T.C. Memo. 1995-460
UNITED STATES TAX COURT
KENT MAERKI AND KATHLEEN TURNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15393-93. Filed September 27, 1995.
Kevin J. Mirch, for petitioners.
David W. Sorensen, for respondent.
MEMORANDUM OPINION
RUWE, Judge: Respondent determined a deficiency in
petitioners' 1990 Federal income tax in the amount of $11,280 and
an addition to tax in the amount of $564, pursuant to section
6651(a)(1).1
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
(continued...)
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The issues for decision are: (1) Whether petitioners
underreported gross income in the amount of $4,398; (2) whether
petitioners are entitled to deduct $38,271 for expenses, which
they claimed on Schedule C, for a business known as the
Registry;2 (3) whether petitioners are entitled to deduct $8,951
for expenses, which they claimed on Schedule C, for a business
known as Express Network Technologies (ENT); and (4) whether
petitioners are liable for the addition to tax pursuant to
section 6651(a)(1).3
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein by this reference. At the time the petition was filed,
petitioners resided in Scottsdale, Arizona. During the year in
issue, petitioners were married, and they filed a joint return
for that year.
For convenience, we will combine our findings of fact and
opinion with respect to each of the issues presented.
Respondent's determination is presumed correct, and petitioners
1
(...continued)
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
Respondent's notice of deficiency disallowed $43,820.
Respondent concedes that $5,549 in claimed education expenses was
erroneously disallowed twice.
3
Respondent also determined that petitioners had overstated
their income by the amount of $16,830 on their Schedule C for a
business known as Fiduciary Administrative Services Trust (FAST).
Petitioners do not contest this adjustment.
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bear the burden of proving otherwise. Rule 142(a); Welch v.
Helvering, 290 U.S. 111 (1933).
Issue 1. Underreported Gross Income
Respondent determined that petitioners failed to report
income from the following sources:
Arizona State lottery winnings $1,409
Interest from Valley Bank of Nevada 1,119
Dividend from the Franklin Fund 1,651
Dividend from Dreyfus Worldwide MM Fund 190
Dividend from American Capital Growth 19
Dividend from Value Line Fund 10
Increase to income 4,398
Petitioners do not seriously dispute the fact that they received
and failed to report these amounts. However, in an attempt to
offset this unreported income, petitioners contend that they
erroneously reported a $5,200 loan as income on their Schedule C
for the Registry. The Registry was a business operated by Mr.
Maerki (hereinafter referred to as petitioner) whose purpose was
to raise capital and do consulting work for other businesses.
Petitioner was the only witness who testified at trial. He
testified that $5,200 had been borrowed and produced a printout
of his computerized records showing a $5,200 deposit to the
Registry account with the description "Equipment Loan Other
Income". Petitioners produced no other corroborating evidence of
the transaction such as loan documents. In answer to his
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attorney's questions concerning whether he overreported income by
this amount, petitioner stated: "If this was put on the tax
return, which I understand it was, we overstated it, yes." Based
on the record before us, petitioners have not met their burden of
proof to show that they erroneously reported $5,200 in loan
proceeds as gross receipts.
Issue 2. Schedule C Expenses for the Registry
On the Schedule C for the Registry, petitioners deducted
expenses of over $126,000. Respondent has disallowed $38,271 of
those Schedule C deductions.
Respondent disallowed $8,521, which was deducted as employee
benefits on petitioners' Schedule C for the Registry. Petitioner
agreed at trial that he had no substantiation for $2,168 of this
amount.4 Of the remaining amount, petitioners claim they are
entitled to deduct $4,256 for medical expenses, $1,497 for child
care, and $600 for travel reimbursement.
Medical expenses paid as part of an employee benefit plan
can be deducted as a business expense. Sec. 1.162-10(a), Income
Tax Regs. Of the medical expenses claimed as a business
4
On brief, petitioners argue that they actually understated
employee benefits expenses because they failed to take
depreciation on a vehicle they purchased for $28,000. This
depreciation was allegedly not claimed on their return and,
therefore, was not part of the disallowed deduction.
Petitioners' evidence falls far short of showing that the vehicle
was used in their business so as to entitle them to a
depreciation deduction that was not claimed previously.
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deduction by petitioners, all but $22 was spent for medical
services for petitioners. Petitioners have not proven that an
employee plan existed for the Registry. Except for petitioner's
conclusory testimony that a plan existed, there is no evidence of
such a plan or its terms of coverage. Medical expenses are
normally considered to be personal,5 and an employer's payment of
medical expenses for employees would normally constitute taxable
income. Section 105 provides for the exclusion of employer-paid
medical expenses if certain conditions are met. However, even if
some type of plan did exist, petitioners have not established (or
even argued) that it would meet the conditions of section 105.
We sustain respondent's disallowance of the claimed medical
expenses.
Petitioner testified that the $1,497 of child care expenses
deducted as employee benefits was paid for the care of
petitioners' child. Petitioners provided checks for child care
totaling only $818. Such expenses would normally be considered
personal, and an employer's payment of its employees' child care
expenses would normally be includable in the employees' taxable
income. Section 129 provides an exception for qualified
dependent care programs. Petitioners have neither proven nor
argued that their situation meets the requirements of section
5
Petitioners elected the standard deduction on their return
and, therefore, make no claim for an itemized deduction under
sec. 213.
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129. We sustain respondent's disallowance of the deduction for
child care expenses.
Petitioner testified that $600 of the amount claimed as
employee benefits was a reimbursement to petitioner Kathleen
Turner for travel expenses she incurred as a member of the board
of directors for Crystal Communications, a client of the
Registry. Petitioners produced a $600 check payable to Ms.
Turner. There was no explanation on the check, and petitioners
produced no other documentation showing the nature of the alleged
travel. Petitioners did not explain why this was classified as
an employee benefit rather than a travel expense, nor have they
shown that the $600 expense was not included in the $1,558 of
travel expenses allowed as a deduction on the Schedule C for the
Registry. Petitioners have failed to prove entitlement to the
$600 deduction.
On Schedule C for the Registry, petitioners claimed a
deduction for "other expenses" in the amount of $29,750, which
respondent also disallowed. These "other expenses" included
expenses for bank charges of $1,881, seminars/education of
$5,549, dues of $1,187, business gifts of $53, casual labor of
$350, and "other" in the amount of $20,730.
With respect to the portion of bank charges related to
credit cards, petitioner testified that he used credit cards in
his name for both business and personal affairs. With respect to
bank charges related to an escrow account, petitioner testified
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that they related to an escrow account that was opened for a
client. Petitioners produced no records showing which portion of
the bank charges for credit cards related to business or personal
matters, nor did they produce any records to show the nature of
the escrow account and related charges. Petitioners have not
shown that they are entitled to a business deduction for these
bank charges.
The education expenses deducted were paid to Lamson College,
apparently for petitioner Kathleen Turner. Petitioner testified
that he required his wife to take courses that would help her
perform services for the business. Except for petitioner's
testimony at trial, no evidence was produced to show that the
expenditures incurred for education were ordinary and necessary
business expenses of the Registry. Petitioners failed to produce
any documents to show which specific courses were taken or the
nature of the courses, and petitioner Kathleen Turner did not
testify. Petitioners have failed to carry their burden of
showing that respondent's determination is incorrect.
With respect to the disallowance of the deduction for
"dues", petitioners provided copies of checks that appear to be
for various magazines, periodicals, and other publications.
Petitioner testified that some of these checks were for magazines
needed for business purposes. Petitioner testified that a
portion of the amount deducted for "dues" also included
advertisements in at least four magazines and/or periodicals.
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Petitioners have not shown that these alleged advertising
expenses were not included in amounts already allowed for
advertising. The Schedule C for the Registry shows a separate
deduction for advertising in the amount of $617. Petitioner
also testified that a portion of the expenses for "dues"
consisted of payments to United Cable for cable television.
Petitioner testified that approximately one-third of petitioners'
house was used for business and that the cable television service
was provided for the whole house. Based on this, we are unable
to determine what portion, if any, of the cable television costs
might be applicable to the business of the Registry. Petitioner
also testified that a portion of the expenses for "dues"
consisted of payments for supplies, even though on the Schedule C
for the Registry, petitioners deducted $2,063 for supplies.
Again, petitioners have not shown that these amounts were not
included in the deduction allowed for supplies on Schedule C.
Petitioners have failed to establish their entitlement to the
claimed "dues" deduction.
With respect to the deductions for gifts, petitioners
produced a check for $53, which indicates on its face that it was
for Godiva chocolates. This was recorded on the business records
as a gift, and petitioner testified that it was for a gift to one
of the Registry's customers. We hold that petitioners have
established that the $53 was a deductible business expense.
With respect to $350 claimed as a labor expense, petitioners
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produced seven canceled checks to Lorraine S. Whipps, each in the
amount of $50. The dates of these checks indicated that they
were issued approximately every 2 weeks from September 14 to
December 14, 1990. The records of the Registry record these
checks as "Contract Wages", and petitioner testified that they
were paid for miscellaneous labor for the business. We hold that
petitioners have established that these items were deductible
expenses.
With respect to the "other" expenses claimed in the amount
of $20,730, petitioners now apparently claim that $16,755 of this
amount actually represents trust preparation fees, which should
have been claimed on the Schedule C for ENT rather than the
Schedule C for the Registry. Petitioner testified that he
operated ENT and that ENT did "business consulting, living trust,
and also was involved in starting a couple of other businesses; a
legal preparation services business and some others." The checks
making up the $16,755 were all drawn on ENT's account.
Petitioner gave no explanation of how checks drawn on ENT's
account were deducted as expenses of the Registry, nor is it
clear whether or not these amounts were already deducted on ENT's
Schedule C. There was no other documentation (such as invoices
or contracts) presented showing the nature and purpose of these
payments. Petitioners again simply failed to prove entitlement
to the deductions claimed.
Petitioners appear to argue that the remainder of the
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"other" expenses was interest of $3,255.29 paid on a home equity
loan. Petitioner testified that the loan proceeds from this loan
were used in his business, but he provided no supporting
documents to establish this. We also find it curious that a
deduction for $3,255.29 of alleged business interest would be
buried in a $20,110.29 business deduction classified as "other"
when the Schedule C provides a specific line for interest
deductions. In any event, based on the record before us,
petitioners have failed to prove entitlement to a business
deduction for interest.6
Issue 3. Education Expenses on Schedule C for ENT
On the Schedule C for ENT, petitioners deducted expenses of
over $135,000. Respondent has disallowed $8,951 of those
Schedule C deductions.
Petitioners claimed a deduction for education expenses on
the Schedule C for ENT in the amount of $8,951. Petitioner
testified that $5,000 of this amount was attributable to the cost
of a training seminar for Jon Palmieri, an ENT employee.
Petitioners produced a canceled check to "The Estate Plan" that
indicates it was for training for Mr. Palmieri. The "Profit and
Loss" statement for ENT for the year ended December 31, 1990,
6
Petitioners presumably could have elected to deduct this
interest as an itemized deduction. Instead, they elected to use
the standard deduction.
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shows total expenses for education in the amount of $5,000. In
her brief, respondent notes the fact that this statement shows
only $5,000--rather than the $8,951--that petitioners claimed on
the Schedule C for ENT. Respondent argues that this shows that
the other items of education expenses should be disallowed, but
respondent makes no argument on brief that specifically addresses
the $5,000 amount. Based on the record before us, we hold that
petitioners are entitled to a $5,000 education expense deduction
with respect to ENT.
Petitioner testified that the claimed education expenses
also include expenses for other items, such as the rental of
rooms from the Arizona Club and the rental of booths for home
shows. Petitioner admitted that he had a personal account with
the Arizona Club and that he visited that establishment for
nonbusiness purposes. In addition, the Schedule C for ENT
already claimed a deduction for the rental of other business
property in the amount of $3,569.63. Petitioners have not shown
that the amount of rental expenses claimed as education expenses
is not included in the deduction allowed for rents on the
Schedule C. As previously noted, petitioners' own disbursement
journal shows that only $5,000 was spent for education. Except
for the $5,000, petitioners have failed to overcome the
presumption that respondent's determination is correct.
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Issue 4. Addition to Tax Pursuant to Section 6651
Respondent determined that petitioners' return was filed 1
day late. Section 6651 imposes an addition to tax for failure to
file a timely tax return, unless such failure was due to
reasonable cause and not due to willful neglect. Petitioners
neither argued nor offered any evidence to show that the addition
to tax pursuant to section 6651 should not be imposed.
Therefore, we sustain respondent's determination that the
addition to tax is applicable.
Decision will be entered
under Rule 155.