T.C. Memo. 2011-142
UNITED STATES TAX COURT
LEONARD AND PEARL FEIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15166-09. Filed June 22, 2011.
Leonard and Pearl Fein, pro sese.
Deborah Aloof, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies,
penalties, and additions to tax with respect to petitioners’
Federal income taxes for 2002, 2003, and 2004 as follows:
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Additions to Tax Penalties
Year Deficiency Sec. 6651(a) Sec. 6662(a)
2002 $41,465 $9,735 $8,293
2003 42,771 10,064 8,554
2004 54,959 13,076 10,992
The issue for decision is whether petitioners have
substantiated claimed business and entertainment expenses under
sections 162, 274, and 6001 relating to Leonard Fein’s
(petitioner’s) accounting and photographic activities. The trial
of this case was held on November 30 and December 1, 2010, in New
York City.
Unless otherwise indicated, all section references are to
the Internal Revenue Code applicable to the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. At
the time the petition was filed, petitioners resided in New York.
Since the late 1970s petitioner has been a certified public
accountant. From 1993 through most of 2000, however, petitioner
did not work as an accountant.
In 2000 and through the years in issue petitioner resumed
his accounting activity, including the preparation of tax
returns.
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During the years in issue petitioner also engaged in some
photographic activity. The evidence does not indicate that
petitioner received any training in photography.
Petitioner paid his children what petitioner refers to as
“per diem”, allegedly in connection with services they performed
in petitioner’s accounting activity. These per diem payments,
however, appear to have been set at amounts that would allow the
children to benefit from the earned income tax credit, not at
amounts that reflect the value of any services the children
actually performed for petitioner, and the credible evidence does
not establish the nature and extent of any services the children
performed for petitioner.
Petitioner paid little attention to recordkeeping and
financial aspects of his accounting and photographic activities.
Documentation petitioner maintained regarding his accounting and
photographic activities was disorganized and incomplete.
Petitioner maintained no credible records and no bank accounts
relating to these activities, and petitioner commingled funds
relating to these activities with funds pertaining to his
personal and family activities.
During the years in issue petitioner lived in his father’s
house with between 10 to 18 other family members and individuals.
Other than petitioner, none of the persons living in this house
owned a car. The car petitioner owned and used in his accounting
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and photographic activities was also used by petitioner and by
other persons living with petitioner for their personal use.
In some of the office space petitioner apparently rented,
petitioner had no phone lines or Internet connections. The eight
phones that petitioner alleges to have used in his accounting and
photographic activities were all registered in the names of
petitioner’s wife and children.
During the years in issue petitioner had severe medical
problems--poor eyesight, stomach ailments, and eating disorders.
In 2004 petitioner traveled to Israel and while there received
medical treatment for his eye problems.
Petitioners’ Federal income tax returns for 2002, 2003, and
2004 were filed late on February 20, March 3, and March 13, 2006,
respectively, on which returns petitioner reported the following
gross income relating to his accounting and photographic
activities:
Gross Income
Year Accounting Photography Total
2002 $98,610
1
$53,910 $152,520
2003 100,220 63,616 163,836
2004 124,200 74,080 198,280
In connection with petitioners’ 2002 Federal
1
income tax return, petitioners and respondent dispute
which copy of the Schedule C, Profit or Loss From
Business, relating to petitioner’s accounting activity
was filed. We use the figures from the Schedule C
respondent asserts was filed.
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On each of petitioners’ Federal income tax returns for the
years in issue, petitioner attached two Schedules C, Profit or
Loss From Business, the first relating to petitioner’s accounting
activity and the second relating to his photographic activity.
The table below summarizes for each year in issue the
expenses petitioner claimed on the Schedules C as deductible
business expenses relating to petitioner’s accounting and
photographic activities.
Accounting--Schedule C-1
Years
Expenses 2002 2003 2004
Depreciation $10,507 $12,291 $13,255
Rent 18,000 19,600 21,600
Postage 3,971 4,209 4,672
Telephone & Internet 4,269 4,316 4,520
Per diem 13,250 13,960 28,200
Office 5,316 5,762 6,572
Repairs & maintenance 369 0 0
Supplies 1,838 1,974 2,139
Professional books 439 463 524
Tax & computer forms 512 502 624
Computer tax programs 7,669 8,034 7,226
Computer supplies 4,639 0 0
Other 572 609 1,024
Tolls & parking 4,312 4,609 4,763
Car & truck 7,696 8,394 8,734
Promotion & gifts 3,312 3,570 3,698
Travel 0 0 1,760
Meals & entertainment 1,534 1,718 2,010
Total expenses 88,205 90,011 111,321
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Photography--Schedule C-2
Years
Expenses 2002 2003 2004
Depreciation $7,888 $11,460 $14,136
Postage 1,217 1,334 1,473
Telephone 1,338 1,296 1,489
Office expense 1,834 1,768 1,636
Repairs & maintenance 338 309 256
Supplies 1,743 1,917 1,873
Printing & developing 14,372 15,968 20,192
Computer programs 6,597 6,219 7,618
Computer supplies 3,487 4,383 3,974
Publications 626 734 1,160
Videotapes & discs 4,312 4,297 3,974
Research material 2,472 3,874 3,098
Car & truck 3,626 3,917 4,024
Promotion & gifts 1,594 2,016 2,619
Travel 0 0 2,468
Meals & entertainment 874 1,105 1,098
Total expenses 52,318 60,597 71,088
On the basis of the above-reported income and expenses,
petitioners reported on their 2002, 2003, and 2004 Federal income
tax returns net profit from petitioner’s accounting and
photographic activities as follows:
Net Profit
Year Accounting Photography Total
2002 $10,405 $1,592 $11,997
2003 10,209 3,019 13,228
2004 12,879 2,992 15,871
On audit respondent disallowed in their entirety the claimed
business expenses relating to petitioner’s accounting and
photographic activities reflected on petitioners’ untimely filed
Federal income tax returns for 2002, 2003, and 2004, determined
the tax deficiencies at issue herein, and imposed on petitioners
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the section 6651(a)(1) late-filing additions to tax and the
section 6662(a) accuracy-related penalties.
Much of the documentation petitioner offered at trial
relating to his accounting and photographic activities is
illegible, with dates, prices, and descriptions unreadable.
Testimony petitioner gave with regard to his proffered
documentation was generally vague and inadequate. Petitioner
testified that bills for expenses relating to his accounting and
photographic activities were the responsibility of his wife--that
he never saw the bills, never paid the bills, and never checked
whether his wife had paid the bills. Petitioner, however, did
not call his wife, his children, or others to testify at the
trial.
OPINION
Respondent claims that petitioner in 2002, 2003, and 2004
was not engaged in a trade or business of accounting or
photography and alternatively that petitioner is not entitled
to the claimed expenses relating thereto for lack of proper and
adequate documentation and substantiation. We address only
respondent’s lack of substantiation argument.
Taxpayers have a responsibility to maintain records
sufficient to determine their correct Federal income tax
liability. Sec. 6001; Higbee v. Commissioner, 116 T.C. 438, 440
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(2001). No deduction is allowed for personal, living, or family
expenses unless expressly provided by law. Sec. 262(a).
Deductions are a matter of legislative grace, and the
taxpayer generally bears the burden of proving he or she is
entitled to the deductions claimed.1 Rule 142(a); New Colonial
Ice Co. v. Commissioner, 292 U.S. 435, 440 (1934). Taxpayers
must be able to substantiate both the amount paid and the purpose
of claimed deductions. Higbee v. Commissioner, supra at 440.
At trial petitioner did not credibly explain how he
accounted for the income received and the expenses incurred in
his accounting and photographic activities. Petitioner stated he
gave funds received to his wife and she did whatever she wanted
with them.
As noted above, documentation petitioner offered to
substantiate claimed expenses relating to his accounting and
photographic activities is illegible, some of it is blank, and
much of it is not in petitioner’s name, but rather in the names
of petitioner’s wife and children. Much of the documentation
that is legible is utterly unclear as to the purpose of the
claimed expense--whether personal, accounting, or photography--
and no further explanatory evidence is provided.
1
Because petitioner has not maintained and submitted
adequate records to substantiate his claimed expenses,
petitioners do not qualify for a shift in the burden of proof
under sec. 7491(a). See sec. 7491(a)(2).
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Petitioner produced no credible documentation with regard to
claimed gasoline purchases, car repairs expenses, and toll costs.
Documentation petitioner produced in support of car and
truck expenses, gifts and promotions, meals, entertainment, and
travel does not meet the recordkeeping requirements of section
274(d).
There is no credible evidence that petitioners’ children
worked in any meaningful way for petitioner in either his
accounting or his photographic activities that would have
justified the per diem payments petitioner paid to them.
In support of claimed depreciation, petitioner offers a list
of assets for 2006. This list is insufficient to establish that
petitioner purchased and placed into service the depreciable
assets and that the depreciation amounts petitioner claimed
during the years in issue were correct.
Petitioner claims that some of the documentation relating to
his accounting and photographic activities was destroyed in a
fire or lost as a result of a computer crash. Petitioner
submitted numerous general receipts at trial but has provided no
credible evidence that the purpose for those expenses related to
petitioner’s accounting and photographic activities, and
petitioner’s ability to produce numerous receipts calls into
question petitioner’s allegation that a fire or a computer crash
occurred that destroyed his records.
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Over the course of the 3 years in issue, petitioner claims
approximately $8,000 in meal and entertainment expenses. The
diary petitioner offers in support of these expenses, however,
inadequately describes the business relationship between
petitioner, the named client, and any business purpose for the
expenses. See sec. 274(d).
Petitioner claims his 2004 trip to Israel qualifies as a
business trip in his photographic activities. However, no
credible evidence supports that claim; rather, it appears
petitioner’s trip to Israel related to needed medical treatments.
In summary, we sustain respondent’s disallowance of all of
the expenses claimed on the Schedules C-1 or C-2 on petitioners’
2002, 2003, and 2004 Federal income tax returns.
Respondent has satisfied his burden of production under
section 7491(c), and petitioners have not established any
reasonable cause with regard to the late filing of petitioners’
2002, 2003, and 2004 Federal income tax returns and the
underpayments associated therewith. See Higbee v. Commissioner,
supra at 447. The credible evidence does not establish that
petitioner’s (or other family members’) medical problems
incapacitated petitioner from filing timely and proper Federal
income tax returns for the years in issue. See Wright v.
Commissioner, T.C. Memo. 1998-224, affd. without published
opinion 173 F.3d 848 (2d Cir. 1999).
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We sustain respondent’s imposition of both the section 6651
late-filing additions to tax and the section 6662(a) accuracy-
related penalties.
To reflect the foregoing,
Decision will be entered
for respondent.