Black v. Comm'r

T.C. Summary Opinion 2008-75

UNITED STATES TAX COURT

DAWN LEA BLACK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10914-05S. Filed June 30, 2008.

Dawn Lea Black, pro se.

Erin R. Hines, 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.1

1
Special Trial Judge Carleton D. Powell, before whom this
case was initially tried and to whom it was submitted, died Aug.
23, 2007. The Court notified the parties and proposed to assign
the case to another judicial officer for the purpose of preparing
the opinion and entering the decision based on the record of that
trial. Respondent consented to the reassignment. Petitioner
(continued...)
 - 2 -

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, subsequent section references are to the Internal

Revenue Code as amended and as in effect for the year in issue,

and all Rule references are to the Tax Court Rules of Practice

and Procedure.

Respondent determined a $14,145 deficiency in petitioner’s

1998 Federal income tax, a $3,536.25 failure to file addition to

tax, and a $2,829 accuracy-related penalty. After concessions2

the issues for decision are: (1) Whether certain payments made

to petitioner by Erdman Rentals, LLC in 1998, totaling $30,034,

are taxable; (2) whether petitioner is entitled to business

1
(...continued)
objected to the reassignment and moved to supplement the record.
A further trial was held on Feb. 26, 2008, at which time the
parties submitted a supplemental stipulation of facts with
attached exhibits. The Court heard additional testimony and
received additional documents.
2
At the initial trial respondent conceded that of the
$38,716 in nonemployee compensation reported as paid to
petitioner by Erdman Rentals, LLC, $8,682 represents
reimbursement of expenses. After this adjustment $30,034 of
nonemployee compensation remains, all of which respondent
contends is unreported income. Petitioner conceded that she
received but failed to report $1,540 in dividends in 1998 from
the Alaska Permanent Fund.

Petitioner failed to address respondent’s self-employment
tax determination with respect to income from Erdman Rentals,
LLC, other than to dispute that the amount she received is income
in the first instance.
 - 3 -

expense deductions in amounts greater than respondent allowed;

and (3) whether petitioner is liable for an addition to tax under

section 6651(a)(1) and an accuracy-related penalty under section

6662(a).

For convenience, after a brief factual overview, we have

combined the findings of fact, discussion of pertinent legal

issues, and our conclusions. The parties have stipulated some of

the facts, and we so find. We incorporate the stipulation of

facts, the supplemental stipulation of facts, and the attached

exhibits by this reference. Petitioner resided in Alaska when

she filed the petition.

In 1998 petitioner was a member of Erdman Rentals, LLC

(hereafter Erdman Rentals or the company), a residential real

estate rental company in Alaska. The other two members were

petitioner’s parents, Donald and Sophia Erdman. Petitioner

managed the rental properties for Erdman Rentals, and the company

reported on Form 1099-MISC, Miscellaneous Income, that it paid

nonemployee compensation of $38,716 to petitioner in 1998.

Petitioner did not report this amount on her 1998 Federal income

tax return.

Petitioner also worked with a coauthor on a book about

Natalia Shelikhova (Mrs. Shelikhova) in 1998.3 She paid amounts

3
Although the book had not been published as of the date of
trial, petitioner asserted that she had arranged for it to be
(continued...)
 - 4 -

for travel, for purchasing and framing original works of art, and

for copying documents and communicating with her coauthor.

Petitioner reported those expenditures on Schedule C, Profit or

Loss From Business. She did not report any business income or

receipts.

Petitioner prepared her 1998 Federal income tax return and

filed it on October 23, 2000. She reported her occupation as

“Writer/Manager”. Petitioner’s 1998 Form 1040, U.S. Individual

Income Tax Return, reports $10,717 on line 7 as wages, salaries,

tips, etc., and a business loss of $10,035 on line 12.4

Petitioner’s tax return as filed reported negative adjusted gross

income, no taxes withheld, and no taxes owed.

Respondent issued a notice of deficiency determining that

petitioner received, but failed to report, $38,716 in income from

Erdman Rentals and $1,540 in dividend income from the Alaska

Permanent Fund. See supra note 2. Respondent also disallowed

business expense deductions, as follows:

3
(...continued)
published by the University of Alaska Press, Rasmuson Library
Translation Series.
4
Only the $10,035 business loss is carried down as total
income on line 22 of petitioner’s 1998 Form 1040, U.S. Individual
Income Tax Return. The $10,717 reported on line 7 is ignored for
the remainder of the handwritten return. Respondent has not
asserted a deficiency related to this amount.
 - 5 -

Business Expense Claimed Allowed Disallowed

Travel expense $1,498 $755 $743
Meals and entertainment 502 63 439
expense
Legal/professional services 8,035 -0- 8,035
Total 10,035 818 9,217

There is no dispute that petitioner paid the claimed

amounts. However, respondent maintains that petitioner has not

proven that the disallowed deductions represent ordinary and

necessary expenses. In addition, respondent determined an

addition to tax for failure timely to file and an accuracy-

related penalty.

Petitioner asserts that her parents gave her a $20,000 gift,

that Erdman Rentals erroneously reported that it paid

compensation income to her, and that, even including the

unreported dividend income, her tax liability is zero because she

had no net income. She also asserts that her late filing was not

due to negligence.

We begin by noting that the Commissioner’s determinations

are presumed correct, and the taxpayer bears the burden of

proving that those determinations are erroneous. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Moreover,

deductions are a matter of legislative grace, and the taxpayer

bears the burden of proving that she is entitled to any deduction

claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).
 - 6 -

Under section 7491(a)(1), if the taxpayer produces credible

evidence with respect to any factual issue relevant to

ascertaining the taxpayer’s liability, the burden of proof shifts

from the taxpayer to the Commissioner as to that factual issue.

Section 7491(a)(2) provides that the burden will shift only if

the taxpayer complies with substantiation requirements, maintains

sufficient records, and cooperates fully with the Commissioner’s

reasonable requests. Although petitioner introduced myriad

documents: (a) She did not maintain books and records of her

writing activity sufficient to document her expenses clearly; and

(b) the records she introduced regarding Erdman Rentals do not

clearly demonstrate which of the numerous payments petitioner

made to herself and to her creditors from Erdman Rentals

constitute alleged gifts from her parents, expense

reimbursements, or payments for her services. Petitioner did not

argue that section 7491 applies. Petitioner has not satisfied

the requirements of section 7491(a)(2), and we conclude that the

burden remains with petitioner.

1. Unreported Income

Petitioner conceded that she received the dividend income

and admits that she received the funds from Erdman Rentals.

However, she challenges respondent’s characterization of the

Erdman Rentals payments as income, asserting that she received
 - 7 -

gifts from her parents, paid through the company, and

reimbursement for expenses she incurred in managing the company.

Erdman Rentals reported paying nonemployee compensation of

$38,716 to petitioner. Petitioner asserts that a mistake by

Erdman Rentals’ accountants caused the company to file a Form

1099-MISC and to report those payments as compensation paid to

her.5

Although petitioner represents that she was an unpaid,

volunteer manager simply helping out in her parents’ business,

she was actively involved in running the business throughout

1998. For example, she had check writing privileges on the

Erdman Rentals checking account which she exercised extensively.

The record includes copies of myriad checks written by

petitioner, drawn against Erdman Rentals, and payable to

petitioner. The memo lines of these checks do not indicate the

purpose of each payment. Petitioner claims that all payments to

her were either gifts or expense reimbursements. Petitioner

introduced a document titled “Erdman Rentals Contract labor pay

for Dawn Lea Black 1998” that lists checks from Erdman Rentals to

petitioner in 1998, totaling $38,716.64, but it does not identify

5
There is no indication that petitioner ever caused the
company to issue a corrected Form 1099-MISC. We find this
noteworthy in light of petitioner’s position as manager of Erdman
Rentals.
 - 8 -

the purpose of any of the checks or indicate which of the

payments were gifts or which were expense reimbursements.

The record includes the Schedules K-1, Partner’s Share of

Income, Credits, Deductions, etc., for Erdman Rentals. These

documents support petitioner’s contention that she paid certain

expenses for Erdman Rentals and was reimbursed for many of those

expenditures; i.e., comparable amounts contributed by her and

distributed to her.6 However, these documents are not consistent

with petitioner’s assertion that her parents made gifts to her

via the company; excluding her apparent expense reimbursements,

the total amount Erdman Rentals distributed to all its members is

far less than the $20,000 petitioner claims she received as a

gift.

Petitioner failed to maintain adequate books and records.

The voluminous documents she introduced at trial were

inadequately organized and fail to reconstruct the transactions

between petitioner and Erdman Rentals to prove that respondent’s

determinations are erroneous. Petitioner has failed to prove

that any of the payments from Erdman Rentals was a gift from her

parents. She has also not proven that her expense reimbursements

6
The record includes numerous copies of checks written by
petitioner, drawn against a bank account in her name, and
purportedly used for Erdman Rentals’ expenses. The sum of these
checks is less than the amount respondent allowed as expense
reimbursement, see supra note 2, and also less than the amount
Erdman Rentals reported as distributed to petitioner in 1998.
 - 9 -

were greater than respondent allowed. Considering respondent’s

concession, respondent’s determination as to unreported income is

sustained.

2. Business Expenses

Ordinarily, a taxpayer is permitted to deduct ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. Sec. 162(a). An ordinary and

necessary expense is one that is appropriate and helpful to the

taxpayer’s business and that results from an activity that is

common and accepted practice. Boser v. Commissioner, 77 T.C.

1124, 1132 (1981), affd. without published opinion (9th Cir.,

Dec. 22, 1983). A taxpayer is required to maintain records

sufficient to establish the amount of her deductions. Sec. 6001;

sec. 1.6001-1(a), Income Tax Regs.

Section 162(a)(2) allows deductions for “traveling expenses

(including amounts expended for meals and lodging * * *) while

away from home in the pursuit of a trade or business”. However,

for trips undertaken for other than business purposes, “the

travel fares and expenses incident to travel are personal

expenses and the meals and lodging are living expenses.” Sec.

1.162-2(a), Income Tax Regs. A taxpayer may not deduct personal,

family, or living expenses. Sec. 262(a).

Section 274(d)(1) generally disallows any deduction under

section 162 for, among other things, “any traveling expense
 - 10 -

(including meals and lodging while away from home)”, unless the

taxpayer complies with stringent substantiation requirements as

to the amount, time and place, and business purpose of the

expense.7

A. Traveling Expenses

In 1998 petitioner and her coauthor were writing a book

about a Russian woman, Mrs. Shelikhova, who lived in the 18th

century. Mrs. Shelikhova took over her husband’s trading company

in Alaska when he died in 1795 and eventually ran the Russian-

American Company (established by the Russian Government to

continue exploiting Alaskan resources). Petitioner referred to

Mrs. Shelikhova as the first woman governor of Alaska.

Petitioner asserts that she has a history of paid writing

assignments, including writing for the Kodiak Fisherman

Newspaper. Respondent does not challenge petitioner’s reporting

that her writing activity constituted a trade or business in

1998. Petitioner did not maintain formal records or books of

account for her writing activity, though she did retain and

7
Sec. 274 supersedes the doctrine in Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930), which otherwise would permit
the Court to estimate a taxpayer’s expenditures, given a
reasonable evidentiary basis. See sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985); see also
Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Thus, strict
substantiation is required for travel expenditures, including
transportation, lodging, and meal expenses.
 - 11 -

introduce numerous receipts and credit card statements in an

attempt to document business expenses for her writing activity.

Petitioner worked with Alexander Petrov, Ph.D. (Dr. Petrov),

a member of the Russian Academy of Sciences, as her coauthor. In

1998 petitioner traveled to Corvallis, Oregon, to meet with Dr.

Petrov and make a presentation about the book to the Humanities

Institute at the University of Oregon. (At that time Dr. Petrov

was a visiting professor at the University of Oregon.) She also

brought Dr. Petrov to Alaska, assertedly for research and further

collaboration on the book. Finally, petitioner flew to Paris and

traveled by train to Berlin, where she met with Dr. Petrov while

he was working in Germany. She asserts that the purpose of her

trip to Europe was to work with Dr. Petrov on translating

documents related to their book. In an e-mail to Dr. Petrov,

however, petitioner wrote that she was looking forward to her

vacation in Germany and to getting together with Dr. Petrov in

regard to the book project.

Petitioner incurred transportation, lodging, and meal

expenses for her trip to Oregon, Dr. Petrov’s trip to Alaska, and

petitioner’s trip to Europe. She did not maintain a

contemporaneous log chronicling these travel expenses.

Petitioner’s travel summary explains that the business purpose of

one trip she took to Anchorage with her father was “to accompany
 - 12 -

him to cataract surgery so his eyesight for our business would

improve.”8

Petitioner claimed $1,498 for travel expenses and $502 for

meals and entertainment expenses (50 percent of $1,004 reported

as expended on meals, see sec. 274(n)(1)(A)) on her 1998 Schedule

C. At trial she claimed $1,542.54 in expenses for her trip to

Oregon and $2,374.03 for her trip to Europe. Respondent allowed

deductions for some of the expenses of her trip to Oregon but

disallowed all of the deductions claimed for Dr. Petrov’s trip to

Alaska and for petitioner’s trip to Europe.

Respondent’s examining agent appears to have overlooked

$12.50 petitioner paid for fuel for the car she rented during her

Oregon trip (which rental expenses respondent otherwise allowed).

Petitioner is entitled to an additional deduction of $12.50 for

her trip to Oregon. Petitioner has not proven that she is

entitled to any further expenses for this trip.

Petitioner testified that she brought Dr. Petrov to Alaska.

The record does not clearly reflect the dates of this trip, the

expenses she incurred for this travel, or the primary purpose of

8
It is not clear whether petitioner claimed deductions for
expenses for any trip to Anchorage with her father on her Federal
income tax return for 1998. We note, however, that it is clear
that the purpose of such a trip was personal and that any related
travel expenses are not deductible. See Fred W. Amend Co. v.
Commissioner, 55 T.C. 320, 325-326 (1970), affd. 454 F.2d 399
(7th Cir. 1971).
 - 13 -

this trip.9 Petitioner has not met the strict substantiation

requirements of section 274(d) with respect to this travel, and

we conclude that she is not entitled to any deduction for this

travel.

Finally, petitioner traveled to Europe in December 1998,

flying to Paris, where she stayed for 2 days before taking a

train to Berlin to meet Dr. Petrov. During at least some of the

5 days spent in Berlin, petitioner and Dr. Petrov worked on the

book. Petitioner and Dr. Petrov then traveled to Paris, where

petitioner stayed for 3 additional days before returning to the

United States. Petitioner’s travel expenses for this trip are

deductible only if the trip is related primarily to her business.

See sec. 1.162-2(b)(1), Income Tax Regs. Petitioner referred to

this trip as her “vacation”. Further, the record is unclear as

to how much time she spent working on the book (of the 5 days in

Berlin or the 3 days petitioner and Dr. Petrov shared in Paris).

We conclude that petitioner has not proven that the trip was

primarily business and not personal. Thus, her travel expenses

are not deductible.

Nevertheless, expenses incurred while at a mixed business

and pleasure destination which are properly allocable to a

taxpayer’s business are deductible even though the traveling

9
No summary of Dr. Petrov’s trip to Alaska appears in the
record, and receipts for such trip are not readily identifiable.
 - 14 -

expenses to and from the destination are not deductible. Sec.

1.162-2(b)(1), Income Tax Regs. The taxpayer must still satisfy

the requirements of section 274(d) and identify the amount, time

and place, and the business purpose of the expenses. Petitioner

paid for meals for herself and Dr. Petrov, and she referred to

these meals as business meetings. Petitioner’s receipts and

summary identify the amounts, dates, and locations of the claimed

meal expenses, but the only evidence of a business purpose is her

vague and general testimony that she and Dr. Petrov worked on the

book in both cities. We are not convinced of the business

purpose of these meals or that petitioner and Dr. Petrov worked

on the book during the meals. Petitioner has not proven that her

trip to Europe or her meals with Dr. Petrov were ordinary and

necessary expenses, and we conclude that she may not deduct those

expenses.

With the exception of the additional allowance for the

Oregon trip discussed above, respondent’s determination as to

petitioner’s travel expenses is sustained.10

10
We note that the record does not clearly indicate
precisely which travel and meal expenses petitioner included in
the $2,000 of travel, meals, and entertainment expenses reported
on her 1998 Schedule C. At trial petitioner summarized roughly
$3,900 in expenses for her trips to Oregon and Europe, which
clearly exceeds the amounts she originally claimed. She did not,
however, argue that her return as filed claimed less than her
actual business travel expenses.
 - 15 -

B. Legal and Professional Expenses

At trial petitioner explained that the business expenses she

claimed as legal and professional services on Schedule C were

predominantly her costs for purchasing original artwork, with a

small amount representing expenditures for making copies for Dr.

Petrov and communicating with him by telephone and Internet.11

Petitioner purchased original artwork at a local gallery in

Kodiak, Alaska, in 1998. Petitioner asserts that she selected

artwork related to places where Mrs. Shelikhova lived in Alaska

(including petitioner’s hometown), to animals indigenous to

Alaska, and to Russia in general. Petitioner intended to

photograph those pieces of art and to use some of the photographs

in the book.12

Petitioner did not provide any evidence that she obtained

licenses from copyright holders in order to use any of this

artwork in her book or that she inquired into obtaining such

licenses. Merely buying original artwork, without obtaining an

explicit license to use the images, does not confer on a

11
Petitioner did not explain why she reported art,
communication, and photocopying expenses as legal and
professional services.
12
Although petitioner bought mostly paintings, she also
paid over $1,100 to purchase a set of Russian nesting dolls,
which she asserted “depict Russian singers of folktales, and show
a great deal about Russian thought, and life and whatnot.” She
testified that she intended to photograph the dolls and publish
the images in her book because they are “a very nice work of
art”.
 - 16 -

purchaser any legal right to copy or use images of that artwork.

Mirage Editions, Inc. v. Albuquerque A.R.T. Co., 856 F.2d 1341,

1343 (9th Cir. 1988); see also the 1976 Copyright Act, 17 U.S.C.

sec. 106 (2000) (granting copyright holders the exclusive rights

to reproduce their works and to prepare derivative works).

We are not convinced that this artwork was principally

purchased for the book, and it does not appear that petitioner

obtained permission to photograph the art she purchased and to

use the images in her book. We find that the claimed expenses

are not ordinary or necessary and conclude that petitioner may

not deduct those expenditures.13

Petitioner also claimed as legal and professional expenses

her costs for communicating with Dr. Petrov and for making copies

for him. She introduced scant evidence of her telecommunication

expenses, which are governed by the strict substantiation

requirements of section 274(d), and even less evidence that such

expenses were business and not personal. While the record

13
Without licenses to copy the pieces and use the copies
in her book, the art purchase expenses are not ordinary business
expenses because they are not helpful or appropriate to
petitioner’s business. See Commissioner v. Tellier, 383 U.S.
687, 689 (1966). Buying such items without at least
investigating whether they could lawfully be used as petitioner
intended is not a reasonable, common, or accepted business
practice. See Boser v. Commissioner, 77 T.C. 1124, 1132-1133
(1981), affd. without published opinion (9th Cir., Dec. 22,
1983).
 - 17 -

includes some apparent copying expenses, the connection between

petitioner’s writing activity and such expenditures is not clear.

Petitioner is not entitled to deduct her expenditures for

artwork, telecommunications, or copying. Respondent’s

determination as to legal and professional expenses is sustained.

3. Addition to Tax and Penalty

By virtue of section 7491(c), the Commissioner has the

burden of production with respect to the accuracy-related

penalty. To meet this burden, he must produce sufficient

evidence indicating that it is appropriate to impose the penalty.

See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the

Commissioner meets this burden of production, a taxpayer must

come forward with persuasive evidence that the Commissioner’s

determination is incorrect. Rule 142(a); see Higbee v.

Commissioner, supra. As a defense to the penalty, the taxpayer

bears the burden of proving that she acted with reasonable cause

and in good faith. See sec. 6664(c)(1); see also Higbee v.

Commissioner, supra at 446-447; sec. 1.6664-4(b)(1), Income Tax

Regs.

Petitioner filed a self-prepared Federal income tax return

for tax year 1998 on October 23, 2000. Petitioner explained that

she filed “after the accountants were done filing everything, but

yeah, I was late filing. That I will admit.”
 - 18 -

Respondent determined an addition to tax under section

6651(a)(1) because petitioner failed to file her 1998 Federal

income tax return on time. Petitioner stated in her petition

that “My lateness was not due to negligence.” She did not,

however, assert that her late filing was due to reasonable cause

and not due to willful neglect. See sec. 6651(a)(1).

Respondent’s determination is sustained, and petitioner is liable

for the section 6651(a)(1) addition to tax.

Respondent also determined an accuracy-related penalty under

section 6662(a). Inter alia, section 6662 provides that a

penalty shall apply to any substantial understatement of income

tax, which is defined as an understatement exceeding the greater

of 10 percent of the tax required to be shown on the return or

$5,000. Sec. 6662(b)(2), (d)(1). The tax required to be shown

on petitioner’s return is over $14,000. Petitioner reported $0.

Her understatement is over $14,000, which is greater than $5,000

and greater than 10 percent of $14,000. Petitioner has not

demonstrated that she had reasonable cause for her understatement

or that she acted in good faith. See sec. 6664(c). Thus,

petitioner is liable for the section 6662(a) accuracy-related

penalty for a substantial understatement.

To reflect the foregoing,

Decision will be entered

under Rule 155.