T.C. Memo. 1998-353
UNITED STATES TAX COURT
SUBHENDU DAS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 18435-96, 27179-96. Filed October 5, 1998.
Subhendu Das, pro se.
Linette Angelastro, for respondent.
MEMORANDUM OPINION
NAMEROFF, Special Trial Judge: These consolidated cases
were heard pursuant to the provisions of section 7443A(b)(3) and
Rules 180, 181, and 182.1 Respondent determined deficiencies in
and penalties on petitioner's Federal income taxes as follows:
1
Unless otherwise indicated, all 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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Year1 Deficiency Sec. 6662(a)
1993 $3,043 $609
1994 2,227 445
1995 84 -0-
1
Docket No. 18435-96 pertains to 1994, and docket No.
27179-96 pertains to 1993 and 1995.
After concessions by petitioner,2 the issues for decision
are: (1) Whether petitioner is entitled to deduct business
expenses on Schedule C for 1993 and 1994 or whether the
deductions belong to his corporation; (2) if we hold that he is
entitled to deduct the business expenses, whether petitioner has
substantiated the expenses; and (3) whether petitioner is liable
for the accuracy-related penalties under section 6662(a) for
negligence or disregard of rules or regulations.
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time he filed his
petition, petitioner resided in Chatsworth, California.
Background
2
In the notice of deficiency for 1993, respondent
determined that petitioner had an unreported capital gain of
$1,128. In the notice of deficiency for 1995, respondent
disallowed a claimed capital loss on the ground that petitioner
did not prove that the stock was worthless in that year.
Petitioner conceded both issues at trial.
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Trial of this case began on January 28, 1998. At trial,
petitioner conceded the capital gain and loss issues for 1993 and
1995. However, petitioner was not prepared to go forward with
his case concerning the claimed business expenses on Schedule C
for 1993 and 1994. We continued the case to March 17, 1998, and
instructed petitioner to be prepared to present the facts of his
case along with the necessary documents and records. Despite the
Court’s warning, petitioner was not prepared to discuss the
substantiation issue, although some documents were stipulated
without explanation or elaboration.
Petitioner has a Ph.D. in electrical engineering. In 1993,
he quit his job as an aerospace engineer in order to pursue his
invention of a computer-controlled nozzle sprinkler system
(sprinkler system). The sprinkler system consisted of a
computer-driven rotating watering device for gardens and lawns.
Also in 1993, petitioner created a California corporation
called Computer Control Systems, Inc. (CCSI). CCSI filed its
articles of incorporation on April 6, 1993. Petitioner and his
wife were the only shareholders. According to petitioner, CCSI’s
business was to produce the sprinkler system to sell to
customers. Petitioner was named the vice president of
engineering, and his wife was named president of CCSI. A
separate checking account was opened in CCSI’s name.
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Thereafter, petitioner expended $4,634.59 for several items
in connection with his invention, such as a lathe with various
attachments and a computer with accessories. Petitioner
testified that the equipment was transferred to the corporation.
Petitioner filed for a patent, which was eventually obtained in
his name. The filing cost for the patent was $585. There was no
formal agreement between petitioner and CCSI for use of the
patent. During 1993 and 1994, petitioner was primarily engaged
in obtaining investors for the product. Neither CCSI nor
petitioner had any product for sale.
On Schedule C for 1993 under the name of Computer Controlled
Systems, petitioner reported no income and claimed deductions of
$16,628 for business expenses and $1,002.11 for a home office.
On Schedule C for 1994 under the name of CCSI, petitioner claimed
deductions of $12,900 for business expenses and $882.31 for home
office. In 1994, petitioner reported $1,600 in gross receipts
and $600 for cost of goods sold resulting in gross income of
$1,000.3 The Schedule C expenses consisted of:
1993 1994
Car and truck $280 $200
Sec. 179 deduction1 15,648 12,000
Insurance 150 150
3
Petitioner stated at trial that, to date, the sprinkler
system has not been ready for sale. Therefore, we assume the
gross receipts reported in 1994 were not related to the sprinkler
system.
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Office expenses 50 50
Utilities 500 500
16,628 12,900
Home office2 1,002 882
Total 17,630 13,782
1
The 1993 amount of $15,648 consists of a $585 patent fee,
$10,000 for the valve prototype, and $4,938 for a lathe,
computer, and tools. The 1994 amount of $12,000 consists of
$2,000 for an IBM PS1 and $10,000 for a second prototype. The
record contains no evidence as to the basis for the prototype
costs.
2
Amounts shown are rounded to the nearest dollar. The
computations for the home office deductions included amounts for
insurance and utilities.
For the home office expenses, the following documents were
stipulated: A Notice of Assessed Value Change for petitioner’s
residence dated February 11, 1989; an annual real estate tax and
interest statement for 1993; an amended declaration page for a
homeowner’s insurance policy; one page of a telephone bill from
1993; one gas bill; and one electric bill.
Petitioner did not file a Schedule C with his 1995 joint
return. Petitioner testified that he filed tax returns for CCSI
in 1994, 1995, and 1996. He claimed expenses on CCSI’s return
only when CCSI reported income. CCSI reported income when
petitioner did contract work on behalf of CCSI.4
Petitioner presented a brochure reflecting an undated
business plan statement describing the sprinkler system. In this
4
Petitioner did not elaborate on what type of contract
work he was doing on behalf of CCSI, but we assume that it was
unrelated to the sprinkler system.
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brochure, the name of petitioner’s corporation was shortened to
Systems, Inc. (SI). The brochure states that SI designed and
produced the sprinkler system.
Respondent disallowed all Schedule C expenses for both years
and contended that the claimed expenses belong to CCSI and not
petitioner.
Discussion
Pursuant to section 162, a deduction is allowed for “all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business”. In order to
be deductible, business expenses generally must be the expenses
of the taxpayer claiming the deduction. Gantner v. Commissioner,
91 T.C. 713, 725 (1988), affd. 905 F.2d 241 (8th Cir. 1990);
Hewett v. Commissioner, 47 T.C. 483, 488 (1967). For tax
purposes, a corporation is treated as a separate entity from its
shareholders. Moline Properties, Inc. v. Commissioner, 319 U.S.
436, 438-439 (1943). Furthermore, a shareholder is not entitled
to a deduction from his individual income for his payment of
corporate expenses. Deputy v. duPont, 308 U.S. 488, 494 (1940);
Gantner v. Commissioner, supra. Shareholders cannot deduct as
personal expenses such expenses that further the business of the
corporation. Leamy v. Commissioner, 85 T.C. 798, 809 (1985).
Petitioner stated that he paid all the claimed expenses.
Petitioner is an officer and shareholder of CCSI, and both
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parties agree that CCSI was an active corporation during the
years at issue. CCSI was created to produce and market the
sprinkler system, and petitioner transferred all equipment
related to the sprinkler system to CCSI. Thus every expense
related to the sprinkler system is an expense of CCSI, even if
petitioner paid the expense.
Furthermore, the fact that the expenses were deducted on
CCSI’s return when CCSI had income shows that the expenses are
those of CCSI. Petitioner cannot shift expenses back and forth
depending on where the income was. CCSI is an entity separate
from petitioner. Moline Properties, Inc. v. Commissioner, supra.
Since petitioner did not file a Schedule C with his 1995 joint
return, we assume that 1995 was the year for which CCSI claimed
expenses on its return.
Petitioner held out CCSI as the producer of the sprinkler
system, and, by incurring these expenses, petitioner was
furthering the business of CCSI. Leamy v. Commissioner, supra.
Therefore, we find that the expenses properly belong to CCSI and
not petitioner.5
5
Respondent has not raised the issue of whether any of the
expenses were nondeductible, preopening expenses. Richmond
Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir.
1965), vacated and remanded per curiam on other grounds 382 U.S.
68 (1965). Given that neither CCSI nor petitioner had sufficient
investors, any plans or facilities for manufacturing the product,
nor any staff for sales of the product, this issue would
otherwise seem to be applicable.
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In light of our conclusion that the expenses are those of
CCSI and not petitioner, we do not consider the issue of
substantiation.
However, we now consider whether petitioner, as an employee
of CCSI, is entitled to deduct home office expenses on Schedule A
as unreimbursed employee expenses. Section 280A(a), in general,
provides that no deduction is allowed with respect to the
business use of a taxpayer’s personal residence. Section 280A(c)
contains some limited and explicit exceptions to this rule.6
For a deduction to be allowed under section 280A(c)(1), a
taxpayer who is an employee must establish that a portion of his
dwelling unit is: (1) Exclusively used, (2) on a regular basis,
(3) for the purpose enumerated in section 280A(c)(1)(A), and (4)
that the taxpayer maintained the office for the convenience of
his employer. Moreover, deductions allowed under section
6
SEC. 280A(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--
(A) [as] the principal place of business for any
trade or business of the taxpayer,
* * * * * * *
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.
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280A(c)(1) may not exceed the excess of the gross income derived
from such use over the deductions allocable to such use which are
allowable regardless of the usage (such as property taxes). See
sec. 280A(c)(5).
There is no evidence in the record that petitioner
maintained a home office for the convenience of CCSI. Petitioner
was not prepared to testify or present documents substantiating
the home office deduction. The few documents that were
stipulated were provided without meaningful testimony. Moreover,
there was no gross income from petitioner’s business as an
employee of CCSI in 1993 or 1994. Therefore, petitioner has not
overcome the prohibition of section 280A(c)(5), and he is not
entitled to deduct home office expenses on Schedule A.
However, we do note that in 1993 petitioner allocated a
portion of his real estate taxes deductible on Schedule A to the
home office computation on Form 8829 for deduction on Schedule
C.7 Of a total amount of $2,285.78, $155.43 was allocated to the
home office deduction, and the remaining $2,130.34 was claimed on
Schedule A. Based on our holding that petitioner is not entitled
to deduct Schedule C expenses, the $155.43 that petitioner
7
Petitioner claimed 100 percent of his mortgage interest
expense in 1993 and 1994 and 100 percent of his real estate taxes
in 1994 as itemized deductions on his Schedules A. In addition,
however, petitioner claimed an alleged business portion of these
items on the Schedules C.
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allocated to that schedule is deductible on line 6 of Schedule A
for 1993.
Accuracy-Related Penalty
Respondent determined an accuracy-related penalty under
section 6662(a). Section 6662(a) imposes a penalty of 20 percent
on any portion of an underpayment of tax that is attributable to
negligence or disregard of rules or regulations. Sec. 6662(a)
and (b)(1). “Negligence” is defined as any failure to make a
reasonable attempt to comply with the provisions of the Internal
Revenue Code, and the term “disregard” includes any careless,
reckless, or intentional disregard. Sec. 6662(c). A position
with respect to an item is attributable to negligence if it lacks
a reasonable basis. Sec. 1.6662-3(b)(1), Income Tax Regs.
Section 6664(c)(1) 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. Sec. 6664(c)(1).
The determination of whether a taxpayer acted with reasonable
cause and good faith within the meaning of section 6664(c)(1) 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.
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At trial and on brief, petitioner did not address the
section 6662(a) penalty. Petitioner prepared the joint returns
for the years at issue. We find that petitioner is liable for
the accuracy-related penalty for failing to report a capital gain
and for improperly claiming expenses that are not allowable.
Accordingly, respondent is sustained on this issue.
To reflect the foregoing,
Decisions will be entered
under Rule 155.