T.C. Summary Opinion 2008-99
UNITED STATES TAX COURT
TERRY ROGERS AND DIANNE ROGERS, Petitioners
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21238-05S. Filed August 12, 2008.
Terry Rogers and Dianne Rogers, pro sese.
Beth A. Nunnink, for respondent.
CARLUZZO, Special Trial Judge: This case was heard
pursuant to the provisions of section 7463.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period. Rule references are to the Tax Court Rules of
Practice and Procedure.
- 2 -
other court, and this opinion shall not be cited as precedent for
any other case.
In a notice of deficiency dated September 28, 2005,
respondent determined deficiencies in petitioners’ income taxes
and penalties as follows:
Penalty
Year Deficiency Sec. 6662(a)
2002 $5,420 $1,084
2003 5,765 1,153
The issues for decision for each year are: (1) Whether
petitioners are entitled to various trade or business expense
deductions in excess of the amounts allowed by respondent; and
(2) whether petitioners are liable for a section 6662(a)
accuracy-related penalty.
Background
Some of the facts have been stipulated and are so found.
Petitioners are, and were at all times relevant, married to each
other. At the time the petition was filed, they resided in
Tennessee.
Petitioners’ Employment Situations
Dianne Rogers was employed by David Smallbone Management Co.
(Management) during each year in issue. Her employment
responsibilities during those years related mostly, if not
entirely, to arranging performances and tours and otherwise
- 3 -
promoting the career of Rebecca St. James, a recording artist who
was a client of Management.
Dianne Rogers’s specific employment duties varied. As she
described them during her trial testimony, she “ran the
business”. For example, she scheduled performances, made travel
arrangements, processed payments, paid bills, picked up and
dropped off mail at the post office, and, from time to time,
traveled with the artist during promotional or performance tours.
According to Management, the company had no “official”
policy with respect to reimbursing its employees for
employment/business-related expenses paid or incurred by the
employee. Nevertheless, for the years in issue, Management
described its reimbursement practice as follows:
Employees of Smallbone Management were only reimbursed
for business travel that was directly related to their
duties. Any leisure trips, sanctioned vacation days,
etc. were not reimbursed unless approved in advance.
With respect to Dianne Rogers, Management’s reimbursement
practice was as follows during those years:
Dianne [Rogers’s] * * * duties * * * included both
reimbursed and non-reimbursed trips. She was
reimbursed regularly for task oriented duties on a day
to day basis like trips to the post office, bank, Fed
Ex, etc. She was not reimbursed for donated time,
vacation days taken mixing business and pleasure, etc.
Terry Rogers’s employment situation during each year in
issue is not so clear. By profession he was a bus driver. He
had an employment arrangement with Pioneer Coach (Coach). During
- 4 -
the years in issue Coach considered him to be “contract labor”
who was “paid per trip by the [artist’s] company.” Coach further
described the company’s arrangement with Terry Rogers as follows:
He is not reimbursed for items he provides for the bus
including candy, candles, supplies, etc. These are
items needed to make the bus enjoyable for the artists
and are the responsibility of the driver. He is also
not reimbursed for his computer. The laptop is needed
on the road for driver logs, fuel logs, e[-]mailing to
the [artist’s] management company, directions, maps,
etc.
As best can be determined from the record, one of the artists
that Terry Rogers regularly provided transportation services for
during the years in issue was Rebecca St. James.
Petitioners’ Federal Income Tax Returns
Petitioners filed a timely joint Federal income tax return
for each year in issue. Both returns were prepared by H&R Block.
1. 2002
The 2002 return includes a Schedule A, Itemized Deductions,
and a Schedule C, Profit or Loss From Business. As relevant
here, on the Schedule A petitioners claimed the following
deductions:
Deduction Amount
Charitable donations $6,579
Employee business expenses 8,687
The above amount shown for the employee business expense
deduction relates to Dianne Rogers and does not take into account
section 67(a). To some extent, the details of that deduction are
- 5 -
shown on a Form 2106-EZ, Unreimbursed Employee Business Expenses,
also included with petitioners’ 2002 return. The Form 2106-EZ
shows amounts claimed for “Vehicle expense using the standard
mileage rate” ($3,723), “Travel expenses while away from home
overnight” ($3,500), “Business expenses” not previously included
in other categories ($1,008), and “Meals and entertainment
expenses” ($456, after 50-percent reduction pursuant to section
274(n)).
The Schedule C included with petitioners’ 2002 return
identifies Terry Rogers as the proprietor and indicates that the
business income and deductions shown on that schedule are
computed in accordance with the cash receipts and disbursements
method of accounting. The Schedule C shows gross receipts and
gross income in the same amount, $6,965. As relevant here, the
following deductions are claimed on the Schedule C:
Deduction Amount
Depreciation/sec. 179 $2,021
Supplies 3,077
Meal and entertainment 3,796
(after sec. 274(n) reduction)
Utilities 1,689
Business use of home 2,096
The depreciation/section 179 deduction includes $1,843 identified
by petitioners as the cost of a computer.
- 6 -
2. 2003
Petitioners’ 2003 return includes a Schedule A and two
Schedules C.
As relevant here, on the Schedule A petitioners claimed the
following deductions:
Deduction Amount
Charitable donations $6,514
Tax preparation 263
Employee business expenses 2,208
The above amount shown for the employee business expense
deduction relates to Dianne Rogers and does not take into account
section 67(a). To some extent, the details of that deduction are
shown on a Form 2106-EZ, also included with petitioners’ 2003
return. The Form 2106-EZ shows amounts claimed for “Vehicle
expense using the standard mileage rate” ($936), “Travel expenses
while away from home overnight” ($150), “Business expenses” not
previously included in other categories ($324), and “Meals and
entertainment expenses” ($798, after 50-percent reduction
pursuant to section 274(n)).
One of the Schedules C identifies Dianne Rogers as the
proprietor. The business is described as “tour promotions:tour
promotionals”, and the business income and deductions shown on
that schedule are computed in accordance with the cash receipts
and disbursements method of accounting. As relevant here, the
following deductions are claimed on the Schedule C:
- 7 -
Deduction Amount
Depreciation/sec. 179 $ 417
Rent or lease 1,589
Supplies 1,800
Office expenses 2,641
Utilities 2,356
The second Schedule C included with petitioners’ 2003 return
identifies Terry Rogers as the proprietor. As with 2002, that
Schedule C relates to his employment as a bus driver and
indicates that the income and deductions attributable to his
business are computed in accordance with the cash receipts and
disbursements method of accounting. As relevant here, the
following deductions are claimed on the second Schedule C:
Deduction Amount
Depreciation/sec. 179 $1,339
Supplies 1,774
Meals and entertainment 3,363
(after sec. 274(n) reduction)
Business use of home 5,570
Other expenses 775
The Notice of Deficiency
The notice of deficiency that forms the basis for this case
contains no fewer than 26 adjustments relating to the 2 years in
issue. Adjustments that have been agreed to by petitioners or
are otherwise in their favor are not discussed. Similarly,
computational adjustments are not addressed in this opinion.
- 8 -
For 2002 respondent disallowed: (1) $2,191 of the
charitable contribution deduction; (2) the employee business
expense deduction claimed on the Schedule A; and (3) all of the
Schedule C deductions shown above.
For 2003 respondent disallowed: (1) $250 of the charitable
contribution deduction; (2) the tax preparation fee expense
deduction claimed on the Schedule A; (3) the employee business
expense deduction claimed on the Schedule A; (4) $1,031 of
deduction for “Supplies”, $1,572 of the deduction for “Office
expense”, the entire deduction for “Depreciation/section 179”,
and the entire deduction for “Rent or lease” claimed on the
Schedule C for Dianne Rogers; and (5) all of the deductions
listed above claimed on the Schedule C for Terry Rogers.
For each year respondent also imposed a section 6662(a)
accuracy-related penalty on several grounds, including
“negligence or disregard of rules or regulations” and
“substantial understatement of income tax”.
Discussion
There is no dispute that deductions are allowable for the
types of expenses that are involved in this case. See secs.
162(a), 170. Nevertheless, as stated and established in opinions
too numerous to count, otherwise deductible expenses, such as the
ones in dispute in this case, must be substantiated. See sec.
6001; Hradesky v. Commissioner, 65 T.C. 87 (1975), affd. per
- 9 -
curiam 540 F.2d 821 (5th Cir. 1976); sec. 1.6001-1(a), Income Tax
Regs. Furthermore, certain deductions, such as those relating to
travel and entertainment expenses, are subject to very strict
substantiation requirements. See sec. 274(d).
Taking into account the concessions respondent made at
trial, the dispute between the parties focuses on the extent to
which petitioners have properly substantiated the expenses that
underlie the deductions, or portions of deductions, that remain
in dispute. That being so, we briefly discuss the evidence, or
the lack of evidence, that informs our findings.
Witness Testimony
Dianne Rogers appeared at trial and testified on
petitioners’ behalf.2 She explained how she and her spouse were
employed during the years in issue, but her knowledge of the
items of income and deductions claimed on petitioners’ returns
for the years in issue was limited. She began her testimony as
follows:
Well, just a little history that when we went and had
our taxes filed, we went to H&R Block. We always used
the same auditor. Her name was Carol, and I’m not sure
what her last name was. She was an accountant for the
State of Tennessee. We went to her every single year
for probably seven years, because we felt her being an
accountant and knowing –- for the State of Tennessee,
and so she handled all of our deductions, where to
place them. We took everything to her.
2
Terry Rogers did not appear at trial.
- 10 -
When we received the letter from the IRS saying
that we were audited, I went back to H&R Block and gave
them the letter, and you know, had them look up
everything. They came back and said they couldn’t help
me, because I did not take out the Peace of Mind
insurance, so that was how I got Lisa Unge, because at
that point, I received the letters from the IRS, and
then she had to refile everything.
Lisa Unge was called as a witness on petitioners’ behalf.
Following preliminary points, and after acknowledging that she
did not prepare petitioners’ return for either year in issue, she
began her testimony as follows: “I prepared the amended return
that she’s [Dianne Rogers] referring in the stipulation of facts,
and all the handwriting on your evidence is mine. Not all of it,
but --”.
For what it is worth, we point out that no amended returns
have been made part of the record by stipulation or otherwise.
Apparently the “amended returns” to which Lisa Unge referred were
actually copies of the original returns for the years in issue
that contained handwritten strikeouts and substituted numbers for
many of the items of income and deductions initially in dispute.
Some of the strikeouts and insertions suggest that petitioners
agree to adjustments made in the notice of deficiency. When the
Court ask Dianne Rogers whether that, in effect, was the case,
she responded: “I think that’s a question you’ll have to ask
Lisa [Unge]”. Lisa Unge did not know.
Other than Dianne Rogers and Lisa Unge, no witnesses were
called to testify on behalf of petitioners. Neither witness
- 11 -
could explain how the deductions, or portions of the deductions,
remaining in dispute were computed.
Documents Introduced Into Evidence
All of the documents introduced into evidence were
stipulated. None of the exhibits tie the evidence to the
computation of the deductions, or portions of deductions, that
remain in dispute. Instead the documents introduced into
evidence include, among other things: (1) Copies of hundreds of
receipts (some illegible) from numerous vendors and restaurants,
arranged in no relevant order that is apparent to the Court; (2)
numerous copies of monthly credit card statements, some reported
transactions having been obliterated by what might have been
highlighting on the original; (3) numerous copies of monthly bank
statements; and (4) printed calendars containing handwritten
notations.
At trial it became obvious to the Court that it would be
difficult, if at all possible, to connect specific exhibits (more
accurately specific copies of receipts or transactions shown on
an exhibit) with the deductions or portions of deductions that
remain in dispute without a schedule showing/explaining how an
exhibit or a portion of an exhibit provides substantiation for a
related deduction or portion of a deduction. Following the
trial, petitioners were directed by order to “submit to the Court
a written schedule that shows the computation of each disputed
- 12 -
deduction by reference to specific items or transactions shown in
an exhibit”. Petitioners submitted a two-page “summary” that
complies somewhat with the Court’s directive, but only to a
limited extent (the summary). Attached to the summary are copies
of “corrected” Forms 1040, U.S. Individual Income Tax Return, for
the years in issue. Even if properly before the Court, which
they are not, it is unclear what conclusions petitioners intended
the Court to draw from the “corrected” Forms 1040.
In part, instead of connecting disputed deductions with
exhibits, the summary recharacterizes some of the disputed
deductions without providing a basis for the recharacterization.
Where the summary does reference specific exhibits to disputed
deductions, the reference is often to an entire exhibit. Even if
it appears or can be determined that an item shown on the exhibit
substantiates a deduction, it cannot be determined whether
respondent has already taken that item into account in a partial
allowance or subsequent concession, or whether petitioners were
or could have been reimbursed for the expenditure.
Findings With Respect To Disputed Deductions
After careful review of the evidence we arrive at the
following conclusions. The testimony of the witnesses provides
no basis for allowing a deduction for any expense in excess of
the amount already allowed by respondent. Furthermore, although
there might be “needles” of substantiating documents in the
- 13 -
numerous exhibits admitted into evidence in this case, for the
most part those needles are effectively obscured by the
“haystacks” of exhibits in which they are buried.
That being so, and keenly aware that the generation of
business income routinely involves business expenditures, see
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930), we are unable
to find that petitioners are entitled to deductions in excess of
the amounts already allowed by respondent with the following
possible exception.
For each year in issue Terry Rogers was employed as a bus
driver. It appears that the amounts now allowed by respondent
for meals expenses for each year might not properly reflect his
status as an individual involved in the transportation industry.
See sec. 274(n)(3); Rev. Proc. 2003-80, 2003-2 C.B. 1037; Rev.
Proc. 2002-63, 2002-2 C.B. 691; Rev. Proc. 2001-47, 2001-2 C.B.
332. If not, the proper amounts should be determined and
respondent’s allowances adjusted.
Section 6662(a) Accuracy-Related Penalty
For each year in issue respondent determined that
petitioners are liable for a section 6662(a) accuracy-related
penalty. Various grounds for the imposition of that penalty are
set forth in the notice of deficiency. If it is shown that the
taxpayer acted in good faith and there is reasonable cause for
- 14 -
the deficiency, then the section 6662(a) accuracy-related
penalty is not applicable. Sec. 6664(c); Higbee v. Commissioner,
116 T.C. 438, 446-447 (2001).
As best can be determined from the record, petitioners
relied upon a paid income tax return preparer to compute their
Federal income tax liability for each year in issue. Nothing in
the record suggests that such reliance was not reasonable.
Furthermore, when selected for examination, petitioners returned
to their return preparer for assistance, only to be turned away
because they did not subscribe to “Peace of Mind” coverage for
either year in issue. We are satisfied that petitioners had
reasonable cause and acted in good faith with respect to whatever
deficiency remains after respondent’s concessions for each year
in issue are taken into account. They are not liable for the
section 6662(a) accuracy-related penalty for either year in
issue.
Decision will be entered
under Rule 155.