T.C. Summary Opinion 2006-1
UNITED STATES TAX COURT
HARON M. AND AURORA L. VERAS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6027-04S. Filed January 3, 2006.
Haron M. and Aurora L. Veras, pro sese.
Robert F. Saal, for respondent.
PANUTHOS, Chief 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
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Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioners’ Federal
income tax for the taxable year 2001 of $14,365. The issues for
decision are: (1) Whether petitioners omitted interest income of
$142; (2) whether petitioners are entitled to claimed Schedule C,
Profit or Loss From Business, expense deductions; and (3) whether
petitioners are entitled to a medical expense deduction not
claimed on the return.1
Background
Some of the facts have been stipulated, and they are so
found. The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time of filing the
petition, petitioners resided in Weehawkeen, New Jersey.
In March 1999, petitioner Haron M. Veras (petitioner) began
operating a trucking company as a sole proprietor. Petitioner
owned a Freightliner tractor which was utilized to transport
freight. The tractor was purchased in 1999 at a cost of
1
Prior to trial petitioners conceded that they are not
entitled to claimed total itemized deductions of $25,593, which
had been disallowed in the notice of deficiency. The notice of
deficiency allowed petitioners a standard deduction.
The return reflected $912 for medical expense, however,
since the amount did not exceed 7.5 percent of adjusted gross
income, no deduction was claimed. See sec. 213(a). At trial
petitioners asserted that they were entitled to a medical expense
deduction in the approximate amount of $10,000.
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approximately $36,000. The purchase was financed by First Union
National Bank, and petitioner was required to make monthly
payments of $599.39. The loan carried an annual interest rate of
12.5 percent over a term of 5 years. Petitioner also utilized
persons who did the loading and unloading at the pier.
Petitioner apparently paid the loaders in cash, and no records
were maintained or presented, documenting the amounts paid.
During 2001 petitioner also leased a Toyota Forerunner. This
vehicle was used in the trucking business during the week and for
personal use on weekends. There were no records presented as to
amounts expended to operate the Forerunner or contemporaneous
records relating to the business use of the vehicle.
Petitioner Aurora Veras gave birth on January 16, 2002.
Mrs. Veras traveled from the Dominican Republic to the United
States sometime in 2001. Petitioners incurred medical expenses
during 2001 with respect to Mrs. Veras’s pregnancy. Petitioners
presented no records relating to this item.
Petitioners timely filed a joint Federal income tax return
for the taxable year 2001. No interest income was reported on
the return. Attached to the Form 1040, U.S. Individual Income
Tax Return, was a Schedule C for petitioner’s trucking business.
The Schedule C reflects gross income of $82,515 and total
expenses of $69,424. The notice of deficiency determined that
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petitioners received $142 of interest income that was not
reported on the 2001 return.
The notice further disallowed Schedule C deductions as
follows:
Item Claimed Allowed Disallowed
Interest $1,044 -0- $1,044
Repairs & maintance 7,640 $5,084 2,556
Commissions & fees 16,000 -0- 16,000
Travel 1,600 -0- 1,600
Meals & entertainment 2,300 -0- 2,300
Other expenses 9,195 1,995 7,200
Car & truck expenses 17,716 2,267 15,449
Burden of Proof
Generally, the burden of proof is on the taxpayer. Rule
142(a)(1). Under section 7491, the burden of proof shifts from
the taxpayer to the Commissioner if the taxpayer produces
credible evidence with respect to any factual issue relevant to
ascertaining the taxpayer’s liability. Sec. 7491(a)(1).
Petitioners have neither argued that the burden of proof should
shift nor satisfied the criteria that would cause the burden of
proof to shift. Given the lack of documentation and information
provided by petitioners in this case, we conclude that the burden
of proof remains with petitioners.
Omitted Interest Income
Petitioners did not present any argument or evidence that
they did not receive $142 of interest income during the taxable
year 2001. Respondent’s determination is accordingly sustained.
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Disallowed Schedule C Deductions
1. General
Section 162(a) permits a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Expenses that are personal in
nature are generally not allowed as deductions. Sec. 262(a). A
taxpayer is required to maintain records sufficient to establish
the amount of his income and deductions. Sec. 6001; sec. 1.6001-
1(a), (e), Income Tax Regs. A taxpayer must substantiate his
deductions by maintaining sufficient books and records to be
entitled to a deduction under section 162(a). When a taxpayer
establishes that he has incurred a deductible expense but is
unable to substantiate the exact amount, we are generally
permitted to estimate the deductible amount. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We can
estimate the amount of the deductible expense only when the
taxpayer provides evidence sufficient to establish a rational
basis upon which the estimate can be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
Section 274(d) supersedes the general rule of Cohan v.
Commissioner, supra, and prohibits the Court from estimating the
taxpayer’s expenses with respect to certain items. Sanford v.
Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d
201 (2d Cir. 1969). Section 274(d) imposes strict substantiation
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requirements for listed property as defined in section
280F(d)(4), gifts, travel, entertainment, and meal expenses.
Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). To obtain a deduction for a listed property,
travel, meal, or entertainment expense, a taxpayer must
substantiate by adequate records or sufficient evidence to
corroborate the taxpayer’s own testimony the amount of the
expense, the time and place of the use, the business purpose of
the use and, in the case of entertainment, the business
relationship to the taxpayer of each person entertained. Sec.
274(d); sec. 1.274-5T(b), Temporary Income Tax Regs., 50 Fed.
Reg. 46014 (Nov. 6, 1985). Section 274 requires that expenses be
recorded at or near the time when the expense is incurred. Sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). Listed property includes passenger automobiles.
Sec. 280F(d)(4)(A)(i).
Petitioner presented very few documents to support the
claimed business expense deductions. Petitioner asserted that he
provided documents to the examining IRS agent, and that said
individual failed to return the substantiation presented.
Respondent disputed this assertion, and respondent’s
administrative file reflected that all substantiating documents
were returned to petitioners. We are inclined to agree with
respondent’s version of these events. The remarks in
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respondent’s administrative file appear consistent with the
disallowance of the Schedule C deductions. Petitioner was unable
or unwilling to articulate the specific documents that were
presented to the IRS and which were not available at trial. We
now consider the specific Schedule C deductions claimed by
petitioners.
2. Interest Deduction
Petitioner asserts that he paid interest on a loan relating
to a tractor purchased during 1999. Petitioner presented
credible testimony and some documentation which established that
he paid at least $1,044 in interest on the loan, which was used
to purchase a tractor for his Schedule C activity. As such,
petitioner is entitled to the claimed interest expense deduction
in full.
3. Repairs and Maintenance
Respondent agreed at trial that petitioners are entitled to
a deduction in the amount of $9,595.12 for this item. This
amount exceeds the amount claimed on the 2001 tax return of
$7,640.
4. Commissions and Fees
Petitioners claimed a deduction in the amount of $16,000 for
this item, representing amounts paid to persons who loaded and
unloaded freight. No documentation or specific testimony was
presented as to the amounts paid to such individuals. While it
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is no doubt possible that petitioner paid persons to unload
freight, we have insufficient evidence to make a reasonable
estimate of the amount that was paid. Respondent is sustained on
this item.
5. Travel, Meals and Entertainment
The deductions claimed for travel expense of $1,600 and
meals and entertainment expense of $2,300 are subject to the
substantiation requirements of section 274(d). Petitioner
presented no documents and no specific testimony in this
connection. Respondent is sustained as to this disallowance.
6. Other Expenses
Petitioners claimed a deduction for $9,195 in other
expenses. Respondent allowed $1,400 of this amount for
communications and $595 for clothes and shoes. Remaining in
dispute is $7,200. Petitioner appeared confused about this item,
and his testimony suggests that the claimed expense deduction may
be a duplication of other items claimed on the Schedule C.
Petitioner did not present documentation or testimony with
respect to this item. Respondent’s determination is sustained.
7. Car and Truck Expenses
Petitioner deducted $17,716 in car and truck expenses.
Respondent allowed $2,267 for this item. At trial petitioner
asserted that this item was for fuel expense for his tractor, and
that he paid approximately $18,000 for fuel expenses. Upon a
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review of this record we are satisfied that petitioner incurred
some expense for fuel for the tractor. We allow petitioner an
additional $6,000, for this item, over and above the amount
allowed by respondent. Respondent’s determination is otherwise
sustained.
Medical Expense
At trial, petitioners alleged that they incurred medical
expenses of approximately $10,000 during 2001 when Mrs. Veras was
pregnant. While section 213 permits a deduction for medical
expenses of a taxpayer or a dependent, a taxpayer must
substantiate claimed medical expense deductions. Sec. 1.213-
1(h), Income Tax Regs. Petitioners presented no documentary
evidence or testimony as to specific expenses incurred in this
connection. Petitioners are not entitled to any amount for a
medical expense deduction.2
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.
2
Even if we were to allow petitioners a deduction for
medical expenses, such amount would not equal or exceed the
amount allowed as a standard deduction.