FURNISH v. COMMISSIONER

T.C. Memo. 2001-286

UNITED STATES TAX COURT

CARROLL R. FURNISH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9490-99. Filed October 29, 2001.

Carroll R. Furnish, pro se.

Leonard T. Provenzale, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined the following

deficiencies in, addition to, and penalties on petitioner’s

Federal income taxes:

Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662

1993 $67,215 $16,803.75 $13,443.00
1994 64,073 -0- 12,814.60
1995 42,196 -0- 8,439.20
 - 2 -

Unless otherwise indicated, 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.

The issues for decision are:1 (1) Whether petitioner is

entitled to deduct Schedule C, Profit or Loss From Business,

expenses in excess of the amounts allowed by respondent, (2)

whether petitioner is liable for an addition to tax pursuant to

section 6651(a)(1) for 1993, and (3) whether petitioner is liable

for penalties pursuant to section 6662(a) for 1993, 1994, and

1995.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. At the time he filed his

petition, Carroll R. Furnish resided in West Palm Beach, Florida.

Mr. Furnish built the house that he lived in with his two minor

children with “his own hands”. During the years in issue, he

owed 2 years of property taxes on his home, and he “maxed out”

all his credit cards.

Prior to and during the years in issue, Mr. Furnish was in

1
Adjustments respondent made to petitioner’s earned income
credit, deduction for personal exemptions, and self-employment
tax are computational in nature and will be resolved by our
holdings herein.
 - 3 -

the construction business. Specifically, he was a roofer who did

shell work, beam work, and put on trusses, sheeting, and plywood.

Prior to 1993, he worked alone. In 1993, he hired carpenters and

laborers to help him construct the roofs. He constructed roofs

for new residential construction projects, and usually worked on

one or two houses at a time.

During the years in issue, Mr. Furnish would put together

crews to help him construct the roofs. He usually had at least

seven men on the job.2 A crew of seven consisted of six

carpenters and one laborer. He paid the carpenters $15 per hour

and the laborer $7 per hour. Most of the people working in Mr.

Furnish’s crews did not speak English. He had one man who

understood English and translated to the other men.

During the years in issue, he and his crew would normally

work 8 hours a day and 5 days a week. Occasionally, however,

they would also work on weekends. Mr. Furnish and his crew

worked regardless of the weather. They worked through the rain,

and when there was lightning they waited until it stopped.

In 1993, because there was no work in West Palm Beach,

Florida, Mr. Furnish drove his truck 50 miles each way to Coral

Springs, Florida. During the years in issue, Mr. Furnish

2
Mr. Furnish needed seven people to set up the trusses:
one to hook them up, one on each side of the wall, one to catch
the middle, two to set the trusses along the beam, and one to
strip them.
 - 4 -

replaced the engine in the truck he used in his business. He

also repaired the transmission and brakes, replaced the tires,

and changed the oil in the truck at least once a month.

Mr. Furnish maintained a separate room in his house as his

office. He bought a computer for use in his business. During

the years in issue, Mr. Furnish purchased liability and

compensation insurance for his business.

In 1993, Mr. Furnish hired an accountant, Richard Buckner.

Mr. Buckner advised Mr. Furnish on what he needed to do for tax

purposes. During the years in issue, Mr. Furnish gave all his

records to Mr. Buckner, and Mr. Buckner prepared Mr. Furnish’s

Federal income tax returns for 1993, 1994, and 1995. Mr. Furnish

also gave Forms 1099 to his crew based on the information given

to him by each of them. He also filed copies of the Forms 1099

with the Internal Revenue Service (IRS).

Mr. Furnish filed his Federal income tax returns for 1993,

1994, and 1995 on August 23, 1995, April 15, 1995, and April 15,

1996, respectively. Mr. Furnish reported the following expenses

on his Schedules C:3

3
For convenience, some figures have been rounded to the
nearest dollar.
 - 5 -

Expenses 1993 1994 1995

Car and truck $2,774 $1,776 $2,776
Forms 10994 178,340 148,900 105,910
Depreciation 3,637 -0- 3,109
Insurance 4,125 4,125 4,775
Legal 670 510 820
Office expenses 472 378 4,258
Repairs 668 569 2,569
Supplies 12,944 23,918 21,458
Taxes and licenses 512 312 518
Utilities 1,198 998 2,797

In 1996, the IRS examined Mr. Furnish’s tax returns.

Sometime before the audit, Mr. Buckner became seriously ill and

was hospitalized. The doctors told Mr. Buckner’s wife that Mr.

Buckner was dying and that he would not last another week. At

this time, without Mr. Furnish’s knowledge or consent, Mr.

Buckner’s wife threw out all of Mr. Buckner’s client records,

including Mr. Furnish’s records. During the time the examination

was being conducted, Mr. Buckner died.

After he learned that his records had been destroyed, Mr.

Furnish went to suppliers to try to obtain records of what he

paid them. With few exceptions, no records existed other than

the ones that he had given to Mr. Buckner (which were destroyed).

Mr. Furnish sold his car and hired an attorney to represent

him during the IRS examination. After a short period of time,

4
These figures represented amounts Mr. Furnish paid to
carpenters and laborers he hired to help him with his
construction work.
 - 6 -

however, he did not have enough money to pay for the attorney’s

services.

Respondent disallowed all of the expenses listed on the

Schedules C for 1993, 1994 and 1995 except for the following:

(1) Car and truck expenses of $2,025 for 1995; (2) insurance

expenses of $4,125 (the full amount claimed) for 1994; (3) legal

expenses of $100 for 1993, 1994, and 1995; (4) office expenses of

$378 (the full amount claimed) in 1994; (5) supplies expenses of

$23,918 (the full amount claimed) for 1994 and $18,018 for 1995;

(6) utilities expenses of $998 (the full amount claimed) for

1994; and (7) all the taxes and licensing expenses claimed by Mr.

Furnish for 1993, 1994, and 1995. Additionally, although Mr.

Furnish deducted only $148,900 for labor expenses in 1994,

respondent disallowed $181,055 of labor expenses.

OPINION

As we observed in Diaz v. Commissioner, 58 T.C. 560, 564

(1972):

This case epitomizes the ultimate task of a trier of
the facts--the distillation of truth from falsehood
which is the daily grist of judicial life. He must be
careful to avoid making the courtroom a haven for the
skillful liar or a quagmire in which the honest
litigant is swallowed up. Truth itself is never in
doubt, but it often has an elusive quality which makes
the search for it fraught with difficulty. That this
is so is clearly illustrated by the situation herein.
* * *

I. Business Expense Deductions

The main issue to be decided in the instant case is whether
 - 7 -

petitioner has substantiated certain Schedule C business expense

deductions that he claimed on his 1993, 1994, and 1995 Federal

income tax returns. Deductions are a matter of legislative

grace, and petitioner bears the burden of proving that he is

entitled to the deductions claimed. Rule 142(a); New Colonial

Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).5

Ordinarily, a taxpayer is permitted to deduct the ordinary

and necessary expenses that he pays or incurs during the taxable

year in carrying on a trade or business. Sec. 162(a). A

taxpayer, however, is required to maintain records sufficient to

establish the amounts of his deductions. Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

When a taxpayer establishes that he paid or incurred a

deductible expense but does not establish the amount of the

deduction, we may estimate the amount allowable in certain

circumstances. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

There must be sufficient evidence in the record, however, to

permit us to conclude that a deductible expense was paid or

incurred in at least the amount allowed. Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).

5
The examination in this case began in 1996; therefore,
sec. 7491 is inapplicable. Higbee v. Commissioner, 116 T.C. 438,
440 (2001) (sec. 7491 applies to examinations commenced after
July 22, 1998).
 - 8 -

A. Preliminary Matters

Before addressing the merits of each claimed deduction, the

Court notes that respondent does not dispute that petitioner’s

records were destroyed by petitioner’s accountant’s wife and does

not contend that the destroyed records were inadequate or

insufficient. Additionally, the record establishes that

petitioner fully cooperated with the IRS from the audit level

through the trial stage. Furthermore, having observed

petitioner’s appearance and demeanor at trial, we find him to be

honest, forthright, and credible.

B. Labor Expense

As an initial matter, we note that respondent disallowed

$32,155 of labor expenses for 1994 in excess of the amount

petitioner claimed on his return. Respondent never explained

this disparity. To this extent, respondent’s determination is

not sustained.

Petitioner testified that he and his crew worked every week

during the years in issue. Although we found petitioner to be a

credible witness, we think it is likely that there were some

weekdays during the years in issue that he did not work. We

note, however, that we found as a fact that occasionally he and

his crew worked weekends. On the basis of the record, we

approximate that petitioner and his crew worked 40 hours a week,

50 weeks a year. On the basis of this finding, we conclude that
 - 9 -

he was entitled to deduct the full amount of the labor costs he

claimed on his returns for each of the years in issue.6

C. Depreciation Expenses

At trial, petitioner provided no evidence regarding the

depreciation deductions. It is unclear from the record what

property petitioner depreciated in 1993 and 1995. Accordingly,

there is no rational basis to approximate these expenses, and we

sustain respondent’s determination as to the depreciation

deductions.

D. Legal Expenses

Respondent allowed $100 of legal expenses each year.

Petitioner testified that he paid $100 of legal expenses.

Therefore, we sustain respondent’s determination as to the legal

expenses.

E. Insurance, Office, Repairs, Supplies, and Utility
Expenses

The parties agree that petitioner’s records were destroyed

due to circumstances beyond his control. Petitioner credibly

testified as to his insurance, office, repairs, supplies, and

utility expenses during the years in issue. Under the

circumstances, petitioner’s uncontradicted testimony warrants

6
Our finding would entitle petitioner to a $194,000
deduction per year (one laborer being paid $7 per hour, working
40 hours a week, for 50 weeks equals $14,000 per year, and six
carpenters paid $15 per hour, working 40 hours a week, for 50
weeks equals $180,000 per year). Petitioner claimed less than
this amount each of the years in issue.
 - 10 -

allowance of the entire amounts claimed for these expenses in his

tax returns. See Miller v. Commissioner, T.C. Memo. 1960-92,

affd. 295 F.2d 538 (8th Cir. 1961). Accordingly, we estimate

that the amounts allowed are the amounts claimed by petitioner

for these expenses on his tax returns for the years in issue.

See Huff v. Commissioner, T.C. Memo. 1994-451.

F. Car and Truck Expenses

In addition to satisfying the criteria for deductibility

under section 162, certain categories of expenses must also

satisfy the strict substantiation requirements of section 274(d)

in order for a deduction to be allowed. The expenses to which

section 274(d) applies include, among other things, automobile

expenses. Secs. 274(d)(4), 280F(d)(4)(a)(i) and (ii). We may

not use the Cohan doctrine to estimate expenses covered by

section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827

(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-

5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,

1985).

To substantiate a deduction attributable to listed property

(i.e., automobile expenses), a taxpayer must maintain adequate

records or present corroborative evidence to show the following:

(1) The amount of the expense; (2) the time and place of use of

the listed property; and (3) the business purpose of the use.
 - 11 -

Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg.

46016 (Nov. 6, 1985).

When a taxpayer's records have been destroyed or lost due to

circumstances beyond his control, he is generally allowed to

substantiate his deductions through secondary evidence.

Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); sec.

1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022

(Nov. 6, 1985). A taxpayer in this type of situation may

reconstruct his expenses through other credible evidence. Watson

v. Commissioner, T.C. Memo. 1988-29; sec. 1.274-5T(c)(5),

Temporary Income Tax Regs., supra. If no other documentation is

available, we may, although we are not required to do so, accept

credible testimony of a taxpayer to substantiate a deduction.

Watson v. Commissioner, supra.

Petitioner credibly testified as to the nature of the

expenses he incurred in the operation of his truck. We accept

petitioner’s credible testimony as substantiation of his car and

truck expenses. Under the circumstances, petitioner’s

uncontradicted testimony warrants allowance of the entire amounts

claimed for these expenses on his tax returns. See Miller v.

Commissioner, supra. Accordingly, we do not sustain respondent’s

determination disallowing these expenses.

II. Section 6651(a)(1)

Respondent determined that petitioner is liable for an
 - 12 -

addition to tax pursuant to section 6651(a)(1) for 1993. Section

6651(a)(1) imposes an addition to tax for failure to file a

return on the date prescribed (determined with regard to any

extension of time for filing), unless the taxpayer can establish

that such failure is due to reasonable cause and not due to

willful neglect. The taxpayer has the burden of proving the

addition is improper. See Rule 142(a); United States v. Boyle,

469 U.S. 241, 245 (1985).

Petitioner stipulated that he did not file his tax return

for 1993 until August 23, 1995. He offered no evidence showing

that his failure to file was due to reasonable cause and not due

to willful neglect. Accordingly, we hold that petitioner is

liable for the addition to tax pursuant to section 6651(a)(1).

III. Section 6662(a)

Pursuant to section 6662(a), a taxpayer may be liable for a

penalty of 20 percent on the portion of an underpayment of tax

(1) attributable to a substantial understatement of tax or (2)

due to negligence or disregard of rules or regulations. Sec.

6662(b). Whether applied because of a substantial understatement

of tax or negligence or disregard of the rules or regulations,

the accuracy-related penalty is not imposed with respect to any

portion of the understatement as to which the taxpayer acted with

reasonable cause and in good faith. Sec. 6664(c)(1). The

decision as to whether the taxpayer acted with reasonable cause
 - 13 -

and in good faith depends upon all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. Relevant

factors include the taxpayer's efforts to assess his proper tax

liability, including the taxpayer’s reasonable and good faith

reliance on the advice of a professional such as an accountant.

See id. Further, an honest misunderstanding of fact or law that

is reasonable in light of the experience, knowledge, and

education of the taxpayer may indicate reasonable cause and good

faith. See Remy v. Commissioner, T.C. Memo. 1997-72.

It is clear from the record that petitioner is an

unsophisticated taxpayer who relied reasonably and in good faith

on his accountant. Consequently, we conclude that for the years

in issue petitioner had reasonable cause and acted in good faith

as to any underpayment resulting from the deductions in issue.

Accordingly, we hold that petitioner is not liable for the

penalty pursuant to section 6662(a).

To reflect the foregoing,

Decision will be entered

under Rule 155.