Bradbury v. Commissioner

T.C. Memo. 1996-182

UNITED STATES TAX COURT

KEITH ROBERT BRADBURY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23890-92. Filed April 15, 1996.

Keith Robert Bradbury, pro se.

Michael D. Zima, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent

determined deficiencies in petitioner's 1988 and 1989 Federal

income taxes in the respective amounts of $998 and $1,389. In

addition, respondent determined that petitioner was liable for an

1
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.
 2

addition to tax under section 6653(a) for 1988 in the amount of

$50, and an accuracy-related penalty under section 6662 with

respect to 1989 in the amount of $278.

The issues are: (1) Whether this Court is unconstitutional

and lacks jurisdiction over petitioner's tax deficiencies; (2)

whether petitioner was engaged in the trade or business of being

a broker during the years at issue, and, if so, whether

petitioner is entitled to various deductions as claimed on his

Schedules C for those years; (3) whether petitioner is liable for

an addition to tax pursuant to section 6653(a) for 1988; and (4)

whether petitioner is liable for an accuracy-related penalty with

respect to 1989 pursuant to section 6662.

Some of the facts have been stipulated and are so found.

The stipulation of facts and exhibits received into evidence are

incorporated by this reference. Petitioner resided in Inverness,

Florida, at the time his petition was filed in this case.

In or around 1979, petitioner resided in Indianapolis,

Indiana, and worked as a business broker and consultant. He

formed K.R. Bradbury & Associates, Inc. (KRBA) in or about 1980,

a corporation engaged in selling businesses and in management

consulting. In 1982, petitioner sold one-third of KRBA to Ray

Leonard, a licensed real estate agent, and changed the corporate

name to Bradbury, Leonard & Associates, Inc. (BLA). Shortly

thereafter, petitioner sold his remaining interest in BLA to a

third party and formed Executive Computer Corp. (ECC), a
 3

corporation engaged in the development and sale of computers and

software.

ECC was ultimately unsuccessful, and, in 1985, petitioner

abandoned the corporation and moved to Florida. Petitioner

obtained a Florida real estate broker license, and went to work

for IBEX Business Brokers, Inc. (IBEX). According to his own

testimony, petitioner did not sell a single property during his

tenure with IBEX, and, at some point thereafter, he went to work

for the School Board of Pinellas County as an engineer and

consultant. During 1988 and 1989, the years at issue, petitioner

earned an annual income from his position with the School Board

in the respective amounts of $20,989.55 and $28,116.43.

Petitioner testified that although he worked full time for

the School Board, approximately 40 hours each week, he had time

during the day for other activities. He further testified that

he used this time, in addition to evenings and weekends, to

independently pursue his brokerage activities, spending 15 to 20

hours per week trying to list and sell properties. To date, he

has yet to sell any such property.

Petitioner maintained no formal ledgers or records of his

brokerage activities, nor did he maintain separate bank accounts.

He did not have a separate business telephone number and did not

advertise his services on a regular basis.
 4

On the Schedules C attached to his 1988 and 1989 Federal

income tax returns, petitioner claimed the following deductions

with respect to his brokerage activities:

Expense 1988 1989

Advertising $114 $83
Bank service charges 10 9
Car and truck expenses 1,440 1,009
Depreciation 4,190 3,088
Dues and publication 81 -0-
Freight -0- 606
Insurance 42 -0-
Legal and professional fees 153 287
Office expenses 99 271
Supplies 45 269
Travel 62 222
Meals 96 145
Utilities 138 -0-
"Biof Project" 196 -0-
"R & D Tools" -0- 600
"Elect. Resc." -0- 62
"ANW Srvcs." -0- 135
Postage -0- 59

Total 6,666 6,845

Petitioner reported no income during 1988 and 1989 other than the

wages he earned as an engineer for the School Board.

Respondent determined that petitioner did not engage in

brokerage activities for profit and therefore disallowed all of

the deductions claimed attributable thereto. Alternatively,

respondent determined that petitioner failed to substantiate the

deductions and to prove that the expenditures were ordinary and

necessary to any business that he conducted.

As a preliminary matter, petitioner argues that the U.S. Tax

Court is unconstitutional because it unfairly shifts the burden
 5

of proof to the taxpayer and allegedly denies taxpayers their

right under the Seventh Amendment to a jury trial. Petitioner's

arguments have been consistently rejected by this Court and

others, and we have no persuasive reason to depart from the

analysis of these cases. E.g., Freytag v. Commissioner, 89 T.C.

849, 888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. 501

U.S. 868 (1991); Swanson v. Commissioner, 65 T.C. 1180, 1182

(1976) ("a taxpayer is not entitled to a jury trial in the Tax

Court") (citing Cupp v. Commissioner, 65 T.C. 68 (1975), affd.

without published opinion 559 F.2d 1107 (3d Cir. 1977); Roberts

v. Commissioner, 62 T.C. 834, 838 (1974) (burden of proof); Dorl

v. Commissioner, 57 T.C. 720, 721-722 (1972), affd. per curiam

507 F.2d 406 (2d Cir. 1974); Burns, Stix Friedman & Co., Inc. v.

Commissioner, 57 T.C. 392 (1971) (the Tax Court is an Article I

Court and its exercise of jurisdiction does not violate Article

III)). Based on the reasoning of these cases, and in light of

petitioner's failure to present any credible evidence to the

contrary, we find petitioner's arguments devoid of any legal

merit. Accordingly, respondent's determinations are presumed

correct, and petitioner bears the burden of proving otherwise.

Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84

(1992).

All taxpayers are required to keep sufficient records to

enable respondent to determine their correct tax liability. Sec.

6001; Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).
 6

Moreover, deductions are strictly a matter of legislative grace,

and a taxpayer has the burden of establishing that he or she is

entitled to any deduction claimed on a return. Deputy v. du

Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).

Section 162(a) allows as a deduction "all the ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on any trade or business". Where a taxpayer conducts an

activity not as a trade or business, section 183 allows

deductions generally to the extent that the activity generates

gross income. To be engaged in a trade or business within the

meaning of section 162, "the taxpayer must be involved in the

activity with continuity and regularity and * * * the taxpayer's

primary purpose for engaging in the activity must be for income

or profit." Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).

Whether petitioner is engaged in business and real estate

brokerage for profit depends on whether the activities were

undertaken with an "actual and honest objective" of making a

profit. Elliott v. Commissioner, 90 T.C. 960, 970 (1988), affd.

without published opinion 899 F.2d 18 (9th Cir. 1990); Fuchs v.

Commissioner, 83 T.C. 79, 98 (1984); Dreicer v. Commissioner, 78

T.C. 642, 644-645 (1982), affd. without opinion 702 F.2d 1205

(D.C. Cir. 1983). While a reasonable expectation of a profit is

not required, petitioner must have entered into the activity, or

continued it, with the bona fide objective of making a profit, as
 7

judged by all the facts and circumstances. Taube v.

Commissioner, 88 T.C. 464, 478-479 (1987); Poast v. Commissioner,

T.C. Memo. 1994-399; sec. 1.183-2(a), Income Tax Regs.

The regulations set forth nine nonexclusive factors for

consideration in determining whether an activity is engaged in

for profit. Sec. 1.183-2(b), Income Tax Regs. These factors

are: (1) The manner in which the taxpayer carries on the

activity; (2) the expertise of the taxpayer or his advisers; (3)

the time and effort expended by the taxpayer in carrying on the

activity; (4) the expectation that assets used in the activity

may appreciate in value; (5) the success of the taxpayer in

carrying on other activities; (6) the taxpayer's history of

income or losses with respect to the activity; (7) the amount of

occasional profit, if any, which is earned; (8) the financial

status of the taxpayer; and (9) whether elements of personal

pleasure or recreation are involved. Furthermore, if a taxpayer

has substantial income from sources other than the activity in

question, it may be an indication that the activity is not

engaged in for profit, particularly if the losses from the

activity generate substantial tax benefits. Sec. 1.183-2(b),

Income Tax Regs.

No single factor is controlling. Abramson v. Commissioner,

86 T.C. 360, 371 (1986); Golanty v. Commissioner, 72 T.C. 411,

426 (1979), affd. without published opinion 647 F.2d 170 (9th

Cir. 1981). The taxpayer's stated intention to make a profit is
 8

not determinative; greater weight is given to objective factors

rather than to the taxpayer's mere statement of intent. Engdahl

v. Commissioner, 72 T.C. 659, 666 (1979). Moreover, section 262

generally precludes a taxpayer from deducting personal, living,

or family expenses.

Based on the record, we find that petitioner lacked the

requisite profit objective in carrying on his brokerage

activities. Petitioner contends that he carried on his brokerage

activities in a regular and continuous manner; however, the

evidence he presented at trial indicates otherwise. Petitioner

introduced 12 documents, including several form letters from

petitioner while he was associated with BLA and IBEX with names

of various companies inserted in the blanks and dated as far back

as September 10, 1982, letters regarding petitioner's membership

in a broker association, subscriptions to newsletters, lists of

potential buyers, and letters to petitioner regarding his status

as a "valued referral source" for Guaranty Acceptance Capital

Corporation (GACC) dated in late 1989 or 1990. Petitioner also

introduced a brochure for K.R. Bradbury & Associates and a

receipt for the printing thereof dated September 15, 1988.

These documents do not demonstrate a regular and continuous

pursuit of brokerage activities for profit during the years at

issue. Most of the letters are dated prior to 1988, none of the

documents are dated in 1988, and it appears that the only

document dated during 1989 was the letter to petitioner regarding
 9

GACC. Petitioner did not maintain a business bank account,

despite having deducted service charges as a business expense for

both years at issue. He also admitted at trial that he failed to

keep organized records or receipts of expenses, and failed to

provide receipts supporting the majority of expenses claimed on

his returns.

Although petitioner appears to have some experience in the

area of brokerage, he conceded that he has not sold one piece of

property or business enterprise in all of his years engaged in

this activity, with the exception of the sales of one-third of

his interest in KRBA to Mr. Leonard, and, later, his remaining

interest in KRBA to third parties. Petitioner did not present

documentation of these transactions, and the record fails to

indicate whether his role in the transactions was that of a

broker or simply a seller.

Petitioner testified that he spent 15 to 20 hours per week

on brokerage activity and was regularly contacting potential

sellers and buyers. However, the receipts presented by

petitioner in support of this contention are dated almost

exclusively during the Christmas and Labor Day weekend holidays.

Moreover, the travel was largely to Indianapolis, Indiana, where

his son lives with petitioner's former wife, and several of the

receipts presented in support of his "business" expenses were for

tickets to Sea World and Disneyland.
 10

Petitioner argues that his failure to achieve success in the

brokerage business should not preclude a determination that he is

engaged in such activity for profit. He insists that he has a

good faith profit motive and that the Internal Revenue Service

and this Court should not be permitted to decide otherwise since

we allegedly lack any brokerage experience. It is well settled

that we are not required to accept self-serving testimony in the

absence of corroborating evidence. Lerch v. Commissioner, 877

F.2d 624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295;

Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992). Based on

the foregoing, we conclude that petitioner was not engaged in a

brokerage business for profit, and, accordingly, having received

no income from that source, is not entitled to claim a deduction

for any expenses related thereto during the years at issue.

We next consider whether petitioner is liable for an

addition to tax for negligence under section 6653(a)(1) for 1988

and an accuracy-related penalty under section 6662 for 1989.

Section 6653(a)(1) imposes an addition to tax equal to 5 percent

of the underpayment if any part of an underpayment of tax was due

to negligence or intentional disregard of rules or regulations.

Negligence is defined by section 6653(a)(3) as the failure to

exercise the due care of a reasonable and ordinarily prudent

person under similar circumstances. Neely v. Commissioner, 85

T.C. 934, 947 (1985). Under section 6662, there shall be added

to the tax an amount equal to 20 percent of the portion of the
 11

underpayment that is attributable to negligence or disregard of

rules or regulations. Under section 6662(c), negligence includes

any failure to make a reasonable attempt to comply with the law

and the term "disregard" includes any careless, reckless, or

intentional disregard. Failure to maintain adequate records may

constitute negligence. Schroeder v. Commissioner, 40 T.C. 30, 34

(1963); Johnson v. Commissioner, T.C. Memo. 1991-346, affd.

without published opinion 8 F.3d 811 (3d Cir. 1993).

As noted, it is the responsibility of petitioner to maintain

books and records sufficient to accurately establish the amount

of his deductions. Sec. 6001. Petitioner failed to maintain

organized records and receipts of the expenses claimed on his

returns for the years at issue, clearly claimed deductions for

items of a personal nature, and did not present any evidence with

respect to his liability for the above addition and penalty. We

conclude that petitioner is liable for the addition to tax under

section 6653(a) and the accuracy-related penalty under section

6662 as determined by respondent.

Decision will be entered

for respondent.