Jacobsen v. Comm'r

T.C. Summary Opinion 2002-87

UNITED STATES TAX COURT

ROBERT C. JACOBSEN AND CAROL S. JACOBSEN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13414-00S. Filed July 11, 2002.

Robert C. Jacobsen and Carol S. Jacobsen, pro se.

Robert B. Taylor, for respondent.

COHEN, 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, all section

references are to the Internal Revenue Code in effect for the
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year in issue, and all Rule references are to the Tax Court Rules

of Practice and Procedure.

Respondent determined a deficiency of $15,195 in

petitioners’ Federal income taxes for 1997. The deficiency

resulted from disallowance of deductions for car and truck

expenses, legal and professional expenses, and salaries and wages

claimed on Schedule C, Profit or Loss From Business, attached to

petitioners’ Federal income tax return. Respondent made

adjustments to petitioners’ Schedule A, Itemized Deductions, and

determined that petitioners were liable for a 10-percent

additional tax on each petitioner’s distribution from a

retirement plan. After concessions, the issues remaining for

decision are whether petitioners have adequately substantiated

expenses subject to section 274(d) or for legal and professional

fees claimed and whether the additional tax imposed on early

distributions under section 72(t) applies to the distributions

received from their retirement plans.

Background

Petitioner Robert C. Jacobsen (Mr. Jacobsen) was licensed to

sell real estate in Arizona and New Jersey prior to and during

1997. Petitioner Carol S. Jacobsen (Mrs. Jacobsen) was employed

prior to 1995 as an executive secretary. In 1995, Mrs. Jacobsen

was diagnosed with a heart condition, and a heart transplant was

recommended. Mrs. Jacobsen had to give up her regular employment
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and began to receive Social Security benefits. During 1997,

petitioners spent a substantial amount of time at hospitals and

going to and from hospitals and doctors’ offices. Mrs. Jacobsen

also performed services in Mr. Jacobsen’s business during 1997.

Petitioners deducted on Form 1040, U.S. Individual Income

Tax Return, Schedule C, $7,194 as “wages”, consisting of $4,000

in compensation and $3,194 as employee expenses of Mrs. Jacobsen.

The $4,000 was reported as wages by Mrs. Jacobsen on page 1 of

the return and thus constituted a “wash”. The $3,194 in employee

expenses is allegedly vehicle expense, miscellaneous business

expenses, and meals and entertainment expenses, which are still

in issue in this case.

Petitioners reported no income from Mr. Jacobsen’s real

estate business on their tax return for 1997. In addition to the

$3,194 in dispute as set forth above, deductions disallowed by

respondent include $16,507 in car and truck expenses and $4,600

for legal and professional fees.

Mrs. Jacobsen was 54 years old in 1997. She received a

distribution from her retirement account in the amount of

$70,000. Mr. Jacobsen was 56 years old in 1997 and received a

distribution from his retirement account in the amount of

$35,550. Respondent determined that each of the distributions

was subject to a 10-percent additional tax under section 72(t).
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Discussion

Expenses Subject to Section 274(d)

Respondent contends that petitioners did not adequately

substantiate the car and truck expenses deducted on their return,

citing section 274(d). Because the disputed amount of $3,194 was

claimed for Mrs. Jacobsen and identified as vehicle expenses and

meals and entertainment expenses, the same considerations apply

to those items. Sec. 274(d)(2), (4). Section 274(d) provides in

part as follows:

SEC. 274(d). Substantiation Required.--No
deduction or credit shall be allowed-–

(1) under section 162 or 212 for any
traveling expense (including meals and lodging
while away from home),

(2) for any item with respect to an
activity which is of a type generally considered
to constitute entertainment, amusement, or
recreation, or with respect to a facility used in
connection with such an activity,

(3) for any expense for gifts, or

(4) with respect to any listed property (as
defined in section 280F(d)(4)),

unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s
own statement (A) the amount of such expense or other
item, (B) the time and place of the travel,
entertainment, amusement, recreation, or use of the
facility or property, or the date and description of
the gift, (C) the business purpose of the expense or
other item, and (D) the business relationship to the
taxpayer of persons entertained, using the facility or
property, or receiving the gift. The Secretary may by
regulations provide that some or all of the
requirements of the preceding sentence shall not apply
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in the case of an expense which does not exceed an
amount prescribed pursuant to such regulations. * * *

In support of their claims to deductible car and truck

expenses, petitioners presented a copy of a calendar for 1997,

some bills and statements reflecting purchase of gas and rentals

of automobiles, bills for insurance on three vehicles, and repair

bills. The calendar showed mileage for the first 3 months of the

year. To support his claim that he engaged in various marketing

activities during 1997, Mr. Jacobsen presented copies of

schedules of activities for the years 2000 and 2001 and testified

that he engaged in the same type of activity in 1997.

Mr. Jacobsen testified:

THE COURT: I see your Schedule C reported no
income for 1997 from your real estate business. Why is
that?

THE WITNESS [Mr. Jacobsen]: Well, between running
between the hospitals and trying to do things and
getting referrals, I had to pass jobs off, or prospects
off, and those things fell through most of the time.
It was a tough year.

THE COURT: Tell me how you used your car again.
I mean how did you come up with the amount that’s
deducted. $16,507 is a lot of car and truck expense
and–-

THE WITNESS: I basically lived in my car.

THE COURT: Well, you were running to the hospital
a lot. How did you distinguish between hospital runs
and business runs?

THE WITNESS: Well, logistically I went from my
house to the hospital and then from there on to the
office or beyond, so that that mile was inclusive.
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Petitioners are not entitled to estimate deductible car and

truck expenses without the substantiation of time, place, and

business purpose required by section 274(d). See also section

280F(d)(4) with respect to expenses relating to passenger

automobiles. Despite the volume of paper presented by

petitioners, they have failed to satisfy the strict

substantiation requirements of the applicable law. Even if we

could accept Mr. Jacobsen’s generalized testimony and assertions

that all of the mileage related to attempts to secure business

and to make contacts, the amount is unreasonable in view of his

testimony about the severity of Mrs. Jacobsen’s illness during

1997. On this record, no deduction for car and truck expenses or

meals and entertainment expenses may be allowed.

Legal Expenses

Respondent contends that there is no evidence substantiating

petitioners’ claim that they incurred legal expenses during 1997

that were deductible as business expenses. Again, petitioners

presented fragmentary documents that showed that certain payments

were made. Neither the documents nor Mr. Jacobsen’s testimony

adequately or persuasively explained how the expenses related to

his business. His testimony about the various matters discussed

with regard to the services provided by the lawyer to whom

payment was made suggests items that are not currently

deductible. Mr. Jacobsen testified:
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I was looking to start up my own real estate company at
that time. In fact I’m still looking to do that--and
real estate investments, REITS and such. We were going
to buy and sell business and start a holding company.
I started two other additional companies in that
regard.

We were concerned about doing maybe business in
California and New Jersey, so we talked about taxes and
consequences thereof. We talked about Social Security
and retirement; talked to him about hiring my wife as a
consultant, and fees and salary and things like that.
We also talked to him about having him work on cases
that we thought we could sue her prior employer. So we
gave him stipends and he deducted every time we called
him or what have you.

Business startup expenses are deductible only as permitted under

section 195. Investment expenses and advice concerning taxes are

deductible under section 212, but only to the extent that the

aggregate of miscellaneous itemized deductions exceeds 2 percent

of adjusted gross income. Sec. 67(a). Legal fees relating to a

suit against Mrs. Jacobsen’s former employer might or might not

be deductible depending on the nature of the lawsuit. In any

event, the identified services included few, if any, services

that would be deductible on Schedule C. The record does not

include any basis for allocation. No deductions for legal

expenses may be allowed.

Distributions From Retirement Plans

Section 72(t) provides in pertinent part as follows:

(t) 10-Percent Additional Tax on Early
Distributions from Qualified Retirement Plans.--

(1) Imposition of additional tax.--If any
taxpayer receives any amount from a qualified
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retirement plan (as defined in section 4974(c)),
the taxpayer’s tax under this chapter for the
taxable year in which such amount is received
shall be increased by an amount equal to
10 percent of the portion of such amount which is
includible in gross income.

(2) Subsection not to apply to certain
distributions.--Except as provided in paragraphs
(3) and (4), paragraph (1) shall not apply to any
of the following distributions:

(A) In general.--Distributions which
are–-

(i) made on or after the date on
which the employee attains age 59-1/2,

(ii) made to a beneficiary (or to
the estate of the employee) on or after
the death of the employee,

(iii) attributable to the
employee’s being disabled within the
meaning of subsection (m)(7),

(iv) part of a series of
substantially equal periodic payments
(not less frequently than annually) made
for the life (or life expectancy) of the
employee or the joint lives (or joint
life expectancies) of such employee and
his designated beneficiary, * * *

Section 72(m)(7) provides:

(m) Special Rules Applicable to Employee Annuities
and Distributions Under Employee Plans.--

* * * * * * *

(7) Meaning of disabled.--For purposes of
this section, an individual shall be considered to
be disabled if he is unable to engage in any
substantial gainful activity by reason of any
medically determinable physical or mental
impairment which can be expected to result in
death or to be of long-continued and indefinite
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duration. An individual shall not be considered
to be disabled unless he furnishes proof of the
existence thereof in such form and manner as the
Secretary may require.

Respondent argues that petitioners’ claim that Mrs. Jacobsen was

disabled is inconsistent with her performance of services in

Mr. Jacobsen’s business during 1997.

Mr. Jacobsen explained that Mrs. Jacobsen’s activities in

relation to his business were therapeutic, and we do not believe

that a performance of office and administrative tasks at home is

inconsistent with disability resulting from heart disease. We

disallowed deductions for car and truck expenses partly because

the substantial expenses that were claimed to be business related

were unreasonable during the time that petitioners were dedicated

to the care of Mrs. Jacobsen. We are satisfied that she was

disabled for purposes of section 72(t) and that petitioners are

not liable for the additional tax on the distribution from her

retirement plan.

Mr. Jacobsen, however, relies on section 72(t)(2)(iv), with

respect to the distribution from his retirement plan, claiming

that the payments that he received over a period of years were

substantially equal. Under Internal Revenue Service Notice

89-25, Q&A No-12, 1989-1 C.B. 662, 666, there are three methods

that may be used to calculate substantially equal annual periodic

payments: (1) Any method that would be acceptable for purposes

of calculating the minimum distribution required under section
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401(a)(9); (2) by amortizing the account balance over a number of

years equal to the life expectancy of the account owner or the

joint life and last survivor expectancy of the account owner and

beneficiary (with life expectancies determined in accordance with

section 1.401(a)(9)-1, Proposed Income Tax Regs., 52 Fed. Reg.

28081 (July 27, 1987)) at an interest rate that does not exceed a

reasonable interest rate on the date payments commence; or (3) by

dividing the account balance by an annuity factor (the present

value of an annuity of $1 per year beginning at the age attained

in the first distribution year and continuing for the life of the

account owner) with such annuity factor derived using a

reasonable mortality table and using an interest rate that does

not exceed a reasonable interest rate on the date payments

commence.

The parties have stipulated that Mr. Jacobsen received

distributions from his individual retirement account of $16,770,

$18,880, $23,330, $33,330, $31,100, and $35,550 in 1992, 1993,

1994, 1995, 1996, and 1997, respectively. At trial, Mr. Jacobsen

presented various computations that he said supported his claim

that the amounts were substantially equal under the annuity

method described in Notice 89-25, supra. Respondent contends

that the amounts distributed were not the amounts calculated for

each year, that petitioners failed to substantiate that the

calculation was based on the correct balance in the retirement
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account at the time the withdrawal was made, and that petitioners

did not employ a consistent interest rate in their calculations.

We agree with respondent and conclude that petitioners have not

shown that Mr. Jacobsen’s distribution qualifies for an exception

to the tax imposed under section 72(t).

Conclusion

Petitioners appear to have had a difficult year in 1997.

However, throughout the proceedings in this case, Mr. Jacobsen

made unwarranted accusations against respondent’s representatives

and complained that respondent’s agents never explained exactly

what would be required to substantiate petitioners’ expenses.

Mr. Jacobsen acknowledged that, in an earlier case in this Court,

docket No. 18060-93, involving petitioners’ liability for 1991,

business expenses were disallowed in a bench opinion and that an

appeal to the Court of Appeals for the Ninth Circuit was

unsuccessful. See Jacobsen v. Commissioner, 103 F.3d 138 (9th

Cir. 1996), affg. an Oral Opinion of this Court. Thus, by the

time their return was filed for 1997, petitioners were on notice

that they needed to substantiate better the deductions claimed on

their returns. Our sympathy toward their personal situation does

not mean that we can allow deductions that have not been

substantiated in accordance with the legal requirements.
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To reflect the foregoing,

Decision will be entered

under Rule 155.