DocketNumber: Docket No. 23590-14.
Citation Numbers: 113 T.C.M. 1318, 2017 Tax Ct. Memo LEXIS 68, 2017 T.C. Memo. 68
Filed Date: 4/24/2017
Status: Non-Precedential
Modified Date: 4/17/2021
Decision will be entered under
PARIS,
Some of the facts are stipulated and are so found. The first stipulation of facts, the first supplemental stipulation of facts, the second supplemental stipulation of facts, the third supplemental stipulation of facts, and the facts drawn from stipulated exhibits are incorporated herein by this reference. Petitioner resided in Florida when she timely filed her petition.
Petitioner has been a stock broker for more than 30 years. She began her career with a national brokerage house in 1983, and in the year in issue she was employed by Wells Fargo in its brokerage*69 department. During the year in issue *70 she managed a number of individual accounts with total assets of approximately $70 million. Petitioner generally worked at her brokerage office from 12:30 p.m. until the U.S. markets closed each weekday.2 Petitioner was compensated on the basis of her production. For most of her client account portfolios, petitioner was paid a commission up front and then received a "trail" on the investment--a small amount of money received quarterly. A few of her clients preferred to actively trade common stock. That was the only aspect of her brokerage job that required her to be in her office regularly when the U.S. markets were trading.
The U.S. stock markets were closed for various holidays on January 1, January 18, February 15, April 2, May 31, July 5, September 6, November 25, and December 24, 2010.3 Those days in petitioner's calendar are marked with an "H".4 Petitioner did not work in her brokerage office on those days. On the days she did work, petitioner would often stay at the office after the U.S. markets closed at *71 3 p.m. for an hour and a half to do work for the various charities for which she volunteered. Petitioner had one administrative assistant*70 who performed tasks associated with petitioner's brokerage work.
Petitioner frequently met with her brokerage clients during business lunches and dinners. The parties entered into evidence receipts for and stipulated that petitioner paid meals and entertainment expenses of $9,687.87. Most of the receipts include the name or names of the individual or individuals who were entertained. The receipts do not, however, include the business purpose for any of the meals and entertainment. Petitioner testified that the meals and entertainment expenses also included meals associated with her rental real estate activities and the various charities for which she volunteered. There are duplicate receipts, and many of the receipts are illegible. Wells Fargo reimbursed petitioner $500 annually for meals and entertainment expenses related to her client accounts.
In addition to her employment as a stock broker, petitioner owned 12 rental properties and a 50% interest in a vacant lot.5 She had a home office where she *72 completed administrative tasks associated with her rental properties. Understanding the time commitment that would be necessary to manage multiple rental*71 properties, petitioner set aside the morning hours before going to her brokerage office to complete those tasks and to handle other issues concerning her rental real estate. Although all of the properties were titled in petitioner's name, she conducted her rental real estate activities under Windham Agency, LC, a limited liability company (LLC).6
Petitioner managed all aspects of her rental properties, including vetting potential tenants, collecting rent, and evicting tenants when necessary. She also negotiated with, hired, and oversaw contractors and repairmen working on the rental properties. Additionally, petitioner acquired and maintained insurance on each rental property, maintained services and upkeep on vacant rental properties, maintained records for each rental property, and completed the necessary documents for her certified public account (CPA) to prepare her Federal income tax returns. Petitioner was interested in selling some of her rental properties, so *73 she showed certain rental properties to potential buyers. The following table details petitioner's approximate hours of participation for each rental property and the vacant lot in 2010.
Culpepper | 73.5 |
North 9th Ave. | 99.5 |
Via de Luna Road | 107.5 |
Bayshore Drive | 104.5 |
Port Royal | 103 |
St. Alban Road1 | 90 |
Brookside Drive | 73 |
Calle Hermosa | 89.75 |
Fort Pickens Road | 54.5 |
Maldonado | 94 |
Apartment attached to personal residence | -0- |
Lynn Haven (vacant lot) | 12 |
Total | 901.25 |
1 This property is a duplex. Petitioner did not divide the hours between the two properties.
Petitioner credibly testified about the hours she spent in regard to the Maldonado property and the hours she spent in regard to the vacant lot in which she had a 50% ownership interest. The parties entered into evidence summaries of *74 the hours petitioner spent on the other properties listed in the table
Petitioner timely filed her 2010 Form 1040, U.S. Individual Income Tax Return. She reported wage income of $285,437 from Wells Fargo along with the distributions from her retirement accounts of $182,025. She attached a Schedule C, Profit or Loss From Business, to her Form 1040, which reported a loss of $307,933 from her rental properties. Petitioner reported gross receipts or sales of $103,629, which was the amount of income she received from all of her rental properties for that year. On a document attached to petitioner's 2010 Form 1040, she listed the origins of her gross receipts or sales.7 Some amounts had a property address next to them, and other amounts had an entity's name next to them. *75 Petitioner reported total expenses of $411,562 on her Schedule C. Petitioner did not attach an election to treat all of her rental properties as one activity to her 2010 Form 1040.8 Petitioner also claimed a deduction for unreimbursed employee expenses of $49,664 on a Schedule A, Itemized Deductions, attached to her return. The deduction was for meals and entertainment expenses, vehicle expenses, an employee bonus expense, cell phone*74 expenses, and business expenses. Petitioner paid a CPA to prepare her 2010 Form 1040.9
Respondent issued to petitioner a notice of deficiency, determining that her loss from her rental real estate activities was passive and could not be used to offset her Wells Fargo wage income. He moved petitioner's rental real estate income and expenses to Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.), but disallowed deductions for most of petitioner's reported expenses.
Generally, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving it incorrect.
If a taxpayer can prove that she is a qualifying taxpayer in a real property trade or business (i.e., a real estate professional), her rental real estate activities will not be considered per se passive activities. (i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and *78 (ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.
For the Court to decide whether petitioner materially participated in her rental real estate activities, each interest in rental real estate will be treated as a separate activity unless she elected to treat all her rental real estate activities as one activity.
Petitioner admitted that she did not include an election to treat her rental real estate activities as one activity. She argued that she was not required to do so under
Involvement in an activity that is regular, continuous, and substantial will qualify as material participation. (2) The individual's participation in the activity for the taxable year constitutes substantially all of the participation in such activity of all individuals (including individuals who are not owners of interests in the activity) for such year; (3) The individual participates in the activity for*79 more than 100 hours during the taxable year, and such individual's participation in the activity for the taxable year is not less than the participation in the activity of any other individual (including individuals who are not owners of interests in the activity) for such year; or * * * * (7) Based on all the facts and circumstances (taking into account the rules in paragraph (b) of this section), the individual *81 participates in the activity on a regular, continuous, and substantial basis during such year. [
Petitioner had three rental real estate activities in which she had over 100 hours of participation each in 2010--Via de Luna Road, Bayshore Drive, and Port Royal.
According to petitioner's testimony for the Maldonado property and the hours listed in Exhibit 21-J for the Culpepper, North 9th Avenue, St. Alban Road, Brookside Drive, Calle Hermosa, and Fort Pickens Road properties, petitioner participated less than 100 hours in a rental real estate activity for each of those properties in 2010.12 Because she participated less than 100 hours in each of those activities, the material participation tests under
Petitioner ran her rental real estate activities by herself. She handled all aspects of the business from collecting rent to overseeing the work of repairmen. She also met prospective buyers and handled problems with utility and service companies. While petitioner did not physically perform all of the repairs that were necessary at each of those rental properties, she hired multiple contractors and repairmen to handle those repairs. With the repairs made and the number of different individuals involved in those repairs, no one individual participated in the rental real estate activities to the extent petitioner did. The Court is satisfied by petitioner's testimony and other evidence that her participation in each of those activities constituted substantially all of the participation in each. Petitioner meets the material participation test requirements in
Now that the Court has found that petitioner did indeed materially participate in her rental real estate activities, the question of whether petitioner was a real estate professional can be addressed. The Court can easily dispense with the requirement under
Petitioner*83 must also meet the requirement of
Respondent argued that petitioner did not meet the requirement under clause (i) because she did not include the hours she spent meeting with her brokerage clients at lunches and dinners. Exhibit 17-J comprises receipts from petitioner's business lunches and dinners. She credibly testified that some were for her brokerage work while others were connected with her rental real estate activities and charities for which*84 she volunteered. Even if all of the meals were for dinners *86 unrelated to petitioner's rental real estate activities--with an average time of two hours-- more than half of her personal service hours would still be in a real property trade or business. The Court finds that petitioner satisfies the requirements of
If a taxpayer*85 cannot substantiate the amount of a deduction, the Court may still allow the deduction, or a portion of the deduction, if there is an evidentiary basis for doing so.
Petitioner claimed a deduction for unreimbursed*86 employee business expenses of $49,664 on the Schedule A attached to her 2010 return. Respondent disallowed all of petitioner's claimed deduction. The parties stipulated that petitioner paid, but did not stipulate that she substantiated, unreimbursed employee business expenses of $37,740.31 for 2010, which comprises meals and entertainment expenses of $9,687.87, vehicle expenses of $13,747, a bonus paid to an employee of $3,550, cell phone expenses of $592.44, and business expenses of $10,163. Although respondent stipulated that petitioner paid those amounts in 2010, he argued that she did not substantiate any of them.16
Petitioner's meals and entertainment and vehicle expenses are both subject to strict substantiation under
Petitioner also claimed a deduction for vehicle expenses of $13,747 for 27,493 miles she reported as having driven for her brokerage work. Petitioner provided no mileage log to corroborate her reported mileage. Therefore respondent's determination to disallow a deduction for all of petitioner's vehicle expenses reported on Schedule A is sustained.
Petitioner had one administrative assistant that worked for her at Wells Fargo. Petitioner credibly testified that she paid to her assistant bonuses totaling $3,550 in 2010. Twelve checks drawn on Beach Community Bank were made out to petitioner's assistant and signed by petitioner. The amounts of the twelve*88 checks varied from $250 to $450 and totaled $3,550. The name imprinted in the top left corner of each check is "Windham Agency, LLC". There is nothing written on the memo line of any of the checks. The Court finds that petitioner did pay her assistant a bonus of $3,550 for brokerage-related work in 2010.17
The parties stipulated that petitioner paid $592.44 in cell phone expenses for 2010 and entered into evidence petitioner's cell phone bills for 2010.18 While *91 petitioner testified that she used her cell phone for her brokerage work, for her rental real estate activities, and for the charities for which she volunteered, she offered no testimony or other evidence delineating how many cell phone minutes were used for business calls, charity calls, or personal calls. Petitioner has provided no evidentiary basis for applying the
The parties stipulated that petitioner paid "business expenses" of $10,163 for 2010 and entered into evidence receipts totaling that amount. Included with*89 the receipts is a handwritten page entitled "2010 Business Expenses" that groups the receipts into various categories. The Court will use those categories to group and discuss petitioner's expenses.
The fee petitioner paid to the State of Florida to incorporate her real estate business is an allowable expense but should properly be reported with her other rental real estate business expenses. If that amount was not included in the conceded amount of petitioner's rental real estate business expenses, it shall be included in the parties'
Petitioner credibly testified that she had to pay tolls when traveling to and from some of her rental properties and produced toll receipts. No testimony or other evidence was provided that petitioner had to pay tolls for her brokerage work. Therefore petitioner is not allowed a deduction for the toll expenses included as a business expense on her Schedule A. The tolls petitioner incurred to travel to her rental properties, however, if they were not included in the conceded amount of petitioner's rental real estate business expenses, shall be included in the parties'
Petitioner included receipts for advertisements and sponsorships in her business expenses. She testified to taking out those ads and to sponsoring events *93 to increase her name recognition for her brokerage work. Petitioner is entitled to a deduction for ads and sponsorships of $1,700 for 2010.
Petitioner also included a receipt for payment of an insurance licensing fee of $100 for a nonresident producer for the State of Georgia. She also included receipts from Wells Fargo for chargebacks of State registration fees from Wisconsin, Louisiana, Ohio, and Mississippi for $80, $60, $60, and $50, respectively. Petitioner is entitled to a deduction of $350 for those fees for 2010.
Petitioner included receipts for dues of $508, books of $196, AAA of $97, flowers of $458, a Blackberry of $43, subscriptions of $398, gifts of $835, and travel of $924. There was no testimony or other evidence presented concerning the dues petitioner deducted. One receipt entered into evidence has "Irish Palitian Club" handwritten on it. At the bottom of the receipt are logos for four*91 restaurants. No deduction is allowed for dues "incurred for membership in any club organized for business, pleasure, recreation, or other social purpose."
There was no testimony or additional evidence provided for the relation of the books, AAA, flowers, and Blackberry expenses to petitioner's brokerage *94 business. Therefore her deductions for those expenses are not allowed, and respondent's determination is sustained.
The parties entered into evidence one receipt for tax preparation fees of $2,750 from petitioner's CPA. Petitioner is entitled to a deduction for tax preparation expenses under
Petitioner testified that she gave gifts of subscriptions or wine to her brokerage clients and, occasionally, to a prospective tenant. There were two receipts entered into evidence with either the word "gift" or "gifts" handwritten on them. One has "$150" handwritten on it; the other has an illegible handwritten amount on it. Two other receipts were entered into evidence that were for*92 subscriptions. One receipt has the name of the recipient of the subscription typed on it and "33.
Travel expenses are also subject to the strict substantiation rules of
The parties entered into evidence receipts for office supplies, stamps, and calendar expenses of $1,266, $146, and $303, respectively. Petitioner had business expenses related to her brokerage business. She also had business expenses for her rental real estate activities and expenses related to her charity work. Although petitioner was a credible witness, it is clear from her testimony and the other evidence in the record that she did not keep her business and charity expenses--or her substantiation of each--separate, as those facets of her life often *96 intersected. There is, however, an evidentiary basis in petitioner's testimony and the other evidence presented at trial for allowing a portion of petitioner's deduction for these expenses. Therefore the Court will follow the
*97 Under
Pursuant to
Reliance on the advice of*95 a tax professional may, but does not necessarily, establish reasonable cause and good faith for the purpose of avoiding a
Respondent contends that petitioner is liable for the
Petitioner argues that she acted in good faith and had reasonable cause because she relied on her CPA. Petitioner testified that her CPA was a former Internal Revenue Service employee. Petitioner's CPA was not called as a witness at trial, and petitioner provided no evidence*96 to corroborate her testimony in regard to her CPA or to otherwise prove her CPA's credentials. That was the extent of petitioner's argument for reliance on her CPA. She entered no evidence to prove that she relied upon her CPA's advice for any of the items reported on her return *99 that respondent disputed. "In order to constitute 'advice' under
The Court also finds that respondent has met his burden of production with respect to the penalty for negligence or disregard of rules and regulations. Petitioner failed to properly substantiate her claimed deduction for a large portion of the unreimbursed employee business expenses she reported on the Schedule A attached to her return as required under
The Court has considered all of the arguments made by the parties, and to the extent they are not addressed herein, they are considered unnecessary, moot, irrelevant, or without merit.
*100 To reflect the foregoing,
1. Petitioner conceded that she is liable for unreported taxable interest income of $8. Respondent conceded that petitioner is entitled to deduct the amount of mortgage interest expense she claimed on her return. After trial respondent also conceded that petitioner is allowed all of the claimed deductions related to her rental real estate activities. There was no adjustment to petitioner's reported rental income. Respondent's only argument regarding the rental real estate activities is that petitioner is not a qualifying taxpayer under
2. The U.S. stock markets close at 3 p.m. central standard time.↩
3. The Court takes judicial notice of those dates.
4. Petitioner's calendar entered into evidence started on Monday, January 11, 2010. Friday, April 2, 2010, is not marked with an "H" in petitioner's calendar, but the space for that day on the calendar contains a diagonal line drawn across it and the words "Good Friday" written and circled at the top.↩
5. One of petitioner's rental properties was an apartment attached to her personal residence. Petitioner did not include the rental property attached to her personal residence when she calculated the number of hours she performed services for real property trades or businesses or to determine whether she materially participated in those trades or businesses.↩
6. Petitioner's LLC is registered as a Florida limited liability company with the Florida Department of State as "WindhamAgency, L.C." and is a single-member LLC. Petitioner testified that the rental properties were titled in her name and not her LLC's for mortgage interest rate and insurance purposes.↩
7. The document appears to be one petitioner's CPA generated.↩
8. The parties also entered into evidence petitioner's 2009 Form 1040, which also had a Schedule C attached to it reporting petitioner's income and expenses from her rental properties. There was no election to treat petitioner's rental properties as one activity attached to her 2009 Form 1040 either.↩
9. The same CPA had prepared petitioner's 2009 Form 1040.
10. The effect of the passive activity loss disallowance rule is that deductions related to passive activities are allowed against income from passive activities and the excess (i.e., the amount by which the deductions related to the passive activities exceed the income from passive activities) cannot be deducted from income from activities other than passive activities.
11. The Court notes that petitioner would also meet the material participation test under
12. The fact that petitioner did not separate her hours for the duplex's two properties is of no consequence because the hours for both properties is less than 100.↩
13. Petitioner would be entitled to deduct her half of the property taxes for the vacant lot on Schedule A.↩
14. Although petitioner did volunteer a considerable amount of her time to various charities, as a volunteer she was not holding herself "out to others as engaged in the selling of goods or services."
15. One of the deductions respondent disallowed in the notice of deficiency was a net operating loss (NOL) carryforward from 2008. Respondent's only reason for disallowing the NOL carryforward was that petitioner did not meet the requirements of
16. Petitioner did not offer any evidence to substantiate the $11,923.69 difference between her claimed deduction and the amount of expenses the parties stipulated she paid. Petitioner is deemed to have conceded that amount.
17. Respondent conceded that petitioner was entitled to deduct contract labor expenses of $13,850 for her rental real estate activities. If the checks drawn on petitioner's real estate business account totaling $3,550 were included in the $13,850, that amount shall be reduced by $3,550, and the $3,550 will be allowed as an unreimbursed employee business expense and properly reported on petitioner's Schedule A when the parties calculate their
18. Cell phones were no longer listed property under
19. Respondent included boilerplate in the notice of deficiency that also lists "any substantial valuation overstatement" as a possible reason for his determination of the accuracy-related penalty. A substantial valuation overstatement is not in issue here.↩
Knight-Ridder Newspapers, Inc. v. United States , 743 F.2d 781 ( 1984 )
Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )
Henry P. White and Estate of Nancy A. White, Deceased, T. ... , 227 F.2d 779 ( 1955 )
W. Horace Williams, Sr., and Viola Bloch Williams v. United ... , 245 F.2d 559 ( 1957 )
John H. Young and Carolyn J. Young v. Commissioner of ... , 783 F.2d 1201 ( 1986 )
neonatology-associates-pa-v-commissioner-of-internal-revenue-tax-court , 299 F.3d 221 ( 2002 )
United States v. Boyle , 105 S. Ct. 687 ( 1985 )
Thomas P. Krukowski and Ermina A. Krukowski v. Commissioner ... , 279 F.3d 547 ( 2002 )
Welch v. Helvering , 54 S. Ct. 8 ( 1933 )
Snow v. Commissioner , 94 S. Ct. 1876 ( 1974 )
Podems v. Commissioner , 24 T.C. 21 ( 1955 )
Primuth v. Commissioner , 54 T.C. 374 ( 1970 )