T.C. Summary Opinion 2006-164
UNITED STATES TAX COURT
SAMUEL S. AND LAURA M. PINKNEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8761-05S. Filed October 16, 2006.
Samuel S. and Laura M. Pinkney, pro sese.
Alexander D. DeVitis, 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
Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
- 2 -
Respondent determined a $7,073 deficiency in petitioners’
2002 income tax and a $1,414.60 accuracy-related penalty pursuant
to section 6662(a). After concessions,1 the issues for decision
are: (1) Whether petitioners can deduct (a) $246 for charitable
cash contributions, (b) $24,510.89 of other expenses, (c) $55 of
bad debt expense, and (d) $3,506 for home office expense; and (2)
whether petitioners are liable for an accuracy-related penalty
under section 6662(a).
Some of the facts have been stipulated and are so found.
Petitioners Samuel Pinkney and Laura Pinkney are married and
resided in Los Angeles, California, at the time their petition
was filed. Petitioners have a son, Roderick Pinkney (Roderick),
who was approximately 41 years old during the year at issue. For
convenience, we combine our findings and discussion herein.
Unless otherwise indicated, all references to petitioner are to
Samuel Pinkney.
1
Respondent concedes deductions for $2,825 of charitable
cash contributions and $314.94 of other expenses. Petitioners
concede their gross income includes $1,063 of gambling winnings,
$14 of interest income from Fiscal Federal Credit Union, and $185
of gross receipts from Nuways, Inc. Petitioners also concede the
disallowance of deductions for $6,964.45 of medical and dental
expenses; $2,918 of charitable noncash contributions; $1,730 of
car and truck expenses; $4,149.72 of travel expense; $1,340.52 of
meals and entertainment expenses; and $2,135.16 of advertising
expense. Adjustments not addressed in this opinion are
computational.
- 3 -
Burden of Proof
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears
the burden of showing that the determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant
to section 7491(a), the burden of proof as to factual matters
shifts to the Commissioner under certain circumstances.
Petitioners have neither alleged that section 7491(a) applies nor
established their compliance with the requirements of section
7491(a)(2)(A) and (B) to substantiate items, maintain records,
and cooperate fully with respondent’s reasonable requests.
Petitioners therefore bear the burden of proof.
1. Petitioners’ Claimed Deductions
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving that he is entitled to any
deduction claimed. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). The taxpayer is required to
maintain records that are sufficient to enable the Commissioner
to determine his correct tax liability. See sec. 6001; sec.
1.6001-1(a), Income Tax Regs.
A. Charitable Cash Contributions
In general, section 170(a) allows as a deduction any
charitable contribution made within the taxable year. A
charitable contribution means a contribution or gift to or for
- 4 -
the use of, inter alia, a State, possession of the United States,
or any political subdivision of the foregoing. Sec. 170(c)(1).
On their joint 2002 Federal income tax return, petitioners
deducted charitable cash contributions of $5,456. Respondent
initially allowed $2,385 of that amount and later conceded an
additional $2,825, leaving $246 in dispute. At trial,
petitioners introduced a copy of a check for $25 to the City of
Carson. The face of the check bears no indication that the $25
represents a contribution or gift, and petitioners offered no
testimony with respect to this item. Accordingly, respondent’s
determination is sustained to the extent of $246.
B. Other Expenses
Section 162(a) generally allows a deduction for ordinary and
necessary business expenses. To qualify as an allowable
deduction under section 162(a), an item must be: (1) Paid or
incurred during the taxable year; (2) for carrying on any trade
or business; (3) an expense; (4) a necessary expense; and (5) an
ordinary expense. Commissioner v. Lincoln Sav. & Loan
Association, 403 U.S. 345, 352 (1971); FMR Corp. & Subs. v.
Commissioner, 110 T.C. 402, 414 (1998).
Petitioners attached to their return a Schedule C, Profit or
Loss From Business, for a business described as real estate
consulting. Petitioners deducted $29,132 of other expenses on
Schedule C, consisting of items such as supplies expense, tax
- 5 -
preparation expense, and professional business expense.
Respondent initially allowed $4,306.17 of that amount and later
conceded an additional $314.94, leaving $24,510.89 in dispute.
At trial, petitioners introduced: (1) A receipt for $447
related to Getotis.com; (2) receipts totaling $888.75 from Pre-
Paid Legal Services, Inc.; (3) a Form 1099-MISC, Miscellaneous
Income, indicating that petitioner paid his son, Roderick, $5,460
of nonemployee compensation;2 (4) receipt stubs and checks drawn
on petitioner’s account to Roderick; and (5) a Form 1096, Annual
Summary and Transmittal of U.S. Information Returns, used to
transmit the Form 1099-MISC to the Internal Revenue Service.
With respect to the receipt for $447, it is not clear from
the document what type of expense this represents or how
Getotis.com relates to the real estate consulting business.
Petitioners offered no testimony on this matter, and, therefore,
they have failed to prove the $447 is an ordinary and necessary
business expense.
With respect to the receipts for $888.75 from Pre-Paid Legal
Services, Inc., legal fees generally are deductible if they are
sufficiently connected with the taxpayer’s trade or business.
See, e.g., Kenton v. Commissioner, T.C. Memo. 2006-13.
2
Petitioners did not report any amount as wage expense on
their Schedule C. It appears that petitioners instead reported
the alleged payments to their son as a component of other
expenses.
- 6 -
Petitioners, however, offered no testimony or other evidence to
demonstrate that the $888.75 was a deductible legal expense or
otherwise constituted an ordinary and necessary business expense.
Accordingly, petitioners are not entitled to a deduction for this
amount.
With respect to the purported payments to Roderick,
compensation is deductible as a trade or business expense only if
it is (1) reasonable in amount, (2) based on services actually
rendered, and (3) paid or incurred. See O’Connor v.
Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax
Regs. When the compensation is paid to a family member, the
Court carefully scrutinizes the transaction. Denman v.
Commissioner, 48 T.C. 439, 450 (1967); Hamdi v. Commissioner,
T.C. Memo. 1993-38, affd. without published opinion 23 F.3d 407
(6th Cir. 1994). In deciding whether payments to a family member
are deductible, we examine all the facts and circumstances.
Eller v. Commissioner, 77 T.C. 934, 962 (1981). Facts that
militate against the deductibility of such payments include
failing to maintain adequate records of the family member’s
hours, duties, and earnings, and failing to file appropriate
information returns. See Haeder v. Commissioner, T.C. Memo.
2001-7; Martens v. Commissioner, T.C. Memo. 1990-42, affd.
without published opinion 934 F.2d 319 (4th Cir. 1991); O’Connor
v. Commissioner, supra.
- 7 -
Petitioner testified that Roderick performed a number of
tasks for him in 2002, such as recruiting clients, setting up
meetings, and making presentations. Petitioner typically paid
Roderick in cash, although Roderick sometimes received payment by
check. Petitioner testified that he recorded the payments in a
notebook, which was not made part of the record. Petitioner and
Roderick later created receipts to correspond to the payments,
including receipts created at the end of 2002. The receipts were
made on preprinted, numbered forms. Some of the receipts were
not written in chronological order. For example, receipt No.
804201 is dated April 30, 2002, while receipt No. 804202 is dated
January 14, 2002.
Petitioner filed a Form 1099-MISC for Roderick, as well as a
Form 1096. However, both the Form 1099-MISC and the Form 1096
were filed late. Roderick did not report the $5,460 as income.
Petitioner contends Roderick was not required to file a 2002 tax
return because he had little or no additional income that year.
Respondent introduced evidence, however, indicating that Roderick
earned $8,136 of wage income from United Airlines Inc., $675 of
gambling winnings, $8,541 of unemployment benefits, and $295 of
nonemployee compensation from Nuways, Inc.
Examining all the facts and circumstances, we conclude that
petitioners cannot deduct the $5,460 as a trade or business
expense. The receipts introduced to substantiate the payments to
- 8 -
Roderick are of doubtful accuracy. To the extent such payments
were made, petitioner did not keep a written log of Roderick’s
hours or duties, nor did he explain how he determined Roderick’s
compensation. As a result, it is not clear whether the payments
represent reasonable compensation for the services, if any, that
Roderick performed. Roderick’s failure to report the $5,460
casts further doubt on the deductibility of the payments, as does
petitioner’s failure to timely file information returns. See
Haeder v. Commissioner, supra; Martens v. Commissioner, supra.
Accordingly, petitioners have failed to meet their burden of
proof, and respondent’s determination is sustained to the extent
of $24,510.89.
C. Bad Debt Expense
In general, section 166(a)(1) allows as a deduction any debt
which becomes worthless within the taxable year. Business debts
may be deducted against ordinary income to the extent that such
debts become wholly or partially worthless during the year.
Nonbusiness debts also may be deducted, but only in the same
manner as short-term capital losses, and only if the debts are
wholly worthless in the year claimed. Sec. 166(d); sec.
1.166-5(a)(2), Income Tax Regs. Section 166(d)(2) provides
generally that a “nonbusiness debt” means a debt other than a
debt created or acquired in connection with a trade or business
- 9 -
of the taxpayer or a debt the loss from the worthlessness of
which is incurred in the taxpayer’s trade or business.
Petitioners did not claim a deduction for bad debt expense
on their return. Shortly before trial, however, petitioners
asserted they were entitled to a $55 deduction for bad debt
expense incurred in connection with a trade or business.
Petitioners introduced a check for $55 to Phillip Peterson. In
the memo section of the check is written “Loan”. Even if we
assume that the $55 represents a loan made in connection with a
trade or business, there is no evidence that the debt became
wholly or partially worthless within the taxable year 2002.
Accordingly, petitioners are not entitled to a deduction.
D. Home Office Expense
Section 280A(c)(1) permits the deduction of expenses
allocable to a portion of a dwelling unit that is used
exclusively and on a regular basis as either (1) the principal
place of business for the taxpayer’s trade or business, or (2) a
place of business that is used by clients or customers in meeting
or dealing with the taxpayer in the normal course of the
taxpayer’s trade or business. The deduction cannot exceed the
gross income derived from the business use of the residence over
the sum of certain deductions allocable to such income. Sec.
280A(c)(5); Cunningham v. Commissioner, T.C. Memo. 1996-141,
affd. without published opinion 110 F.3d 59 (4th Cir. 1997).
- 10 -
Petitioners attached to their return a Form 8829, Expenses
for Business Use of Your Home, but did not claim a deduction for
home office expense on Schedule C. Shortly before trial,
petitioners asserted they were entitled to deduct $3,506 of home
office expense. Petitioners offered no evidence, however, that
any portion of their home meets the requirements of section
280A(c)(1). Accordingly, they are not entitled to a deduction.
2. Accuracy-Related Penalty Under Section 6662(a)
Section 6662(a) provides that a taxpayer may be liable for a
penalty of 20 percent of the portion of an underpayment of tax
attributable to negligence or disregard of rules or regulations.
Sec. 6662(a) and (b)(1). Negligence includes any failure by the
taxpayer to keep adequate books and records or to substantiate
items properly. Sec. 1.6662-3(b)(2), Income Tax Regs. Disregard
of rules or regulations includes any careless, reckless, or
intentional disregard. Sec. 1.6662-3(b)(1), Income Tax Regs. An
exception to the section 6662(a) penalty applies when the
taxpayer demonstrates (1) there was reasonable cause for the
underpayment, and (2) the taxpayer acted in good faith with
respect to the underpayment. Sec. 6664(c).
Respondent determined a $1,414.60 penalty against
petitioners pursuant to section 6662(a). Under section 7491(c),
the Commissioner bears the burden of production with respect to
the accuracy-related penalty. To meet this burden, the
Commissioner must come forward with sufficient evidence
indicating that it is appropriate to impose the penalty. Higbee
- 11 -
v. Commissioner, 116 T.C. 438, 446 (2001). Under Rule 34(b),
however, the taxpayer is required to assign error in the petition
to each and every error alleged to have been committed by the
Commissioner, including issues with respect to which the
Commissioner bears the burden of proof. Any issue not raised in
the assignments of error is deemed to be conceded. Id.; see also
Swain v. Commissioner, 118 T.C. 358, 363-364 (2002).
Petitioners did not assign error to the determination of the
penalty in their petition. Nor did they dispute the
determination at trial. Accordingly, the penalty is deemed to be
conceded. See Rule 34(b); Swain v. Commissioner, supra. Even if
petitioners had challenged the penalty, petitioners failed to
keep adequate books or records or to properly substantiate the
disallowed expense deductions. See sec. 1.6662-3(b)(1), Income
Tax Regs. Petitioners introduced no evidence to indicate their
failure was due to reasonable cause or good faith. See sec.
6664(c). Accordingly, respondent’s determination is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.