T.C. Memo. 1999-212
UNITED STATES TAX COURT
MELVIN L. LEVINSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6618-97. Filed June 29, 1999.
Melvin L. Levinson, pro se.
Brendan G. King, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: By notice dated February 11, 1997, respondent
determined the following deficiencies and penalties relating to
petitioner's Federal income taxes:
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Penalty
Year Deficiency Sec. 6662(a)
1993 $12,720.79 $2,544.16
1994 8,307.00 1,661.40
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
After concessions by the parties, the remaining issues for
decision are whether petitioner is liable for self-employment
tax, entitled to deduct expenses relating to his patents, and
liable for accuracy-related penalties.
FINDINGS OF FACT
Petitioner resided in Edison, New Jersey, at the time his
petition was filed. From 1948 until his retirement in 1989,
petitioner operated a retail store that sold electronic goods and
collectibles (i.e., comic books, baseball cards, and stamps).
While operating his retail business, petitioner, in his spare
time, created and patented inventions. His inventions ranged
from microwave power sources to methods for preparing beverages.
In 1981, petitioner was issued a patent for a microwave cookware
container.
In 1989, petitioner filed a civil suit against Northland
Aluminum Products, Inc. (d/b/a Nordic), and Regal Ware, Inc.
(Regal), for infringing upon petitioner's 1981 patent. That same
year, petitioner and Nordic entered into a settlement agreement
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in which Nordic agreed to pay petitioner $500,000, in five
installments, for the past use of petitioner's patent.
Petitioner and Nordic also entered into a license agreement
relating to Nordic's continued use of petitioner's patent. In
1990, petitioner and Regal entered into a settlement agreement in
which Regal agreed to pay petitioner $210,000, in three
installments, for the past use of petitioner's patent.
Petitioner and Regal also entered into a license agreement
relating to Regal's continued use of petitioner's patent.
On his 1993 and 1994 returns, petitioner reported royalties
of $158,611 (i.e., $145,000 relating to Regal's settlement
payments and $13,611 from various companies) and $75,810 (i.e.,
$75,000 relating to Nordic's settlement payment and $810 from
various companies), respectively. Petitioner also reported
$72,227 and $34,201 of business expenses relating to 1993 and
1994, respectively.
OPINION
Respondent contends that the settlement awards and royalties
petitioner received in 1993 and 1994 are subject, pursuant to
section 1401, to self-employment tax. Petitioner contends he is
not in the trade or business of inventing and, therefore, not
liable for self-employment tax.
Section 1401(a) imposes a tax on the self-employment income
of every individual. In general, self-employment income consists
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of the net earnings from a trade or business carried on by an
individual. See sec. 1402(a) and (b). An individual is engaged
in a trade or business if such individual's activities are
conducted with continuity and regularity, and primarily for
income or profit. See sec. 1402(c) (stating that the term "trade
or business" for the purposes of self-employment income generally
has the same meaning as it does for the purposes of section 162);
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
Petitioner was not engaged in the trade or business of
inventing. He did not develop or design inventions on a
continuous or regular basis. Petitioner testified:
I could sit here in front of you all for the next year
and I might not even think of an invention, never even
come to my mind. All of a sudden, I'll get two more
[ideas] in a stroke of genius, they say, but it's
really not a stroke of genius, it's just luck.
Indeed, petitioner conducted his activities sporadically.
Accordingly, the settlement awards and royalties petitioner
received in 1993 and 1994 are not subject to self-employment tax.
Respondent determined that petitioner is not entitled to
deductions for the following: (1) $155 of automobile expenses
relating to 1993; (2) $565 and $1,130 of depreciation relating to
1993 and 1994, respectively; (3) $738 and $519 of utility
expenses relating to 1993 and 1994, respectively; and (4) $7,406
and $3,401 of miscellaneous expenses relating to 1993 and 1994,
respectively. Petitioner bears the burden of proof, yet has
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failed to present sufficient evidence to establish that
respondent's determinations are incorrect. See Welch v.
Helvering, 290 U.S. 111, 115 (1933). Accordingly, respondent's
determinations are sustained.
Respondent determined that petitioner is liable for section
6662(a) accuracy-related penalties for failing to pay self-
employment tax and failing to substantiate deductions relating to
petitioner's patents. The penalty applies to the portion of
petitioner's underpayment that is attributable to negligence or
disregard of the rules or regulations. Sec. 6662(b)(1).
Petitioner is not liable for self-employment tax, and he acted in
good faith and had reasonable cause for claiming the disallowed
deductions. See sec. 1.6664-4(a), Income Tax Regs. At trial,
petitioner failed to substantiate a portion of the expenses he
deducted on his return. At the time he filed his return,
however, he made reasonable efforts to determine the
deductibility of these expenses (e.g., he relied on his records,
conducted tax research, and attended tax seminars). Accordingly,
petitioner is not liable for the accuracy-related penalties.
Contentions we have not addressed are irrelevant, moot, or
meritless.
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To reflect the foregoing,
Decision will be entered
under Rule 155.