DocketNumber： No. 24610-96; No. 3155-98
Citation Numbers： 79 T.C.M. 1269, 2000 Tax Ct. Memo LEXIS 1, 2000 T.C. Memo. 1
Judges： "Ruwe, Robert P."
Filed Date： 1/3/2000
Status： Non-Precedential
Modified Date： 4/18/2021
Decisions will be entered under Rule 155.
MEMORANDUM OPINION
RUWE, JUDGE: In these consolidated cases, respondent determined deficiencies in petitioner's Federal income taxes and accuracy-related penalties as follows:
Accuracy-related Penalty
________________________
Docket No. Year Deficiency
__________ ____ __________ ____________
24610-96 1993 $ 78,220 $ 15,644
3155-98 1994 80,056 16,011
After concessions, 2000 Tax Ct. Memo LEXIS 1">*2 the issues for decision are: (1) Whether petitioner is entitled to various deductions claimed on Schedule C in 1993 and 1994; (2) whether petitioner is entitled to claim a Schedule A deduction of $ 5,280 in 1994; and (3) whether petitioner is liable for the accuracy-related penalty under
BACKGROUND
During 1993 and 1994, petitioner was engaged in the practice of law. Petitioner operated two law offices that were located at 5526 Spruce Street, Philadelphia, Pennsylvania, and 4429 Westfield Avenue, Pennsauken, New Jersey.
Petitioner reported 1993 and 1994 gross receipts and expenses associated with his law practice on Schedules C. On his 1993 Schedule C, petitioner reported gross receipts of $ 226,739.09 and deductions of $ 220,717. On his 1994 Schedule C, petitioner reported gross receipts of $ 244,569 and expenses of $ 224,480.
In August of 1998, petitioner was notified that these cases were set for the trial session starting on January 11, 1999. The notice contained the Standing Pre-Trial Order requiring petitioner to exchange documents expected to be utilized at trial with respondent at least 15 days prior to the first day of the trial session. Notwithstanding those explicit instructions, petitioner neglected to timely present all such documents. As a result, we excluded certain documents from evidence.
For convenience, we will combine the facts regarding each issue with our opinion.
DISCUSSION
Deductions 2000 Tax Ct. Memo LEXIS 1">*4 are a matter of legislative grace, and the burden of showing the right to deductions is on the taxpayer. See
The Schedule C deductions that remain in issue fall into four broad categories: (1) Office expenses; (2) meals and entertainment; (3) repairs and maintenance; and (4) parking/tolls.
1. OFFICE EXPENSES
Total office expense deductions at issue are $ 73,294.50 for 1993, and $ 23,815.97 for 1994, and fall into two broad categories: (a) Office expense deductions allegedly taken to offset improperly reported income items; and (b) other office expenses.
a. OFFICE EXPENSE DEDUCTIONS ALLEGEDLY TAKEN TO OFFSET IMPROPERLY REPORTED INCOME ITEMS
The first issue is whether petitioner can deduct $ 72,516 and $ 15,956.97 in office expense deductions allegedly taken to offset improperly reported income items in 1993 and 1994, respectively. Petitioner argues that he included nontaxable items in gross receipts and then deducted the same amount on Schedule C as an office expense because the items included in income were nontaxable. From this, we conclude that petitioner acknowledges 2000 Tax Ct. Memo LEXIS 1">*5 that he did not really have $ 72,516 and $ 15,956.97 in office expenditures as he claimed on his returns and that his claimed office expense deductions were false.
According to petitioner, the sources of nontaxable items that he included in his 1993 gross receipts are: $ 6,250 in life insurance proceeds from Cigna, 2000 Tax Ct. Memo LEXIS 1">*6 and $ 65,000 in loan proceeds from Sinh Hang. 2000 Tax Ct. Memo LEXIS 1">*7
Petitioner has not convinced us that he reported nontaxable items in gross receipts. Petitioner testified that he kept a cash receipts journal and bank statements to determine his gross receipts. Petitioner did not provide a copy of his cash receipts journal or any bank statements to show that nontaxable items were in fact included in his gross receipts. Furthermore, petitioner is a tax lawyer 2000 Tax Ct. Memo LEXIS 1">*8 (III) language lessons.
(I). STORAGE FACILITIES
Petitioner claimed storage facility expenses of $ 478 in 1993 and $ 409 in 1994. Petitioner testified that in 1993 he closed an office at Ventnor, New Jersey, and then stored the office furniture at Access Storage. 2000 Tax Ct. Memo LEXIS 1">*9 in 1994. The checks were drawn on the checking account that petitioner maintains for his law practice: "Larry Charles Miller, Attorney at Law". However, petitioner also testified that in the middle of 1994 he moved to a new house and that he also paid household expenses and personal expenses such as credit card debts and automobile expenses from the same checking account. In fact, other than an escrow account, petitioner did not maintain any other checking account.
Assuming that all the checks in fact relate to storage expenses, we have only petitioner's uncorroborated testimony that the expenses were incurred in carrying on a trade or business as opposed to personal expenses incurred in anticipation of, and during, his change of personal residence. Petitioner testified that he was requested to provide respondent with information that would serve to substantiate his claimed office expenses. However, petitioner also testified that he did not attempt to contact Black Horse Self Storage to secure any documentation, even though he signed a lease agreement with the storage facility company. Based on this record, petitioner has not met his burden and established his entitlement to these claimed deductions.
(II). ORIENTAL RUGS AND ART
The third office expense at issue relates to items allegedly purchased by petitioner in 1994. Petitioner testified that he purchased three used oriental rugs for $ 6,050 and art for $ 1,400 and then placed these items in his Pennsauken, New Jersey and Philadelphia, Pennsylvania offices. Petitioner produced copies of two checks, one payable to Togar, Inc., for $ 6,050 and one payable to Lucien Crup for 2000 Tax Ct. Memo LEXIS 1">*10 $ 1,400. Neither check contained a notation regarding its intended purpose.
Petitioner has not proven that these items were purchased and used in his place of business, as opposed to the new home that he purchased in the same year. Petitioner did not provide any invoices which might have confirmed that Togar, Inc., sells oriental rugs and that Lucien Crup sells artwork, and shown a delivery address or the address of petitioner's offices. Given petitioner's experience as a tax attorney and the amount of the deduction at issue, we would have expected petitioner to have such evidence. Petitioner has not proven that he is entitled to the claimed deduction. 2000 Tax Ct. Memo LEXIS 1">*11 provided. Petitioner has not proven that he is entitled to this deduction.
2. MEALS AND ENTERTAINMENT
The next issue is whether petitioner can deduct meals and entertainment expenses of $ 10,270 in 1993 and $ 6,242 in 1994.
Even 2000 Tax Ct. Memo LEXIS 1">*13 if the Court were to view the loss of petitioner's records as a casualty, petitioner has failed to fulfill the additional requirement of reasonably reconstructing records. In an effort to reconstruct his records, petitioner provided copies of several checks payable to Diners Club, Citibank, MBNA, American Express, and one check payable to Claire Bixby. Most, but not all, of the checks 2000 Tax Ct. Memo LEXIS 1">*14 contained a notation indicating that they were for either travel, entertainment, or travel and entertainment. However, petitioner did not provide any information regarding the amount of each expense, the time and place of each activity, the business purpose of the activity, or petitioner's business relationship to the person entertained. Petitioner did not produce copies of the receipts and/or monthly account statements from Diners Club, Citibank, MBNA, or American Express. Rather, petitioner simply asserts that it would have been impossible to reconstruct his meals and entertainment expenses without receipts. We sustain respondent's disallowance of these deductions.
3. REPAIRS AND MAINTENANCE
Petitioner claims repair and maintenance expenses of $ 396.40 in 1993 and $ 5,767.43 in 1994. Petitioner testified that his office incurred water damage, and in order to minimize the cost of repairs, he purchased the materials himself and hired individuals to provide the labor.
To substantiate the deduction for 1993, petitioner provided copies of two checks. One check was for $ 100 and payable to an individual, while the other check was for $ 296.40 and payable to a building and supply store. To substantiate his deductions for 1994, petitioner provided copies of 26 checks totaling $ 5,767.43, all payable to businesses such as Hechinger, Home Depot, and Providence Lighting. All of these businesses sell goods which can be used to repair 2000 Tax Ct. Memo LEXIS 1">*15 or renovate an office or a personal residence.
Petitioner claims he is entitled to a $ 5,280 deduction under Schedule A for home mortgage points in 1994. Respondent disallowed petitioner's deduction for mortgage points due to lack of substantiation.
There is no evidence to substantiate petitioner's deduction for mortgage points in 1994. As a result, we sustain respondent's determination regarding this deduction.
The final issue is whether petitioner is liable for the accuracy-related penalty under
On the basis of the entire record, we conclude that petitioner has not established that there was reasonable cause and that he acted in good faith with respect to the underpayment of tax. Petitioner did not meet his burden of proving that he was not negligent. Respondent's deficiency determination exceeds 10 percent of the amount required to be shown on the return and is more than $ 5,000. We, therefore, hold that petitioner is liable for an accuracy-related penalty of 20 percent of the entire underpayment for each year.
Decisions will be entered under Rule 155.
* * * * *
APPENDIX A
Schedule C Deductions 2000 Tax Ct. Memo LEXIS 1">*18 Initially Disallowed by Respondent
1993 1994
____ _____
Advertising $ 838 $ 860
Bad debt 17,375 18,492
Car & truck 3,360 3,360
Insurance 7,174 1,478
Mortgage -0- 9,561
Office expense 98,939 99,403
Repairs and maintenance 3,014 5,224
Supplies 5,922 2,001
Taxes 100 947
Travel 5,960 3,557
Meals & entertainment 10,270 6,242
Utilities 5,187 5,751
Wages 31,627 34,980
Other expenses -0- 32,624
Postage 2,439 -0-
Filing fees 3,574 -0-
Donations 14,571 -0-
Telephone 7,389 -0-
Parking tolls 2,978 -0-
_______ _______
Amounts disallowed 220,717 224,480
* * * * *
APPENDIX B
Schedule C Deductions Allowed by Respondent
1993 1994
____ ____
Advertising $ 455 -0-
Bad debt 2000 Tax Ct. Memo LEXIS 1">*19 3,883 $ 803
Office expense 1. Initially, respondent disallowed $ 220,717 and $ 224,480 in Schedule C deductions due to lack of substantiation for the tax years 1993 and 1994, respectively. See appendix A. The parties have agreed on the amount of certain of these deductions in their stipulation. Respondent now agrees that petitioner substantiated $ 119,347 and $ 94,499 of the Schedule C deductions for 1993 and 1994, respectively. See appendix B. Petitioner concedes that he received interest income of $ 16 from Minnesota Mutual Life Insurance Co. in 1993, none of which was reported on his tax return. Additionally, the parties agree that petitioner can deduct $ 10,830 under Schedule A for charitable donations made in 1993, not $ 14,571 under Schedule C as initially claimed and disallowed. Finally, the parties agree that petitioner is entitled to claim the following 1994 Schedule A itemized deductions: $ 169 for State taxes and $ 12,843 for charitable contributions.↩ 2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩ 3. Stipulation No. 65 incorrectly indicates that Exhibits 43-J through 68-J, which are copies of 26 of petitioner's checks, totaled $ 12,736. The total amount is $ 5,767.43. 4. Petitioner produced a copy of a death certificate for Ms. Aretha Payne and a life insurance certificate schedule issued by the Life Insurance Co. of North America reflecting a policy limit of $ 25,000 on the life of Aretha Payne. Petitioner testified that upon the death of his mother, he and his three siblings shared the proceeds from the $ 25,000 policy equally. However, the life insurance certificate does not indicate who benefits under the policy.↩ 5. Petitioner testified that he received $ 1,266 from Minnesota Life Insurance. 6. Petitioner produced a copy of a loan agreement for $ 65,000 dated Nov. 1, 1993. The loan agreement consists of a one-page, unnotarized document between petitioner and one of his clients, Sinh Hang. While the agreement does indicate a willingness on the part of Mr. Hang to lend petitioner $ 65,000 in 1993, it does not demonstrate that petitioner received $ 65,000 in loan proceeds. Petitioner did not provide a deposit slip or bank statement, nor did he provide a cash receipts journal entry reflecting that the loan, if received, was included in gross receipts.↩ 7. Petitioner produced a check, drawn on his account, payable to "Lumpkins" in the amount of $ 6,956.97. The check contained a notation indicating that it was for "car repair/State Farm". Petitioner testified that he received $ 6,956.97 from State Farm Insurance and then paid Lumpkins, an auto repair shop, the exact same amount. However, petitioner did not provide a copy of the draft from State Farm Insurance.↩ 8. Petitioner provided a check payable to "Larry Miller Attorney-at-Law" for $ 9,000, with the notation, that in part indicated, that it was for "repayment of loan". The check was drawn on the High Fashions' account in Memphis, Tennessee. Petitioner testified that his sister issued the check. 9. Petitioner testified that he has been practicing law since 1985, and, as part of his practice, he prepares tax returns including Forms 1040 with Schedules C.↩ 10. The deductions in 1993 and 1994 allegedly relate to the same office closing.↩ 11. This amount consists of one check payable to Access Black Horse for $ 132, and two additional checks payable to Black Horse Self Storage for $ 165 and $ 181.50.↩ 12. This amount consists of checks payable to Black Horse Storage and Black Horse Pike Storage for $ 181.50 and $ 228, respectively. 13. We note that even if the expenses were substantiated, they appear to be capital in nature.↩ 14. Petitioner deducted $ 10,270 in 1993 and $ 6,242 in 1994, and respondent disallowed both deductions. In order to substantiate his deductions, petitioner submitted checks drawn in 1993 and 1994 totaling $ 12,286.76 and $ 9,492.32, respectively.↩ 15. Petitioner testified that he was unable to provide receipts for the expenses because they were lost in the process of closing an office and moving to another office. Petitioner testified that he moved his office in 1993. 16. See 17. See 18. The checks in 1993 totaled $ 12,286.76, while petitioner reported total travel, meals, and entertainment expenses of $ 18,797 before application of the limit on meals and entertainment expenses under 19. Petitioner testified that he had some renovation work done on his Pennsauken, New Jersey, office in 1993.↩ 1. Petitioner incorrectly deducted a bad debt expense of $ 17,375 in 1993 on Schedule C. The parties agree that petitioner is not entitled to the deduction and that the items petitioner claimed as a bad debt expense are deductible as office expenses.↩ 2. This consists of $ 21,874 in expenses substantiated by petitioner and the $ 17,375 bad debt expense reclassified as an office expense and allowed as a deduction.↩Footnotes