T.C. Summary Opinion 2010-71
UNITED STATES TAX COURT
ISSA K. SHOKEH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 29666-08S. Filed June 9, 2010.
Issa K. Shokeh, pro se.
Jon D. Feldhammer, for respondent.
LARO, 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 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.
1
Unless otherwise indicated, section references are to the
applicable versions of the Internal Revenue Code, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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Respondent determined a $8,746 deficiency in petitioner’s
2005 Federal income tax and a $1,749 accuracy-related penalty
under section 6662(a). The issues for decision are whether
petitioner: (1) Failed to include $1,503 of a State income tax
refund in his gross income, (2) may deduct $40,665 in expenses
reported on his amended 2005 Schedule C, Profit or Loss From
Business (Sole Proprietorship), and (3) is liable for the
accuracy-related penalty.
Background
I. Preliminaries
Some facts were stipulated and are so found. The stipulated
facts and the accompanying exhibits are incorporated herein by
this reference. Petitioner resided in California when he filed
his petition. He filed a 2005 Form 1040, U.S. Individual Income
Tax Return (2005 return). He later filed an amended 2005 return
(amended 2005 return) in July 2007.
II. Petitioner’s Employment
A. Full-time Occupation
Petitioner has a college degree in engineering, and he
worked in and around San Jose, California, as an engineer during
2005. He was a full-time employee during that year, and his
employer paid him a salary of $120,556.
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B. Claimed Second Occupation
Petitioner claims for 2005 that he also was a self-employed
consultant. He claims that his consulting business for 2005
consisted primarily of keeping track of the payroll, current
orders, and sales tax information for two clients, ToolBar, Inc.
(ToolBar), and Service Island, Inc. (Service Island).2 He claims
that he operated his consulting business out of his home in
Milpitas, California, and that his consulting business required
that he travel twice a month to his clients’ location in
Escondido, California. Escondido, California, is a city in San
Diego County, and the business addresses of ToolBar and Service
Island were practically next to each other. The distance from
petitioner’s home to those business addresses is 450 miles.
III. ToolBar and Service Island
A. ToolBar
Petitioner and two other individuals formed ToolBar in 2004,
and petitioner had a significant (and apparently controlling)
ownership interest in ToolBar during 2005. ToolBar operated as
Precision Tune Auto Care.
2
We herein use the words “business” and “clients” to refer
respectively to petitioner’s claimed consulting business and to
petitioner’s relationship with ToolBar and Service Island. We
use those words for convenience and neither find nor mean to
suggest that petitioner actually had a consulting business or
that either referenced entity was actually petitioner’s client.
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B. Service Island
Petitioner had no ownership interest in Service Island
during 2005. He acquired a one-third ownership interest in 2006.
The record does not reveal the nature of Service Island’s
business or whether that business was operating during 2005.
IV. Petitioner’s 2005 Return
A. Overview
Petitioner reported on his 2005 return that his gross income
included his $120,556 salary, $5,656 of a $7,159 State income tax
refund, a $3,000 capital loss, and a $46,643 loss from a sole
proprietorship. His amended 2005 return reported $21 of interest
income that was not reported on the 2005 return, and it reported
that the sole proprietorship’s loss was actually $40,665.
B. Petitioner’s Schedule C
1. Overview
Petitioner’s 2005 return included a Schedule C that reported
that petitioner owned a sole proprietorship with $46,643 of
expenses and no gross income. The Schedule C listed that
“service” and “repair and maintenance of automobiles” was the
business of the sole proprietorship and that “Toolbar, Inc.” was
the sole proprietorship’s name. The Schedule C listed the sole
proprietorship’s business address as a post office box in San
Jose that petitioner reported on his 2005 return was his personal
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address. The Schedule C broke down the $46,643 of expenses as
follows:
Expenses Amount
Car and truck expense $17,515
Depreciation 450
Other interest 8,500
Legal and professional services 500
Office expense 100
Repairs and maintenance 4,000
Supplies 500
Travel 2,000
Meals and entertainment 270
Utilities 2,000
Business use of home 10,808
Total 46,643
Petitioner’s amended 2005 return included an amended
Schedule C. The amended Schedule C reported the same list of
expenses reported on the original Schedule C but stated that the
amounts of expenses for car and truck and business use of home
were $9,720 and $12,625, respectively. The amended Schedule C
listed “Business Services” and “repair and maintenance of
automobiles” as the businesses of the sole proprietorship and
“Issa K Shokeh” as the sole proprietorship’s name. The amended
2005 return listed the sole proprietorship’s business address as
the same post office box listed on the 2005 return.
2. Car and Truck Expenses
Petitioner claimed the car and truck expenses for travel
from his home to San Diego County. Petitioner’s brother moved to
San Diego County in 2005, and during that year petitioner
regularly traveled to San Diego County, taking either his
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children or another person with him. Petitioner knew that 450
miles was the distance between his home and the Escondido
business addresses, but he consciously used 500 miles to
calculate the car and truck expenses he reported on both his 2005
return and on his 2005 amended return. Petitioner initially
claimed that he drove back and forth between those locations 3
times each month during 2005 (or a total of 36 times), and one
exhibit in this case is a rudimentary “mileage log” that
petitioner prepared to support that claim. Petitioner now claims
(inconsistently with his “mileage log”) that he went back and
forth to San Diego County only twice a month (or a total of 24
times). Petitioner’s amended 2005 return states that his
business mileage was 24,000 (i.e., 24 trips at 1,000 miles round
trip) and that his resulting deduction (on the basis of a
standard mileage rate of 40.5 cents per mile) was $9,720.
3. Business Use of Home
Petitioner claimed his “Business Use of Home” expenses for
some of his home expenses. For most of 2005, petitioner lived in
his home with his mother, his two children, his niece, and his
nephew. The home is 2,400 square feet, and one room in the house
is 600 square feet. Petitioner calculated his business use of
home deductions on the basis of those numbers.
Petitioner reported on his 2005 tax return that his expenses
for business use of home totaled $10,808, and he reported on his
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amended 2005 return that those expenses totaled $12,625. The
difference between these amounts is attributable to petitioner’s
claim in the amended 2005 return that his deductible mortgage
interest was $1,817 higher than initially reported.
4. Travel Expenses
For 13 months beginning on April 1, 2004, petitioner and
ToolBar rented an apartment in San Diego at a monthly rent of
$1,055. Petitioner included that rent in the $2,000 he deducted
as travel expenses.
5. Other Expenses
The record contains no evidence as to the other expenses
that petitioner reported on Schedule C. Those other expenses are
other interest, repairs and maintenance, utilities, legal and
professional services, supplies, depreciation, office expense,
and meals and entertainment.
Discussion
I. Burden of Proof on Tax Liability
The Commissioner’s deficiency determination is presumed
correct, and taxpayers generally bear the burden of proving
otherwise in order to prevail. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). In addition, an individual
taxpayer generally bears the burden of “clearly showing the
right” to any deduction that he or she claims. See Interstate
Transit Lines v. Commissioner, 319 U.S. 590, 593 (1943). If an
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individual taxpayer meets certain requirements, the burden of
proof may shift to the Commissioner as to factual issues relevant
to ascertaining the taxpayer’s income tax liability. See sec.
7491(a). Petitioner does not argue (nor do we find) that he
meets the requirements under section 7491(a) for a shifting of
the burden of proof. We conclude that petitioner has the burden
of proof.
II. State Income Tax Refund
Petitioner does not dispute that he received a $7,159 State
income tax refund. He argues that $1,503 of the refund is not
taxable to him because he never received a tax benefit from the
$1,503. Petitioner relies upon a worksheet which shows his
calculation that only $5,656 of the $7,159 is taxable to him.
The worksheet, however, shows a clear error in petitioner’s
calculation. When we correct this error, we find that the full
$7,159 is taxable to petitioner. We sustain respondent’s
determination of the same.
III. Schedule C Expenses
Respondent determined that petitioner did not operate a
consulting business during the subject year. We agree. While
section 162 generally lets a taxpayer deduct the ordinary and
necessary expenses of a consulting business that he operated
during 2005, we are unable to find in the limited record before
us that petitioner had a consulting business during 2005.
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Petitioner essentially relies upon his testimony and two
exhibits to support his claim that he had a consulting business
during 2005. The first exhibit purports to be a “Contract”
between petitioner and ToolBar, stating that petitioner will
provide certain services to ToolBar for an undisclosed term in
exchange for “a fee not to exceed $10,000 per year”. The second
exhibit purports to be a “Consulting Agreement” between
petitioner and Service Island, stating that petitioner will
provide certain services to Service Island for a 5-year term
beginning January 1, 2005, in exchange for $10,000 per year.
We are unpersuaded by petitioner’s testimony and by the
referenced exhibits. His testimony was limited and vague. The
exhibits are unreliable. The exhibits, while claimed to be bona
fide agreements between petitioner and his related (and
apparently controlled) entities, are not indicative of agreements
that would be entered into by persons acting at arm’s length. In
fact, neither “agreement” sets forth a provision under which
petitioner’s compensation would be ascertained on the basis of
the quantity or quality of the services that he actually
performed for the entities. The “agreements” simply state that
petitioner will receive set payments for the entire year,
payments in the total which cannot exceed an average of
approximately $385 a week. Moreover, neither “agreement” appears
to be signed by an officer or employee of ToolBar or Service
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Island. We also note that petitioner did not receive any
payments under the “agreements” during 2005 and that, even if he
did receive the maximum amount payable under the “agreements”, he
would have realized a substantial loss from his claimed
consulting business.
Nor do the other facts support a conclusion that petitioner
actually had a consulting business during 2005. First,
petitioner reported no Schedule C income for 2005, and he
admitted during his testimony that he did not intend to receive
any income from the “agreements” during 2005. We also do not
find that petitioner even billed the entities for any consulting
services that he performed during 2005, let alone that he
performed any such services in the first place. Second, we find
in the record no reliable documentation that ordinarily would be
kept by a bona fide business. Such documentation, at a minimum,
would include documentation of the time that petitioner spent
consulting pursuant to the “agreements” and accurate
documentation of at least some business expenses. Third,
petitioner worked full time as an engineer, and he traveled to
San Diego County, the home of his brother, many times with his
children. Petitioner has not explained why he would have to
travel to San Diego County so often on business or, if he did,
why he would have to bring his children with him. Fourth,
petitioner reported the Schedule C expenses on his 2005 return as
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if those expenses were incurred in ToolBar’s business (rather
than in a business of his). Fifth, petitioner’s claimed
consulting business had no established physical location or any
clients other than the two related entities.
We sustain respondent’s determination that petitioner is not
entitled to deduct any of his claimed Schedule C expenses for
2005.
IV. Accuracy-Related Penalty
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662(a). Section 6662(a)
and (b)(1) imposes a 20-percent accuracy-related penalty on the
portion of an underpayment of tax attributable to negligence or
disregard of rules or regulations. Negligence connotes a lack of
due care or failure to do what a reasonable and prudent person
would do under the circumstances. See Allen v. Commissioner, 92
T.C. 1, 12 (1989), affd. 925 F.2d 348 (9th Cir. 1991). An
accuracy-related penalty shall not be imposed on any portion of
an underpayment for which the taxpayer had reasonable cause and
acted in good faith with respect thereto. See sec. 6664(c)(1).
Respondent bears the burden of production with respect to
the applicability of the accuracy-related penalty. See sec.
7491(c). That burden requires that respondent produce sufficient
evidence that it is appropriate to impose the accuracy-related
penalty. See Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
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Once respondent meets this burden, the burden of proof falls upon
petitioner. See id. at 447. Petitioner may carry his burden by
proving he was not negligent and did not act carelessly,
recklessly, or in intentional disregard of rules or regulations.
See sec. 6662(c). Alternatively, petitioner may establish that
his underpayment was attributable to reasonable cause and his
acting in good faith. See sec. 6664(c)(1).
Respondent has met his burden of production in that the
record establishes that petitioner understated his gross income
through, in part, his claim to undocumented (and sometimes
intentionally inflated) Schedule C expenses for a fictitious
business. Petitioner argues that he should not be liable for the
accuracy-related penalty because he relied upon the advice of his
accountant. We are unpersuaded. Although reliance on the advice
of a professional as to the tax treatment of an item may
sometimes be enough to escape the imposition of a section 6662(a)
accuracy-related penalty, see United States v. Boyle, 469 U.S.
241, 250 (1985); sec. 1.6664-4(b), Income Tax Regs., individual
taxpayers relying upon this exception must prove by a
preponderance of evidence that: (1) The adviser was a competent
professional who had sufficient expertise to justify reliance;
(2) the taxpayer provided necessary and accurate information to
the adviser; and (3) the taxpayer actually relied in good faith
on the adviser’s judgment, see Neonatology Associates, P.A. v.
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Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d Cir.
2002). On the basis of the record at hand, we are unable to
conclude that any of these requirements has been met. We sustain
respondent’s determination as to the accuracy-related penalty.
V. Conclusion
We have considered all arguments made by the parties and, to
the extent not discussed above, conclude they are without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.