T.C. Memo. 2006-58
UNITED STATES TAX COURT
KAREN V. HOUGH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6686-04. Filed March 28, 2006.
Karen V. Hough, pro se.
Francis C. Mucciolo and Lorianne D. Masano, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in, addition to, and penalties on petitioner’s
Federal income tax:
Addition to Tax Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
1999 $19,153 $2,060.50 $3,830.60
2000 81,696 –- 16,339.20
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Unless otherwise indicated, all 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.
At trial, petitioner stated that she was contesting only
some of the business expense deductions respondent disallowed for
1999 and 2000. At trial, petitioner did not dispute the amounts
of unreported gross income, the self-employment tax, the addition
to tax, or the penalties determined by respondent. Although
ordered to do so, petitioner did not file any briefs.
Accordingly, petitioner has abandoned all issues other than
whether she substantiated business expenses in excess of the
amounts allowed or conceded by respondent for 1999 and 2000.1
Petzoldt v. Commissioner, 92 T.C. 661, 683 (1989); Money v.
Commissioner, 89 T.C. 46, 48 (1987); cf. Funk v. Commissioner,
123 T.C. 213 (2004); Swain v. Commissioner, 118 T.C. 358 (2002).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time she filed the
petition, petitioner resided in Largo, Florida.
1
We note that on brief respondent also conceded $612 of
unreported income for 2000. This concession will be accounted
for in the Rule 155 computation.
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During 1999 and 2000, petitioner operated as a sole
proprietorship a nursing business. The nursing business
consisted of working as an expert witness (medical legal
consulting) and as a nurse practitioner.
Petitioner reported her nursing business expenses on
Schedule C, Profit or Loss From Business, of her 1999 and 2000
tax returns (nursing business expenses). Respondent issued to
petitioner a notice of deficiency for 1999 and 2000 that
disallowed some of the nursing business expenses in part and
other nursing business expenses in full. Petitioner filed a
petition challenging the disallowance of her nursing business
expenses.
OPINION
Petitioner has neither claimed nor shown that she satisfied
the requirements of section 7491(a) to shift the burden of proof
to respondent with regard to any factual issue. Accordingly,
petitioner bears the burden of proof. Rule 142(a). Deductions
are a matter of legislative grace; petitioner has the burden of
showing that she is entitled to any deduction claimed. Id.; New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Petitioner relies on her own testimony to substantiate the
nursing business expenses. The Court is not required to accept
petitioner’s unsubstantiated testimony. See Wood v.
Commissioner, 338 F.2d 602, 605 (9th Cir. 1964), affg. 41 T.C.
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593 (1964). We found petitioner’s testimony to be general,
vague, conclusory, and/or questionable in certain material
respects. On the record, we repeatedly noted petitioner’s lack
of credibility and veracity. Under the circumstances presented
here, we are not required to, and generally do not, rely on
petitioner’s testimony to sustain her burden of establishing
error in respondent’s determinations. See Lerch v. Commissioner,
877 F.2d 624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295;
Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971),
affg. per curiam T.C. Memo. 1969-159; Tokarski v. Commissioner,
87 T.C. 74, 77 (1986).
When taxpayers establish that they have incurred deductible
expenses but are unable to substantiate the exact amounts, we can
estimate the deductible amount, but only if the taxpayers present
sufficient evidence to establish a rational basis for making the
estimate. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
In estimating the amount allowable, we bear heavily upon
taxpayers whose inexactitude is of their own making. See
Cohan v. Commissioner, supra at 544. We may not use the Cohan
doctrine, however, to estimate expenses covered by section
274(d). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968),
affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
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There must be sufficient evidence in the record, however, to
permit us to conclude that a deductible expense was paid or
incurred. Williams v. United States, 245 F.2d 559, 560 (5th Cir.
1957).
One “contractor”,2 Mandy Babyak, who worked for petitioner’s
nursing business in 2000 testified regarding petitioner’s nursing
business expenses. We found Ms. Babyak to be credible. We shall
rely on Ms. Babyak’s testimony to estimate petitioner’s nursing
business expenses under the Cohan doctrine.
1. Contractor Expenses
Petitioner claimed $23,100 in expenses for subcontractors
for 1999. For 1999, respondent allowed $575 in the notice of
deficiency and conceded an additional $8,550.77 on brief for a
total of $9,125.77. This $9,125.77 represents checks paid to
Carol Blank, Robert Shearer, and Kim Atkins. Petitioner has
failed to substantiate that any additional amounts were paid to
contractors in 1999. Accordingly, respondent’s determination, as
modified by his concession, is sustained.
Petitioner claimed $49,836 in expenses for subcontractors
for 2000. For 2000, respondent conceded on brief $58,528 in
contractor expenses. This concession represents amounts paid by
2
We use the term “contractor” for convenience only. We
make no findings whether the people who worked for petitioner’s
nursing business were independent contractors or employees.
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checks to Carol Blank, Robert Shearer, Kim Atkins, Harold
Stratton, and Natalie Stephens.
Ms. Babyak credibly testified that she was a contractor of
petitioner’s nursing business for 2000. Ms. Babyak testified
that she started working for petitioner’s nursing business in the
middle (summer) of 2000, she was paid $15 per hour, and earned
approximately $600 per week, but this amount varied and
occasionally it was less. On the basis of the record, we
approximate that petitioner paid Ms. Babyak $9,000 in 2000, and
petitioner is entitled to deduct this amount in addition to the
amount respondent conceded for 2000. Petitioner has failed to
substantiate that any additional amounts were paid to contractors
in 2000.
2. Insurance
Petitioner claimed $6,424 and $1,956 in expenses for
insurance for 1999 and 2000, respectively. Respondent disallowed
these expenses in full.
Ms. Babyak credibly testified that for 2000 petitioner paid
$1,200 for medical malpractice insurance and $1,500 for office
insurance. On the basis of the record, we shall allow these
amounts for each of the years 1999 and 2000. Petitioner has
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failed to substantiate that any additional amounts were paid for
insurance for 1999 or 2000.3
3. Dues and Memberships
Petitioner claimed $2,204 and $2,504 in expenses for dues
and memberships for 1999 and 2000, respectively. Respondent
allowed $800 for 1999 and disallowed this expense in full for
2000.
Ms. Babyak credibly testified that in 2000 petitioner paid
approximately $300 each for dues and memberships to approximately
four to five nursing societies/agencies. On the basis of the
record, we approximate that petitioner paid $1,200 in 2000 for
dues and memberships and is entitled to deduct this amount for
2000. Petitioner has failed to substantiate that any additional
amounts were paid for dues and memberships for 1999 or 2000.
4. Fed Ex and P.O. Box (Postage and Delivery Expenses)
Petitioner claimed $7,204 for postage for 1999, $15,023 in
delivery and freight expenses for 2000, and $360 for P.O. box
3
Petitioner claimed she paid $1,800 for flood insurance.
Ms. Babyak testified that petitioner paid flood insurance, but
she did not testify as to the amount paid. We do not rely on
petitioner’s testimony to establish the amount paid for flood
insurance. As there is insufficient credible evidence to
establish a rational basis for making an estimate, we shall not
allow petitioner a deduction for flood insurance. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). Additionally,
petitioner claimed she paid disability insurance. We do not
accept petitioner’s unsubstantiated and uncorroborated testimony.
See Wood v. Commissioner, 338 F.2d 602, 605 (9th Cir. 1964),
affg. 41 T.C. 593 (1964).
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expenses for each of the years 1999 and 2000. Respondent allowed
$1,014 and $1,731 for 1999 and 2000, respectively. This amount
included $36 for a P.O. box for both years.
Petitioner has failed to substantiate that any additional
amounts were paid for a P.O. box for 1999 or 2000. Accordingly,
respondent’s determination on this issue is sustained.
Ms. Babyak credibly testified that while she worked for
petitioner Fed Ex picked up packages from petitioner’s nursing
business approximately two times per week, but petitioner tried
to limit the number of pickups. Ms. Babyak estimated the cost of
each pickup to be between $75 and $200. On the basis of the
record, we approximate that in 2000 petitioner paid $7,800 to Fed
Ex. Accordingly, in addition to the $1,695 in delivery and
freight expense allowed by respondent for 2000 ($1,731 minus $36
for the P.O. box), petitioner is entitled to deduct an additional
delivery and freight expense of $6,105 for 2000. We believe that
petitioner likely paid a similar amount to Fed Ex in 1999.
Accordingly, petitioner is entitled to deduct her total claimed
postage expense, $7,204, for 1999. Petitioner has failed to
substantiate that any additional amounts were paid for postage or
delivery expenses for 1999 or 2000.
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5. Books
Petitioner claimed zero for books on her 2000 return.
Respondent, however, allowed petitioner at audit $1,870 for book
expenses for 2000. Ms. Babyak testified that petitioner bought
books for Ms. Babyak in 2000, but there is no evidence regarding
the cost of the books. As there is insufficient evidence to
establish a rational basis for making an estimate, petitioner is
not entitled to a deduction greater than that allowed by
respondent for books for 2000. See Cohan v. Commissioner, 39
F.2d at 543-544; Vanicek v. Commissioner, 85 T.C. at 742-743.
6. Supplies
Petitioner claimed $1,359 and $20,997 for supplies for 1999
and 2000, respectively. Respondent allowed $1,724.98 and $2,179
for supplies for 1999 and 2000, respectively. Although Ms.
Babyak testified that petitioner bought various supplies in 2000,
there is no evidence regarding the cost of the supplies or that
the amount spent exceeds the amount allowed by respondent. As
there is insufficient evidence to establish a rational basis for
making an estimate, we shall not allow petitioner a deduction for
these items greater than that allowed by respondent for supplies
for 1999 and 2000. See Cohan v. Commissioner, supra at 543-544;
Vanicek v. Commissioner, supra at 742-743.
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7. Pest Control and Lawn Service
Petitioner claimed $770 for pest control for 2000 and at
trial claimed she also paid for lawn service. Respondent
disallowed the amount claimed for pest control in full. Although
Ms. Babyak testified that petitioner paid for pest control and
lawn service in 2000, there is no evidence regarding the cost of
the pest control and lawn service. As there is insufficient
evidence to establish a rational basis for making an estimate, we
shall not allow petitioner a deduction for these items. See
Cohan v. Commissioner, supra at 543-544; Vanicek v. Commissioner,
supra at 742-743.
8. Advertising/Marketing
Petitioner claimed $6,234 and $3,063 in expenses for
advertising for 1999 and 2000, respectively. Respondent allowed
$1,560.60 and $5,580.91 for 1999 and 2000, respectively.
Respondent conceded an additional $3,395 for 2000 (for a total of
$8,975.91 for 2000).
Ms. Babyak testified that petitioner mailed marketing
packages during 2000. Ms. Babyak’s testimony, however, did not
establish the cost of the marketing packages or how many were
mailed. We do not accept petitioner’s unsubstantiated and
uncorroborated testimony as to the cost of these marketing
packages or the amount mailed. See Wood v. Commissioner, 338
F.2d at 605. It is unclear whether petitioner spent amounts on
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advertising in excess of the amounts already allowed or conceded
by respondent. As there is insufficient credible evidence to
establish a rational basis for making an estimate, we shall not
allow petitioner a deduction for this item greater than that
allowed or conceded by respondent. See Cohan v. Commissioner,
supra at 543-544; Vanicek v. Commissioner, supra at 742-743.
9. Section 274 Expenses (Automobile and Travel)
In addition to satisfying the criteria for deductibility
under section 162, certain categories of expenses must also
satisfy the strict substantiation requirements of section 274(d)
in order for a deduction to be allowed. The expenses to which
section 274(d) applies include, among other things, listed
property (e.g., automobile expenses and cellular telephones) and
travel expenses (including meals and lodging while away from
home). Secs. 274(d)(4), 280F(d)(4)(A)(i), (ii), (v). We may not
use the Cohan doctrine to estimate expenses covered by section
274(d). See Sanford v. Commissioner, 50 T.C. at 827; sec. 1.274-
5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985).
To substantiate a deduction attributable to travel and
listed property, a taxpayer must maintain adequate records or
present corroborative evidence to show the following: (1) The
amount of the expense; (2) the time and place of use of the
listed property; and (3) the business purpose of the use. Sec.
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1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). Petitioner failed to do so. Accordingly,
respondent’s determination regarding expenses subject to section
274, as modified by his concessions, is sustained.
10. Computer, Fax, and Printer
At trial, petitioner tried to establish she is entitled to
deduct as expenses computers, faxes, and printers. Section
274(d) applies to, among other things, computer and peripheral
equipment; however, there is an exception for such equipment used
exclusively at a regular business establishment and owned or
leased by the person operating such establishment. Secs.
274(d)(4), 280F(d)(4)(A)(iv), (B).
Regardless of whether section 274 applies or not (some of
the computers and peripheral equipment were at petitioner’s
nursing business office, and some were at the homes of
petitioner’s contractors), the evidence does not establish when
the computers, faxes, and printers were purchased or how much
they cost. As there is insufficient evidence to establish these
items were purchased during the years in issue, or if they were
so purchased a rational basis for making an estimate, we shall
not allow petitioner a deduction for these items. See Cohan v.
Commissioner, supra at 543-544; Vanicek v. Commissioner, supra at
742-743; see also secs. 274(d), 280F(d)(4)(A)(iv), (B).
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11. Expenses Allowed or Conceded by Respondent
Respondent has allowed or conceded other items, such as
telephone expenses and legal expenses, up to the amounts of
checks or receipts previously provided by petitioner. As there
is insufficient evidence to establish a rational basis for making
an estimate of a greater amount, we shall not allow petitioner a
deduction for these items greater than that allowed or conceded
by respondent. See Cohan v. Commissioner, supra at 543-544;
Vanicek v. Commissioner, supra at 742-743.
To reflect the foregoing,
Decision will be entered
under Rule 155.