T.C. Summary Opinion 2006-27
UNITED STATES TAX COURT
DOUGLAS L. AND NANCY H. MAXFIELD, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8075-04S. Filed February 16, 2006.
Douglas L. and Nancy H. Maxfield, pro se.
Avery Cousins III, for respondent.
POWELL, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463.1 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 during the
years in issue, and Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined deficiencies in petitioners’ 2000 and
2001 Federal income taxes and accuracy-related penalties as
follows:
Years Deficiency Sec. 6662 Penalty
2000 $22,221 $4,444.20
2001 20,892 4,178.49
The issues are (1) whether petitioners are entitled to
various deductions claimed on Schedule C, Profit or Loss From
Business, for the years in issue, and (2) whether petitioners are
liable for the penalties under section 6662. At the time the
petition was filed petitioners resided in Bowie, Maryland.
Background
The facts may be summarized as follows. Petitioners filed
Federal income tax returns for the taxable years 2000 and 2001.
Each return included a Schedule C for Common Sense Consultants,
Inc. (CSCI),2 and Galaxy 6 (Galaxy). Petitioners reported gross
receipts, cost of goods sold, and deductions for the two entities
as follows:
2000 2001
Galaxy 6
Gross receipts $3,883 $8,240
Cost of goods sold 5,755 -0-
Expenses:
Advertising 82 424
Bad debt -0- 926
Travel -0- 198
2
CSCI was not incorporated.
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Other expenses:
Mountain View -0- 6,500
Bank service charge -0- 50
Bank tracing costs -0- 598
CSCI
Gross receipts $31,265 25,850
Cost of goods sold 15,157 -0-
Expenses:
Advertising 2,100 -0-
Car 15,382 17,062
Depreciation 763 3,944
Insurance 3,493 3,768
Legal -0- 1,544
Office -0- 3,398
Rental 203 -0-
Repairs 8,977 10,049
Supplies 3,467 4,495
Taxes & licenses 427 137
Travel 2,450 579
Meals & entertainment 2,631 2,516
Utilities 6,939 8,275
Equipment & upgrades 6,503 768
Work clothes 3,319 957
Lodging 3,384 936
Publications 606 423
Political contributions 220 -0-
Donations -0- 224
Postage 307 141
Training, etc. 487 1,227
Expenses (boat) -0- 6,531
Dry Cleaning 195 -0-
Equipment -0- 5,260
Materials -0- 4,168
Galaxy appears to have been a conduit for credit card
payments for rents on cabins in Washington State that were owned
by the mother and brother of petitioner Douglas L. Maxfield
(petitioner). The reason for this arrangement is unclear.
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CSCI is, using petitioner’s words, “an umbrella business
that deals in legal issues, construction issues, any [sic]
advice.” While petitioner allegedly gives legal advice, he does
not practice law. Apparently, the construction aspect of CSCI
during the years before the Court involved property belonging to
the parents of petitioner Nancy H. Maxfield. Petitioner also was
a “hearing officer for section 8 assistance and terminations” in
Prince George’s County, Maryland, for which he was paid
$4,987.50.
Petitioner’s records for the deductions listed above
consisted of credit card monthly statements. With respect to the
expenses for car, repairs, and a portion of the insurance the
deductions allegedly relate to petitioner’s expenses for local
transportation. Petitioner claimed deductions for both alleged
mileage and actual expenses. The travel and lodging expenses
relate to trips to California, Florida, and Texas by automobile,
and to Alaska and Washington State by airplane. Petitioner did
not maintain any logs or similar type records concerning the
automobile or travel expenses. The deductions for insurance
include insurance for automobiles, a boat, homeowners insurance,
and life insurance on petitioner.
At trial respondent was willing to allow the following cost
of goods sold and deductions for trade or business expenses:
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2000 2001
Cost of goods sold1 $2,100 -0-
Deductions
Car 7,634 $10,284
Insurance 33 33
Legal -0- 772
Supplies 626 1,001
Utilities 763 900
Publications 100 100
Postage 154 71
Training, etc. 244 614
Advertising2 82 -0-
1
Claimed with respect to Galaxy.
2
Claimed with respect to Galaxy.
These deductions are based on the assumption that petitioner
operated a trade or business of being a housing hearing officer
for the county under CSCI. During the trial, the parties agreed
that Galaxy was a conduit; the income should not have been
reported, and the deductions claimed, other than those stated for
the year 2000 and the amounts paid to petitioner’s mother, were
not allowable.
Discussion
A. Deductions
Section 162 allows a deduction for “all the ordinary and
necessary expenses paid * * * during the taxable year in carrying
on any trade or business”. Similarly, section 212 allows
deductions for ordinary and necessary expenses incurred “for the
production or collection of income.” On the other hand, “no
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deduction shall be allowed for personal, living, or family
expenses.” Sec. 262(a). Furthermore, section 274(d) provides
that no deduction shall be allowed, inter alia, with respect to
travel and entertainment expenses and “listed property (as
defined in section 280F(d)(4))” unless the taxpayer substantiates
by adequate records or by sufficient evidence corroborating the
taxpayer’s own statement (1) the amount of such expense or item,
(2) the time and place of the travel, entertainment, or use of
the property, (3) the business purpose of the item, and (4) the
business relationship to the taxpayer of the persons entertained
or using the property. Listed property includes passenger
automobiles. Sec. 280F(d)(4)(A)(i).
Petitioner claims to have two separate businesses operating
under the names of Galaxy and CSCI. Petitioner's testimony
concerning both was confusing. It is axiomatic that a taxpayer
must be engaged in a trade or business if any expense is
deductible under section 162. Respondent concedes that
petitioner was engaged in a trade or business, but, as far as we
can determine from this record, that concession is based on
petitioner’s activity as a hearing officer for the county.
Petitioner also claims that he “deals in legal issues”. We found
that his testimony concerning this activity was, at best,
confusing and contradictory. First, his testimony concerning
income from this activity was obtuse. He “went out to California
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and did an estate out there when my cousin died.” He went to
Florida as a “process server and served my ex son-in-law some
papers”. He helped “several old folks” in Texas with Social
Security and “got them food stamps and a little money and their
medical services.” He helped another person get veteran’s
benefits. Petitioner is not licensed to practice law.
Furthermore, he has no records concerning these activities, and
there is no indication of what, if any, income petitioner derived
from these endeavors. Second, with regard to the construction
activity, petitioner testified that he had closed that activity
before the year 2000. While there is some indication that some
work was done on his in-laws’ residence, petitioner’s role in
that work is unspecified.
Most of the deductions claimed for expenses are patently
without legal bases.3 Petitioner claimed deductions for boat
expenses, but he has no records to support any business use of
the boat. He has no logs or any other documentation showing the
business use of any automobiles that satisfy the requirements of
section 274(d).4 Moreover, he deducted both actual expenses and
3
The provisions of sec. 7491(a)(1) do not apply.
Petitioners have not satisfied the record-keeping requirements of
sec. 7491(a)(2).
4
Respondent, however, did allow a deduction for automobile
expenses based on mileage that includes an element of the cost of
insurance.
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mileage for the automobiles. The deductions claimed for clothes
and food were for everyday clothing and meals which are clearly
personal expenses. The claimed utility expense deductions were
for the total utilities for his home and clearly have more than
an incidental personal portion in the amount claimed.5 Even
putting aside the failure to comply with section 274(d), there is
no evidence as to the business nature of the claimed travel and
lodging expenses. Petitioner’s testimony concerning the travel
expenses indicates that members of his family traveled with him.
The insurance, other than that allowed by respondent, consisted
of personal life insurance and automobile insurance. In sum, we
find no basis for the amount of the deductions claimed.
B. Section 6662 Penalties
Section 6662(a) provides a penalty in an amount equal to 20
percent of the portion of any underpayment attributable to, among
other things, “Negligence or disregard of rules or regulations”.
Sec. 6662(b)(1). “‘Negligence’ includes any failure to make a
reasonable attempt to comply with the provisions * * * [of the
Internal Revenue Code], and the term ‘disregard’ includes any
careless, reckless, or intentional disregard.” Sec. 6662(c).
Negligence also includes any failure by the taxpayer to keep
5
Respondent allowed a portion of the utilities and
homeowners insurance based on petitioner’s use of a portion of
his home for business purposes.
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adequate books and records or to substantiate items properly.
Sec. 1.6662-3(b)(1), Income Tax Regs. We have no difficulty in
finding that petitioners are guilty of negligence for both years
before the Court.6 They claimed deductions that are clearly
improper and made no attempt to keep satisfactory records as
required by section 6001. Petitioners claim that they used
“Turbo Tax”, a computer program for preparing tax returns, and
any fault lies with that program. While section 6664(c) provides
an exception for a portion of the underpayment due to reasonable
cause, petitioner’s have not shown reasonable cause here. The
“Turbo Tax” program depends on the entry of correct information.
Petitioners certainly knew that they were deducting personal
expenses when they entered items such as routine meals,
clothing, insurance, etc. Respondent’s determinations are
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect respondent’s concessions at trial,
Decision will be entered
under Rule 155.
6
Respondent has met his burden of production with respect
to the penalties, sec. 7491(c), and petitioners bear the burden
of proof, Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).