Njenge v. Comm'r

T.C. Summary Opinion 2008-84

UNITED STATES TAX COURT

NDILE GEORGE NJENGE AND EKINDE SONE NZELLE RACHEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12793-06S. Filed July 15, 2008.

Ndile George Njenge and Ekinde Sone Nzelle Rachel, pro sese.

Margaret A. Martin, for respondent.

GOEKE, 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.
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This case arises from a petition filed in response to a

notice of deficiency.

Respondent disallowed $11,871 of the car and truck expense

deductions petitioners claimed on their Schedule C, Profit or

Loss From Business, and home mortgage interest and real estate

tax deductions claimed on their Schedule A, Itemized Deductions,

for 2003. After the audit, petitioners also claimed entitlement

to additional unclaimed Schedule C expenses not represented on

their 2003 Federal income tax return, which were also disallowed

in the notice of deficiency. On the record before us, we must

decide petitioners’ entitlement to those deductions pursuant to

sections 162, 163 and 164.1

Background

Some of the facts have been stipulated, and the stipulation

of facts and the attached exhibits are incorporated herein by

this reference. At the time the petition was filed, petitioners

were residents of California.

Petitioners claimed on Schedule A of their income tax return

for 2003 deductions for home mortgage interest and real estate

taxes of $3,522 and $3,194, respectively, on property claimed as

their residence (residence property). Petitioners resided at the

residence property for all of 2003; at that time title to the

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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property was in the name of petitioners’ son, Muabe Etuge,2 as

was the mortgage on the property. Mr. Etuge obtained a mortgage

loan and took title to the house essentially to procure it for

petitioners, who were unable to secure such a loan because of

financial difficulties.3 Mortgage payments from 2001 until the

time of trial were made through Camrock General Engineering Co.,

of which petitioner Ekinde Rachel (Mrs. Rachel) was a registered

agent and Mr. Etuge was president. The mailing address of

Camrock General Engineering Co. is that of the residence

property.

Petitioners also claimed a $15,722 loss on their Schedule C.

The income and expenses detailed on the Schedule C were those of

a corporation known as NG&N Construction Co. (NG&N), of which

Mrs. Rachel was both the registered agent and president, related

to work done under a contract discussed infra. The mailing

address of NG&N was also that of the residence property.

The gross receipts listed on the Schedule C consisted of a

sum reportedly paid to petitioner Ndile Njenge (Mr. Njenge) by

his sister, Ntube Alice Njenge, pursuant to a purported contract

she entered into with NG&N for work to be done on property which,

2
Muabe Etuge held title to the property from 2001 to 2005,
when petitioners assumed ownership.
3
Petitioners had previously filed for bankruptcy and
received a discharge of debtor in a ch. 7 bankruptcy proceeding
on Jan. 30, 2001.
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at that time, she owned (project property). Toward the end of

2003 petitioners decided not to repair the property but instead

to tear it down and build a new residence. In 2005 Ntube Alice

Njenge quitclaimed the project property to petitioners in lieu of

paying the previously agreed-upon amount specified in the

contract.4 Petitioners took title to the project property on May

23, 2005.

Petitioners claimed Schedule C deductions of $15,767

relating to the car and truck expenses resulting from the hauling

of materials and trash to and from the worksite at the project

property. Petitioners lost the documents substantiating their

purchase of two vehicles5 and could provide only a registration

card for one of those vehicles;6 consequently, depreciation and

mileage were estimated using the 30-percent depreciation limit

for 2003 and a mileage rate of 36 cents.

Petitioners also claimed entitlement to deductions for

additional unclaimed Schedule C expenses paid from a Wells Fargo

bank account in the name of Mr. Njenge related to the rebuilding

4
The contract specified a payment of $55,000. Because of
the additional work required in tearing down and rebuilding the
property, that total was revised to $69,074, which petitioners
claimed as income on their 2003 tax return. Because the property
was later quitclaimed to petitioners in lieu of payment, the
$69,074 was never received despite its being reported as income.
5
One 1988 Dodge Dakota and one Chevrolet flatbed truck.
6
Valid from Apr. 30, 2005, to Apr. 30, 2006.
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of the project property. The additional expenses, totaling

$64,448.96, were claimed after respondent’s audit; the original

amount deducted on their Schedule C was $75,292. As a result,

petitioners now claim a $3,849 overpayment.

Discussion

Generally, taxpayers bear the burden of proving the

Commissioner’s determinations are erroneous. Rule 142(a); Welch

v. Helvering, 290 U.S. 111, 115 (1933). Deductions are strictly

a matter of legislative grace, and taxpayers bear the burden of

proving they are entitled to any claimed deductions. 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 records sufficient to substantiate the

amounts of the deductions claimed.

The first issue we must decide is whether petitioners are

entitled to claim Schedule A deductions for the mortgage payments

and real estate taxes paid on the residence property. Section

163(a) generally allows a deduction for all interest paid or

accrued within the taxable year on indebtedness. Section

163(h)(1), however, provides that noncorporate taxpayers

generally cannot deduct personal interest. Pursuant to section

163(h)(2)(D), qualified residence interest is excluded from the

definition of personal interest; thus, deduction of qualified

residence interest within the meaning of section 163(h)(3) is
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allowed. Section 163(h)(3)(A) defines the term “qualified

residence interest” as interest paid or accrued on acquisition

indebtedness or home equity indebtedness with respect to any

qualified residence of the taxpayer.

The aforementioned indebtedness must be an obligation of the

taxpayer and not an obligation of another. See Golder v.

Commissioner, T.C. Memo. 1976-150, affd. 604 F.2d 34, 35 (9th

Cir. 1979). Where the residence is occupied exclusively by the

taxpayers and all mortgage payments are made by the taxpayers,

the indebtedness may be found to rest solely on those taxpayers.

See Uslu v. Commissioner, T.C. Memo. 1997-551. Conversely, where

title to the property and the debt to a third-party lender for

the mortgage are held by another, taxpayers may not be found to

hold the exclusive burden and benefit of the property and

therefore are not entitled to a deduction. See Loria v.

Commissioner, T.C. Memo. 1995-420. Where the taxpayers are

equitable and beneficial owners of the property, enjoying

exclusively the burden and benefit of the property, payments of

interest are deductible. Uslu v. Commissioner, supra. Thus, the

point at issue is whether petitioners are the equitable and

beneficial owners of the residence property.

Respondent contends that because petitioners had no legal

obligation to make mortgage payments and did not hold legal title

to the residence property, they are not entitled to deduct the
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mortgage payments. Respondent further contends that petitioners

did not make any mortgage payments on the residence property;

payments were made by Camrock General Engineering Co.

Petitioners assert that while their son, Mr. Etuge, held

legal title to the residence property, petitioners owned Camrock

General Engineering Co., and through the company they had assumed

payment of the mortgage from its outset; mortgage payments were

made from a bank account registered to Camrock General

Engineering Co., of which petitioners were signatories. The

evidence shows the company was not operating as an active

business. Mr. Njenge testified that the corporation was merely

experimental, stating that “the company actually wasn’t formed,”

and they “wanted to try something new * * * but it just didn’t

happen.” The company was suspended on October 1, 2003, and Mr.

Njenge further testified that, as a result, they were “left with

a fully-established bank account” that Mrs. Rachel used to pay

bills. See Damron v. Commissioner, T.C. Memo. 1983-451 (finding

where the taxpayer leaves his employment with the intention of

resuming work in that trade or business at some indefinite time

in the future, he is not considered to be “carrying on” the trade

or business during that period). Petitioners stated no intention

of resuming the corporate activity in the future. The corporate

bank account functioned only as a personal account for
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petitioners, making the mortgage payments directly attributable

to them.

Mr. Etuge did not reside at the residence property with

petitioners, and petitioners paid for all maintenance of, and

taxes on, the property. Petitioners held exclusively the burden

and benefit of the property, using Mr. Etuge’s name solely to

acquire a mortgage loan and continuously occupying the residence

property from the outset of its acquisition. See Trans v.

Commissioner, T.C. Memo. 1999-233; Uslu v. Commissioner, supra.

When petitioners moved to the project property, they began

serving as landlords for the residence property--renting it out

to one tenant and performing all services related to that

tenancy.

We find petitioners were equitable and beneficial owners of

the property. Because it is undisputed that the residence

property is a “qualified residence” under section 163(h)(4)(A),

we find petitioners are entitled to the claimed Schedule A

deductions for the mortgage interest on the residence property.

Section 164(a) allows a taxpayer deductions for State and

local income taxes, real property taxes, and personal property

taxes. As with mortgage interest, we have held that taxpayers

who do not have legal title to property may nevertheless deduct

property taxes paid with respect to the property if they

establish equitable ownership of the property. See Trans v.
 - 9 -

Commissioner, supra; Uslu v. Commissioner, supra. Because we

have found petitioners to be the equitable and beneficial owners

of the residence property, we accordingly find petitioners are

entitled to the claimed Schedule A deductions for real estate

taxes on the residence property.

The second issue we must decide is whether petitioners are

entitled to deduct Schedule C car and truck expenses of $15,767.

Section 6001 requires taxpayers to maintain records sufficient to

establish the amount of their income and deductions; we have held

that where the taxpayers’ testimony is general, conclusory, or

uncorroborated, this Court is not required to accept such

testimony as sustaining the taxpayers’ burden of proof. See

Lerch v. Commissioner, T.C. Memo. 1987-295, affd. 877 F.2d 624

(7th Cir. 1989); Geiger v. Commissioner, T.C. Memo. 1969-159,

affd. 440 F.2d 688 (9th Cir. 1971). Section 274 further requires

strict substantiation by either adequate records or sufficient

evidence of expenses with respect to listed property as defined

in section 280F(d)(4), which includes the Dodge Dakota in the

instant case.7 The Chevrolet flatbed truck is excluded from the

definition of listed property under section 1.274-

5T(k)(2)(ii)(J), Temporary Income Tax Regs., 50 Fed. Reg. 46033

(Nov. 6, 1985); however, petitioners have failed to substantiate

7
Listed property includes, but is not limited to, any
passenger automobile or any other property used as a means of
transportation. Sec. 280F(d)(4)(A)(i) and (ii).
 - 10 -

the deductions associated with this vehicle even in the absence

of the requirements of section 274(d).

Petitioners have produced a vehicle registration for only

one of the vehicles in question and could not provide proof of

purchase or a mileage log for either vehicle; all deductions were

estimated. The estimation used for depreciation of the vehicles

included the additional 30 percent allowed for new vehicles (for

2003), but petitioners failed to present any purchase records or

other evidence to substantiate how long they had owned the

vehicles. Petitioners also offered no corroborating evidence for

the mileage totals used in the calculation for Schedule C mileage

deductions. Therefore, we find petitioners have failed to

establish their entitlement to the claimed Schedule C deductions

for car and truck expenses.

The final issue we must decide is whether petitioners are

entitled to deductions for additional unclaimed Schedule C

expenses paid from their Wells Fargo bank account. Pursuant to

section 162(a), business expenses can be deducted so long as they

primarily benefit the business and pursuant to Rule 142(a) are

substantiated by adequate records. See Hradesky v. Commissioner,

65 T.C. 87 (1975), affd. 540 F.2d 821 (5th Cir. 1976); Alemasov

v. Commissioner, T.C. Memo. 2007-130. Pursuant to section

262(a), no deductions are allowed for personal, living, or family

expenses. We have found business activities engaged in primarily
 - 11 -

for the personal benefit of the taxpayers do not constitute

business expenses. See Baldwin v. Commissioner, T.C. Memo. 2002-

162.

Petitioners have claimed entitlement to deductions from

unclaimed additional expenses paid from a personal Wells Fargo

bank account registered to Mr. Njenge. Petitioners assert the

expenses incurred are Schedule C expenses related to rebuilding

the project property. However, while the project property was

owned by Mr. Njenge’s sister, she lived in New Orleans and did

not reside at the project property. All mortgage documents

concerning the project property were sent to petitioners’

residence property. Petitioners have neither sold nor attempted

to make any commercial returns on the project property since

moving in and have used it solely as their personal residence.

Petitioners have provided no evidence to substantiate a claim

that the expenses incurred in the construction of their residence

on the project property were primarily for the benefit of their

business.

Additionally, we have held that taxpayers must be “carrying

on” a trade or business, even though unemployed, at the time the

expenditures are incurred. An important factor in determining

whether taxpayers are in a trade or business during a period of

unemployment is whether the taxpayers’ absence from the trade or

business is “temporary” or “indefinite”. See Furner v.
 - 12 -

Commissioner, 393 F.2d 292 (7th Cir. 1968), affg. 47 T.C. 165

(1966); Haft v. Commissioner, 40 T.C. 2 (1963); Owen v.

Commissioner, 23 T.C. 377 (1954); Damron v. Commissioner, supra.

In Owen, we found the taxpayer had not been carrying on a trade

or business as a lawyer where he provided no legal services

during the taxable year and his only income for that year was

received from the Government in payment for his services rendered

to the U.S. Department of Justice. Conversely, where the

taxpayers are actively seeking work for that trade or business

and have an expectation of income in the year at issue and

subsequent years, or where the taxpayers consider the business to

be their full-time employment or devote substantial time and

effort to that trade or business, the taxpayers have been found

to be carrying on such a trade or business. See Westphal v.

Commissioner, T.C. Memo. 1994-537; Louismet v. Commissioner, T.C.

Memo. 1982-294.

During 2003 petitioners had only one contract under NG&N for

the work being performed on Mr. Njenge’s sister’s residence at

the project property. Mr. Njenge stated in his testimony that no

work had been performed up to the date of trial since the

completion of that 2003 contract. All of petitioners’ income for

the 2003 tax year was derived from Mr. Njenge’s position as a

civil engineer for the Government, and petitioners suspended NG&N

in August of that year, before the completion of the work on the
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project property. Thus, we find that petitioners were not

carrying on a trade or business, but instead were simply using

their existing NG&N bank account to pay expenses related to work

performed on the project property.

Lastly, the only financial records petitioners provided

relating to the expenses at issue were copies of bank statements

that reflect various payments to supply companies and other

entities that petitioners testified, in a somewhat conclusory

manner, were related to the work performed on the project

property. We have held that such a thin showing of evidence is

not sufficient to satisfy taxpayers’ burden of substantiation.

See Alemasov v. Commissioner, supra (finding credit card records

in conjunction with the taxpayer’s testimony were not adequate

substantiation of business expenses). Furthermore, petitioners

admitted through testimony that some of the claimed expenses

connected with that bank account were strictly for personal items

and services, deductions for which are disallowed pursuant to

section 262(a). Accordingly, we hold that petitioners have

failed to carry their burden of establishing entitlement to the

additional Schedule C deductions.

To reflect the foregoing,

Decision will be entered

under Rule 155.