T.C. Memo. 1998-105
UNITED STATES TAX COURT
VALERIE JEAN GENCK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22967-96. Filed March 16, 1998.
Valerie Jean Genck, pro se.
Reginald R. Corlew, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
- 2 -
Respondent determined a deficiency in petitioner's Federal
income tax for 1992 in the amount of $5,127, an addition to tax
pursuant to section 6651(a)(1) in the amount of $1,313, and an
accuracy-related penalty pursuant to section 6662(a) in the
amount of $1,025.
The issues for decision are: (1) Whether petitioner is
entitled to Schedule C business expense deductions; (2) whether
petitioner is liable for the section 6651(a)(1) addition to tax;
and (3) whether petitioner is liable for the section 6662(a)
accuracy-related penalty.2
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Hollywood, Florida, on the date the petition was filed in this
case.
Petitioner works as a self-employed musician and band
manager. She and her husband, Matthew Genck, are members and
managers of a jazz band named "Paris" (the band). Petitioner
spends an average of 12 hours per week performing as the band's
lead singer. Matthew plays the bass guitar. Although petitioner
and Matthew are primarily responsible for managing the band, they
generally split the band's profits and expenses three ways with
2
Respondent's adjustments to petitioner's liability for
self-employment taxes and deduction for one-half of such
liability are computational and will be resolved by the Court's
holdings on the issues in this case.
- 3 -
petitioner's brother-in-law, John Genck, who is the band's
drummer, composer, and technical expert. The band also has a
full-time keyboard player, Jim Gazier, and various part-time
accompanying musicians who do not share in the band's profits.
The band performs at weddings and nightclubs at various locations
in the tricounty area of Dade County, Broward County, and Palm
Beach County, Florida.
Petitioner and Matthew reside in an apartment located above
a marketplace at 2424 Hollywood Boulevard in Hollywood, Florida.
The apartment is divided, in roughly equal areas, into living
quarters and an office. The two areas are connected by a single
door. The living quarters consist of two bedrooms, a living
room, a kitchen, and a bathroom. The office consists of a large
studio and a smaller room located adjacent thereto. The studio
contains recording equipment and computers. It also contains
filing cabinets in which the band's contracts, sheet music, and
supplies are stored. The smaller room contains a desk, a
telephone, a couch, and a kitchenette. Unlike the band's other
expenses, since the office is part of petitioner and Matthew's
apartment, they each paid and claimed deductions for 50 percent
of the band's office-related expenses for 1992.
Petitioner spends an average of 30 hours per week managing
the band out of the office. She promotes the band through the
distribution of advertising flyers which are designed on the
office computers. She books the band's performances and
- 4 -
negotiates contracts with its clients. She maintains files of
the band's lyrics, music books, and audio and video demos. She
is responsible for hiring accompanying musicians, coordinating
their stage apparel, and issuing their paychecks. All of the
above-mentioned management activities are conducted in the
office.
The first issue for decision is whether petitioner is
entitled to Schedule C business expense deductions. Petitioner
filed her 1992 return under married filing separately filing
status. On a Schedule C attached to her return, petitioner
reported gross receipts in the amount of $21,542.50 and claimed
the following deductions:
Bad debt $183.33
Car and truck expenses 3,627.20
Depletion 2,100.00
Insurance 210.00
Interest 1,880.00
Professional services 645.00
Office expenses 629.00
Rental of business property 2,169.33
Supplies 1,143.00
Travel 33.33
Meals and entertainment 1,050.40
Utilities 1,289.00
Stage clothes 2,777.00
Stage makeup 930.00
Miscellaneous 890.00
Dry cleaning 106.00
Donations 940.00
In the statutory notice of deficiency, respondent disallowed
all of the claimed deductions.
Respondent's determinations in the statutory notice of
deficiency are presumed to be correct, and petitioner bears the
- 5 -
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Moreover, deductions are strictly a
matter of legislative grace, and petitioner bears the burden of
proving her entitlement to any deductions claimed. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Section 162(a) allows a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Although we will address each
of petitioner's claimed business expense deductions separately,
infra, we generally find that petitioner's testimony was entirely
credible and do not hesitate to rely on it. Petitioner appeared
at trial in possession of well-organized written documentation of
all of the claimed expenses. In our view, respondent's counsel
accepted her testimony as adequate substantiation in light of his
repeated failure to ask her to corroborate her testimony with
documentary evidence. Moreover, the statutory notice of
deficiency does not reveal respondent's basis for the blanket
disallowance of the claimed deductions. Significantly,
respondent's counsel was unable to state, at trial, whether or
not substantiation of the amounts claimed was an issue in the
case. We, therefore, only address the question of whether she is
entitled to deductions for the amounts paid.
- 6 -
Home Office Expenses - Rent and Utilities
Petitioner claimed deductions for rent and utilities paid
with respect to her home office in the amounts of $1,200 and
$1,289, respectively.
Section 280A(a) provides that in the case of a taxpayer who
is an individual, no deduction otherwise allowable under
chapter 1 of the Code (relating to normal taxes and surtaxes)
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.
The term "dwelling unit" includes a house, apartment,
condominium, or similar property, and all structures or other
property appurtenant to such dwelling unit. Sec. 280A(f)(1)(A).
Section 280A(c) provides for exceptions to section 280A(a).
In pertinent part, section 280A(c)(1)(A) states that section
280A(a) shall not apply to any item to the extent that such item
is allocable to a portion of the dwelling unit which is
exclusively used on a regular basis as the principal place of
business for any trade or business of the taxpayer. We are
convinced from the record that 50 percent of petitioner's
apartment was exclusively used on a regular business for her band
management activities. We must also, however, address the
question of whether the home office constitutes her principal
place of business.
The Supreme Court in Commissioner v. Soliman, 506 U.S. 168
(1993), postulated two primary considerations to decide whether
- 7 -
an office located within a taxpayer's dwelling unit is a
taxpayer's principal place of business: (1) The relative
importance of the activities performed at each business location,
and (2) the time spent at each place. Id. at 175.
We find that the importance of, and the time spent on, the
activities performed at the office are sufficient to support its
treatment as petitioner's principal place of business as manager
of the band. In addition to the various managerial and
administrative activities conducted at the office, the band
recorded and edited its promotional video and audio tapes in the
studio. The office computers and other equipment were also used
to both create and mix portions of the band's songs. We are
further persuaded by the fact that petitioner spent an average of
30 hours per week working in the home office.
Petitioner's role as the band's manager and the importance
and extent of her time spent on activities performed in the
office convinces us that her home office constitutes her primary
place of business as the band manager. Accordingly, we hold that
petitioner is entitled to the deductions claimed by her as her
share of the rent and utilities attributable to her home office.
Car and Truck Expenses
Petitioner claimed a deduction in the amount of $3,627.20
for expenses paid for transporting the band's equipment and
members from the home office to their various performance
locations. Since we have found, supra, that petitioner's home
- 8 -
office is properly treated as her primary place of business as
the band manager, it follows that the claimed transportation
expenses are not commuting expenses and may therefore be
deductible under section 162(a) as travel expenses between places
of business. Curphey v. Commissioner, 73 T.C. 766, 777-778
(1980); Kahaku v. Commissioner, T.C. Memo. 1990-34.
Insurance
Petitioner claimed a deduction for insurance paid in the
amount of $210. She testified that the claimed expense
represents the amount paid by her for car insurance. However,
petitioner failed to address whether such amount was allocated
according to her business and personal use of the car. We
therefore hold that petitioner is not entitled to the claimed
insurance deduction of $210.
Meals and Entertainment
Petitioner claimed a deduction for meals and entertainment
in the amount of $1,050.40 after accounting for certain
limitations. The amount claimed consists of the per diem
allowance for meals paid for by petitioner while she was
performing at various locations. Based upon our review of the
record, we hold that such meal expenses are not deductible
because the amount claimed was for personal living expenses.
Sec. 262.
- 9 -
Bad Debt
Petitioner claimed a deduction for a bad debt in the amount
of $183.33 on her return as her share of an uncollected fee for
one of the band's performances. In August of 1992, the band
entered into a contract with the Spectrum Club to perform two
nights for $1,100. The band contracted with side men
(independent musicians) to perform with the group and guaranteed
the side men's wages. Spectrum paid the band for one night's
performance; it did not pay the band for the second night. The
band, however, paid the side men their wages for the second
night's performance. Based upon the facts presented, we find
that petitioner may not deduct the $183.33 claimed as a bad debt.
We do, however, hold that she is entitled to claim the $183.33 as
an ordinary and necessary business expense. Sec. 162(a).
Depreciation
Petitioner claimed a deduction in the amount of $2,100 as
depletion. At trial, the parties agreed that the claimed
deduction was intended to be for depreciation of equipment
purchased during 1992. Petitioner submitted a number of checks
in support of the claimed deduction. She contends that she
properly deducted the entire cost of the equipment pursuant to
section 179.
Section 179 allows a taxpayer to elect to treat the cost of
section 179 property as a current expense in the year such
property is placed in service within certain dollar limitations.
- 10 -
Sec. 179(a). An election under section 179 must be made on the
taxpayer's original return for the taxable year or a timely filed
amended return. Sec. 179(c)(1)(B); sec. 1.179-4(a), Income Tax
Regs. The election must specify the items of section 179
property to which the election applies and the cost of each of
the items. Sec. 179(c)(1)(A); sec. 1.179-4(a)(1) and (2), Income
Tax Regs. Petitioner did not make the requisite election on her
1992 return because she failed to specify the items for which the
section 179 deduction was claimed.3 Therefore, we hold that she
is not entitled to a section 179 deduction for 1992.
After reviewing the checks submitted by petitioner, we are
satisfied that the amounts were paid for musical equipment,
consisting of covers and cases, that may be depreciated.
However, petitioner failed to provide an explanation for the
difference between the amount listed on her return ($2,100) and
the amount substantiated by the checks ($1,275).
We hold that petitioner is entitled to depreciate musical
equipment placed into service in 1992 in the total amount of
$425, which represents her one-third share of the total amount
shown on the checks. We instruct the parties to determine the
proper amount of petitioner's 1992 depreciation deduction in the
3
Petitioner failed to attach to her return a Form 4562
on which the specific items to be deducted under sec. 179 must be
listed.
- 11 -
Rule 155 computation in accordance with the appropriate section
168(e) classification.
Interest
Petitioner claimed a deduction for interest paid in the
amount of $1,880. The interest claimed consists of: (1) One-
half of the interest paid during 1992 on petitioner's credit card
debt, and (2) interest paid during 1992 on a loan obtained by
petitioner to pay for studio recording time.
Section 163(a) provides that there shall be allowed as a
deduction all interest paid or accrued within the taxable year on
indebtedness. However, section 163(h)(1) generally disallows any
deduction for personal interest paid or accrued during the
taxable year. Although petitioner testified that she used her
credit cards for both business and personal expenses, we accept
her estimate that 50 percent of her credit card interest was paid
on debt incurred for business purposes, based upon her credible
testimony. Since the interest paid on the debt incurred to pay
for studio recording time is directly related to petitioner's
business, we hold that she is entitled to her claimed deduction
for interest expense.
Rental of Recording Studio
Petitioner claimed a deduction for rental of business
property in the amount of $2,169.33. The amount claimed includes
$1,200 paid as rent for the home office, discussed supra, and
- 12 -
$878 paid as rent for studio recording time. Petitioner did not
explain what the remaining amount of $91.33 was claimed for.
Therefore, we hold that petitioner, in addition to the $1,200 of
rent for the home office, is only entitled to a deduction in the
amount of $878 for studio recording time as an ordinary and
necessary business expense. Sec. 162(a).
Professional Services
Petitioner claimed a deduction for professional services in
the amount of $645. The amount claimed represents payments to an
engineer for mastering the final tracks of the band's audio and
video tapes. We hold that this expense is deductible as an
ordinary and necessary business expense. Sec. 162(a).
Office Expenses
Petitioner claimed a deduction for office expenses in the
amount of $629. The amount claimed consists of payments for
stamps, paper goods, typewriter ribbons, and computer disks. We
hold that these expenses are deductible as ordinary and necessary
business expenses. Sec. 162(a).
Supplies
Petitioner claimed a deduction for supplies in the amount of
$1,143. The amount claimed consists of payments for promotional
glossy photographs, and cassettes and compact disks containing
songs requested by customers but not previously included in the
band's repertoire. We hold that these expenses are deductible as
ordinary and necessary business expenses. Sec. 162(a).
- 13 -
Travel
Petitioner conceded at trial that she could not explain the
claimed deduction for travel in the amount of $33.33.
Accordingly, we hold that she is not entitled to a deduction for
that amount.
Stage Clothes
Petitioner claimed a deduction for stage clothes in the
amount of $2,777. The amount claimed consists of clothes
purchased by petitioner and worn during her performances. We had
the opportunity at trial to view examples of the type of clothing
worn by petitioner in her performances and agree with her that
such clothes are not suitable for ordinary use. We hold that the
amount she paid for stage clothes is deductible as an ordinary
and necessary business expense. Sec. 162(a); Teschner v.
Commissioner, T.C. Memo. 1997-498.
Stage Makeup
Petitioner claimed a deduction for stage makeup in the
amount of $930. We hold that the amount claimed is deductible as
an ordinary and necessary business expense. Sec. 162(a).
Dry Cleaning, Donations, and Miscellaneous Expenses
Petitioner claimed deductions for dry cleaning, donations,
and miscellaneous expenses in the amounts of $106, $940, and
$890, respectively. Petitioner failed to explain the nature of
these expenses or how they specifically relate to her music
- 14 -
business. We hold that the amounts claimed are not deductible as
ordinary and necessary business expenses.
The second issue for decision is whether petitioner is
liable for the section 6651(a)(1) addition to tax for 1992.
Section 6651(a)(1) imposes an addition to tax for failure to
timely file a return, unless the taxpayer establishes that such
failure is due to reasonable cause and not due to willful
neglect. "Reasonable cause" requires the taxpayer to demonstrate
that she exercised ordinary business care and prudence and was
nonetheless unable to file a return within the prescribed time.
United States v. Boyle, 469 U.S. 241, 245-246 (1985). "Willful
neglect" means a conscious, intentional failure or reckless
indifference. Id. at 246. The addition to tax equals 5 percent
of the tax required to be shown on the return if the failure to
file is for not more than 1 month, with an additional 5 percent
for each additional month or fraction of a month during which the
failure to file continues, not to exceed a maximum of 25 percent.
Sec. 6651(a)(1).
Petitioner's 1992 return was due on April 15, 1993. Sec.
6072(a). She applied for and received an automatic, 4-month
extension of time to file, until August 16, 1993.4 Sec. 6081;
sec. 1.6081-4, Income Tax Regs. Petitioner's return was not
received by respondent until November 9, 1994.
4
Since Aug. 15, 1993, fell on a Sunday, petitioner was
allowed an extra day to file the return. Sec. 7503.
- 15 -
Petitioner did not dispute in her petition or address at
trial respondent's determination that she is liable for the
section 6651(a)(1) addition to tax. We therefore find that she
has failed to prove that her failure to timely file her return
was not due to willful neglect or that such failure was due to
reasonable cause. Accordingly, we hold that petitioner is liable
for the section 6651(a)(1) addition to tax for 1992.
The third issue for decision is whether petitioner is liable
for the section 6662(a) accuracy-related penalty for 1992.
Respondent's determination of negligence is presumed to be
correct, and petitioner bears the burden of proving that the
penalty does not apply. Rule 142(a); Welch v. Helvering, 290
U.S. at 115; Bixby v. Commissioner, 58 T.C. 757, 791-792 (1972).
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
one of which is negligence or disregard of rules or regulations.
Sec. 6662(b)(1). Respondent determined that petitioner is liable
for the accuracy-related penalty imposed by section 6662(a) for
her underpayment of tax in 1992, and that such underpayment was
due to negligence or disregard of rules or regulations.
"Negligence" includes a failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue laws or to
exercise ordinary and reasonable care in the preparation of a tax
return. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
"Disregard" includes any careless, reckless, or intentional
- 16 -
disregard of rules or regulations. Sec. 6662(c); sec.
1.6662-3(b)(2), Income Tax Regs.
Section 6664(c)(1), however, provides that the penalty under
section 6662(a) shall not apply to any portion of an
underpayment, if it is shown that there was reasonable cause for
the taxpayer's position with respect to that portion and that the
taxpayer acted in good faith with respect to that portion. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. Sec.
1.6664-4(b)(1), Income Tax Regs. The most important factor is
the extent of the taxpayer's effort to assess her proper tax
liability for the year. Id.
After reviewing the record and considering our holdings on
the claimed deductions, we find that petitioner has proved that
she acted in good faith with respect to her underpayment of tax.
The record shows that she made a reasonable effort to assess her
proper tax liability. Accordingly, we hold that petitioner is
not liable for the section 6662(a) accuracy-related penalty for
1992.
To reflect the foregoing,
Decision will be entered
under Rule 155.