T.C. Memo. 1997-185
UNITED STATES TAX COURT
KATHLEEN J. KELLY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10304-94. Filed April 21, 1997.
Kathleen J. Kelly, pro se.
Veena Luthra, 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 a deficiency in petitioner's Federal income tax for
1989 in the amount of $4,511 and additions to tax pursuant to
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
2
sections 6651(a) and 6654(a) in the amounts of $685.75 and
$172.05, respectively. After a concession,2 the issues for
decision are whether petitioner is entitled to a Schedule A
deduction claimed for unreimbursed employee business expenses,
and whether petitioner is entitled to a Schedule C deduction
claimed for amounts paid in connection with petitioner's activity
carried on to create awareness and support for the country of
Haiti.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by this reference. Petitioner resided in
Virginia Beach, Virginia, at the time her petition was filed.
During the tax year in question, petitioner was employed on
a full-time basis by Pitney Bowes as a carrier management
specialist, a customer service and sales position in the
Washington, D.C., area. Petitioner estimated that she worked 60
hours per week for Pitney Bowes.
Petitioner's job with Pitney Bowes required that she drive
to see customers. Petitioner leased a car during 1989. With
respect to automobile expenses incurred, petitioner completed
field travel reimbursement expense reports which she submitted to
Pitney Bowes, and she was reimbursed by her employer based on
these reports. The reimbursement expense reports show a date,
2
Petitioner conceded that she had unreported wage income in
the amount of $29,848 for the tax year 1989.
3
daily mileage, and parking expense reported in 2-week intervals.
The record contains reimbursement expense reports for the months
of July, August, September, October, and December 1989.
Petitioner did not keep other records of her business use of her
car. Petitioner's evidence shows that she paid automobile
insurance premiums totaling $1,740.61 during the year in issue.
Petitioner also worked for the Whitman-Walker Clinic in an
AIDS awareness program. She estimated that she devoted
approximately 20 hours each week to the clinic.
In May 1989, petitioner traveled to Haiti with a group on a
tour. The trip was petitioner's first to the country, and the
experience had a significant impact upon her. Petitioner became
interested in helping the people of Haiti and wanted to create a
group in Washington, D.C., to provide tours similar to the one
she had experienced. In June 1989, petitioner started to engage
in activities designed to create an interest in and provide
support for Haiti and, in doing so, she used the name Too Close
To Home. Petitioner carried on her activity during her lunch
hours and in the time between her other jobs. Petitioner hoped
to create a job for herself through her activity.
Sometime during the end of 1989, petitioner rented a portion
of a house located at 69 Observatory Circle, N.W., Washington,
D.C., at a cost of $375 a month. This was the address for Too
Close To Home.
4
In early fall of the year in issue, petitioner participated
in a festival held in Adams Morgan, an area of Washington, D.C.
Petitioner had a booth for Too Close To Home where she handed out
balloons imprinted with messages. The record contains a receipt
for a $300 cash deposit petitioner paid for the order of the
imprinted balloons.
During the year in issue, petitioner organized a Haitian
tour for four people. In November 1989, petitioner traveled to
Haiti with the tour group. Petitioner charged each individual
$300 in addition to the cost of his or her airline ticket.
Petitioner applied the $300 to the cost of room and board in
Haiti, and she distributed the remaining amount to various
charities that the group visited in Haiti.
On December 3, 1989, petitioner organized and cohosted an
art show for the benefit of the orphans of Haiti. Petitioner
estimated that the postcards announcing this event cost $800 to
produce.
Petitioner's records of the expenses paid for Too Close To
Home are virtually nonexistent. Petitioner maintained a bank
account in the name of Too Close To Home. Petitioner did not
keep any records detailing the purpose for which funds were
expended. The checking account records show that the following
amounts were paid from this account in 1989. In November, three
checks totaling $2,043 to Omega Travel for plane tickets were
paid. Petitioner wrote a check to 69 Observatory Circle in the
5
amount of $375 on December 5, 1989, for December rent. Two
checks were drawn on this account in the amounts of $704.70 and
$498 to pay petitioner's car insurance premiums. During the
latter part of 1989, petitioner deposited her paychecks from
Pitney Bowes into this account.
Petitioner quit her Too Close To Home activity at the end of
1989. Later, petitioner revived Too Close To Home as a
charitable corporation, but it remained active less than 1 year.
On March 1, 1994, respondent issued a notice of deficiency
to petitioner for the tax year 1989. Respondent determined that
petitioner had unreported wage income in the amount of $29,848.
After allowing for the standard deduction, respondent determined
a deficiency in petitioner's Federal income tax for 1989 in the
amount of $4,511. Respondent further determined an addition to
tax in the amount of $685.75 pursuant to section 6651(a), for
failure to file a return within the prescribed time, and an
addition to tax pursuant to section 6654(a), for the underpayment
of estimated taxes.
After receiving the notice of deficiency, petitioner filed
her Federal income tax return for 1989. Petitioner reported wage
income of $29,848. On Schedule A of the Form 1040, petitioner
reported State and local taxes in the amount of $1,283 and a
deduction for unreimbursed employee business expenses for
automobile expense in the amount of $8,404 above the 2-percent
floor. Petitioner deducted only $8,404 as itemized deductions.
6
On Schedule C of Form 1040 filed with respect to her activity,
Too Close To Home, petitioner reported gross receipts in the
amount of $1,200 less cost of goods sold and/or operations in the
amount of $1,200. In addition, petitioner claimed expenses
totaling $8,000 and deducted a loss from this activity in the
amount of $8,000. Respondent received petitioner's return for
the year in issue on September 1, 1995.
Respondent's determinations are presumed correct, and
petitioner has the burden of proving them erroneous. Rule
142(a); Welch v. Helvering, 290 U.S. 111 (1933). Deductions
against income are allowed as a matter of legislative grace. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must maintain adequate records to substantiate the
amount of any deductions. Sec. 6001; sec. 1.6001-1(a), Income
Tax Regs.
Generally, when evidence shows that a taxpayer incurred a
deductible expense but the exact amount cannot be determined, the
Court may approximate the amount. Cohan v. Commissioner, 39 F.2d
540 (2d Cir. 1930). An exception to the Cohan rule is section
274(d), which prohibits the estimation of expenses with respect
to certain listed property. Listed property includes automobiles
and computers. Sec. 280F(d)(4).
Section 274(d) requires substantiation of these expenses
either "by adequate records or by sufficient evidence
corroborating the taxpayer's own statement". Petitioner must
7
substantiate the amount of each separate expenditure, the amount
of business and total use of the property, the date of the
expenditure or use, and the business purpose for the expenditure
or use. Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed.
Reg. 46016 (Nov. 6, 1985).
Based on the mileage reported on petitioner's reimbursement
expense reports, on brief respondent concedes that petitioner is
entitled to a deduction for automobile expenses in the amount of
$827.94 using the standard mileage rate. Respondent contends
that petitioner has failed to substantiate automobile expense in
excess of this amount. We agree.
It is clear that petitioner paid some automobile insurance
premiums during 1989. She provided evidence of insurance expense
in the amount of $1,740.61. Petitioner has not established any
amount paid for the lease of her car. Petitioner testified that
she claimed 95 percent of her automobile expense as attributable
to business usage of her car. However, petitioner maintained no
records which would indicate that the business usage of her car
was 95 percent. Petitioner has not met the requirements of
substantiation under section 274(d). Accordingly, she is not
entitled to a deduction for automobile expense in excess of the
amount conceded by respondent.
Petitioner contends that she is entitled to a deduction in
the amount of $1,155 for expense incurred with respect to the use
of a computer in her work for Pitney Bowes. Petitioner testified
8
that she leased a computer which she used to organize her
accounts. Petitioner introduced copies of two invoices for
monthly lease payments. There is no evidence in the record that
petitioner paid either of these bills. In addition, petitioner
did not maintain any records of her business use of the computer
as required by section 274(d). Thus, petitioner has not
established that she is entitled to any deduction for the
business use of the computer.
Petitioner contends that she incurred an $8,000 loss in her
Too Close To Home activity in 1989, and she argues that she is
entitled to deduct the amount of this loss in that year. On
brief respondent requests that we find the following facts:
"Petitioner carried on the Too Close To Home activity from June
1989 to December 1989. She incurred an $8,000 loss with respect
to this activity during the taxable year." We accept this as a
concession as to the amount of the loss incurred by petitioner.
Respondent argues, however, that petitioner did not engage in
this activity for profit, and that she is therefore not entitled
to deduct this amount.
Section 162 allows deductions for ordinary and necessary
expenses paid or incurred in carrying on a trade or business.
Section 183 generally limits allowable deductions to the extent
of gross income generated by "an activity not engaged in for
profit". Sec. 183(b). Whether petitioner was engaged in the
activity for profit depends on whether she undertook the activity
9
"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). Whether
petitioner possessed the necessary intention of making a profit
is a question of fact to be determined on the basis of all the
facts and circumstances. Taube v. Commissioner, 88 T.C. 464, 480
(1987).
The regulations set forth the following nonexclusive factors
to consider in determining whether an activity is engaged in for
profit: (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 were involved. Sec. 1.183-2(b), Income
Tax Regs.
Considering the relevant factors contained in the
regulation, we conclude that petitioner did not engage in her Too
Close To Home activity for profit. Petitioner did not carry on
the activity in a businesslike manner. Although she maintained a
bank account for Too Close To Home, it was not used exclusively
10
for those purposes. Petitioner paid expenses not associated with
the activity, such as her insurance premiums, from the account.
Petitioner had no business records for the activity. Petitioner
had no expertise in providing tours, nor did she have any special
knowledge of Haiti. Petitioner did not devote much of her time
to Too Close To Home. She worked 80 hours a week in her jobs and
carried on Too Close to Home during lunch and between jobs.
Petitioner did not carry on Too Close To Home for profit during
the year in issue. Therefore, her deductions are limited to the
income derived from the activity, which was zero. Petitioner
offered no evidence to support a deduction for State and local
income taxes. Therefore, she is not entitled to a deduction.
Respondent determined an addition to tax as a result of
petitioner's failure to file a timely return. Section 6651(a)(1)
imposes an addition to tax for failure to file a timely tax
return. The addition to tax is equal to 5 percent of the amount
of the tax required to be shown on the return if the failure to
file is not more than 1 month. Sec. 6651(a)(1). An additional 5
percent is imposed for each month or fraction thereof in which
the failure to file continues, to a maximum of 25 percent of the
tax. Id. The addition to tax is applicable unless petitioner
establishes that the failure to file was due to reasonable cause
and not willful neglect. Id.
Petitioner's 1989 return was received by respondent on
September 1, 1995. Petitioner offered no testimony or evidence
11
that the late filing was due to reasonable cause. Accordingly,
she has not established that the addition should not apply. The
determination of respondent is sustained.
Section 6654(a) imposes an addition to tax if the total tax
withheld, or the estimated tax payments made during the year, do
not equal the percentage of liability required under the statute
to be paid as estimated tax, subject to limited exceptions. Sec.
6654. Petitioner offered no testimony or evidence that an
exception applies. Accordingly, respondent's determination is
sustained.
To reflect the foregoing,
Decision will be entered
for respondent.3
3
Although respondent conceded that petitioner is entitled to
automobile expense in the amount of $827.94, a Rule 155
computation is unnecessary because this amount does not exceed
the standard deduction used by respondent in determining the
amount of the deficiency.