T.C. Summary Opinion 2003-117
UNITED STATES TAX COURT
JUAN G. AND MARGARITA IBARRA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14441-02S. Filed August 25, 2003.
Juan G. and Margarita Ibarra, pro se.
Ross M. Greenberg, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 of the Internal Revenue Code in effect
at the time the petition was filed.1 The decision to be entered
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
year at issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
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is not reviewable by any other court, and this opinion should not
be cited as authority.
Respondent determined a deficiency of $2,466 in petitioners'
Federal income tax for 2000.
The issue for decision is whether petitioners are entitled
to various Schedule A, Itemized Deductions, and Schedule C,
Profit or Loss From Business, deductions in excess of amounts
allowed by respondent. The Court's holding on these adjustments
will, in turn, determine the amount of petitioners' earned income
credit, self-employment tax, and the adjustment to income for
one-half of the self-employment tax.
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioners' legal residence at the time the petition was filed
was Miami, Florida.
Juan G. Ibarra (petitioner) was employed in construction
work installing drywall during the year in question. Petitioner
also engaged in a ministerial activity as pastor of a church.
During 2000, the church had approximately 15 members. Mrs.
Ibarra was not employed during 2000 and earned no income.
On their joint Federal income tax return for 2000,
petitioners reported wage and salary income of $29,300.
Petitioner's ministerial activity was reported on a Schedule C as
follows:
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Gross income $7,140
Expenses:
Car and truck $2,031
Commissions and fees 1,048
Insurance 250
Seminary and convention 1,550
Robes, oils, incense, and
special gear 1,205
Educational, books,
publications, and software 2,887 8,971
Net loss ($1,831)
On Schedule A of their return, petitioners claimed the following
itemized deductions:
Medical $5,817
Less 7.5% of adjusted
gross income (2,060) $ 3,757
Real estate taxes 753
Home mortgage interest 4,815
Charitable contributions:
Cash $4,650
Other than cash 500 5,150
Unreimbursed employee expenses $6,588
Less sec. 67(a) 2% floor 549 6,039
Total itemized deductions $20,514
All the adjustments by respondent in the notice of
deficiency relate to Schedules A and C of petitioners' return.
With respect to the Schedule A itemized deductions,
respondent determined that the medical and dental expenses
substantiated by petitioners totaled $1,295. Since that amount
did not exceed 7.5 percent of petitioners' adjusted gross income
as required by section 213(a), petitioners were not entitled to a
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deduction for medical and dental expenses. Of the $4,815
deducted by petitioners for home mortgage interest, $4,146 was
allowed, and $2,788 of the $5,150 deducted as charitable
contributions was allowed. Of the $6,039 deducted as
unreimbursed employee business expenses, $1,736 was allowed. No
adjustment was made for the $753 in real estate taxes deducted by
petitioners. Thus, of the total $20,514 claimed as deductions,
respondent allowed deductions of $9,423 and disallowed $11,091.
All the amounts disallowed were for lack of substantiation.
With respect to Schedule C, involving petitioner's activity
as a minister, respondent's determinations were as follows, all
relating to expenses deducted:
Claimed on Allowed by
Return Respondent
Car and truck $2,031 $2,031
Commissions and fees 1,048 -0-
Insurance 250 250
Seminars 1,550 480
Robes, special gear, oils,
and incense 1,205 -0-
Educational, books, etc. 2,887 200
Totals $8,971 $2,961
No adjustments were made to petitioners' reported gross income.
The deductions also were disallowed for lack of substantiation.
As a result of the Schedule C adjustments, respondent determined
that petitioner realized a net profit from his ministry, thus
resulting in a liability for self-employment tax under section
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1401 with a corresponding adjustment to gross income for one-half
of such tax under section 164(f)(1).
Deductions are a matter of legislative grace. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). The taxpayer bears the
burden of proof, which means the presentation of adequate
documentation to support the deductions claimed on tax returns.
Rule 142; Welch v. Helvering, 290 U.S. 111, 115 (1933). It is
also the taxpayer's responsibility to maintain records sufficient
to enable the Commissioner to determine the correct tax
liability. Sec. 6001; Higbee v. Commissioner, 116 T.C. 438
(2001); sec. 1.6001-1(a), Income Tax Regs. The taxpayer must
substantiate both the amount and purpose of the claimed
deductions. Higbee v. Commissioner, supra.
As noted earlier, respondent's determinations disallowing
all or part of the deductions claimed on the return were for lack
of substantiation. Petitioners kept no books and records and
produced only minimal evidence at trial in support of some of
their deductions.2
2
Sec. 7491, under certain circumstances, places the
burden of proof on the Commissioner in connection with
proceedings arising from the examination of returns that
commenced after July 22, 1998. The record does not show when the
examination of petitioners' returns commenced in this case;
however, because of the paucity of records and information
maintained by petitioners, the Court is satisfied that the burden
of proof in this case did not shift to respondent. Higbee v.
Commissioner, 116 T.C. 438 (2001).
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With respect to petitioners' medical and dental expenses,
claimed as an itemized deduction, respondent allowed $1,295 out
of the $5,817 claimed by petitioners. The amount allowed
consisted of dental expenses of $720 and chiropractic services of
$575; however, since $1,295 was less than 7.5 percent of
petitioners' adjusted gross income, petitioners realized no tax
benefit from the allowed amount. Sec. 213(a). Based on
petitioners' testimony at trial, the Court is satisfied that
petitioners incurred additional medical expenses during 2000.
Petitioners visited Mrs. Ibarra's brother in Texas during 2000.
During that visit, petitioners ventured into Mexico, and Mrs.
Ibarra became ill and was hospitalized in a Mexican hospital.
Petitioners offered into evidence a bill from that hospital that
listed various medical services she was provided and recited a
total amount of $4,276 for those services. Mrs. Ibarra's brother
paid the hospital in full, and, during 2000, petitioners repaid
her brother. Petitioners offered into evidence a written
statement from Mrs. Ibarra's brother that states that he paid
$4,750 to the Mexican hospital and that, during the year 2000,
petitioners had repaid him $4,500. At trial, petitioners agreed
that the $4,276 shown on the Mexican hospital bill and the $4,750
shown on the statement of Mrs. Ibarra's brother represented
Mexican pesos and not United States currency. The correct
amount, converted to United States currency, as agreed by the
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parties, was approximately $645. The Court is satisfied, on this
record, that petitioners are entitled to an additional deduction
of $645 in medical and dental expenses for 2000.
With respect to all the other itemized deductions and the
Schedule C trade or business expenses, petitioners produced no
documentary evidence to establish entitlement to deductions in
excess of the amounts allowed by respondent in the notice of
deficiency, nor is the Court persuaded that they are entitled to
deductions in excess of those allowed by respondent.
Accordingly, except for the additional amount allowed for medical
and dental expenses, respondent's determinations are sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.3
3
Although the Court allows petitioners an additional
$645 itemized deduction for medical expenses, raising their total
medical expenses to $1,940, the allowance of $645 will not result
in a tax benefit to petitioners because the Court's holding on
petitioners' Schedule C, Profit or Loss From Business, activity
will increase petitioners' adjusted gross income, thereby
increasing the 7.5 percent threshold of sec. 213(a).
Petitioners' $1,940 in medical expenses will be less than the 7.5
percent floor.