T.C. Summary Opinion 2011-133
UNITED STATES TAX COURT
JEFFREY GUNN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 15834-09S. Filed November 28, 2011.
Jeffrey Gunn, pro se.
Daniel C. Munce, for respondent.
DEAN, 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. 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. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code (Code) in effect for the year at
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issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined a deficiency in petitioner’s Federal
income tax of $21,613 for 2004. Respondent also determined an
addition to tax for failure to file timely under section
6651(a)(1) of $2,271.50 and an accuracy-related penalty under
section 6662(a) of $4,322.60 for 2004.
The issues for decision1 are whether petitioner: (1) Had
unreported capital gain income;2 (2) is entitled to itemized
deductions in excess of those respondent allowed; (3) is entitled
to a deduction for a rent or lease expense on Schedule C, Profit
or Loss From Business; (4) is entitled to deductions for supplies
and repairs expenses on Schedule E, Supplemental Income and Loss
(From rental real estate, royalties, partnerships, S
corporations, estates, trusts, REMICs, etc.); (5) is liable for
the addition to tax under section 6651(a)(1) for failure to file
timely; and (6) is liable for the accuracy-related penalty under
section 6662(a).
1
Petitioner’s liability for the alternative minimum tax is
computational and should be resolved in accordance with the
decision of the Court.
2
Respondent’s pretrial memorandum states that petitioner
failed to report $22,038 in capital gain rather than the $71,711
determined in the notice of deficiency. The Court will treat
this as a concession by respondent of the $49,673 difference.
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Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received in evidence
are incorporated herein by reference. Petitioner resided in
Pennsylvania when the petition was filed.
Background
Capital Gain
During the taxable year petitioner was employed as a
mortgage application specialist for GMAC Mortgage Corp. (GMAC)
and Doherty Employment Group, Inc., which was doing business as
Superior Mortgage (Doherty Employment).3 Petitioner also sold
and rented refurbished properties.
Petitioner “had access to distressed properties” as a result
of his employment. Petitioner’s first acquisition in his pursuit
of property rehabilitation and sales was the Walker Street
property (Walker Street). Petitioner purchased Walker Street in
2000 for $43,000, financed by a loan from CTX Mortgage. He
refinanced Walker Street in January 2001 with another loan from
CTX Mortgage of $58,000, of which $45,099.32 was used to pay the
original mortgage and $12,900.68 was received by petitioner as a
cash payment.
3
The nature of the relationship between the two entities is
not clear from the record, the former having been described by
the parties as a “PEO” for Superior Mortgage. Doherty Employment
issued petitioner a Form W-2, Wage and Tax Statement, for the
year.
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Petitioner sold Walker Street on October 15, 2004, for
$108,000. After paying closing costs that included taxes,
settlement costs, a “seller credit”, a “payoff of first Mortgage
to Wachovia Bank” of $14,174.16, and a “payoff of second Mortgage
to Bank of America” of $49,329.23, petitioner received at
settlement a cash payment of $37,575.74. Petitioner presented a
statement from Chase Bank addressed to him at his home address
showing a payment to Chase Bank of $20,000 on December 6, 2004.
Petitioner did not attach to his return a Schedule D, Capital
Gain or Loss, but reported on line 13 of the return a capital
gain of $20,001.
Itemized Deductions
Petitioner deducted on Schedule A, Itemized Deductions,
unreimbursed employee business expenses of $12,842, of which
$9,377 was for vehicle expenses and $3,465 was for other
expenses, including meals and entertainment. The parties
stipulated a letter, computer-generated spreadsheets, and copies
of receipts related to the deductions.
The letter the parties stipulated was sent to the Internal
Revenue Service (IRS) by the chief financial officer of Superior
Mortgage. According to the letter, the types of expenses
identified on petitioner’s Form 2106, Employee Business Expenses,
were a condition of his employment and “appear reasonable in
amount and type (office supplies and postage)”. The letter
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further explains that although petitioner was not reimbursed for
the listed expenses, he was reimbursed $2,100 for business
mileage driven between January and July 2004.
Schedule C Loss
Petitioner filed a Schedule C for G Family Construction LLC
(G Family), as a home remodeling contractor. The Schedule C
reported no gross receipts and only one deduction of $14,400 for
the rental or lease of other business property. Petitioner, on
Schedule E, reported $14,400 as rent received in respect of a
single-family dwelling on Poquessing Avenue and deducted $17,741
in total expenses. The parties stipulated a document titled
“Residential Lease” naming Joseph Gunn, petitioner’s brother, as
lessor and petitioner as lessee of the Poquessing Avenue property
(Poquessing Avenue).
Schedule E Supplies and Repairs
Petitioner deducted supplies and repairs expenses for three
properties, Walker Street, Poquessing Avenue, and a property on
South Maple Avenue (South Maple Avenue). Petitioner provided as
substantiation for the expenses a computer listing for each
category of expense for each property along with copies of
various receipts and invoices, including those issued by his home
remodeling company, G Family, and by his brother, Joseph Gunn.
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Discussion
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some
cases the burden of proof with respect to relevant factual issues
may shift to the Commissioner under section 7491(a). As
petitioner did not argue or prove that the requirements of
section 7491(a) have been met, the burden of proof does not shift
to respondent.
Capital Gain
The gain from the sale or other disposition of property is
the excess of the amount realized over the adjusted basis of the
property. Sec. 1001(a). Generally, a taxpayer’s basis in
property is the cost of the property. Sec. 1012. The amount
realized on the sale or disposition is the amount of money
received plus the fair market value of any property received.
Sec. 1001(b). Petitioner’s adjusted basis in Walker Street was
$43,000 reduced by the amount of depreciation allowed or
allowable under subtitle A.4 Sec. 1016(a)(2).5 The amount
4
Petitioner deducted $992 of depreciation expense on
Schedule E for 2004; respondent calculated depreciation and a
basis reduction of $4,464 during petitioner’s ownership of the
property.
5
Although sec. 1016(a) also provides for adjustments to
(continued...)
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petitioner realized upon the sale of the property was $108,000,
resulting in a gain of approximately $65,000.
Petitioner did not attach a Schedule D to his return but did
report on line 13 a capital gain of $20,001. Petitioner deducted
expenses on Schedule E for Walker Street for repairs of $1,265
for 2004 and alleges but has not shown that funds from the
refinancing of the property were used for “major repairs” to the
property. As an alternative, petitioner alleges that he is
entitled to exclude the gain from the sale of Walker Street under
section 121, exclusion of gain from sale of a principal
residence. But petitioner failed to present any evidence of the
factual prerequisites for the exclusion.
Respondent concedes, without explanation, however, that
petitioner failed to report $22,038 in capital gain rather than
the $71,711 determined in the notice of deficiency. Because of
respondent’s concession, the Court holds that petitioner must
include in income additional capital gain of $22,038.
Itemized Deductions
Petitioner deducted as miscellaneous expenses on Schedule A
expenses related to his employment as a mortgage application
specialist for GMAC and Doherty Employment. Although the parties
stipulated some items petitioner presented as substantiation for
5
(...continued)
basis for amounts chargeable to capital account, petitioner
offered no evidence of such expenditures.
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his deductions, respondent argues that many of the items are
illegible, that the letter from one employer shows that he was
reimbursed for business mileage expenses, and that he failed to
produce from the other employer any statement of its
reimbursement policy.
Deductions are strictly a matter of legislative grace, and a
taxpayer bears the burden of proving entitlement to any deduction
claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292
U.S. 435 (1934); Welch v. Helvering, supra at 115. Moreover,
taxpayers are required to maintain records that are sufficient to
substantiate their deductions. Sec. 6001.
Section 162 generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Generally, no deduction is
allowed for personal, living, or family expenses. See sec. 262.
The taxpayer must show that any claimed business expenses were
incurred primarily for business rather than personal reasons.
See Rule 142(a); Walliser v. Commissioner, 72 T.C. 433, 437
(1979). To show that the expense was not personal, the taxpayer
must show that the expense was incurred primarily to benefit his
business, and there must have been a proximate relationship
between the claimed expense and the business. See Walliser v.
Commissioner, supra at 437.
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An employee’s performance of services is a trade or
business. Primuth v. Commissioner, 54 T.C. 374 (1970). An
expense, however, is not deductible as ordinary and necessary to
the extent that it was subject to reimbursement by the employer.
Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); see also Orvis
v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg. T.C.
Memo. 1984-533.
Petitioner provided copies of receipts showing the purchase
in 2004 of $210.76 of postage stamps. Copies of other receipts
or documents were from such places as Gelfand’s, Sears,
Burlington Coat Factory, Staples, Walmart, Value City, and
others. Many of the receipts were illegible and the others were
not, without further explanation, identifiable as relating to
business expenses.
The other expenses petitioner deducted related to his
employment were business transportation expenses. Petitioner’s
only substantiation for his transportation expenses for the year
was a computer printout listing dates, miles driven for business
or for personal purposes,6 and most often a truncated apparent
destination point like Phila-Delco, Montg-Delco, 308 phila-
trenton, or Phila-Bucs.
6
The printout lists for every date zero personal miles
driven even though his Form 2106 shows 36,010 total miles driven
and 25,005 business miles driven.
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Certain business deductions as provided in section 274 are
subject to strict rules of substantiation that supersede the
doctrine in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930), that allows the Court to estimate expenses in certain
circumstances. See sec. 1.274-5T(c)(2), Temporary Income Tax
Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Section 274(d)
provides that no deduction shall be allowed with respect to:
(a) Any traveling expense, including meals and lodging away from
home; (b) any item related to an activity of a type considered to
be entertainment, amusement, or recreation; or (c) the use of any
“listed property”, as defined in section 280F(d)(4)(A)(i),
including any passenger automobile, unless the taxpayer
substantiates certain elements.
For an expense described in one of the above categories, the
taxpayer must substantiate by adequate records or sufficient
evidence to corroborate the taxpayer’s own testimony: (1) The
amount of the expenditure or use; (2) the time and place of the
expenditure or use; (3) the business purpose of the expenditure
or use; and in the case of entertainment, (4) the business
relationship to the taxpayer of the persons entertained. See
sec. 274(d).
To meet the adequate records requirements of section 274, a
taxpayer must maintain some form of records and documentary
evidence that in combination are sufficient to establish each
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element of an expenditure or use. See sec. 1.274-5T(c)(2),
Temporary Income Tax Regs., supra. A contemporaneous log is not
required, but corroborative evidence to support a taxpayer’s
reconstruction of the elements of an expenditure or use must have
“a high degree of probative value to elevate such statement” to
the level of credibility of a contemporaneous record. Sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985).
Not only does petitioner’s evidence not meet the required
standard; one of his employers confirmed that petitioner was
reimbursed $2,100 for business mileage driven between January and
July 2004. Petitioner failed to produce the reimbursement policy
of his other employer and is therefore unable to show that he
incurred ordinary and necessary business transportation expenses
for that employer. See Podems v. Commissioner, supra at 22-23.
The Court finds that petitioner had deductible postal
expenses of $210.76. Except to the extent of petitioner’s postal
expenses, respondent’s determination of petitioner’s itemized
deductions of unreimbursed employee business expenses is
sustained.
Schedule C Loss
Petitioner filed a Schedule C for “G Family Construction
LLC” as a home remodeling contractor. Although the business
includes the letters “LLC” in its name, the Court concludes that
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by reporting his business activities on Schedule C of his Federal
income tax return, petitioner is treating the business as a sole
proprietorship for Federal income tax purposes. See sec.
301.7701-3(b)(1)(ii), Proced. & Admin. Regs. The Schedule C
reported no gross receipts and only one deduction of $14,400 for
the expense of the rental or lease of other business property.
Petitioner, on Schedule E, reported $14,400 as rent received in
respect of Poquessing Avenue and deducted $17,741 in total
expenses associated with the property. The parties stipulated a
document titled “Residential Lease” naming Joseph Gunn,
petitioner’s brother, as lessor and petitioner as lessee of
Poquessing Avenue.
Petitioner took the position in a letter to the IRS,
stipulated by the parties, that his brother, Joseph Gunn, lived
at Poquessing Avenue rent free and in return performed work there
and elsewhere. Petitioner, offering no evidence of fair rental
value or the value of his brother’s services, valued both the
rental of the house and the labor of his brother, whose
affiliation with G Family is unexplained, at $14,400.7
In the alternative petitioner argues that if the Schedule C
rental expense is disallowed, there is nothing to “support” the
7
Petitioner’s brother’s name is listed on some unsigned G
Family correspondence as “General Manager” but there is no
indication on the Schedule C that G Family had any employees
during the year at issue.
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equal amount of rental income reported for the property on
Schedule E; it would be “an investment property” according to
petitioner.
The Court accepts petitioner’s invitation to treat the
Schedule C loss and the Poquessing Avenue rental income as a
nullity, and respondent’s determination with respect to the
Schedule C loss is sustained.
Schedule E Supplies and Repairs
Petitioner deducted supplies and repairs expenses for his
three properties, Walker Street, South Maple Avenue, and
Poquessing Avenue, and provided as substantiation a computer
listing for each category of expense for each property, along
with copies of receipts and invoices. Some of the receipts are
illegible, some receipts while legible do not contain sufficient
information to determine the type of or purpose for the purchase,
and some of the invoices and receipts are from G Family,
petitioner’s proprietorship, or his brother. Although it is not
apparent from the copies of the invoices and receipts which
expenditure was made for a particular property, the putative
totals can be “tied” to the amounts deducted for each property on
the Schedule E.
Where a taxpayer has established that he has incurred an
expense, failure to prove the exact amount of the otherwise
deductible item may not be fatal. Generally, unless precluded by
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section 274, the Court may estimate the amount of such an expense
and allow the deduction to that extent. See Finley v.
Commissioner, 255 F.2d 128, 133 (10th Cir. 1958), affg. 27 T.C.
413 (1956); Cohan v. Commissioner, 39 F.2d at 543-544. Any
inexactitude in the estimate by the Court is of the taxpayer’s
own making because of his failure to maintain proper business
records. See Cohan v. Commissioner, supra at 543-544.
The Court, having examined the documents petitioner
submitted as evidence of his supplies and repairs expenses for
the three properties on Schedule E, concludes that petitioner is
entitled to deduct: (1) Walker Street repairs expenses of $693
and supplies expenses of $3,163; (2) South Maple Avenue repairs
expenses of $2,250 and supplies expenses of $245; and (3)
Poquessing Avenue repairs expenses of $682 and supplies expenses
of $140. The Court has found above that there is no rental
income for Poquessing Avenue for 2004.
Additions to Tax and Penalties
Section 7491(c) imposes on the Commissioner the burden of
production in any court proceeding with respect to the liability
of any individual for penalties and additions to tax. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.
Commissioner, T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir.
2004). In order to meet the burden of production under section
7491(c), the Commissioner need only make a prima facie case that
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imposition of the penalty or addition to tax is appropriate.
Higbee v. Commissioner, supra at 446.
Section 6651(a)(1) Addition to Tax
The parties agree that petitioner filed his 2004 Federal
income tax return on September 25, 2007. Respondent has met his
burden of production under section 7491(c) with respect to
imposing the addition to tax under section 6651(a)(1).
It is petitioner’s burden to prove that he had reasonable
cause and lacked willful neglect in not filing the return timely.
See United States v. Boyle, 469 U.S. 241, 245 (1985); Higbee v.
Commissioner, supra at 446; sec. 301.6651-1(a)(2), Proced. &
Admin. Regs. Because petitioner failed to offer any evidence of
reasonable cause and lack of willful neglect for his failure to
file timely, respondent’s determination that petitioner is liable
for the addition to tax under section 6651(a)(1) is sustained.
Section 6662(a) Accuracy-Related Penalty
Respondent determined that for 2004 petitioner underpaid a
portion of his income tax because of negligence or disregard of
rules or regulations and that there was a substantial
understatement of income tax. Section 6662(a) and (b)(1) and (2)
imposes a 20-percent penalty on the portion of an underpayment of
tax attributable to any one of various factors, including
negligence or disregard of rules or regulations and a substantial
understatement of income tax. “Negligence” includes any failure
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to make a reasonable attempt to comply with the provisions of the
Code, including any failure to keep adequate books and records or
to substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”
includes an understatement of income tax that exceeds the greater
of 10 percent of the tax required to be shown on the return or
$5,000. See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. The determination of whether a taxpayer acted
with reasonable cause and in good faith is made on a case-by-case
basis, taking into account all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
important factor is the extent of the taxpayer’s effort to assess
his proper tax liability for the year. Id.
Petitioner may have a substantial understatement of income
tax for 2004 that would be determined by the computations of the
parties. The Court, however, concludes that respondent has
produced sufficient evidence of negligence to show that the
accuracy-related penalty under section 6662 is appropriate for
2004. Petitioner failed to report capital gain income and failed
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to keep adequate books and records or to substantiate properly
items that he deducted.
The accuracy-related penalty will apply unless petitioner
demonstrates that there was reasonable cause for the underpayment
and that he acted in good faith with respect to the underpayment.
See sec. 6664(c). Section 1.6664-4(b)(1), Income Tax Regs.,
specifically provides: “Circumstances that may indicate
reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of
all the facts and circumstances, including the experience,
knowledge, and education of the taxpayer.”
Petitioner did not show that there was reasonable cause for,
and that he acted in good faith with respect to, the underpayment
of tax for 2004.
Respondent’s determination of the accuracy-related penalty
under section 6662(a) for 2004 is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.