T.C. Summary Opinion 2001-118
UNITED STATES TAX COURT
JOHN J. ZANATH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15294-99S. Filed July 31, 2001.
John J. Zanath, pro se.
Julia L. Wahl, for respondent.
DINAN, 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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For the taxable year 1996, respondent determined a
deficiency in petitioner’s Federal income tax of $3,371, an
addition to tax under section 6654(a) of $181.49, and additions
to tax under section 6651(a)(1) and (2) of $758.47 and $370.81.
The issues for decision are: (1) Whether petitioner is
entitled to deduct a net operating loss (NOL) carryover of
$7,367.70; (2) whether petitioner is entitled to a deduction for
employee business expenses of $19,105.30; (3) whether petitioner
is liable for the addition to tax under section 6654(a); and (4)
whether petitioner is liable for the additions to tax under
section 6651(a)(1) and (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
Aliquippa, Pennsylvania, on the date the petition was filed in
this case.
During the year in issue, petitioner was hired as a computer
systems contract engineer with Tech-Power, Inc., located in
Minneapolis, Minnesota. Tech-Power arranged for petitioner to
provide engineering services to United Defense Limited
Partnership, also in Minneapolis, from December 11, 1995 through
April 16, 1996. Petitioner was responsible for developing
computer based training materials for United Defense. Tech-Power
issued a Form W-2, Wage and Tax Statement, to petitioner for 1996
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indicating he earned wages of $24,800. No Federal income tax was
withheld from petitioner’s pay in accordance with the Form W-4,
Employee’s Withholding Allowance Certificate, completed by
petitioner indicating that he was “exempt”. Neither Tech-Power
nor United Defense required petitioner to attend educational
courses or purchase supplies or equipment as a condition of his
employment. Petitioner received unemployment compensation from
the State of Colorado in 1996, which was mailed to him at an
address in Illinois. Also during 1996, petitioner stored
personal belongings at a storage facility in Iowa.
Petitioner did not file a Federal income tax return for
taxable year 1995. For taxable year 1996, he did not file a
return prior to the time respondent issued him a statutory notice
of deficiency for that year. Although only what appears to be
the cover page of the notice of deficiency is in the record,
respondent explains the deficiency in his trial memorandum as
resulting from wage income of $24,800 and unemployment
compensation of $4,223.1 On October 12, 2000, after filing the
1
Although we do not have before us the basis of respondent’s
determinations in the notice of deficiency, both parties agree as
to what issues are before the Court. Furthermore, it is evident
that respondent’s calculation of petitioner’s tax liability was
determined as follows:
Wages $24,800.00
Unemployment compensation 4,223.00
Standard deduction (4,000.00)
Personal exemption (2,550.00)
Taxable income 22,473.00
Tax (from 1996 tax table) 3,371.00
(continued...)
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original petition in this case, petitioner filed a Federal income
tax return for taxable year 1996. He reported the following
income and claimed the following deductions:
Wages $24,800.00
Unemployment compensation 4,223.00
NOL carryover (7,367.70)
Itemized deductions (19,105.30)
Personal exemption (2,550.00)
Taxable income -0-
The itemized deductions consist solely of an employee business
expense deduction comprised of the following, listed as
characterized by petitioner:
Education $7,472.56
Domestic 639.61
Rent 4,890.23
Phone (lowball est.-2 checks only) 141.40
Utilities (power) 94.36
Postal 113.15*
Xerox, printing 37.39*
Computer related (professional) 470.00*
Stationery/office supplies 716.11
Books, etc. (business related) 302.58*
Misc. fees 23.64*
Misc. major (ministorage) 195.07*
AT&T MC phone bills 130.46
Misc. mileage (3 MN-IA round trips
+ MN-PA return, 3,618 @ .31) 1,121.58*
Auto mileage (2,340 @ .31) 725.40*
Travel-related (tolls, parking,
truck for moving) 344.45*
Bus. lodging 212.42*
Food (91 days @ 34/day;
19 days @ 38/day) 3,816.00*
Less 50 percent of food (1,908.00)
Less 2 percent of adjusted gross
income (433.11)
19,105.30
*
Respondent does not challenge petitioner’s substantiation of these
amounts.
1
(...continued)
The tax from this calculation exactly matches the amount of the
deficiency determined by respondent. Petitioner admits receiving
the amount of income determined by respondent; the remainder of
respondent’s deficiency determination is essentially
computational.
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The first issue for decision is whether petitioner is
entitled to deduct an NOL carryover of $7,367.70. Generally, NOL
carryovers are allowed as deductions under section 172(a).
A taxpayer generally must keep records sufficient to
establish the amounts of the items reported on his Federal income
tax return. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
However, in the event that a taxpayer establishes that a
deductible expense has been paid but is unable to substantiate
the precise amount, we generally may estimate the amount of the
deductible expense bearing heavily against the taxpayer whose
inexactitude in substantiating the amount of the expense is of
his own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930). We cannot estimate a deductible expense, however,
unless the taxpayer presents evidence sufficient to provide some
basis upon which an estimate may be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the Cohan doctrine. Sanford v.
Commissioner, 50 T.C. 823, 827 (1968), affd. 412 F.2d 201 (2d
Cir. 1969). Section 274(d) provides that, unless the taxpayer
complies with certain strict substantiation rules, no deduction
is allowable (1) for traveling expenses, (2) for entertainment
expenses, (3) for expenses for gifts, or (4) with respect to
listed property. Listed property includes passenger automobiles
and other property used as a means of transportation. Sec.
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280F(d)(4). To meet the strict substantiation requirements, the
taxpayer must substantiate the amount, time, place, and business
purpose of the expenses. Sec. 274(d); sec. 1.274-5T, Temporary
Income Tax Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).
Petitioner presented no substantiation of the NOL, which he
argued was carried forward from a prior year. Pursuant to
section 172(b), a taxpayer can carry an NOL back 2 years and any
remaining loss forward 20 years, unless an election is made to
waive the carryback. Although petitioner did provide copies of
tax returns from prior years, these returns merely contain
assertions made by petitioner and do not substantiate either that
an NOL was sustained or that any amount was available to carry
forward. Petitioner made statements at trial indicating he
concedes this issue. With or without such a concession, we hold
that petitioner is not entitled to a deduction for an NOL
carryover.
The second issue for decision is whether petitioner is
entitled to a deduction for employee business expenses of
$19,105.30. As a general rule, ordinary and necessary business
expenses are deductible in the year paid, while personal, family,
and living expenses are not deductible. Secs. 162(a), 262(a).
Deductible business expenses may be paid by a taxpayer who is in
the trade or business of being an employee. Primuth v.
Commissioner, 54 T.C. 374, 377-378 (1970). An ordinary expense
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is one that relates to a transaction “of common or frequent
occurrence in the type of business involved”, Deputy v. du Pont,
308 U.S. 488, 495 (1940), and a necessary expense is one that is
“appropriate and helpful” for “the development of the
petitioner’s business,” Welch v. Helvering, 290 U.S. 111, 113
(1933).
Respondent has conceded that petitioner incurred a portion
of the deducted expenses, but argues that they are not ordinary
and necessary business expenses. To substantiate the remaining
expenses, petitioner presented checks and check duplicates in
amounts totaling $4,481.42 for payments for rent, utilities, and
office supplies. In addition, he provided credit card statements
on which he made notations indicating the types of certain
expenses, such as gas, lodging, or phone calls. However,
assuming arguendo that we would accept these documents as
adequate substantiation, we find that these expenses (and those
expenses for which respondent has not challenged substantiation)
are not ordinary and necessary business expenses. Petitioner’s
vague and uncertain testimony provided no connection between the
expenses and petitioner’s employment, and it is evident that many
if not all of the expenses are of an inherently personal nature,
nondeductible under section 262(a).
Petitioner argues that his employment in Minnesota was
temporary, and that many of the expenses he incurred and claimed
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as deductions were incurred while traveling away from his tax
home. He asserts that his “lifetime homestead” is at his
parents’ residence in Aliquippa. Section 162(a) allows as a
deduction “traveling expenses * * * while away from home in the
pursuit of a trade or business”. An individual’s tax home under
this provision generally is the individual’s principal place of
business, not the location of his personal residence. Mitchell
v. Commissioner, 74 T.C. 578, 581 (1980). An exception exists
under which an individual’s tax home is his personal residence if
his principal place of business is temporary rather than
indefinite. Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958).
However, as this Court has previously stated:
An obvious precondition to petitioner’s being “away from
home” is that he have a home to be away from. In the
context of section 162(a)(2), petitioner must show that he
incurred substantial living expenses at a permanent
residence. This requirement is in accord with the purpose
underlying section 162(a)(2), to mitigate the burden falling
upon a taxpayer who, because of the exigencies of his or her
trade or business, must maintain two places of abode and
thereby incur additional and duplicate living expenses.
Lichtenberger v. Commissioner, T.C. Memo. 1985-370, affd. without
published opinion 789 F.2d 919 (7th Cir. 1986).
Petitioner’s employment was apparently temporary. However,
we find that he did not have a tax home in Aliquippa within the
context of section 162(a)(2) because he did not incur substantial
living expenses while there. On the contrary, his presence there
was purely personal in nature, and his parents, not petitioner,
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maintained the residence. See id. He testified that his “rent
arrangements are nominal,” and that he provides help around the
house for his elderly parents. Any expenses petitioner incurred
while away from Aliquippa in 1996 were not traveling expenses
within the meaning of section 162(a)(2) and are not deductible
thereunder. See id.
We hold that petitioner is not entitled to a deduction in
any amount for employee business expenses.
The third issue for decision is whether petitioner is liable
for the section 6654(a) addition to tax for failure to make
estimated Federal income tax payments for 1996. This Court has
jurisdiction to review respondent’s determination of this
addition to tax only if the taxpayer does not file a return for
the taxable year. Sec. 6665(b)(2); Meyer v. Commissioner, 97
T.C. 555, 562 (1991). In this case, petitioner did not file the
return until after the petition had been filed. However, the
stipulation clearly states petitioner did file the return on
October 12, 2000, and a copy of the return is attached to the
stipulation as an exhibit. We therefore lack jurisdiction over
this issue and cannot review respondent’s determination in this
regard.
The final issue for decision is whether petitioner is liable
for the section 6651(a)(1) and (2) additions to tax for failure
to file a return and pay the tax shown thereon. Paragraph (1) of
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section 6651(a) imposes an addition to tax for failure to timely
file a return, and paragraph (2) imposes an addition to tax for
failure to timely pay the amount of tax shown on a return. If a
taxpayer fails to file a return, the paragraph (2) addition to
tax may be calculated based upon the tax shown on the return
prepared by the Secretary pursuant to section 6020(b). Sec.
6651(g)(2).
A taxpayer may avoid the additions to tax under one or both
paragraphs if he establishes that the failure to timely file
and/or pay is due to reasonable cause and not due to willful
neglect. “Reasonable cause” requires the taxpayer to demonstrate
that he 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, 246 (1985). “Willful
neglect” means a conscious, intentional failure or reckless
indifference. Id. at 245.
Petitioner did not file a return for taxable year 1996 until
October 12, 2000. Petitioner’s explanation for the failure to
file is that he honestly believed he owed no taxes because he
assumed an NOL carryover was available. However, petitioner did
not file a return in 1995, making this assumption uncertain at
best and unreasonable in any case. We hold that petitioner is
liable for the addition to tax under section 6651(a)(1).
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Petitioner, however, is not liable for the addition to tax
under section 6651(a)(2). This addition to tax must be based
upon a tax liability shown on a return--a return either filed by
the taxpayer or filed by the Secretary pursuant to section
6020(b). Sec. 6651(a)(2), (g)(2). There is nothing in the
record to indicate that the Secretary prepared such a return,2
and the addition to tax cannot be based on petitioner’s filed
return because the return reflects a zero tax liability.
The addition to tax under section 6651(a)(1) generally is
equal to 5 percent of the amount of tax required to be shown on
the return for each month or portion thereof for which the
delinquency in filing continues, up to a maximum of 25 percent.
The amount of the addition to tax under section 6651(a)(1)
generally is reduced by the amount of the addition to tax under
section 6651(a)(2) with respect to each month in which both are
otherwise applicable. Sec. 6651(c)(1). Because petitioner filed
his return over 3 years late, he is liable for the section
6651(a)(1) addition to tax in the maximum amount of 25 percent,
or $842.75. This amount is greater than the amount determined by
respondent because, due to our holding that petitioner is not
2
A notice of deficiency may be issued without a return
having been filed pursuant to sec. 6020(b). Secs. 6211(a),
6212(a); Roat v. Commissioner, 847 F.2d 1379 (9th Cir. 1988),
affg. on this issue an Order of this Court.
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liable for the section 6651(a)(2) addition to tax, section
6651(c)(1) is no longer applicable.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
An order will be entered
dismissing this case for lack of
jurisdiction as to the section
6654(a) addition to tax, and
decision will be entered for
petitioner as to the section
6651(a)(1) addition to tax and for
respondent as to the deficiency and
the increased section 6651(a)(2)
addition to tax.