T.C. Memo. 2009-286
UNITED STATES TAX COURT
GREGORY HOUSTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24342-07. Filed December 14, 2009.
Gregory Houston, pro se.
Andrew M. Stroot, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes and additions to tax as
follows:
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Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654(a)
2003 $7,378 $1,525.05 $1,253.93 $173.17
2004 4,511 983.70 546.50 124.81
The issues for decision are: (1) Whether petitioner is entitled
to certain business expense deductions for taxable years 2003 and
2004; and (2) whether petitioner is liable for additions to tax
for failure to file under section 6651(a)(1),1 failure to pay
under section 6651(a)(2), and failure to pay estimated taxes
under section 6654 for the years at issue.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. At the time he filed his
petition, petitioner resided in Maryland.
Petitioner did not file a timely return for 2002.
Respondent prepared a substitute for return for 2002 and assessed
tax based thereon. Petitioner subsequently submitted a return
for 2002, on the basis of which respondent abated a portion of
the tax previously assessed. Respondent stipulated that
petitioner’s income tax liability for 2002 was greater than zero
after the abatement.
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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During 2003 petitioner received $18,615 of wage income from
Management Alternatives, Inc. Petitioner also received
nonemployee compensation in 2003 from three sources:
Source Amount
Equals Three Communications, Inc. $4,113
American Federation of Teachers AFL 14,887
KTA Group, Inc. 2,047
During 2004 petitioner received $790 of wage income from
International Limousine Service, Inc., and $5,664 from Management
Alternatives, Inc. Petitioner also received nonemployee
compensation of $16,238 from the American Federation of Teachers
and $1,908 from IP-Central, L.L.C.
Petitioner did not timely file a tax return for either of
the taxable years 2003 and 2004. On April 16, 2007, respondent
prepared substitutes for returns under section 6020(b) on behalf
of petitioner for both years. Respondent also mailed to
petitioner a Letter 2566 (30-day letter) for each of his taxable
years 2003 and 2004. In those respective 30-day letters,
respondent advised petitioner that respondent had no record of
having received petitioner’s Federal income tax returns and
proposed assessments using information returns that respondent
had received from third-party payers. Respondent also requested
that petitioner file a tax return for each of those years.
On July 23, 2007, respondent sent petitioner notices of
deficiency for 2003 and 2004. On October 22, 2007, petitioner
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timely petitioned the Court claiming that he had filed his tax
returns and expected a nominal refund.
On June 23, 2008, petitioner mailed undated Forms 1040, U.S.
Individual Income Tax Return, to respondent for taxable years
2003 and 2004. Petitioner subsequently submitted to respondent
another set of Forms 1040 for taxable years 2003 and 2004 dated
September 11, 2008. In addition, on September 11, 2008,
petitioner provided photocopies of several receipts and a ledger
that was prepared on the same day.
OPINION
I. Schedule C Business Expenses
Deductions are a matter of legislative grace. Taxpayers
generally bear the burden of proving that they are entitled to
claimed deductions. See Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). The taxpayer is required to
maintain records that are sufficient to enable the Commissioner
to determine his or her correct tax liability. See sec. 6001;
sec. 1.6001-1(a), Income Tax Regs.
The Commissioner’s determinations set forth in a notice of
deficiency are generally presumed correct, and the taxpayer bears
the burden of proving that the determinations are in error. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant
to section 7491(a), the burden of proof as to factual issues may
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shift to the Commissioner where the taxpayer complies with
substantiation requirements, maintains records, and cooperates
fully with reasonable requests for information. Petitioner does
not claim and has not shown that the burden shifts to respondent
under section 7491(a).
A. Automobile Expenses
Petitioner claimed deductions for automobile expenses of
$857 and $2,215, respectively, for tax years 2003 and 2004 on his
Schedules’ C, Profit or Loss from Business, as business expenses.
Pursuant to section 274(d), automobile expenses otherwise
deductible as business expenses will be disallowed in full unless
the taxpayer satisfies strict substantiation requirements. The
taxpayer must substantiate the automobile expenses by adequate
records or other corroborating evidence of items such as the
amount of the expense, the time and place of the automobile’s
use, and the business purpose of its use. See Sanford v.
Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412
F.2d 201 (2d Cir. 1969); Maher v. Commissioner, T.C. Memo. 2003-
85. Petitioner provided gas receipts that he claimed are
evidence that he had traveled to Baltimore, Pennsylvania, and New
York. Petitioner did not (1) keep records of each trip, (2) keep
a log as to the business purpose of each trip, and (3) keep a
record of what vehicle was used. Gas expenses were paid from
petitioner’s personal checking account, and there is no
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indication that expenses listed on the receipts represent
expenses paid for petitioner’s business activities. Therefore,
petitioner is not entitled to deductions for automobile expenses.
B. Bank Charges
Petitioner claimed deductions for bank charges of $60 and
$154, respectively, for 2003 and 2004. Petitioner argues that
the claimed bank charges were deductible ordinary and necessary
business expenses. To substantiate his claim, petitioner
provided bank statements and claimed the charges were for
overdraft fees during the year. Petitioner admitted that the
account giving rise to the overdraft fees was in part a personal
account. Petitioner has not provided any evidence showing the
fees for the returned checks to be ordinary and necessary
expenses of his businesses. Cf. Bailey v. Commissioner, T.C.
Memo. 1991-385, affd. without published opinion 968 F.2d 25 (11th
Cir. 1992). Petitioner has not sustained his burden of proving
that the claimed bank charges for overdrafts were ordinary and
necessary expenses of his businesses.
C. Computer Equipment and Repairs
Petitioner claimed deductions for computer equipment and
repairs for 2003 and 2004 of $2,538 and $591, respectively.
Petitioner claimed to have purchased a computer to maintain
business records at his house. Petitioner also claimed
deductions for repairing the computers as part of his moving
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business. As evidence, petitioner offered receipts from various
computer stores with charges for computer equipment.
A computer is “listed property” and subject to the strict
substantiation requirements of section 274(d). Sec.
280F(d)(4)(A)(iv). Petitioner failed to present any evidence
that the computer was used for his moving business. Further,
petitioner has not shown that he did not use the computer for
personal reasons. Petitioner has failed to substantiate a
Schedule C deduction relating to the computer.
Petitioner’s purchase of computer equipment and/or upgrades
to the computer equipment is not shown to be an ordinary and
necessary business expense. See Riley v. Commissioner, T.C.
Memo. 2007-153; Wasik v. Commissioner, T.C. Memo. 2007-148.
D. Client Entertainment
Petitioner claimed deductions for client entertainment
expenses of $271 and $211, respectively, for 2003 and 2004 on his
Schedules C. Petitioner must satisfy the requirements of section
274(d) to the extent provided under the applicable regulations.
Under those regulations, petitioner must maintain adequate
records showing the amount, time, place, business purpose, and
business relationship of the recipient. Sec. 1.274-5T(b)(3),
Temporary Income Tax Regs. 50 Fed. Reg. 46015 (Nov. 6, 1985).
Petitioner testified that he would take clients and coworkers out
after work for drinks and food and provided receipts from several
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social establishments. Petitioner has not met the section 274
substantiation requirements because he has not provided evidence
as to the business nature of the expense. See Henry Schwartz
Corp. v. Commissioner, 60 T.C. 728 (1973).
E. Office Expenses/Supplies
Petitioner claimed deductions for office expenses of $138
and $85, respectively, for 2003 and 2004 on his Schedule C.
Petitioner testified that these deductions are for office paper
and carbon paper. As evidence, petitioner provided receipts for
purchases made at a Staples office supply store. Under these
circumstances we may estimate the amount of deductible expenses,
using our best judgment. Cohan v. Commissioner, 39 F.2d 540 (2d
Cir. 1930). Considering the record as a whole, we find that
petitioner is entitled to deductions for office expenses and
supplies of $86 and $11, respectively, for 2003 and 2004.
F. Telephone/Internet/Faxes
Petitioner claimed deductions for telephone, Internet, and
fax expenses for his residence of $1,058 and $517, respectively,
for 2003 and 2004.
Section 262 provides that personal, living, and family
expenses are not deductible unless expressly allowed, and the
regulations specify that personal, living, and family expenses
include utilities provided to a taxpayer’s home unless the
taxpayer uses a part of his home for his business. Sec.
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1.262-1(b)(3), Income Tax Regs. Section 262(b) specifically
disallows any deduction for the first line of basic local
telephone service provided to a taxpayer’s residence. Petitioner
claimed a deduction for his telephone and fax expenses in 2003
and 2004. Petitioner has provided no evidence to establish that
he uses his home as a place of business. Petitioner’s telephone
and fax expenses are nondeductible personal expenses under
section 262.
Petitioner claimed a deduction for Internet expenses.
Petitioner provided monthly bills for Internet services; however,
he failed to show the ratio of business to personal use. In
addition, petitioner did not produce evidence that his business
required him to have Internet access. The Internet expense
deductions petitioner claimed are therefore disallowed.
G. Parking and Taxicabs
Petitioner claimed deductions for taxicabs and parking of
$43 and $36, respectively, for 2003. Petitioner often traveled
to meet with clients in their offices. Petitioner would either
take a taxicab to these local meetings or drive himself.
Petitioner presented several taxicab receipts totaling $43.
Section 274(d)(4) applies to parking expenses, but
expenditures of $75 or less for transportation charges do not
require documentary evidence. See sec. 1.274-5(c)(2)(iii)(A)(2),
Income Tax Regs. Petitioner presented receipts from parking
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garages totaling $36. We find that petitioner is entitled to a
deduction of $79 for these business expenses.
H. Rental Expenses
Petitioner claimed deductions on his Schedule C for rental
expenses in 2003 and 2004 totaling $3,542, respectively.
Petitioner testified that those costs represented rental costs
for shipping carts, trucks, and jacks for his moving business.
At trial petitioner produced invoices of equipment rentals
totaling $1,158.09 for 2003 as well as receipts for truck rentals
totaling $262.26 for 2004. We find that petitioner is entitled
to the claimed deductions.
II. Additions to Tax
Respondent determined that petitioner is liable for (1)
additions to tax for failure to timely file a return under
section 6651(a)(1); (2) failure to timely pay tax under section
6651(a)(2); and (3) failure to pay estimated income tax under
section 6654(a), for the 2 years at issue. The Commissioner
bears the burden of production with respect to a taxpayer’s
liability for additions to tax under sections 6651(a)(1) and (2)
and 6654(a). Sec. 7491(c); Rule 142(a); Higbee v. Commissioner,
116 T.C. 438 (2001). At trial petitioner conceded that there was
no reasonable cause for his failure to timely file his income tax
returns nor any basis for not finding that he is liable for the
additions to tax.
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The evidence establishes that petitioner failed to timely
file income tax returns for 2003 and 2004. Therefore, respondent
has sustained his burden of proving that the additions to tax are
appropriate. See sec. 7491(c); Rule 142(a)(2). Accordingly, we
hold that petitioner is liable for the additions to tax under
sections 6651(a)(1) and (2) and 6654 for the years in issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.