T.C. Memo. 1995-578
UNITED STATES TAX COURT
RAHIM A. AND LISA R. MUNSHI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9423-94. Filed December 5, 1995.
Rahim A. Munshi, pro se.
Maria Murphy, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1 Respondent determined a deficiency in petitioners' 1991
Federal income tax in the amount of $791.
1
All section references are to the Internal Revenue Code
in effect for the year at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
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After concessions,2 the issues for decision are: (1)
Whether petitioners are entitled to Schedule C depreciation
expense in the amount of $3,200, and (2) whether petitioners are
entitled to Schedule C rental expense in the amount of $2,410.
Some of the facts have been stipulated and are so found.
The stipulation of facts and attached exhibits are incorporated
herein by this reference. Petitioners resided in Cerritos,
California, at the time of the filing of this petition. Because
the activities herein were conducted by Rahim A. Munshi, all
further references to "petitioner" will be to Mr. Munshi. During
the year at issue, petitioner was a full-time engineer in the
aerospace department of Northrop Corporation.
For some time, because of defense cutbacks and company
layoffs, petitioner had become concerned about job security. He
decided to go into real estate as another source of income and
obtained a real estate salesperson license on July 2, 1990.
After obtaining his license, petitioner researched real estate
offices to find a place to hang his real estate license.
Petitioner became associated as a real estate salesperson
with Real Estate Plus, Inc. (REP), which was operated by broker
Wray Beihagi. Pursuant to the "Real Estate Special Commission
Choices" agreement signed by petitioner on October 10, 1990,
2
Respondent conceded $840 of the Schedule C rental
expense. Petitioners conceded that they received interest income
of $265.
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petitioner was to receive a 100-percent commission from the
listing and selling of real properties; however, petitioner was
required to pay REP $70 per month for sharing a desk and $100 at
the close of any escrow. In addition, petitioner was required to
pay for all Board of Realtors and Multiple Listing Service (MLS)
fees, listing input fees, real estate forms, advertising,
stationery, real estate signs, and stamps. Further, petitioner
was to keep track of, and was charged for, all telephone calls,
facsimiles, copy paper, use of REP's conference room, and
computer time (if charges were incurred). Petitioner considered
these expenses an additional rental expense.
Petitioner received monthly bills from REP, which charged
fees for the support services that were used by petitioner.
Petitioner did not pay these bills promptly because he was not
selling properties. Petitioner usually paid these bills 2 to 3
months late.3
In 1988 or 1989, petitioner purchased a MacIntosh 2X
computer. Petitioner also purchased a color monitor, laser
printer, copy machine, and facsimile machine. In addition,
petitioner purchased extensive software which he used, in part,
to access the MLS service. Petitioner allegedly obtained a loan
3
Petitioner was invited to supplement the record with
copies of billing statements, receipts, invoices, or canceled
checks to support his claimed deduction for rental expense within
30 days after trial. No such documents have been submitted.
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in the amount of $10,000 from his credit union to purchase all of
this equipment.4
Petitioner kept his computer in a garage that he had
converted into an office. Petitioner spent an average of 2 to 3
hours each evening in his garage office. Generally, petitioner
spent more time in the garage office during the weekends.
Petitioner spent much of this time setting up the computer,
installing the software, debugging the system, and learning how
to use the computer and software. In addition, petitioner spent
time learning to use MLS. Although the computer allegedly was
primarily used for petitioner's real estate activities, he has
recently installed some computer games for his children.
Petitioner kept no records of the amount of time he devoted
to his real estate activity in 1991. During his first 2 years as
a real estate salesperson, petitioner learned the basics of how
to be a real estate salesperson. By attending seminars and
training courses or teaching himself, petitioner learned how to
make cold calls, do appraisals, download data, and use MLS.
During 1991, petitioner had no income from his real estate
activity and did not have any clients. However, respondent did
4
Petitioner's opportunity to supplement the record was
extended to include a copy of the loan agreement. See supra note
3. It is unclear whether the software for the MLS service was
purchased prior to petitioner's obtaining his real estate license
and becoming associated with REP.
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not contend that petitioner was not "carrying on" this activity
or that section 183 is involved herein.
Depreciation
On the Schedule C attached to petitioner's 1991 return,
petitioner claimed a deduction in the amount of $3,200 for
depreciation. This deduction pertains to the computer and other
equipment allegedly purchased for $10,000. Respondent disallowed
this entire amount.
A taxpayer may deduct ordinary and necessary expenses paid
or incurred during the taxable year in carrying on a trade or
business. Sec. 162(a). Deductions are a matter of legislative
grace, and the taxpayer bears the burden of proving that he is
entitled to any claimed deductions. Rule 142(a); New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.
Helvering, 290 U.S. 111, 115 (1933). This includes the burden of
substantiating the amount and purpose of the item claimed.
Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam
540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
However, if certain claimed deductions are not adequately
substantiated, we are permitted to estimate them, provided we are
convinced from the record that the taxpayer has incurred such
expenses, and we have a basis upon which to make an estimate.
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930); Vanicek v.
Commissioner, 85 T.C. 731, 735 (1985).
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Section 167 provides, in part, for a depreciation deduction
with respect to property used in a trade or business.
Depreciation allows the taxpayer to recover the cost of the
property used in a trade or business or for the production of
income. United States v. Ludey, 274 U.S. 295, 300-301 (1927);
Southeastern Bldg. Corp. v. Commissioner, 3 T.C. 381, 384 (1944),
affd. 148 F.2d 879 (5th Cir. 1945). To substantiate entitlement
to a depreciation deduction, the taxpayer must show that the
property was used in a trade or business (or other profit-seeking
activity). In addition, the taxpayer must establish the
property's depreciable basis. E.g., Delsanter v. Commissioner,
28 T.C. 845, 863 (1957), affd. 267 F.2d 39 (6th Cir. 1959);
Kerrigan v. Commissioner, T.C. Memo. 1995-483; Greenway v.
Commissioner, T.C. Memo. 1980-97.
Petitioner has failed to substantiate any depreciable basis
for the office equipment. According to petitioner's testimony,
he obtained a loan in the amount of $10,000, which he used to
purchase various pieces of office equipment in 1988 or 1989.
However, petitioner has failed to present detailed testimony, the
loan agreement, or any other documentation such as receipts,
invoices, or canceled checks to substantiate the cost of such
equipment. Thus, petitioner has failed to substantiate any
depreciable basis for the equipment. Moreover, petitioner has
failed to substantiate the extent to which the office equipment
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was used in his trade or business or other profit-seeking
activity. Accordingly, we sustain respondent on this issue.
Rental expense
On the Schedule C attached to petitioner's 1991 return,
petitioner claimed a deduction in the amount of $3,500 for rental
expense. Respondent has allowed $840.
According to petitioner's testimony, he received bills from
REP for various support services that he used during 1991.
However, petitioner presented no documentation such as receipts,
invoices, canceled checks, or detailed testimony to substantiate
the amounts he spent, or the amounts charged by REP, for support
services. Thus, petitioner has failed to substantiate the amount
disallowed. Accordingly, we sustain respondent on this issue.
To reflect the concessions in this case,
Decision will be entered
under Rule 155.