T.C. Summary Opinion 2007-210
UNITED STATES TAX COURT
LISA J. TOMLINSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16445-05S, 6086-06S. Filed December 17, 2007.
Lisa J. Tomlinson, pro se.
Margaret Burow, for respondent.
RUWE, Judge: These cases were heard pursuant to the
provisions of section 74631 of the Internal Revenue Code in
effect when the petition was filed.2 Pursuant to section
1
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.
2
Respondent issued separate notices of deficiency for 2002
and 2003, respectively. Petitioner filed a separate petition for
(continued...)
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7463(b), the decisions to be entered are not reviewable by any
other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined deficiencies in petitioner’s 2002 and
2003 Federal income taxes of $16,928 and $5,189, respectively,
and an addition to tax for failure to file timely a tax return
under section 6651(a)(1) of $774 for 2003. After concessions by
respondent,3 the issues remaining for decision are: (1) Whether
petitioner is entitled to deduct medical expenses of $6,966.21
claimed on her Schedule A, Itemized Deductions, for 2003; (2)
whether petitioner is entitled to deduct business expenses of
$77,267 and $32,018 claimed on her Schedules C, Profit or Loss
From Business, for 2002 and 2003, respectively; and (3) whether
petitioner is liable for an addition to tax under section
6651(a)(1) for failure to file timely a return for 2003.
2
(...continued)
each year. Due to the similarity of the issues, the Court
granted respondent’s motion to consolidate for trial, briefing
and opinion on Dec. 6, 2006.
3
Respondent concedes that petitioner is entitled to deduct
Schedule A, Itemized Deductions, of $30,477 for home mortgage
interest paid during 2002, $6,149 for charitable contributions
made in 2002, and $17,264 for a casualty loss for property in
2003. Respondent also concedes that petitioner has substantiated
$6,929.79 of the $13,896 in medical expenses claimed on her 2003
return.
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Background
Some of the facts have been stipulated and are so found.
The stipulations of facts, supplemental stipulation of facts, and
the attached exhibits are incorporated by this reference. When
the petitions were filed, petitioner resided in Oakland,
California.
For approximately the first 7 months of 2002, petitioner was
employed full time with Versata, Inc., as the vice president of
human resources. Petitioner subsequently received disability
income as a result of a health condition that prevented her from
working.
On May 2, 2004, petitioner untimely filed a 2002 income tax
return on which she reported income from wages, salaries, tips,
etc. of $88,540,4 interest income of $1,134, a taxable refund of
State and local income tax of $6,242, and a Schedule C business
loss of $77,267. On June 17, 2005, respondent issued to
petitioner a notice of deficiency for 2002.
On January 3, 2005, petitioner untimely filed a 2003 income
tax return on which she reported income from wages, salaries,
tips, etc., of $90,250,5 interest income of $779, dividends of
4
The Forms W-2, Wage and Tax Statement, attached to
petitioner’s 2002 return show that she received $51,040.34 from
Versata, Inc., and $37,500 from CNA Group Life Assurance Co.
5
The Form W-2 attached to petitioner’s 2003 return shows
that she received $90,250 from CNA Group Life Assurance Co.
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$16, and a Schedule C business loss of $32,018. On January 13,
2006, respondent issued to petitioner a notice of deficiency for
2003.
Discussion
Schedule A Medical Expenses
Expenses paid during the taxable year, not compensated for
by insurance or otherwise, for medical care of the taxpayer, her
spouse, or a dependent shall be allowed as a deduction to the
extent that such expenses exceed 7.5 percent of adjusted gross
income. Sec. 213(a). The term “medical care” includes amounts
paid for insurance covering medical care. Sec. 213(d)(1)(D).
On her 2003 return, petitioner claimed itemized deductions
for medical expenses. Petitioner failed to substantiate the
$6,966.21 in medical expenses that remain in dispute. In an
attempt to substantiate the disputed medical expenses, petitioner
produced evidence of payments made to National Finance Center.
The purpose of these payments is not clear. Copies of several of
the canceled checks and cashier’s checks that document these
payments contain writing that was scratched out. Petitioner
testified that the scratched out writing was her Social Security
number. However, the writing that was scratched out on the
cashier’s checks visibly indicates the checks were made out for
Jon Tomlinson, who is petitioner’s brother. Jon Tomlinson was
not petitioner’s dependent for tax purposes. Respondent’s
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disallowance of the disputed remaining medical expenses is
sustained.
Schedule C Expenses
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving that they are entitled to any
deductions claimed. 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). Taxpayers are required to maintain
sufficient records to enable the Commissioner to determine their
correct tax liability. Sec. 6001.
Section 162 generally allows a deduction for all the
ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business. Such expenses
must be directly connected with or pertain to the taxpayer’s
trade or business. Sec. 1.162-1(a), Income Tax Regs. Whether an
expenditure satisfies the requirements of section 162 is a
question of fact. Commissioner v. Heininger, 320 U.S. 467, 475
(1943).
Whether a taxpayer’s activities constitute the carrying on
of a trade or business requires an examination of the particular
facts and circumstances of each case. Commissioner v.
Groetzinger, 480 U.S. 23, 36 (1987). Carrying on a trade or
business requires a showing of more than an initial investigation
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of business potential. Dean v. Commissioner, 56 T.C. 895, 902
(1971); Glotov v. Commissioner, T.C. Memo. 2007-147.
Personal, living, or family expenses are not deductible.
Sec. 262. Similarly, deductions for expenditures that are
properly categorized as capital expenditures are not allowable.
Sec. 263. In order for petitioner to be entitled to deduct her
claimed Schedule C expenses she must satisfy the requirements of
section 162. Additionally, certain expenses warrant the
heightened substantiation requirements of section 274(d) and the
regulations thereunder.
Petitioner’s return for 2002 contains a Schedule C for “ASIL
Investments” on which she reported zero gross receipts and a net
loss of $77,267. Respondent disallowed all of the claimed
deductions for expenses, which were listed on petitioner’s 2002
Schedule C as follows:
Expenses Amount
Car and truck expenses $1,230
Depreciation 4,196
Insurance 1,600
Legal and professional services 12,115
Office expense 10,132
Rent or lease of other business 4,152
property
Supplies 5,936
Travel 10,706
Meals and entertainment 5,845
Wages 1,490
Accounting 1,832
Answering service 495
Club membership 3,170
Delivery and freight 757
Gifts 1,226
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Internet services 168
Membership fees 404
Parking and tolls 1,827
Photography 2,037
Postage 1,785
Professional development 245
Subscriptions and publications 702
Telephone 5,217
Total 77,267
Petitioner claims that ASIL Investments was a real estate
investment business that she began while she worked full time at
Versata, Inc. Petitioner testified that she took a number of
courses and looked at a variety of properties in 2002.
Petitioner testified that she made some offers on properties;
however, she provided no other evidence of these offers. There
is no evidence that petitioner ever completed a purchase of
property. Petitioner received no income from ASIL Investments in
2002 and abandoned the venture early in 2003.
If any of the expenses incurred by petitioner were in
relation to a real estate investment venture, they appear to be
in the nature of investigating the business potential of creating
a real estate investment business or preparing to start such a
business. In order to deduct expenses under section 162, the
expenses must relate to a functioning business at the time the
expenses were incurred. Glotov v. Commissioner, supra.
Section 195(a) provides: “Except as otherwise provided in
this section, no deduction shall be allowed for start-up
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expenditures.” Section 195(c)(1) defines “start-up expenditure”
as:
(1) * * * any amount--
(A) paid or incurred in connection with--
(i) investigating the creation or
acquisition of an active trade or business,
or
(ii) creating an active trade or
business, or
(iii) any activity engaged in for profit
and for the production of income before the
day on which the active trade or business
begins, in anticipation of such activity
becoming an active trade or business, and
(B) which, if paid or incurred in connection with
the operation of an existing active trade or business
(in the same field as the trade or business referred to
in subparagraph (A)), would be allowable as a deduction
for the taxable year in which paid or incurred.[6]
Petitioner’s activities in 2002 with relation to ASIL
Investments were, at best, start-up activities and did not amount
to an active trade or business. Accordingly, we hold that
6
Sec. 195(c)(1) provides that the term “start-up
expenditure” does not include expenditures for which a deduction
would be allowable under sec. 163(a) (interest), 164 (taxes), or
174 (research and experimental expenses). See TSR, Inc. & Sub.
v. Commissioner, 96 T.C. 903 (1991) (explaining that the phrase
“research or experimental” for purposes of sec. 174 refers to
scientific or technological research); see also sec. 1.174-2(a),
Income Tax Regs. None of the expenditures listed on petitioner’s
Schedules C were allowable under these sections.
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respondent’s disallowance of petitioner’s 2002 Schedule C
deductions was proper.7
Petitioner’s return for 2003 contains a Schedule C on which
she reported zero gross receipts and a net loss of $32,018 for
“Temps To Go”. The Schedule C for Temps To Go is the only
Schedule C attached to the 2003 return. Petitioner testified
that the expenses claimed on her Schedule C for 2003 were
actually expenses incurred in another business called “Gotta Get
Up Productions”.8 Petitioner claimed that she held a 100-percent
interest in Gotta Get Up Productions in 2003.
In the notice of deficiency, respondent disallowed the
following claimed deductions for expenses listed on petitioner’s
2003 Schedule C:
7
We note that many of the claimed expenses were clearly
personal as opposed to business expenses. These included:
Travel expenses paid for with petitioner’s Versata, Inc., credit
card for a stay at the Oakland Marriott while her house was being
restored after experiencing water damage caused by a leaky roof;
expenses associated with a tennis club membership; expenses for
the rental of other business property for a studio that her
brother Jon Tomlinson leased in September 2002; travel expenses
for four rooms at the Dayton Marriott for petitioner’s family to
attend an event featuring petitioner’s brother Jon’s art; and
expenses for the entire cost of petitioner’s health, life,
disability, homeowner’s, and automobile insurance. Many other
claimed expenses were unsubstantiated.
8
Petitioner also testified that she was unsure whether any
of the expenses claimed on the 2003 Schedule C relate to Temps to
Go.
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Expenses Amount
1
Other expenses $16,055
Meals and entertainment 2,140
Travel 460
Legal and professional services 459
Car and truck expenses 824
Total 19,938
1
“Other expenditures” are enumerated on petitioner’s return
as follows:
Expenses Amount
Club memberships $172
Copyright registration 1,890
Dues and subscriptions 320
Framing 280
Membership fees 175
Parking 848
Photography 685
Postage 1,043
Professional development 4,250
Storage fees 440
Subscriptions and publications 199
Telephone 5,753
Total 16,055
On brief, respondent disputes the entire $32,018 of claimed
Schedule C expenses for 2003. Section 6214(a) provides that this
Court shall have jurisdiction to redetermine the correct amount
of the deficiency, even if the amount so redetermined is greater
than the amount determined by the Commissioner in the notice of
deficiency, if the Commissioner asserts a claim at or before the
hearing or rehearing. Consistent with the general mandate of
section 6214(a), this Court generally will exercise its
jurisdiction over an increased deficiency only where the matter
is properly pleaded. See Estate of Petschek v. Commissioner, 81
T.C. 260, 271-272 (1983), affd. 738 F.2d 67 (2d Cir. 1984); see
also Markwardt v. Commissioner, 64 T.C. 989, 997 (1975). Because
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respondent failed to plead an increase in the disallowance of
petitioner’s Schedule C deductions for 2003, we consider the only
amount of Schedule C deductions in dispute to be $19,938.
Petitioner testified that Gotta Get Up Productions is a
greeting card, stationery, and gift item business. Petitioner
described Gotta Get Up Productions as a “family business”
involving the prospective sale of artwork created by her brother,
Jon Tomlinson.
Petitioner testified that she took over Gotta Get Up
Productions in March or April of 2003 and that “in 2003 what I
had to do was identify our product offerings, develop prototypes,
select paper, figure out which offerings were going to be
introduced and how they were going to be introduced to the
general public”. Petitioner added that Gotta Get Up Productions
did not open its doors until 2004. Petitioner did not earn any
income from Gotta Get Up Productions in 2003. When asked at
trial whether the expenses she incurred in 2003 were start-up
expenses, petitioner replied that they were “the cost of starting
a business, yes.” Gotta Get Up Productions was not incorporated
during 2003 and had no paid employees in 2003. Petitioner
testified that the people who assisted her received no wages
because they “hadn’t sold anything” and “didn’t have anything”
from which they could receive any money.
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Petitioner failed to provide evidence indicating that Temps
to Go existed as an active trade or business in 2003. While
petitioner may have intended to create a greeting card business,
petitioner’s evidence indicates that her activities during 2003
were related to an attempt to start a business. Thus, for the
same reasons that we upheld respondent’s disallowance of
petitioner’s Schedule C expenses for 2002, we sustain
respondent’s disallowance of petitioner’s 2003 Schedule C
deductions as determined in the notice of deficiency.9
Sec. 6651(a)(1) Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a timely return. The addition equals 5 percent of the
amount required to be shown on the return for each month or
fraction thereof that the return is late, not to exceed 25
percent. Sec. 6651(a)(1).
Respondent bears the burden of production with respect to
the addition to tax. Sec. 7491(c); Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001). To meet his burden of production,
respondent must come forward with sufficient evidence indicating
it is appropriate to impose the addition to tax. See Higbee v.
Commissioner, supra. Once respondent meets his burden of
production, petitioner bears the burden of proving he is not
9
As in 2002, many of petitioner’s claimed expenses in 2003
appear to be personal in nature. Many other claimed expenses
lack the required substantiation.
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liable for the addition to tax. See id. at 447. Petitioner’s
2003 income tax return was due on October 15, 2004, but was not
filed until January 3, 2005. We find that respondent has met his
burden of production.
“A failure to file a tax return on the date prescribed leads
to a mandatory penalty unless the taxpayer shows that such
failure was due to reasonable cause and not due to willful
neglect.” McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.
1997), affg. T.C. Memo. 1995-547. A showing of reasonable cause
requires taxpayers to demonstrate they exercised “ordinary
business care and prudence” but were nevertheless unable to file
the return within the prescribed time. United States v. Boyle,
469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. & Admin.
Regs. Generally, factors that constitute “reasonable cause”
include unavoidable postal delays, death or serious illness of
the taxpayer or a member of his immediate family, or reliance on
the mistaken legal opinion of a competent tax adviser, lawyer, or
accountant that it was not necessary to file a return. McMahan
v. Commissioner, supra at 369.
Petitioner contends that she had reasonable cause for filing
late, and that the late filing of her return is because of her
responsibility to care for her brother after he was released from
the hospital in December 2003. Petitioner argues that it took
more than 5 months to secure reliable caregivers, and that her
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primary focus was overseeing her brother’s caregiver needs and
starting a new business venture.
We accept petitioner’s testimony that she became responsible
for her brother after he was released from the hospital in 2003.
However, petitioner testified that she found the time to try to
start a new greeting card venture and also found caregivers for
her brother by May 2004, 5 months before the extended due date of
the 2003 tax return and more than 7 months before it was actually
filed.10 We conclude that petitioner failed to demonstrate that
her failure to file timely a return was because of reasonable
cause and not willful neglect. See sec. 301.6651-1(c), Proced. &
Admin. Regs. Accordingly, petitioner is liable for the addition
to tax under section 6651(a)(1) for 2003.
To reflect the foregoing,
Decisions will be entered
under Rule 155.
10
We note that respondent did not determine a sec. 6651
addition to tax with regard to petitioner’s late filing of her
2002 return.