T.C. Memo. 1999-63
UNITED STATES TAX COURT
JOHN PAUL MASSA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12472-97. Filed March 4, 1999.
John Paul Massa, pro se.
James R. Robb, 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.
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Respondent determined a deficiency in petitioner's Federal
income tax for 1992 in the amount of $5,115 and an addition to
tax pursuant to section 6651(a)(1) in the amount of $1,279.
The issues for decision are: (1) Whether petitioner is
entitled to Schedule C trade or business expense deductions; (2)
whether petitioner is entitled to a medical expense deduction for
amounts claimed for his special diet; and (3) whether petitioner
is liable for the section 6651(a)(1) addition to tax.2
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioner resided in Colorado
Springs, Colorado, on the date the petition was filed in this
case.
Petitioner is a certified public accountant. He worked as
the chief financial officer of Gates Land Company (GLC) until he
retired in 1989. At that time, GLC was downsizing its workforce
and petitioner was suffering from complications related to
Crohn's disease. Crohn's disease is characterized by
inflammation of the lower digestive tract. Petitioner has
endured numerous surgeries and periods of hospitalization for his
Crohn's disease. In order to meet his minimum nutritional
requirements, petitioner has followed a special diet and has
2
Respondent's adjustments to petitioner's taxable Social
Security benefits, medical expense deduction (other than to the
amounts claimed for his special diet), and miscellaneous itemized
deductions are computational and will be resolved by the Court's
holding on the issues in this case.
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taken dietary supplements recommended by his physician and a
certified nutritionist.
Petitioner conducted a bookkeeping activity during 1990 and
1991. On a Schedule C attached to his 1990 return, he reported
gross income in the amount of $225 and claimed total expenses in
the amount of $10,782. On a Schedule C attached to his 1991
return, he reported no gross income and claimed total expenses in
the amount of $10,963. In 1991, he ended his bookkeeping
activity and referred his clients to another certified public
accountant.
Petitioner purchased personal care products sold by
Melaleuca, Inc. during 1991 and 1992. According to his bank
statements, the total amounts of his purchases in 1991 and 1992
were $344.32 and $325.28, respectively.
Petitioner traveled to Russia for 2 weeks in May 1992 to
investigate certain business ventures. In preparation for these
business ventures, petitioner had retained an office service and
warehouse space in Colorado Springs, Colorado.
The first issue for decision is whether petitioner is
entitled to Schedule C trade or business expense deductions for
1992. On a Schedule C attached to his 1992 return, petitioner
reported no gross income and claimed expenses in the total amount
of $20,745 with respect to a "trade" activity. In the statutory
notice of deficiency, respondent disallowed any deduction for the
claimed expenses.
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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. The record contains evidence of
communications which petitioner had in 1991 and 1992 concerning
potential trade with individuals in the former Soviet Republics,
including Russia. However, there is no evidence that any
completed business transactions resulted from his communications
and travel to Russia. Petitioner testified that the lack of a
reliable infrastructure and instability in the Russian currency
convinced him that business ventures in Russia were too risky.
Based on the record, we find that petitioner was not
"carrying on a trade or business" during 1992. Rather, we find
that he was investigating potential trade opportunities. We
further find that the amounts paid by him during 1992 in
connection with his trade activity constitute "start-up
expenditures" which are only deductible over the 60-month period
beginning in the month in which an active trade or business
begins. Sec. 195(b)(1) and (c). We hold that petitioner is not
entitled to any deductions for his Schedule C trade or business
expenses for 1992 because his alleged business activity did not
rise to the level of an active trade or business during 1992.
Sec. 195.
The second issue for decision is whether petitioner is
entitled to a medical expense deduction for amounts claimed for
his special diet.
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On a Schedule A attached to his 1992 return, petitioner
claimed medical expenses in the total amount of $7,960. In the
statutory notice of deficiency, respondent disallowed any
deduction for $2,696 of the claimed expenses on the ground that
petitioner did not establish that the disallowed amount meets the
requirements of section 213. This disallowed amount represents
the costs which petitioner claimed for his special diet.
Section 213(a) allows as a deduction the expenses paid
during the taxable year, not compensated by insurance or
otherwise, for the medical care of the taxpayer, to the extent
that such expenses exceed 7.5 percent of adjusted gross income.
The term "medical care" includes the diagnosis, cure, mitigation,
treatment, or prevention of disease. Sec. 1.213-1(e)(1)(i),
Income Tax Regs. Deductions for expenditures for medical care
allowable under section 213 are confined strictly to expenses
paid primarily for the prevention or alleviation of a physical or
mental defect or illness. Sec. 1.213-1(e)(1)(ii), Income Tax
Regs. An expenditure which is merely beneficial to the general
health of an individual is not an expenditure for medical care.
Id.
We have held that the additional costs of obtaining
medically required foods are deductible as expenditures for
medical care. Randolph v. Commissioner, 67 T.C. 481 (1976); Cohn
v. Commissioner, 38 T.C. 387 (1962); Von Kalb v. Commissioner,
T.C. Memo. 1978-366. On the other hand, we have rejected
taxpayers' claims for deductions for special foods which were
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found to be merely substitutes for foods normally consumed by an
individual. Harris v. Commissioner, 46 T.C. 672 (1966); Estate
of Webb v. Commissioner, 30 T.C. 1202, 1213-1214 (1958); Collins
v. Commissioner, T.C. Memo. 1965-233. The costs of a special
diet are deductible only to the extent the taxpayer establishes
that such costs exceed the costs of a normal diet. Nehus v.
Commissioner, T.C. Memo. 1994-631, affd. without published
opinion 108 F.3d 338 (9th Cir. 1997); Crawford v. Commissioner,
T.C. Memo. 1993-192.
Based on the record, we find that petitioner has failed to
establish that his special diet was other than a substitute for a
normal diet. We are not convinced that his special diet,
although followed for medical reasons, differed from the diet of
an ordinarily health-conscious individual. Sec. 1.213-
1(e)(1)(ii), Income Tax Regs. Moreover, petitioner has failed to
establish the amount by which his actual food expenditures
exceeded the costs of a normal diet. Petitioner testified that
he deducted 66 percent of his total food expenditures for 1992 as
medical expenses, but submitted little evidence of the cost,
quantity, or type of foods and supplements which he purchased
during 1992. We are therefore unable to make an estimate of his
excess costs. Cf. Cohan v. Commissioner, 39 F.2d 540 (2d. Cir.
1930); Von Kalb v. Commissioner, supra.
We hold that petitioner is not entitled to a medical expense
deduction for the amounts claimed for his special diet.
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The third issue for decision is whether petitioner is liable
for the section 6651(a)(1) addition to tax.
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 it 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. 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 testified that he thought that he was not
required to file a return for 1992 because he believed that his
gross income for 1992 was less than $5,900. Section 6012
provides that an individual with a filing status of single must
file an income tax return for any taxable year in which his
"gross income" exceeds the sum of the section 151(d)(1) exemption
amount and the section 63(c)(2) basic standard deduction for such
individual. Sec. 6012(a)(1)(A)(i). The sum of these amounts for
petitioner's 1992 taxable year was $5,900. However, petitioner's
reported gross income for 1992 was $31,452, consisting of
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interest ($794), dividends ($723), and taxable individual
retirement account distributions ($29,935). Petitioner
erroneously believed that his claimed Schedule C business expense
deductions and his alleged net operating carryover losses from
1990 and 1991 reduced his reported gross income for 1992 below
$5,900. These amounts reduce "taxable income" under section
63(a), but do not reduce "gross income" under section 61(a).
See, e.g., sec. 61(a)(2); sec. 1.61-3(a), Income Tax Regs. (gross
income derived from business determined "without subtraction of
selling expenses, losses or other items not ordinarily used in
computing costs of goods sold"). Thus, petitioner's reported
gross income for 1992 exceeded the section 6012(a)(1)(A)(i)
threshold for filing a return.3
Petitioner's return for his 1992 taxable year was due on
April 15, 1993. Sec. 6072(a). Respondent received petitioner's
1992 return at his Ogden, Utah, service center on August 10,
1994. In light of the fact that he is a certified public
accountant, we find that petitioner's failure to understand the
basic term "gross income" does not constitute reasonable cause
for not timely filing his return. Accordingly, we hold that
petitioner is liable for the section 6651(a)(1) addition to tax.
3
We note that petitioner's actual gross income for 1992
is greater than his reported gross income as a result of the
computational adjustment to the taxable amount of his Social
Security benefits under sec. 86.
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To reflect the foregoing,
Decision will be entered
for respondent.