T.C. Summary Opinion 2009-173
UNITED STATES TAX COURT
ANTHONY T. YOUNG AND KIMBERLEE M. YOUNG, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5130-05S. Filed November 23, 2009.
Anthony T. Young, pro se.
Alex Shlivko, for respondent.
CARLUZZO, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, in effect for the year
in issue. Rule references are to the Tax Court Rules of Practice
and Procedure.
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7463(b), the decision to be entered is not reviewable by any
other court, and this opinion shall not be cited as precedent for
any other case.
In a notice of deficiency dated December 16, 2004,
respondent determined a $6,962 deficiency in and a $1,392.40
section 6662(a) accuracy-related penalty with respect to
petitioners’ 2002 Federal income tax.
After concessions, the issues for decision are as follows:
(1) Whether petitioners are entitled to a charitable contribution
deduction; (2) whether petitioners are entitled to a deduction
for employee business expenses; (3) whether petitioners are
entitled to a deduction for expenses claimed on a Schedule C,
Profit or Loss From Business, relating to a business identified
as “GASY Investment Co.”; and (4) whether petitioners are liable
for a section 6662(a) accuracy-related penalty.
Background
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioners resided in New York.
Petitioners are and were at all times relevant married to each
other. They filed a timely 2002 joint Federal income tax return.
During 2002 Anthony T. Young (petitioner), who holds a
bachelor’s degree in economics and has taken some courses towards
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a postgraduate degree, was employed as a salesperson by Salomon
Smith Barney, Inc. Kimberlee M. Young was employed as a
veterinarian by Secaucus Animal Hospital.
On January 24, 2003, petitioners’ residence and its contents
suffered significant damages due to a furnace malfunction that
allowed the water pipes in the house to freeze and ultimately
burst. Petitioners were out of town at the time.
Petitioners are members of the Greater Faith Church of the
Abundance in Haledon, New Jersey. During 2002 they made
contributions in cash and property to that organization. The
property contributions consisted of computer equipment, including
monitors, central processing units, and keyboards.2
Petitioner prepared petitioners’ 2002 joint Federal income
tax return using a computer-based, income tax return preparation
program. Before the return was filed, it was “reviewed and
revised” by a paid income tax return preparer.
The incomes earned and received from their respective
employers are shown on Forms W-2, Wage and Tax Statement, and
reported on the return. Included with petitioners’ 2002 return
are a Schedule A, Itemized Deductions, and a Schedule C.
2
This is as specific a description as the record allows.
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As relevant here, the following deductions are claimed on
the Schedule A:
Deduction Amount
Cash gifts to charity $1,923
Gifts to charity other than cash 4,843
Employee business expenses 34,240
According to petitioner, the cash gifts to charity consist in
part of contributions to Greater Faith Church of the Abundance
and in part of contributions to animal rescue organizations.
According to a Form 8283, Noncash Charitable Contributions,
included with petitioners’ 2002 return, the gifts to charity made
other than in cash were made to the Salvation Army in Secaucus,
New Jersey, and consist of “clothing”, “toys”, “couch, chairs,
dresser”.3 The employee business expense deduction relates to
Kimberlee Young’s employment as a veterinarian with Secaucus
Animal Hospital.
The Schedule C relates to a business identified as “GASY
Investment Co.”; its principal business is shown as
“Consultant/Brokerage Sales & Trading”. Petitioner is listed as
the proprietor of GASY on the Schedule C. No income is reported
on the Schedule C; as relevant here the following deductions are
claimed:
3
See supra note 2.
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Deduction Amount
Advertising $2,781
Car and truck expenses 4,699
Legal and professional services 2,075
Travel 1,730
Meals 1,825
Other expenses 3,955
In the above-referenced notice of deficiency, respondent:
(1) Disallowed the charitable contribution deduction; (2)
disallowed the employee business expense deduction; (3)
disallowed the above-listed deductions claimed on the Schedule C;
and (4) imposed a section 6662(a) accuracy-related penalty.
According to the notice of deficiency, petitioners failed to
substantiate the amounts of the disallowed deductions. Other
adjustments made in the notice of deficiency are computational
and need not be addressed.
Discussion
We begin by noting, as we have observed in countless
opinions, that deductions are a matter of legislative grace, and
the taxpayer bears the burden of proof to establish entitlement
to any claimed deduction.4 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); Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.
1976). A taxpayer claiming a deduction on a Federal income tax
4
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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return must demonstrate that the deduction is allowable pursuant
to some statutory provision and must further substantiate by
adequate records that the expense to which the deduction relates
has been paid or incurred. See sec. 6001; Hradesky v.
Commissioner, supra; sec. 1.6001-1(a), Income Tax Regs.
None of the deductions here in dispute have been adequately
substantiated by any written records or documents admitted into
evidence. According to petitioner, his 2002 tax records were
damaged, destroyed, or otherwise lost when the water pipes in his
house burst in January 2003.5 Petitioner explained his failure
to attempt to reconstruct any of the records upon his mistaken
belief that the case had been settled. According to petitioner,
he did not learn otherwise until shortly before the trial date,
and he did not have sufficient time to contact third parties in
an attempt to acquire copies of canceled checks, etc.
Sympathetic to petitioners’ dilemma, the Court allowed the record
to remain open for a substantial period to allow for the
introduction of additional evidence by stipulation or further
trial. The parties apparently could not agree to any further
stipulations, and neither party requested further trial.
5
Set against evidence establishing the date of this event,
petitioner testified that at the time he prepared the 2002 return
(which is dated Apr. 15, 2003), his tax records, including
records to support the deductions claimed on that return, were
available to and relied upon by him.
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As it stands, the evidence in this case consists of: (1)
Petitioner’s testimony; (2) a copy of petitioners’ 2002 joint
Federal income tax return; (3) a copy of the notice of deficiency
that forms the basis for this case; (4) a copy of an invoice from
petitioners’ accountant showing that their 2002 return was
“reviewed and revised” in April 2003; (5) documents demonstrating
the damages to petitioners’ residence as described above; and (6)
a letter dated in 2005 from the pastor of petitioners’ church
acknowledging donations of computer equipment during 2002.
Petitioners are both well educated, and the manner in which
petitioner proceeded at trial demonstrates that he is
sophisticated in Federal income tax matters. That being so, we
are satisfied that little discussion is required to support our
resolution of each of the issues here in dispute.
Charitable Contribution Deduction
In general, section 170(a) allows a deduction for any
charitable contribution made within the taxable year if properly
verified pursuant to regulations promulgated by the Commissioner.
The charitable contribution deduction claimed on the return and
disallowed in the notice of deficiency consists in part of cash
donations and in part of donations made in property. Petitioner
testified that some of the cash donations were made by check, but
no canceled checks were produced to support his testimony or the
amount shown on the return.
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With respect to the property donations, petitioner testified
that from time to time during 2002 various items of clothing were
left in containers placed by the Salvation Army. He also
testified that he donated computer equipment to his church, a
donation evidenced by a letter from the church’s pastor. The
donations made to the Salvation Army are shown on petitioners’
2002 return; the donation of computer equipment is not.
After careful review of the evidence, we find that
petitioners are entitled to a charitable contribution deduction
totaling $1,500.
Employee Business Expense Deduction
In general, section 162(a) 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). 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). In general, 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
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662 (11th Cir. 1985). 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).
The employee business expense deduction here in dispute
relates to Kimberlee M. Young, who did not attend trial or submit
in any form any explanation regarding the circumstances giving
rise to the expenses that underlie the deduction. When
petitioner was asked on cross-examination whether his wife was
required to incur the expenses in connection with her employment
at the animal hospital he responded: “I don’t know”.
Absent sufficient evidence that the expenses were
“necessary” in connection with Kimberlee M. Young’s employment,
and in the absence of any substantiating documents to support a
finding that the expenses were paid or incurred, respondent’s
disallowance of the deduction is sustained.
Schedule C Deductions
Petitioner’s description of what business activity he
conducted as the proprietor of GASY Investment Co. was, at best,
vague. The lack of specificity regarding the business
activities, coupled with the absence of any substantiating
documents to support the deductions in dispute, constrains us to
sustain respondent’s disallowances of those deductions.
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Section 6662(a) Accuracy-Related Penalty
Section 6662(a) imposes an accuracy-related penalty of 20
percent of any portion of an underpayment of tax, if among other
reasons, the underpayment is attributable to a substantial
understatement of income tax. Sec. 6662(b)(2), (d). An
understatement of income tax is a substantial understatement of
income tax if it exceeds the greater of $5,000 or 10 percent of
the tax required to be shown on the taxpayer’s return. Sec.
6662(d)(1). Ignoring conditions not relevant here, for purposes
of section 6662 an understatement is defined as the excess of the
amount of the tax required to be shown on the taxpayer’s return
over the amount of the tax which is shown on the return. Sec.
6662(d)(2)(A). In this case the understatement of income tax is
computed in the same manner as, and is equal to, the deficiency
as redetermined taking into account the foregoing. That amount
will exceed $5,000. See secs. 6211, 6662(d)(2).
Under section 7491(c) respondent has the burden of
production with respect to the accuracy-related penalty under
section 6662(a). To meet that burden, respondent must come
forward with sufficient evidence to show that imposition of the
penalty is appropriate. See Higbee v. Commissioner, 116 T.C.
438, 446 (2001). We have sustained adjustments in the notice of
deficiency that will give rise to a deficiency and underpayment
of tax that exceeds $5,000 for 2002.
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The accuracy-related penalty does not apply to any part of
an underpayment of tax if it is shown the taxpayer acted with
reasonable cause and in good faith. Sec. 6664(c)(1). The
determination of whether a taxpayer acted in good faith is made
on a case-by-case basis, taking into account all the pertinent
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners bear the burden of proving that they had reasonable
cause and acted in good faith with respect to the underpayment.
See Higbee v. Commissioner, supra at 449. This they have failed
to do. Respondent’s imposition of the section 6662(a) accuracy-
related penalty is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.