T.C. Summary Opinion 2003-114
UNITED STATES TAX COURT
MARIE-FRANCINE T. GROW, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2913-02S. Filed August 19, 2003.
Marie-Francine T. Grow, pro se.
Lorianne D. Masano, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 74631 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.
1
Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the year in issue.
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Respondent determined a deficiency and an accuracy-related
penalty under section 6662(a) in petitioner’s 1998 Federal income
tax of $4,247 and $849.40, respectively. The issues are (1)
whether petitioner is entitled to deductions on Schedule C,
Profit or Loss From Business, for expenses of $21,442, (2)
whether income shown on the Schedule C is understated by $1,597,
(3) whether petitioner is liable for the accuracy-related penalty
under section 6662(a), and (4) whether petitioner is entitled to
relief as an innocent spouse under section 6015. Petitioner
resided in Lady Lake, Florida, at the time the petition was
filed.
Background
The facts may be summarized as follows. Petitioner was
divorced in December 1999. For the taxable year 1998, petitioner
and her former husband filed a joint Federal income tax return.
On Schedule C of that return, they reported income of $3,571 and
deductions of $21,442 from a photography equipment rental
business. The deductions claimed consisted of:
Car and truck expenses $13,471
Depreciation 3,441
Legal and professional services 175
Office expense 41
Supplies 1,028
Utilities 573
Computer upgrade 1,028
Telephone 182
Work tools 321
Postage 118
Travel expenses 1,064
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As we understand, the business consisted of renting
photographic and audiovisual equipment primarily for conventions.
This aspect of the Schedule C business concerned the activities
of petitioner’s former husband. The former husband was employed
by Multi-Media Unlimited, which apparently was a similar
business, and High Definition Digital, the nature of which is not
defined in the record. The former husband owned a Jeep
automobile that he used in his employment, for commuting, and in
his Schedule C activity. At trial, petitioner could not produce
any record or log as to his use of the Jeep.
The Schedule C also included a second business described as
“public data research”. This activity was conducted by
petitioner. Petitioner performed one research project in this
activity during 1998 and was not paid for that project.
The 1998 Federal income tax return was prepared by a
certified public accountant using copies and summaries of records
compiled by petitioner. Respondent disallowed the Schedule C
deductions for failure to substantiate and increased the Schedule
C income based on income of the former husband reported by third
parties on Forms 1099-MISC, Miscellaneous Income. Petitioner’s
former husband did not file a petition with this Court and,
although notified of petitioner’s claim for relief from liability
as an innocent spouse, he did not seek to intervene in these
proceedings. When petitioner and her former husband divorced the
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records pertaining to the Schedule C activities remained with the
former husband. Petitioner attempted unsuccessfully to obtain
those records.
The revenue agent who conducted the audit determined that
petitioner was entitled to relief as an innocent spouse under
section 6015(f). That determination was overruled on review.
The reviewer decided that she had knowledge of the understatement
and had not established any hardship. The Appeals Officer
adopted that recommendation.
Discussion
Schedule C Deductions
Section 162(a) allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business.
Section 274(d), however, provides that no deduction is allowed
for certain expenses unless the taxpayer “substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement”, inter alia, the time and place of the
travel and the business purpose of an expense. The deductions
that fall within section 274(d) include travel expenses, sec.
274(d)(1), and deductions “with respect to any listed property
(as defined in section 280F(d)(4)”, sec. 274(d)(4). Included
within the ambit of “listed property” are passenger automobiles
and “computer or peripheral equipment”. Sec. 280F(d)(4)(A).
There is an exception for computers and peripheral equipment used
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exclusively at a regular business establishment. A portion of a
dwelling may be treated as a regular business establishment if it
meets the requirement of section 280A(c)(1). Under the latter
provision the portion of the dwelling must be used “exclusively
* * * on a regular basis–-(A) as the principal place of business
for any trade or business of the taxpayer”. Sec. 280A(c)(1)(A).
Similarly, section 280A(a) prohibits any deduction “with respect
to the use of a dwelling unit which is used by the taxpayer * * *
as a residence.” This is the same exception that is contained in
section 280A(c)(1)(A).
Petitioner’s former husband has possession of the business
records, and petitioner was not successful in getting the records
from him. Accordingly, she presented no evidence concerning the
deduction claimed for travel expenses; therefore, no deduction is
allowable. Furthermore, as we understand, the computers and
computer equipment involved here were used in petitioner’s
dwelling, and there is no evidence in the record that any part of
the dwelling was used exclusively for business. Respondent’s
disallowance of these deductions is sustained. Similarly,
deductions for expenses related to the dwelling are not
allowable. There is no evidence pertaining to the remaining
deductions, and the deductions claimed with regard to these items
cannot be allowed.
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Unreported Income
Respondent’s determination of additional Schedule C income
of $1,597 is based on third-party information submitted on Forms
1099-MISC. Petitioner does not dispute that her former husband
may have received the income reported. We sustain respondent’s
determination with respect to this issue.
Penalty Under Section 6662(a)
Relevant here, section 6662(a) imposes a penalty in the
amount of 20 percent of the underpayment due, inter alia, to
negligence or to a substantial understatement of tax. Neither in
the notice of deficiency nor at trial did respondent specify
which ground applied here. We do not find that the negligence
penalty is appropriate here with regard to this petitioner, and
therefore, we focus on whether there was a substantial
understatement. A substantial understatement is defined, inter
alia, as an understatement of tax that exceeds 10 percent of the
tax required to be shown on the return. Sec. 6662(d)(1)(A)(i).
The understatement here exceeds 10 percent of the tax required to
be shown on the return. See sec. 6662(d)(2). Petitioner has not
shown that any of the circumstances contained in section
6662(d)(2)(B) apply.
Innocent Spouse Relief
A requesting spouse may elect relief from joint and several
liability under section 6015. There are three types of relief
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available: (1) Section 6015(b)(1) provides full relief from
joint and several liability; (2) section 6015(c) provides
separate tax liability available to divorced or separated
taxpayers; and (3) section 6015(f) provides equitable relief from
joint and several liability in certain circumstances if section
6015(b) and (c) are unavailable. For our purposes here we are
willing to assume that petitioner is not eligible for relief
under either section 6015(b) or (c). We then turn to section
6015(f).
Section 6015(f) provides:
SEC. 6015(f). Equitable Relief.–-Under procedures
prescribed by the Secretary, if--
(1) taking into account all the facts and
circumstances, it is inequitable to hold the individual
liable for any unpaid tax or any deficiency (or any
portion of either); and
(2) relief is not available to such individual
under subsection (b) or (c),
the Secretary may relieve such individual of such liability.
To prevail, petitioner must show that respondent’s denial of
equitable relief under section 6015(f) was an abuse of
discretion. Jonson v. Commissioner, 118 T.C. 106, 125 (2002);
Cheshire v. Commissioner, 115 T.C. 183, 198 (2000), affd. 282
F.3d 326 (5th Cir. 2002); Butler v. Commissioner, 114 T.C. 276,
292 (2000). As directed by section 6015(f), respondent
prescribed procedures to use in determining whether the
requesting spouse qualifies for relief under section 6015(f).
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Those procedures are found in Rev. Proc. 2000-15, 2000-1 C.B.
447.2 The revenue procedure includes a partial list of the
positive and negative factors to be considered, including whether
the requesting spouse is divorced, whether the requesting spouse
would suffer undue economic hardship, whether the requesting
spouse “had no reason to know of the items giving rise to the
deficiency”, and whether the requesting spouse significantly
benefited from the items giving rise to the deficiency. See Rev.
Proc. 2000-15, sec. 4.03(1) and (2), 2000-1 C.B. at 448-449. We
are at a loss to explain respondent’s comment that petitioner has
not shown undue economic hardship. In a Statement of
Disagreement as to respondent’s denial of innocent spouse relief
petitioner stated that she suffered from fibromyalgia and could
not work, she had to live at a friend’s house because she could
not afford her own home, her former husband is not paying alimony
as required by the divorce decree, and she did not make “ends
meet.” This statement has not been questioned by respondent. It
seems that respondent was exclusively focused on whether she knew
or had reason to know of the items that gave rise to the
deficiency. But, even if we assume that she did, “No single
factor will be determinative of whether equitable relief will or
will not be granted in any particular case. Rather all factors
2
Rev. Proc. 2000-15, sec. 3, 2000-1 C.B. 447, 448, is
applicable for any liability for tax arising on or before July
22, 1998, that was unpaid on that date.
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will be considered and weighed appropriately.” Rev. Proc. 2000-
15, sec. 4.03, 2000-1 C.B. at 448.
Finally, we would be hard pressed to find that petitioner
derived a significant benefit from the items that gave rise to
the deficiency. The loss from the Schedule C was used to offset
the former husband’s income and not petitioner’s income.
In sum, we find that all factors considered support the
conclusion that petitioner is entitled to relief under section
6015(f) and that respondent’s denial of relief was an abuse of
discretion.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for petitioner.