T.C. Summary Opinion 2010-6
UNITED STATES TAX COURT
ANDREW A. SHAH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21833-08S. Filed January 21, 2010.
Andrew A. Shah, pro se.
Nicole C. Lloyd, for respondent.
JACOBS, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect
when 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.
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Respondent determined a deficiency of $3,024 and a section
6662(a) penalty of $604.80 for 2005 and a deficiency of $3,548
and a section 6662(a) penalty of $709.60 for 2006.
The issues for decision are: (1) Whether petitioner is
entitled to the following claimed business expense deductions for
2005: (a) $15,485 for college tuition and book expenses, (b)
$825 for travel expenses, and (c) $639 for office expenses; (2)
whether petitioner is entitled to the following claimed business
expense deductions for 2006: (a) $14,522 for college tuition and
book expenses, (b) $578 for travel expenses, and (c) $1,092 for
office expenses; and (3) whether petitioner is liable for the
section 6662(a) accuracy-related penalty for 2005 and/or 2006.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years at issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts, the supplemental stipulation of facts,
and the attached exhibits are incorporated herein by this
reference. Petitioner resided in California when the petition
was filed.
During 2005 and 2006 petitioner was an undergraduate student
at New York University (NYU), where he majored in film and
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television studies. To meet his graduation requirements
petitioner was required to complete both the core courses of his
major and elective courses from other fields of study. A
substantial number of the elective courses petitioner enrolled in
consisted of computer science, Web design, and multimedia
courses.
Petitioner has long been interested in computer and Web
design work. While attending high school in Chicago, Illinois,
petitioner began performing information technology (IT) services
for several of the clients of Physicians Tax Services, Inc.
(Physicians Tax Services), a company owned by petitioner’s
father, Ashvin Shah. Physicians Tax Services provides
accounting, tax preparation, payroll, and tax planning services
for 450 to 475 clients, most of whom are doctors. Part of
petitioner’s work involved working on the Web sites of clients of
Physicians Tax Services. Petitioner earned between $5,000 and
$10,000 during 2003 and 2004 (his junior and senior years in high
school) providing these services.
Petitioner generally returned to Chicago during NYU’s
summer, winter, and spring breaks. Petitioner stayed with his
parents, and he worked for Physicians Tax Services. Petitioner
again performed IT and Web design services for that company’s
clients, using skills he learned in some of his classes at NYU.
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After petitioner graduated from NYU in 2008 he began working
in the entertainment industry in California. At the time
of trial he was employed by a late-night television talk show,
creating multimedia content for the show’s Web site.
On his 2005 and 2006 Forms 1040, U.S. Individual Income Tax
Return, petitioner attached Schedules C, Profit or Loss From
Business, for his work as an “IT Consultant-Web Designer.” On
his 2005 Schedule C petitioner deducted office expenses, travel
expenses, and other expenses which consisted of tuition and
books. Although petitioner’s 2006 Federal income tax return is
not in the record, the parties submitted a certified tax return
transcript representing petitioner’s 2006 Federal income tax
return. The certified transcript indicates that petitioner filed
a Schedule C and deducted office expenses, travel expenses, and
other expenses that were made up of his tuition and book
expenses. Petitioner’s father, an accountant and professional
tax preparer, prepared petitioner’s Federal tax returns for both
2005 and 2006 and signed both returns as the return preparer.
Respondent issued a notice of deficiency to petitioner for
2005 and 2006 on June 17, 2008.
Discussion
In general, the Commissioner’s determinations in the notice
of deficiency are presumed correct, and the taxpayer bears the
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burden of proving error.1 Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933). The Commissioner has the burden of
producing sufficient evidence to show that it is appropriate to
impose the relevant penalty, addition to tax, or additional
amount. Sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446
(2001).
Deductions are a matter of legislative grace and are
allowable only as specifically provided by statute. See INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Joseph v.
Commissioner, T.C. Memo. 2005-169. Taxpayers bear the burden of
proving that they are entitled to any deductions claimed. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Singh v.
Commissioner, T.C. Memo. 2009-36. The taxpayer is required to
maintain adequate records to substantiate the amounts of any
deductions or credits claimed. Sec. 6001; sec. 1.6001-1(a),
Income Tax Regs.
Section 162(a) authorizes a deduction for “all the ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business”. A trade or business
expense is ordinary for purposes of section 162 if it is normal
or customary within a particular trade, business, or industry and
is necessary if it is appropriate and helpful for the development
1
Sec. 7491(a)(1) (which could shift the burden of proof to
respondent) was not raised by petitioner.
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of the business. Commissioner v. Heininger, 320 U.S. 467, 471
(1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940). In
contrast, “personal, living, or family expenses” are generally
nondeductible. Sec. 262(a).
For reasons specified infra, we uphold respondent’s
determinations in the notice of deficiency with respect to
petitioner’s claimed business expense deductions.
A. Petitioner’s Education Expenses
Petitioner claimed a business expense deduction for a
portion of his NYU tuition and book expenses for 2005 and 2006.
Petitioner provided a copy of Form 1098-T, Tuition Statement, for
2005 which states that petitioner was billed $35,420 in qualified
tuition and related expenses and received $4,000 in scholarships
or grants. Petitioner did not provide a Form 1098-T with respect
to amounts billed for qualified tuition and related expenses for
2006.
Petitioner failed to provide any evidence with respect to
the payment of the tuition for either 2005 or 2006. Hence, we do
not know the exact amounts of the tuition payments and, more
importantly, that it was petitioner who actually paid the tuition
expenses. We therefore hold that petitioner has not established
that he paid the claimed educational expenses for either year.
See, e.g., Udoh v. Commissioner, T.C. Memo. 1999-174.
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Even were we to find that petitioner substantiated his
educational expenses, the claimed deductions for the expenses
would not be allowed because expenses for education which is part
of a program of study being pursued by a taxpayer that leads to
qualifying the taxpayer for a new trade or business are not
deductible. Sec. 1.162-5(b)(1), (3)(i) Income Tax Regs. These
expenses are not deductible as ordinary and necessary business
expenses “even though the education may maintain or improve
skills required by the individual in his employment or other
trade or business or may meet the express requirements of the
individual’s employer or of applicable law or regulations.” Sec.
1.162-5(b)(1), Income Tax Regs.; see Jungreis v. Commissioner, 55
T.C. 581, 591 (1970); Warren v. Commissioner, T.C. Memo. 2003-
175; Malek v. Commissioner, T.C. Memo. 1985-428. With respect to
courses taken as part of an undergraduate degree, we stated in
Kersey v. Commissioner, T.C. Memo. 1993-641, affd. without
published opinion 50 F.3d 15 (9th Cir. 1995):
It is difficult, if not impossible, for a taxpayer to
satisfy the requirements of the Code and regulations in
order to obtain a deduction for expenses incurred in
attaining a bachelor’s degree. Malek v. Commissioner, T.C.
Memo. 1985-428. Such degrees generally qualify the graduate
for a new trade or business in some field, and that field
would not necessarily be in the same area as was previously
engaged in. * * *
Petitioner maintains that he deducted only tuition and book
costs for those classes related to his computer work.
Specifically, petitioner posits that since he was employed in Web
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design and multimedia while in high school, classes he took at
NYU related to those fields should be considered to be qualifying
work-related education that improved skills and not a program of
study that qualifies him for a new trade or business.
Petitioner is incorrect in his analysis. While his computer
and Web design courses may have improved his skills, they also
helped qualify petitioner for a new trade or business. These
courses were necessary for him to earn his bachelor’s degree
since he could not have graduated from NYU without those credits.
Therefore, these courses were part of a course of study that will
lead to qualifying petitioner in a new trade or business. As we
stated in Warren v. Commissioner, supra: “what is important
under the regulations is that the degree ‘will lead’ petitioner
to qualify for a new trade or business. Sec. 1.162-5(b)(3)(i),
Income Tax Regs.” (Fn. ref. omitted). Consequently, we hold
that petitioner may not deduct his tuition and book expenses for
2005 and 2006.
B. Petitioner’s Travel Expenses
Petitioner deducted travel costs he incurred in traveling
between NYU and Chicago in 2005 and 2006, asserting
that the trips were for the purpose of providing services to
clients of Physicians Tax Services.
Section 162(a)(2) permits a deduction for traveling expenses
while away from home in the pursuit of a trade or business.
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Initially, we note petitioner has not established a tax home from
which he was away. The question of whether petitioner has a tax
home is factual, and the burden of proof is on petitioner. See
Rule 142(a); Welch v. Helvering, 290 U.S. at 115; Barone v.
Commissioner, 85 T.C. 462, 466 (1985), affd. without published
opinion 807 F.2d 177 (9th Cir. 1986).
Petitioner provided no evidence or legal theory with respect
to this issue. He merely asserts that he “qualified for all
three factors to determine” that his tax home is New York.
We have previously held that a college student’s tax home
may be where he or she is regularly employed and not the location
of the school. See Weiberg v. Commissioner, T.C. Memo. 1980-147
(taxpayer’s tax home was his principal place of employment and
not the location of the school he attended), affd. 639 F.2d 434
(8th Cir. 1981); Waggener v. Commissioner, T.C. Memo. 1963-2
(taxpayer’s tax home was wherever she was regularly employed as a
clerk-typist while attending college). Upon the record before
us, we cannot determine that petitioner’s tax home is New York.
Furthermore, section 274(d) imposes strict substantiation
requirements for deductions related to traveling expenses. The
taxpayer must substantiate by adequate records or sufficient
evidence the amount of the expense, the time and place of the
travel, the business purpose of the expense, and the business
relationship to the taxpayer. Sec. 274(d); sec. 1.274-5T(b)(2),
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Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
“To meet the ‘adequate records’ requirement of section 274(d), a
taxpayer shall maintain an account book, diary, log, statement of
expense, trip sheets, or similar record * * *, and documentary
evidence”. Sec. 1.274-5T(c)(2)(i), Temporary Income Tax Regs.,
50 Fed. Reg. 46017 (Nov. 6 1985). Petitioner does not meet these
strict substantiation requirements.
To substantiate his expenses, petitioner offered credit card
invoices for 2005 and a noncontemporaneous schedule he created
entitled “Andrew Shah Tax Year 2005 Log for Expenses” that lists
amounts allegedly paid for “travel” and the dates they were
incurred.
The 2005 credit card invoices petitioner submitted relate to
a credit card in his mother’s name. Petitioner’s name is not on
that credit card. The record does not show whether petitioner
paid the travel-related expenses or whether they were paid by his
parents. While there are three travel-related entries, July 16,
2005, Other travel--Travelocity.com; July 16, 2005, Air Travel
ATA Air; and October 18, 2005, Air Travel ATA Air, it is unclear
to what travel these entries relate. Further, these entries do
not provide the information required by the regulations as
discussed supra p. 9. Petitioner’s 2005 Log for Expenses suffers
from these same defects.
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Petitioner provided no documentation with respect to 2006.
We therefore conclude that he did not meet the substantiation
requirements for his 2006 travel expenses.
C. Petitioner’s Office Expenses
Petitioner deducted office expenses he stated he incurred
with respect to the work he performed for Physicians Tax
Services’ clients in 2005 and 2006. Petitioner used the 2005
credit card invoices and the 2005 Log for Expenses mentioned
supra p. 10 to substantiate these expenses. Neither document
states the items that were purchased or their business purpose.
We have no way of determining whether those expenses are business
or personal expenses. Consequently, we cannot conclude that the
proffered documentation substantiates petitioner’s 2005 office
expense deduction. See Rudnick v. Commissioner, T.C. Memo. 2009-
133; Alemasov v. Commissioner, T.C. Memo. 2007-130.
As stated supra p. 10, petitioner provided no documentation
with respect to 2006. We therefore find that he did not meet the
substantiation requirements for his 2006 office expenses.
D. Section 6662(a) Accuracy-Related Penalty
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the underpayment of tax attributable to, inter
alia, a substantial understatement of income tax, as provided in
section 6662(b)(2), or negligence or disregard of rules or
regulations, as provided in section 6662(b)(1). An
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understatement of income tax pursuant to section 6662(b)(2) is
equal to the excess of the amount of tax required to be shown on
the tax return over the amount of tax shown on the return. Sec.
6662(d)(2)(A). The understatement is substantial in the case of
an individual if it exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). Negligence is the lack of due care or failure to
do what a reasonable and ordinarily prudent person would do under
the circumstances. Jean Baptiste v. Commissioner, T.C. Memo.
1999-96. Respondent has the burden of production with respect to
the section 6662(a) accuracy-related penalties. See sec.
7491(c). Respondent has met his burden of production.
The accuracy-related penalty does not apply to any part of
an underpayment of tax if it is shown that the taxpayer acted
with reasonable cause and in good faith. Sec. 6664(c)(1). This
determination 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. Reliance on the advice of a
professional tax adviser may constitute reasonable cause and good
faith if the reliance was reasonable. Id. Petitioner bears the
burden of proving that he had reasonable cause and acted in good
faith. See Higbee v. Commissioner, 116 T.C. at 446.
The record demonstrates that petitioner’s father, Ashvin
Shah, an accountant, was an experienced tax preparer. Thus
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despite the close familial relationship, we find petitioner had
reasonable cause to rely on his father’s advice. Cf. Bassett v.
Commissioner, 100 T.C. 650 (1993), affd. 67 F.3d 29 (2d Cir.
1995). Consequently, we do not sustain respondent’s
determination with respect to the imposition of the section
6662(a) accuracy-related penalties for 2005 and 2006.
Decision will be entered
for respondent as to the
deficiencies and for
petitioner as to the accuracy-
related penalties.