T.C. Summary Opinion 2009-17
UNITED STATES TAX COURT
JOSEPH H. SCHENKER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5755-07S. Filed January 29, 2009.
Joseph H. Schenker, pro se.
Elizabeth Martini, 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 (Code) in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
The issue for decision is whether petitioner was engaged in
a trade or business during 2003, 2004, and 2005 which would allow
him to deduct expenses claimed on Schedule C, Profit or Loss From
Business, for these years. If petitioner was not engaged in a
trade or business, then a second issue for decision arises as to
whether petitioner is entitled to deduct those expenses under any
other provisions of the Code.
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 New
York State when he filed his petition.
After graduating from the Talmudical Academy of Baltimore,
Maryland, petitioner studied at and received his rabbinical
ordination from Hebron Yeshiva Knesset Israel (Hebron Yeshiva) in
Jerusalem, Israel.1 A yeshiva is a rabbinical seminary.
1
The prestigious Hebron (spelled alternately as Hevron or
Chevron on many documents depending on the translation from
Hebrew to English) Yeshiva originated in the 1800s in Slabodka,
Lithuania. Following the tumultuous aftermath of World War I,
the yeshiva relocated to Hebron in Palestine, which was then
under a British Mandate. In August 1929 many members of the
Hebron Jewish community, including teachers and students of the
yeshiva, were killed in a massacre. The yeshiva resettled in the
Geula section of Jerusalem and formally renamed the school the
“Hebron Yeshiva Knesset Israel” in memory of the students and
(continued...)
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Petitioner returned to the United States, where he earned a
bachelor’s degree in economics from Queens College in New York
and a master’s degree in educational research from City College
in New York. Following a brief stint as a Talmud teacher at a
yeshiva in Miami, Florida, petitioner returned to the City
College of New York, where he worked for many years in the
educational research field. Then he rejoined the Talmudical
Academy of Baltimore as a fundraiser.
On or about August 29, 1988, petitioner signed an employment
contract with Rabbi Chevroni, the administrator of Givat
Mordechai. The contract called for petitioner to serve a 6-month
trial period starting September 1, 1988, as full-time executive
director of Hebron Yeshiva’s New York City office. The New York
office has the official name “American Friends of Hebron Yeshiva
in Jerusalem, Inc.” (American Friends). The contract stated that
petitioner’s official title was “President of the Friends of the
Yeshiva in America”, and that his principal responsibilities were
to oversee office functions such as collection, donor mailing
lists, and bookkeeping and to raise funds from supporters in the
1
(...continued)
teachers who died there. Because of its location, the yeshiva
became known as Hebron Yeshiva Geula (Geula). Because of its
growth, around 1975 Hebron Yeshiva opened a second, more spacious
location in the Givat Mordechai section of Jerusalem. This
second location became known as Hebron Yeshiva Givat Mordechai
(Givat Mordechai) and left Hebron Yeshiva with two branches,
Geula and Givat Mordechai, operating under one charter.
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United States and Canada. The pay was $45,000 per year.
Petitioner, in addition to his salary, was to receive 15 percent
of all income arising from new contributors to the Yeshiva that
he brought in personally. The percentage was reduced to 10
percent if the contributor earmarked the donation for the
building fund and gave more than $100,000.
Earlier, two American sisters from Titusville, Pennsylvania,
Rebecca and Mirrel Davis, created sizable charitable trusts
through their wills. Each sister directed that Hebron Yeshiva
was to receive 19 percent of the trust’s annual income.
Petitioner learned of the sisters’ trusts through his position
with American Friends.
After Hebron Yeshiva established a second campus, Givat
Mordechai’s enrollment grew rapidly. The record is not clear
about the ensuing events, but it appears that the leader of
Geula, Rabbi Sarna, and the leader of Givat Mordechai, Rabbi
Chevroni, had a dispute. Rabbi Sarna and Rabbi Chevroni tried to
find a solution, but eventually, they went to a religious court
to resolve the matter. Apparently, the religious court suggested
that they dissolve the unified charter, operate under separate
names, and seek civil arbitration to divide the assets and
income.
In November 1990 for unknown reasons Rabbi Chevroni
terminated petitioner’s job with American Friends. Petitioner,
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with his knowledge as the former director, approached Rabbi Sarna
and offered to provide information that might be valuable in the
arbitration. On or about December 26, 1990, petitioner signed a
contract drafted by Rabbi Sarna. The contract stated that
petitioner would have available certain information related to
American Friends’ assets, donor mailing lists, and transfers to
Hebron Yeshiva.
As compensation for the information, the contract called for
petitioner to receive one of three percentages depending on the
reaction of Rabbi Chevroni to Rabbi Sarna’s contract with
petitioner. If the contract caused Rabbi Chevroni to provide
previously undisclosed information to the arbitrator, then
petitioner would receive 15 percent of the amount that Geula
received over 5 years as a result of the arbitrator’s decision.
However, if Rabbi Chevroni was not forthcoming and Rabbi Sarna
needed petitioner’s information, then petitioner’s percentage
would be 30 percent. Finally, if Rabbi Chevroni offered Geula a
fixed annual payment and Geula did not need to contact the donors
on the American Friends’ mailing lists, then petitioner’s
percentage would be one-third. The contract also provided that
if Rabbi Sarna and petitioner were to have any other joint
projects in the future, then at that time they would agree on
petitioner’s compensation for such cooperation.
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It turned out that Rabbi Sarna did need and petitioner did
furnish valuable information, such as donor lists and funding
figures from American Friends. Apparently, at some point
afterwards the leadership of the two branches formally dissolved
the parent corporation through Israel’s Registrar of Corporations
and officially established two separate entities: “Hebron Yeshiva
Guela” and “Hebron Yeshiva Knesset Israel--Givat Mordechai”. The
leaders also apparently agreed to divide donations and perhaps
certain assets, in a ratio of 70 percent to Givat Mordechai and
30 percent to Geula.
Petitioner, who was living in Brooklyn and who was now out
of a job, tried his hand as an independent mortgage broker. In
1990 he paid $5,200 to buy a one-bedroom cooperative (co-op)
apartment on the Upper West Side of Manhattan. Around 1994
petitioner also entered into an oral agreement with Rabbi Sarna
to raise funds for Geula in exchange for one-third of the
donations he generated. On occasion, petitioner would meet with
mortgage clients and fundraising donors at the co-op apartment,
but more often he would go to the client’s or donor’s location.
He would also call donors and read the New York Times for leads.
Intermittently, Rabbi Sarna would visit the United States,
sometimes for up to 6 to 7 weeks to meet with people and help
with fundraising. Very often on these visits Rabbi Sarna would
stay at petitioner’s co-op apartment. Petitioner did not charge
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him rent. Apparently, at some point petitioner began to include
a Schedule C with his annual income tax return to claim business
deductions for expenses related to his mortgage activities,
fundraising efforts, and co-op apartment.
In 1998 petitioner began working full time for the New York
City Department of Finance, where he continues to work full time
to date. Even though petitioner’s mortgage efforts ended
sometime during the first half of 2003, petitioner continued to
deduct apartment and other expenses on Schedules C through the
end of 2005. He did not list a business name, principal
activity, or business code on the Schedules C. Petitioner
generated donations to Geula of about $40,000, $25,000, and zero
in 2003, 2004, and 2005, respectively. In 2003 petitioner
traveled to and stayed in Israel for 13 days, during which time
he met with Rabbi Sarna and other leaders at Geula to discuss
fundraising. Petitioner deducted the cost of the trip on the
2003 Schedule C.
By this time, unfortunately for petitioner, he still had not
received a penny from Geula, either under the contract or for his
subsequent fundraising activities. Petitioner did not press his
claim because he assumed the payments would be forthcoming after
Geula started receiving funds under the agreement to split income
30/70 with Givat Mordechai. However, in 2003 Rabbi Sarna
indicated to petitioner that Geula would not pay him for prior
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years. In February 2004 petitioner traveled again to Israel,
this time staying for 12 days. He confronted Rabbi Sarna
regarding payment under the contract. Petitioner received no
payment or commitment from Rabbi Sarna. As a consequence, before
returning home petitioner met with and engaged an Israeli law
firm to sue Geula and Rabbi Sarna. Petitioner deducted the
travel expenses related to the 2004 trip on Schedule C.
After returning to New York, petitioner continued to
fundraise intermittently for Guela because he wanted to maintain
his relationship with the institution during the litigation.
However, petitioner stopped fundraising completely by the spring
of 2005, and in late October 2005 petitioner moved out of
Brooklyn and into the co-op apartment. After October 2005
petitioner stopped claiming Schedule C deductions for apartment
expenses.
In May 2007 the initial phase of his Israeli litigation
concluded when the District Court of Jerusalem, Israel, ruled
that petitioner was entitled to receive 7 percent of the sums
that Geula was to receive over a 5-year period from Givat
Mordechai. Because petitioner was dissatisfied with the judicial
decision of what he believed was an unfairly low percentage, he
appealed to the Israeli Supreme Court.
Around December 2007 a few days after a pretrial conference
with a justice of the Israeli Supreme Court, petitioner and Rabbi
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Sarna reached a settlement. They agreed petitioner is to receive
“12 percent of all monies from the Sisters’ Fund to be obtained
by Hebron Yeshiva Geula, dating on a yearly basis, back to 1986
and from the date the first monies are received for the next 5
years--22.5 percent”. From 1986 to 2003 Givat Mordechai received
about $10 million in donations through American Friends, of which
it owes Geula about $3 million.
The record is not clear as to the source of the donations
and whether the percentages in the settlement refer solely to
donations from the sisters’ trusts or to all funds Geula is to
receive from Givat Mordechai. Before the settlement,
petitioner’s Israeli attorney estimated petitioner could receive
a judgment between $200,000 to $250,000. After the settlement
petitioner estimated Geula owed him more than $400,000. Through
the date of trial in February 2008 petitioner still had not
received any payment from Geula.
Petitioner timely filed his 2003 through 2005 Federal income
tax returns. He reported the following taxable income:
2003 2004 2005
Wages $57,409 $67,925 $71,382
State tax refund 2,039 4,295 3,258
Business income/(loss) (36,509) (27,373) (26,327)
Pension distribution 1,731 1,303 1,700
Adjusted gross income 24,670 46,150 50,013
Itemized deductions 7,973 10,159 9,853
Personal exemption 3,050 3,100 3,200
Taxable income 13,647 32,891 36,960
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The detail for each Schedule C, is as follows:
2003 2004 2005
Income -0- -0- -0-
expenses:
Advertising $300 -0- -0-
Legal fees -0- $6,000 $7,800
Medical expenses 2,870 -0- 3,212
Mortgage interest 254 183 172
NYCERS pension buyback 18,456 -0- 2,380
Real estate taxes 823 -0- 642
Travel 1,740 1,650 -0-
1
Other expenses: N/A 2,774 N/A
Apt. maintenance fees 9,544 9,544 10,470
Newspapers, magazines 340 N/A -0-
Telephone 1,483 N/A 652
Petitioner discrepancy2 699 7,222 999
Profit/(loss) (36,509) (27,373) (26,327)
1
For 2004 the Court received a transcript of
petitioner’s account instead of a tax return. As a result,
no breakout was available of petitioner’s “Other expenses”,
which the transcript reported as $12,318. However, the
stipulation of facts states that petitioner deducted $9,544
in apartment maintenance fees, leaving $2,774 as “Other
expenses”.
2
Petitioner prepared his tax returns manually. In each
year the sum of the individual expenses did not add up to
and were less than the total amount of expenses that
petitioner reported on Schedule C. Petitioner did not
explain the discrepancies.
Respondent audited petitioner’s tax returns for 2003 through
2005 and determined that petitioner’s fundraising and other
activities did not rise to the level of an active trade or
business. Consequently, respondent disallowed petitioner’s
Schedule C deductions. Respondent, however, allowed petitioner’s
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deductions for mortgage interest and real estate taxes on
Schedule A, Itemized Deductions.
As a result of all of the above adjustments, respondent
issued a notice of deficiency dated December 15, 2006,
determining deficiencies of $7,410, $6,638, and $6,375 in
petitioner’s Federal income taxes for 2003, 2004, and 2005,
respectively.2 Petitioner timely petitioned this Court seeking
allowance of his Schedule C deductions.
Discussion
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is in error. Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under
section 7491(a), a taxpayer may shift the burden to the
Commissioner regarding factual matters if the taxpayer produces
credible evidence and meets the other requirements of the
section. Petitioner has not raised the burden of proof as an
issue, and therefore, the burden remains with petitioner.
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving his entitlement to a
deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
2
The Court rounded all dollar amounts in this opinion to the
nearest dollar.
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(1934). Section 6001 requires taxpayers to maintain records
sufficient to establish the amount of each deduction. See also
sec. 1.6001-1(a), (e), Income Tax Regs. Taxpayers may deduct
only the business expenses that they can substantiate. Ronnen v.
Commissioner, 90 T.C. 74, 102 (1988).
A taxpayer may deduct ordinary and necessary expenses that
he pays in connection with the operation of a trade or business.
Sec. 162(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004). To
be “ordinary” the expense must be of a common or frequent
occurrence in the type of business involved. Deputy v. du Pont,
308 U.S. 488, 495 (1940). To be “necessary” an expense must be
“appropriate and helpful” to the taxpayer’s business. Welch v.
Helvering, supra at 113. Additionally, the expenditure must be
“directly connected with or pertaining to the taxpayer’s trade or
business”. Sec. 1.162-1(a), Income Tax Regs. Section 262(a)
disallows deductions for personal, living, or family expenses.
If a taxpayer establishes that an expense is deductible but
is unable to substantiate the precise amount, we may estimate the
amount, bearing heavily against the taxpayer whose inexactitude
is of his own making. Cohan v. Commissioner, 39 F.2d 540, 543-
544 (2d Cir. 1930). However, the taxpayer must present
sufficient evidence for the Court to form an estimate because
without such a basis, any allowance would amount to unguided
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largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th
Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
I. Whether Petitioner Was Engaged in a Trade or Business
Respondent determined that petitioner was not engaged in
fundraising or any other activity sufficient to qualify the
expenses for 2003, 2004, and 2005 as section 162 business
deductions on Schedule C.
To be engaged in a trade or business within the meaning of
section 162(a), an individual taxpayer must be involved in the
activity with continuity and regularity, and with the primary
purpose of deriving a profit. Commissioner v. Groetzinger, 480
U.S. 23, 35 (1987); Ranciato v. Commissioner, 52 F.3d 23, 25 (2d
Cir. 1995), vacating and remanding T.C. Memo. 1993-536. Whether
the taxpayer is carrying on a trade or business requires an
examination of all of the facts and circumstances in each case.
Commissioner v. Groetzinger, supra at 36; Ranciato v.
Commissioner, supra at 25.
Although a reasonable expectation of a profit is not
required, the taxpayer’s profit objective must be actual and
honest. Ranciato v. Commissioner, supra at 25; Dreicer v.
Commissioner, 78 T.C. 642, 644-645 (1982), affd. without
published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec. 1.183-
2(a), Income Tax Regs. Whether a taxpayer has an actual and
honest profit objective is a question of fact to be answered from
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all of the relevant facts and circumstances. Ranciato v.
Commissioner, supra at 26. Hastings v. Commissioner, T.C. Memo.
2002-310; sec. 1.183-2(a), Income Tax Regs.
The pertinent regulations set forth a nonexhaustive list of
factors that may be considered in deciding whether a profit
objective exists. These factors include: (1) The manner in
which the taxpayer carries on the activity, (2) the expertise of
the taxpayer or his advisers, (3) the time and effort the
taxpayer expended in carrying on the activity, (4) the taxpayer’s
expectation that assets he used in the activity would appreciate
in value, (5) the success of the taxpayer in carrying on other
similar or dissimilar activities, (6) the taxpayer’s history of
income or losses with respect to the activity, (7) the amount of
occasional profits, if any, which the taxpayer earned, (8) the
financial status of the taxpayer, and (9) the elements of
personal pleasure or recreation. Golanty v. Commissioner, 72
T.C. 411, 426 (1979), affd. without published opinion 647 F.2d
170 (9th Cir. 1981); sec. 1.183-2(b), Income Tax Regs. No single
factor or group of factors is determinative. Golanty v.
Commissioner, supra at 426. A final determination is made only
after a consideration of all of the relevant facts and
circumstances.
Sometime during the first half of 2003 petitioner ended his
mortgage brokerage activity. He did not receive any income from
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the mortgage business during the years in dispute. Therefore at
the outset we conclude on the basis of the above factors that
petitioner was not in the trade or business of being a mortgage
broker during the years at issue.
Petitioner’s fundraising activities require greater
analysis. Petitioner received no payments for his fundraising
efforts during 2003, 2004, or 2005. Petitioner spent the bulk of
his working hours maintaining his full-time job with the city.
In 2003 petitioner’s fundraising efforts were infrequent and
petitioner did not conduct his efforts with the continuity or
regularity that section 162 requires. Petitioner curtailed his
fundraising activities even further after February 2004 when he
started suing Geula and Rabbi Sarna, and he ceased fundraising
entirely by spring 2005. Importantly, the law holds that a
sporadic activity does not qualify as a trade or business.
Commissioner v. Groetzinger, supra at 35.
Petitioner has not established a profit objective for his
fundraising activity on behalf of Geula. We observe that
petitioner did not receive any payment for his efforts during the
years at issue and that he did not conduct the activity on a
regular basis. Further, petitioner, as a rabbi, may find it a
righteous deed to help Jewish causes and raise funds for his alma
mater. Likewise, petitioner’s efforts in trying to gain payment
from the contract was not an ongoing trade or business within the
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meaning of section 162 but rather was an activity that fits well
under the definition of section 212 as an endeavor petitioner
pursued for the collection of income due him.
For all the foregoing reasons, we hold that petitioner’s
fundraising activity was not a trade or business during 2003
through 2005. Although petitioner may not deduct his expenses as
section 162 trade or business expenses on Schedule C, other
sections allow deductions for some of the expenses as itemized
deductions on Schedule A. We now discuss each of the disputed
expenses.
II. Deductibility of Expenses
A. Advertising
Petitioner sent a $300 check dated April 16, 2003, to his
synagogue in New York to display the name of his mortgage
business in an advertising brochure printed for the synagogue.
Instead, the synagogue listed petitioner’s personal name on a
one-page “Scroll of Honor” for a June 2003 luncheon. Petitioner
deducted the $300 on Schedule C in 2003 as an advertising
expense.
Because we have already concluded that petitioner was not in
the trade or business of mortgage brokering during 2003, he may
not deduct the payment as an “above the line” advertising
expense. Similarly, because petitioner did not write the check
with detached and disinterested generosity, the payment is not
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deductible as a Schedule A charitable contribution. See Sklar v.
Commissioner, 125 T.C. 281, 291-292 (2005), affd. 549 F.3d 1252
(9th Cir. 2008). If petitioner had received any income from his
mortgage activity, he would have had to report the income.
Therefore, petitioner may deduct the $300 as a section 212
miscellaneous itemized deduction incurred for the production of
income subject to the 2-percent floor that section 67(a) imposes
on section 212 expenses.
B. Legal Fees
Petitioner deducted $6,000 and $7,800 for 2004 and 2005,
respectively, on Schedules C for payments to an Israeli law firm.
Petitioner had engaged the firm to press his legal claim against
Geula and Rabbi Sarna for payment under the contract.
Petitioner’s only substantiation for the expenses was a letter
from the Israeli law firm stating that pertaining to the
litigation, petitioner paid $7,000 in 2004 and $5,800 in 2005.
Because petitioner’s litigation expenses arose from a
contract right generating income, he may deduct the legal fees
under section 212(1) as miscellaneous itemized deductions
incurred for the production or collection of income. See United
States v. Gilmore, 372 U.S. 39, 48 (1963); Commissioner v.
Doering, 335 F.2d 738, 741 (2d Cir. 1964), affg. 39 T.C. 647
(1963). Respondent acknowledged that petitioner’s legal fees are
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deductible under section 212 but disallowed the deduction because
petitioner did not substantiate the fees.
We find the law firm’s letter to be credible evidence, and
therefore we hold that petitioner may deduct the legal fees the
law firm reported, subject to the 2-percent limitation that
section 67(a) imposes on section 212 expenses. See Knight v.
Commissioner, 552 U.S. __, __, 128 S. Ct. 782, 785 (2008); sec.
1.67-1T(a)(1)(ii) and (2), Temporary Income Tax Regs., 53 Fed.
Reg. 9875 (Mar. 28, 1988).
C. Medical Expenses
Petitioner deducted $2,870 and $3,212 for 2003 and 2005,
respectively, on Schedules C for medical expenses. He may have
also claimed medical expenses in 2004 on Schedule C which
respondent’s transcript may have included in “Other Expenses”, or
which petitioner may have included as part of the discrepancy in
adding up his total expenses.
Section 213 permits a deduction for medical expenses that
taxpayers incur and which insurance does not cover, but only to
the extent that the expenses exceed 7.5 percent of the taxpayer’s
adjusted gross income. Further, section 1.213-1(h), Income Tax
Regs., requires taxpayers to substantiate their medical expenses
by providing the names and addresses of the persons or
organizations to whom they made payment and the amounts and dates
of the payments.
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We have some leeway because of Cohan v. Commissioner, 39
F.2d 543-544 (2d Cir. 1930). However, petitioner has not
provided doctors’ invoices, printouts from pharmacies, or any
other evidence from which we can form a reasonable estimate of
the expenses he paid. Moreover, petitioner would have to
establish that his payments went for qualifying medical expenses
and that insurance did not cover or reimburse the payments. For
the foregoing reasons, petitioner may not deduct medical expenses
for 2003, 2004, or 2005.
D. NYCERS Pension Buyback
During 2003 and 2005 petitioner paid $18,456 and $2,380,
respectively, to “buy back” pension credits with the New York
City Employee Retirement System (NYCERS). The buy back program
is an option for NYCERS members who previously worked for a
public employer within New York State and who at that time did
not participate in NYCERS. Eligible members may buy pension
credits in NYCERS for their prior State employment. Petitioner
funded his buy backs by writing a $16,784 check in 2003 and by
paying for the remaining 2003 and 2005 buy backs through payroll
withholdings.
Petitioner makes two arguments to support the validity of
the deductions. First, petitioner contends that his payments
should qualify as deductible employer contributions. However, as
noted above, petitioner has not established that he was operating
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a business during 2003 through 2005; and further, he made the
contributions as an employee of New York City, not as an
employer.
Secondly, petitioner contends that the combination of the
following two sentences in NYCERS’s brochure Buy Back No. 901, at
2, disallows a deduction only when an employee pays for the buy
back through payroll withholdings: (1) “Members generally have
three options to purchase Previous Service: lump sum, payroll
deductions, or roll over funds from a 457 or 403(b) Deferred
Compensation Plan”; and (2) “If you pay for your Previous Service
through payroll deductions, those deductions are subject to
Federal, State, and local income taxes.” However, to the extent
that those sentences are relevant, they focus narrowly on the
taxation of payroll withholdings and do not overcome the broader
and more pertinent language in the brochure which states
explicitly that “There is no tax advantage to buying-back time.”
Moreover, from a legal standpoint it is long settled that
employee contributions to a pension plan are not deductible under
section 162 (business expenses), section 212 (expenses for the
production of income), or any other section of the Code. Miller
v. Commissioner, 144 F.2d 287 (4th Cir. 1944), affg. Taylor v.
Commissioner, 2 T.C. 267 (1943); Sims v. Commissioner, 72 T.C.
996, 1005 (1979); Davidson v. Commissioner, 42 T.C. 766, 769
(1964).
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The courts have held that two main reasons explain why
employee contributions are not deductible. First, one can view
an employee’s contributions to a pension plan as a capital
contribution that the employee recovers without tax after he or
she begins to receive the pension benefit. Sims v. Commissioner,
supra at 1005. Secondly, if the contributions are an expense,
then they are a nondeductible section 262 payment for personal,
living, or family expenses. Id.
For all the foregoing reasons, petitioner may not deduct his
buy back payments.
E. Travel
Petitioner deducted travel expenses of $1,740 and $1,650 for
13- and 12-day stays in Israel in April through May 2003 and in
February 2004, respectively. These expenses consisted of $975
and $767 for airfare, respectively, with the remainder for each
year going to meals and incidentals which petitioner computed
using a per diem rate of approximately $50 per day. Petitioner
testified that during the 2003 trip he discussed fundraising with
Rabbi Sarna and other leaders at Geula, and that during the 2004
trip he confronted Rabbi Sarna and engaged an Israeli law firm to
try to collect payment from the contract. Because petitioner was
not engaged in the trade or business of fundraising during 2003
or 2004, none of the travel expenses are deductible as section
162 business expenses. However, regarding the 2004 trip, we
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discuss below whether the travel expenses are deductible under
section 212.
Section 212 allows a deduction for travel expenses that
taxpayers incur for the production or collection of income;
however, section 274(d) requires substantiation before a
deduction can be allowed. When a trip consists of personal and
business activities the taxpayer may deduct the travel expenses
only if the trip is related primarily to the business purpose,
which is a facts and circumstances inquiry. Rudolph v. United
States, 370 U.S. 269, 275-276 (1962). For travel outside the
United States, section 274(c)(1) generally disallows a deduction
for the portion of the expense that is not allocable to the
income-producing activity. However, section 274(c)(2) provides
an exception to section 274(c)(1) if the trip qualifies under one
of two exceptions: (A) The trip does not exceed 1 week, or (B)
the portion of the trip not attributable to the taxpayer’s
section 212 activities constitutes less than 25 percent of the
total time of the stay. Hintze v. Commissioner, T.C. Memo.
2001-70.
Regarding petitioner’s 2004 trip to Israel, we note that
because he is an Orthodox rabbi, and because he studied for and
received his ordination in Israel, he had religious and personal
reasons for visiting there. Out of his 12 days in Israel, we
give petitioner the benefit of the doubt and estimate that he
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spent 3 days (25 percent of his stay) discussing the 1990
contract with Rabbi Sarna and with the Israeli law firm. Because
3 out of 12 days is well less than 75 percent of the time he
stayed in the country, petitioner’s 2004 trip was primarily
personal, and therefore, he may not deduct his airfare.
However, under section 274(c)(1) the portion of his expenses
allocable to his section 212 activities may be deductible. Sec.
274(c)(2). The Commissioner, under authority of section 274(d),
issues annual revenue procedures that rely on monthly rates
published by the U.S. Department of State, Bureau of
Administration, to allow a combined per diem meal and incidental
rate for Jerusalem, Israel, of $84 per day for April and May
2003, as well as $84 per day for February 2004. Johnson v.
Commissioner, 115 T.C. 210, 217 (2000); sec. 1.274-5(j), Income
Tax Regs.; Rev. Proc. 2002-63, 2002-2 C.B. 691 (for the 2003
trip); Rev. Proc. 2003-80, 2003-2 C.B. 1037 (for the 2004 trip).
Consequently, petitioner is entitled to a 2004 deduction for
meals and incidental expenses of $252 ($84 x 3 days), subject to
the 50-percent limitation on meals and entertainment that section
274(n) imposes, and subject to 2-percent floor that section 67(a)
imposes on section 212 expenses. See Johnson v. Commissioner,
supra at 215.
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F. Co-Op Apartment Maintenance Fees, Newspaper and Magazine
Subscriptions, and Telephone Expenses
On Schedules C for 2003, 2004, and 2005 petitioner deducted
$9,544, $9,544, and $10,470, respectively, for co-op maintenance
fees on his Upper West Side co-op apartment. Likewise,
petitioner deducted $1,483 and $652 on Schedules C for telephone
service at the co-op apartment for 2003 and 2005, respectively.
Petitioner also deducted $340 on Schedule C for 2003 for a
subscription to the New York Times newspaper, and briefly, to New
York Magazine. Petitioner testified that on occasion, he met
with potential donors at the apartment, Rabbi Sarna on occasion
stayed there, about 80 percent of the telephone usage was for
fundraising, and he read the newspaper for fundraising leads.
Section 262(a) disallows a deduction for personal, living,
or family expenses. The taxpayer bears the burden of proving
that an expense was for a business or income-producing purpose
rather than for personal reasons. Walliser v. Commissioner, 72
T.C. 433, 437 (1979). For an expense to be deductible, the
taxpayer must show that he incurred the expense primarily to
benefit his business, and the expense must have had a proximate
rather than a remote or incidental relationship to the taxpayer’s
business. Id.
Specifically, the purchase of general circulation newspapers
is a personal expense that taxpayers may not deduct. Stemkowski
v. Commissioner, 690 F.2d 40 (2d Cir. 1982), affg. in part and
- 25 -
revg. in part 76 T.C. 252 (1981). As to the telephone expenses,
petitioner moved into the co-op apartment in October 2005.
Because petitioner has not substantiated the pre-residential
income-producing use, the claimed deduction must be disallowed
under section 262(a). Further, once the apartment became
petitioner’s residence near the end of 2005 the telephone
expenses would become subject to section 262(b), which disallows
a deduction with respect to the first telephone line to a
taxpayer’s residence.
Moreover, as we have previously discussed, petitioner was
not conducting fundraising during 2003 through 2005 with
sufficient continuity and regularity to qualify his expenses as
deductible section 162 trade or business expenses on Schedules C.
Further, petitioner has not shown how these expenses are
proximately and not incidentally related to his attempts to
collect payment from the contract.
For all the foregoing reasons, petitioner may not deduct the
apartment maintenance fees, telephone charges, or newspaper
subscriptions.
Conclusion
To reflect our disposition of the issues,
Decision will be entered
under Rule 155.