T.C. Summary Opinion 2004-127
UNITED STATES TAX COURT
ROWLAND SETYONO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5500-03S. Filed September 13, 2004.
Rowland Setyono, pro se.
John D. Faucher, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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Respondent determined deficiencies of $9,845 and $3,846 in
petitioner's 1999 and 2000 Federal income taxes, respectively.
The issues for decision are: (1) Whether petitioner is
entitled to claim rental real estate losses in excess of those
allowed by respondent; (2) whether petitioner is entitled to
deductions for employee business expenses; and (3) whether
petitioner is liable for the 10-percent additional tax under
section 72(t) for early distributions from retirement plans.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
in this case was filed, petitioner resided in Sacramento,
California.
1. Petitioner's Rental Real Estate Losses
During the years in issue, petitioner owned three houses:
(1) 8501 Canterbury (Canterbury) in Sun Valley, California; (2)
960 N. Adams (Adams) in Chandler, Arizona; and (3) 28705
Persimmon Lane (Persimmon) in Saugus, California.
Petitioner purchased the Canterbury house around 1982 and
still owns it. He did not have a tenant in this house during
either 1999 or 2000.
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Petitioner purchased the Adams house in 1996 and still owns
it. Petitioner would drive from California to Arizona weekly to
perform maintenance on the Adams house.
Petitioner hired Desert Wide Properties (Desert Wide) to
manage the Adams property. Desert Wide was not responsible for
cleaning the house or otherwise preparing it for rental. They
simply advertised the property for rental and did not charge
petitioner a fee until the property was rented. The Adams house
was rented from September 1999 through the entire 2000 tax year.
After it was rented, petitioner had no further need to drive to
Arizona.
Petitioner has owned the Persimmon house since 1990. In
1993, he hired Southern California Real Estate Management Co. to
manage the property. During the years at issue, petitioner had a
tenant in the house and did not visit the property.
On his 1999 Schedule E, Supplemental Income and Loss,
petitioner claimed deductions pertaining to the Adams and
Persimmon properties of $28,614.27 and $38,649.53, respectively.
Petitioner lived in the Adams house from January through June
1999. In the notice of deficiency, respondent reclassified from
Schedule E to Schedule A, Itemized Deductions,
$5,860 of the mortgage interest and property taxes attributable
to the Adams property for the period during which petitioner
lived there.
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On his 2000 Schedule E, petitioner claimed deductions
pertaining to the Adams and Persimmon rental properties of
$25,616.92 and $38,213.00, respectively. Respondent determined
that petitioner qualifies for a $25,000 loss for active
participation in his rental real estate activity in each of the
years in issue. Respondent disallowed loss deductions in excess
of that amount.
2. Petitioner's Employee Business Expenses
During the years in issue, petitioner was employed as a
computer analyst by Wells Fargo Bank (Wells Fargo), his employer
of more than 20 years. At the beginning of 1999, petitioner was
working in Tempe, Arizona. In June 1999 petitioner's job was
relocated from Arizona to Sacramento, California. At that time,
petitioner rented an apartment in Sacramento.
During one of the weekly trips he made from California to
the Adams house to perform maintenance, petitioner retrieved from
the Adams house computer manuals he needed for his job. He was
not required by Wells Fargo to drive down and pick up the
manuals. Petitioner did it for his own convenience. He did not
keep records of the mileage he drove.
On his 1999 Schedule A, petitioner deducted his mileage
expenses for trips to the Adams house as an employee business
expense, claiming a total deduction of $13,392.00, less the 2-
percent AGI floor of $1,360.87, or $12,031.13. On his 2000
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Schedule A, petitioner deducted his mileage expenses for trips to
the Adams house as an employee business expense, claiming a total
deduction of $13,000, less the 2-percent AGI floor of $809.36, or
$12,190.64. Respondent disallowed petitioner's claimed deduction
for mileage expenses because petitioner did not establish that
the expenses were related to his employment.
3. Petitioner's Retirement Plan Withdrawals
In 1999, petitioner made withdrawals from two retirement
plans. A Form 1099-R, Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc., reflects that his gross distribution from the Federal
Savings Bank plan was $22,839.61. The amount comprises
$6,957.18 as a return of employee contributions and $15,882.43 as
a taxable distribution.
Petitioner's gross distribution from his Wells Fargo section
401(k) plan was $12,850. The full amount is identified on the
Form 1099-R as a taxable distribution. Petitioner reported both
distributions as income on his 1999 Form 1040, U.S. Individual
Income Tax Return. He did not, however, report the 10-percent
additional tax attributable to a premature withdrawal from a
retirement plan.
In 2000, petitioner again made a withdrawal from the Wells
Fargo section 401(k) plan. The Form 1099-R reflects that his
gross distribution was $10,793.25. The full amount is identified
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as taxable. Petitioner reported the distribution as income on
his 2000 Form 1040, but once again he did not report the 10-
percent additional tax attributable to a premature withdrawal
from a retirement plan. In the notice of deficiency, respondent
determined that petitioner is liable for the additional tax on
premature distributions for each year.
Petitioner made the withdrawals to pay for his sister's
funeral and to stop foreclosure on one of his properties.
Petitioner's sister passed away during the 1999 tax year. She
had lived in Indonesia, and her funeral was held there.
According to petitioner, the Muslim funeral ceremonies for his
sister were required to span 3 years. In 1999, petitioner spent
approximately $12,000 to $15,000 for her funeral expenses. He
also spent the funds he withdrew in 2000 on his sister's funeral
expenses.
At the end of 1998, First Nationwide Mortgage notified
petitioner of its intent to foreclose on the Canterbury house.
In 1999, petitioner spent approximately $15,000 of the funds
distributed to him from his pension plan to avoid the
foreclosure. At the time of trial, petitioner had not yet
reached the age of 59-1/2 years.
Discussion
The Commissioner's determinations in the notice of
deficiency are presumed correct, and, generally, taxpayers must
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prove those determinations wrong in order to prevail. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Because
the issues to be decided are questions of law, section 7491(a) is
inapplicable, and the Court decides the issues without regard to
the burden of proof.
1. Petitioner's Rental Real Estate Losses
Section 469(a) generally disallows passive activity losses.
Section 469(d)(1) defines "passive activity loss" as the excess
of passive activity losses over passive activity income for the
taxable year. Under section 469(c)(2), passive activity includes
any rental activity, "without regard to whether or not the
taxpayer materially participates in the activity." Sec.
469(c)(4).
However, under section 469(c)(7), section 469(c)(2) does not
apply to the rental real estate activities of a taxpayer in the
real property business (a real estate professional) if:
(i) more than one-half of the personal
services performed in trades or businesses by
the taxpayer during such taxable year are
performed in real property trades or
businesses in which the taxpayer materially
participates, and
(ii) such taxpayer performs more than
750 hours of services during the taxable year
in real property trades or businesses in
which the taxpayer materially participates.
Sec. 469(c)(7)(B).
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Petitioner was employed full time as a computer analyst with
Wells Fargo. He testified that he retained two property
management companies to manage the Adams and Persimmon
properties. Petitioner also admitted that he did not keep any
records as to how much time he devoted to his real estate
activities. The Court concludes that petitioner does not satisfy
the exception set forth in section 469(c)(7) and he is not
entitled to deduct real estate losses in excess of the $25,000
loss allowed by respondent.
2. Petitioner's Employee Business Expenses
Deductions are a matter of legislative grace, and taxpayers
must maintain adequate records to substantiate the amounts of any
deductions or credits claimed. Sec. 6001; INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); sec. 1.6001-1(a), Income
Tax Regs.
Section 162(a) allows a deduction for all ordinary and
necessary expenses incurred in carrying on a trade or business.
Generally, a taxpayer must establish that deductions claimed
pursuant to section 162 are ordinary and necessary expenses and
must maintain records sufficient to substantiate the amounts of
the deductions claimed. Sec. 6001; Meneguzzo v. Commissioner, 43
T.C. 824, 831-832 (1965); sec. 1.6001-1(a), (e), Income Tax Regs.
With respect to certain business expenses specified in
section 274(d), however, more stringent substantiation
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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 expense,
(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 passenger
vehicles. See sec. 280F(d)(4)(A)(i).
Under section 274(d), substantiation by means of adequate
records requires a taxpayer to maintain a diary, a log, or a
similar record, and documentary evidence that, in combination,
are sufficient to establish each element of each expenditure or
use. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed.
Reg. 46017 (Nov. 6, 1985). To be adequate, a record must
generally be written. Each element of an expenditure or use that
must be substantiated should be recorded at or near the time of
that expenditure or use. Sec. 1.274-5T(c)(2)(ii)(A), Temporary
Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Thus, under
section 274(d) no deduction may be allowed for expenses incurred
for use of a passenger automobile on the basis of any
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approximation or the unsupported testimony of the taxpayer.
Bradley v. Commissioner, T.C. Memo. 1996-461; Golden v.
Commissioner, T.C. Memo. 1993-602.
Petitioner's employment as a computer analyst did not
require that he drive 13,392 miles in 1999 or 13,000 miles in
2000. Therefore, the Court finds that petitioner's mileage
expenses are unrelated to his employment and thus are not
deductible. Respondent's disallowance of petitioner's claimed
employee business expenses is sustained.
3. Petitioner's Retirement Plan Withdrawals
Section 72 typically operates to include distributions in
gross income, and subsection (t) provides for an additional tax
on premature distributions. For purposes of the statute, section
4974(c) includes a pension plan described in section 401(a) as a
qualified retirement plan.
None of the exceptions enumerated in section 72(t)(2) is
applicable. Petitioner acknowledges that the funds were
withdrawn from his retirement plan accounts and that he had not
reached age 59-1/2. The foreclosure of petitioner's property and
his sister's funeral expenses do not satisfy any of the
exceptions set forth in section 72(t). Therefore, respondent's
determination that petitioner is liable for each year for the 10-
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percent additional tax on his premature distributions is
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.