T.C. Memo. 1997-257
UNITED STATES TAX COURT
RODNEY J. AND LORRAINA S. HUANG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14667-96. Filed June 10, 1997.
Rodney J. and Lorraina S. Huang, pro se.
David A. Winsten, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Chief Judge: Respondent determined deficiencies of
$7,461 and $10,167 in petitioners’ Federal income taxes for 1992
and 1993, respectively, and penalties of $1,492 and $2,033 under
section 6662(a) for 1992 and 1993, respectively. Unless
otherwise indicated, all section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
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references are to the Tax Court Rules of Practice and Procedure.
The issues for decision are whether petitioners are entitled to
deduct expenses claimed on Schedules A, C, and E of their
Forms 1040 for the years in issue and whether they are liable for
the penalties determined by respondent.
FINDINGS OF FACT
Petitioners resided in Hawaii at the time that they filed
their petition.
During 1992 and 1993, petitioners maintained journals of
their expenditures by cash and by check, including but not
limited to expenditures for meals at restaurants, for groceries,
for items at department stores and at drugstores, for
unidentified supplies, and for medical expenses. The recorded
expenditures were transferred to a monthly summary. On the
monthly summary, the majority of the expenditures, including auto
expense, electricity, entertainment, laundry ($60 per month),
rent, supplies, telephone, and water, were claimed to be
“deductible”. The monthly allocations recorded for 1992 and 1993
were as follows:
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Total Total
Month “Deductible” “Personal”
Jan. 1992 $ 2,628.75 $402.73
Feb. 1992 1,900.82 467.15
Mar. 1992 2,236.51 244.28
Apr. 1992 2,035.30 289.15
May 1992 8,102.56 100.75
June 1992 3,202.55 202.76
July 1992 3,347.10 176.81
Aug. 1992 3,219.43 201.18
Sept. 1992 2,786.08 175.78
Oct. 1992 2,975.31 246.22
Nov. 1992 3,077.19 226.70
Dec. 1992 14,898.97 213.27
Jan. 1993 4,149.40 234.20
Feb. 1993 4,413.19 175.09
Mar. 1993 4,650.48 126.61
Apr. 1993 3,924.60 384.54
May 1993 3,859.91 206.31
June 1993 4,963.33 177.24
July 1993 4,000.50 300.30
Aug. 1993 3,985.91 368.72
Sept. 1993 4,037.29 325.07
Oct. 1993 3,831.84 102.68
Nov. 1993 3,907.11 302.93
Dec. 1993 11,336.90 263.92
On their Federal tax returns for 1992 and 1993, petitioners
reported, among other things, the following items:
Items 1992 1993
Wages $72,648.44 $72,674.35
Losses from
Schedule C 19,841.45 39,504.60
Losses from
Schedule E 4,900.00 9,600.00
On Schedule A for 1992, petitioners claimed $10,920 in
unreimbursed employee expenses, including $3,220 vehicle expense;
$500 parking fees, tolls, and local transportation; $300 travel
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expenses while away from home; and $3,600 meals and
entertainment.
Petitioners’ Schedules C reported that they were in a
“telecommunications” business known as “Today’s Enterprises”.
Petitioners reported no gross receipts from this business during
1992 or 1993 but claimed the following expenses:
Items 1992 1993
Advertising $ 240.00 --
Car and truck expenses 2,200.00 $ 11,080.98
Office expense -- 1,718.62
Rent
Vehicles, machinery, and
equipment 3,120.00 5,800.00
Other business property -- 9,600.00
Supplies 4,417.92 --
Travel
Meals and entertainment 7,200.00 12,000.00
Enter 20% of line 24b
subject to limitations 1,440.00 2,400.00
Subtract line 24c from
line 24b 5,760.00 9,600.00
Utilities 1,277.66 --
Other expenses
Equipment 2,054.00 1,705.00
Publications 635.87 --
Tentative profit (loss) (19,841.45) (39,504.60)
The amounts claimed as losses on Schedules E attached to
petitioners’ returns for 1992 ($4,900) and 1993 ($9,600)
represented $700 per month in 1992 and $800 per month in 1993
allegedly owed to petitioners by Today’s Enterprises for rent
beginning June 1992. Petitioners claimed the loss as rent not
received because Today’s Enterprises had no income. At least as
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to 1993, the same amount was deducted as rent on petitioners’
Schedule C. The rents claimed were for petitioners’ personal
residence.
Respondent determined that petitioners’ deductible losses
were $2,954 for 1992 and $455 for 1993. The remaining deductions
claimed were disallowed because petitioners had not established
that they paid or incurred the expenses during the years in issue
or that the expenses were ordinary and necessary business
expenses.
OPINION
Petitioners contend that they commenced a business in May
1992 and that all of the deductions claimed on their returns were
correct. They assert that their representations must be accepted
and that the Internal Revenue Service (IRS) has “illegally”
disallowed their deductions. Notwithstanding the Court’s attempt
to direct their testimony to specific items, they simply persist
in insisting that the Court require the IRS to “rescind and
abate” the notice of deficiency. Petitioners did not present any
documents supporting their contentions that items listed in their
journals were deductible.
Petitioners have the burden of proving that respondent’s
determination is erroneous. Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); Rockwell v. Commissioner,
512 F.2d 882, 886 (9th Cir. 1975), affg. T.C. Memo. 1972-133.
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Their assertion that their return was correct as filed has no
evidentiary weight. See Wilkinson v. Commissioner, 71 T.C. 633,
639 (1979).
Section 262 provides as follows:
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SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES.
(a) General Rule.--Except as otherwise expressly
provided in this chapter, no deduction shall be allowed
for personal, living, or family expenses.
(b) Treatment of Certain Phone Expenses.--For
purposes of subsection (a), in the case of an
individual, any charge (including taxes thereon) for
basic local telephone service with respect to the lst
telephone line provided to any residence of the
taxpayer shall be treated as a personal expense.
The tax returns that they filed and the journals that petitioners
presented create a strong inference that petitioners have
improperly deducted many household and living expenses. They
have failed to present evidence that would overcome this
inference.
Section 274(d) requires, with respect to entertainment
expenses, that taxpayers substantiate, among other things, the
business purpose of each expense and the business relationship to
the taxpayer of persons entertained. Although they deducted
thousands of dollars each year for “entertainment”, petitioners
have failed to substantiate any of those expenses as required by
section 274. The amounts claimed apparently included in many
instances three meals a day for petitioners and their dependent
son. Although they claim that they were entertaining potential
customers, this claim is inherently improbable.
Petitioner Rodney J. Huang testified that the total monthly
rent for petitioners’ residence was $1,350 and that he allocated
$700 to business expense (for 1992; in 1993, the amount claimed
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was $800 per month). The records of “personal” items each month
during the years in issue, however, showed less than the alleged
personal portion of the rent. Moreover, in addition to recording
alleged business rent on Schedule C for 1993, petitioners claimed
a rental loss on Schedule E because they did not recover the rent
from the business. Thus, the rent was deducted twice on that
return. In any event, a cash basis taxpayer cannot deduct as a
loss income that was not received or previously reported. See,
e.g., Hort v. Commissioner, 313 U.S. 28, 32-33 (1941); Marks v.
Commissioner, 390 F.2d 598 (9th Cir. 1968), affg. T.C. Memo.
1966-62. Petitioners’ claims regarding rent expense are patently
untenable.
In addition, petitioners have not made the showing required
to deduct expenses relating to business use of their home.
Section 280A provides in pertinent part as follows:
(a) General Rule.--Except as otherwise provided in
this section, in the case of a taxpayer who is an
individual or an S corporation, no deduction otherwise
allowable under this chapter shall be allowed with
respect to the use of a dwelling unit which is used by
the taxpayer during the taxable year as a residence.
* * * * * * *
(c) Exceptions for Certain Business or Rental Use;
Limitation on Deductions for Such Use.
(1) Certain business use.--Subsection (a)
shall not apply to any item to the extent such
item is allocable to a portion of the dwelling
unit which is exclusively used on a regular
basis--
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(A) as the principal place of business
for any trade or business of the taxpayer,
(B) as a place of business which is used
by patients, clients, or customers in meeting
or dealing with the taxpayer in the normal
course of his trade or business, or
(C) in the case of a separate structure
which is not attached to the dwelling unit,
in connection with the taxpayer’s trade or
business.
In the case of an employee, the preceding sentence
shall apply only if the exclusive use referred to
in the preceding sentence is for the convenience
of his employer.
* * * * * * *
(5) Limitation on deductions.--In the case of
a use described in paragraph (1), (2), or (4), and
in the case of a use described in paragraph (3)
where the dwelling unit is used by the taxpayer
during the taxable year as a residence, the
deductions allowed under this chapter for the
taxable year by reason of being attributed to such
use shall not exceed the excess of--
(A) the gross income derived from such
use for the taxable year, over
(B) the sum of--
(i) the deductions allocable to
such use which are allowable under this
chapter for the taxable year whether or
not such unit (or portion thereof) was
so used, and
(ii) the deductions allocable to
the trade or business (or rental
activity) in which such use occurs (but
which are not allocable to such use) for
such taxable year.
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Petitioners have failed to satisfy any of the requirements of
section 280A; specifically, they have failed to show that any
portion of their residence was used exclusively for business.
Moreover, because their alleged business had no income, they
cannot deduct any of the costs of maintaining their home.
With respect to the employee business expenses claimed on
Schedule A for 1992, petitioners presented neither explanation
nor substantiation. The amounts claimed are again inherently
unreasonable. Further, it appears that some of the items claimed
on Schedule A were duplicated on Schedule C. Petitioners claimed
on Schedules A and C for 1992 total meals and entertainment
expenses of $10,800, which is approximately 15 percent of their
total reported income for that year. Petitioners in 1992 claimed
vehicle expenses relating to alleged business use of two cars,
for a total of $5,420, but they did not provide any evidence of
how the cars were used either in Mr. Huang’s employment or in
petitioners’ telecommunications business.
Section 6662(a) provides, among other things, for a penalty
equal to 20 percent of the portion of an underpayment
attributable to negligence. Negligence is defined in section
6662(c) as follows:
(c) Negligence.--For purposes of this section, the
term “negligence” includes any failure to make a
reasonable attempt to comply with the provisions of
this title, and the term “disregard” includes any
careless, reckless, or intentional disregard.
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Mr. Huang testified that petitioners did not consult any tax
preparer, accountant, or lawyer with respect to the claims made
on their returns. On consideration of the record in this case,
respondent’s determination of the penalties must be sustained.
Decision will be entered
for respondent.