T.C. Memo. 1996-22
UNITED STATES TAX COURT
ABHIMANYU SWAIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16556-94. Filed January 23, 1996.
Abhimanyu Swain, pro se.
Helen F. Rogers, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PANUTHOS, Chief 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 deficiencies in
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the taxable years in issue. All Rule references
are to the Tax Court Rules of Practice and Procedure.
petitioner's 1989 and 1990 Federal income taxes in the amounts of
$2,092 and $2,190, respectively, and penalties pursuant to
section 6662(a) in the amounts of $399 and $438, respectively.
After concessions,2 the issues for decision are (1) Whether
petitioner is entitled to home office deductions in the amounts
claimed on his returns or in lesser amounts as determined by
respondent; (2) whether petitioner is entitled to deduct legal
fees; and (3) whether the accuracy-related penalties as
determined by respondent should be sustained.
At the time of filing the petition herein, petitioner
resided in Damascus, Maryland.
FINDINGS OF FACT
During 1989 and 1990, petitioner was a research hydraulic
engineer for the U.S. Army Corps of Engineers. In the spring of
1989, petitioner taught a course for the U.S. Army Corps of
Engineers at Mississippi State University. Petitioner reported
$44,368 and $42,256 as total wages on his 1989 and 1990 Federal
income tax returns, respectively. On Schedule A of his 1989
return, petitioner claimed deductions for "Office Space" in the
amount of $5,200, and "Legal Expense" in the amount of $3,600.
On Schedule A of his 1990 return, petitioner claimed deductions
2
At trial, petitioner conceded the following adjustments: (1)
Petitioner failed to report $909 and $1,188 in State income tax refunds on his
1989 and 1990 returns, respectively; (2) petitioner failed to report interest
income in the amount of $43 and $101 on his 1989 and 1990 returns,
respectively; (3) petitioner is not entitled to deduct personal sales tax in
the amounts of $4,349 and $4,095 on his 1989 and 1990 returns, respectively.
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for "Office space" in the amount of $5,800 and "Legal fee" in the
amount of $4,200.3
Petitioner asserts that a friend prepared his 1989 and 1990
returns. The record does not indicate the name or occupation of
the preparer. The return preparer signature line on each of the
1989 and 1990 returns is blank. Petitioner could not explain the
basis for many of the deductions claimed on the returns. As
previously indicated, petitioner conceded some of the claimed
deductions at trial.
Petitioner asserts that the deductions claimed for the home
office and legal fees are correct as reflected on his 1989 and
1990 returns. Petitioner arrived at the amounts of his home
office deductions by approximating the cost of renting comparable
office space for the year. Respondent allowed petitioner
deductions of one-sixth of the costs associated with his home.
(Petitioner's home consists of six rooms, one of which was used
as an office.) The room petitioner utilized as an office
measures 10 feet by 10 feet, or 100 square feet, in a home that
is approximately 1,800 square feet. In this room petitioner
reviewed the homework of his students and prepared for class.
Petitioner asserts that he incurred legal expenses relating
to an action brought by his former wife in 1987 to gain custody
3
At trial, petitioner indicated that the total amount of legal fees
claimed on his 1989 and 1990 returns was incorrect. Petitioner indicated that
he should have claimed $10,000 in legal fees on each of his 1989 and 1990
returns.
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of their child and to take possession of the house, and with
respect to a criminal action against petitioner which was
ultimately dismissed. A letter dated July 8, 1988, reflects that
petitioner paid a total of $4,312.10 in legal fees to LaBarre &
LaBarre, a law firm, and owed an additional $2,187.90. The
letter reflects the following services were rendered:
SERVICES - State v. Swain (First Trial) $2,500
Per Agreement
SERVICES - State v. Swain (Second Trial) $2,500
SERVICES - Chancery Contempt Proceedings $1,500
$6,500
Petitioner wrote at the bottom of this letter "Paid in 1989", and
"$7,500 to Vance in 1989". A canceled check dated March 20,
1989, in the amount of $750 reflects that the check was in
payment of a "Chancery Contempt Case".
OPINION
At the outset, we note that respondent's determinations are
presumed correct, and petitioner bears the burden of proving that
those determinations are erroneous. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). In addition, deductions are
a matter of legislative grace, and petitioner bears the burden of
proving that he is entitled to the claimed deductions. Rule
142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934).
1. The Home Office Deduction
Section 280A(c) permits the deduction of expenses allocable
to a portion of the dwelling unit that is used exclusively and on
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a regular basis as "the principal place of business for any trade
or business of the taxpayer". Sec 280A(c)(1)(A). Additionally,
items such as interest and taxes are deductible without regard to
section 280A(a). Sec. 280A(b).
As indicated, petitioner claimed $5,200 and $5,800 as home
office deductions for 1989 and 1990, respectively. Respondent
does not question petitioner's entitlement to a home office
deduction, but rather determined that the amount claimed is
excessive. Petitioner did not allocate his expenses based upon
the number of rooms in his house or by actual floor space.
Apparently, petitioner estimated his home office deductions on
the basis of how much it would cost if he rented a room of
comparable size. This is not a proper method to compute
deductions attributable to a home office. The allocation method
utilized by petitioner is based upon his personal estimate of
comparable rental space. Such a method is based purely upon
conjecture, and, in any event, is not supported by any evidence
in the record. Accordingly, respondent's determination is
sustained.4
2. Deductibility of Legal Fees
The thrust of petitioner's argument is that the legal
expenses were incurred to protect his interest in his property
4
Based upon petitioner's testimony and estimates of the total square
footage of his home in comparison to the square footage of the home office, it
appears that respondent's allowance of one-sixth of the total square footage
was generous.
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and hence his "home office". Petitioner argues that the amounts
paid in 1988 are deductible on his 1989 and 1990 returns because
the case continued into 1989.5 Respondent argues that the
expenses relate to a claim which is personal in nature and,
therefore, are not deductible.
Section 212 provides, in pertinent part, that expenses for
the production of income (i.e., legal expenses) are deductible as
ordinary and necessary business expenses, if the expenses are--
paid or incurred during the taxable year--
(1) for the production or collection of
income;
(2) for the management, conservation, or
maintenance of property held for the
production of income; or
(3) in connection with the
determination, collection, or refund of any
tax.
Section 262(a) provides that, in general, no deduction shall
be allowed for personal, living, or family expenses.
"[A]ttorney's fees and other costs paid in connection with a
divorce, separation, or decree for support, are not deductible by
either the husband or the wife." Sec. 1.262-1(b)(7), Income Tax
Regs. Expenses incurred in connection with a divorce property
settlement are not deductible because such expenses are derived
5
We note that petitioner's proposition that expenses incurred by a cash
basis taxpayer in 1 year are deductible in the next is erroneous. Taxpayers
on a cash basis ordinarily may claim deductions only in the year such expenses
are actually paid. Sec. 1.461-1(a)(1), Income Tax Regs.
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from the marital relationship rather than the spouse's activities
in holding such income-producing property. In United States v.
Gilmore, 372 U.S. 39, 49 (1963), the Supreme Court indicated
that--
the origin and character of the claim with respect to
which an expense was incurred, rather than its
potential consequences upon the fortunes of the
taxpayer, is the controlling basic test of whether the
expense was "business" or "personal" and hence whether
it is deductible or not under * * * [the predecessor to
section 212]. * * *
See also United States v. Patrick, 372 U.S. 53, 56 (1963).
Even if the legal fees were incurred to protect the
ownership of petitioner's home, and, consequently, the home
office, petitioner has failed to show that the fees are
deductible as expenses of a profit-seeking activity. In United
States v. Gilmore, supra at 48, the Supreme Court stated--
If two taxpayers are each sued for an automobile accident
while driving for pleasure, deductibility of their
litigation costs would turn on the mere circumstance of the
character of the assets each happened to possess, that is,
whether the judgments against them stood to be satisfied
out of income- or nonincome-producing property. We should
be slow to attribute to Congress a purpose producing such
unequal treatment among taxpayers, resting on no rational
foundation.
Petitioner has not demonstrated that the legal expenses incurred
in the criminal action are related to his trade or business or to
any other income-producing activity conducted by him.
Commissioner v. Tellier, 383 U.S. 687, 689 (1966). Therefore,
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the legal expenses attributable to the criminal action are not
deductible. United States v. Gilmore, supra at 49.
Accordingly, we hold that the payments made by petitioner
are not deductible as business or profit-seeking expenses.
3. The Accuracy-Related Penalty
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the portion of the underpayment to which section
6662 applies. Section 6662 applies to that portion of the
underpayment attributable to negligence or disregard of rules or
regulations. Sec. 6662(b)(1). The term "negligence" includes
any failure to make a reasonable attempt to comply with the
Internal Revenue Code, and the term "disregard" includes any
careless, reckless or intentional disregard. Sec. 6662(c).
Negligence is defined as a lack of due care or the failure to do
what a reasonably prudent person would do under the
circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985).
We find that petitioner was negligent for both years.
Petitioner conceded at trial that he was not entitled to some of
the deductions he claimed on his income tax returns. Petitioner
argued that he supplied all of his income tax information to a
"friend" who used this information to prepare petitioner's 1989
and 1990 returns. In addition, petitioner argued that some of
the deductions claimed were not derived from the information
provided to his friend.
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At the time petitioner signed the returns, petitioner
should have reviewed the returns for their accuracy. A cursory
review would have revealed that the returns contained claimed
deductions to which petitioner is not entitled. We are satisfied
that the underpayment of tax was due to negligence.
To reflect the foregoing,
Decision will be entered
for respondent.