Sexcius v. Commissioner

T.C. Memo. 1996-175

UNITED STATES TAX COURT

SHERIEL L. SEXCIUS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7224-94. Filed April 10, 1996.

Sheriel L. Sexcius, pro se.

Aretha Jones, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CARLUZZO, Special Trial Judge: This case was heard pursuant

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

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
 - 2 -

determined a deficiency in petitioner's Federal income tax in the

amount of $7,645.75 for the year 1989 and an addition to tax

pursuant to section 6651(a)(1) in the amount of $1,705.93. In

her answer respondent asserted that petitioner is also liable for

a penalty in the amount of $1,529.15 pursuant to section 6662(a)

because either she was negligent under section 6662(b)(1) or she

substantially understated her 1989 Federal income tax liability

under section 6662(b)(2).

Following concessions,2 the issues for decision are: (1)

Whether petitioner is entitled to deductions in the amount of

$14,312 claimed on a Schedule C, Profit or Loss from Business,

relating to her tutoring and counseling activity; (2) whether

petitioner is entitled to miscellaneous deductions in the amount

of $14,534 claimed on Schedule A, Itemized Deductions; (3)

whether petitioner is liable for the addition to tax pursuant to

section 6651(a) as determined by respondent; and (4) whether

petitioner is liable for the penalty under section 6662(a), due

to her negligence or because she substantially understated her

Federal income tax within the meaning of section 6662(d).

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

The stipulation of facts and the exhibits attached thereto are

2
Respondent conceded that petitioner is not liable for self-
employment tax for the year 1989. Petitioner conceded liability
for an addition to tax pursuant to sec. 6651(a); however, she
disputes the amount as determined by respondent.
 - 3 -

incorporated herein by this reference. At the time the petition

was filed, petitioner resided in Washington, D.C.

FINDINGS OF FACT

During 1989, petitioner was employed on a full-time basis as

a teacher in the District of Columbia Public School System.

Petitioner holds a bachelor of science degree and a master's

degree, and is certified to teach biology at the senior high

school level. Petitioner is also a registered nurse and during

the year in issue was employed on a part-time basis with

Medlantic Long Term Care Corp. as a nurse on weekends and

holidays.

Beginning in 1979 and continuing at least through 1991,

petitioner engaged in a tutoring and counseling activity (the

tutoring activity). For the years 1979 through 1991, without

data available for years 1981 and 1990, petitioner reported

Schedule C gross receipts in the aggregate amount of $36,880, and

other income on Schedule C in the aggregate amount of $6,275, and

claimed total deductions of $172,868.55 that resulted in a loss

for each year, and an aggregate loss in the amount of

$129,713.55. Petitioner provided her tutoring and counseling

services primarily to individuals from low income, impoverished

families. Petitioner operated the activity in 1989 in a similar

manner to its operation in prior years. Thus, the general set up

of the activity, the number of students tutored, the time she

devoted to the activity, and various other policies and practices
 - 4 -

were similar to prior years. For a more detailed explanation as

to how petitioner conducted her tutoring activity, see Sexcius v.

Commissioner, T.C. Memo. 1993-310 and Sexcius v. Commissioner,

T.C. Memo. 1991-162.3

Petitioner tutored students for several hours every day

after school and also during the summer months and holidays,

devoting an average of 33 hours per week to such activity. She

charged minimally for her services, allowed customers to pay at

their discretion according to their ability to do so, and made

little or no effort to collect outstanding account receivables,

notwithstanding the substantial losses she incurred repeatedly

over several years. Other than the gross receipts reported on

Schedule C, petitioner provided little information with respect

to the amounts, if any, that she charged or received for her

services. She merely indicated that her fees were based upon

what she believed the students could pay, whether in cash or

other property. To petitioner, the fact that students or their

families could or could not pay for her services was secondary to

the fact that they needed the assistance that petitioner could

provide, and, for that reason, it was not petitioner's practice

3
The parties stipulated to the trial transcripts in those
prior cases. At trial, the Court advised the parties that such
stipulations were being considered an invitation to base findings
of fact in this case upon testimony presented in the prior cases.
Neither party objected. To petitioner's detriment in this
proceeding, there was little if any change to petitioner's
methods of operation from one year to the next.
 - 5 -

to turn customers away based on their inability to pay. She did

not maintain a separate bank account for depositing whatever

payments she did receive. With respect to the expenses claimed,

petitioner did not attempt to introduce into evidence any books

or records, or source documents, that reflected the nature and

amounts of such expenses.

Petitioner reported income and deductions from her tutoring

and counseling activity on a Schedule C for every year from 1979

through 1991. As noted above, in each year since 1979 for which

there is evidence in the record, petitioner claimed a substantial

loss from her activity. The losses incurred from year to year

from petitioner's tutoring activity were apparently financed from

her other earnings.

In 1989, petitioner reported on Schedule C gross receipts of

$4,399 and deductions in the amount of $14,312, resulting in a

$9,913 loss. Respondent disallowed the deductions claimed on

petitioner's Schedule C for 1989 on the grounds that her activity

was not engaged in for profit and that she failed to substantiate

any of the deductions claimed.

Petitioner also claimed $20,124 in itemized deductions on

her Schedule A for the year 1989, including $14,534 in

miscellaneous deductions attributable to employee business and

other expenses. Respondent disallowed the miscellaneous

deductions claimed for lack of substantiation.
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OPINION

Schedule C Deductions

The Commissioner's determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving that those determinations are erroneous. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that he or she is entitled to any

deduction claimed. Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering, supra.

This includes the burden of substantiation. Hradesky v.

Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976). In addition, section 6001 requires the

taxpayer to keep records sufficient to show whether or not the

person is liable for tax.

As in the prior cases, petitioner has taken the position

that the expenses relating to her tutoring activity were incurred

by her in connection with a trade or business and are deductible

pursuant to section 162. Respondent argues that petitioner's

tutoring activity does not constitute a trade or business because

petitioner did not engage in such activity with the requisite

profit objective. Consequently, according to respondent,

petitioner cannot rely upon section 162 to support her claimed

deductions.
 - 7 -

Our consideration of respondent's adjustment with respect to

petitioner's Schedule C deductions begins with an examination of

whether petitioner conducted her tutoring activity with the

intent to make a profit. Absent an intent to make a profit,

petitioner's tutoring activity could not be considered a trade or

business within the meaning of section 162. Commissioner v.

Groetzinger, 480 U.S. 23 (1987).

The test for determining whether a taxpayer conducted an

activity for profit is whether he or she entered into, or

continued, the activity with the actual or honest objective of

making a profit. Dreicer v. Commissioner, 78 T.C. 642, 644-645

(1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 1983);

sec. 1.183-2(a), Income Tax Regs. The taxpayer's expectation of

profit need not be reasonable, but the profit objective must be

bona fide, as judged by all facts and circumstances. Dreicer v.

Commissioner, supra at 645; Golanty v. Commissioner, 72 T.C. 411,

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

Cir. 1981); Bessenyey v. Commissioner, 45 T.C. 261, 274 (1965),

affd. 379 F.2d 252 (2d Cir. 1967).

Whether petitioner engaged in her tutoring activity with the

requisite profit objective must be determined on a year-by-year

basis from the facts and circumstances of the case. Golanty v.

Commissioner, supra at 426; sec. 1.183-2(a) and (b), Income Tax

Regs. More weight is given to objective facts than to
 - 8 -

petitioner's statement of her intent. Sec. 1.183-2(a), Income

Tax Regs. Petitioner bears the burden of showing she engaged in

her tutoring activity with the actual and honest objective of

realizing a profit. Rule 142(a); Golanty v. Commissioner, supra

at 426.

The following factors, which are nonexclusive, should be

considered in the determination of whether an activity is engaged

in for profit: (1) The manner in which the taxpayer carried on

the activity; (2) the expertise of the taxpayer or his or her

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 similar or dissimilar activities;

(6) the taxpayer's history of income or losses with respect to

the activity; (7) the amount of occasional profits, if any, which

are earned; (8) the financial status of the taxpayer; and (9)

elements of personal pleasure or recreation. Sec. 1.183-2(b),

Income Tax Regs. No one factor is determinative in and of

itself, and a profit objective does not hinge on the number of

factors satisfied. Id.

Petitioner did not carry on her tutoring activity in a

businesslike manner. Sec. 1.183-2(b)(1), Income Tax Regs.

Petitioner did not maintain a separate bank account for the

activity. Neither did she produce any books or records she might
 - 9 -

have maintained with respect to the activity. She had no set

fees for her services, allowed customers to pay at their

discretion, and made little or no effort to collect outstanding

debts, notwithstanding the fact that she incurred substantial

losses repeatedly over several years.

The fact that petitioner failed to change her manner of

operation in an effort to reverse her history of losses also

supports respondent's adjustment. See id. Although a profit

objective may exist despite a history of losses unaccompanied by

any gains, see, e.g., Bessenyey v. Commissioner, supra at 273-

274, losses continuing beyond the period customarily necessary to

make the operation profitable, if not explained, support the

proposition that the activity is not engaged in for profit. Sec.

1.183-2(b)(6), Income Tax Regs. The record reflects that

petitioner operated the activity in 1989 in a similar manner to

its operation in prior years insofar as the general set up of the

activity, the number of students tutored, the time petitioner

devoted to the tutoring activity, etc. Petitioner did not change

her operating methods from one year to the next in a manner

consistent with an intent to improve profitability and did not

adequately explain why she failed to do so. Sec. 1.183-2(b)(1),

Income Tax Regs.

Considering her history of losses, petitioner's practices of

neither charging nor collecting fees from customers who were
 - 10 -

unable or unwilling to pay strongly suggests the absence of the

requisite profit objective necessary to support the deductions

claimed. Based upon an examination of all the facts and

circumstances, we are unable to conclude that petitioner

conducted her tutoring activity with a bona fide, honest, and

objective profit motive. Furthermore, she has failed to

substantiate any of the claimed deductions. Consequently, we

sustain respondent's disallowance of the deductions claimed on

petitioner's Schedule C for the year 1989.4

Schedule A Deductions

Petitioner reported on her Schedule A, Itemized Deductions,

deductions for employee business expenses and other miscellaneous

deductions in the amount of $14,534 for the year 1989. As

previously noted, deductions are a matter of legislative grace

and petitioner must prove her entitlement to these deductions.

Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. at 440;

Welch v. Helvering, 290 U.S. at 115.

Petitioner has failed to substantiate any of the deductions

claimed on her Schedule A for the year 1989. Accordingly, we

sustain respondent's determination with respect to this issue.

4
Our finding with respect to petitioner's profit motive also
precludes allowing the disputed Schedule C deductions under sec.
212. Petitioner's failure to substantiate such deductions
precludes the allowance of any which might otherwise be permitted
by sec. 183.
 - 11 -

Addition to Tax

Section 6651(a)(1) imposes an addition to tax for failure to

timely file a return, unless the taxpayer establishes that the

failure to file is due to reasonable cause and not due to willful

neglect. The addition to tax equals 5 percent of the tax

required to be shown on the return for the first month, with an

additional 5 percent for each additional month or fraction of a

month during which the failure to file continues, not to exceed a

maximum of 25 percent. Sec. 6651(a)(1).

In her brief, petitioner conceded that section 6651(a)

applies with respect to the year 1989 and for reasons unexplained

only disputes the amount as computed by respondent. Petitioner

presented no evidence or argument demonstrating the nature of the

alleged computational error. Accordingly, we sustain respondent

with respect to this issue.

Accuracy-Related Penalty

In her answer, respondent asserted that the section 6662(a)

penalty should be imposed. Respondent argues for the imposition

of the penalty due to petitioner's negligence or disregard of

rules or regulations within the meaning of section 6662(b)(1) and

(c), or because petitioner substantially understated her income

tax, within the meaning of section 6662(b)(2) and (d).

Negligence includes any failure to make a reasonable attempt to

comply with the provisions of the internal revenue laws or to
 - 12 -

exercise ordinary and reasonable care in the preparation of a tax

return. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.

Disregard includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c); sec. 1.6662-

3(b)(2), Income Tax Regs. Respondent bears the burden of proof

with respect to the imposition of this penalty. Rule 142(a);

Robinson v. Commissioner, 102 T.C. 116, 124 (1994), affd. in

part, revd. in part 70 F.3d 34 (5th Cir. 1995); Achiro v.

Commissioner, 77 T.C. 881, 890 (1981).

Petitioner failed to produce at trial any substantiating

evidence with respect to the deductions she claimed on her

Schedules A and C. Given her prior experiences in this Court,

she was no doubt aware that the production of such evidence was

expected and necessary to support her claimed entitlement to the

deductions in dispute. We can only conclude that her failure to

produce such substantiating evidence results from her failure to

have maintained adequate books and records as required by section

6001 and the corresponding regulation. In our view, petitioner's

recordkeeping deficiencies constitute at least a careless

disregard of the rules or regulations within the meaning of

section 6662(b)(1) and (c), which renders her liable for the

penalty imposed by section 6662(a), and we so hold.

To reflect the foregoing,

Decision will be entered

under Rule 155.