T.C. Summary Opinion 2008-152
UNITED STATES TAX COURT
ORLIE E. FAY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8916-07S, 8927-07S. Filed December 8, 2008.
James Allen Brown, for petitioner.
Ann Darnold, for respondent.
HAINES, Judge: These consolidated cases were heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petitions were filed.1 Pursuant to section
7463(b), the decisions to be entered are not reviewable by any
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code), as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Amounts are rounded to the nearest dollar.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined deficiencies and additions to tax with
respect to petitioner’s Federal income taxes as follows:
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2003 $25,861 $5,819 $4,008 $677
2004 17,672 3,976 1,679 513
The issues for decision after concessions are: (1) Whether
petitioner is entitled to deduct business expenses related to car
and truck use, contract labor, tax return preparation, supplies,
office, and meals and lodging for 2003 and 2004; (2) whether
petitioner is entitled to deduct gambling losses for 2004; and
(3) whether petitioner is liable for additions to tax under
sections 6651(a)(1) and 6654.2 For all purposes hereafter, years
at issue will refer to 2003 and 2004.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts, together with the attached exhibits, is
incorporated herein by this reference. At the time petitioner
filed his petitions, he resided in Arkansas.
2
Respondent concedes the proposed additions to tax under
sec. 6651(a)(2) for 2003 and 2004. Respondent also concedes that
petitioner is entitled to deductions for mortgage interest of
$1,223 for both 2003 and 2004, real estate taxes of $700 for both
2003 and 2004, general sales taxes of $542 for 2004, and gambling
losses of $17,100 for 2003.
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During the years at issue petitioner worked as an
independent contractor for Stallmann Construction Co. (Stallmann)
and Industrial Siding (Industrial), related Arkansas businesses
that specialized in the installation of siding, soffit, and
fascia. In 2003 and 2004 Stallmann and Industrial paid
petitioner rental income of $18,970 and $13,055, respectively,
and nonemployee compensation of $56,913 and $40,570,
respectively.
Petitioner failed to file Federal income tax returns for
2003 and 2004. On February 26, 2007, respondent sent petitioner
separate notices of deficiency for those years. In response,
petitioner hired an accountant, Roger D. Harrod (Mr. Harrod). On
January 14, 2008, Mr. Harrod prepared and submitted petitioner’s
proposed Forms 1040, U.S. Individual Income Tax Return, for the
years at issue. The Schedules C, Profit or Loss From Business,
attached to the proposed returns reported the following expenses:
Expense 2003 2004
Car and truck $12,600 $12,600
Contract labor 8,556 8,556
Legal and professional 3,375 3,375
Supplies 10,741 10,741
Office 1,416
Travel 10,500 5,670
Total 45,772 42,358
The Schedules A, Itemized Deductions, attached to the proposed
returns reported gambling losses of $17,100 for 2003 and $15,613
for 2004.
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I. Schedule C Expenses
A. Car and Truck Expenses
Petitioner drove a Chevrolet Silverado throughout central
Arkansas completing projects for Stallmann. Petitioner did not
keep a mileage log but recorded his mileage from his odometer
after each trip.
B. Contract Labor
Petitioner regularly hired and supervised laborers to help
with Stallmann projects. Stallmann usually paid the laborers
directly, but petitioner would occasionally pay the laborers’
wages and motel expenses himself on Stallmann’s behalf.
C. Legal and Professional Expenses
Petitioner retained the tax preparation firm J.K. Harris to
file his tax returns for the years at issue. Petitioner provided
J.K. Harris with his tax records and financial information for
both 2003 and 2004. J.K. Harris failed to file returns on
petitioner’s behalf and failed to return the majority of
petitioner’s records to petitioner.3
D. Supplies
Between January 1, 2004, and November 11, 2007, petitioner
purchased $41,177 of equipment and supplies from Stallmann for
use on Stallmann projects.
3
Records made unavailable to petitioner because of the
alleged actions of J.K. Harris include motel receipts, mileage
notes, and, paradoxically, J.K. Harris receipts.
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E. Office Expenses
Petitioner deducted office expenses of $1,416 for 2004. The
expenses related to petitioner’s use of a cellular telephone.
F. Travel Expenses
Petitioner traveled extensively on behalf of Stallmann
during the years at issue and would stay in a motel when a
project required that he work too far from home to commute.
II. Gambling Losses
Petitioner frequently played Keno at Sam’s Town Casino
(Sam’s Town) in Tunica, Arkansas. In 2003 and 2004 petitioner
had gambling income of $17,100 and $17,750, respectively.
Letters from Sam’s Town indicate that petitioner incurred a net
loss from gambling of $14,537 for 2003 and a net gain from
gambling of $2,137 for 2004.
Discussion
I. Business Expense Deductions
Deductions are a matter of legislative grace, and the
taxpayer must prove he or she is entitled to the deductions
claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). The burden of proof may shift to the
Commissioner under section 7491(a) with respect to a factual
issue relevant to the liability of the taxpayer for tax if the
taxpayer introduces credible evidence regarding the issue and
establishes compliance with the requirements of section
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7491(a)(2)(A) and (B) by substantiating items, maintaining
required records, and fully cooperating with the Secretary’s
reasonable requests. As discussed below, we find that petitioner
has failed to substantiate his claimed expenses and to maintain
adequate records. The burden of proof, therefore, does not shift
to respondent under section 7491(a).
Section 162(a) provides that “There shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business”. The regulations specify that ordinary and
necessary business expenses include “the ordinary and necessary
expenditures directly connected with or pertaining to the
taxpayer’s trade or business”, sec. 1.162-1(a), Income Tax Regs.,
such as “a reasonable allowance for salaries or other
compensation for personal services actually rendered”, sec.
1.162-7(a), Income Tax Regs. Taxpayers are required to maintain
records sufficient to establish the amount of allowable
deductions and to enable the Commissioner to determine the
correct tax liability. Sec. 6001; Shea v. Commissioner, 112 T.C.
183, 186 (1999).
As a general rule, if the trial record provides sufficient
evidence that the taxpayer has incurred a deductible expense, but
the taxpayer is unable to substantiate adequately the precise
amount of the deduction to which he or she is otherwise entitled,
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the Court may estimate the amount of the deductible expense and
allow the deduction to that extent. Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85
T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);
sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). In these instances, the Court is permitted to
make as close an approximation of the allowable expense as it
can, bearing heavily against the taxpayer whose inexactitude is
of his or her own making. Cohan v. Commissioner, supra at 544.
However, in order for the Court to estimate the amount of an
expense, the Court must have some basis upon which an estimate
may be made. Vanicek v. Commissioner, supra at 742-743. Without
such a basis, any allowance would amount to unguided largesse.
Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).
A. Car and Truck Expenses
Pursuant to section 274(d), automobile expenses otherwise
deductible as a business expense will be disallowed in full
unless the taxpayer satisfies strict substantiation requirements.
The taxpayer must substantiate the automobile expenses by
adequate records or other corroborating evidence of items such as
the amount of the expense, the time and place of the automobile’s
use, and the business purpose of its use. See Sanford v.
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Commissioner, supra at 827-828; Maher v. Commissioner, T.C. Memo.
2003-85.
The only evidence of automobile expenses petitioner produced
at trial was the testimony of Mr. Harrod that petitioner drove
roughly 35,000 miles for business in each of the years at issue.
Mr. Harrod based this mileage on the reasonable mileage driven by
other siding contractors in central Arkansas.4 Petitioner failed
to produce any documentary evidence to support Mr. Harrod’s
testimony. Accordingly, petitioner did not meet the adequate
records or other corroborating evidence requirement of section
274(d).
Section 274(d)(4) overrides the Cohan rule with respect to
section 280F(d)(4) “listed property” and thus specifically
precludes the Court from allowing automobile expenses on the
basis of any approximation or the taxpayer’s uncorroborated
testimony. For this reason we are unable to estimate
petitioner’s car and truck expenses for the years at issue.
B. Contract Labor
Mr. Harrod testified at trial that he estimated petitioner’s
contract labor expenses for the years at issue using comparable
expenses listed in petitioner’s 2005 checkbook. Mr. Harrod’s
testimony, based on a rough estimation, is insufficient to
4
The 35,000 figure for 2003 and 2004 does not take into
account the fact that petitioner’s income was 28 percent lower in
2004 than 2003, possibly indicating that petitioner drove fewer
miles for work in 2004.
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substantiate petitioner’s contract labor expenses for the years
at issue. See Shea v. Commissioner, supra at 189.
Petitioner leaves us no basis upon which to estimate his
contract labor expenses. Petitioner did not produce his 2005
checkbook at trial, nor did he produce any other documentary
evidence of those expenses. Although it is reasonable to
conclude that a siding contractor in petitioner’s position would
incur contract labor expenses, the record is devoid of any
evidence that would allow us to estimate such expenses. See
Vanicek v. Commissioner, supra at 742-743.
C. Legal and Professional Expenses
Petitioner and Mr. Harris testified that petitioner paid
J.K. Harris $3,375 in both 2003 and 2004 to file petitioner’s tax
returns. We find their testimony to be credible. Therefore, we
hold that petitioner is entitled to a deduction for legal and
professional expenses of $3,375 for each of the years at issue
for fees paid for tax return preparation.
D. Supplies
Petitioner failed to produce any personal records, such as
checkbooks or receipts, to substantiate his deductions for
supplies. However, petitioner produced a notarized letter from
Stallmann (Stallmann letter) indicating that between January 1,
2004, and November 11, 2007, petitioner purchased from Stallman
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pieces of equipment worth $41,177. All of the items listed in
the Stallmann letter have a clear business purpose.5
The Stallmann letter provides us a basis upon which to
estimate petitioner’s supply costs for the years at issue. See
Cohan v. Commissioner, 39 F.2d at 544. The letter identifies
each piece of equipment and its cost, but fails to specify each
item’s exact date of purchase. Accordingly, we will allow
petitioner to deduct supply costs of $10,632 for 2003 and 2004.6
E. Office Expenses
Expenses of a cellular telephone must be substantiated
pursuant to section 274(d). The Court cannot estimate those
expenses. Secs. 274(d)(4), 280F(d)(4)(v); sec. 1.274-5T(a),
Temporary Income Tax Regs., supra.
The record is devoid of any documentary evidence regarding
petitioner’s 2004 office expenses. At trial petitioner was
unable to remember the items to which his office expenses
5
The items consist of walk boards, double steppers,
extension ladders, ladder jacks, drills, trailers, bend breaks,
chaulk and staple guns, air compressors, saws, and other pieces
of equipment that would be of use to a siding contractor.
6
These figures are derived from prorating $41,177 over 46.5
months to obtain supply costs per month of $886. The costs per
month are then multiplied by 12 to obtain supply costs of $10,632
per year.
Petitioner credibly testified that he spent roughly the same
amount on supplies for both years at issue despite earning
roughly 28 percent less in 2004 than in 2003. Therefore, we will
not adjust the supply cost figures to take into account the
discrepancy in petitioner’s gross income.
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pertained. Mr. Harrod testified that the expenses related to
petitioner’s use of a cellular telephone in 2004 and that he had
estimated the amount of those expenses using the cellular
telephone costs listed in petitioner’s 2005 checkbook. Because
petitioner failed to produce any records pertaining to his use of
a cellular telephone in 2004, we will deny his deduction for
office expenses.
F. Travel Expenses
Expenses related to meals and lodging must be substantiated
pursuant to section 274(d). The Court cannot estimate those
expenses. Sec. 274(d)(1); sec. 1.274-5T(a), Temporary Income Tax
Regs., supra.
The record is devoid of any documentary evidence regarding
petitioner’s meal and lodging expenses for the years at issue.
Accordingly, we will deny petitioner’s deductions for those
expenses.
II. Gambling Losses
Gross income includes all income from whatever source
derived, including gambling. See sec. 61; McClanahan v. United
States, 292 F.2d 630, 631-632 (5th Cir. 1961). In the case of a
taxpayer not engaged in the trade or business of gambling,
gambling losses are allowable as an itemized deduction, but only
to the extent of gains from such transactions. Sec. 165(d);
McClanahan v. United States, supra at 632 n.1 (citing Winkler v.
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United States, 230 F.2d 766 (1st Cir. 1956)). In order to
establish entitlement to a deduction for gambling losses the
taxpayer must prove the losses sustained during the taxable year.
Mack v. Commissioner, 429 F.2d 182 (6th Cir. 1970), affg. T.C.
Memo. 1969-26; Stein v. Commissioner, 322 F.2d 78 (5th Cir.
1963), affg. T.C. Memo. 1962-19.
Petitioner did not maintain a diary or any other
contemporaneous record reflecting either his winnings or his
losses from gambling during 2004. However, petitioner produced a
letter from Sam’s Town indicating that he had net gambling
winnings of $2,137 in 2004. As Sam’s Town was the only source of
petitioner’s gambling income and losses in 2004, we hold that
petitioner proved he sustained gambling losses of $15,613 for
2004.7
III. Additions to Tax
Respondent determined that petitioner is liable for
additions to tax under section 6651(a)(1) for failure to file
income tax returns for 2003 and 2004 and under section 6654(a)
for failure to make estimated tax payments for 2003 and 2004.
Respondent bears the burden of production with respect to
petitioner’s liability for the additions to tax. See sec.
7
The parties stipulated that petitioner had gambling income
of $17,750 for 2004. The gambling losses of $15,613 are derived
from deducting petitioner’s net gambling winnings of $2,137 from
his gross winnings of $17,750.
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7491(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
To meet his burden of production with respect to section 6651,
respondent must come forward with sufficient evidence indicating
that it is appropriate to impose the additions to tax. See
Higbee v. Commissioner, supra at 446.
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on the date prescribed (determined with regard to
any extension of time for filing), unless the taxpayer can
establish that such failure is due to reasonable cause and not
due to willful neglect. Petitioner admitted that he did not file
Federal income tax returns for 2003 or 2004. Respondent has met
his burden of production.
Petitioner argues that his failure to file his returns was
due to reasonable cause because he retained J.K. Harris to file
his returns and J.K. Harris failed to do so. We disagree. The
failure to timely file a tax return is not excused by the
taxpayer’s reliance on an agent, and such reliance is not
“reasonable cause” for a late filing under section 6651(a)(1).
United States v. Boyle, 469 U.S. 241, 252 (1985). We find that
petitioner’s failure to file Federal income tax returns for 2003
and 2004 was not due to reasonable cause and was due to willful
neglect. Therefore, we hold that petitioner is liable for the
section 6651(a)(1) additions to tax for 2003 and 2004.
A taxpayer has an obligation to pay estimated tax for a
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particular year only if he has a “required annual payment” for
that year. Sec. 6654(d). A required annual payment is equal
to the lesser of (1) 90 percent of the tax shown on the
individual’s return for that year (or, if no return is filed, 90
percent of his or her tax for such year), or (2) if the
individual filed a return for the immediately preceding taxable
year, 100 percent of the tax shown on that return. Sec.
6654(d)(1)(B); Wheeler v. Commissioner, 127 T.C.
200, 210-212 (2006), affd. 521 F.3d 1289 (10th Cir. 2008); Heers
v. Commissioner, T.C. Memo. 2007-10.
Respondent’s burden of production under section 7491(c) with
respect to the section 6654(a) addition to tax has been satisfied
by proof at trial that petitioner has a Federal income tax
liability for 2003 and 2004 and that petitioner made no estimated
payments for either year. The parties also stipulated that
petitioner filed a Federal income tax return for 2002 showing a
tax of $11,478. Petitioner offered no evidence whatsoever to
refute respondent’s evidence or to establish that one of the
statutorily provided exceptions applies. See Recklitis v.
Commissioner, 91 T.C. 874, 913 (1988). Consequently, we hold
that respondent’s determination that petitioner is liable for the
section 6654 additions to tax must be sustained. However, to the
extent respondent failed to take into account a required annual
payment of $11,478 for 2003 under section 6654(d)(1)(B)(ii) in
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his calculation of petitioner’s addition to tax, we now direct
respondent to do so.
In reaching our holdings, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decisions will be entered
under Rule 155.