T.C. Summary Opinion 2008-105
UNITED STATES TAX COURT
HASAN HUSEYIN BABATURK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9950-06S. Filed August 19, 2008.
Hasan Huseyin Babaturk, pro se.
Bradley C. Plovan, for respondent.
GOLDBERG, 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. 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 in effect for
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the years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined deficiencies of $34,890 and $6,985,
and accuracy-related penalties under section 6662(a) of $6,978
and $1,397, in petitioner’s Federal income tax for 2003 and 2004,
respectively.
The deficiencies resulted from: (1) Respondent’s
disallowance of $106,710 and $14,850 of business expense
deductions claimed on Schedule C, Profit or Loss From Business,
for 2003 and 2004, respectively; (2) respondent’s disallowance of
dependency exemption deductions petitioner claimed for his
girlfriend, Arlene Makris (Ms. Makris), in 2003 and 2004; and (3)
$650 of unreported income for 2004. In the deficiency
computations, respondent also made adjustments to petitioner’s
self-employment income, itemized deductions, and alternative
minimum taxes based on the aforementioned disallowances and
income adjustment.
After concessions,1 the issues for decision are: (1)
Whether petitioner is entitled to certain business expense
deductions for 2003 and 2004; (2) whether petitioner is entitled
1
The parties agree that petitioner received $650 in
nonemployee compensation from Erdman Medical Center, Inc., in
2004 which was reported on the Schedule C for Erdman Medical
Center, Inc. However, petitioner’s deduction of a $650 insurance
expense resulted in zero business income. Respondent allowed
this expense.
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to dependency exemption deductions for Ms. Makris for 2003 and
2004; and (3) whether petitioner is liable for accuracy-related
penalties under section 6662(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference.
Petitioner resided in Maryland at the time the petition was
filed.
During 2003 petitioner was a general practice physician who
provided medical services for seven medical clinics in Baltimore,
Maryland, and the surrounding area. These were: Erdman Medical
Center, Inc.; Mount Claire Medical Center, Inc.; Alameda Medical
Center, Inc.; Liberty Medical and Injury Center, Inc.; Slade
Medical Center, Inc.; Northern Medical and Physical Therapy
Center, LLC; and Goodcare Medical Services. Petitioner also
provided medical services as a telemedicine physician for Medical
Advisory Systems, Inc., in Owings, Maryland. Petitioner attached
eight Schedules C (one for each clinic where he worked and one
for his work at Medical Advisory Systems, Inc.) to his 2003
Federal income tax return on which he reported combined gross
income of $162,757.46, received from the above sources, and
combined business expenses totaling $106,710. The business
expenses deducted were as follows:
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Car and truck expenses $20,100
Commissions and fees 1,465
Insurance 19,910
Legal and professional
services 10,010
1
Office expenses 6,015
Repairs and maintenance 5,540
Supplies 5,010
Taxes and licenses 1,050
Travel 19,620
Meals and entertainment 17,990
Total 106,710
1
Petitioner classified his cellular phone expenses for
both years as office expenses.
During 2004 petitioner worked at Medical Advisory Systems,
Inc., Erdman Medical Center, Inc., and MS-HC, L.L.C., a
multispecialty health clinic. The latter two facilities were in
Baltimore. Petitioner submitted two Schedules C with his 2004
Federal income tax return: One for Medical Advisory Systems,
Inc., and the other for Erdman Medical Center, Inc. On these
Schedules C he reported combined gross income totaling $17,150
and combined business expenses totaling $15,550. These business
expenses were as follows:
Car and truck expenses $5,000
Insurance 2,500
Legal and professional
services 3,000
Office expenses 2,000
Travel 2,000
Meals and entertainment 1,000
1
Total 15,500
1
In the notice of deficiency for 2004 respondent
disallowed $14,850 of business expenses.
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Petitioner worked at eight medical facilities in 2003. He
divided his time between working at medical clinics in and
around Baltimore and the telemedicine facility in Owings,
Maryland, approximately 50 miles from Baltimore. Petitioner
would often work at more than one of the Baltimore-area clinics
per day. Petitioner kept regular office hours at each of these
clinics, and support staff employed by the clinic would arrange
his patient schedule. All supplies and equipment that
petitioner used while at the facility were provided by the
clinic with the exception of personal items limited to his lab
coat and stethoscope.
Petitioner would occasionally work a full day seeing
patients at one or more of the medical clinics and then travel
to Owings to work at Medical Advisory Systems, Inc. Owings is
approximately 1 hour from Baltimore by car. As a telemedicine
physician, petitioner staffed an Internet phone with video
capabilities in order to consult with and treat patients working
overseas as U.S. Department of Defense contractors and oil
workers. Petitioner would usually arrive at the call center in
the early evening and work his assigned shift through the night.
The facility provided all of the equipment necessary for
petitioner’s work at the call center including a break/sleep
room for him to rest in during and after his shift. Petitioner
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would often go to breakfast with the other call center
physicians before returning to Baltimore.
On his 2003 and 2004 returns petitioner claimed two
dependency exemptions deductions: One for his minor child,
B.B.,2 and one for Ms. Makris. At the time of trial
petitioner’s minor son was 16 years old, and he had been in a
relationship with Ms. Makris, the child’s mother, for 17 years.
Ms. Makris and the child resided with petitioner, and Ms. Makris
did not work outside of the home in either 2003 or 2004.
Respondent disallowed petitioner’s claimed dependency exemption
deductions for Ms. Makris because the “relationship between
(petitioner and Ms. Makris) was in violation of local law.”
Following notification that his 2003 and 2004 returns had
been selected for examination, petitioner met with a revenue
agent. On the basis of that meeting, petitioner was convinced
that the revenue agent was biased against him because he is a
Muslim. Following the meeting, both the revenue agent and an
Appeals officer attempted on several occasions to reschedule
petitioner’s examination and later an Appeals conference.
However, either petitioner’s schedule would conflict with the
time that the revenue agent or the Appeals officer proposed or
petitioner would change his mind about attending the scheduled
2
The Court uses initials when referring to a minor child.
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conference on the basis of “his perception of racial bias”
stemming from his previous meeting with the revenue agent.
Discussion
In general, the Commissioner’s determination as set forth
in a notice of deficiency is presumed correct. Welch v.
Helvering, 290 U.S. 111, 115 (1933). In pertinent part, Rule
142(a)(1) provides the general rule that the burden of proof
shall be on the taxpayer. In certain circumstances, however, if
the taxpayer introduces credible evidence with respect to any
factual issue relevant to ascertaining the proper tax liability,
section 7491 shifts the burden of proof to the Commissioner.
Sec. 7491(a)(1); Rule 142(a)(2). Respondent argues that
petitioner has not produced sufficient evidence such that the
burden of proof should shift to him. For the reasons discussed
infra we agree.
Schedule C Expenses
Deductions are strictly a matter of legislative grace, and
the taxpayer bears the burden of proving entitlement to any
deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). A taxpayer is required to maintain records
sufficient to establish the amount of any deduction claimed.
Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. With respect to
the Schedule C expenses, petitioner bears the burden of proving
that respondent’s determinations as set forth in the notice of
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deficiency are erroneous. See Rule 142(a); Welch v. Helvering,
supra at 115.
Section 162(a) generally allows a deduction for ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. The determination of
whether an expenditure satisfies the requirements for
deductibility under section 162 is a question of fact. See
Commissioner v. Heininger, 320 U.S. 467, 475 (1943). In
general, an expense is ordinary if it is considered normal,
usual, or customary in the context of the particular business
out of which it arose. See Deputy v. du Pont, 308 U.S. 488, 495
(1940). Ordinarily, an expense is necessary if it is
appropriate and helpful to the operation of the taxpayer’s trade
or business. See Commissioner v. Tellier, 383 U.S. 687 (1966);
Carbine v. Commissioner, 83 T.C. 356, 363 (1984), affd. 777 F.2d
662 (11th Cir. 1985). Section 262(a) generally disallows a
deduction for personal, living, or family expenses.
A taxpayer whose principal place of business is at a
distance from his residence cannot deduct the cost of the
transportation to and from the business or the costs of meals
and lodging at the place of business. Such expenses are
regarded as personal commuting expenses and under section 262
are not deductible. Fausner v. Commissioner, 413 U.S. 838
(1973); Commissioner v. Flowers, 326 U.S. 465 (1946). If a
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taxpayer has several regular places of work, however, commuting
expenses from the taxpayer’s home to his first work site and
from his last work site to his home are not deductible, but
transportation expenses between the work sites are deductible.
Steinhort v. Commissioner, 335 F.2d 496 (5th Cir. 1964), affg.
T.C. Memo. 1962-233; Feistman v. Commissioner, 63 T.C. 129
(1974). Travel away from home generally requires that the
taxpayer remain either overnight or for a period requiring sleep
or rest. United States v. Correll, 389 U.S. 299 (1967).
For certain kinds of expenses otherwise deductible under
section 162(a), such as expenses related to travel, meals and
entertainment, and “listed property”, as defined in section
280F(d)(4), a taxpayer must satisfy substantiation requirements
set forth in section 274(d) before such expenses will be allowed
as deductions. See sec. 1.274-5T, Temporary Income Tax Regs.,
50 Fed. Reg. 46014 (Nov. 6, 1985). As pertinent here, “listed
property” is defined in section 280F(d)(4) to include passenger
automobiles and other property used as a means of transportation
unless excepted by section 280F(d)(4)(C) or (5)(B), and cellular
phones. See sec. 280F(d)(4)(A)(i), (ii), (v). With respect to
such “listed property”, a taxpayer must prove: (1) The amount
of each separate expenditure with respect to such property; (2)
the amount of each business use based on the appropriate
measure; and (3) the business purpose for an expenditure or use
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with respect to such property. Sec. 1.274-5T(b)(6), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
In order to satisfy his burden of proof, petitioner relies
on the following: (1) His testimony; (2) certain credit card
statements pertaining to 2003; (3) two calendars, one for 2003
and the other for 2004, that contain abbreviated notes as to his
work assignments; and (4) a document entitled “IRS Review of
Taxpayer’s papers received 10/4/07”, which petitioner prepared
following a meeting with the revenue agent.
At the outset, we note that petitioner’s testimony as to
his business’s expenses for the years in issue was, at times,
inconsistent, vague, conclusory, and self-serving. As such, we
are not required to, nor shall we, rely on his testimony to
establish his entitlement to any deductions at issue. See Shea
v. Commissioner, 112 T.C. 183, 188 (1999). We are convinced,
however, from petitioner’s testimony that his trips between the
clinics in the Baltimore area would generally qualify as
deductible transportation expenses. Also, on the basis of
petitioner’s testimony, we do not believe that petitioner’s
overnight work at Medical Advisory Systems, Inc., required a
period of sleep or rest as the nature of his job was to provide
telemedicine services throughout the night. Irrespective of the
foregoing, and for the reasons discussed infra, we conclude that
petitioner has not complied with the rules and regulations for
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record keeping that, if satisfied, might entitle him to deduct
certain business expenses at issue. See sec. 6001; sec. 1.6001-
1(a), Income Tax Regs.
First, and with respect to the credit card statements
produced, petitioner testified that these statements listed
items purchased both for his business and for personal use and
that since his business and personal lives were “inextricably
connected” it would be impossible to distinguish the two. In an
attempt to do just this, petitioner placed a check mark on the
statements beside those expenses which were either for his
personal or business use. Without any testimony to clarify
these marks it is impossible for us to presume their relevance;
and even if we were to know whether petitioner used the check
marks to indicate the expenses as business expenses, we lack
credible evidence of explanation as to why they would be so.
For example, several of the expenses listed are for purchases
from department stores, convenience stores, and drug stores.
Without detailed elaboration it is impossible to determine
whether any of these expenses were business expenses of the type
that petitioner would be entitled to claim a deduction for.
With respect to the calendars, we note that petitioner
admitted that the notations on the calendars were not always
contemporaneously made. Additionally, petitioner appears to
have used an abbreviation system to record the number of hours
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each day that he would work at a particular location. There is
no record of the number of miles or the total weekly miles that
he drove from location to location.3 Moreover, petitioner did
not testify as to how far each clinic was from the others.
Given the coded nature of the calendars and the lack of any
testimony as to the distances between petitioner’s work sites,
we do not find that the calendars are either credible or of any
assistance to the Court.
Finally, and with respect to the document entitled “IRS
Review of Taxpayer’s papers received 10/4/07”, petitioner
prepared this document from his recollection following his
meeting with the revenue agent. As respondent pointed out at
trial, the nature of the expenses and the amounts for those
expenses listed on this document were based on what petitioner
felt that respondent would accept during the appeals process.
In fact, as respondent also pointed out at trial, contrary to
petitioner’s opinion that the revenue agent was racially biased
against him, that agent was willing to allow some of the claimed
expenses despite petitioner’s inability to produce all receipts
and records pertaining to those items. Therefore, we view the
document as no more than petitioner’s opinion as to the items
that he felt himself entitled to as business expense deductions
3
If there is such a record, it is by no means evident from
our examination of the calendar, and petitioner did not testify
to such a notation at trial.
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at the time of his meeting with the revenue agent or the Appeals
officer.
On the basis of our review of the entire record, we cannot
allow petitioner any of the claimed expenses for 2003 or 2004.
Petitioner’s glaring lack of substantiation is abundantly clear,
along with his audacious position that it is the Court’s
function to sift through the unclear and incomplete records that
he provided us in order to determine his correct tax liability.
We find neither the calendars nor the credit card statements to
be clear or credible evidence to substantiate any of his claimed
expenses. With respect to the legal services deductions, the
record is devoid of any invoices from his attorneys that might
permit us to allow those items. In short, we have no evidence
to approximate, where permissible, a base for any of the items
claimed. Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir.
1930). Where section 274(d) requires strict substantiation for
those items previously mentioned, we lack any evidence to
determine any exact expenses or the business nature of those
items.
Finally, as to petitioner’s argument that were he to comply
with the substantiation requirements of the Code he would be
constantly recording his expenses, we are unmoved. Petitioner
characterized almost two-thirds of his gross income for 2003 as
business expense deductions and produced in substantiation only
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two nearly illegible personal calendars and partial copies of
two credit card statements for those years. His testimony at
trial that he had “more receipts” and odometer readings was not
supported by the production of any credible, tangible evidence
of such items. Moreover, we simply do not believe that
petitioner had such documentation. To wit, respondent’s
counsel, in preparation of this case for trial, sent petitioner
no less than five requests for production in accordance with our
decision in Branerton Corp. v. Commissioner, 61 T.C. 691, 692
(1974). None of these requests were answered. Accordingly, for
all of the foregoing reasons, we sustain respondent in full with
respect to his disallowance of petitioner’s business expense
deductions for 2003 and 2004.
Dependency Exemption Deductions
Petitioner claimed two dependency exemption deductions on
his 2003 and 2004 returns. Petitioner listed one minor child
and one adult--Ms. Makris--as dependents. Respondent disallowed
the dependency exemption deductions claimed for Ms. Makris.
Generally, the burden of proof rests with the taxpayer.
Rule 142(a)(1). This burden will shift, however, in “respect of
any new matter, increases in deficiency, and affirmative
defenses, pleaded in the answer”. Id. A new argument presented
to sustain a deficiency will be treated as a new matter when it
“alters the original deficiency or requires the presentation of
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different evidence.” Wayne Bolt & Nut Co. v. Commissioner, 93
T.C. 500, 507 (1989). If the new argument merely clarifies or
develops the Commissioner’s original determination it is not a
new matter that will shift the burden to the Commissioner. Id.
Respondent disallowed the claimed dependency exemption
deductions for Ms. Makris on the basis that the relationship
between petitioner and Ms. Makris was in violation of local law.
See sec. 152(b)(5). At trial respondent abandoned this position
and argued that we should sustain respondent’s determination on
the basis that petitioner had failed to show that he had
provided more than one-half of the support for Ms. Makris during
the years in issue. The evidence required to show that the
relationship between petitioner and Ms. Makris violated local
law is different from the evidence required to establish that
petitioner had failed to show that he had provided more than
one-half of the support for Ms. Makris during the years in
issue. The latter argument is therefore a new matter.
Accordingly, the burden of proving that petitioner did not
establish that he furnished more than one-half of the total
support for Ms. Makris during the years in issue is on
respondent. See Rule 142(a).
Section 151 allows deductions for personal exemptions,
including exemptions for dependents of a taxpayer. See sec.
151(c). Section 152(a) defines the term “dependent”, as
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relevant here, to include an individual who has as his or her
principal place of abode for the taxable year the home of the
taxpayer, if over half of his or her support for the calendar
year was received from the taxpayer. The term “support”
includes “food, shelter, clothing, medical and dental care,
education, and the like.” Sec. 1.152-1(a)(2)(i), Income Tax
Regs.
In determining whether an individual received more than
half of his or her support from a taxpayer, there shall be taken
into account the amount of total support received from the
taxpayer as compared to the entire amount of support which the
individual received from all sources. Id.
Petitioner testified that Ms. Makris lived with him
throughout 2003 and 2004, that she did not work outside of the
home, that he provided her with credit cards for her personal
use, and that he asked her to purchase items for himself and
their home. Petitioner stated that Ms. Makris received only
occasional support from her elderly mother.
Respondent presented no evidence as to the total amount of
support provided to Ms. Makris from all sources and that Dr.
Babaturk furnished less than 50 percent of her support.
Accordingly, we conclude that respondent has failed to meet his
burden of proof on this issue and hold that Dr. Babaturk is
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entitled to claim dependency exemption deductions with respect
to Ms. Makris for 2003 and 2004.
Accuracy-Related Penalties
In the notice of deficiency, respondent determined that
petitioner is liable for accuracy-related penalties under
section 6662(a) for underpayments of taxes. With respect to any
penalty or addition to tax, section 7491(c) places the burden of
production on the Commissioner.
Section 6662(a) imposes a 20-percent penalty with respect
“to any portion of an underpayment of tax required to be shown
on a return”. This penalty applies to underpayments
attributable to any substantial understatement of income tax.
Sec. 6662(a), (b)(2).
An “understatement” of income tax is defined as the excess
of the tax required to be shown on the return over the tax
actually shown on the return. Sec. 6662(d)(2)(A). An
understatement is “substantial” if it exceeds the greater of 10
percent of the tax required to be shown on the return, or
$5,000. Sec. 6662(d)(1)(A).
Section 6664 provides a defense to the accuracy-related
penalty if a taxpayer establishes that there was reasonable
cause for any portion of the underpayment and that he or she
acted in good faith with respect to that portion. Sec.
6664(c)(1); sec. 1.6664-4(a), Income Tax Regs. Whether a
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taxpayer acted with reasonable cause and in good faith is
decided on a case-by-case basis, taking into account all the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs. The taxpayer’s education, experience, and knowledge
are considered in determining reasonable cause and good faith.
And, generally, the most important factor is the extent of the
taxpayer’s effort to assess his or her proper tax liability.
Id.
Respondent determined an accuracy-related penalty under
section 6662(a) to be applicable because petitioner understated
his income tax by $34,890 on his 2003 return and $6,985 on his
2004 return. Because each understatement of tax was greater
than 10 percent of the tax required to be shown on the return or
$5,000, each understatement was a substantial understatement of
income tax pursuant to section 6662(d)(1)(A).
Petitioner argues that he should not be held liable for the
penalty because he was in compliance with the applicable rules
and regulations. For the reasons previously discussed, we
disagree.
The Commissioner bears the burden of production under
section 7491(c) with respect to the accuracy-related penalty
under section 6662. To meet that burden, the Commissioner must
come forward with sufficient evidence indicating that it is
appropriate to impose the penalty. Higbee v. Commissioner, 116
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T.C. 438, 446 (2001). Although the Commissioner bears the
burden of production with respect to the penalty, the
Commissioner “need not introduce evidence regarding reasonable
cause * * * or similar provisions. * * * [T]he taxpayer bears
the burden of proof with regard to those issues.” Id.
Petitioner concedes that if we determine that he did not
comply with the rules and regulations with respect to record
keeping for the years in issue, underpayments of taxes would
exist for those years. Petitioner offered no evidence under
section 6662 with respect to those items raised in the petition.
On the basis of the foregoing, we hold that respondent has
satisfied the burden of production under section 7491(c).
We further conclude that petitioner has failed to show that
his reliance on the documents produced to substantiate the
claimed expenses was reasonable. On the entire record before
us, we hold that petitioner has failed to carry his burden of
proving that he is not liable for accuracy-related penalties
for 2003 and 2004 under section 6662(a). We accordingly sustain
respondent’s determination with respect to that issue.
Decision will be entered
under Rule 155.