T.C. Memo. 1997-107
UNITED STATES TAX COURT
CURTIS G. AND EDNA L. LOCKETT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3978-94. Filed March 3, 1997.
Curtis G. Lockett, pro se.
Ruth Perez, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.
Respondent determined deficiencies in Federal income taxes
of $7,012 and $5,985, respectively, for petitioners' 1991 and
1992 tax years.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
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The issues for decision are: (1) Whether petitioners are
entitled to deductions for expenses, under section 162(a),
incurred in connection with a medical research activity conducted
by Curtis G. Lockett (petitioner) during the years at issue, and
(2) whether petitioners are entitled to an itemized deduction,
under Schedule A, for job expenses and other miscellaneous
expenses for the year 1991.2
Some of the facts were stipulated. Those facts, with the
exhibits submitted therewith, are so found and are incorporated
herein by reference. At the time the petition was filed,
petitioners' legal residence was Mobile, Alabama.
For some 20 years prior to the years at issue, petitioner
was a home building contractor. Sometime during this period,
petitioner maintained a home laboratory for the purpose of
developing a medicine to treat his minor daughter who was
2
Petitioners conceded the failure to include in gross income
dividends for the year 1991. The parties agree that the correct
amount of the unreported dividend income is $94.52 instead of $96
as set out in the notice of deficiency. Petitioners also
conceded the failure to include in gross income for the year 1991
the $500 premature distribution of an individual retirement
account. Respondent determined, in the notice of deficiency, the
10-percent additional tax on early distributions from qualified
retirement plans under sec. 72(t). Although petitioners did not
expressly concede this adjustment, they presented no evidence and
did not address this issue at trial. Petitioners are deemed to
have waived this issue. The Court, therefore, determines that
adjustment against petitioners. Rule 149(b); Walker-Scott Corp.
v. Commissioner, 35 T.C. 34, 37 (1960). All other adjustments in
the notice of deficiency are computational, based upon the
Court's holding on the contested issues.
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afflicted with sickle cell anemia. Petitioner developed what he
referred to as a "compound" that he administered to his daughter
and that, to petitioner's satisfaction, placed her sickle cell
anemia in remission. Petitioner was convinced that his compound
was effective because, for a time period in which he was unable
to administer the compound to his daughter, her condition
worsened, and she lost her left eye. When the compound was again
administered to her, she became well.
Petitioner is not a doctor of medicine, although he holds a
college degree in biology, chemistry, and physics. For the years
prior to the years in question, petitioner did not consider his
home laboratory as a trade or business for tax purposes. Also,
the record does not indicate that petitioner ever contacted or
made known to doctors and/or pharmaceutical companies his
development of the compound, which he was satisfied relieved his
daughter of her sickle cell anemia. Petitioner did not
administer this compound to anyone other than his daughter, nor
did he ever sell or market the compound. He was of the belief
that his compound would be effective in suppressing AIDS and
other human immune system problems.
Sometime in 1991, or a short time prior thereto, petitioner
decided to proceed commercially with his compound. He
discontinued his contracting business and spent considerable
amounts of money in improving his laboratory. He adopted a trade
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name of TEL Sickle Cell Research & Development and attempted to
obtain tax-exempt status from the Internal Revenue Service
under section 501(c)(3). That attempt was unsuccessful and was
not pursued further. Petitioner, nevertheless, continued with
his laboratory and considered it a trade or business for tax
purposes for the years at issue.
On their 1991 and 1992 income tax returns, petitioners
reported their construction/laboratory activity on Schedule C,
Profit or Loss From Business, as follows:
1991
Income -0-
Expenses:
Bad debts from sales or services $22,360.00
Car and truck expenses 1,034.74
Insurance 3,849.00
Legal and professional services 8,494.71
Office expense 637.00
Rent or lease of vehicles 2,640.00
Utilities 4,080.00
Total $43,095.45
Loss $43,095.45
1992
Income -0-
Expenses:
Advertising $ 3,840
Commissions and fees 2,130
Insurance 1,560
Legal and professional services 2,500
Office expense 632
Rent or lease of vehicles 547
Repairs and maintenance 18,350
Taxes and licenses 680
Travel 1,303
Meals and entertainment (net) 294
Utilities 2,880
Total $34,716
Loss $34,716
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In the notice of deficiency, respondent disallowed all of
the expenses claimed for the 2 years in question on the ground
that petitioners "did not establish that the business expenses
shown on your tax return were paid or incurred during the taxable
year and that the expenses were ordinary and necessary to your
business".
On Schedule A, Itemized Deductions, of their 1991 return,
petitioners claimed an itemized deduction for the following:
Uniform rental $ 360.00
Leftover equipment expenses 5,435.00
Less 2% (sec. 67(a)) (188.44)
Deduction claimed $5,606.56
Respondent disallowed that amount on the ground that no
information was provided to support the claimed deduction.
The determinations of the Commissioner in a notice of
deficiency are presumed correct, and the taxpayer bears the
burden of proving that the determinations are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
When this case was originally heard, the Court, after
hearing the testimony of petitioner and one witness for
respondent, recessed the trial because petitioner had no books
and records to present. Petitioner stated that his books and
records were held at different places over the United States;
that he would gather his records and meet with counsel for
respondent; and that, if a settlement of the case was not
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reached, the case would be recalendared for trial. Over 1 year
later, the parties had failed to agree on a settlement; whereupon
the case was recalendared for completion of the trial.
The evidence presented by petitioner to substantiate his
expenses was scant. Although he produced copies of a series of
canceled checks, many of the checks were payable to cash, and no
receipts, bills, or invoices were produced to corroborate or
associate any of the checks with the expense purportedly being
paid. Moreover, as to each of the expenses at issue, the checks
submitted to support the expense claimed did not add up to or
equal the amount claimed as an expense on the return.
Petitioner's basic answer was that he could not "come up" with
the missing checks. Moreover, the evidence fails to support a
finding that petitioner was engaged in a trade or business during
the years in question. Petitioner acknowledged that he was no
longer in the building construction business during 1991 and
1992, and the Court is satisfied that petitioner was not engaged
in a medical research and development activity during the 2 years
at issue. At best, petitioner was attempting to start or begin
an activity in medical research, and the evidence falls short of
establishing that such an activity ever commenced or was likely
to commence.
Section 162(a) provides generally that there shall be
allowed as a deduction all the ordinary and necessary expenses
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paid or incurred during the taxable year in carrying on any trade
or business. To be entitled to a deduction under section 162(a),
a taxpayer is required to substantiate the deduction through the
maintenance of books and records. Section 6001 requires
generally that a taxpayer liable for any tax shall maintain such
records, render such statements, make such returns, and comply
with such regulations as the Secretary may from time to time
prescribe. The meager records petitioner presented to
substantiate the expenses at issue do not satisfy the
recordkeeping requirements of section 6001 and do not prove that
the expenses claimed were paid or incurred. The Court holds that
petitioners have not sustained their burden of establishing their
entitlement to a deduction of their Schedule C expenses for 1991
and 1992. Respondent, therefore, is sustained on this issue.
The second issue relates to the year 1991 and Schedule A,
Itemized Deductions, in the amount of $5,606.56 claimed by
petitioners that were also disallowed by respondent for lack of
substantiation. As noted above, petitioners claimed a deduction
of $360 for uniform rental and $5,435 for leftover equipment
expenses, subject to the limitation provisions of section 67(a).
The $5,435 represented payments petitioner claims he made
during 1991 on equipment that had been used in his construction
activity. No documentary evidence was presented to substantiate
either the $5,435 for equipment payments or the $360 uniform
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rental expenses. Respondent, therefore, is sustained on this
issue.
Decision will be entered
under Rule 155.