source of several deposits to be nontaxable. We are not bound to accept petitioner's testimony, especially when his testimony is improbable, unreasonable, *508 or questionable.
Petitioner's testimony regarding income from his rental units is credible. The eviction proceedings that petitioner documented roughly correspond to the unpaid rent which would have been collected in the years in issue. However, petitioner's testimony regarding other sources of his gross income is not credible. We find the source to be his accounting business. We doubt that an accountant, who not only provides financial advice to his clients, but who is also employed by the county of Los Angeles as head of a department that prepares annual budgets, would remain in a business that incurred consistent losses as reported by petitioner.
Therefore, we find petitioners' gross income for 1983 *509 and 1985 to be understated by $ 8,985 and $ 992, respectively. See appendix A for our computation for 1983. 3
The sources of petitioner's unreported income for 1983 are: (1) Interest income (earned on refund of 1981 Federal income taxes) -- $ 156; and (2) operation of his accounting, tax return preparation, and notary services business -- $ 8,829.
The sources of petitioners' unreported income for 1985 are: (1) Condemnation award from Caltrans -- $ 1,300; (2) interest income -- $ 544; and (3) petitioner's accounting, tax return preparation, and notary service business -- $ 1,773.
C.
Petitioner has been engaged in the accounting, tax return preparation, and notary services business for almost 20 years. This business was operated as a sideline to his main source of income, *510 his position with the county of Los Angeles. In his tax returns for 1983 through 1985, petitioner claimed losses of $ 7,504, $ 7,498, and $ 4,805, respectively, after deducting expenses for those years of $ 17,454, $ 14,028, and $ 10,305, respectively. Respondent disallowed all but a small portion of the claimed deductions.
Respondent argues that petitioner was not engaged in an accounting, tax return preparation, and notary service business during the years at issue, apparently on the theory that petitioner did not have a profit objective.
It is noted that an accounting, tax return preparation, or notary service activity is not the sort from which one normally derives personal pleasure or recreation. Petitioner is well trained to carry on this activity, and expended great amounts of time in the process. We find that he was engaged in his accounting, tax return preparation, and notary service business for a profit.
At trial, petitioner presented evidence in attempts to corroborate his deductions. However, the amount he was able to prove fell far short of the amount he deducted on his tax returns. Several of the receipts were illegible. For example, photocopies of receipts*511 supposedly for parking fees were either blank or too dark to read. Other receipts were for items purchased by "Marvin Minter," or "Marv," who is petitioner's father, or "Tax Methods Company," a fictitious name registered by petitioner's father. Payments for telephone service were admittedly for service at petitioner's home. Several of the deductions were for clearly personal items, such as dry cleaning, groceries, infant wear, toys at Christmas time, or a subscription to "Road and Track" magazine. Such personal items are not deductible. Sec. 262. Of the items that were clearly related to accounting activity, petitioner's evidence fell short of the amount deducted.
While we may estimate the amount of allowable deductions where there is evidence that deductible expenses were incurred,
We find that petitioner is entitled to deductions attributable to his accounting, tax return preparation, and notary services business for 1983 through 1985 in the amounts of $ 1,122, *512 $ 670, and $ 892, respectively. See appendices B, C, and D for our computations.
D.
Copetitioner registered a fictitious name for her computer consulting business on October 23, 1985. Petitioner testified that copetitioner engaged in this activity on an intermittent basis until that date. Respondent has impliedly conceded that copetitioner was engaged in this business for a profit, as he did not raise the issue at trial or in his brief.
For 1985 petitioners deducted a loss of $ 3,965 from copetitioner's business after claiming expenses of $ 5,215. Respondent disallowed all of the expenses; petitioners and respondent did not stipulate to any of the expenses.
Based on our analysis, we find that copetitioner is entitled to deduct $ 1,466 of expenses for her computer-consulting business. See appendix E for our computations.
E.
Petitioner has owned rental real estate since 1976. During all periods relevant to this case, he owned the properties at 12030-36 South Figueroa St., Los Angeles, California (Property 1), 441 West 121st Street, Los Angeles, California (Property 2), and 1626 Pennsylvania Avenue, *513 Los Angeles, California (Property 3). In 1984 petitioners purchased a duplex at 1080-82 South Sycamore Avenue, Los Angeles, California (Property 4). They lived in one-half of the property, and rented the other half to a tenant.
Petitioners claimed losses from these properties in 1983 through 1985 of $ 35,175, $ 55,409, and $ 47,518, respectively, after deducting expenses of $ 43,875, $ 67,059, and $ 56,928, respectively. Petitioners and respondent have stipulated to expenses for the years in issue of $ 26,962, $ 37,895, and $ 28,422, respectively. 4
As with their respective accounting activity and computer-consulting expenses, petitioners were unable to corroborate all*514 of the expenses on which they and respondent could not agree. Several receipts were illegible. Others lacked sufficient explanation to be credible. For example, petitioner presented a check payable to "Gary Toone." No explanation was offered as to the reason Mr. Toone was paid. A receipt from Photomat was entered into evidence; petitioner's explanation was that he needed a photograph for an appraisal of one of his properties. However, he did not present a copy of the appraisal, or a proof of payment made to the appraiser.
Based on our analysis, we find that petitioners overstated their rental expenses for each year in issue. They are entitled to rental property expenses for 1983 through 1985 of $ 26,962, $ 38,483 and $ 36,272, respectively. See appendix F for our computations.
F.
Petitioner claimed a $ 2,000 deduction each year at issue for a contribution to an IRA. Respondent denied the deductions for 1983 and 1985.
1.
In 1983 petitioner contributed $ 2,000 to his IRA for 1982. He made no other contributions in 1983.
On July 2, 1984, petitioner contributed $ 2,000 to his IRA, and deemed this to be his 1983 contribution. *515 Respondent has denied the deduction, since it was not paid on or before April 15, 1984. Petitioner made no other contributions to his IRA in 1984.
Respondent denied the deduction based on his reading of section 219(f)(3)(A),
Section 219(f)(3)(A), as in effect for 1983, allowed taxpayers to make an IRA contribution up until the extended due date for the tax return. Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 311(a), 95 Stat. 274. For contributions made after December 31, 1984, the Deficit Reduction Act of 1984 required taxpayers to make their contributions on or before the unextended due date of the tax return, or April 15 in the case of a calendar year taxpayer. Pub. L. 98-369, sec. 147, 98 Stat. 687.
On April 16, 1984, petitioner filed Form 4868, applying for an extension of the due date of his 1983 Federal tax return. (April 15, 1984, was a Sunday, so the due date for calendar year taxpayers to file their 1983 tax returns was April 16, *516 1984.) Sec. 7503; sec. 301.7503-1(a), Proced. & Admin. Regs. On the extension request, petitioner estimated that his tax liability was $ 790; since he paid $ 4,672 through payroll tax deductions, he reported that no tax was due with the extension form.
To be valid, an extension request must meet the following requirements (
Even though petitioner filed his extension request on April 16, 1984, and used Form 4868, he did not make a "bona fide and reasonable estimate of his tax liability based *517 on the information available to him at the time he [made] his request for extension."
Petitioner, as an accountant, should have known that his tax liability was actually far more than $ 790, as reported on Form 4868. We identify herein approximately $ 40,000 of unreported income and overstated deductions for 1983 alone. Such an amount should have made petitioner aware that his tax liability was unreasonably estimated at $ 790. Since the information is available to us today, it certainly was available to petitioner in 1983.
Therefore, we find petitioner's extension request was invalid. The due date for petitioner's IRA contribution was not extended. As he paid his contribution on July 2, 1984, we find that it was not made timely. Respondent's disallowance of the IRA deduction for 1983 is therefore sustained. 5
*518 2.
Respondent concedes that petitioner paid $ 2,000 as his 1984 IRA contribution before April 15, 1985, and does not contest the deduction. Petitioner made no other payments to his IRA in 1985.
Petitioner paid $ 2,000 as his 1985 IRA contribution on April 2, 1986. Although the carbon copy of the check petitioner used to make the payment is arguably difficult to read, petitioner presented a copy of the bank statement for his IRA, which covers the period January 1, 1986, to January 1, 1987. This bank statement shows a payment made by petitioner for his 1985 IRA contribution on April 2, 1986.
Therefore, we find that he is entitled to a deduction for the contribution.
G.
Petitioner deducted his distributive share of the losses incurred by Minter-Clayvon Company (the partnership) for 1983 through 1985 in the amounts of $ 4,250, $ 4,850, and $ 4,043, respectively. Respondent disallowed these deductions on the theory that petitioner's basis in the partnership was zero.
Petitioner testified that each partner originally contributed $ 35,000 to the partnership's capital, but his statement is inconsistent with the settlement statement.
Petitioner*519 presented no credible evidence of amounts he contributed to the partnership's capital since the property was purchased. His protestations to the contrary, the partnership information returns do not reflect sufficient information to prove petitioner's basis, as they are replete with mathematical errors and inconsistencies. For each year, the amount reflected in the balance sheet as "Partners' Capital Accounts" does not equal the balance reflected in the "Reconciliation of Partners' Capital Accounts" section of the information return. In fact, the balance sheet reflects a positive balance in the capital accounts, whereas the reconciliation reflects a negative balance; no explanation was given in any of the 3 years for this inconsistency.
On each 1983 Schedule K-1, on which the partnership was to report transactions in each partner's capital account, the reconciliation of the total partnership capital is copied. No detail is reported as to the amount of capital contributed by each partner.
The closing balance sheet on the 1984 partnership information return is completely different from the opening balance sheet on the 1985 partnership information return. Petitioner, as an accountant, *520 should have known that the closing balance from one year should equal the opening balance of the next.
Section 704(d) limits the deduction of a partner's distributive share of partnership loss to the partner's adjusted basis in the partnership at the end of the partnership year.
Petitioner contributed no more than $ 3,738 to the partnership when it was formed in 1977. 6 He presented no evidence of any capital contributions since then. Petitioner's share of the partnership's liability at December 31, 1983, 1984, and 1985 was $ 12,075, $ 12,495, and $ 12,240, respectively. He testified that the partnership consistently lost approximately $ 4,000 per year. At that rate, his adjusted basis in the partnership was less than zero by 1981.
As he did not repay this deficit capital amount, petitioner's distributive share of the partnership's losses are not deductible for the years at issue.
H.
On petitioners' 1983 and 1984 tax returns, *522 they deducted $ 365 and $ 310, respectively, as miscellaneous itemized deductions. Petitioner and respondent stipulated to miscellaneous itemized deductions for 1983 and 1984 under section 63(f) of $ 514 and $ 1,056, respectively, and we so find.
Because petitioners occupied 44 percent of Property 4, we disallowed that portion of the expenses for that property as deductions against petitioners' rental income. The real estate taxes and the mortgage interest so allocated are deductible by petitioners as itemized deductions, as follows:
1983 | 1984 | 1985 | |
Real Estate Taxes | N/A | $ 453 | $ 816 |
Mortgage Interest | N/A | $ 5,250 | $ 5,862 |
I.
Respondent determined petitioner is liable for additions to tax for fraud under
The existence of fraud is a question of fact to be resolved upon consideration of the entire record.
Respondent bears the burden of proof as to additions to tax for fraud under
Petitioner understated gross income by $ 8,985 and $ 992 in 1983 and 1985, respectively. He overstated deductions by approximately $ 40,000 for each year in issue. Given petitioner's knowledge and experience, such actions can only be explained by fraudulent intent.
A taxpayer's experience and knowledge, especially knowledge of the tax laws, is a further justification for the inference of fraud.
Courts have relied on a number of indicia of fraud in deciding
Petitioner is an accountant who prepared income tax returns for others. He has a bachelor's and a master's degree in business. He enrolled in continuing education classes throughout the years at issue. He certainly knew the tax laws to which he was subject. Likewise, the paucity of credible records maintained by Mr. Minter is a clear indication of his intent to conceal petitioners' tax liability. Presentation of photocopies of duplicate copies of checks, of illegible "receipts" for supposed expenditures, of clearly personal items such as infant wear, of childbirth classes and dry cleaning, and of receipts issued to petitioner's father*527 was directed at misleading respondent and this Court as to the true extent of petitioner's tax liability. It was only after this Court warned petitioner during pretrial discovery that he must cooperate with respondent, or else risk having respondent's proposed facts accepted as established, that petitioner agreed to constructively discuss the issues.
Most of petitioner's explanations of his actions were implausible or incredible. He expected the Court to believe that he was able to identify the source of certain deposited items, up to 7 years after the fact, simply based on memory. His testimony regarding one receipt from a general merchandise store is especially troubling. He expected us to accept that he was able to identify at trial a receipt from 1984 in the amount of $ 12.72 as being for roofing paper. We are not persuaded.
For the reasons stated above, we find respondent proved by clear and convincing evidence that petitioner fraudulently intended to evade taxes which he knew to be owing, and that his actions were directed at concealing his tax liability.
Therefore, petitioner is liable for the additions to tax for fraud under
As a general rule, if a husband and wife file a joint income tax return, they are jointly and severally liable for the tax computed on the aggregate income, including additions to tax and penalties.
Respondent asserted in the notice of deficiency that, in the alternative, petitioners are liable for the additions to tax for negligence or intentional disregard of rules and regulations under
J.
Petitioners did not have substantial authority for their positions in any year at issue. They did not adequately disclose any facts pertaining to the understated gross receipts or overstated deductions on any of the tax returns as filed, or on any statements attached to such returns. Therefore, after petitioners' tax liability has been recomputed based on the foregoing under Rule 155, if such liability exceeds the tax shown on petitioners' *531 tax return by the greater of 10 percent of the correct tax for that year or $ 5,000, petitioners will be liable for the
To reflect our findings and conclusions herein,
Appendix A
Computation of Unreported Income
1983 | |
Net Deposits | $ 81,224 |
Less: Income reported on | |
income tax return: | |
Net Wages | (31,669) |
Interest Income | (9,350) |
Dividend Income | -0- |
Accounting Activity and/or | (9,950) |
Computer Consulting Income | |
Rental Income | (8,700) |
Balance | 21,555 |
Less: Proceeds from non- | |
taxable sources | |
1981 Federal Tax Refund | (4,070) |
1983 and 1984 Federal | |
Tax Refunds | -0- |
1983 and 1984 State | |
Tax Refunds | -0- |
Loan from Edward Law | (8,500) |
Loan from Michael Clayvon | -0- |
Unreported Income | $ 8,985 |
Appendix B
Computation of 1983 Accounting Business Expenses -- Petitioner
Shown below are the deductions which petitioner proved for 1983, or for which he presented sufficient evidence to enable this Court to estimate his true expenses, and which we therefore allow:
Total Deducted | Total | ||
on Tax Return | Allowed | Explanation | |
Automobile Expense | $ 5,146 | $ 710 | A |
Office Rent | 3,600 | -0- | B |
Telephone | 366 | -0- | B |
Accounting Supplies | 444 | 90 | C |
Travel and Entertaining | 1,150 | -0- | D |
Business Meals | 888 | -0- | D |
Postage | 115 | 17 | E |
Education | 2,036 | 189 | C |
Office Expense | 233 | 11 | C |
Repairs and Maintenance | 775 | -0- | B |
Secretarial | 876 | -0- | B |
Equipment Depreciation | 1,250 | -0- | B |
Journals and Publications | 575 | 105 | C |
Totals | $ 17,454 | $ 1,122 |
*532 A Petitioner claimed $ 5,146 as automobile expenses relating to the accounting business. Petitioner testified that he computed his accounting-activity-related automobile expenses based on the actual amount he spent. Petitioner maintained no log, book, maintenance records, or other contemporaneous document attesting to the usage of the automobiles. Petitioner incurred $ 2,806 of total automobile expense for 1983, before allocation between his accounting business, his rental properties, and his personal use. He testified only as to the number of miles he drove for the rental activity. Therefore, we allocated his total expense to each activity based on the relative percentage of his gross income derived from each activity, as follows:
Gross | Relative | Automobile | |
Income | Percentage | Expense | |
Wages and Interest Income | $ 46,828 | 63.0% | $ 1,768 |
Accounting Income | 18,779 | 25.3 | 710 |
Rental Income | 8,700 | 11.7 | 328 |
Totals | $ 74,307 | 100.0% | $ 2,806 |
See
We find the portion of his automobile expense allocated to his wages and*533 interest income is to be a nondeductible personal expenditure, sec. 262; the portion of his automobile expense allocated to his rental activities will be discussed below; the portion of his automobile expense allocated to his accounting business is deductible.
1.
2.
3.
4.
1.
2.
3.
4.
Petitioner maintained no such *536 records. Consequently, he is not allowed a deduction for these expenditures, as follows:
1.
Appendix C
Computation of 1984 Accounting Business Expenses -- Petitioner
Shown below are the deductions which petitioner proved for 1984, or for which he presented sufficient evidence*537 to enable this Court to estimate his true expenses, and which we therefore allow:
Total Deducted | Total | ||
on Tax Return | Allowed | Explanation | |
Automobile Expense | $ 4,981 | $ 192 | A |
Office Rent | 3,600 | -0- | B |
Telephone | 164 | -0- | B |
Accounting Supplies | 212 | 85 | C |
Travel and Hotel | 710 | -0- | D |
Dinners and Meals | 540 | -0- | D |
Postage Expense | 95 | 11 | E |
Education Expense | 854 | 177 | C |
Office Supplies | 198 | -0- | B |
Repairs and Maintenance | 614 | -0- | B |
Secretarial and Clerical | 475 | -0- | B |
Equipment Depreciation | 1,250 | -0- | B |
Trade Journals and | |||
Publications | 335 | 205 | C |
Totals | $ 14,028 | $ 670 |
A Petitioner claimed $ 4,981 as automobile expenses relating to the accounting business. Petitioner testified that he computed his accounting-activity-related automobile expenses based on the actual amount he spent. Petitioner maintains no log book, maintenance records, or other contemporaneous document attesting to the usage of the automobiles. Petitioner incurred $ 2,669 of total automobile expense for 1984 before allocation between his accounting business, his rental properties, and his personal use. He only testified as to the number of miles he drove for the rental activity. *538 Therefore, we allocated his total expense to each activity based on the relative percentage of his gross income derived from each activity, as follows:
Gross | Relative | Automobile | |
Income | Percentage | Expense | |
Wages and Interest Income | $ 71,599 | 79.8% | $ 2,130 |
Accounting Income | 6,500 | 7.2 | 192 |
Rental Income | 11,650 | 13.0 | 347 |
Totals | $ 89,749 | 100.0% | $ 2,669 |
See
We find the portion of his automobile expense allocated to his wages and interest income to be a nondeductible personal expenditure, sec. 262; the portion of his automobile expense allocated to his rental activities will be discussed below; the portion of his automobile expense allocated to his accounting business is deductible.
1.
2.
3.
4.
5.
1.
2.
3.
Petitioner maintained no such records. Consequently, he is not allowed a deduction for these expenditures, as follows:
1.
Appendix D
Computation of 1985 Accounting Business Expenses -- Petitioner
Shown below are the deductions which petitioner*542 proved for 1985, or for which he presented sufficient evidence to enable this Court to estimate his true expenses, and which we therefore allow:
Total Deducted | Total | ||
on Tax Return | Allowed | Explanation | |
Automobile Expense | $ 3,333 | $ 399 | A |
Office Rent | 3,600 | -0- | B |
Stationery and Supplies | 475 | 190 | C |
Dinners and Meals | 310 | -0- | D |
Education | 683 | 303 | C |
Clerical and Typing | 404 | -0- | B |
Cleaning and Maintenance | 180 | -0- | B |
Small Tools and Repairs | 201 | -0- | B |
Equipment Depreciation | 1,044 | -0- | B |
Gifts and Promotion | 75 | -0- | B |
Totals | $ 10,305 | $ 892 |
A Petitioner claimed $ 3,333 as automobile expenses relating to the accounting business. Petitioner testified that he computed his accounting business-related automobile expenses based on the actual amount he spent. Petitioner maintained no log book, maintenance records, or other contemporaneous document attesting to the usage of the automobiles. Petitioners incurred $ 5,398 of total automobile expense for 1985 before allocation between petitioner's accounting business, copetitioner's computer consulting business, their rental properties, and their personal use. Petitioner only testified as to the number*543 of miles he drove for the rental activity. Therefore, we allocated his total expense to each activity based on the relative percentage of their gross income derived from each activity, as follows:
Gross | Relative | Automobile | |
Income | Percentage | Expense | |
Wages, Interest, and | |||
Dividend Income | $ 79,558 | 80.5% | $ 4,345 |
Accounting Income | 7,273 | 7.4 | 399 |
Computer Consulting | |||
Income | 1,250 | 1.3 | 70 |
Rental Income | 10,710 | 10.8 | 584 |
Totals | $ 98,791 | 100.0% | $ 5,398 |
See
We find the portion of their automobile expense allocated to wages, interest and dividend income to be a nondeductible personal expenditure, sec. 262; and the portion of their automobile expense allocated to rental activities will be discussed below. The portion of his automobile expense allocated to his accounting business is deductible.
1.
2.
3.
4.
1.
2.
D
Petitioner maintained no such records. Consequently, he is not allowed a deduction for these expenditures.
*546
Appendix E
Computer Consulting Expenses -- CoPetitioner
Shown below are the expenses claimed for copetitioner's computer consulting business in 1985, and the portion of each allowed:
Total Deducted | Total | ||
on Tax Return | Allowed | Explanation | |
Automobile Expenses | $ 2,796 | $ 70 | A |
Stationery and Supplies | 396 | 658 | B |
Rental Automobiles | 289 | 0 | B |
Books and Publications | 111 | 155 | B |
Telephone Expense | 333 | 0 | C |
Depreciation -- Equipment | 1,250 | 533 | D |
Legal Filing and Costs | 40 | 50 | E |
Totals | $ 5,215 | $ 1,466 |
A As we discussed earlier, petitioners presented receipts for automobile expenses for 1985 which totaled $ 5,398. Based on our above computation, copetitioner is allowed a deduction for automobile expense of $ 70.
B We allowed the portion of the expense which was stipulated by the parties, or which was proven by petitioners, as the case may be.
C Copetitioner deducted $ 333 as telephone expenses for the year. However, she presented no evidence of business usage of the telephone, including no records as to what portion of the amount deducted was for business purposes, or what portion was for the basic line charge of a personal telephone. Therefore, *547 we find that none of the claimed deduction is allowed.
D Copetitioner deducted $ 1,250 as depreciation of equipment, computed under the straight-line method of depreciation over an estimated useful life of 5 years. The cost of the equipment used by copetitioner in this computation was $ 6,250. However, copetitioner presented proof of $ 5,334 paid for equipment. Petitioners presented no log or other contemporaneous record of the portion of this equipment that was used for business purposes. Computer equipment is included in the definition of "listed property." In spite of the fact that copetitioner did not maintain a log to enable us to determine the business usage of her computer equipment, we find that 50 percent of its use was for her computer consulting business. Nonadherence to the recordkeeping requirement would make a finding of zero business usage reasonable. However, given that respondent did not argue that copetitioner was not engaged in the business for a profit, and that petitioner generated $ 1,250 from computer consulting, we find the equipment was at least partially used in copetitioner's business. See Therefore, we find copetitioner is allowed a depreciation deduction of $ 533 for 1985 ($ 5,334 at 50 percent business usage on a straight-line basis over 5 years.) Such costs are not "start-up expenditures" as defined by section 195(c)(1), as she was engaged in the business before the costs were incurred, albeit intermittently. Therefore, we find that the costs are deductible.
Appendix F
Rental Property Expenses
Shown below are the deductions for petitioners' rental properties, which they corroborated, or which were stipulated by the parties, and which are therefore allowed:
Explanation | 1983 | 1984 | 1985 | |
Automobile Expense | A | $ 347 | $ 584 | |
Cleaning and Rubbish | 553 | 612 | ||
Depreciation | B,C | 12,589 | 13,268 | |
Gardening | 2,191 | 121 | ||
Insurance | 1,236 | 1,178 | ||
Interest Expense | D | 16,948 | 16,829 | |
Legal and Accounting | N/A | N/A | ||
Pest Service | 177 | 250 | ||
Plumbing | B | 377 | 141 | |
Painting | B | -0- | 162 | |
Roofing | B | N/A | N/A | |
Replacements | B | -0- | -0- | |
Utilities | 778 | 1,300 | ||
Taxes | 2,662 | 1,782 | ||
Office Supplies | -0- | N/A | ||
Repairs | B | 488 | N/A | |
Electric | B | 92 | -0- | |
Amortization | 45 | 45 | ||
Telephone | N/A | -0- | ||
Totals | 26,962 | 38,483 | 36,272 | |
Amount Deducted | 43,875 | 1 67,059 | 2 56,928 | |
Amount Disallowed | 3 $ 16,913 | $ 28,576 | $ 20,656 |
*551 A Petitioner claimed automobile expenses for his rental activity for 1984 and 1985 based on mileage supposedly driven, in the amounts of $ 2,949 and $ 2,873, respectively. He claims to have driven approximately 13,000 miles each year in this regard. We find this contention wholly incredible, given that petitioner worked 40 hours per week at his position with the county of Los Angeles, and maintained a sideline accounting business. There are simply not enough hours in the day to have done all this. See The issue of petitioner's credibility notwithstanding, by his own admission, petitioner simultaneously used more than one vehicle in his rental activities. He is therefore precluded from using the optional mileage allowance. Therefore, petitioners must base their deduction for automobile expenses in rental activities on actual expenses. The amount of such deductions were determined earlier to be $ 347 and $ 524 for 1984 and 1985. Over the years at issue, petitioners documented or *553 stipulated to $ 3,058 and $ 1,170 of repairs or maintenance to the various systems in their rental properties. 8 Of this total, $ 2,101 and $ 867 was paid for "replacements."
We find that the amounts paid for repairs or maintenance were for deductible repairs, but the cost of the replacements must be capitalized, and depreciated in accordance with section 168. See
C Petitioner stated that he agreed to respondent's determination of the depreciation deduction for each year at issue. For 1985, petitioner presented evidence of $ 2,553 paid for carpets. As he accepted respondent's determination of the depreciation deduction, no additional deduction was noted above.
D Although petitioner did not present documentation of the amount paid for interest expense for 1985 for Property 4, he presented evidence of the balance of the loan at December 31, 1985, the interest rate in effect throughout 1985, and the payment of each monthly payment for 1985. Based on this evidence, we computed the interest paid*554 by petitioners on their loan for Property 4 to be $ 13,322, and allocated 44 percent to the personal-use portion of the property. The amount noted above as interest expense documented by petitioner is therefore comprised of the following items:
Amount Stipulated for Property 1 | $ 1,305 |
Amount Stipulated for Property 3 | 8,064 |
Amount Determined for Property 4 | 7,460 |
Total | $ 16,829 |
Appendix G
Summary of Adjustments
The following adjustments are to be made to petitioners' tax returns as filed, without regard to intervening notices of deficiency, or concessions made by the parties:
1983 | 1984 | 1985 | |
1 Gross Income | |||
Unreported Income | |||
for each year is | |||
comprised of the | |||
following amounts: | |||
Accounting Activity | $ 8,829 | N/A | |
Condemnation Award | N/A | N/A | |
Interest Income | 156 | N/A | |
Totals | $ 8,985 | N/A | 1 $ 992 |
2 Accounting Activity | |||
Expenses-Petitioner | |||
The expenses | |||
disallowed for | |||
each year total | |||
as follows: | $ 16,332 | $ 13,358 | $ 9,413 |
3 Computer Consulting | |||
Expenses | |||
The expenses | |||
disallowed | |||
for 1985 are | |||
as follows: | N/A | N/A | $ 3,749 |
4 Rental Property | |||
Expenses | |||
a. The expenses | |||
disallowed for | |||
each year are | |||
as follows: | 2 $ 16,913 | $ 28,576 | $ 20,656 |
4 Rental Property | |||
b. Petitioners are | |||
entitled to | |||
deductions for | |||
depreciation of | |||
replacements, | |||
placed in service | |||
in the year | |||
indicated, with | |||
the following | |||
bases: | $ 648 | $ 2,101 | $ 867 |
5 Individual Retirement | |||
Account | |||
Petitioner's deduction | |||
for IRA contribution | |||
is disallowed for | |||
1983, but allowed for | |||
1985. Therefore, | |||
the following | |||
adjustments are | |||
required: | $ 2,000 | N/A | $ -0- |
6 Partnership Loss | |||
The pass-through | |||
loss deductions | |||
claimed by | |||
petitioner are | |||
disallowed in | |||
their entirety | |||
as follows: | $ 4,250 | $ 4,850 | $ 4,043 |
7 Itemized Deductions | |||
a. Petitioners are | |||
entitled to | |||
miscellaneous | |||
itemized deduc- | |||
tions in addition | |||
to the amount | |||
originally | |||
deducted, as | |||
follows: | $ 149 | $ 746 | N/A |
7 Itemized Deductions | |||
b. Petitioners are | |||
allowed the | |||
following | |||
amounts in | |||
addition to | |||
the amounts | |||
originally | |||
deducted: | |||
i. Real Estate | |||
Taxes | N/A | $ 187 | $ 188 |
ii. Mortgage | |||
Interest | N/A | $ 3,800 | $ 1,405 |
1. Unless otherwise noted, all section references are to the Internal Revenue Code, as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
*. 50 percent of the interest due on $ 54,628, $ 25,846 and $ 34,901, respectively.↩
*. 50 percent of the interest due on $ 54,628, $ 25,846 and $ 34,901, respectively.↩
2. Petitioners made a transfer on November 12, 1985, in the amount of $ 2,142, from their account at Engineers Federal Credit Union, account number 30596690-02 to an account at Public Services Federal Credit Union, account number 554382-9.↩
3. The evidence indicates that unreported income for 1985 was $ 3,617. However, since respondent did not move to amend the pleadings to conform to the evidence under Rule 41(b), we will not do so.↩
4. Respondent has implicitly conceded that petitioners were engaged in their rental activities for a profit. See
5. Since respondent did not raise a possible issue of excess contribution under sec. 4973, we decline to do so.↩
6. Petitioner testified that he and his partners made contributions to the partnership on an equal basis. Petitioner therefore contributed one-half of the total contributed by the partners at the inception of the partnership, or $ 3,738.↩
7. See, e.g.,
1. Petitioners stated on their 1984 tax return that they occupied 15 percent of the space at Property 4. The amount reflected here represents the deduction claimed after the 15-percent allocation.
Petitioners and respondent stipulated that 44 percent of Property 4 was occupied by petitioners. The deductions allowed are after the allocation for this personal use.↩
2. Petitioners stated on their 1985 tax return that they occupied 33 percent of the space at Property 4. The amount reflected here represents the deduction claimed after the 33-percent allocation. Further, petitioners deducted only $ 56,928, even though the expenses they listed totalled $ 57,428.
Petitioners and respondent stipulated that 44 percent of Property 4 was occupied by petitioners. The deductions allowed are after the allocation for this personal use.↩
3. The amount determined by the Court was less then the amount stipulated to by the parties. Since respondent did not move to amend the pleadings to conform to the evidence under Rule 41(b), this Court will not increase petitioners' liability.↩
8. These amounts included expenditures for plumbing, painting, roofing, electrical, or general repairs.↩
1. These amounts were stipulated by the parties. The Court's findings in these instances would, in effect, increase the petitioners' liability.↩
2. See
Halle v. Commissioner of Internal Revenue , 175 F.2d 500 ( 1949 )
Hague Estate v. Commissioner of Internal Revenue , 132 F.2d 775 ( 1943 )
Boyett Et Ux. v. Commissioner of Internal Revenue , 204 F.2d 205 ( 1953 )
Jay J. And Rose B. Armes v. Commissioner of Internal Revenue , 448 F.2d 972 ( 1971 )
Chris D. Stoltzfus and Irma H. Stoltzfus v. United States , 398 F.2d 1002 ( 1968 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Stephen Bolaris and Valerie H. Bolaris v. Commissioner of ... , 776 F.2d 1428 ( 1985 )
Olaf C. Akland, and Bertha A. Akland v. Commissioner of ... , 767 F.2d 618 ( 1985 )
Robert P. Lord, Appellee-Cross-Appellant v. Commissioner of ... , 525 F.2d 741 ( 1975 )
Joseph Solomon v. Commissioner of Internal Revenue , 732 F.2d 1459 ( 1984 )
United States v. Robert E. Helina , 549 F.2d 713 ( 1977 )
Thomas W. Banks v. Commissioner of Internal Revenue , 322 F.2d 530 ( 1963 )
Lovell and Hart, Inc. v. Commissioner of Internal Revenue , 456 F.2d 145 ( 1972 )
Estate of Mary Mason, Deceased, Herbert L. Harris, ... , 566 F.2d 2 ( 1977 )
Sally Conforte v. Commissioner of Internal Revenue, Joseph ... , 692 F.2d 587 ( 1982 )
Robert W. Bradford v. Commissioner of Internal Revenue , 796 F.2d 303 ( 1986 )
Spies v. United States , 63 S. Ct. 364 ( 1943 )
Grace M. Powell, of the Estate of O. E. Powell, Deceased v. ... , 252 F.2d 56 ( 1958 )