T.C. Summary Opinion 2006-174
UNITED STATES TAX COURT
CURTIS MUHAMMAD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14743-05S. Filed October 24, 2006.
Curtis Muhammad, pro se.
Harry J. Negro, for respondent.
RUWE, Judge: This case was heard pursuant to section 74631
in effect when 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.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the year in issue. Rule
references are to the Tax Court Rules of Practice and Procedure.
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Respondent determined a deficiency in petitioner’s 2002
Federal income tax of $4,279. After concessions by the parties,2
the issues for decision are whether petitioner can deduct: (1)
$6,500 on Schedule A, Itemized Deductions, for cash charitable
contributions; (2) $1,800 on Schedule C, Profit or Loss From
Business, for legal and professional expenses; (3) $2,400 on
Schedule C for rental expenses; and (4) $2,155 on Schedule C for
business use of the home.
Some facts have been stipulated and are so found. The
stipulation of facts and the attached exhibits are incorporated
by this reference. When the petition was filed, petitioner
resided in West Chester, Pennsylvania.
Petitioner earned a biomedical engineering degree from a
community college in, or about, 1990 and also graduated from
Lyons Tech in 1978. While he served in the Air Force, petitioner
worked as an accountant. During the taxable year 2002,
petitioner worked full time for SEPTA and also worked as a
financial adviser for Waddell & Reed.
Petitioner timely filed his 2002 Federal income tax return
via electronic filing. Petitioner’s return for 2002 was prepared
2
The parties stipulated that the proper mortgage interest
and real estate taxes on Schedule A, Itemized Deductions, are
$5,143 and $1,178, respectively, and that the proper mortgage
interest and real estate taxes on Schedule E, Supplemental Income
and Loss, are $4,494 and $1,254, respectively. At trial,
petitioner also conceded that he is not entitled to a deduction
for a $500 noncash charitable contribution.
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by Chalamar Muhammad, petitioner’s wife, who worked for Business
Management Solutions, Inc. (BMS). Chester Muhammad, Chalamar
Muhammad’s father and petitioner’s father-in-law, owned BMS in
2002. Petitioner claimed Chalamar Muhammad as a dependent on his
2002 Federal income tax return.3 Respondent issued petitioner a
notice of deficiency.
Discussion
As a general rule, the Commissioner’s determinations set
forth in a notice of deficiency are presumed correct, and the
taxpayer bears the burden of proving that these 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 issues may shift to the Commissioner where the taxpayer
introduces credible evidence and complies with substantiation
requirements, maintains records, and cooperates fully with
reasonable requests for witnesses, documents, and other
information. Petitioner has not met the requirements of section
7491(a) because he has not met the substantiation requirements or
introduced credible evidence regarding the deductions at issue.
3
Petitioner reported that his filing status in 2002 was
head of household. Respondent did not change petitioner’s status
in the notice of deficiency. Nevertheless, petitioner testified
that he and Chalamar Muhammad were married in 2002, while
Chalamar Muhammad testified that they were not married. Chalamar
Muhammad also testified that she could not remember the date when
she and petitioner married.
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Section 6001 and section 1.6001-1(a), Income Tax Regs.,
require that any person subject to tax or any person required to
file a return of information with respect to income, shall keep
such permanent books of account or records, as are sufficient to
establish the amount of gross income, deductions, credits, or
other matter required to be shown by such person in any return of
such tax or information. Deductions are strictly a matter of
legislative grace, and the taxpayer bears the burden of proving
entitlement to the claimed deduction. Rule 142(a); INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).
A. Charitable Contribution Deductions Claimed on Schedule A
Respondent disallowed a deduction of $6,500 that petitioner
claimed as charitable contributions. Respondent argues that
petitioner failed to retain adequate records and that the
documents provided by petitioner to support cash contributions
should be disregarded because they do not constitute credible
evidence.
Section 170(a) allows as a deduction any charitable
contribution the payment of which is made within the taxable
year. Deductions for charitable contributions are allowable only
if verified under regulations prescribed by the Secretary. Sec.
170(a)(1). In general, the regulations require a taxpayer to
maintain for each contribution one of the following: (1) A
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canceled check; (2) a receipt from the donee;4 or, in the absence
of a check or receipt, (3) other reliable written records. Sec.
1.170A-13(a)(1), Income Tax Regs. Section 1.170A-13(a)(2)(i),
Income Tax Regs., provides special rules to determine the
reliability of records on the basis of all the facts and
circumstances of the particular case and further provides factors
to consider in making this determination, including: (1) Whether
the writing that evidences the contribution was written
contemporaneously and (2) whether the taxpayer keeps regular
records of the contributions.
Petitioner had a checking account in 2002; however, because
he claimed to have made only cash charitable contributions,
petitioner provided no canceled checks to substantiate his
claimed deductions. Petitioner testified that the total cash
charitable contributions he claimed were based on receipts he
received from his mosque, but that he could not provide the
receipts because he shredded them.
Petitioner produced two documents to substantiate his
charitable contributions. The first is the computer-generated
list of charitable contributions prepared by BMS. The computer-
generated document lists weekly contributions of $130 to Muhammad
Mosque No. 12 (the mosque) from January 8 to December 27, 2002
4
A receipt is required to contain the name of the donee,
the date of the contribution, and the amount of the contribution.
Sec. 1.170A-13(a)(1), Income Tax Regs.
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($6,500 total). At trial, petitioner testified that this
document was inaccurate.5 The second is a two-page undated
document purportedly from the mosque consisting of a cover letter
and a list of total contributions to a variety of mosque funds.
At the bottom of the first page of the document there is an
address line but white correction fluid has been applied to
obscure a telephone number on that line. The contributions,
totaling $6,500, are listed on the second page of the document as
follows:
SAVIOURS’ DAY (FEB) $2,200.00
NO.2 POOR CHARITY $1,000.00
OBLIGATORY CHARITY $1,300.00
MOSQUE NO 12 BLDG FUND $905.00
LOCAL CHARITY $565.00
3 YEAR ECONOMIC PLAN $530.00
This document does not show the dates or amounts of the
individual contributions. Petitioner testified that he received
the latter document on May 28, 2006, nearly 4 years after the
alleged charitable contributions were made, and only provided it
5
Petitioner had previously submitted another erroneous
document to respondent. Although petitioner eventually conceded
that he was not entitled to a noncash charitable contribution
deduction, he originally submitted to respondent a letter that
was allegedly from the Salvation Army. The letter is addressed
to petitioner and thanks him for donations of furniture and
clothing. Respondent obtained from a supervisor in the Vehicle
Donation Program of the Salvation Army a certification of
business records declaring that the letter submitted by
petitioner purporting to be from the Salvation Army was not
genuine. The certification states that the division of the
Salvation Army from which petitioner’s letter appears to have
been sent does not handle furniture and clothing, but only
vehicle donations.
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to respondent on June 5, 2006, the day before trial. The first
page indicates that the document was issued by “Sister LaVerne
Muhammad, Delaware Valley Regional Secretary.” However,
petitioner testified that LaVerne Muhammad is not the current
Delaware Valley Regional Secretary. Petitioner did not provide a
statement of charitable contributions from the current regional
secretary or any current recordkeeper at the mosque.
Applying the previously mentioned standards for
substantiating deductions for contributions, we find that
petitioner failed to provide reliable evidence of his purported
contributions and failed to meet his burden of proof. We hold
that respondent’s determination disallowing petitioner’s claimed
charitable contribution deduction is sustained.
B. Business Expense Deductions Claimed on Schedule C
Section 162(a) permits a taxpayer to deduct expenses paid or
incurred during the taxable year in carrying on the taxpayer’s
trade or business and requires a taxpayer to prove that the
expenses deducted were: (1) Paid or incurred during the taxable
year; (2) incurred to carry on the taxpayer’s trade or business;
and (3) ordinary and necessary expenditures of the business. See
sec. 162(a); Commissioner v. Lincoln Sav. & Loan Association, 403
U.S. 345, 352 (1971).
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1. Legal and Professional Expenses
Respondent argues that petitioner failed to substantiate his
legal and professional expenses because the receipts submitted by
petitioner are untrustworthy.
Petitioner produced four sales receipts from BMS, the
company that employed petitioner’s wife and that was owned by his
father-in-law, to substantiate his legal and professional expense
deductions.
Although he had a checking account, each BMS receipt
indicates a $450 cash payment.
Petitioner testified that the charges on the receipts
represented costs incurred while Chester Muhammad helped him set
up a limited liability company for his rental real estate
activity. The receipts indicate that they were for services
including monthly accounting, bookkeeping, and payroll.
Petitioner testified that he hired an employee, whom he paid
sometimes with both a check and cash and sometimes just with
cash. Petitioner issued neither a Form W-2, Wage and Tax
Statement, nor a Form 1099 and claimed no deduction for the
employee’s wages. Petitioner testified that he did not deduct
his employee’s wages because he did not want the employee to have
to pay taxes on them. Petitioner’s testimony indicates that
although the receipts he received from BMS represent charges for
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payroll services, his payments to his only purported employee
would not necessitate such services.
Other than the BMS receipts, petitioner failed to produce
any substantiation that he actually made payments to his father-
in-law or BMS or that the purported payments actually related to
a trade or business. Given the relationship between petitioner
and the people who operated BMS, the fact that the payments were
allegedly made in cash, and the fact that the receipts indicate
that they were for payroll work that would seem unnecessary, we
find that petitioner has failed to meet his burden of proof.
Respondent’s determination disallowing petitioner’s claimed legal
and professional expense deductions is sustained.
2. Rental Expenses
Respondent argues that petitioner failed to substantiate the
$2,400 rental equipment expense deduction because the invoices
submitted by petitioner lack credibility and are generally
untrustworthy. To substantiate his rental expenses, petitioner
submitted five invoices from CB Associates indicating that he
leased a laptop computer for $3,600 and a printer for $2,400 from
January 7 to December 7, 2002, at monthly rates of $300 and $200
for the computer and printer, respectively.6 Craig Brown,
6
The invoice dates and amounts purportedly paid in 2002 are
as follows: January 7-$500; April 7-$1,500; August 7-$2,000;
November 7-$1,500; December 7-$500. The return address for CB
Associates on the invoices was incorrect because it had the wrong
(continued...)
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petitioner’s brother-in-law, owns CB Associates.7 Petitioner
claimed a deduction for the rental expense of the printer, but
not the computer, on his return. Although the total lease price
referenced in the invoices is based on a 12-month lease term, the
term referenced on the invoices is for only the 11 months between
January 7 and December 7, 2002.
Petitioner had a checking account in 2002 but purports to
have paid $6,000 using multiple money orders for the lease of the
computer and printer from CB Associates. Petitioner did not
produce any money order receipts or a lease agreement to
substantiate the expense he claimed on his return for the lease
of the printer. Petitioner testified that, after 11 months, he
returned the computer and printer via mail to his brother-in-law
in Houston, Texas.
Bearing in mind the questionable nature of several other
documents that petitioner produced in this case, invoices
purporting to be from a family member at an address that does not
exist are insufficient to substantiate petitioner’s rental
expense deductions. We find that petitioner has failed to meet
his burden of proof and hold that respondent’s determination
6
(...continued)
ZIP Code.
7
Petitioner initially testified that Craig Brown was his
father’s son, but he refers to him as his brother-in-law
throughout the rest of his testimony.
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disallowing petitioner’s claimed rental expense deduction is
sustained.
3. Business Use of Home
Respondent argues that petitioner is not eligible for a
business use of home deduction because his residence was not his
principal place of trade or business. If the Court decides that
petitioner’s residence was his principal place of trade or
business, respondent argues that the deductions petitioner
claimed in relation to the business use of home, other than
mortgage interest and real estate taxes, should be disallowed for
a lack of substantiation. Mortgage interest and real estate
taxes on petitioner’s home have already been allowed.8
Section 280A(a) provides as a general rule that no deduction
otherwise allowable to an individual “shall be allowed with
respect to the use of a dwelling unit which is used by the
taxpayer during the taxable year as a residence.” The seemingly
prohibitory rule of section 280A(a) is ameliorated by section
280A(c), which provides exceptions for certain business uses. As
8
Petitioner submitted to respondent a Form 1098, Mortgage
Interest Statement (former Form 1098), in support of mortgage
interest expenses of $5,142.69 and real estate taxes of $1,178.11
for petitioner’s personal residence. Petitioner also produced an
identical Form 1098 (latter Form 1098), except for the fact that
the amount for real estate taxes was changed from $1,178.11 to
$2,299.11, an amount which petitioner originally included on
Schedule A of his return. The parties stipulated that the former
Form 1098 was correct and the latter Form 1098 was incorrect
because it indicated an improper amount for real estate taxes.
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relevant herein, section 280A(c)(1) provides that the general
rule of section 280A(a) is not applicable to any item to the
extent it is allocable to a portion of the dwelling unit which is
exclusively used on a regular basis as the principal place of
business for any trade or business of the taxpayer, or as a place
of business which is used by patients, clients, or customers in
meeting or dealing with the taxpayer in the normal course of his
trade or business. Expenses deducted as a business use of home
must be deductible under section 162 or some other Code section.
See sec. 280A(a).
Petitioner testified that he used his basement as his home
office. The evidence and testimony available do not indicate
that petitioner met with clients or customers in his basement.
Therefore, petitioner’s deductions for business use of home can
only be sustained if he used the basement on a regular basis as
the principal place of business for a trade or business.
Petitioner argues that an income statement, which lists
operating expenses and which he testified had been created by
BMS, was created from a log petitioner kept of his expenses and
was averaged over the year. Petitioner argues that this income
statement is sufficient to substantiate his business use of home
expenses. Petitioner testified that from January 2001 to
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September 2002, he was being trained as a financial adviser for
Waddell & Reed and worked out of an office in Langhorne,
Pennsylvania. After September 2002, petitioner was assigned to a
Waddell & Reed district office located in Philadelphia,
Pennsylvania, where petitioner had a desk from which to work.
Petitioner also testified that he received assistance from
Chester Muhammad in setting up a limited liability company for
his rental real estate, but petitioner failed to establish that
he actually operated this enterprise from his basement. In terms
of working in a business, petitioner refers mostly to his job as
a financial adviser for Waddell & Reed.
The evidence and testimony indicate that petitioner’s
principal place of business was the office of Waddell & Reed, in
Langhorne, Pennsylvania, until September 2002, and in
Philadelphia, Pennsylvania, for the rest of 2002. We find that
petitioner has failed to establish that his basement was his
principal place of business in 2002. Because petitioner has
failed to meet the requirements necessary to apply a section
280A(c)(1) exception to the general rule of section 280A(a), it
is unnecessary to examine whether petitioner substantiated the
expenses he deducted in relation to the purported business use of
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home. Respondent’s determination disallowing petitioner’s
claimed business use of home deduction is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.