T.C. Memo. 2003-273
UNITED STATES TAX COURT
AJUBA GAYLORD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 14840-02, 16962-02. Filed September 22, 2003.
Ajuba Gaylord, pro se.
Milan K. Patel, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KROUPA, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes for the years 1999 and 2000 of
$3,576 and $2,524, respectively, and determined penalties under
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section 6662(a)1 in the amounts of $715 for 1999 and $504 for
2000.
After concessions,2 the issues to be decided are:
(1) Whether petitioner is entitled to deductions for various
expenses claimed on Schedule C, Profit or Loss From Business, for
the taxable years 1999 and 2000. We find that petitioner is
entitled to some of the deductions.
(2) Whether petitioner is eligible for head-of-household
filing status in 2000 and a dependency exemption deduction for
her brother for that year. We hold she is not.
(3) Whether petitioner is liable for accuracy-related
penalties pursuant to section 6662(a) for the years at issue. We
hold she is.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, the second stipulation of facts, and
the attached exhibits are incorporated herein by this reference.
At the time the petition was filed, petitioner resided in New
York, New York.
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
2
The concessions of petitioner and respondent, as well as
the amounts which remain in dispute, are detailed in table 2,
infra p. 5.
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During the years in question, petitioner was employed full
time as an administrative assistant by Columbia University, from
which she reported wage income of $40,329 for 1999 and $39,824
for 2000.
In addition to her position as an administrative assistant,
petitioner was working as a “field trainer” for American
Communications Network (American), a telecommunications company
that provides, inter alia, long-distance, Internet, and paging
services. Petitioner commenced working for American in 1996 and
was primarily involved in the solicitation of customers for the
company. Petitioner sought to attract customers by holding
receptions at her home every weekend and occasionally on
weekdays. She also attended individual meetings with customers
to discuss the business. Petitioner’s compensation for her work
for American consisted of a percentage of her customers’ phone
bills.
Petitioner filed her Federal income tax returns for 1999 and
2000 as a head of household and claimed, for each year, a
dependency exemption deduction for her brother. With respect to
her work for American, on Schedule C petitioner reported gross
income of $657 for 1999 and $327 for 2000 and claimed numerous
deductions resulting in net losses from the activity for those
years of $26,715 and $25,902, respectively. In addition to the
Schedule C deductions, petitioner filed a Schedule A, Itemized
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Deductions, with her 2000 return on which she claimed $4,565 in
deductions for unreimbursed employee business expenses incurred
in connection with her employment as an administrative assistant.
Respondent issued a notice of deficiency for 1999 in which
he made adjustments to the Schedule C deductions petitioner
claimed. In the notice of deficiency for 2000, respondent denied
petitioner the head-of-household status and dependency exemption
deduction, disallowed the Schedule A deductions in their
entirety, and made adjustments to the Schedule C deductions
petitioner claimed. The Schedule C adjustments respondent made
for 1999 and 2000 are laid out in the following table 1:
Table 1
1999 2000
Schedule C Dis- Dis-
Deductions Claimed Allowed allowed Claimed Allowed allowed
Advertising -- -- -- $284 $284 --
Legal &
professional $147 -- $147 288 288 --
Office
expenses 5,200 -- 5,200 6,701 4,500 $2,201
Rent 7,883 -- 7,883 5,223 -- 5,223
Repair and
maintenance -- -- -- 215 -- 215
Travel 1,605 $1,605 -- 987 741 246
Meals &
entertainment 2,151 -- 2,151 2,357 -- 2,357
Utilities 3,120 -- 3,120 3,613 2,357 1,256
Business
meetings 1,221 -- 1,221 685 390 295
Business gifts 404 -- 404 502 -- 502
Transportation 1,949 1,949 -- 2,502 -- 2,502
Cellular-
phone/pager 3,692 -- 3,692 2,836 2,260 576
Subscriptions –- –- –- 36 –- 36
Total 27,372 3,554 23,818 26,229 10,820 15,409
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Respondent disallowed the Schedule C and Schedule A
deductions on the grounds that they were not ordinary and
necessary, lacked sufficient substantiation, or were personal.
Likewise, respondent denied petitioner’s entitlement to head-of-
household filing status and the dependency exemption deduction on
account of her failure to substantiate that: (1) Her brother
lived with her; (2) she provided more than half of his support;
and (3) he did not earn more than the statutory amount.
At trial, the parties entered into a stipulation wherein
petitioner conceded the entire amount of the Schedule A
deductions. With respect to the Schedule C deductions, the
parties’ concessions are set forth in table 2:
Table 2
1999
Schedule C Previously Additional Petitioner
Deductions Claimed allowed allowed conceded Disputed
Legal &
professional $147 -- $82 $65 --
Office
expenses 5,200 -- 427 1,228 $3,545
Rent 7,883 -- -- 7,883 --
Travel 1,605 $1,605 -- -- --
Meals &
entertainment 2,151 -- -- 1,890 261
Utilities 3,120 -- 2,623 497
Business --
meetings 1,221 -- -- 469 752
Business gifts 404 -- -- 242 162
Transportation 1,949 1,949 -- -- --
Cellular-
phone/pager 3,692 –- 335 1,515 1,842
Total 27,372 3,554 844 15,915 7,059
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2000
Schedule C Previously Additional Petitioner
Deductions Claimed allowed allowed conceded Disputed
Advertising $284 $284 -- -- --
Legal &
professional 288 288 -- -- --
Office
expenses 6,701 4,500 -- $2,201 --
Rent 5,223 -- -- 5,223 --
Repairs and
maintenance 215 -- $215 -- --
Travel 987 741 -- 246 --
Meals &
entertainment 2,357 -- -- 1,243 $1,114
Utilities 3,613 2,357 -- 1,256 --
Business
meetings 685 390 -- 295 --
Business gifts 502 -- -- 191 311
Transportation 2,502 -- -- 2,502 --
Cellular-
phone/pager 2,836 2,260 -- 576 --
Subscriptions 36 –- 36 –- –-
Total 26,229 10,820 251 13,733 1,425
Allowing for these concessions, therefore, the Schedule C
deductions that remain in dispute are those taken for: (1)
Office expenses; (2) meals and entertainment expenses; (3)
utilities; (4) business meeting expenses; (5) business gifts; and
(6) use of the cellular phone.
OPINION
At the outset, we note that it is petitioner who bears the
burden of proving that respondent’s determination of income tax
deficiencies is incorrect. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933).3
3
Sec. 7491 does not apply in this case to shift the burden
of proof to respondent because petitioner neither alleged that
sec. 7491 was applicable nor established that she fully complied
with the requirements of sec. 7491(a)(2).
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A. Schedule C Deductions
Section 162(a) allows a taxpayer deductions for ordinary and
necessary business expenses incurred during the taxable year in
carrying on a trade or business. Deductions, however, are a
matter of legislative grace, and the taxpayer bears the burden of
proving the entitlement to any deductions claimed. See INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Generally, a
taxpayer must establish that deductions taken pursuant to section
162 are ordinary and necessary business expenses and must
maintain records sufficient to substantiate the amounts of the
deductions claimed. Sec. 1.6001-1(a), Income Tax Regs.
With respect to certain business expenses specified in
section 274(d), however, more stringent substantiation
requirements apply. Section 274(d) disallows deductions for
traveling expenses, gifts, and meals and entertainment, as well
as for “listed property”, unless the taxpayer substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement: (1) The amount of the expenses; (2)
the time and place of the expense; (3) the business purpose of
the expense; and (4) the business relationship to the taxpayer of
the persons involved in the expense. The term “listed property”
is defined in section 280F(d) and includes cellular phones. See
sec. 280F(d)(4)(v).
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1. Office Expenses
Petitioner contests respondent’s disallowance of $3,545 in
deductions for office expenses incurred during 1999. These
expenses include, according to petitioner’s testimony and
receipts she produced, outlays for music CDs, videos, home
cleaning products, packs of Kleenex, napkins, a laptop computer,
computer hardware, batteries, certain office supplies, and
postage.
At trial, petitioner presented receipts and bank statements
to substantiate her office-related expenses. Some of the
receipts simply indicate the amount paid but do not contain any
itemization from which the nature of the items purchased can be
ascertained. The only available evidence to that effect is
petitioner’s own self-serving testimony, which we are not
required to accept, and which we do not, in fact, find to be
credible. See Niedringhaus v. Commissioner, 99 T.C. 202, 219
(1992). Thus, with regard to the expenses for which there are no
adequate receipts, petitioner’s claim fails for lack of
substantiation.
With respect to expenses that are supported by adequate
receipts, there are items we find to be related to petitioner’s
business and therefore deductible. These are expenses for office
supplies, totaling some $44.4 Additionally, while petitioner
4
These comprise expenses for bookmarks, markers, writing
(continued...)
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failed to submit adequate evidence that the postage expenses were
incurred for business purposes, we are persuaded that some
portion of the $421 incurred for postage was related to
petitioner’s business and is therefore deductible. Where the
taxpayer establishes that a deductible expense has been incurred,
but is unable to substantiate the exact amount, the Court may
estimate the amount, bearing heavily if it chooses against the
taxpayer, whose inexactitude is of his own making. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Taking into
consideration the magnitude of petitioner’s business, we find $75
of the postage costs to be deductible by petitioner as a business
expense.
With respect to the remainder of the documented expenses,
petitioner failed to provide us with any credible evidence that
would allow us to conclude that the items were purchased for
business rather than personal use, or otherwise that they were
ordinary and necessary for petitioner’s business. Accordingly,
we hold that petitioner is not entitled to these deductions.
2. Business Meetings
Petitioner claims deductions for $752 in expenses she
asserts she incurred during business meetings in 1999.
Most of the evidence petitioner produced to verify the
expenses comprises handwritten receipts, some of them completed
by petitioner herself, which contain notations of the purpose for
4
(...continued)
pads, a stapler, and a planner pad.
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which the payments were allegedly made such as “briefing,”
“training”, and “dues”. Except for the signature of the
individual in charge of collecting those fees (which is
frequently that of petitioner herself), however, the receipts do
not disclose any information regarding the identity of the payee,
the business purpose, or the nature of the expense. Petitioner
has failed to provide us any additional credible information that
these expenses are related to, or were required by, her business.
Accordingly, we agree with respondent’s determination disallowing
these deductions.
3. Gifts and Meals and Entertainment
Petitioner disputes respondent’s disallowance of $162 and
$311 in expenses she incurred for business gifts in 1999 and
2000, respectively. She also claims that respondent erred in
denying her deductions for meals and entertainment expenses of
$261 for 1999 and $1,114 for 2000.
As discussed above, both business gifts and meals and
entertainment expenses are subject to the substantiation
requirements of section 274(d). See sec. 274(d)(2) and (3). Yet
the only evidence petitioner submitted to substantiate her gifts
and business meals and entertainment expenditures is receipts on
which she has notated “gifts for client” or “meeting with [name
of the individual]”. Petitioner has not proffered any
information regarding the business purpose of the expenses, her
business relationship with the recipient of the gift or the
individual entertained, or any other information that would
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comply with the substantiation requirements of section 274(d).
Accordingly, we sustain respondent’s determination with respect
to these deductions.
4. Cellular Phone Expenses
Petitioner disputes respondent’s denial of $1,842 in
cellular phone expenses she incurred in 1999.
Cellular phones are included in the definition of “listed
property” for purposes of section 274(d)(4) and are thus subject
to the strict substantiation requirements of this section.
In support of her claim for deductions, petitioner presented
copies of 10 checks, drawn on her account for a total of $1,842.
Six of the checks were made payable to “Bell Atlantic Mobile” and
“C-work Solutions”, while the remaining four were made payable to
a specific individual. Petitioner testified that the recipient
of the latter payments was her sister, whose phone she was using
during that time. Even if we were to believe petitioner’s
assertions, which we do not, petitioner has produced no evidence
that the phone was used for business purposes or any other
reliable evidence regarding the services rendered. Given
petitioner’s failure to substantiate the cellular phone expenses,
we sustain respondent’s determination denying these deductions.
5. Utilities
Petitioner claimed deductions for utilities used in her home
office for both 1999 and 2000. After concessions by petitioner
at trial, the amount that remains in contention is $497 incurred
during 1999.
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In general, a taxpayer may not deduct expenses incurred with
respect to the use of the taxpayer’s residence. See sec.
280A(a). Section 280A(c)(1) provides a narrow exception to the
disallowance of home office deductions where the taxpayer can
establish that the portion of the home to which the expenses are
attributable is exclusively used on a regular basis as either the
taxpayer’s principal place of business or a place of business
which is used by clients or customers in meeting or dealing with
the taxpayer in the normal course of business.
Petitioner claimed expenses attributable to a portion of her
home she contends she used exclusively as a home office.
Petitioner estimated that portion at about 50 percent of her
residence. Petitioner failed, however, to provide any credible
evidence to support her contention that any portion of her home
was used exclusively for business purposes. The only evidence
regarding the use of petitioner’s home for business-related
matters is petitioner’s own testimony. We find petitioner’s
testimony not credible.
Even if we were persuaded that some portion of the house was
used exclusively for business purposes, petitioner has not
offered any evidence that would support her allocation of
expenses or otherwise allow the Court to reach an alternate
determination under Cohan v. Commissioner, supra. Petitioner
testified that her residence has two bedrooms, a kitchen, a
separate eating area, one bathroom, and a living room. The
portion of the house used exclusively for the business, according
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to petitioner, was a “a little area * * * [connected to the
living room] that has all the office equipment.” This testimony
is sharply inconsistent with petitioner’s allocation and suggests
that the portion used, if any, as a home office by petitioner was
substantially less than the 50 percent she claims. While Cohan
allows us to estimate the amount of expense that we find to be
deductible when the exact amount cannot be ascertained, in order
for us to do so, petitioner must have supplied us with some basis
upon which an estimate can be made. See Vanicek v. Commissioner,
85 T.C. 731, 742,743 (1985). Petitioner, however, has failed to
provide the Court with any measurements, pictures, floor plans,
or any other evidence that would enable us to estimate the
portion allocable to the home office.
Accordingly, having failed to substantiate that a portion of
her home was used exclusively for business purposes, petitioner
is not entitled to a deduction for these expenses.
B. Head-of-Household Filing Status and Dependency Exemption
Petitioner filed her Federal income tax return for 2000 as a
head of household and claimed the dependency exemption deduction
for her brother.
In order to qualify for head-of-household filing status, a
taxpayer must satisfy the requirements of section 2(b). Pursuant
to this section, an individual qualifies as a head of household
if she (1) is not married at the close of the taxable year, and
(2) maintains as her home a household that constitutes for more
than one-half of the taxable year the principal place of abode,
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as a member of such household, of any person who is a dependent
of the taxpayer, if the taxpayer is entitled to a deduction for
the taxable year for such person under section 151. Section 151
allows the taxpayer to claim an exemption deduction for a
dependent whose gross income for the calendar year in which the
taxable year of the taxpayer begins is less than the “exemption
amount”. Sec. 151(c)(1)(A) and (d)(1). Included among those
that qualify as dependents is a taxpayer’s brother, so long as
more than half of his support for the year at issue was received
from the taxpayer. See sec. 152(a)(3).
Petitioner, who during 2000 was married but separated from
her husband, testified that her brother, born in 1976, has been
living with her since his last year in high school. She stated
that since then she has been supporting her brother and has paid
all his expenses, including his education, food, clothing, and
rent. Petitioner testified that her brother worked in several
part-time jobs during 2000 but that she did not know how much he
had earned. Respondent introduced into evidence documents
showing that petitioner’s brother filed a Federal income tax
return for 2000 in which he reported gross income of $7,789.
We have already noted that the burden is on petitioner to
establish that she is entitled to head-of-household filing
status. Apart from petitioner’s testimony, however, she did not
offer any other credible evidence that would substantiate that
her home constituted the principal place of abode for her brother
during the year in question or that she provided more than half
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of his support. Furthermore, given that petitioner’s brother
earned $7,789 during 2000, a sum in excess of the limitation
amount of section 151, he does not qualify as a dependent for
whom she is entitled to a deduction under section 151, and thus,
petitioner would not be entitled to file as a head of household
even if she could substantiate the aforementioned requirements.
Accordingly, we hold that petitioner is not entitled to claim
head-of-household status and the dependency exemption.
C. Penalties
Section 6662 imposes a penalty of 20 percent of the portion
of the underpayment which is attributable to negligence or
disregard of rules or regulations. See sec. 6662(a) and (b).
Negligence is the “lack of due care or failure to do what a
reasonable and ordinarily prudent person would do under the
circumstances.” Neely v. Commissioner, 85 T.C. 934, 947 (1985).
“Negligence” includes the failure to make a reasonable attempt to
comply with provisions of the Internal Revenue Code, as well as
any failure by the taxpayer to keep adequate books and records or
to substantiate items properly. See sec. 1.6662-3(b)(1), Income
Tax Regs. The term “disregard” includes any careless, reckless,
or intentional disregard. See sec. 6662(c).
Nevertheless, a taxpayer may avoid the imposition of a
penalty if she is able to show that there was a reasonable cause
for, and that she acted in good faith with respect to, the
underpayment. See sec. 6664(c). The determination of whether
the taxpayer acted with reasonable cause and in good faith is
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made by taking into account all the pertinent facts and
circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
In her Federal tax returns, petitioner claimed excessive
Schedule C and Schedule A expenses that she was unable to
substantiate, thereby disregarding the requirements of sections
162 and 274. Further, neither the receipts petitioner submitted
nor her testimony establish a business purpose for the claimed
expenses.
At trial petitioner failed to demonstrate that she acted in
good faith with respect to the underpayments during the years at
issue. Accordingly, we hold that petitioner is liable for
accuracy-related penalties under section 6662(a) for 1999 and
2000.
To reflect the foregoing,
Decisions will be entered
under Rule 155.