T.C. Summary Opinion 2003-65
UNITED STATES TAX COURT
FRANK AND LOU-ANN GUARNA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9524-01S. Filed May 29, 2003.
Frank and Lou-Ann Guarna, pro sese.
Elaine T. Fuller, for respondent.
GOLDBERG, 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 years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency of $918 and an addition
to tax of $100 pursuant to section 6651(a)(1) in petitioners’
Federal income tax for the taxable year 1997. Respondent also
determined a deficiency in petitioners’ Federal income tax for
1998 of $586.
Some of the facts in this case have been stipulated and are
so found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioners lived in Sierra Madre, California.
References to petitioner in the singular are to Frank Guarna.
In the notice of deficiency, respondent determined that
petitioners: (1) Failed to report interest income of $45 for the
1997 tax year; (2) are liable for self-employment tax of $318 for
the 1997 tax year; (3) are liable for an addition to tax of $100
pursuant to section 6651(a)(1) for failure to file their 1997 tax
return by the prescribed due date; (4) failed to report capital
gain income of $953 for the 1998 tax year; (5) failed to report
dividend income of $43 for the 1998 tax year; and (6) failed to
report a taxable State tax refund of $563 for the 1998 tax year.
In the stipulation of facts, petitioners conceded that the
State income tax refund of $563 is includable in income for the
1998 tax year. Respondent conceded in the stipulation of facts
that petitioners are entitled to a $2,000 deduction in the 1998
tax year for a contribution to an individual retirement account.
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At trial, petitioners conceded that: (1) The unreported
interest income of $45 is includable in their gross income for
the 1997 tax year; (2) the unreported capital gain income of $953
is includable in income for the 1998 tax year; and (3) the
unreported dividend income of $43 is includable in income for the
1998 tax year.
After the above concessions, the remaining issues for
decision are: (1) Whether petitioners are liable for self-
employment tax for the 1997 tax year; and (2) whether petitioners
are liable for an addition to tax pursuant to section 6651(a)(1)
for the 1997 tax year. Adjustments for the (1) self-employment
tax and the deduction therefor, (2) reduction to medical and
dental expenses pursuant to section 213(a), (3) reduction to
miscellaneous itemized deductions pursuant to section 67(a), and
(4) alternative minimum tax, if applicable, are computational and
will be resolved by the Court’s holding in this case.
During the years at issue, petitioner worked as an actor and
model. He has appeared in movies, stage presentations,
television shows, commercials, and print work. Petitioner goes
by the professional name of “Frank Isles”. Related to his acting
and modeling during 1997, petitioner received (1) combined wages
of $10,915 reported on 7 separate Forms W-2, Wage and Tax
Statement, and (2) self-employment income of $2,250 reported on
Form 1099-MISC, Miscellaneous Income. In addition, petitioner
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received $16,511 of Form W-2 wages and tip income from working at
2 restaurants during 1997.
On petitioners’ 1997 tax return they reported other income
of $2,250 related to self-employment income that petitioner
received from L.A. Models Inc. In the description field of line
21, Other income, on the 1997 Form 1040 tax return, petitioners
reported that the $2,250 was income from Schedule C, Profit or
Loss From Business. However, petitioners did not submit a
Schedule C with their 1997 tax return.
On petitioners’ 1997 Schedule A, Itemized Deductions, they
claimed a total of $34,430 of miscellaneous itemized deductions.
Except for a tax preparation fee of $450, the $34,430 consists of
unreimbursed business expenses. At trial, petitioners presented
a schedule individually listing each of their business expenses
for the 1997 tax year, which totaled $41,972.84. The $41,972.84
of business expenses consists of the $34,430 deducted on Schedule
A and an additional $7,542.84 of business expense that was not
deducted on the 1997 tax return. At trial, the Court directed
respondent to meet with petitioners and attempt to resolve the
substantiation issue related to the additional business expenses
on petitioners’ schedule.
In respondent’s status report filed after the conclusion of
the trial while the record was still open, respondent
acknowledged that petitioners presented documents substantiating
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the $34,430 of expenses deducted on the Schedule A. Respondent
further acknowledged that petitioners presented documentation
substantiating the additional $7,542.84 of unreimbursed business
expenses that petitioners listed on the schedule presented at
trial.
We decide the deficiency issues in this case on the basis of
the record without regard to the burden of proof. Accordingly,
we need not decide whether the general rule of section 7491(a)(1)
is applicable in this case. See Higbee v. Commissioner, 116 T.C.
438 (2001).
Schedule C–Business Expense Deductions
Petitioner testified at trial that he should have filed a
Schedule C with the 1997 tax return. At trial, petitioner
presented a list of expenses that he asserts relate to the
production of the $2,250 of self-employment income. The list of
expenses that petitioner claims should have been reported on
Schedule C includes the following:
Pictures $ 600.00
Parking 20.00
Agent 450.00
Directories 190.00
Computer 750.00
Meals 306.00
Education 1,130.00
Dues 170.00
Phone 28.00
Supplies 18.00
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Ent., Publicity 824.00
Networking 307.00
Mileage 290.00
Total expenses $5,083.00
Petitioners did not produce documentation at trial to
substantiate any of the above expense items, except for the $450
agent fee. However, petitioners claim that the above expenses
were included in the $34,430 of business expenses deducted on
Schedule A that respondent concedes were substantiated by
petitioners. Petitioners request that the $5,083 of business
expenses be removed as deductions from Schedule A and be reported
as Schedule C expense deductions.
Section 162(a) allows a taxpayer to deduct ordinary and
necessary business expenses paid or incurred during the taxable
year in carrying on any trade or business. To be “ordinary” the
transaction which gives rise to the expense must be of a common
or frequent occurrence in the type of business involved. Deputy
v. Du Pont, 308 U.S. 488, 495 (1940). To be “necessary” an
expense must be “appropriate and helpful” to the taxpayer’s
business. Welch v. Helvering, 290 U.S. 111, 113 (1933).
Additionally, the expenditure must be “directly connected with or
pertaining to the taxpayer’s trade or business”. Sec. 1.162-
1(a), Income Tax Regs.
Generally, if a claimed business expense is deductible, but
the taxpayer is unable to fully substantiate it, the Court is
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permitted to make as close an approximation as it can, bearing
heavily against the taxpayer whose inexactitude is of his or her
own making. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). The estimate must have a reasonable evidentiary basis.
Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). However,
section 274 supersedes the Cohan doctrine, see sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985),
and requires strict substantiation of expenses for travel, meals
and entertainment, and gifts, and with respect to any listed
property as defined in section 280F(d)(4).
A taxpayer is required by section 274(d) to substantiate a
claimed expense by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement establishing the
amount, time, place, and business purpose of the expense. Sec.
274(d). Even if such an expense would otherwise be deductible,
the deduction may still be denied if there is insufficient
substantiation to support it. Sec. 1.274-5T(a), Temporary Income
Tax Regs., supra.
We find petitioner’s testimony in this matter to be
truthful. We agree with petitioner that he has substantiated the
business expenses deducted on Schedule A and that the amounts
have been accepted by respondent. We further agree that a
portion of the expenses should have been reported on Schedule C
instead of Schedule A. However, we do not agree with the
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allocation petitioner used to determine the amount of Schedule C
expenses. Therefore, we shall apply the Cohan doctrine to each
of the above expenses that petitioner asserts relate to the L.A.
Models Inc. job to decide the amount that should have been
claimed on Schedule C.
Unless an expense was directly incurred for the L.A. Models
Inc. job, the total business expenses reported on Schedule A
should be prorated according to the amount of time spent on the
particular job. Petitioner testified that he worked a total of
205 days in 1997. Petitioner further testified that the L.A.
Models Inc. job lasted 4 days. Therefore, 1.95 percent of
petitioner’s total days worked was spent on the L.A. Models Inc.
job. Accordingly, 1.95 percent of petitioner’s total business
expenses reported on Schedule A that relate to the L.A. Models
Inc. job are proper Schedule C expenses.
Of the above expenses that petitioner asserts relate to the
L.A. Models Inc. job, petitioner testified that the $20 for
parking, $450 for agent fee, and the $306 for meals were expenses
directly incurred during that job. Petitioner presented
documentation at trial to substantiate that the $450 agent fee
directly related to the L.A. Models Inc. job. Since petitioner
deducted expenses for parking on Schedule A that respondent
agrees were substantiated, we find that petitioner is entitled to
a Schedule C deduction of $20 for parking. Petitioner did not
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deduct an amount on Schedule A for meals, nor has he
substantiated an amount therefor. Because the Cohan doctrine is
superseded by section 274, which requires strict substantiation
for meals, petitioner is not entitled to a Schedule C deduction
for the $306 of meals.
Petitioner alleges that $290 of mileage expense was incurred
during the L.A. Models Inc. job. Respondent agreed that
petitioner did substantiate the total mileage deduction on
Schedule A. However, no evidence was presented relating to
actual operating and fixed costs for this travel. Petitioner
testified that he traveled 120 miles round trip for 4 days
working on the job, for a total of 480 miles. Since the business
standard mileage rate for 1997 was 31.5 cents per mile,
petitioner is entitled to a Schedule C deduction of $176 for
mileage expense. See Rev. Proc. 96-63, 1996-2 C.B. 420.
Petitioner asserts that $750 of expense relating to a
computer should be deducted on Schedule C. Pursuant to section
280F(d)(4), a computer is listed property. As such, a deduction
relating to a computer requires strict substantiation under
section 274(d). Petitioner failed to present any evidence that
the computer was used to obtain the L.A. Models Inc. job.
Further, petitioner failed to present the amount of personal
computer use to determine the business use percentage.
Petitioner’s failure to substantiate sufficiently the computer
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expense precludes him from claiming a Schedule C deduction
relating to the computer. As respondent concedes that
petitioners have substantiated their business expenses, we do not
disturb the total amount respondent allowed as a computer
deduction on Schedule A.
While we do not agree with the amounts determined for the
remaining expenses that petitioner alleges should be reported on
Schedule C, we find that the remaining expenses from above do
relate to the L.A. Models Inc. job. These remaining expenses are
allocated based on 1.95 percent of the total amount claimed for
these expenses on petitioners’ original Schedule A, rounded to
the nearest dollar. A description of the expense related to the
L.A. Models Inc. job, the total amount claimed on the original
Schedule A for that expense, and the prorated amount that is
allowed on Schedule C is as follows:
As Reported Prorated
on Schedule A Amount
Pictures $4,021.00 $78.00
Directories 318.00 6.00
Education 1,400.00 27.00
Dues 160.00 3.00
Phone 710.00 14.00
Supplies 180.00 4.00
Ent., publicity &
networking 6,657.00 130.00
Total expenses $13,446.00 $262.00
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Based on our findings above, petitioner is entitled to
Schedule C expense deductions relating to the L.A. Models Inc.
job, as follows:
Pictures $78.00
Parking 20.00
Agent 450.00
Directories 6.00
Education 27.00
Dues 3.00
Phone 14.00
Supplies 4.00
Ent., publicity &
networking 130.00
Mileage 176.00
Total expenses $908.00
Accordingly, respondent must subtract $908.00 of
unreimbursed business expense from petitioners’ 1997 Schedule A
to account for the expense deductions now allowed on Schedule C.
Petitioner’s net income from self-employment relating to the
L.A. Models Inc. job is as follows:
Self-employment income $2,250.00
Total expenses 908.00
Net income $1,342.00
Self-Employment Tax
Respondent determined that petitioners are liable for $318
of self-employment tax on the $2,250 of income received from L.A.
Models Inc. Section 1401 imposes a tax on the self-employment
income of individuals.
Self-employment income means the net earnings from self-
employment derived by an individual. Sec. 1402(b). In general,
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net earnings from self-employment means the gross income derived
by an individual from any trade or business that he or she
carries on, reduced by allowable deductions attributable thereto.
Sec. 1402(a).
Above, we determined that petitioner had allowable
deductions of $908, reducing his income from self-employment to
$1,342. Accordingly, we hold that petitioners are liable for
self-employment tax on $1,342 of self-employment income.
Other Items
Since petitioners substantiated to respondent an additional
$7,542.84 of business expenses for the 1997 tax year, petitioners
are entitled to this additional expense as an unreimbursed
employee expense deduction on Schedule A.
At trial, petitioner testified that petitioners paid $414.27
of home mortgage interest that was not reported on their 1997
Schedule A. Further, petitioners presented documentation
substantiating the additional $414.27 of mortgage interest not
deducted on their 1997 tax return. Accordingly, petitioners are
entitled to an additional mortgage interest deduction on their
1997 Schedule A for $414.27.
Section 6651(a)(1)
Section 6651(a)(1) provides for an addition to tax of 5
percent of the tax required to be shown on the return for each
month or fraction thereof for which there is a failure to file a
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return, up to 25 percent in the aggregate. The addition to tax
is imposed on the net amount due, calculated by reducing the
amount required to be shown as tax on the return by any part of
the tax which is paid on or before the date prescribed for
payment of the tax. Sec. 6651(b)(1). The flush language of
section 6651(a) provides that in the case of a failure to file
within 60 days of the date prescribed for the filing of such
return, unless it is shown that such failure is due to reasonable
cause and not due to willful neglect, the addition to tax under
section 6651(a)(1) shall not be less than the lesser of $100 or
100 percent of the amount required to be shown as tax on such
return. See Patronik-Holder v. Commissioner, 100 T.C. 374, 379-
381 (1993).
Petitioners’ 1997 Federal income tax return was due on April
15, 1998. See sec. 6072(a); sec. 1.6072-1(a), Income Tax Regs.
Petitioners filed their 1997 Federal income tax return on August
13, 1998, well over 60 days past the due date. Respondent has
met his burden of production with respect to the addition to tax,
and petitioners bear the burden of proving the addition to tax
does not apply. Sec. 7491(c); Higbee v. Commissioner, 116 T.C.
at 446-447. Petitioners have not offered any evidence to show
that the delay was due to reasonable cause. We therefore sustain
respondent’s determination that petitioners are liable for the
addition to tax under section 6651(a)(1).
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
Under Rule 155.