T.C. Memo. 2009-173
UNITED STATES TAX COURT
SHENAE A. OUTERBRIDGE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7907-08. Filed July 21, 2009.
Shenae A. Outerbridge, pro se.
Michele A. Yates, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Judge: Respondent determined a deficiency of $8,389
in petitioner’s Federal income tax for 2006. After concessions,
the issue for decision is whether petitioner is entitled to
deduct $46,173.49 in relation to a travel services activity.
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
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Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioner resided in Virginia at the time she filed her
petition.
Petitioner achieved a college degree in accounting. During
2006, petitioner worked as an auditor for the firm of McGladrey &
Pullen, L.L.P., reviewing financial statements and reconciling
balance sheets. Petitioner also attended evening classes at
Keller Graduate School of Management for the purpose of obtaining
a master’s degree in business.
In December 2005, petitioner attended a marketing session
for YTB Travel Network (YTB). YTB operated as an online
multilevel marketing company and hosted a Web portal for
“referring travel agents” to complete travel sales to clients.
YTB paid a commission for any such completed sales. YTB charged
fees of $49.95 per month for use of its Web site.
Petitioner, on behalf of “Firefly Xpress Travel, a Sole
Proprietorship” (Firefly), entered into a sublease “dated as of
January 1, 2006” for a 1-year term commencing January 1, 2006, at
$4,000 per month. The premises were described as the ground
floor of a property in Stafford, Virginia. Rosary Edwards
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(Edwards) signed the lease for United States Collection Bureau,
as “sublandlord”, and Jauquine Tantillo (Tantillo) signed the
lease as “landlord”. Tantillo was a friend of petitioner through
his cousin. Rosary Edwards is the mother of Jauquine Tantillo
and was a friend of petitioner, whom she had known for about 9
years. Tantillo occupied a separate part of the property as his
residence.
Petitioner did not begin any activity for Firefly before
February 2006. On March 23, 2006, she booked a travel package
for herself and a companion on the travel portal. On March 28,
2006, she received a package from YTB that included a business
card, online order form, and rules regarding the YTB structure
and compensation plan. Simply stated, commissions of $50 would
be paid on direct sales, and additional commissions depended on
being part of a team that secured or sponsored additional
“referring travel agents”.
Petitioner never received a commission from YTB. She paid
Web site access fees of $49.95 for 2 months, April and May 2006.
By July 2006, petitioner canceled her arrangement with YTB and
terminated the travel services activity.
On petitioner’s Form 1040, U.S. Individual Income Tax
Return, for 2006, signed March 1, 2007, she reported wage income
of $74,766.29 and claimed $72,061.64 on Schedule A, Itemized
Deductions. She reported no payments by withholding or otherwise
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and no tax liability. On the Schedule A “Other expenses” line
she deducted $46,173.49, described as office expenses of $173.49
and office rent expense of $46,000.
On Form 1040X, Amended U.S. Individual Income Tax Return,
for 2006 signed April 16, 2007, petitioner reduced the itemized
deductions claimed on Schedule A and claimed $46,099.90 on
Schedule C, Profit or Loss From Business. The business claimed
was a travel services business known as Firefly Xpress Travel
with a Stafford, Virginia, address. No gross receipts were
reported, and the claimed expense deductions were office expenses
of $99.90 and an office rent expense of $46,000.
The notice of deficiency determined that petitioner was
liable for the alternative minimum tax because of the “excess
itemized deductions”, pursuant to sections 55 and 56(b)(1).
Acknowledging the amended return that petitioner had submitted,
the Form 886-A, Explanation of Items, attached to the notice of
deficiency stated: “Since it does not appear that we have
received any supporting documentation to verify your Schedule C
and expenses, we have continued to disallow your request for
changes.” The notice did not disallow the expense deductions
claimed on Schedule A of the original Form 1040. Respondent has
now conceded that the alternative minimum tax is not applicable
and challenges the deductibility of the amounts claimed on
Schedule C of the Form 1040X.
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Petitioner did not make regular rent payments by check or
money order. To substantiate her claimed rental expenses,
petitioner produced a series of “receipts” reflecting the
following dates and amounts:
Date Amount
1/06 $1,500
2/06 2,000
3/06 1,200
4/06 7,300
5/06 1,600
6/06 5,100
7/06 5,500
8/06 2,000
9/06 5,500
10/06 3,500
11/06 6,634
12/06 4,166
OPINION
Petitioner, Edwards, and Tantillo testified that they agreed
on a lease of property in a residential area of Stafford,
Virginia. According to petitioner, the leased space was
furnished “like an entertainment sort of setting” with a “bar
area”, a separate entrance, a kitchenette with refrigerator, and
space for a borrowed computer. According to Tantillo, the lease
also provided for utilities, cable and satellite, and a monthly
allowance of about $100 for food. Tantillo testified that the
lease started March 1, 2006 (notwithstanding the January 1, 2006,
date on the lease). He testified that he declined to terminate
the lease in July 2006 when petitioner’s travel services activity
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ceased, but that he agreed to terminate the lease 5 months later
in December 2006 because:
Well, that’s because it came into a little
controversy with my fiancee. Basically she had a
disagreement about a woman renting out the
apartment where she got kind of jealous. In June
she moved in and pretty much there was a lot of
issues, so in December that’s when the mutual
agreement was made.
Petitioner did not pay the rent by check or money order or in
regular amounts. According to Tantillo, the rent was paid by
bank transfers. During his testimony he explained the receipts
as follows:
Q And what are those documents?
A Rent receipts.
Q And do those documents correspond with the
exact timing of your receipt of Firefly Xpress Travel’s
bank remittance of the lease payments?
A Not exactly. Some of them are. Some of them
might not be.
Q And why not?
A Because depending on when I checked the bank
account and depending on when I received the funds it
could fluctuate from month to month.
So if I received -- if I checked on like the 2nd
and the payment was on the 30th, I might have applied
it to the next month’s receipt, so it depends on when I
actually checked it.
Generally, the taxpayer has the burden of proving that the
claimed expenses were ordinary and necessary business expenses
rather than nondeductible personal expenses. New Colonial Ice
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Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v. Helvering,
290 U.S. 111, 113-114 (1933). In a case involving deductions,
such as this one, concessions and variations from the
determination in the notice of deficiency do not relieve the
taxpayer of the burden of establishing the deductible nature and
amount of the items in dispute. Gatlin v. Commissioner, 754 F.2d
921, 923-924 (11th Cir. 1985), affg. T.C. Memo. 1982-489.
Petitioner does not dispute respondent’s reliance on the
general rule. She argues that the burden of proof has shifted
under section 7491(a). The burden of proof shifts only if a
taxpayer produces credible evidence with respect to a factual
issue. Petitioner has not satisfied that standard. See Higbee
v. Commissioner, 116 T.C. 438, 442 (2001).
We are not required to accept testimony that is improbable
or implausible. See Geiger v. Commissioner, 440 F.2d 688, 689-
690 (9th Cir. 1971), affg. T.C. Memo. 1969-159; Shea v.
Commissioner, 112 T.C. 183, 189 (1999). Petitioner’s claimed
deductions against her reported income were so large as to be
improbable. It is not plausible that petitioner, a trained
accountant and auditor earning less than $75,000 per year, would
incur and pay $46,000 in rent for property to be used in a
business that had little potential, never produced any income,
and was abandoned after 2 months with no more than minimal
activity. So far as the record discloses, the activity included
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personal travel and vaguely described entertainment. There are
simply too many gaps in the scenario presented by petitioner and
her friends for us to accept her claims. The reliable evidence
strongly suggests that the amounts in dispute were personal in
nature. See sec. 262.
We have considered the other arguments of the parties. They
are either unnecessary to our conclusion or lacking in merit. To
reflect concessions by respondent,
Decision will be entered
under Rule 155.