T.C. Summary Opinion 2001-134
UNITED STATES TAX COURT
INEZ T. MORIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6078-00S. Filed September 4, 2001.
Inez T. Morin, pro se.
Ric Hulshoff and Jordan Musen, 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
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effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency of $28,449 in
petitioner's Federal income tax for the year 1996, and an
addition to tax under section 6651(a)(1) of $5,805.04.
We must decide: (1) Whether petitioner is entitled to
deduct Schedule C expenses in amounts greater than respondent has
determined; (2) whether petitioner has additional self-employment
income; and (3) whether petitioner is liable for an addition to
tax under section 6651(a)(1).
Petitioner failed to substantiate her deductions on audit.
She failed to stipulate matters with respondent before trial. At
trial, she refused to stipulate matters which she said were
correct. The Court took a long recess for stipulation purposes.
Although respondent was willing to concede a number of items in
petitioner’s favor, she still refused to stipulate. Finally,
only after the intervention of the Court, did petitioner
stipulate in part.
To the limited extent stipulated, the facts are so found.
Petitioner resided in Sylmar, California, at the time her
petition was filed.
Petitioner reported $9,240 as other income from services as
a notary public. On her Schedule C, Profit or Loss From
Business, for “Morin Business Services” (MBS), petitioner
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deducted $59,323 in total expenses from $82,528 of gross receipts
for a net profit of $23,205. On her first Schedule C, petitioner
described MBS as an accounting, bookkeeping, and income tax
business. On her second Schedule C for “A Joyful Wedding”, which
was described as minister services, petitioner deducted $12,871
of total expenses from $13,600 of gross receipts for a net profit
of $729.
Respondent disallowed $59,323 of deductions for the first
Schedule C and $12,871 for the second Schedule C because
petitioner did not establish that the business expenses shown on
her return were paid or incurred during the taxable year and that
the expenses were ordinary and necessary to her businesses. At
trial, respondent conceded that petitioner was engaged in two
businesses. Respondent in the notice of deficiency determined
that the $9,240 amount reported as other income for notary public
services was gross receipts of MBS and was subject to self-
employment tax. The notice of deficiency attributed another
$3,600 of income to gross receipts of MBS, but respondent
conceded this amount at trial.
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
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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. Section 7491 does not change a taxpayer’s obligation
to substantiate deductions. Higbee v. Commissioner, 116 T.C. 438
(2001).
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,
however, must have some basis upon which an estimate can be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Section 274(d) imposes stringent substantiation requirements
for the deduction of travel expenses, automobile expenses, and
entertainment expenses. Taxpayers must substantiate by adequate
records certain items in order to claim deductions, such as the
amount and place of each separate expenditure, the property’s
business and total usage, the date of the expenditure or use, and
the business purpose for an expenditure or use. Sec. 274(d);
sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). To substantiate a deduction by means of adequate
records, a taxpayer must maintain an account, book, diary, log,
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statement of expense, trip sheet, and/or other documentary
evidence, which, in combination, are sufficient to establish each
element of expenditure or use. Sec. 1.274-5T(c)(2)(i), Temporary
Income Tax Regs., 50 Fed Reg. 46017 (Nov. 6 1985). Travel,
automobile, and entertainment expenses cannot be estimated under
Cohan. Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968),
affd. per curiam 412 F.2d 201 (2d Cir. 1969).
Petitioner did not have any books or records. She did not
have a diary, a log, or trip sheets relating to her travel. At
trial, petitioner had little evidence to support many of her
claimed deductions. Many expenses appeared to be personal
expenses nondeductible under section 262. Petitioner provided
some substantiation for business expense deductions and
respondent conceded that she was entitled to most of those
deductions.
Petitioner was asked whether she could provide for MBS:
“Any kind of books or records that might show that [she] had any
reason to travel that year”. Petitioner’s answer was: “Not with
me, no.” Petitioner failed to comply with the strict
substantiation rules of section 274(a) and is not entitled to
deduct any travel, meals, and entertainment expenses. As to the
claimed $2,378 bad debt deduction for MBS, petitioner said: “I
mean, it’s not worth the headache to point out all the returned
checks, and matching it [sic] to my deposits” so she conceded
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this issue. Respondent, after reviewing the material petitioner
belatedly provided, made substantial concessions. This should
prove to petitioner that a wiser course than the one she followed
in this case would be to provide respondent with information when
it is requested.
The Court has reviewed the evidence and finds some instances
in which we allow petitioner additional deductions under the
Cohan rule, keeping in mind the admonition that we bear heavily
against petitioner whose inexactitude is of her own making and
the concept that we must have some basis upon which an estimate
can be made. The rounded amounts of respondent’s concessions,
the Court’s additional allowances, and the total allowed are set
forth below for MBS:
Deductions Respondent Additional Total
Expenses Claimed Conceded Allowances Allowed
Advertising $852 $607 $607
Bad Debts 2,378 0
Car and Truck 3,345 0
Depreciation 2,896 0
Legal 99 115 115
Office 3,516 $764 764
Business property 8,100 6,700 6,700
Repairs 188 0
Taxes/licenses 1,274 879 879
Travels/meals 310 0
Utilities 1,556 454 454
Wages 11,212 11,212 11,212
Other Expenses 23,597 731 731
$59,323 $21,462
Accordingly, we find that petitioner is entitled to deduct a
total of $21,462 of expenses for MBS.
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On her second Schedule C for her Joyful Wedding business,
petitioner deducted a total of $12,871 in expenses. The amounts
claimed and the rounded amounts respondent conceded are set forth
below:
Deductions Respondent
Expenses Claimed Conceded
Advertising $3,725 $3,508
Bad debts 75
Office 406 438
Bank charges 194 113
Licenses 7,996 7,320
Misc. 267 75
Telephone 208 -
$12,871 $11,454
Petitioner did not have any other credible evidence. We find
that she is entitled to deduct $11,454 of expenses for the Joyful
Wedding business.
Petitioner reported $9,240 as other income from notary
public services. Respondent determined that the $9,240 was part
of petitioner’s gross receipts for MBS and that it was subject to
self-employment tax. Income from services as a notary public is
not subject to the self-employment tax. Sec. 1402(c); sec.
1.1402(c)-2(b), Income Tax Regs. However, petitioner had no
records of a notary public business or any other evidence to show
she was entitled to exclude $9,240 from self-employment income.
When asked about her notary records, petitioner stated: “It’s
just a lot of paperwork. I didn’t bring that. I didn’t bring
the details”. She did have a notary seal. Accordingly, we allow
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her to exclude $100 from self-employment income as income from
services as a notary public. The remaining $9,140 is subject to
self-employment tax under section 1401. Petitioner is entitled
to the corresponding deduction under section 164(f) on all self-
employment tax imposed by section 1401.
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on time. The addition equals 5 percent for each
month that the return is late, not to exceed 25 percent.
Additions to tax under section 6651(a)(1) are imposed unless the
taxpayer establishes that the failure was due to reasonable cause
and not willful neglect. Section 7491(c) does not change the
taxpayer’s burden of proof in this respect. Higbee v.
Commissioner, 116 T.C. 438 (2001). “Reasonable cause” requires a
taxpayer to demonstrate that she exercised ordinary business care
and prudence. United States v. Boyle, 469 U.S. 241, 246 (1985).
Willful neglect is defined as a “conscious, intentional failure
or reckless indifference.” Id. at 245.
Petitioner’s return was untimely filed on July 21, 1997,
even though it bore a signature date of April 13, 1997.
Petitioner did not show reasonable cause why the return was not
timely filed. A comparison of the signature date and the filing
date leads to the conclusion that the late filing was due to
willful neglect. We conclude that petitioner is liable for an
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addition to tax under section 6651(a)(1) for failure to timely
file her 1996 return.
Contentions that we have not addressed are moot, irrelevant,
or meritless.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.