T.C. Summary Opinion 2003-62
UNITED STATES TAX COURT
RICHARD V. FREDERICK AND NANCY M. FREDERICK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11603-01S. Filed May 27, 2003.
Richard V. Frederick, pro se.
T. Keith Fogg, for respondent.
CARLUZZO, 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. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue. Rule references
are to the Tax Court Rules of Practice and Procedure.
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The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
Respondent determined deficiencies in and penalties with
respect to petitioners’ Federal income taxes as follows:
Year Deficiency Section 6662(a) Penalty
1997 $11,783 $2,356.60
1998 3,696 739.20
1999 2,310 462.00
After concessions, the following issues remain for
consideration: (1) Whether petitioners are entitled to a non-
business bad debt deduction which they claimed in 1997; (2)
whether petitioners are entitled to certain miscellaneous
itemized deductions for 1997, 1998, and 1999; (3) whether
petitioners are entitled to deductions claimed on a Schedule C,
Profit or Loss From Business (Sole Proprietorship), included with
their 1999 Federal income tax return; and (4) whether petitioners
are liable for a section 6662(a) penalty for each year in issue.
Background
Some of the facts have been stipulated and are so found.
Petitioners are husband and wife. They filed a timely joint
Federal income tax return for each year in issue. References to
petitioner are to Richard V. Frederick.
In 1996, petitioner was the sole shareholder and an employee
of the Bear Cleaning Services corporation. Through this
corporation petitioner provided services to Farm Credit. Bear
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Cleaning Services apparently charged and billed Farm Credit
$2,000 for these services, but the bill was never paid.
In 1997, petitioner was employed as an area manager by
Corporate Staffing Resources (CSR). In connection with this
employment he regularly traveled throughout southeastern Michigan
where petitioners were living at the time. Usually petitioner
used one of petitioners’ cars for his employment-related travel.
When he did, he was entitled to reimbursement by CSR at the rate
of $0.24 per mile, claim for which he was required to make on a
travel voucher.
Some time during 1997 petitioner traveled by air from
Michigan to Arizona to look for a new job. He remained in
Arizona for approximately 10 days.
Nancy M. Frederick (Ms. Frederick) was employed as a
“kitchen and bath specialist” by Central Michigan Lumber Company
(Central) during 1997. In connection with this employment she
was required to travel for various reasons to Central’s customers
or clients, and she did so from time to time during that year.
She was reimbursed for her traveling expenses in accordance with
Central’s “expense policy”. According to claims submitted to
Central for travel expense reimbursements, she used one of
petitioners’ cars to travel approximately 2,000 miles during 1997
in connection with her employment.
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Starting in February 1998, petitioner began working for
Molly Maid, Inc. He worked there throughout 1998. In January
1999, petitioners and their golden retrievers, Morgan and Cujo,
moved from Michigan to Virginia where petitioner began to work
for Argenbright Security.
Petitioners lived in a house that they rented in Virginia
during 1999. Because they had two dogs, their landlord required
them to make what petitioner referred to as an “additional”
security deposit.
The Leader Dog School for the Blind is located in Rochester
Hills, Michigan, about 130 miles from where petitioners resided
during 1997 and 1998. From time to time during 1999, petitioners
traveled by car from their home in Virginia to Michigan.
Petitioner did not keep a mileage log or other records related to
the expenses incurred during these trips.
Petitioners owned two cars during the years in issue.
According to their automobile insurance policy, one car was
insured for “pleasure” use, and the other car was insured “to
drive to work or school more than 3 miles but less than 15
miles”.
Petitioners’ 1997 return was prepared by a paid income tax
return preparer. Included with petitioners’ 1997 return are the
following schedules or forms: (1) Schedule A, Itemized
Deductions; (2) Form 2106-EZ, Unreimbursed Employee Business
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Expenses; (3) Schedule C for a “kitchen design” business
attributable to Nancy M. Frederick; and (4) Schedule D, Capital
Gains and Losses. On the Schedule D, petitioners claimed a
$2,000 “non business bad debt”. On the Schedule C, petitioners
reported income of $420, but claimed expenses totaling $12,763,
resulting in a net loss of $12,343. All but $600 of the expenses
are identified and deducted on the Schedule C as “car and truck
expenses”. On the Schedule A, petitioners claimed deductions for
what are described as “Form 2106 (Taxpayer)” expenses of $22,024
and “job hunting expenses” of $3,000.1 The Form 2106-EZ relates
to petitioner’s employment with CSR. On that form petitioners
indicate that petitioner traveled 58,444 miles in connection with
his employment and claimed a deduction for that travel based upon
the standard mileage rate of $0.315 per mile. They also listed
other unspecified “business expenses”, other than expenses for
meals and lodging, of $3,614 on the Form 2106-EZ.
Petitioners’ 1998 return was prepared by petitioner.
Included with that return is a Schedule C for a business named
Morgan Farms, the business of which is described as “raising
seeing eye dogs”. Nancy M. Frederick is identified as the sole
proprietor of Morgan Farms. As noted, one of petitioners’ golden
retrievers is named Morgan. On this Schedule C, petitioners
1
References to deductions claimed on a Schedule A for any
year in issue do not take into account sec. 67.
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reported income of $270 and claimed expenses totaling $8,692,
resulting in a net loss of $8,422. All but $200 of the expenses
are identified and deducted as “car and truck expenses”. There
is also a Schedule A included with petitioners’ 1998 return.
On that schedule petitioners claimed a $1,837 deduction for
unreimbursed employee business expenses related to petitioner’s
employment with Molly Maid, Inc. Petitioners did not include a
Form 2106 with their 1998 return.
Petitioners’ 1999 return was also prepared by petitioner.
Included with that return is a Schedule C for Morgan Farms.
For that year the business is described as “training/breeding
leader dogs”, and petitioner, rather than Nancy M. Frederick
is identified as the sole proprietor. On that Schedule C,
petitioners claimed deductions totaling $6,884, resulting in a
net loss of the same amount. The expenses are identified as
“car and truck expenses” totaling $5,902, and “veterinary
care” fees of $982. There is also a Schedule A included with
petitioners’ 1999 return. On that schedule, petitioners claimed
an “other miscellaneous” deduction of $1,400. That deduction
relates to the “additional” security deposit that petitioners’
landlord required in connection with the house they rented in
Virginia.
In the notice of deficiency for 1997, respondent (1)
disallowed the bad debt deduction claimed on the Schedule D; (2)
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disallowed the miscellaneous itemized deductions claimed on the
Schedule A; (3) disallowed the expenses claimed on the Schedule
C; (4) imposed a section 6662(a) penalty upon the ground of
negligence; and (5) made other adjustments that are not in
dispute.
In the notice of deficiency for 1998, respondent (1)
disallowed the miscellaneous itemized deductions claimed on the
Schedule A; (2) disallowed the expenses claimed on the Schedule
C; (3) imposed a section 6662(a) penalty upon the ground of
negligence; and (4) made other adjustments not in dispute.
In the notice of deficiency for 1999, respondent (1)
disallowed the “other miscellaneous” deduction claimed on the
Schedule A; (2) disallowed the expenses claimed on the Schedule
C; and (3) imposed a section 6662(a) penalty upon the ground of
negligence.
Discussion
Nancy M. Frederick did not sign the stipulation of facts
filed in this case and she did not appear at trial. An order
dismissing this case as to her for lack of prosecution will be
issued. The decision entered as to her will reflect the
resolutions of the issues decided in this opinion, as well as
those matters otherwise agreed to between petitioner and
respondent.
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At trial, petitioner made the following concessions: (1)
For 1997, the miscellaneous itemized deduction claimed for car
and truck expenses incurred by petitioner as an employee of CSR
is overstated to the extent that petitioners failed to take into
account mileage reimbursements paid to petitioner by CSR
(according to the stipulation of facts, the deduction, if
otherwise allowable, is limited to $4,383.30); and (2) for 1997
and 1998, petitioner concedes that petitioners are not entitled
to the deductions claimed on the Schedules C.
All of the issues in this case arise from the disallowance
of deductions claimed on petitioners’ Federal income tax returns.
As has been noted in countless cases, deductions are a matter of
legislative grace and are allowed only as specifically provided
by statute. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); Interstate Transit Lines v. Commissioner, 319 U.S. 590,
593 (1943); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). With
the exception of the discussion relating to the section 6662(a)
penalty, this fundamental principle of Federal income taxation
informs our analysis and resolution of each of the disputed
issues in this case as set forth below.2
2
Respondent bears the burden of production with respect to
the imposition of the sec. 6662(a) penalty for each year in
issue. Sec. 7491(c). Otherwise, under the circumstances,
petitioner bears the burden of proof on all issues in this case.
Sec. 7491(a); Rule 142(a).
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1997 Bad Debt Deduction
Petitioners claimed a $2,000 nonbusiness bad debt deduction
on their 1997 joint Federal income tax return. In general, there
is allowed as a deduction “any debt which becomes worthless
within the taxable year.” Sec. 166(a)(1). It is axiomatic that
such deductions, if otherwise allowable, are allowed to the
taxpayer to whom the debt is owed. In this case, it is clear
from petitioner’s presentation that the debt, if any, that forms
the basis of the bad debt deduction here in dispute was owed to
petitioner’s wholly owned corporation and not to petitioner. For
Federal income tax purposes, petitioner and that corporation are
separate entities, see Moline Props., Inc. v. Commissioner, 319
U.S. 436, 438-439 (1943), and petitioner is not entitled to
deductions that might otherwise be allowable to the corporation.
See Hewitt v. Commissioner, 47 T.C. 483, 488 (1967); Willits v.
Commissioner, T.C. Memo. 1999-230. Respondent’s disallowance of
the bad debt deduction claimed on petitioners’ 1997 return is
sustained.
1997 Miscellaneous Itemized Deductions
On a Schedule A included with their 1997 return, petitioners
claimed miscellaneous itemized deductions for unreimbursed
employee business expenses totaling $22,024 and job hunting
expenses of $3,000. The admittedly overstated unreimbursed
employee business expense deduction is, in large part,
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attributable to car expenses. The deduction for job hunting
expenses relates to the cost of airfare and other traveling
expenses incurred when petitioner traveled from Michigan to
Arizona to look for a new job. Authority for deducting these
types of expenses is found in section 162(a), which, in general,
allows “as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business”, including a taxpayer’s trade or business as an
employee. See Primuth v. Commissioner, 54 T.C. 374, 377-378
(1970). Deductions for travel and transportation expenses
otherwise allowable under section 162(a), however, are subject to
strict substantiation requirements, see sec. 274(d)(1); sec.
1.274-5T, Temporary Income Tax Regs., 50 Fed. Reg. 46006 (Nov. 6,
1985), which petitioners have failed to satisfy.
It is not clear whether the section 274(d) substantiation
requirements are applicable to the portion of the unreimbursed
employee expense deduction identified on the Form 2106-EZ as
“business expenses”, since those expenses are neither
specifically described on petitioners’ return nor explained by
petitioner at trial. Petitioners’ failure to explain the
deduction is grounds for its denial. Petitioners are not
entitled to the miscellaneous itemized deduction claimed on their
1997 Federal income tax return, and respondent’s disallowance of
that deduction is sustained.
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1998 Miscellaneous Itemized Deduction
On a Schedule A included with their 1998 Federal income tax
return, petitioners claimed a $1,837 deduction for unreimbursed
employee business expenses. According to petitioner, this
deduction relates to cellular telephone and other unspecified
expenses incurred by him as an employee of Molly Maid, Inc.
Deductions for cellular telephone expenses, if otherwise
allowable, are also subject to the substantiation requirements of
section 274(d). See sec. 274(d)(4); sec. 280F(d)(4)(A)(v);
Brodsky v. Commissioner, T.C. Memo. 2001-240. Petitioners did
not attach a Form 2106 to their 1998 return, nor did petitioner
maintain any records of the expenses to which the deduction
relates. Therefore, petitioners are not entitled to the
miscellaneous itemized deduction claimed on their 1998 return
because they have failed to satisfy the substantiation
requirements necessary to support such a deduction. To the
extent that the deduction includes expenses not subject to
section 274(d), they have failed to otherwise establish
entitlement to a deduction for the unspecified and unexplained
expenses. Respondent’s disallowance of the miscellaneous
itemized deduction claimed on petitioners’ 1998 return is
sustained.
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1999 Other Miscellaneous Deduction
On a Schedule A included with petitioners’ 1999 Federal
income tax return, petitioners claimed an “other miscellaneous”
deduction of $1,400. The expenditure to which the deduction
relates is the “additional” security deposit that petitioners’
landlord required with respect to the house they rented in
Virginia. As we view that matter, the security deposit required
for petitioners’ rented residence is a personal living or family
expense, the deduction of which is prohibited by section 262.
Respondent’s disallowance of this deduction is sustained.
1999 Schedule C Deductions
Petitioners’ 1999 Federal income tax return includes a
Schedule C for Morgan Farms, the business of which is identified
as “training/breeding leader dogs”. Petitioner is listed as the
sole proprietor of this business. According to petitioner’s
testimony at trial, petitioners intended to raise or train leader
dogs. Petitioner’s plan in some manner or another involved the
Leader Dog School for the Blind located in Rochester Hills,
Michigan and petitioners’ two golden retrievers. The deductions
claimed on the Schedule C are for travel expenses between
Michigan and petitioners’ residence in Virginia, and for
veterinary fees. Petitioner did not keep a mileage log or other
records related to the expenses incurred for these trips.
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As previously noted, section 162(a) generally allows
deductions for ordinary and necessary expenses paid or incurred
in carrying on the taxpayer’s trade or business. Petitioners
claim that Morgan Farms was a trade or business during 1999, but
petitioner’s vague testimony on the point compels us to conclude
otherwise. Petitioner conceded entitlement to the deductions
attributable to Morgan Farms that petitioners claimed on their
1998 return-–he should have made a similar concession for 1999.
Petitioners are not entitled to the deductions claimed on the
Schedule C included with their 1999 return. Respondent’s
disallowances of those deductions are sustained.
Section 6662(a) Penalty
For each year in issue, respondent imposed a penalty under
section 6662(a) on the ground that the underpayment of tax
required to be shown on petitioners’ return is due to negligence
or disregard of rules or regulations. Sec. 6662(a) and (b)(1).
Negligence is defined to include any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code. Sec. 6662(c). It is further defined as the failure to do
what a reasonable person with ordinary prudence would do under
the same or similar circumstances. Neely v. Commissioner, 85
T.C. 934, 947 (1985). Disregard is defined to include any
careless, reckless, or intentional disregard. Sec. 6662(c). An
accuracy-related penalty is not imposed with respect to any
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portion of the understatement as to which the taxpayer acted with
reasonable cause and in good faith. Sec. 6664(c)(1). Whether a
taxpayer acts with reasonable cause and in good faith depends on
the relevant facts and circumstances, including the extent of the
taxpayer’s effort to properly assess the tax liability. See sec.
1.6664-4(b)(1), Income Tax Regs.
Given the facts and circumstances surrounding each of the
deductions here in dispute, we are satisfied that petitioners
failed to make a reasonable attempt to ascertain the correctness
of those deductions. See sec. 1.6662-3(b)(1), Income Tax Regs.
We find that the underpayment of tax required to be shown on
petitioners’ return for each year in issue is due to negligence.
Respondent’s determinations that petitioners are liable for a
section 6662(a) penalty upon that ground for each year in issue
are sustained.
Reviewed and adopted as the report of the Small Tax
Division.
To reflect the foregoing,
Decision will be
entered for respondent.