T.C. Summary Opinion 2001-80
UNITED STATES TAX COURT
JAMES E. HARRELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10656-99S. Filed June 7, 2001.
James E. Harrell, pro se.
Robert A. Varra, for respondent.
PAJAK, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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Respondent determined a deficiency of $2,770 and a section
6651(a)(1) addition to tax of $598.25 in petitioner's Federal
income tax for the year 1994. This Court must decide: (1)
Whether petitioner qualifies for head of household filing status;
(2) whether petitioner substantiated the amounts claimed as
itemized deductions for medical expenses, taxes paid, interest
expenses, charitable contributions, unreimbursed employee
business expenses, and other expenses; and (3) whether petitioner
is liable for an addition to tax for failing to timely file his
1994 tax return. If petitioner's itemized deductions are less
than the standard deduction, then petitioner will be entitled to
the standard deduction under section 63(b), as respondent
determined.
Petitioner resided in Aurora, Colorado, at the time he filed
his petition.
In 1993, petitioner and his wife were legally separated.
During 1994, petitioner's four children lived with their mother.
They spent 2-3 nights per week at petitioner's house. Petitioner
provided financial support for his children. Under the 1996
decree of dissolution, petitioner was entitled to claim
dependency exemption deductions for two of his four children. On
his 1994 return, which was filed on July 3, 1997, petitioner
claimed head of household filing status. Respondent determined
that petitioner's filing status should be single.
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To qualify as a head of household, petitioner must have
maintained a home that was the principal place of abode for more
than one-half of the year for at least one of his children. Sec.
2(b). Petitioner did not establish that any of his children
lived in his home for more than one-half of the year.
Accordingly, we sustain respondent's disallowance of head of
household filing status.
Respondent disallowed certain itemized deductions claimed by
petitioner because petitioner did not substantiate the amounts he
claimed. Deductions are strictly a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must substantiate claimed deductions. Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). Moreover, taxpayers must keep sufficient
records to establish the amounts of the deductions. Meneguzzo v.
Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-1(a), Income
Tax Regs. Generally, except as otherwise provided by section
274(d), when evidence shows that a taxpayer incurred a deductible
expense, but the exact amount cannot be determined, the Court may
approximate the amount bearing heavily if it chooses against the
taxpayer whose inexactitude is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court,
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however, must have some basis upon which an estimate can be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Petitioner reported $4,280 of medical and dental expenses on
his Schedule A. Respondent conceded that petitioner
substantiated $887 of these expenses for medical insurance. At
trial, petitioner substantiated that he paid $2,500 to a doctor.
Under section 213, individuals are entitled to an itemized
deduction for amounts paid for medical care to the extent that
these expenses exceed 7.5 percent of the individual's adjusted
gross income. Petitioner's adjusted gross income was $41,471.
Therefore, petitioner may deduct medical expenses only to the
extent that they exceed $3,110. The substantiated expenses
totaled $3,387. We find that petitioner may deduct $277 for
medical expenses.
Petitioner claimed $1,450 of taxes paid as an itemized
deduction on his return. Respondent conceded $1,230 of this
amount was deductible. An itemized deduction is allowable under
section 164(a) for certain types of taxes. Petitioner did not
substantiate any additional amount. We find that petitioner may
deduct $1,230 for taxes.
Petitioner deducted $4,105 of home mortgage interest expense
on his return. In 1995, in lieu of foreclosure, petitioner's
house was sold. The settlement statement shows that interest
from January 1, 1993, to April 1, 1995, was paid with the
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proceeds from the sale on April 6, 1995. A deduction for
qualified residence interest paid on indebtedness during the year
is allowed under section 163(a) and (h). In this case,
petitioner did not pay the interest on his home during 1994, the
year in issue. He paid it in 1995 when his house was sold.
Accordingly, we sustain respondent's disallowance of the interest
expense deduction.
Petitioner claimed $650 of charitable contributions
deductions. An itemized deduction is generally allowable for
charitable contributions made during a year but only if the
contribution is verified in accordance with regulations
prescribed by the Secretary of the Treasury. Sec. 170(a). Based
on petitioner’s testimony, we allow petitioner a $100 deduction
for charitable contributions. Cohan v. Commissioner, supra.
Petitioner deducted $2,300 of unreimbursed employee business
expenses for union dues and job-hunting expenses. Respondent
conceded $382.68 for union dues. Expenses incurred in looking
for a new job in a taxpayer's current trade or business are
allowed as an itemized deduction. Sec. 162(a); Primuth v.
Commissioner, 54 T.C. 374 (1970). However, if part of the
purpose of a job hunting trip is personal in nature, the personal
portion of the expenses is not deductible. Sec. 262. Petitioner
stated that he looked for jobs in Jackson and Gulfport,
Mississippi, and that the expenses he claimed were for mileage.
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He also visited his father on these trips. Petitioner provided
no record of his mileage and failed to meet the strict
substantiation requirements of section 274(d). Accordingly, we
find that petitioner is entitled to deduct only the $382.68 of
union dues expense conceded by respondent.
Petitioner deducted $3,600 of expenses for legal fees and
"claim of right" and $8,150 of other miscellaneous expenses for
the "claim of right". He did not know how the $3,600 amount was
allocated between the two expenses. Legal fees may be deductible
as an itemized deduction under section 212 if they are paid for
the production or collection of income or for the management,
conservation, or maintenance of income producing property.
Petitioner did not substantiate that he paid the legal fees, nor
did he establish his right to deduct them under section 212. In
regards to the "claim of right" expenses, it appears that
petitioner borrowed money from a Mr. Ashley and Mr. Ashley then
sued to collect the money. Petitioner testified that the "claim
of right" expenses were the amounts he transferred to Mr. Ashley
in repayment of the loan. There was no documentation supporting
petitioner's testimony that these payments were actually made.
In any event, it is well established that deductions are not
permitted on account of the repayment of loans. Brenner v.
Commissioner, 62 T.C. 878, 883 (1974); Clark v. Commissioner,
T.C. Memo. 1994-120, affd. without published opinion 68 F.3d 469
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(5th Cir. 1995). Accordingly, we sustain respondent's
disallowance of the deductions for the legal expenses and the
"claim of right" expenses.
The itemized deductions substantiated by petitioner or
allowed by the Court are less than the standard deduction for an
unmarried individual. Sec. 63(c)(2)(C). Consequently,
petitioner is entitled to the standard deduction for his 1994 tax
year.
Respondent contends that petitioner is liable for an
addition to tax pursuant to section 6651(a)(1). Section
6651(a)(1) imposes an addition to tax for failure to file a
Federal income tax return by its due date, determined with regard
to any extension of time for filing previously granted. The
addition equals 5 percent for each month that the return is late,
not to exceed 25 percent. Sec. 6651(a)(1). Additions to tax
under sections 6651(a)(1) are imposed unless the taxpayer
establishes that the failure was due to reasonable cause and not
willful neglect. Sec. 6651(a)(1). The taxpayer must prove both
reasonable cause and a lack of willful neglect. Crocker v.
Commissioner, 92 T.C. 899, 912 (1989). "Reasonable cause"
requires the taxpayer to demonstrate that he exercised ordinary
business care and prudence. United States v. Boyle, 469 U.S.
241, 246 (1985). Willful neglect is defined as a "conscious,
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intentional failure or reckless indifference." United States v.
Boyle, supra at 245.
Petitioner filed his 1994 return on July 3, 1997.
Petitioner stated that he did not file his 1994 tax return on
time because his bankruptcy lawyer told him he should not file it
until his 1992 and 1993 returns were "cleared up with the actual
bankruptcy action." The attorney did not explain why filing the
return late would be a good idea. We find that relying on this
alleged information without questioning why he should file late
or why he should not at least file for an extension demonstrates
that petitioner did not exercise ordinary business care and
prudence. Petitioner did not have reasonable cause for filing
late. We sustain respondent's determination of the section
6651(a)(1) addition to tax.
To the extent that we have not addressed any of the parties'
arguments, we have considered them and conclude they are without
merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.