T.C. Summary Opinion 2010-95
UNITED STATES TAX COURT
COLLEEN A. LYNCH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10688-09S. Filed July 19, 2010.
Colleen A. Lynch, pro se.
Jeffery D. Rice, for respondent.
GERBER, 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
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2006, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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this opinion shall not be treated as precedent for any other
case. Respondent determined a $2,994 deficiency in petitioner’s
2006 income tax. The issues2 presented for our consideration are
whether: (1) Petitioner substantiated certain employee business
deductions claimed on Schedule A, Itemized Deductions; and (2)
certain deductions claimed on Schedule A should have been claimed
as business deductions on Schedule C, Profit or Loss From
Business, and whether petitioner has substantiated those
deductions.
Background
Petitioner resided in California at the time that her
petition was filed. During the 2006 tax year petitioner had
three sources of income. She engaged in an activity involving
the sale of jewelry and earned wages from two sources--Coworx
Staffing Services (Coworx) and United Way, Inc. (United). In the
Coworx job petitioner was subcontracted to service the Waterford
Crystal Co. (Waterford) by going to various department stores and
making sure that the Waterford products were prominently and
properly displayed for sales potential. Similarly, in her
position with United, petitioner was a fundraiser who promoted
the charitable goals of United at various corporate
establishments. Petitioner’s travel and vehicle expenses in
2
Respondent conceded that petitioner is entitled to a $75
deduction for preparation of her tax return.
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connection with her Waterford work were not reimbursed, but those
for United were. For 2006 petitioner earned $24,499 from United
and $2,673 from Coworx.
During 2004 petitioner took a course in entrepreneurial
skills with the intent of establishing a jewelry business. Her
interest in a jewelry business overlapped with her involvement in
retailing of “fashion items” and retail promotion. She made
plans to purchase lines of jewelry and ultimately sell the
jewelry to the big volume retailers. To that end, petitioner had
a logo and business cards prepared. The business name she chose
was “Amazonia” because her jewelry was Brazilian in origin and
style. Petitioner had the business name registered with the
California Franchise Tax Board, and she investigated and
considered involvement with the local chamber of commerce.
During 2005 and 2006, in her efforts to sell jewelry,
petitioner drove to jewelry shows to accumulate additional
information and contacts regarding jewelry purchasing and sales.
She became acquainted with a Brazilian jewelry manufacturer who
made the type of jewelry that petitioner thought would be
suitable for her business. After purchasing some of the
Brazilian jewelry petitioner negotiated with the manufacturer;
and although the product quality was good, she was unable to
reach terms that would produce the quantity of product necessary
to be profitable.
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During 2006 petitioner continued her effort to duplicate the
Brazilian product, and she sought out the representative of a
Chinese jewelry manufacturer. The product was produced and
acquired by petitioner; and although the manufacturer was able to
produce sufficient quantities, the quality was substandard.
Petitioner’s 2006 tax return was prepared by a professional
tax return preparer. Petitioner provided the preparer with her
tax papers, and he reported all of her expenditures, irrespective
of whether connected with employee activities or the Amazonia
activity on Schedule A. After the audit and before trial
petitioner realized that her expenses connected with Amazonia
should have been claimed on a Schedule C as business, rather than
employee, expenses.
The following expenses were claimed on Schedule A of
petitioner’s 2006 tax return and disallowed by respondent:
Item Amount
Vehicle expense $18,418
Travel expense 3,548
Meals and entertainment 2,415
Business classes 210
Cellular phone 665
Computer landline 720
Office supplies 345
P.O. box 120
Web hosting and access 100
Web site design 50
Petitioner also claimed $150 for tax return preparation, and
respondent now agrees and petitioner concedes that the amount
allowable is $75.
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Discussion
This case involves the classification and substantiation of
deductions. Taxpayers are permitted deductions for ordinary and
necessary expenses incurred in carrying on a trade or business or
in the production of income. Secs. 162, 212. To be entitled to
the deduction, a taxpayer must keep sufficient records to
substantiate the amounts claimed. Sec. 6001. Regarding
unreimbursed expenses, an employee must show that there is no
entitlement to reimbursement. Further, employee expenses are
generally allowed as miscellaneous itemized deductions and
subject to certain limitations. Sec. 67(a) and (b). Finally,
certain travel, entertainment and meals, and vehicle expense
deductions are subject to more stringent recordkeeping and
substantiation requirements. Sec. 274(d).
We consider each of petitioner’s disallowed deductions
separately and decide whether there has been sufficient
substantiation and, if so, whether the deduction is allowable on
Schedule A or Schedule C.
Amazonia Status
Initially, we address the question of whether Amazonia,
petitioner’s jewelry activity, was a Schedule C activity (a
business entered into for a profit). Because petitioner’s income
of $268 was less than her expenses, her activity for the year
resulted in a loss. Respondent questions whether petitioner’s
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Amazonia activity was entered into with the intent to make a
profit, because that is determinative of whether any portion of
the deduction in excess of income is deductible. See sec. 183;
sec. 1.183-2, Income Tax Regs.
Petitioner invested a great deal of time and money with the
intent of making Amazonia profitable. She began taking
entrepreneurial courses in 2004, and she consulted various
professionals concerning her business logo, business card,
approach, and related matters. She also did extensive research
on various types of jewelry and decided that Brazilian jewelry
had the right combination of appeal and cost to be mass
marketable. She found a Brazilian manufacturer, bought some of
his product, and negotiated various terms, including the quantity
of production. Petitioner was very satisfied with the cost,
appearance, and quality of the Brazilian manufacturer’s jewelry,
but he was not able to produce it in sufficient quantities for
mass marketing purposes.
Petitioner then found a Chinese manufacturer and sought to
have him reproduce the Brazilian style jewelry in China. The
Chinese manufacturer could produce large quantities in a short
time, but the product quality turned out to be substandard. By
the end of 2006 petitioner made some sales of the product
acquired but was unable to introduce her jewelry to the large-
scale retailers. Although petitioner enjoyed selling jewelry,
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she worked hard in seeking a profit, even though her extensive
efforts resulted in a loss for 2006. Under these circumstances,
we hold that petitioner was engaged in the wholesale jewelry
business with the intent to make a profit. Accordingly, any
ordinary, necessary, and substantiated expenses while she was
engaged in that business are deductible as business expenses on
Schedule C.
Vehicle Expenses--$18,418
Petitioner drove her personal car extensively as an employee
and for her Amazonia business. Initially, we must note that
petitioner did not keep particularly good records and that fact
weighs heavily against her. The $18,418 claimed on the 2006 tax
return is the total of all automobile expenses. Because
petitioner admits that she was entitled to and/or was reimbursed
for her United vehicle expenses, she is not allowed any deduction
for them. See Tokh v. Commissioner, T.C. Memo. 2001-45, affd. 25
Fed. Appx. 440 (7th Cir. 2001); sec. 1.67-1T(a)(1)(i), Temporary
Income Tax Regs., 53 Fed. Reg. 9875 (Mar. 28, 1988).
With respect to petitioner’s vehicle expenses for Coworx,
her trips occurred at the end of the year, beginning in November.
The evidence in the record is sufficient to establish the date
and purpose of each trip. She would drive 50 miles round trip to
Bloomingdale’s in Newport on some days and 20 miles round trip to
Macy’s in Westminster on others. The travel occurred during all
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of November and December, when petitioner made approximately 38
round trips to promote Waterford products. Because petitioner
was not entitled to reimbursement from Coworx or Waterford, we
hold that she is entitled to a deduction based upon 1,330 total
miles at the standard mileage rate for her 2006 tax year on
Schedule A, subject to any limitations that may apply.
With respect to the jewelry business, petitioner drove to
several cities. Amongst others, she drove to Las Vegas, Phoenix,
Santa Barbara, Palm Springs, and San Francisco during 2006 in
pursuit of her Amazonia activity, as indicated in a
contemporaneously maintained log. She drove to those cities to
attend jewelry shows or to visit specialty jewelry retailers for
purposes of enhancing her line of jewelry. According to her
records, she drove at least 3,200 miles for purposes of attending
jewelry shows and/or checking suitable product lines. Petitioner
is entitled to deduct that amount of mileage at the standard rate
as a business expense on her Schedule C for 2006. Although
petitioner’s log refers to more mileage than is being allowed,
her recordkeeping was inadequate to properly substantiate any
amount in excess of 3,200 miles for 2006.
Travel Expense--$3,548; Meals and Entertainment--$2,415; Business
Classes--$210; and Office Supplies--$345
With respect to the travel and meals and entertainment
deductions, petitioner’s records are far from sufficient to meet
the requirements of section 274(d). The educational and office
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supplies deductions were not sufficiently substantiated although
subject to a less rigorous standard. Accordingly, we hold that
petitioner is not entitled to deduct any of the amounts in the
above categories for 2006.
Cellular Phone--$665
Petitioner testified that she estimated the business use of
her cellular phone for 2006. Although it is reasonable to expect
that petitioner used her cell phone for employee and Amazonia
business purposes, petitioner’s rough methodology in estimating
leaves a substantiation gap because deductions for the use of a
cell phone are subject to the more rigorous recordkeeping
requirements of section 274(d). Accordingly, petitioner is not
entitled to a deduction for cell phone use.
Computer Land Line--$720; P.O. Box--$120; Web Hosting and
Access--$100; and Web Site Design--$50
Each of these expenditures was exclusively for the Amazonia
business. The telephone number and service, P.O. box, and
related items were listed in the name “Amazonia” and used
exclusively for that business activity. Cf. sec. 262(b).
Accordingly, we hold that petitioner is entitled to deduct the
above amounts on her Schedule C for 2006.
Although we have decided the allowable amounts and whether
the expenses are employee or business related, we leave to the
parties the obligation of applying our above holdings and
computing the amount of the income tax deficiency, if any. To
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the extent that petitioner’s allowable Schedule A deductions are
less than the standard deduction otherwise allowable, that should
be taken into account in the computation.
To reflect the foregoing,
Decision will be entered
under Rule 155.