T.C. Summary Opinion 2007-175
UNITED STATES TAX COURT
MALCOLM ELWOOD MCCLAIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10870-00S. Filed October 17, 2007.
Malcolm Elwood McClain, pro se.
Frederick J. Lockhart, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, all other section references
are to the Internal Revenue Code in effect for the years at
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issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Respondent determined deficiencies in petitioner’s Federal
income tax of $40,017 for 1994, $3,446 for 1995, and $12,959 for
1997. Respondent also determined additions to tax under:
Section 6651(a)(1) of $9,397.50 for 1994, $254.75 for 1995, and
$1,448.55 for 1997; section 6651(a)(2) of $869.13 for 1997; and
section 6654 of $175.09 for 1994 and $305.68 for 1997.
A substantial number of issues have been resolved and are
listed in the stipulation of settled issues filed on October 25,
2006. In addition to their mutual agreements, the parties have
made separate concessions: (1) Petitioner concedes that his
basis in 30.8760 shares of certain Federal Express Corp. stock
sold in 1994 is equal to one-half of the $2,154.34 gross
proceeds; (2) petitioner concedes all deductions for dependency
exemptions except those for his son, his daughter, and one Stacy
Brown; (3) respondent concedes the additions to tax under section
6654 for 1994 and 1997; and (4) respondent concedes the addition
to tax under section 6651(a)(2) for 1997.
The issues remaining for decision are whether petitioner:
(a) Is entitled to deductions for dependency exemptions for his
son and daughter for 1994, 1995, and 1997, and for one Stacy
Brown for 1994 and 1995; (b) is entitled to losses from various
activities reported on Schedules C, Profit or Loss From Business,
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for all years; and (c) is liable for the addition to tax under
section 6651(a)(1) for failure to file timely without reasonable
cause for all years under consideration.
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. At the time the
petition in this case was filed, petitioner resided in Colorado
Springs, Colorado.
The parties agree that petitioner did not provide respondent
with Federal income tax returns for 1994, 1995, and 1997 until
after the notice of deficiency was issued. Petitioner claimed on
the returns dependency exemption deductions for a number of
individuals, including his son, his daughter, and for 1994 and
1995, an individual named Stacy Brown. Petitioner’s son and
daughter were both over the age of 19 in 1994. Neither was a
full-time student during the years 1995 through 1997. Both of
his children filed tax returns for the years at issue claiming
personal exemptions for themselves.
In or around 1993, petitioner retired on disability from his
job in computer operations with Federal Express. Petitioner
bought 5 acres of land, originally zoned as agricultural but
subsequently rezoned as rural/residential. During the years
under consideration, petitioner lived on his property in a mobile
home, a 1976 Eaton Park double-wide.
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Schedule C Activities
Petitioner attached to his tax returns Schedules C, claiming
losses from five different activities: (1) Automobile restoration
for all 3 years, (2) “Board and Room Rental” for all 3 years, (3)
timber and firewood sales for 1994, (4) health food sales and
“resort” for 1994 and 1995, and (5) oil and gas for 1997.
Automobile Restoration
Petitioner bought several automobiles with the expectation
of restoring and selling them. After the rezoning of his real
estate, however, the county “raised a fuss” about the cars and
certain building materials he maintained on his property. As a
result, in 1994 or 1995 petitioner was forced to dispose of his
cars, machine tools, parts, trailers, and “a good part” of his
building materials.
Petitioner had an unrestored 1967 Dodge Dart and a 1952
Chevy pickup truck that he sold at auction. In 1994, he traded a
1979 Dodge “window van” for two electric motors, a compressor,
three “windows with aluminum frames”, and some machine tool
equipment. In that same year petitioner allowed an individual to
remove parts from three nonrunning vehicles in return for an
electric hammer drill before he sent the vehicles to the auto
wrecking yard. Another transaction in 1994 included the sale of
a Chevy Chevette for $25 plus sales tax of 75 cents.
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Board and Room Rental
Petitioner’s mobile home has three bedrooms. He also
converted an attached heated porch into a bedroom. Petitioner
allowed to stay with him individuals who were friends of his son
or daughter or who had previously stayed with him. Some were
minors. Sometimes as many as seven people lived with him,
including his son and daughter. There were sometimes two or
three persons to a bed. His guests were people “who had been in
some sort of misfortune or down and out with nowhere to go.” As
it turned out, many of petitioner’s guests were using drugs.
They did not, with a few exceptions, pay any rent or do any work
to compensate petitioner for their room and board.
Petitioner, on his Schedule C for board and room rental,
checked the box for “other” method of accounting and wrote in
“rent accrued”. Under petitioner’s “rent accrued” method, he
kept a running total of the amounts that he thought should have
been paid by each individual. In the case of Stacy Brown,
petitioner shows an “accrual” of $7,293.16 for 1994, but it
includes unpaid amounts from 1992 and 1993. The “accruals” do
not reflect amounts that may have been paid by work or cash
during the respective years. For 1994 and 1997, petitioner
claimed bad debt deductions for unpaid rent. Petitioner used a
method other than the accrual method for his expenses.
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Other Schedule C Activities
There were no sales of timber or firewood with respect to
petitioner’s timber and firewood sales activity for 1994, because
“the thing fell apart”. His “venture capital” health food and
resort enterprise “never got off the ground.” The only items in
petitioner’s possession to show his involvement in an oil and gas
venture were copies of two uncleared checks that he showed to
respondent’s counsel before trial.
Discussion
The Commissioner’s deficiency determinations are presumed
correct, and taxpayers generally have the burden of proving that
the determinations are incorrect. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Under certain
circumstances, however, section 7491(a) may shift the burden to
the Commissioner with respect to a factual issue affecting
liability for tax. Petitioner did not present evidence or
argument that he satisfied the requirements of section 7491(a),
and, therefore, the burden of proof does not shift to respondent.
Deductions for Dependency Exemptions
Petitioner argues that he is entitled to dependency
exemption deductions for his son and daughter for the years at
issue and for Stacy Brown for 1994 and 1995.
Section 151(c)(1) allows a taxpayer to claim an exemption
deduction for each dependent as defined in section 152 whose
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gross income is less than the exemption amount. A child of the
taxpayer is considered a “dependent” so long as the child has not
attained the age of 19 at the close of the calendar year in which
the taxable year of the taxpayer begins and more than half the
dependent’s support for the taxable year was received from the
taxpayer. Secs. 151(c)(1)(B), 152(a)(1). The age limit is
increased to 24 if the child was a student as defined by section
151(c)(4). Sec. 151(c)(1)(B).
Petitioner testified that both his children were over the
age of 19 in 1994. Neither was a full-time student as defined by
section 151(c)(4) during the years 1994 through 1997. Therefore,
neither qualifies as a dependent under section 151(c)(1)(B) for
any of the years at issue.
Petitioner claims Stacy Brown as a dependent for 1994 and
1995. Petitioner also claims her to have been a renter who owed
him for room and board for those same years. He claimed a bad
debt deduction for that “debt”. See discussion infra.
A dependent is defined as an individual over half of whose
support for the year was received from the taxpayer or is treated
as having been received from the taxpayer. Sec. 152(a). In
order for petitioner to establish that he provided more than half
of the support of Stacy Brown, he must first show by competent
evidence the total amounts of support she received from all
sources for the years at issue. See Blanco v. Commissioner, 56
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T.C. 512, 514 (1971). Petitioner has not provided evidence of
the total amount of support provided for Stacy Brown for either
year at issue, except for his own testimony. He testified that
he provided all her room and board and other support. The Court
is not required to accept petitioner’s self-serving testimony,
particularly in the absence of corroborating evidence. See
Geiger v. Commissioner, 440 F.2d 688, 689 (9th Cir. 1971), affg.
per curiam T.C. Memo. 1969-159; Urban Redev. Corp. v.
Commissioner, 294 F.2d 328, 332 (4th Cir. 1961), affg. 34 T.C.
845 (1960).
It is not necessary under section 152(a)(9) that an
individual be related to the taxpayer to qualify as his
dependent. However, in order for an unrelated individual to
qualify as a dependent under section 152(a)(9), such individual
must live with the taxpayer and be a member of the taxpayer’s
household throughout the entire taxable year of the taxpayer.
Trowbridge v. Commissioner, 268 F.2d 208, 209 (9th Cir. 1959),
affg. per curiam 30 T.C. 879 (1958); McMillan v. Commissioner, 31
T.C. 1143, 1145-1146 (1959); sec. 1.152-1(b), Income Tax Regs.
Petitioner offered no evidence that Stacy Brown was a member
of his household for the entire year of 1994 or 1995 except for
his own testimony.
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The Court finds that petitioner has not shown that he is
entitled to a dependency exemption deduction for Stacy Brown for
1994 or 1995.
Schedule C Activities
Petitioner provided to respondent, for the years under
consideration, Schedules C for five different activities that
petitioner claims were operated as businesses. Deductions are
allowed under section 162 for the ordinary and necessary expenses
of carrying on an activity that constitutes the taxpayer’s trade
or business. Deductions are allowed under section 212(1) and (2)
for expenses paid or incurred in connection with an activity
engaged in for the production or collection of income or for the
management, conservation, or maintenance of property held for the
production of income.
Petitioner, in order to show that he was engaged in a trade
or business, must show not only that his primary purpose for
engaging in the activity was for income or profit but also that
he engaged in the activity with “continuity and regularity”.
Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987).
With respect to either section, however, the taxpayer must
demonstrate a profit objective for the activity in order to
deduct associated expenses. See Jasionowski v. Commissioner, 66
T.C. 312, 320-322 (1976); sec. 1.183-2(a), Income Tax Regs. The
profit standards applicable for section 212 are the same as those
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used for section 162. See Agro Science Co. v. Commissioner, 934
F.2d 573, 576 (5th Cir. 1991), affg. T.C. Memo. 1989-687;
Antonides v. Commissioner, 893 F.2d 656, 659 (4th Cir. 1990),
affg. 91 T.C. 686 (1988); Allen v. Commissioner, 72 T.C. 28, 33
(1979); Rand v. Commissioner, 34 T.C. 1146, 1149 (1960).
Whether the required profit objective exists is to be
determined on the basis of all the facts and circumstances of
each case. See Hirsch v. Commissioner, 315 F.2d 731, 737 (9th
Cir. 1963), affg. T.C. Memo. 1961-256; Golanty v. Commissioner,
72 T.C. 411, 426 (1979), affd. without published opinion 647 F.2d
170 (9th Cir. 1981); sec. 1.183-2(a), Income Tax Regs. While a
reasonable expectation of profit is not required, the taxpayer’s
objective of making a profit must be bona fide. See Elliott v.
Commissioner, 84 T.C. 227, 236 (1985), affd. without published
opinion 782 F.2d 1027 (3d Cir. 1986). In making this factual
determination, the Court gives greater weight to objective
factors than to a taxpayer’s mere statement of intent. See
Indep. Elec. Supply, Inc. v. Commissioner, 781 F.2d 724, 726 (9th
Cir. 1986), affg. Lahr v. Commissioner, T.C. Memo. 1984-472;
Dreicer v. Commissioner, 78 T.C. 642, 645 (1982), affd. without
published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-
2(a), Income Tax Regs.
Section 1.183-2(b), Income Tax Regs., sets forth nine
nonexclusive factors that should be considered in determining
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whether a taxpayer is engaged in a venture with a profit
objective. They include: (1) The manner in which the taxpayer
carried on the activity; (2) the expertise of the taxpayer or his
advisers; (3) the time and effort expended by the taxpayer in
carrying on the activity; (4) the expectation that the assets
used in the activity may appreciate in value; (5) the success of
the taxpayer in carrying on other similar or dissimilar
activities; (6) the taxpayer’s history of income or loss with
respect to the activity; (7) the amount of occasional profits
that are earned; (8) the financial status of the taxpayer; and
(9) whether elements of personal pleasure or recreation are
involved.
No single factor is controlling, and the Court does not
reach its decision by merely counting the factors that support
each party’s position. See Dunn v. Commissioner, 70 T.C. 715,
720 (1978), affd. 615 F.2d 578 (2d Cir. 1980); sec. 1.183-2(b),
Income Tax Regs. Rather, the facts and circumstances of the case
are determinative. See Golanty v. Commissioner, supra at 426.
Automobile Restoration
The only evidence petitioner presented to establish that he
operated an automobile restoration activity was a couple of
receipts showing trades of vehicles for unrelated items and the
sale of unrestored vehicles. Petitioner also provided evidence
that he had advertised for sale a 1974 Toyota. It appears from
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his testimony that he was forced to dispose of his automobiles
and some equipment because the property where he lived was
rezoned by the county. It does not appear that petitioner ever
started his activity of restoring automobiles. Startup or
preopening expenses are not deductible under either section 162
or section 212. Hardy v. Commissioner, 93 T.C. 684 (1989);
Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), affd. without
published opinion 691 F.2d 490 (3d Cir. 1982); Polachek v.
Commissioner, 22 T.C. 858, 863 (1954). Deduction of such
expenses, even if substantiated, is specifically denied by
section 195(a).
Board and Room Rental
The evidence, including petitioner’s testimony, leads the
Court to conclude that petitioner did not conduct his room and
board activity primarily with the objective to make a profit.
Petitioner seems to have allowed minors and others to stay in his
mobile home on the basis of his perception of their needs and
their friendship with his son or daughter. Most of the
individuals were allowed to stay with him without paying rent or
board in any form. Petitioner’s description of his guests as
people “who had been in some sort of misfortune or down and out
with nowhere to go” strongly suggests to the Court that profit
was not the primary purpose for his room and board activity.
Petitioner is clearly a caring and generous person, but this
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activity was conducted neither for profit nor as a business
operation.
Other Schedule C Activities
There were no sales of timber or firewood with respect to
petitioner’s timber and firewood sales activity for 1994 because
“the thing fell apart”. His “venture capital” health food and
resort enterprise “never got off the ground.” The only items in
petitioner’s possession to show his involvement in an oil and gas
venture were copies of two uncleared checks that he showed to
respondent’s counsel before trial. These three activities appear
never to have reached the operational stage. As with
petitioner’s automobile restoration activity, startup or
preopening expenses are not deductible under either section 162
or section 212. Hardy v. Commissioner, supra; Goodwin v.
Commissioner, supra at 433; Polachek v. Commissioner, supra at
863. Deduction of such expenses, even if substantiated, is
specifically denied by section 195(a).
Additions to Tax Under Section 6651(a)
Respondent bears the burden of production with respect to
any addition to tax. Sec. 7491(c). In order to meet this
burden, respondent must produce evidence sufficient to establish
that it is appropriate to impose the addition to tax. Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001).
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The parties agree that petitioner did not file timely
Federal income tax returns for 1994, 1995, and 1997. Respondent
has met his burden of production under section 7491(c) with
respect to imposing the addition to tax under section 6651(a)(1).
It is petitioner’s burden to prove that he had reasonable
cause and lacked willful neglect in not filing his return timely.
See United States v. Boyle, 469 U.S. 241, 245 (1985); Higbee v.
Commissioner, supra; sec. 301.6651-1(a)(1), Proced. & Admin.
Regs.
Petitioner argues that he was unable to file timely returns
because of health problems and lost computer data. Petitioner
provided the Court with a “Problem List” of 29 health items that
he alleges contributed to his inability to file his Federal
income tax returns timely. When asked why he did not hire
someone to prepare his returns for him, petitioner replied: “I
just don’t commit to things I can’t pay for.” Petitioner,
however, testified that he invested $15,000 by check in his oil
and gas activity. The Court finds that petitioner willfully
neglected to file timely his Federal income tax returns for the
years at issue. Respondent’s determination that he is liable for
the additions to tax under section 6651(a)(1) is sustained.
To reflect the foregoing,
Decision will be
entered under Rule 155.