T.C. Summary Opinion 2010-134
UNITED STATES TAX COURT
JAMES MICHAEL & SUSANNE ADAMS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8486-09S. Filed September 9, 2010.
James Michael Adams and Susanne Adams, pro sese.
Michael T. Shelton, for respondent.
COHEN, 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 $7,498 in petitioners’
Federal income tax for 2006 and a penalty of $1,499.60 for
negligence under section 6662(a) and (b)(1). In an amendment to
the answer, respondent asserted an increased deficiency of
$11,009, a proportionate increase in the penalty, and substantial
understatement of income tax as an alternative ground for the
penalty. The issues for decision are whether petitioners are
entitled to deduct travel, meals and entertainment, and vehicle
expenses and whether they are liable for the penalty. All
section references are to the Internal Revenue Code in effect for
2006, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference.
Petitioners resided in Illinois at the time the petition was
filed.
James Michael Adams (petitioner) was employed full time by
Brunswick Corp. until October 2006 and thereafter by Sokolowski,
Inc. His title in the latter employment was Executive Vice
President of Sales and Marketing. He also engaged in a
“consulting” activity through which he hoped to receive “finder’s
fees.” He did not receive any income from the activity during
2006 or through the time of trial in April 2010.
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On petitioners’ joint Federal income tax return for 2006,
petitioner claimed as business expenses $22,546 for travel,
$6,621 for meals and entertainment, and $3,664 in vehicle
expenses related to his consulting activity. He did not maintain
contemporaneous or reliable records to substantiate the amount,
time, place, or business purpose of the expenses claimed. Some
of the expenses claimed were nondeductible personal expenses
incurred for himself and his wife.
In the statutory notice, only the travel expenses were
disallowed, and the stated ground for the penalty was negligence.
In the amendment to the answer, respondent asserts that the
claimed meals and entertainment and vehicle expenses are not
deductible. Respondent also asserts, in the alternative, that
any otherwise deductible expenses are limited by the passive
activity loss rules of section 469 and that a penalty should be
imposed because of a substantial understatement of income tax for
purposes of section 6662.
Discussion
The expenses in dispute in this case all require
substantiation of amount, time, place, and business purpose in
accordance with section 274(d). Petitioner has the burden of
proving the deductions that he claimed. See New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934); Rockwell v. Commissioner,
512 F.2d 882, 886 (9th Cir. 1975), affg T.C. Memo. 1972-133.
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Petitioner described his consulting activity as traveling
the world in search of investors for commercial real estate
development projects. Petitioner testified that he was actively
involved in raising capital for hotel properties and always hoped
to make a profit from that activity, even though the payment
would be received, if at all, in the indefinite future. Neither
petitioner’s testimony nor the few documents that he produced
provided the necessary substantiation. Some of the documents
contradicted the alleged business purpose of the expenses. Some
of the expenses claimed were for a trip to Italy with
petitioner’s wife. Some of the vehicle expenses were for
commuting to petitioner’s place of employment.
Attacking petitioner’s credibility by highlighting the
inconsistencies in his records and his testimony, respondent
seeks to increase the deficiency to disallow all of the losses
claimed. Respondent also contends that petitioner was at most an
investor in the activity rather than being engaged in a trade or
business and that any expenses incurred are not currently
deductible because of section 469.
Section 469 limits deduction of “passive activity” losses,
such as a loss incurred in an investment activity, to income
produced from the activity. On the section 469 issue and with
respect to the increased deficiency claimed, respondent has the
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burden of proof because the issues were raised in the amendment
to the answer. See Rule 142(a).
The preponderance of the evidence in this case is that
petitioner deducted personal expenses as business expenses and
failed to maintain records to substantiate travel, meals and
entertainment, or vehicle expenses as required under section 274.
Thus disallowance of all of the expenses in dispute is justified.
Because we cannot identify any appropriate deductions, we need
not address the limitations of section 469.
Respondent has the burden of production with respect to the
section 6662 accuracy-related penalty on the ground of
negligence. Sec. 7491(c); see Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001). Respondent also has the burden of proof
with respect to the alternative ground of substantial
understatement of income tax asserted in the amendment to answer.
Claiming personal expenses as business expenses and failing
to maintain records substantiating any valid deductions
constitute negligence for purposes of section 6662(a) and (b)(1).
See Higbee v. Commissioner, supra at 449; sec. 1.6662-3(b)(1),
Income Tax Regs. Because the penalty is sustained on the ground
of negligence, we need not consider whether respondent has proven
that there was a substantial understatement of income tax on the
return.
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For the reasons explained above,
Decision will be entered
for respondent.