T.C. Summary Opinion 2009-59
UNITED STATES TAX COURT
PRESTON REECE AND CAROLYN YOUNG-REECE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8416-07S. Filed April 30, 2009.
Preston Reece and Carolyn Young-Reece, pro sese.
Ashley Vaughan, 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 year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Some of the issues have been settled. The remaining issues
for decision are: Whether petitioners are entitled to itemized
and business expense deductions that remain in dispute and
whether petitioners are liable for the accuracy-related penalty.
This case centers on deductions for the 2005 tax year
claimed on Schedule A, Itemized Deductions, and Schedule C,
Profit or Loss From Business, that respondent disallowed. We
provide an initial factual introduction to summarize the events
leading up to the commencement of this case.
Introduction
Some of the facts have been stipulated and are so found.
The stipulation of facts, the attached exhibits, and the
stipulation of settled issues are incorporated herein by this
reference. Petitioners resided in Texas when they filed their
petition.
During 2005 petitioner Preston Reece (Mr. Reece) worked for
Anheuser-Busch brewery as a machinist, and petitioner Carolyn
Young-Reece (Ms. Reece) operated an unincorporated real estate
sales business from her home. Ms. Reece reported the income and
expenses for her real estate business on a Schedule C, using the
cash method of accounting. Ms. Reece had a real estate broker’s
license for over 20 years preceding the date of trial; however,
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she was not very active in the real estate business for the 5
years preceding the date of trial. In 2005 Ms. Reece spent
approximately two-thirds of her time as a self-employed real
estate broker selling three properties, which generated income
from sales commissions of $8,802. Ms. Reece spent one-third of
her time as an employee of Norwood Management, Inc., where she
sold homes.
Petitioners were members of Jasper Missionary Baptist Church
in New Waverly, Texas, during 2005. This is the church that Mr.
Reece has attended since he was a boy. Petitioners attended
services every other week and typically made contributions by
placing an envelope containing cash in the offering plate when it
was passed around. Petitioners deducted $4,300 for cash
contributions given to their church.
Christopher Young is Ms. Reece’s son. Petitioners paid for
Christopher Young’s tuition at Houston Baptist University by
check in 2005. The check was in the amount of $2,352.39.
Petitioners also claimed charitable contributions deductions for
clothes, books, furniture, kitchen appliances, and various other
items donated to Purple Heart and to Sand Dollar in the amounts
of $2,500, and $2,800, respectively, during 2005.
The Internal Revenue Service (IRS) audited petitioners’ 2005
income tax return. Petitioners failed to appear for the audit,
whereupon the IRS disallowed all of petitioners’ Schedule C
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business expense deductions and Schedule A itemized deductions,
made adjustments relating to the self-employment tax, and
determined an accuracy-related penalty. Respondent issued to
petitioners a notice of deficiency reflecting an increase in
Federal income tax of $15,991, and an accuracy-related penalty of
$3,198 under section 6662(a). After the petition was filed an
Appeals conference was scheduled, but petitioners failed to
appear.
Discussion
Deductions are a matter of legislative grace, and the
taxpayer bears the burden of proving his entitlement to a
deduction. Rule 142(a)(1); INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934). A taxpayer is required to maintain records
sufficient to establish the amount of his or her income and
deductions. Sec. 6001; 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).
Under section 7491(a), the burden may shift to the
Commissioner regarding factual matters if the taxpayer produces
credible evidence and meets the other requirements of the
section. Petitioners did not argue for a burden shift and thus
did not fulfill the requirements of section 7491(a); therefore,
the burden remains with them.
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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, 290 U.S. 111, 113 (1933). 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 make an estimate because
without such a basis, any allowance would amount to unguided
largesse. Williams v. United States, 245 F.2d 559, 560-561 (5th
Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
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I. Itemized and Business Expense Deductions
A. Itemized Deductions at Issue--$15,192
The table below shows the three itemized deductions that
remain in dispute.
Itemized Amount Per Amount Per Amount in
Deduction Tax Return Examination Dispute
Real property taxes $2,892 -0- $2,892
Charitable
contributions:
Cash 7,000 -0- 7,000
Noncash 5,300 -0- 5,300
1. Real Property Taxes--$2,892
Petitioners testified that they have owned their home for
approximately 10 years, and they had their property tax statement
at the time they prepared their return. Petitioners failed to
provide the IRS with any documentation that would substantiate
this deduction; however, at trial petitioners provided a 2007
property tax bill for an amount similar to the amount claimed for
2005. Although petitioners did not have a 2005 property tax
bill, we believe they owned the property and paid real estate
taxes in 2005. Therefore, petitioners are entitled to a
deduction for real property taxes of $2,892.
2. Charitable Contributions–-$12,300
a. Cash–-$7,000
Petitioners testified that they have been parishioners at
Jasper Missionary Baptist Church for a long time and that they
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attend services approximately every other week, contributing
approximately $300 in cash per visit. The letter from Jasper
Missionary Baptist Church states that petitioners contributed
$4,300 to the church during the 2005 tax year. The letter is
contemporaneous with the donation and was signed by the clerk of
the church. See sec. 170(f)(8). We find that the letter is
credible evidence. Petitioners testified that the other $2,700
consists of a $2,352.39 payment for college tuition at Houston
Baptist University for their son, miscellaneous gifts, and
donations of $347.61.
Assuming that Houston Baptist University was a qualified
organization as defined by section 170(c), in order for
petitioners to be entitled to a charitable contribution deduction
under section 170 for the payment made to the university, they
must show the extent to which the tuition payment exceeds the
market value of their son’s education and that the excess payment
was made with the intention of making a gift. See United States
v. American Bar Endowment, 477 U.S. 105 (1986).
Petitioners have failed to establish that the amount paid to
Houston Baptist University exceeded the market value of the
education received by their son so as to take on the dual
character of both a tuition payment and a charitable
contribution. Additionally, even if we assume that the $2,352.39
was a qualified tuition expense, it is not deductible by
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petitioners because petitioners did not claim a dependency
exemption for their son on their return for the 2005 tax year.
See secs. 222(d)(1), 25A(f). Therefore, petitioners are not
entitled to a charitable contribution deduction for their son’s
tuition.
Petitioners have failed to substantiate the remaining
$347.61; however, they have adequately substantiated charitable
contributions to Jasper Missionary Baptist Church in the amount
of $4,300. Accordingly, petitioners are entitled to a deduction
of $4,300 for cash charitable contributions.
b. Noncash--$5,300
At trial, petitioners offered a handwritten list of numerous
items donated to charitable organizations, such as Purple Heart
and Sand Dollar. This list fails to provide the dollar amount
assigned to the various donated items. Ms. Reece testified that
the amount deducted on their income tax return was a mere
estimate. Further, petitioners did not provide any type of
receipt given to them by the charitable organizations to evidence
their contributions. Accordingly, because petitioners have
failed to adequately substantiate their contributions,
respondent’s determination is sustained and no deduction shall be
allowed.
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B. Business Expense Deductions at Issue--$9,974.95
The table below shows the 10 business expense deductions on
Schedule C that remain in dispute.
Business Expense Amount Per Amount Per Amount in
Deduction Tax Return Stipulation Dispute
Advertising $2,732 $950.00 $1,782.00
Legal & professional 1,488 1,243.05 244.95
Office expense 2,656 -0- 2,656.00
Repairs & maintenance 811 -0- 811.00
Supplies 1,617 -0- 1,617.00
Taxes and licenses 625 511.00 114.00
Travel 408 -0- 408.00
Meals and entertainment 259 -0- 259.00
Other expenses- 1,083 -0- 1,083.00
promotion
Other expenses-MLS 1,000 -0- 1,000.00
1. Advertising, Legal and Professional, and Taxes and
Licenses--$2,140.95
The parties stipulated that petitioners substantiated
advertising, legal and professional, and tax and license expenses
of $950, $1,243.05, and $511, respectively. Petitioners failed
to provide any documentation that would substantiate any amount
in excess of the amounts stipulated. On the basis of the record,
the Court is unable to make a reasoned estimate. Accordingly,
petitioners are not entitled to deductions in excess of the
amounts stipulated.
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2. Travel--$408
Ms. Reece produced documentation at trial showing that she
traveled from Houston to Oakland on August 4, 2005, and from
Oakland back to Houston on August 7, 2005, at a total cost of
$377.30. She further testified that she traveled to San
Francisco, to meet with a client, at the client’s request, about
selling a property located in Houston, and that she met with the
client every day for approximately 5 or 6 hours. Ms. Reece was
engaged by the customer to list the property for sale, but never
did sell it. During her weekend trip to San Francisco, Ms. Reece
stayed with her niece. We find it implausible that Ms. Reece
spent such a prolonged period of time discussing the sale of a
single piece of property and believe that the trip was made
primarily for personal reasons. See sec. 1.162-2, Income Tax
Regs. Therefore, respondent’s determination is sustained.
3. Office Expense, Repairs and Maintenance, Supplies,
Meals and Entertainment, Other Expenses-Promotion,
and Other Expenses-MLS–-$7,426
Petitioners have failed to provide any documentation that
would substantiate these expenses or enable the Court to make a
reasoned estimate. Accordingly, respondent’s determination is
sustained as to these expense deductions.
II. Accuracy-Related Penalty
Taxpayers may be liable for a 20-percent penalty on the
portion of an underpayment of tax attributable to negligence,
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disregard of rules or regulations, or a substantial
understatement of income tax. Sec. 6662(a) and (b)(1) and (2).
Negligence is a failure to make a reasonable attempt to comply
with the provisions of the Code. The taxpayer is required to
prove he acted with due care. Sec. 6662(c); Collins v.
Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988), affg. Dister
v. Commissioner, T.C. Memo. 1987-217; sec. 1.6662-3(b)(1), Income
Tax Regs.
The term “negligence” in section 6662(b)(1) includes any
failure to make a reasonable attempt to comply with the Code.
Sec. 6662(c). Negligence has also been defined as the failure to
exercise due care or the failure to do what a reasonable person
would do under the circumstances. See Allen v. Commissioner, 92
T.C. 1, 12 (1989), affd. 925 F.2d 348, 353 (9th Cir. 1991); Neely
v. Commissioner, 85 T.C. 934, 947 (1985). The term “disregard”
includes any careless, reckless, or intentional disregard. Sec.
6662(c). Failure to keep adequate records may be evidence not
only of negligence, but also of intentional disregard of
regulations. See sec. 1.6662-3(b)(1) and (2), Income Tax Regs.;
see also Benson v. Commissioner, T.C. Memo. 2007-113.
Negligence penalties do not apply where the taxpayer shows
that he had reasonable cause and acted in good faith. Sec.
6664(c)(1). The determination depends on the facts and
circumstances of each case and includes the knowledge and
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experience of the taxpayer and the reliance on the advice of a
professional, such as an accountant. Sec. 1.6664-4(b)(1), Income
Tax Regs. Most important in this determination is the extent of
the taxpayer’s effort to determine the proper tax liability. Id.
Respondent has the burden of production under section
7491(c), with respect to the accuracy-related penalty under
section 6662. To satisfy that burden, respondent must produce
sufficient evidence showing that it is appropriate to impose the
penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent has met his burden of production by establishing that
petitioners maintained their books and records in a negligent
manner. Petitioners have failed to demonstrate reasonable cause
for inadequate recordkeeping and their inability to substantiate
a good number of their deductions. Petitioners claim that they
were unable to obtain many of their tax records because of
shortness of time and because of Mr. Reece’s May 2006 hip
surgery. However, we note that on November 20, 2007, petitioners
were served with a notice setting the case for trial at the
Houston trial session beginning April 14, 2008. We believe that
petitioners had ample time to obtain such records. These reasons
are not sufficient to establish reasonable cause for inadequate
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recordkeeping. We sustain respondent on the accuracy-related
penalty. To reflect our disposition of the issues,
Decision will be entered
under Rule 155.