T.C. Summary Opinion 2004-171
UNITED STATES TAX COURT
HILARY HARRY SAX, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8363-03S. Filed December 20, 2004.
Hilary Harry Sax, pro se.
Mindy S. Meigs, for respondent.
PAJAK, 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. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
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Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner’s 1999
Federal income tax in the amount of $8,788 and a penalty under
section 6662(a) in the amount of $1,755.60.
Petitioner conceded that he (1) received long-term capital
gain income in the amount of $1,154 in 1999, (2) received $11,154
from Social Security, (3) received interest income in the amount
of $155 in 1999, (4) is liable for an addition to tax for 1999
pursuant to section 6651(a)(1) and (5) is liable for a penalty
under section 6662(a). After concessions by petitioner, this
Court must decide whether petitioner is entitled to a deduction
for expenses from Schedule C, Profit or Loss From Business, in
the amount of $28,780.
Some of the facts in this case have been stipulated and are
so found. Petitioner resided in Los Angeles, California, at the
time he filed his petition.
Petitioner is 86 years old, is an attorney, and is currently
an active member of the State Bar of California. Petitioner
graduated from Harvard Law School in 1944. He has been engaged
in the practice of law for 60 years.
In 1999, petitioner was a lawyer operating as a sole
proprietor. On occasion, he used the Sax-Brook Structural
Building Systems, Inc. (Sax Brook) name for his own purposes.
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Petitioner requested an extension of time to file a Form
1040, U.S. Individual Income Tax Return (return), for 1999 which
extension was approved to August 15, 2000. On January 16, 2001,
petitioner untimely filed his return for 1999, attaching the
relevant Schedule C. Petitioner prepared the return himself. He
admitted it was a mistake to use the Sax-Brook name on his
Schedule C because Sax-Brook was inactive in 1999 and remained
inactive until the time of trial. Petitioner claimed his
business activities in 1999 were those of a lawyer.
Section 7491 does not apply in this case because petitioner
did not meet the substantiation requirements.
Petitioner received payments in the amount of $11,154 from
the Social Security Administration in 1999. Petitioner failed to
include any portion of these payments on his 1999 return.
Petitioner was the president of Sax-Brook from 1994 to date
of trial. On September 9, 1994, petitioner and a business
associate, Mr. Robert L. Timbrook, organized the Sax-Brook
corporation.
Sax-Brook was created in order to manufacture and sell
building panels that could be used in new home construction. Mr.
Timbrook had invented a panel made of inexpensive materials to be
used in the construction of houses. Because the inexpensive
materials would replace lumber, including plywood, used in
building a house, it was projected to be cost-effective.
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Unfortunately, because the materials did not fit under the
requirements of building codes, petitioner could not sell the
idea to investors. The cost of getting building codes revised
was prohibitive.
During 1999, petitioner wrote letters to individuals and
entities in an attempt to cover the costs of obtaining building
permits to build houses and to secure investors in order to begin
manufacturing the building panels.
During 1999, Sax-Brook did not pay any employees or officers
to perform services for the business. Petitioner was not
reimbursed by Sax-Brook for any expenses incurred by him in
connection with the corporation during 1999. Sax-Brook did not
file a corporate income tax return with respect to 1999 with the
Internal Revenue Service.
Respondent in the notice of deficiency, among other things,
disallowed petitioner’s Schedule C deductions in full.
Respondent determined that petitioner did not establish that the
Schedule C expenses were ordinary and necessary business expenses
and that he did not substantiate the expenses.
Section 162(a) allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business. To be deductible as a
business expense, the expenditure must relate to activities which
constitute the current carrying on of an existing trade or
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business. Corbett v. Commissioner, 55 T.C. 884, 887 (1971).
Whether activities carried on by an individual can be
characterized as a trade or business is a question of fact. Id.
at 887. Petitioner has the burden of proof. Rule 142(a); Welch
v. Helvering, 290 U.S. 111 (1933).
Deductions are strictly a matter of legislative grace.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Taxpayers must substantiate claimed deductions. Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curium 540 F.2d
821 (5th Cir. 1976). Moreover, taxpayers must keep sufficient
records to establish the amounts of the deductions. Meneguzzo v.
Commissioner, 43 T.C. 824, 831 (1965); sec. 1.6001-1(a), Income
Tax Regs. Generally, except as otherwise provided by section
274(d), when evidence shows that a taxpayer incurred a deductible
expense, but the exact amount cannot be determined, the Court may
approximate the amount, bearing heavily if it chooses against the
taxpayer whose inexactitude is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court,
however, must have some basis upon which an estimate can be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). There are
strict substantiation requirements under section 274(d) for items
such as travel expenses and meals.
Respondent stated that up to the date of trial, petitioner
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provided no substantiation. At trial, petitioner offered no
substantiation for any of the deductions. Petitioner did not
have any books, records, receipts, or other documents to
substantiate expenses claimed on his Schedule C. Petitioner also
candidly admitted that “We didn’t build anything in 1999" and
that we were “unable to raise the money to do business.”
Petitioner acknowledged that he did not maintain a separate
bank account to pay expenses. He did not maintain a business
office. He operated out of his own apartment. He had no
business records, no books, no checks, and no receipts. When
asked about these, he replied “No I did not keep them.”
We conclude that petitioner did not prove that the claimed
deductions were his ordinary and necessary business expenses. We
further conclude that petitioner failed to substantiate any
Schedule C expenses claimed as deductions in 1999. For these
reasons, the Schedule C expenses are disallowed in full.
Contentions we have not addressed are irrelevant, moot, or
without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.