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.