T.C. Summary Opinion 2011-51
UNITED STATES TAX COURT
REGINALD L. MOORE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8657-10S. Filed April 18, 2011.
Reginald L. Moore, pro se.
Priscilla A. Parrett, for respondent.
GERBER, Judge: This case was heard pursuant to the
provisions of section 74631 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,
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2007, the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
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and this opinion shall not be treated as precedent for any other
case.
Respondent determined a $5,900 income tax deficiency and a
$1,180 section 6662(a) accuracy-related penalty for petitioner’s
2007 tax year. The income tax deficiency is attributable to
respondent’s disallowance of various deductions petitioner
claimed on Schedule A, Itemized Deductions, and Schedule C,
Profit of Loss From Business. We consider whether petitioner has
substantiated the expenses for which the deductions were claimed
and/or whether they are ordinary and necessary business expenses.
We also consider whether petitioner is liable for the section
6662(a) accuracy-related penalty.
Background
Petitioner resided in California at the time his petition
was filed. During 2007 petitioner was a high school teacher
working for the Inglewood Unified School District (Unified).
Petitioner also worked in Unified’s afterschool program tutoring
special needs students in their homes. He would tutor students
in various subjects. Some of the students were not motivated to
learn, and petitioner used unique teaching aids to motivate them.
He would purchase contemporary music CDs and ask the student to
write the words of the songs or, in some way, to vary the words
of the songs. Another approach he used was to rent movies and
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provide them to the student with an assignment to watch the movie
and write some type of report.
Petitioner tutored every school day and drove from the high
school to the student’s home to perform his tutoring function.
He was paid by Unified for his extracurricular tutoring, but he
received no reimbursement for his expenses, including travel.
Petitioner’s 2007 Federal income tax return included two
Schedules C and one Schedule A. On the Schedules C petitioner
reported two ostensibly separate activities--one involving his
tutoring activity and business (first Schedule C) and the other
involving the development of Portugese language aids (second
Schedule C). The Schedules C were denominated “Curriculum Design
Services”. The first Schedule C reflected no income and a
$17,192 loss comprising the following categories and amounts of
expenses:
Advertising $256 Office expense $150
Car & truck 1,882 Rent 276
Depreciation 384 Repairs 401
Other 469 Travel 4,956
Legal & prof. 3,204 Meal & entertainment 2,160
Supplies 1,598 Utilities 1,456
In the notice of deficiency, respondent did not make any
adjustments regarding the expenses claimed on the first
Schedule C.
The second Schedule C reflected negative gross income of
$2,600 and expenses of $7,843 as follows: Supplies--$1,245,
travel and entertainment--$6,241, meals and entertainment--$357,
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for a total loss of $10,443. Respondent disallowed substantially
all of the deductions petitioner claimed on the second Schedule
C. Petitioner’s Portugese language activity involved his
regularly traveling to Brazil and accumulating colloquial and
street phrases on 3- by 5-inch cards in order to make a
compendium of cards to be used as an aid for travelers to Brazil.
When in Brazil he was a tourist (not on a business visa), and he
would record colloquial phrases during his visit. Petitioner was
not fluent in Portugese. He also communicated with individuals
in Brazil by means of the Internet and by telephone. His goal
was to put together a complete set of cards that he would market
to individuals who traveled to Brazil or in other ways
communicated with Brazilians for social or business purposes.
Through the 2007 tax year petitioner had not reported any income
or sales from this activity.
The disputed deductions on the Schedule A attached to
petitioner’s 2007 tax return included $11,839 of unreimbursed
employee expenses, consisting of $4,894 and $3,638 for vehicle
expenses, $136 for business expenses, $540 for parking fees,
$65 for travel while away from home, $1,574 for business
expenses, $42 for meals, and $950 for qualified educator
expenses. Also claimed were a $135 tax preparation fee and other
expenses of $3,100 for a total of $15,074. Because of the
2 percent of adjusted gross income threshold, petitioner deducted
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$13,502 of the disputed Schedule A deductions. In the notice of
deficiency, respondent allowed the $135 for tax preparation and
disallowed the remaining $14,939 of deductions as being
duplicative of amounts petitioner claimed and respondent allowed
on the first Schedule C.
Discussion
Petitioner claimed business and employee expenses on two
Schedules C and a Schedule A. Respondent allowed all of the
expenses on the first Schedule C and disallowed substantially all
of the business and employee deductions claimed on the second
Schedule C and the Schedule A. Respondent contends that the
disallowed amounts are unsubstantiated and/or duplications of
amounts claimed on the first Schedule C. Alternatively, to the
extent that petitioner can show that the amounts on the second
Schedule C are not duplications, respondent contends that
petitioner’s Portugese language activity was not a trade or
business and/or that petitioner’s expenditures were personal.
In the case of claimed deductions, taxpayers bear the burden
of showing that the Commissioner’s determination is in error.
Rule 142.2 Petitioner has supplied extensive documentation in
the form of receipts and other materials reflecting his
expenditure of various amounts for specific purposes. The
2
No question was raised by either party regarding the
shifting of the burden of proof under sec. 7491(a).
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question remains as to whether petitioner duplicated those
expenditures in his return and/or whether they are otherwise
deductible. We have carefully reviewed the evidence and compared
the various schedules and must conclude and hold that, with the
exception of the Brazilian travel expenses, petitioner has
claimed duplicate amounts on the second Schedule C and the
Schedule A that were already claimed and that respondent allowed
on the first Schedule C. One such example is the $3,204 of legal
and professional services expenses claimed on the first Schedule
C and the $3,100 claimed on the Schedule A. Another example is
that petitioner claimed $1,882 in travel expenses on his first
Schedule C for his tutoring business, and he also claimed $4,894
of travel expenses as unreimbursed employee expenses on his
Schedule A. Petitioner was not able to provide an adequate
explanation for these duplications. We also found petitioner’s
explanation of the $2,600 of “negative gross income” to be
curious and without substance. During the trial petitioner’s
explanation of some of the adjustments reflected his propensity
to exaggerate or duplicate expenditures. This aspect is also
reflected by the documentation. For example, he claimed to have
supplied tutoring students with various items, but on closer
examination these items were actually and obviously for
petitioner’s personal consumption.
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Taxpayers are allowed deductions for ordinary and necessary
expenses paid or incurred in the carrying on of a trade or
business or for the production of income. Secs. 162(a), 212(1).
A taxpayer, however, is not engaged in a trade or business or an
income-producing activity until the business or activity begins
to function as a going concern. Additionally, deductions are not
allowed for personal expenses. Sec. 262(a). We find these
principles especially applicable with respect to the travel and
other deductions claimed in connection with petitioner’s
Portugese language activity.
Petitioner’s Portugese language activity was not a going
concern, and his trips to and expenditures concerning Brazil were
personal. Accordingly, even if petitioner could show that any of
the claimed amounts were not duplicated, they would not be
deductible.3 See secs. 195, 262(a).
Finally, we consider whether petitioner is liable for a
section 6662(a) accuracy-related penalty for negligence or
disregard of rules or regulations and/or a substantial
understatement of income tax under section 6662(b)(1) and (2) for
2007. Respondent bears the burden of production with respect to
the penalty, see sec. 7491(c), but petitioner has the burden of
3
It is noted that our comparison of petitioner’s
substantiation with the amounts claimed on the Schedules C
reflect that respondent may have been generous in the allowance
of all of the amounts claimed.
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proof with respect to reasonable cause, etc., see Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001). A taxpayer may be
liable for a 20-percent penalty on any underpayment of tax
attributable to negligence or disregard of rules or regulations
or a substantial understatement of income tax. Sec. 6662(a) and
(b)(1) and (2). “Negligence” is any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, and “disregard” means any careless, reckless, or
intentional disregard. Sec. 6662(c). An underpayment is not
attributable to negligence or disregard to the extent that the
taxpayer shows that the underpayment is due to reasonable cause
or good faith. Sec. 6664(c); Neonatology Associates, P.A. v.
Commissioner, 115 T.C. 43, 98 (2000), affd. 299 F.3d 221 (3d Cir.
2002); see also secs. 1.6662-3(a), 1.6664-4(a), Income Tax Regs.
A substantial understatement of income tax is an understatement
that exceeds the greater of 10 percent of the tax required to be
shown on the tax return or $5,000. Sec. 6662(d)(1)(A).
Petitioner is an educator who uses creative means to
motivate his students. For that, he must be admired. He is also
entrepreneurial and is attempting to develop businesses and
business models related to tutoring that can provide him with a
livelihood after he retires from public education. That is also
admirable. His tax return preparation and recordkeeping,
however, are not models of precision. Petitioner used a
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computerized tax return program to prepare his 2007 tax return,
and he supplied the information that the program, in turn, placed
on the tax return and the appurtenant schedules. In that
process, however, he is not relieved from reviewing the
information on the tax return to determine whether it is correct.
Petitioner is well educated, and we cannot accept as
reasonable his explanation that he merely puts in the numbers and
relies completely on the computer program. That explanation is
not sufficient to permit petitioner to avoid the penalty. That
is so because of the amount of obviously duplicated expenditures
and the personal nature of the Brazilian travel and related
expenditures. Petitioner’s treatment of that activity as a
business is nothing less than hyperbole.
We accordingly hold that petitioner is liable for the
section 6662(a) accuracy-related penalty.
To reflect the foregoing,
Decision will be entered
for respondent.