T.C. Summary Opinion 2009-110
UNITED STATES TAX COURT
JOHNNY D. AND CANDY L. FORIEST, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13485-06S. Filed July 14, 2009.
Johnny D. Foriest and Candy L. Foriest, pro sese.
Beth A. Nunnink, for respondent.
CARLUZZO, Special Trial Judge: This case was heard
pursuant to the provisions of section 7463.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the
relevant period. Rule references are to the Tax Court Rules of
Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
In a notice of deficiency dated April 12, 2006, respondent
determined deficiencies in petitioners’ income taxes and
penalties as follows:
Penalty
Year Deficiency Sec. 6662(a)
2003 $11,821 $2,364.20
2004 12,889 2,577.80
The issues for decision are: (1) Whether petitioners are
entitled to deductions for unreimbursed employee business
expenses for 2003 and 2004; (2) whether petitioners properly
reported deductions related to a lawn care business for 2003 and
2004; (3) whether petitioners are entitled to a loss from a
farming activity for 2004; (4) whether petitioners are entitled
to deductions for charitable contributions for 2003 and 2004; (5)
whether petitioners understated income earned in the lawn care
business for 2003; and (6) whether petitioners are liable for
section 6662(a) accuracy-related penalties for 2003 and 2004.
Background
Some of the facts have been stipulated and are so found.
Petitioners are, and were at all times relevant, married to each
other. At the time the petition was filed, they resided in
Tennessee.
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Petitioners are members of the Slayden Baptist Church.
Contributions they made to that church during each year in issue
were routinely made by check.
Petitioners’ Employment and Farming Activity
At all times relevant, Johnny D. Foriest (petitioner) was
employed as a firefighter by the City of Dickson, Tennessee.
During each year in issue he contributed to a common meal fund
for meals consumed at the firehouse. He also incurred expenses
for maintaining and cleaning his firefighter uniforms.
Petitioner was also the sole proprietor of a lawn care
business that he operated during 2003 (as well as for years
before 2003) under the name Spoon’s Lawn Care (Spoon’s).
Petitioner maintained a business checking account for Spoon’s
(the business account). During 2003 deposits totaling $14,589
were made to the business account. Income and expenses
attributable to Spoon’s are shown on a Schedule C, Profit or Loss
From Business, included with petitioners’ Federal income tax
return for each year in issue. Petitioner sold Spoon’s at the
end of 2003.
At all times relevant, petitioners lived on what petitioner
describes as a “family farm”. The property is owned by Candy L.
Foriest’s parents, who apparently conducted some farming activity
on the property during years preceding the years in issue. In
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November 2004 petitioner purchased two heifers for a total cost
of $1,580.
It cannot be determined whether, or if so how, Candy Foriest
was employed during the years in issue. The wage income
($260,145) reported on petitioners’ 2004 Federal income tax
return strongly suggests that she was employed during that year,
but the record is completely silent on the point.
Petitioners’ Federal Income Tax Returns
Petitioners filed a timely joint Federal income tax return
for each year in issue. Both returns were prepared by a
professional income tax return preparer.
1. 2003
As relevant here, petitioners’ 2003 return includes a
Schedule A, Itemized Deductions, a Form 2106, Employee Business
Expenses, relating to petitioner’s employment as a firefighter,
and a Schedule C on which income and expenses attributable to
Spoon’s are reported.
Among other things, on the Schedule A petitioners claimed a
$4,024 deduction for unreimbursed employee business expenses.2
Of this amount, $2,040 is identified as meals expenses (after the
application of section 274(n)), $260 is identified merely as
“business expenses”, $210 is identified as union dues, and $1,514
is identified as “uniforms for work”.
2
This is the amount before the application of sec. 67(a).
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On the Schedule C petitioners claimed a $2,760 deduction for
vehicle expenses, a $30,366 deduction for depreciation and
section 179 expense, a $250 deduction for legal and professional
services, a $501 deduction for supplies, and a $990 deduction for
other expenses.3
2. 2004
As relevant here, petitioners’ 2004 return includes a
Schedule A, a Form 2106 relating to petitioner’s employment as a
firefighter, a Schedule C on which expenses attributable to
petitioner’s lawn care business are reported, and a Schedule F,
Profit or Loss From Farming, on which the income and expenditures
attributable to petitioner’s 2004 farming activity are reported.
Among other things, on the Schedule A petitioners claimed a
$4,390 deduction for unreimbursed employee business expenses.4
Of this amount, $2,040 is identified as meals expenses (after the
application of section 274(n)), $260 is identified merely as
“business expenses”, $510 is identified as union dues, and $1,580
is identified as “uniforms for work”.
On the 2004 Schedule C petitioners claimed a $7,686
deduction for depreciation and section 179 expense as well as a
$245 deduction for repairs and maintenance. Petitioners,
3
Petitioners now concede that the depreciation and sec. 179
expense deduction reported on the 2003 Schedule C is overstated.
4
This amount is before the application of sec. 67(a).
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however, did not report any income from gross receipts or sales
on their Schedule C. The $7,931 net loss shown on the Schedule C
is taken into account in the computation of the adjusted gross
income reported on petitioners’ 2004 return.
On the Schedule F petitioners claimed a net loss of $24,116,
of which $19,785 is attributable to a depreciation and section
179 expense deduction, $492 is attributable to a deduction for
repairs and maintenance, and $1,131 is attributable to a
deduction for other expenses. Although there is no income
reported on the Schedule F, $2,708 is shown as cost of goods
sold.
The Notice of Deficiency
Some of the adjustments made in the notice of deficiency
have been agreed to between the parties or conceded, and other
adjustments are computational. Those adjustments will not be
discussed.
For 2003 respondent disallowed: (1) All unreimbursed
employee expenses, with the exception of union dues, claimed on
the Schedule A; (2) the entire charitable contribution deduction;
and (3) all of the Schedule C deductions listed above.
For 2004 respondent disallowed: (1) All unreimbursed
employee expenses, with the exception of $210 for union dues;
(2) the entire charitable contribution deduction; (3) all of the
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Schedule C deductions listed above; and (4) all of the Schedule F
deductions listed above.
For each year respondent also imposed a section 6662(a)
accuracy-related penalty on several grounds, including
“negligence or disregard of rules or regulations” and
“substantial understatement of income tax”.
Discussion
As we have observed in countless opinions, deductions are a
matter of legislative grace, and the taxpayer bears the burden of
proof to establish entitlement to any claimed deduction.5 Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Commissioner, 292 U.S. 435, 440 (1934).
This burden requires the taxpayer to substantiate deductions
claimed by keeping and producing adequate records that enable the
Commissioner to determine the taxpayer’s correct tax liability.
Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.
per curiam 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.
Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a
deduction on a Federal income tax return must demonstrate that
the deduction is allowable pursuant to some statutory provision
and must further substantiate that the expense to which the
deduction relates has been paid or incurred. See sec. 6001;
5
Petitioners do not claim that the provisions of sec.
7491(a) are applicable, and we proceed as though they are not.
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Hradesky v. Commissioner, supra; sec. 1.6001-1(a), Income Tax
Regs.
Except for the deductions for charitable contributions, the
types of deductions here in dispute are allowable, if at all,
under section 162(a). That section generally allows a deduction
for ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business. The term
“trade or business” as used in section 162(a) includes the trade
or business of being an employee. Primuth v. Commissioner, 54
T.C. 374, 377-378 (1970); Christensen v. Commissioner, 17 T.C.
1456 (1952). The determination of whether an expenditure
satisfies the requirements for deductibility under section 162 is
a question of fact. See Commissioner v. Heininger, 320 U.S. 467,
475 (1943). In general, an expense is ordinary if it is
considered normal, usual, or customary in the context of the
particular business out of which it arose. See Deputy v. du
Pont, 308 U.S. 488, 495 (1940). Ordinarily, an expense is
necessary if it is appropriate and helpful to the operation of
the taxpayer’s trade or business. See Commissioner v. Tellier,
383 U.S. 687 (1966); Carbine v. Commissioner, 83 T.C. 356, 363
(1984), affd. 777 F.2d 662 (11th Cir. 1985). On the other hand,
section 262(a) generally disallows a deduction for personal,
living, or family expenses.
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Set against these fundamental principles, we turn our
attention first to the deductions here in dispute.
A. Disputed Deductions
1. Unreimbursed Employee Business Expense Deduction
The unreimbursed employee business expense deduction
petitioners claimed for each year in issue relates to
petitioner’s employment as a firefighter and consists of four
components: (1) Unreimbursed incidental expenditures of $260 for
2003 and $260 for 2004; (2) union dues of $210 for 2003 and $510
for 2004; (3) expenses for meals petitioner consumed at the
firehouse; and (4) expenses for uniform maintenance. We consider
each in the order just listed.
a. Unreimbursed Incidental Expenditures
The unreimbursed business expense deduction claimed for each
year includes amounts attributable to incidental expenditures
such as batteries for flashlights and other work supplies. For
each year, the deduction was disallowed for lack of
substantiation, and at trial petitioners failed to present any
documentary evidence to substantiate the $260 deduction claimed
for both 2003 and 2004. We accept petitioner’s testimony that
some amounts were expended for certain items; but in the absence
of any documents supporting the amounts so expended, we find
that petitioners are allowed a $50 deduction for incidental
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expenditures for each year. See Cohan v. Commissioner, 39 F.2d
540 (2d Cir. 1930).
b. Union Dues
Petitioners claim unreimbursed employee business expense
deductions for union dues of $210 and $510 in 2003 and 2004,
respectively. Respondent concedes that petitioners are
entitled to a $210 deduction for union dues for each year in
issue. That leaves $300 in dispute for 2004.
Petitioners have failed to present any evidence that they
actually paid more than $260 for union dues in 2004. It would
seem that written substantiation for such an expense is readily
available. In the absence of written substantiation, petitioners
are not entitled to a deduction for union dues for 2004 in excess
of the amount respondent conceded.
c. Meals Expenses
Petitioner contributed to a fund that was used to purchase
food for meals that he consumed while on duty at the firehouse.
Generally, the cost of a taxpayer’s meals are nondeductible
personal expenses, unless the expense of the meal is incurred
while the taxpayer is traveling away from home for business
purposes. See secs. 162(a)(2), 262(a). If, however, a fire
department requires its firefighter-employees as a condition of
employment to make contributions into a common meal fund, then
those contributions qualify as deductible ordinary and necessary
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business expenses. See, e.g., Sibla v. Commissioner, 68 T.C.
422, 432 (1977), affd. 611 F.2d 1260 (9th Cir. 1980); Belt v.
Commissioner, T.C. Memo. 1984-167. On the other hand, if a
firefighter’s contributions into a common meal fund are not
required as a condition of employment but are made voluntarily,
then such contributions are considered a personal expense that is
not deductible. See, e.g., Duggan v. Commissioner, 77 T.C. 911,
914-915 (1981).
It is obvious that the meal expenses petitioners deducted
were not incurred while petitioner was traveling away from home
on business, and the expenses cannot be deducted on that ground.
Furthermore, nothing in the record would support a finding that
the contributions petitioner made to the common meal fund were
made other than voluntarily. Petitioners are not entitled to a
deduction for amounts attributable to meal expenses included in
the unreimbursed employee business expense deduction claimed for
each year.6
d. Expenses for Uniform Maintenance
The unreimbursed employee business expense deduction claimed
on petitioners’ returns includes $1,514 and $1,580 for 2003 and
2004, respectively, for uniform maintenance. Uniform maintenance
includes the cost of dry cleaning, polish for petitioner’s shoes
6
Even if otherwise allowable, we note that the amount
deducted for meals expenses each year greatly exceeded the amount
actually expended.
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and brass/silver, and the occasional item that is not covered by
the yearly uniform allowance.
Expenses for uniforms are deductible if the uniforms are of
a type specifically required as a condition of employment, the
uniforms are not adaptable to general use as ordinary clothing,
and the uniforms are not worn as ordinary clothing. Yeomans v.
Commissioner, 30 T.C. 757, 767-769 (1958); Wasik v. Commissioner,
T.C. Memo. 2007-148; Beckey v. Commissioner, T.C. Memo. 1994-514.
Petitioner was required to wear a uniform provided by the City of
Dickson as a condition of his employment as a firefighter.
Petitioners did not offer any evidence to substantiate the
deductions claimed for uniform maintenance. In the absence of
any substantiating evidence, we find that petitioners are
entitled to a deduction of $500 for each year in issue. See
Cohan v. Commissioner, supra.
2. Lawn Care Schedule C Deductions
For 2003 the Schedule C expense deductions in dispute are:
(1) $2,760 for car and truck expenses, (2) $250 for legal
expenses, (3) $501 for supplies expenses, (4) $990 for other
expenses; and (5) some portion of the $30,366 depreciation and
section 179 expense deduction. As noted, petitioners now concede
that the depreciation and section 179 expense deduction was
overstated by $11,694 (an amount attributable to a Dodge truck).
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Petitioners submitted bank records, credit card company
records, receipts, and other written documents to substantiate
their deductions. The organization of the documents as relating
to the deductions in dispute leaves much to be desired.
Nevertheless, after a careful review of the documents we find
that petitioners are entitled to the 2003 Schedule C deductions
as claimed, with the exception of the portion of the depreciation
and section 179 expense deduction attributable to the Dodge
truck.
Petitioner testified that Spoon’s was sold sometime near the
end of 2003.7 The sale of the business in 2003 perhaps explains
why the 2004 Schedule C shows no income. What remains
unexplained is why deductions attributed to that business are
claimed for 2004. Petitioners’ failure to justify or otherwise
explain business expense deductions claimed for 2004, the year
following the year that the business apparently was sold,
requires that respondent’s disallowance of those deductions be
sustained.
3. Farming Activity Schedule F Deductions
According to petitioners, the expense deductions claimed and
resultant loss shown on the 2004 Schedule F are allowable because
the expenses were paid or incurred in connection with a “trade or
7
He was less than certain on the point, but petitioners
provided nothing else to otherwise establish the date the
business was sold.
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business”. According to respondent, petitioners’ farming
activity did not qualify as a trade or business during 2004 and
expenditures incurred in connection with that activity are
deductible only as provided by section 183.
To be engaged in a trade or business within the meaning of
section 162(a) and section 165(c)(1), a taxpayer must conduct the
activity with continuity, regularity, and for the primary purpose
of deriving a profit. Commissioner v. Groetzinger, 480 U.S. 23,
35 (1987). Whether a taxpayer is carrying on a trade or business
requires an examination of all of the facts in each case. Id. at
36.
Petitioners’ evidence on the point consists of the
following: (1) They lived on property, owned by the parents of
one of them, which was at one time used as an operating farm; (2)
two heifers were purchased and apparently kept on the property
during 2004; and (3) petitioner observed that nobody “farms as a
hobby”. To the extent that petitioner’s observation suggests
that farming is an arduous activity, we agree. Keeping
petitioner’s observation in mind, as we view the matter, living
on a family farm and the purchase of two cows, without more, does
not a farmer make. Petitioners have failed to demonstrate that
the farming activity was conducted with “continuity and
regularity” and “for the purpose of making a livelihood” as
necessary to be considered a trade or business within the meaning
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of section 162. Id. at 28, 35. Respondent’s disallowances of
deductions claimed in connection with that activity are
sustained. Petitioners are not entitled to a deduction for
expenses or the loss shown on the 2004 Schedule F.
4. Charitable Contribution Deductions
According to petitioners, the charitable contribution
deductions of $1,200 and $6,896 claimed on their 2003 and 2004
returns, respectively, consist of contributions by check to
Slayden Baptist Church.
In general, a taxpayer is allowed to deduct any
contributions or gifts made to qualifying organizations for their
use. See sec. 170(a). Section 1.170A-13(a)(1), Income Tax
Regs., requires that a charitable contribution deduction, whether
made by cash or otherwise, be substantiated by at least one of
the following: (1) A canceled check; (2) a receipt from the
donee charitable organization showing the name of the donee, the
date of the contribution, and the amount of the contribution;8 or
(3) in the absence of a canceled check or receipt from the donee
charitable organization, other reliable written records showing
the name of the donee, the date of contribution, and the
amount of the contribution. The reliability of the records is
8
A letter or other communication from the donee charitable
organization acknowledging receipt of a contribution and showing
the date and amount of the contribution constitutes a receipt.
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determined on the basis of all the relevant facts and
circumstances. See sec. 1.170A-13(a)(2), Income Tax Regs.
Although petitioners claim to have made the contributions by
check, they presented no canceled checks or other acceptable
substantiating documents showing any contributions. That being
so, they are not entitled to the charitable contribution
deductions claimed on their 2003 and 2004 returns, and
respondent’s disallowance of those deductions is sustained.
B. Omitted Income
The 2003 deficiency results in part from the disallowed
deductions discussed above. It also results in part from
respondent’s adjustment increasing the income reported on Spoon’s
Schedule C, and we turn our attention to that adjustment.
During 2003, deposits totaling $14,589 were made to the
business account, but the Schedule C shows income of only $6,014.
Respondent increased petitioners’ income by the difference; that
is, $8,575.
Taxpayers must keep adequate books and records from which
their correct tax liability can be determined. Sec. 6001.
Petitioners’ business records, which consist in part of the
monthly statements for the business account, show deposits in
excess of the amount reported as income. According to
petitioner, the business account was used exclusively for
business purposes and the income generated by the business was
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deposited into that account. Petitioners’ business records
support respondent’s adjustment, and petitioners have failed to
explain the difference between the income established by the
business records and the income reported on the Schedule C.
Respondent’s adjustment, therefore, is sustained.
C. The Accuracy-Related Penalties
Lastly, we consider whether petitioners are liable for
section 6662(a) accuracy-related penalties. For each year in
issue, respondent has determined that they are.
Various grounds for the imposition of that penalty are set
forth in the notice of deficiency. Nevertheless, if it is shown
that petitioners acted in good faith and there is reasonable
cause for the deficiency for each year, then the section 6662(a)
accuracy-related penalty is not applicable to either. See sec.
6664(c); Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001).
For each year in issue, petitioners relied upon a paid
income tax return preparer to prepare their Federal income tax
return and to compute the tax liability shown on the return. We
are satisfied that petitioners had reasonable cause and acted in
good faith with respect to the underpayment of tax that will
remain for each year. See sec. 6664(c). They are not liable for
the section 6662(a) accuracy-related penalty for either year in
issue.
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To reflect the foregoing,
Decision will be entered
under Rule 155.