T.C. Memo. 1997-7
UNITED STATES TAX COURT
JULIE PUSATERI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7394-95. Filed January 2, 1997.
David B. Crall, for petitioner.
Christine V. Olsen, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: This case was heard pursuant to
section 7443A(b)(3) of the Code and Rules 180, 181, and 182. 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.
Respondent determined a deficiency in petitioner's 1991
Federal income tax in the amount of $7,795, together with an
accuracy-related penalty under section 6662(a) of $1,356.
We must decide: (1) Whether petitioner improperly reported
income and deductions on two Schedules C and on a Schedule E
attached to her 1991 Federal income tax return; (2) whether
petitioner is subject to additional self-employment tax;
(3) whether petitioner is entitled to a child care credit; and
(4) whether petitioner is liable for an accuracy-related penalty
under section 6662(a).
Some of the facts have been stipulated and they are so
found. Petitioner resided in Solana Beach, California, when her
petition was filed.
For clarity and convenience, our findings of fact and
opinion have been combined.
During 1991, petitioner was married but separated from her
husband. During that year, petitioner was a paralegal licensed
to practice in California. She operated two paralegal
businesses. On her 1991 Federal income tax return, petitioner
reported income and expenses of her two paralegal business on two
Schedules C, "Julie Pusateri-Paralegal" (Schedule C-1), and
"Legal Assistance Center" (Schedule C-2). The parties have used
the Schedule C-1 and Schedule C-2 terminology and so shall we.
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The paralegal business for Schedule C-1 was operated out of
an office owned by petitioner's husband. The office was located
in her husband's house. Petitioner did not pay rent to her
husband or to a landlord for the use of the office. The office
had a fax machine, a computer, shelves for supplies, a telephone,
a printer, and similar items. Petitioner paid for her own
supplies. The paralegal business for Schedule C-2 was operated
out of the Legal Assistance Center.
In 1991, petitioner maintained a checking account with Union
Bank. She also maintained an account with Wells Fargo Bank under
the name "Legal Assistance Center". Petitioner testified that
all earnings from her Schedule C-1 paralegal business were
deposited into the Union Bank account, and that all earnings from
her Schedule C-2 paralegal business were deposited into the Wells
Fargo bank account. The parties stipulated that the total gross
receipts from petitioner's Schedule C-1 paralegal business in the
Union Bank checking account were $29,056 in 1991. (The $258
difference between this amount and the $29,314 reported on the
Schedule C-1 was due to a mistake.)
On her Schedule E, Supplemental Income and Loss, petitioner
reported "rent income" of $6,720 from "residential" property in
San Diego, and "rent income" of $1,600 from "equipment and
furniture", for a total of $8,320. On the Schedule E, petitioner
also deducted expenses of $200 for cleaning, $100 for insurance,
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$100 for utilities on the residential property in San Diego and
depreciation of $1,280 on equipment and furniture, for a total
deduction of $1,680.
Respondent disallowed, for lack of substantiation, all of
petitioner's expenses claimed on the Schedule C-1 and some of the
expenses claimed on the Schedule C-2. Respondent disallowed all
expenses claimed on the Schedule E and allocated the $8,320 of
Schedule E income to petitioner's Schedule C-1.
Deductions are a matter of legislative grace. A taxpayer
who seeks a deduction must be able to show that the taxpayer
comes within the express provisions of the statute. New Colonial
Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Petitioner has
the burden of proving that respondent's determinations are
incorrect in all respects. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933).
We first turn to the expenses deducted on the Schedule C-1
and the Schedule C-2. The parties agreed, by written and oral
stipulation, that petitioner substantiated the amounts set forth
below:
Schedule C-1
Expenses Expenses
Claimed Substantiated
Car $ 5,272 $4,060
Rent-vehicles, machinery
and equipment 1,600
Rent-other business property 6,720
Supplies 1,530 1,000
Meals and entertainment 246
Utilities 1,220
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Seminars 525 495
Telephone 403
Visa/Mastercard 216
Certification _______ 100
Total Expenses $17,113 $6,274
Schedule C-2
Expenses Expenses
Claimed Substantiated
Advertising $ 5,178 $5,078
Bad debt 203
Car 3,500
Legal & professional
services 950 500
Rent-other business
property 1,000
Supplies 2,047
Taxes & licenses 133
Meals & entertainment 162 162
Utilities 271 242
Computer expenses 1,698 1,348
Bank fees 122 122
Law book 47
Depreciation 227
Business license fees _______ 133
Total Expenses $15,264 $7,859
On her Schedule C-1, petitioner claimed rental expenses of
$1,600 and $6,720 for a total of $8,320. Petitioner admitted
that she did not pay the $1,600 rental expense on machinery.
Petitioner also admitted that she did not pay $6,720 for rent for
the use of her husband's office. In short, petitioner did not
pay the $8,320 deducted by her on the Schedule C-1. Except to
the extent the parties stipulated that the expenses were
substantiated, respondent's disallowances of the Schedule C-1 and
Schedule C-2 deductions are sustained.
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We hold that the $8,320 reported by petitioner on the
Schedule E was not rental income. Petitioner admitted that this
amount was paid to her by an attorney. Petitioner claimed this
was to help make up for the fact that she supplied her own
facilities.
Petitioner conceded that she did not incur any of the $1,680
of expenses claimed as deductions on her Schedule E.
Respondent's disallowance of that amount is sustained.
The next issue is respondent's allocation of the $8,320 of
Schedule E income to petitioner's Schedule C-1. Petitioner
argued that by claiming the $8,320 on her Schedule C-1 and
reporting the $8,320 on her Schedule E, she merely made a "paper
transfer" of the $8,320 from her Schedule C-1 to her Schedule E.
It was not merely a paper transfer. We agree with respondent
that this was done to avoid the payment of self-employment tax.
However, petitioner further argues that by disallowing the $8,320
rent deduction on her Schedule C-1, and then attributing $8,320
from Schedule E to Schedule C-1 income, respondent has double-
counted the $8,320. We find it significant that the amounts of
$6,720 and $1,600 included in income on petitioner's Schedule E
correspond to the amounts of $6,720 and $1,600 petitioner
deducted on her Schedule C-1. We do not believe that petitioner
failed to report $8,320 of income. Rather, we believe that
petitioner tried to "transfer" $8,320 to her false Schedule E and
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to hide this by specious deductions on her Schedule C-1. On this
record, we are satisfied that petitioner reported all of her
income, subject to correction for the $258 mistake in her favor.
Accordingly, we sustain petitioner on this issue.
Petitioner's self-employment tax was increased by
respondent. A taxpayer is liable for self-employment tax on net
earnings pursuant to section 1401. Net earnings are defined as
"the gross income derived by an individual from any trade or
business carried on by such individual," less the allowable
deductions pertaining to such trade or business. Sec. 1402(a).
It is not disputed that petitioner is self-employed in both her
businesses. Accordingly, petitioner is liable for self-
employment taxes to the extent that petitioner has net earnings
under our findings. The deduction of one-half of the self-
employment tax will be a computational adjustment. Sec. 164(f).
The parties stipulated that the gross receipts in the Union
Bank account were $29,056, which was $258 less than the gross
receipts of $29,314 reported on the Schedule C-1. We conclude
that the gross receipts for the Schedule C-1 business were
$29,056. When we deduct the expenses stipulated as substantiated
by petitioner of $6,274, petitioner had net profit of $22,782 for
her Schedule C-1 paralegal business. This is in sharp contrast
to the net profit of $12,201 petitioner reported on the original
Schedule C-1.
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The gross receipts for the Schedule C-2 business were
$3,692. When we deduct the expenses stipulated as substantiated
by petitioner of $7,859, petitioner had a net loss of $4,167 for
her Schedule C-2 paralegal business. This again is in sharp
contrast to the $11,572 loss petitioner reported on the original
Schedule C-2.
Petitioner made no argument with respect to the denial of
the $96 child care credit and we deem this issue conceded.
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662(a) for 1991. Section
6662(a) and (b)(1) imposes a penalty on any portion of an
underpayment that is attributable to negligence or disregard of
rules or regulations. The term "negligence" includes any failure
to make a reasonable attempt to comply with the statute, and the
term "disregard" includes any careless, reckless, or intentional
disregard. Sec. 6662(c). The penalty does not apply to any
portion of an underpayment for which there was reasonable cause
and with respect to which the taxpayer acted in good faith. Sec.
6664(c). Respondent's determinations are presumed correct, and
petitioner bears the burden to prove she is not liable for the
accuracy-related penalty under section 6662(a). Rule 142(a);
Neely v. Commissioner, 85 T.C. 934, 947 (1985); Bixby v.
Commissioner, 58 T.C. 757, 791-792 (1972).
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Petitioner conceded that she took deductions on both the
Schedule C-1 and the Schedule E which were false. She had no
right to claim these deductions. She was unable to substantiate
many of the deductions she claimed on both the Schedule C-1 and
the Schedule C-2. In fact, she only fully substantiated two
items originally deducted on the two Schedules C. Petitioner
filed a false Schedule E that benefited her through the avoidance
of self-employment tax.
Under the foregoing circumstances, we can only conclude that
she was negligent. We find that petitioner is liable for the
accuracy-related penalty.
To reflect the various adjustments,
Decision will be entered
under Rule 155.