T.C. Memo. 1996-297
UNITED STATES TAX COURT
JOHN K. JORMAN, JR. AND AUDREY JORMAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9379-94. Filed June 26, 1996.
John K. Jorman, pro se.
Brian M. Harrington, 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
determined a deficiency in petitioners' 1991 Federal income tax
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.
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in the amount of $6,339 and an accuracy-related penalty under
section 6662(a) in the amount of $1,268.
After concessions by the parties, the issues for decision
are: (1) Whether petitioners are entitled to an itemized
deduction for moving expenses; (2) whether John K. Jorman was
engaged in a trade or business related to the real estate
industry during the year 1991 so as to allow for deductions under
section 162(a); and (3) whether petitioners negligently filed
their 1991 Federal income tax return so as to render them liable
for the accuracy-related penalty imposed by section 6662(a).
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference. During the year in issue,
petitioners were husband and wife and filed a joint Federal
income tax return. At the time that the petition was filed,
John K. Jorman resided in Plainfield, Indiana, and Audrey Jorman
resided in Indianapolis, Indiana. References to petitioner are
to John K. Jorman.
FINDINGS OF FACT
During the year in issue, petitioner was employed as a
customer service supervisor with PSI Energy, Inc. (PSI).
Petitioner began his employment with PSI on March 30, 1990, in
Bloomington, Indiana. When he started with PSI he was living in
Indianapolis, Indiana. He moved to an apartment in Bloomington
sometime in May or June of 1990. Toward the end of 1990,
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petitioner was promoted and transferred to Kokomo, Indiana, which
is approximately 120 miles from Bloomington. His assignment with
PSI in Kokomo began in January of 1991.
Prior to his transfer, petitioner traveled to Kokomo by car
on several occasions to look for a place to live and eventually
rented an apartment there. He moved into this apartment in late
January 1991. After his transfer was effective, and before he
moved into his apartment in Kokomo, petitioner resided with a
friend in Fishers, Indiana, for 4 weeks. Petitioner testified
that he paid his friend $100 per week, or a total of $400, for
such lodging but offered no corroborating evidence on this point.
During this same time period he spent approximately $20 per week
on groceries and a total of $60 for meals in restaurants.
There is insufficient evidence in the record to determine
whether petitioner incurred any penalty for terminating his lease
on the Bloomington apartment. In connection with the acquisition
of the apartment in Kokomo, petitioner incurred expenses for new
curtains and other furnishings.
During 1991, PSI had in effect an employee relocation
program, part of which provided financial and other assistance to
employees transferred from one company location to another.
Petitioner qualified for benefits under this program, evidenced
by a Miscellaneous Expenses Allowance Agreement entered into by
petitioner and PSI on January 7, 1991. Although not exactly
clear from the record, it appears that petitioner received
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$8,352.39 in relocation benefits directly or indirectly from PSI
as a result of his transfer from Bloomington to Kokomo. Included
in the amount of relocation benefits received by petitioner were
the following items:
Amount paid to third party for transportation
and storage of household goods and
personal effects $1,247.25
Amount paid to petitioner for lodging
incurred in his move from Bloomington to
Kokomo 22.60
Amount paid to petitioner for expenses
incurred in selling, buying, or leasing a
residence 416.68
The entire amount of the relocation benefits received by
petitioner in 1991 was included in his Form W-2 wages and
reported on petitioners' 1991 return.
On their 1991 return petitioners claimed an itemized moving
expense deduction in the amount of $3,897.18 computed as follows:
Transportation and storage expenses in
moving household goods and personal
effects $1,247.252
Travel, meals and lodging expenses
in moving from old to new residence 298.25
Pre-move travel, meals, and lodging
in looking for a new residence after
getting a job incurred from 1/1-1/31/91 1,344.00
Expenses of settling an unexpired lease 412.68
2
This amount was paid directly by PSI to third parties on
petitioner's behalf.
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Expenses of getting a new lease 595.00
Total claimed deduction 3,897.18
In addition to his employment with PSI during 1991,
petitioner also maintains that he was in some trade or business
related to the real estate industry. Petitioner held licenses to
appraise, broker, and sell real estate during the year in issue.
A Schedule C included with petitioners' 1991 return reflects the
following items:
Gross receipts -0-
Gross income -0-
Car and truck expenses $10,000
Office expense 4,345
Taxes and licenses 50
Other expenses
Materials 4,100
Journal 78
Total expenses 18,573
Net loss 18,573
Petitioner provided little detail as to how the specific
amounts of the deductions were computed. He did testify that the
automobile deduction related to a 1978 Buick Regal and a 1980
Oldsmobile Cutlass, vehicles that were acquired by petitioners
prior to 1991. He also testified that included in office
expenses were items such as cable television services fees,
newspaper and magazine subscriptions, and the costs of acquiring
a sofa, computer table, and other items of furniture, as well as
a portion of the rent paid on his Kokomo apartment. Petitioner
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maintained a separate bank account for the real estate activity;
however, most of the checks entered into evidence that were drawn
on the account were made payable to "cash". Petitioner described
the nature of his real estate activity for years prior to 1991
but provided no information concerning what he was doing in 1991.
OPINION
Respondent disallowed the entire moving expense deduction
based upon lack of substantiation. Respondent disallowed all of
the deductions claimed on the Schedule C upon the ground that
petitioner's real estate activity did not constitute a trade or
business within the meaning of section 162(a). Petitioners claim
that they have satisfied all of the provisions of section 217,
and with the exception of certain PSI records, rely exclusively
on petitioner's testimony to support the amount of the deduction
claimed. Petitioner also claims that he was engaged in some real
estate business during 1991 and relies primarily upon his history
of such activity in the years 1985 through 1988.
Respondent's determinations, having been made in a notice of
deficiency, are presumed correct, and petitioners bear the burden
of proving such determinations to be erroneous. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Furthermore,
deductions are a matter of legislative grace, and the taxpayer
bears the burden of proving that he is entitled to any deduction
claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S.
79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435,
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440 (1934); Welch v. Helvering, supra. In addition, a taxpayer
is required to keep books or records to substantiate all
deductions which are claimed. Sec. 6001; sec. 1.6001-1(a),
Income Tax Regs. Where a taxpayer fails to produce any records
to substantiate his deductions, disallowance of the claimed
deductions is proper. Williams v. Commissioner, T.C. Memo. 1986-
195.
Moving Expense Deduction
Ordinarily, moving expenses are considered nondeductible
family and living expenses. However, subject to certain
requirements neither relevant nor in dispute in this case,
section 217 permits a deduction for all reasonable moving
expenses paid or incurred during the taxable year in connection
with the commencement of work as an employee at a new principal
place of work. Whether a claimed moving expense is reasonable is
a question of fact to be determined under the circumstances of
the particular move. Sec. 1.217-2(b)(2), Income Tax Regs. A
taxpayer is required to prove the expenses incurred. See
Haberthier v. Commissioner, T.C. Memo. 1984-377. Petitioners'
proof in support of the disputed moving expense deduction
consists of petitioner's testimony and records from PSI relating
to the amount of relocation benefits petitioner received. After
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considering such evidence we find that petitioners are entitled
to a moving expense deduction in the amount of $1,524.25.3
Schedule C Deductions
Petitioner is no doubt connected in some fashion with the
real estate industry, as evidenced by the licenses he holds and
his activities in prior years. However, it is clear that
petitioner was not engaged in any real estate business during
1991. Although petitioner testified as to what he did in other
years, he provided no explanation whatsoever regarding what his
real estate activity consisted of in 1991. The introduction of
checks made payable to "cash" and drawn on some "business"
account tells us little, if anything, about the nature of the
activity. In those instances where a check was made payable to a
specific payee, it appears that the transaction involved a
personal rather than a business expense.
In countless opinions far too numerous to cite, including
one involving petitioner,4 this Court has resolved disputes
3
The deduction is computed as follows: Expenses incurred
for transportation of household goods ($1,247.25), plus two round
trips by car from Bloomington to Kokomo for househunting, at the
standard mileage rate provided in Rev. Proc. 90-59, 1990-2 C.B.
644 (2 round trips x 240 miles per trip x $.275 per mile = $132),
plus travel by car from Bloomington to Kokomo in connection with
the move (120 miles x $.275 = $33), plus total meal expenses for
househunting and temporary quarters ($140 x .80 = $112).
4
In Jorman v. Commissioner, T.C. Memo. 1994-613, we held
that petitioner's real estate activity was not engaged in with an
actual and honest profit objective in 1990 so as to allow for
deductions under sec. 162(a).
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between taxpayers and the Commissioner involving whether certain
activities constituted trades or businesses for purposes of
section 162(a). In resolving such disputes we are required to
focus upon the nature of the activity involved. Needless to say,
before we can determine whether an activity constitutes a trade
or business, we must know what the activity is. In this case, we
have no idea what petitioner's real-estate-related activity was
in 1991. Without knowing the nature and the extent of the
underlying activity, we cannot determine whether such activity
was conducted by petitioner regularly and with continuity with
the primary purpose of earning a profit. Absent such findings
we are unable to conclude that petitioner was engaged in a real-
estate-related trade or business during 1991. See Commissioner
v. Groetzinger, 480 U.S. 23, 35 (1987). Because petitioner has
failed to meet his burden of proving that the deductions in
dispute relate to expenses paid or incurred in connection with an
activity that constitutes a trade or business, respondent's
adjustments disallowing the deductions are sustained.
Accuracy-Related Penalty
Respondent determined that petitioners were liable for the
accuracy-related penalty pursuant to section 6662(a) in the
amount of $1,268 for the year 1991. Section 6662(a) and (b)(1)
imposes a penalty on any portion of an underpayment which is
attributable to negligence or disregard of rules or regulations.
The term "negligence" includes any failure to make a reasonable
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attempt to comply with the statute, and the term "disregard"
includes any careless, reckless, or intentional disregard. Sec.
6662(c). Respondent's determination is presumed correct, and
petitioners bear the burden of proving that they are not liable
for the accuracy-related penalty under section 6662(a). Rule
142(a); Welch v. Helvering, supra at 115 (1933); Bixby v.
Commissioner, 58 T.C. 757, 791-792 (1972).
Petitioners produced little substantiating evidence in
support of the moving expense deduction in dispute in this
matter. Furthermore, they failed to explain why all but one of
the components of the deduction were in excess of what
substantiating evidence they did produce. Likewise, petitioners
produced substantiating evidence for only a small portion of the
deductions claimed on the Schedule C. Had we resolved the trade
or business issue in favor of petitioners, most of the deductions
would have been denied for lack of substantiation anyway. Given
petitioners' prior experience in this Court, they were no doubt
aware that the production of substantiating evidence was expected
and necessary to support their claimed entitlement to the
deductions in dispute. We can only conclude that their failure
to produce substantiating evidence results from their failure to
have maintained adequate books and records as required by section
6001 and the corresponding regulation. In our view, petitioners'
failure to explain the excessive deductions claimed along with
their recordkeeping deficiencies constitute at least a careless
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disregard of rules or regulations within the meaning of section
6662(b)(1) and (c), which renders them liable for the penalty
imposed by section 6662(a), and we so hold.
To reflect the foregoing,
Decision will be entered
under Rule 155.