T.C. Summary Opinion 2011-21
UNITED STATES TAX COURT
XIANFENG ZHANG, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28557-08S. Filed March 2, 2011.
Xianfeng Zhang, pro se.
Halvor Melom, for respondent.
PANUTHOS, Chief Special Trial 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
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
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any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined a deficiency of $1,624 in petitioner’s
2006 Federal income tax. After concessions,2 the issues for
decision are whether petitioner is entitled to deductions claimed
on Schedule C, Profit or Loss From Business, for travel expenses
and a home office.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
California at the time the petition was filed.
Petitioner sold travel insurance through KCG Insurance Co.
(KCG). Petitioner was compensated with commissions for the
insurance policies he sold, and he reported those commissions as
business income on Schedule C. Petitioner’s primary clientele
was Chinese travelers visiting the United States. Petitioner
traveled to China to meet with clients and sell travel insurance
covering the insureds’ stays in the United States. The time
2
Petitioner conceded other expenses of $1,000 reported on
Schedule C and a real estate loss of $1,992 reported on Schedule
E, Supplemental Income and Loss, and that he received unreported
Schedule C income of $10,000. Other adjustments made in the
notice of deficiency were computational and will not be
discussed.
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petitioner spent in China and the number of clients he had are
unclear from the record.
Petitioner used one room of his dwelling as an office, which
was approximately 25 percent of the total area of his home. KCG
did not provide petitioner with an office. Petitioner shared his
house with his parents and his son. Neither petitioner’s parents
nor his son used the home office. Petitioner performed
administrative and management activities related to selling
insurance in the home office.
Petitioner timely filed his 2006 Federal income tax return.
On Schedule C petitioner reported gross receipts of $20,000 and
claimed deductions for car and truck expenses of $5,408,
insurance expenses of $1,400, other expenses of $1,000, travel
expenses of $7,000, and meals and entertainment expenses of $750.
Petitioner reported a net profit of $4,442 after deductions.
Petitioner did not claim a home office deduction on his original
Federal income tax return. Respondent mailed petitioner a notice
of deficiency dated August 20, 2008, disallowing petitioner’s
claimed Schedule C deductions for travel expenses.
Petitioner, through his tax return preparer, submitted three
amended Federal tax returns after the petition was filed and
before trial.
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Petitioner’s Schedule C for Each Amended Return1
Car and Home
Amended Gross Truck Insurance Travel Office Net
Returns Receipts Expenses Expenses Expenses Deduction Profit
2
First $20,000 $4,998 $1,100 -0- $9,786 $4,116
3
Second 20,000 4,998 1,100 $5,543 3,848 4,511
4 3
Third 30,000 4,998 1,100 15,420 3,848 4,634
1
The expenses claimed on Schedule C changed with each amended return.
Petitioner asserted that the returns were structured to reflect a net profit
above $4,000.
2
This amounts to 100 percent of the real estate taxes assessed on
petitioner’s home.
3
This amounts to 25 percent of the real estate taxes assessed on
petitioner’s home.
4
Petitioner used a per diem of $257 for 60 days in China.
Discussion
I. General Law
In general, the Commissioner’s determination set forth in a
notice of deficiency is presumed correct, and the taxpayer bears
the burden of showing that the determination is 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 matters
shifts to the Commissioner under certain circumstances.
Petitioner does not allege that section 7491(a) applies. See
sec. 7491(a)(2)(A) and (B). Therefore, petitioner bears the
burden of proof. See Rule 142(a).
Deductions are allowed solely as a matter of legislative
grace, and the taxpayer bears the burden of proving his
entitlement to them. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
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U.S. 435, 440 (1934). The taxpayer also bears the burden of
substantiating claimed deductions. Sec. 6001; Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
The fact that a taxpayer claims a deduction on his income
tax return is not sufficient to substantiate it. Wilkinson v.
Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner,
62 T.C. 834, 837 (1974). Rather, an income tax return is merely
a statement of the taxpayer’s claim; it is not presumed to be
correct. Wilkinson v. Commissioner, supra at 639; Roberts v.
Commissioner, supra at 837; see also Seaboard Commercial Corp. v.
Commissioner, 28 T.C. 1034, 1051 (1957) (a taxpayer’s income tax
return is a self-serving declaration that may not be accepted as
proof for the claimed deduction or exclusion); Halle v.
Commissioner, 7 T.C. 245 (1946) (a taxpayer’s income tax return
is not self-proving as to the truth of its contents), affd. 175
F.2d 500 (2d Cir. 1949).
Section 162(a) allows a deduction for ordinary and necessary
business expenses paid or incurred during the taxable year in
carrying on any trade or business. In order for an expense to be
“necessary”, it must be “appropriate and helpful” to the
taxpayer’s business. Welch v. Helvering, supra at 113-114. An
expense will be considered “ordinary” if it is a common or
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frequent occurrence in the type of business in which the taxpayer
is involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940).
II. Travel Expenses
Travel expenses while away from home3 are included as
ordinary and necessary business expenses. Sec. 162(a)(2).
In order to deduct travel expenses (including meals and lodging),
a taxpayer must substantiate the expenditures. Sec. 274(d). To
substantiate travel expenses under section 274(d), a taxpayer
must show by adequate records or sufficient evidence
corroborating his or her testimony: (1) The amount of the
expense; (2) the time and place of the travel; and (3) the
business purpose of the expense. There are additional
requirements for certain foreign travel. Sec. 274(c). No
deduction will be allowed under section 162 for the portion of
expenses otherwise allowable under such section that are not
allocable to such trade or business. Sec. 274(c)(1). Paragraph
(1) will not apply to expenses of travel outside the United
States away from home if such travel does not exceed 1 week or
the portion of travel time not attributable to a trade or
business is less than 25 percent of the total time of such
travel. Sec. 274(c)(2)(A) and (B).
3
The question of whether petitioner was “away from home”
within the meaning of Commissioner v. Flowers, 326 U.S. 465
(1946), is not at issue.
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As a general rule, if the taxpayer has incurred a deductible
expense but is unable to adequately substantiate the precise
amount of the deduction, the Court may estimate the amount of the
deductible expense and allow the deduction to that extent. Cohan
v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The rule
in Cohan, however, does not apply to expenses, such as travel
expenses, that must be substantiated under section 274(d).
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per
curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Petitioner testified that he took three separate trips to
China for business purposes in 2006--one in June lasting
approximately 90 days, another in September lasting approximately
60 days, and a third that began in December 2006 and ended
sometime in 2007. Petitioner entered into evidence three
airplane tickets for flights from both Beijing to Los Angeles and
Los Angeles to Beijing. The dates on the airplane tickets are
not consistent with the dates or periods of travel to which
petitioner testified. Although petitioner’s passport bears
customs stamps from both the United States and China, some of the
stamps are illegible. The stamps that are legible do not
correspond with the dates petitioner testified he was in China
for business.
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Petitioner did not testify to or produce other evidence
explaining precisely what business was conducted in China or the
length of each business trip to China. Petitioner presented no
evidence delineating how much of each trip was devoted to
business or how much was devoted to nonbusiness activities. See
sec. 274(c)(2)(B).
Petitioner did produce several receipts that appear to be
for automobile and lodging expenses in China. The receipts,
however, are in Chinese and do little to explain petitioner’s
business activities. The receipts do not satisfy the strict
substantiation requirement of section 274(d). Petitioner has
failed to substantiate the travel expenses he claimed for his
trips to China. Therefore, we sustain respondent’s disallowance
of petitioner’s deduction for travel expenses.
III. Home Office Deduction4
Generally, a deduction for an expense relating to property
that is occupied by a taxpayer as a residence is disallowed.
Sec. 280A(a). An exception to the general rule is found in
section 280A(c)(1)(A), which provides that an expense that is
allocable to a portion of the taxpayer’s dwelling that is used
exclusively on a regular basis as the taxpayer’s principal place
4
Although not in the pleadings, the parties stipulated that
the home office deduction was at issue, and the Court finds the
issue was tried by consent and is properly before us. See Rule
41(b)(1).
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of business will be allowed as a deduction. The term “principal
place of business” includes a place of business that is used by a
taxpayer for administrative and management activities if no other
fixed location of the trade or business is used by the taxpayer
to conduct substantial administrative or management activities.
Sec. 280A(c)(1). A portion of the taxpayer’s dwelling is a room
or other separately identifiable space. Hefti v. Commissioner,
T.C. Memo. 1993-128.
The activities petitioner performed at his home office
consisted of phone calls, paperwork, and other administrative or
management activities associated with selling insurance.5
Petitioner credibly testified that his family members did not use
the home office and credibly testified that he used the home
office portion of his dwelling exclusively for trade or business
purposes.
We conclude that petitioner’s use of a home office was
exclusive and on a regular basis and that his home office was his
principal place of business under section 280A(c). Therefore,
5
Petitioner testified that he met with the Chinese travelers
to whom he sold insurance at his home office while they were in
the United States. From the record it does not appear that
petitioner met with clients on a regular basis in his home
office. See sec. 280A(c)(1)(B).
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petitioner is entitled to a home office deduction for the portion
of his dwelling that was used as such.6
We have considered the parties’ arguments and, to the extent
not discussed herein, we conclude the arguments to be irrelevant,
moot, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
6
It appears that petitioner’s home office deduction includes
only real estate taxes and depreciation as business expenses.
Accordingly, the Rule 155 computation is limited to these two
items.