T.C. Memo. 2008-235
UNITED STATES TAX COURT
EDWARD NORMAN FADELEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15933-05. Filed October 22, 2008.
Edward Norman Fadeley, pro se.
Aimee R. Lobo-Berg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies and
additions to tax with respect to petitioner’s Federal income
taxes as follows:
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Additions to Tax
Sec. Sec. Sec.
Deficiency 6651(a)(1) 6651(a)(2) 6654
2000 $33,852 $5,658 $6,035 $1,290
2002 34,798 6,038 3,220 868
At issue is petitioner’s claim to additional deductions
for business and personal expenses beyond those allowed by
respondent.
All section references are to the Internal Revenue Code
applicable to the years in issue, and all rule references are to
the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Since 1957, petitioner has been a licensed attorney in
Oregon. From approximately 1964 to 1989 petitioner was an elected
member of the Oregon State Legislature. In 1989 petitioner was
elected as a justice on the Oregon Supreme Court.
In the mid-to-late 1990s, disciplinary questions were
raised as to petitioner’s ability to continue performing judicial
duties. In 1998, when petitioner was 68 years of age the
disciplinary matter was settled. Under the settlement, petitioner
agreed to retire as a justice of the Oregon Supreme
Court but to retain his right to a judicial retirement pension.
In 2000 and in 2002 petitioner received total pension
income of $81,981 and $85,302, respectively, from petitioner’s
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judicial retirement and from a pension relating to his
25 years in the Oregon Legislature.
In 2001 petitioner sold a parcel of real estate in Salem,
Oregon, and petitioner used proceeds from the sale to pay to an
Oregon law firm $100,000 in legal fees relating to the above
disciplinary matter.
Since his retirement in 1998, petitioner has performed
a limited amount of legal work for a few clients out of his home.
Petitioner and his wife’s home is located on an 80-acre farm
in the Willamette Valley in Oregon. On their farm petitioner
and his wife have a barn and raise a number of animals.
Typically, petitioner and his wife work on the farm a total
of 10 to 20 hours a week. Meat harvested from animals raised on
the farm is kept on the farm and is eaten by petitioner and his
wife and their guests. None of the meat is sold.
Petitioner and his wife maintain no separate books and
records relating to their farm activity. Bills, receipts, and
payments relating to the farm are intermingled with petitioner and
his wife’s personal expenses.
For the 5 years for which evidence was offered,
petitioner and his wife realized no profit from their farming
activity, and the evidence does not establish what gross income,
if any, was realized.
During 2000 and 2002 petitioner’s wife worked part time as
an employee of Landmark Education Corporation (LEC) and
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she was not otherwise engaged in a trade or business. As part of
her employment with LEC, petitioner’s wife could have requested
and received reimbursement from LEC for all employee-related
expenses she incurred.
In 2000 and 2002 petitioner and his wife received the
following types and amounts of income and retirement benefits:
Year Type Amount
2000 Pension $81,981
Social Security 18,102
Other income 2,750
Interest Income 106
2002 Pension $85,302
Social Security 19,248
Other income 2,750
Interest Income 76
In 2000 and 2002 Federal income taxes of $8,706 and $7,963,
respectively, were withheld from petitioner’s pension income.
As of the spring of 2005, petitioner and his wife had not
filed their 2000 and 2002 Federal income tax returns. On audit,
respondent prepared substitute 2000 and 2002 Federal income tax
returns for petitioner, and respondent determined the above
deficiencies in petitioner’s Federal income taxes. On May 27,
2005, respondent mailed to petitioner notices of the above
deficiencies and additions to tax.
In 2006, after petitioner filed the petition and after
respondent filed a motion to dismiss for lack of prosecution, the
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Court continued this case and asked petitioner to file his 2000
and 2002 joint Federal income tax returns.
On July 25, 2006, petitioner and his wife late filed with
respondent their 2000 and 2002 joint Federal income tax returns.
Petitioner himself prepared the returns. Thereon, petitioner
reported the pension income received in each year, and petitioner
and his wife each attached a Schedule C, Profit or Loss From
Business, and a Schedule F, Profit or Loss From Farming, on each
of which a loss was reported. Petitioner’s Schedules C related to
petitioner’s part-time law practice. Petitioner’s wife’s
Schedules C related to her employment with LEC. The Schedules F
related to petitioner and his wife’s farming activity.
Also attached to petitioner and his wife’s 2000 and 2002
late-filed joint Federal income tax returns was a Form 8829,
Expenses for Business Use of Your Home, on which petitioner and
his wife claimed that 70 percent of their home was used for
petitioner’s legal work and 50 percent of their home expenses were
deductible expenses of a home office.
On Schedules A, Itemized Deductions, the following
miscellaneous deductions were claimed: (1) $11,400 on the 2000
return as a loss carryback; and (2) $11,000 on the 2002 return as
a loss carryforward relating to the $100,000 in legal fees
petitioner paid in 2001 in connection with the settlement of the
dispute over petitioner’s status as a justice on the Oregon
Supreme Court.
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On their late-filed 2000 and 2002 Federal income tax returns,
petitioner and his wife claimed credits for the approximately
$8,000 that had been withheld during each year as Federal income
taxes from petitioner’s pensions, no taxes due, and overpayments
of Federal income taxes.
Before trial in September of 2007, respondent reviewed
petitioner and his wife’s late-filed 2000 and 2002 Federal income
tax returns and allowed some of the items and disallowed others.
Specifically, respondent disallowed many of the claimed Schedule A
itemized deductions and Schedule C business expenses, all of the
home office and farm expenses claimed, and all of petitioner’s
wife’s claimed business expenses. Respondent disallowed most of
the claimed expenses due to inadequate substantiation and due to
respondent’s determination that petitioner’s wife’s claimed
business and farm expenses did not qualify as ordinary and
necessary expenses of a trade or business. At trial, the unagreed
items claimed on petitioner’s late-filed 2000 and 2002 Federal
income tax returns were tried by consent. Rule 41(b)(1).
After trial, respondent acknowledged that 13.25 percent of
petitioner’s home qualifies as a home office and that expenses
properly allocated thereto are deductible under section 179.
Respondent disallowed the $11,400 and the $11,000 in claimed
carryback and carryforward losses relating to the legal fees
petitioner incurred in 2001.
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The schedule below reflects by category for each year the
total amounts of petitioner’s claimed expenses, the amounts
respondent allowed, and the amounts still in dispute:
2000
Expense Amount Amount Allowed Still
Category Claimed by respondent in dispute
Business $33,546 $16,968 $ 6,272
Home Office 11,630 5,358 6,272
Itemized 52,042 40,594 11,400
Farm 8,902 -0- 8,902
2002
Expense Amount Amount Allowed Still
Category Claimed by respondent in dispute
Business $46,193 $19,519 $25,674
Home Office 16,709 5,372 11,337
Itemized 50,112 39,112 11,000
Farm 10,333 -0- 10,333
OPINION
Generally, as to the allowance of deductions taxpayers bear
the burden of proof, and the Commissioner’s determinations are
entitled to a presumption of correctness. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933); Durando v. United
States, 70 F.3d 548, 550 (9th Cir. 1995).
Petitioner and his wife late filed their Federal income tax
returns. During respondent’s audit and during pretrial,
petitioner did not cooperate with respondent’s representatives,
and petitioner did not participate in good faith in the Court’s
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pretrial stipulation process. Further, with regard to the
expenses still in dispute, petitioner has not submitted credible
evidence.
The burden of proof on the disputed expenses (and on the
additions to tax) is on petitioner. Sec. 7491(a); Rule 142(a).
The $6,272 and the $25,674 in business expenses for 2000 and
2002 still in dispute have not been adequately substantiated by
petitioner, and petitioner has not established that the disputed
expenses constitute ordinary and necessary business expenses
deductible under section 162.
On brief, petitioner states that “Taxpayer spent all the
money claimed in the amount of every deduction for the purpose
that was claimed.” Petitioner’s records in evidence and the
credible trial testimony, however, do not adequately establish the
nature and/or purpose of the items in dispute--particularly
whether the items were incurred in connection with a trade or
business.
Section 262 denies a deduction for personal, living, or
family expenses. Section 274(d) requires taxpayers to maintain
substantiating evidence with regard to travel, meal, and
entertainment expenses. Beale v. Commissioner, T.C. Memo. 2000-
158.
Petitioner has failed to substantiate that any of the claimed
expenses still in dispute qualify as deductible business expenses.
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Also the law is clear that expenses for which petitioner’s wife
could have received reimbursement from an employer are not
deductible. Lucas v. Commissioner, 79 T.C. 1 (1982).
With respect to the claimed home office expenses in dispute,
section 280A generally prohibits deductions relating to a
taxpayer’s personal residence. Section 280A(c)(1) provides an
exception and allows a deduction for appropriate home office
expenses where a taxpayer establishes that a portion of the
taxpayer’s home is used exclusively on a regular basis as: (1)
The taxpayer’s principal place of business or (2) a place of
business which is used by the taxpayer in meeting with clients in
the normal course of business. The deduction cannot exceed the
gross income derived from the business use of the residence over
the sum of certain deductions allocable to such income. Sec.
280A(c)(5); Tobin v. Commissioner, T.C. Memo. 1999-328; Cunningham
v. Commissioner, T.C. Memo. 1996-141, affd. without
published opinion 110 F.3d 59 (4th Cir. 1997).
In order for a taxpayer to establish use of a personal
residence on a “regular” basis, the business use must be more than
occasional and incidental. Irwin v. Commissioner, T.C. Memo.
1996-490, affd. without published opinion 131 F.3d 146 (9th Cir.
1997); Hefti v. Commissioner, T.C. Memo. 1993-128. The use of a
portion of a residence both for personal purposes and for the
carrying on of a trade or business does not meet the exclusive use
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test. See Sengpiehl v. Commissioner, T.C. Memo. 1998-23; Hefti v.
Commissioner, supra.
The trial evidence is particularly vague as to petitioner’s
use of his home in his part-time legal work.1 Respondent is
generous in agreeing to treat 13.25 percent of petitioner’s home
as a home office. On the facts before us we have no basis for
using a higher percentage, and we disallow any claimed home office
expenses in excess of the amount reflected by this percentage.
With regard to the miscellaneous itemized deductions claimed
on petitioner’s 2000 and 2002 tax returns that are still in
dispute ($11,400 for 2000 and $11,000 for 2002), at trial
petitioner testified that the $11,400 claimed for 2000 actually
was incurred in 2001 and represented a claimed loss carryback to
2000. The $11,000 claimed for 2002 also was acknowledged to have
been incurred in 2001 and represents a claimed loss carryforward
to 2002. There is only a limited legal basis for loss carryovers
of miscellaneous itemized deductions, and petitioner’s entitlement
thereto in this case has not been established. See sec.
172(d)(4).
The claimed Schedule F farm expenses still in dispute involve
$8,902 for 2000 and $10,333 for 2002. No income was earned from
petitioner and his wife’s farm activity, and the facts before us
1
Petitioner stated that he “lives in his workspace.”
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do not establish that the farm activity constituted a trade or
business activity.
Petitioner alleges that a number of misfortunes on the farm
hampered efforts to earn a profit. Petitioner claims that one of
the horses fell into a ditch and died and that cougars and an
English bulldog killed some of the sheep and three pygmy angora
goats. Petitioner notes that Douglas fir trees grow on the
property, and petitioner argues that the long growing cycle for
Douglas fir and the resulting delayed tree harvest, explain the
lack of farming profits, not a lack of profit motive. On the
evidence before us, we reject petitioner’s claimed additional farm
expenses.
Although not clear from the parties’ briefs, claimed medical
expenses of $7,203 and a claimed horse casualty expense of $1,800
may also be in dispute. Neither item is supported by credible
evidence, and they are disallowed.
On the disputed additions to tax, the evidence satisfies
respondent's burden of production.
For the reasons stated, we sustain respondent’s disallowance
of each of the claimed expenses still in dispute, and we sustain
the imposition against petitioner of each of the additions to tax.
Decision will be entered
under Rule 155.