T.C. Summary Opinion 2008-124
UNITED STATES TAX COURT
CHARLES R. OLIVER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16034-06S. Filed September 18, 2008.
Charles R. Oliver, pro se.
Beth A. Nunnink, for respondent.
WELLS, Judge: The instant case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court,
1
All subsequent section references are to the Internal
Revenue Code, as in effect for 2002 and 2003, the years in issue.
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and this opinion shall not be treated as precedent for any other
case.
The issues we must decide are: (1) Whether petitioner is
entitled to business expense deductions and costs of goods sold
greater than those respondent allowed for 2002 and 2003; (2)
whether petitioner had gambling winnings of $3,097 and $1,250 in
2002 and 2003, respectively, and whether petitioner is entitled
to deduct gambling losses; and (3) whether petitioner is liable
for penalties under section 6662 for 2002 and 2003.
Background
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated in this
Summary Opinion by reference and are found as facts in the
instant case.
At the time of filing the petition, petitioner resided in
Tennessee.
During 2002 and 2003 petitioner engaged in a painting
business named R & B Paint & Repair Co., using subcontractors,
the income and expenses of which he reported on Schedules C,
Profit or Loss From Business, attached to his returns for those
years. Petitioner maintained no receipts, contracts, invoices,
Forms 1099, or Forms W-2, Wage and Tax Statement, with respect to
the income and expenses reported on his Schedules C. The only
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documentation petitioner maintained was his checking account
records.
During 2002 and 2003 petitioner gambled at Fitzgerald’s
Casino. During 2002 petitioner had gambling winnings of $3,097.
During 2003 petitioner had gambling winnings of $1,250. In both
2002 and 2003 petitioner’s gambling losses met or exceeded his
gambling winnings. On each of his returns for 2002 and 2003
petitioner omitted his gambling winnings from gross income and
claimed the standard deduction.
Discussion
Schedule C Expenses
In general, deductions are a matter of legislative grace and
the burden of showing the right to claimed deductions is on the
taxpayer. Welch v. Helvering, 290 U.S. 111 (1933).
Section 162(a) allows the deduction of “ordinary and
necessary expenses” incurred while carrying on a trade or
business. Section 6001 requires a taxpayer to maintain adequate
books of account or records that are sufficient to establish the
amount of gross income, deductions, or other matters required to
be shown on his tax return.
If a taxpayer establishes that a deductible expense has been
paid but is unable to substantiate the precise amount, the Court
may estimate the amount of the deductible expense, bearing
heavily against the taxpayer whose inexactitude in substantiating
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the amount of the expense is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). An estimate
is possible, however, only if the taxpayer presents evidence
sufficient to provide some basis upon which an estimate can be
made. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
In general, no deduction is allowed for personal, living,
or family expenses. Sec. 262. In Richards v. Commissioner, T.C.
Memo. 1999-163, the Court stated that television sets are
“inherently personal items under section 262.” The Court has
also held that the expense incurred in repairing a television
is inherently personal. O’Connor v. Commissioner, T.C. Memo.
1986-444. Additionally, costs of daily newspapers in general
circulation, which contain a significant amount of information
that is inherently personal, are nondeductible personal expenses.
Richards v. Commissioner, supra.
Car and truck expenses are subject to the strict
substantiation requirement found in section 274(d) and section
280F(d)(4)(A)(i) and (ii). The taxpayer must provide documents
that corroborate by adequate records or by sufficient evidence
the amount of the expense, the mileage for each business use of
the vehicle and the total mileage for all use of the vehicle
during the taxable period, the date of the business use, and the
business purpose for the use. Sec. 1.274-5T(b)(6), Temporary
Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). The
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taxpayer must substantiate each element of an expenditure or use
by adequate records or by sufficient evidence corroborating his
own statement. Sec. 1.274-5T(c), Temporary Income Tax Regs., 50
Fed. Reg. 46016 (Nov. 6, 1985). During 2002 the standard mileage
rate was $0.365. Rev. Proc. 2001-54, 2001-2 C.B. 530. During
2003 the standard mileage rate was $0.36. Rev. Proc. 2002-61,
2002-2 C.B. 616.
On his Schedules C petitioner deducted expenses for
“DirecTV” (cable television) and listed the cable television
access as “weather info service” on the theory that the cable
television included weather information. Petitioner claims that
the purpose of having cable television was to watch the Weather
Channel. However, petitioner admitted that he had basic cable
television which gave him access to 40 to 50 stations. Basic
cable television, similar to daily newspapers, contains a
significant amount of information which is inherently personal.
As with the purchase of a television or television repair,
petitioner’s cable television access is not deductible as
petitioner has failed to prove that his use of the cable
television access was not primarily personal. Accordingly, we
hold that petitioner is not entitled to deduct the claimed “Other
expenses” for cable television.
For 2002 petitioner claimed cost of goods sold of $51,531.
Petitioner included cost of labor of $18,484, materials and
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supplies of $31,414, and other costs of $1,633. According to
petitioner’s check analysis, petitioner had materials and
supplies expenses of $11,650 and subcontractor expenses of
$18,509.89. Many of petitioner’s checks for materials and
supplies expenses are made out to “cash”. He provided no
receipts to show that the cash was actually used for materials
and supplies.
Additionally, some of the checks were payable to places that
do not appear to be related to petitioner’s business, such as a
grocery store. Petitioner made credit card payments to Wachovia,
Home Depot, Cabelas, Exxon, Lowes, Texaco, Union76, Citi,
Discover, NAEC, Lasalle Bank, Sams, and Conseco Finance totaling
$16,572.21. Petitioner offered no receipts, invoices, or
statements that show the items purchased with the credit cards.
Accordingly, the record does not show which, if any, business
expenses were paid with the credit cards. Because petitioner
failed to offer any receipts or invoices, we cannot estimate
which if any of such items should be included in petitioner’s
cost of goods sold.
Petitioner provided no Forms W-2 or Forms 1099 issued to his
subcontractors to support his claimed cost of labor.
Petitioner’s own check analysis indicates materials and supply
costs of $11,650 and subcontractor expenses of $18,510 for total
cost of goods sold of $30,160. In the notice of deficiency
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respondent allowed cost of goods sold of $35,251. Accordingly,
even if we were to accept all the checks petitioner issued for
“materials and supplies” and “subs” as petitioner’s expenses,
respondent already has allowed cost of goods sold greater than
the amount shown in petitioner’s analysis. On the basis of the
foregoing, we hold that petitioner is not entitled to additional
cost of goods sold for 2002.
For 2003 petitioner claimed cost of goods sold of $117,195.
Petitioner included cost of labor of $39,055 and materials and
supplies of $78,140. According to petitioner’s “Client’s Recap
of Books”, petitioner had subcontractor expenses of $48,070.42
and materials and supplies expenses of $69,125.53. On the basis
of petitioner’s memos on his checks, the checks are broken down
into materials, subs, and credit card payments. Petitioner did
not offer any Forms W-2 or Forms 1099 for his subcontractor
expenses. Even if we were to accept all the checks to
petitioner’s subcontractors, the checks marked materials (usually
made out to “cash”), and the checks to Porter Paints and Sherwin
Williams as petitioner’s expenses, they would total only $76,058,
and respondent already has allowed cost of goods sold of $93,719.
Additionally, petitioner offered checks made out to “cash”
which listed “materials” on the memo line. However, he provided
no receipts to show that the cash was actually used for materials
and supplies. Because petitioner did not offer any receipts or
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invoices regarding his materials and supplies, it is unclear
whether any items were returned for cash or credit. Some
of the checks in the record are for purposes unrelated to
petitioner’s business, for example, check No. 1958 for boat
registration and check No. 1956 for a birthday present to Casey
Oliver. Accordingly, we are unable to conclude that petitioner
used his checking account exclusively for business. Petitioner
made credit card payments to Wachovia, Home Depot, Cabelas,
Exxon, Lowes, Providian, and Bank One. To the extent petitioner
is claiming that some or all of those credit card payments are
deductible, there are no receipts, invoices, or statements in the
record that show what was purchased with those credit cards.
Because petitioner failed to offer any receipts or invoices, we
cannot determine which if any of such claimed expenses were paid
with the credit cards and should be included in petitioner’s cost
of goods sold. We hold that petitioner has failed to show that
he had cost of goods sold greater than the amount respondent
allowed for 2003.
For 2002 petitioner deducted rent expenses of $2,400.
Petitioner stated that he agreed to pay his companion $100 a week
for rent and utilities. However, petitioner admitted that his
companion would not make him pay and he was allowed to pay only
when he was able to. Petitioner offered no rental agreement and
no documents that would show he paid a consistent amount to his
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companion. Moreover, petitioner did not offer any credible
evidence that shows the payments were actually for business rent.
For the checks made out to petitioner’s companion on which the
memo line was completed, none of the checks indicated the
payments were for rent. Only two checks written to petitioner’s
companion contained memos: (1) Petitioner’s companion wrote
check No. 1416 to herself and wrote in the memo line
“Reimbursement for all payments” and (2) petitioner wrote check
No. 1471 and wrote in the memo line “loan payment.” Respondent
suggests that petitioner’s payments to his companion appear to be
either his share of living expenses or repayment of a loan.
Additionally, petitioner did not provide any evidence that his
payments were actually business expenses. Indeed, petitioner’s
companion appears to have had check writing authority on
petitioner’s checking account. Furthermore, three of the checks
to petitioner’s companion were written by petitioner’s companion.
Petitioner’s checking account was not used only for business
expenses. For example, petitioner wrote checks to Fitzgerald’s
Casino for gambling and had debit card transactions on the
account for Leslie’s Pool Supply, Carl’s Wine and Liquor, and
Travis Boating Center. On the basis of the foregoing, we find
that petitioner has not established that he paid any rent and
hold that he is not entitled to deduct his claimed rent expenses.
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For 2002 petitioner deducted utility expenses of $817.
Petitioner testified that he agreed to pay his companion $100 a
week for rent and utilities. However, as stated above,
petitioner was not required to make such payments and would pay
only when he was able. Furthermore, none of the checks to
petitioner’s companion indicate that they are for rent or
utilities. We are unable to conclude that petitioner’s payments
to his companion were for rent or utilities used in his business.
Petitioner contends that he deducted utility expenses
related to water use, electricity to charge tools and to heat
work trailers, and trash pickup. In petitioner’s checking
account analysis, he included in utilities items from Salesville
Water, Bartlett Water, MLGW (Memphis Light, Gas, & Water),
Southern Disposal, and the City of Bartlett. However, petitioner
offered no evidence as to what portion of those expenses was
personal and what portion, if any, was for business. Water,
trash pickup, gas, and electricity are all expenses that
generally are for personal use in a residence. Accordingly, we
have no basis for concluding that the claimed utility expense
deductions were business related. Consequently, we hold that
petitioner is not entitled to his claimed utility expense
deductions.
Petitioner claimed mileage of 21,263 miles and 20,247 miles
for 2002 and 2003, respectively. For 2002 petitioner provided a
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document labeled “Key Figures” dated January 16, 2006, which
shows business mileage of 21,263. For 2003 petitioner provided a
document labeled “Client’s Recap of Books” that shows mileage of
21,313 and business use of 95 percent. However, petitioner
admitted that his Client’s Recap of Books would have been created
in 2004 for his 2003 taxes. Petitioner offered no
contemporaneous records, mileage logs, or calendars in regard to
his claimed mileage. Petitioner offered no records or evidence
which substantiated his testimony. The only evidence petitioner
offered was evidence he created after the years in issue, and it
is in the nature of statements or testimony rather than actual
substantiation of his testimony.
Petitioner prepared and had three of his subcontractors sign
letters stating “he did not use his work truck except to work out
of.” The letters are identical and appear to be petitioner’s
statements and not the subcontractors’ statements. Furthermore,
there are no addresses, phone numbers, or Social Security numbers
to enable corroboration of the subcontractors’ statements.
Moreover, the subcontractors could not have had such extensive
knowledge unless they were in petitioner’s presence at all times
during the years in issue. On the basis of the record, we
conclude that petitioner has not established the business use of
his vehicle and has not met the strict substantiation
requirements for his car and truck expenses. Consequently, we
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hold that petitioner is not entitled to deduct his claimed car
and truck expenses.
Gambling Winnings
Section 61 defines gross income as all income from whatever
source derived. Section 165(a) provides the general rule that
there shall be allowed as a deduction any loss sustained during
the taxable year and not compensated for by insurance or
otherwise. Section 165(d) limits the loss deduction of section
165(a), providing: “Losses from wagering transactions shall be
allowed only to the extent of the gains from such transactions.”
Section 165 permits a deduction for gambling losses for a
taxpayer who is not in the business of gambling, see Commissioner
v. Groetzinger, 480 U.S. 23, 35 (1987), only to the extent the
taxpayer elects to itemize his deductions, sec. 63(a); see Calvao
v. Commissioner, T.C. Memo. 2007-57; Heidelberg v. Commissioner,
T.C. Memo. 1977-133.
During 2002 and 2003 petitioner gambled at Fitzgerald’s
Casino. During 2002 petitioner had gambling winnings of $3,097.
During 2003 petitioner had gambling winnings of $1,250. In both
2002 and 2003 petitioner’s gambling losses met or exceeded his
gambling winnings. On each of his returns for 2002 and 2003
petitioner failed to include his gambling winnings in income and
claimed the standard deduction. Although the gambling losses
would be allowable as an itemized deduction up to the amount of
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the winnings, since petitioner did not elect to itemize his
deductions, he is not entitled to deduct the gambling losses.2
Sec. 63(a) and (b); see Calvao v. Commissioner, supra; Heidelberg
v. Commissioner, supra. Consequently, we hold that for each of
the years in issue petitioner is required to include the gambling
winnings in gross income and is not entitled to any deduction for
losses.
Accuracy-Related Penalties Under Section 6662
Section 6662(a) and (b)(1) and (2) imposes a penalty for a
taxpayer’s underpayment which is attributable to negligence or
disregard of rules or regulations or a substantial understatement
of income tax. Negligence is any failure to make a reasonable
attempt to comply with the provisions of Internal Revenue Code,
and disregard is any careless, reckless, or intentional
disregard. Sec. 6662(c). Negligence includes the failure of a
taxpayer to keep proper records or to substantiate his reported
expenses. Sec. 1.6662-3(b)(1), Income Tax Regs. A “substantial
understatement” of income tax is $5,000 or 10 percent of the tax
required to be shown on the return, whichever is greater. Sec.
6662(d)(1). Pursuant to section 7491(c), the Commissioner bears
the burden of production with respect to the imposition of any
penalty. Petitioner has deficiencies of $7,167 and $8,872 for
2
A taxpayer may change his or her election pursuant to sec.
63(e)(3). However, the losses for both 2002 and 2003 would not
be as advantageous to petitioner as the standard deduction for
those years.
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2002 and 2003, respectively. Those amounts exceed both $5,000
and 10 percent of the tax required to be shown on those returns.
Consequently, petitioner had substantial understatements of
income tax and is liable for the penalties under section
6662(b)(2).
On the basis of the record, we sustain respondent’s
determinations. We have considered all of the arguments of the
parties, and, to the extent not addressed in this Summary
Opinion, we conclude those issues are without merit, irrelevant,
or unnecessary to reach.
To reflect the foregoing,
Decision will be entered
for respondent.