T.C. Summary Opinion 2012-96
UNITED STATES TAX COURT
BRANDON DEAN MORRIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23655-09S. Filed September 25, 2012.
Brandon Dean Morris, pro se.
Ardney J. Boland, III, for respondent.
SUMMARY OPINION
GOEKE, 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
1
Unless otherwise indicated, all section references are to the Internal Revenue
Code in effect for the years at issue, and all Rule references are to the Tax Court
(continued...)
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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.
Respondent determined deficiencies in petitioner’s Federal income tax of
$30,0642 and $19,466 for 2006 and 2007, respectively. Respondent also
determined a section 6651(a)(1) failure to timely file addition to tax of $1,503 for
2006 as well as section 6662(a) accuracy-related penalties of $6,013 and $3,893 for
2006 and 2007, respectively. After concessions,3 the issues remaining for decision
are:
(1) whether petitioner is entitled to disputed deductions claimed on Schedule
C, Profit or Loss From Business, for car and truck expenses of $51,320 and $36,194
for 2006 and 2007, respectively. We hold that he is not entitled to the disputed car
and truck expense deductions for 2006 but is entitled to $3,033 of the disputed car
and truck expense deductions for 2007;
1
(...continued)
Rules of Practice and Procedure.
2
All dollar amounts are rounded to the nearest dollar.
3
After trial respondent conceded that petitioner is entitled to additional
deductions above those already allowed, totaling $538 and $15,783 for 2006 and
2007, respectively. These concessions will affect the amounts of the sec.
6651(a)(1) addition to tax and the sec. 6662(a) penalties.
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(2) whether petitioner is entitled to disputed Schedule C deductions for travel
expenses of $24,000 and $10,062 for 2006 and 2007, respectively. We hold that he
is entitled to $1,950 of the disputed travel expenses for 2006 and $73 of the
disputed travel expenses for 2007;
(3) whether petitioner is entitled to disputed Schedule C deductions for meal
and entertainment expenses of $9,955 and $1,887 for 2006 and 2007, respectively.
We hold that he is not;
(4) whether petitioner is entitled to a section 163 mortgage interest deduction
for 2007 in excess of the $874 respondent already allowed. We hold that he is not;
(5) whether petitioner is liable for the section 6651(a)(1) failure to timely file
addition to tax for 2006. We hold that he is; and
(6) whether petitioner is liable for section 6662(a) accuracy-related penalties
for 2006 and 2007. We hold that he is.
Background
At the time the petition was filed, petitioner resided in Oklahoma.
1. Section 162 Business Expense Deductions
During the years at issue petitioner worked as an independent contractor for
Total Impact Services, Inc. (Total Impact). Petitioner’s job involved traveling to
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various locations throughout the United States to “re-merchandise” goods in venues
such as Lowe’s or Home Depot. This work entailed adding new products, putting
up new displays, and rearranging current merchandise to catch the eye of customers.
During the years at issue petitioner’s significant other (now his wife), Brandi
Tarwater, was also employed by Total Impact and frequently traveled with
petitioner across the country.
Total Impact did not pay or reimburse petitioner for automobile, meal and
entertainment, or travel expenses he incurred because of his work. Facts regarding
the various expenses are discussed infra.
A. Car and Truck Expenses
On his 2006 and 2007 tax returns petitioner claimed that he and Ms.
Tarwater4 drove 152,250 miles in 2006 and approximately 92,100 miles in 2007
because of their jobs with Total Impact. Petitioner claimed corresponding
deductions of $67,751 and $44,664 for 2006 and 2007, respectively. In the notice
of deficiency respondent allowed $16,431 of petitioner’s reported 2006 car and
truck expenses but allowed none of the reported 2007 car and truck expenses. After
4
When petitioner and Ms. Tarwater traveled together, they used only one
vehicle.
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reviewing evidence produced before and during the trial, respondent conceded
$8,470 of the reported 2007 expenses, but no additional expenses for 2006.
B. Travel Expenses
Because of his work travel, petitioner often spent nights in hotels. Petitioner
claimed $27,929 and $14,185 in travel expense deductions on his 2006 and 2007
Schedules C, respectively. In the notice of deficiency respondent allowed $3,391 of
petitioner’s reported 2006 travel expenses but allowed none of the reported 2007
travel expenses. After reviewing evidence produced both before and during trial,
respondent conceded an additional $538 and $4,123 of the reported 2006 and 2007
expenses, respectively.
C. Meal and Entertainment Expenses
Petitioner often ate meals at restaurants while traveling for work. Petitioner
and Ms. Tarwater also engaged in various recreational activities while traveling,
such as going to the movies or visiting parks which charged an admittance fee.
Petitioner claimed $13,331 and $5,077 in meal and entertainment expense
deductions on his 2006 and 2007 Schedules C, respectively. In the notice of
deficiency respondent allowed $3,376 of petitioner’s reported 2006 meal and
entertainment expenses but allowed none of the reported 2007 meal and
entertainment expenses. After reviewing evidence produced before and during trial,
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respondent conceded $3,190 of the reported 2007 expenses, but no additional
expenses for 2006.
2. Section 163 Mortgage Interest Deduction
On his 2007 Schedule A, Itemized Deductions, petitioner claimed a mortgage
interest deduction of $4,129. In the notice of deficiency respondent allowed a
mortgage interest deduction of only $874. In support of the claimed deduction
petitioner introduced a Form 1098, Mortgage Interest Statement, and a timeshare
agreement. The Form 1098 listed petitioner, John D. Morris, and Denise R. Morris
as the borrowers5 and reflected $4,390 in total interest, points, and mortgage
insurance premiums paid. The timeshare agreement was unsigned but listed
petitioner and Ms. Tarwater as owners. Ms. Tarwater’s credit card information was
listed on the timeshare agreement page entitled “Authorization for Auto Pay”.
3. Additional Information
Petitioner received an extension to October 15, 2007, to file his 2006 Federal
tax return. However, petitioner did not sign or mail his self-prepared return until
October 16, 2007. Petitioner timely filed his 2007 return, which was prepared by a
5
The relationship between petitioner, John D. Morris, and Denise R. Morris
was not established.
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certified public accountant. On June 30, 2009, respondent issued a notice of
deficiency to petitioner for 2006 and 2007. Petitioner timely filed a petition
contesting the deficiencies, addition to tax, and penalties.
Discussion
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency are presumed
correct, and taxpayers bear the burden of proving that the Commissioner’s
determinations are incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). Deductions are a matter of legislative grace, and taxpayers bear the
burden of proving that they have met all requirements necessary to be entitled to the
claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). Petitioner has not argued that section 7491(a) applies in this case, and
the record does not support a conclusion that the requirements of section 7491(a)
have been met. Petitioner therefore bears the burden of proof.
II. Section 162 Business Expense Deductions
Section 162 allows a deduction for all ordinary and necessary business
expenses paid or incurred during the taxable year in carrying on any trade or
business. The determination of whether an expenditure satisfies the requirements of
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section 162 is a question of fact. Commissioner v. Heininger, 320 U.S. 467, 475
(1943).
Taxpayers are required to maintain records sufficient to establish the amounts
of allowable deductions and to enable the Commissioner to determine the correct
tax liability. Sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999). No
deduction is allowed for personal, living, and family expenses. Sec. 262(a). Certain
expenses described in section 274 are subject to strict substantiation rules. No
deduction under section 162 shall be allowed for, among other things, travel
expenses, entertainment, gifts, and expenses with respect to “listed property”
defined in section 280F(d)(4) “unless the taxpayer substantiates by adequate records
or by sufficient evidence corroborating the taxpayer’s own statement”: (1) the
amount of the expense or other item; (2) the time and place of the travel,
entertainment, or use, or date and description of the gift; (3) the business purpose of
the expense or other item; and (4) in the case of entertainment or gifts, the business
relationship to the taxpayer of the recipients or persons entertained.6 Sec. 274(d).
6
“We may not use the Cohan doctrine * * * to estimate expenses covered by
section 274(d).” Hough v. Commissioner, T.C. Memo. 2006-58, slip op. at 4.
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Passenger automobiles and any other property used as a means of
transportation are generally “listed property” as defined by section 280F(d)(4).
Secs. 274(d)(4), 280F(d)(4)(A)(i) and (ii). Accordingly, with certain exceptions
(none of which petitioner has shown he meets), taxpayer’s claiming deductions for
car and truck expenses must satisfy the strict substantiation requirements of section
274.
Section 1.274-5A(c)(5), Income Tax Regs., exempts taxpayers from the strict
substantiation requirements when there is a loss of records beyond their control.
Although petitioner testified that some of his records were destroyed as a result of
water damage to a storage unit, he offered no other evidence (such as photographs,
insurance claims, or corroborating testimony) that such records were indeed
destroyed. We thus find that section 1.274-5A(c)(5), Income Tax Regs., does not
apply in this case. We proceed to determine whether the records petitioner
produced are sufficient for us to sustain certain deductions greater than those
respondent allowed in the notice of deficiency or conceded after trial.
A. Car and Truck Expenses
In support of the claimed miles driven for 2006 petitioner introduced oil
change receipts which showed mileage on his various vehicles, emails from Total
Impact listing the dates and locations of the stores he was scheduled to
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remerchandise, and a daily planner which listed many of the cities he traveled to as
well as certain odometer readings from his vehicles. Petitioner introduced fewer
supporting documents regarding his 2007 mileage, although he did introduce emails
from Total Impact listing the dates and locations of the stores he was scheduled to
remerchandise during that year.
On his 2006 Schedule C petitioner claimed a $67,751 deduction for car and
truck expenses corresponding to the 152,250 miles he claimed to have driven during
that year. Respondent allowed a deduction for $16,431 of these expenses in the
notice of deficiency and conceded no additional amounts after trial. After reviewing
the records petitioner provided for 2006, we find that petitioner failed to prove that
he drove sufficient miles to entitle him to a car and truck expense deduction greater
than that respondent already allowed in the notice of deficiency. Because the
odometer readings on certain oil change receipts seemed incredible (and in any case
did not take into account any personal miles petitioner drove), we chose to rely
primarily on the schedules of cities kept by petitioner and sent to him by Total
Impact. Using the schedules of cities to calculate the business miles petitioner
drove yields a number of miles slightly below the number of miles respondent
allowed. As a result we find that petitioner has failed to prove entitlement to any
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additional deduction for 2006 car and truck expenses above that respondent already
allowed in the notice of deficiency.
On his 2007 Schedule C petitioner claimed a $44,664 deduction for car and
truck expenses corresponding to the 92,100 miles he claimed to have driven during
that year. Respondent allowed none of this deduction in the notice of deficiency but
conceded $8,470 in car and truck expenses after the trial. After reviewing the
records petitioner supplied, we find that petitioner has proven he traveled 23,716
miles on business during 2007. Using the standard mileage rate in effect for 2007 of
$0.485, we find that petitioner is entitled to a total deduction of $11,503 for car and
truck expenses in 2007, or $3,033 above the amount respondent conceded.
B. Travel Expenses
Petitioner claimed $27,929 and $14,185 in travel expense deductions on his
2006 and 2007 Schedules C, respectively. In the notice of deficiency respondent
allowed $3,391 of petitioner’s claimed 2006 travel expense deduction but none of
the claimed 2007 travel expense deduction. After trial respondent conceded an
additional $538 of the reported 2006 expenses and $4,123 of the reported 2007
expenses.
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In support of his claimed travel expense deductions petitioner introduced a
number of hotel reservations and receipts. After reviewing the records petitioner
supplied, we find that he has proven entitlement to deduct an additional $1,950 of
travel expenses for 2006 and an additional $73 of travel expenses for 2007. These
amounts are in excess of the amounts respondent already allowed or conceded.
C. Meal and Entertainment Expenses
Petitioner claimed deductions of $13,331 and $5,077 in meal and
entertainment expenses on his 2006 and 2007 Schedules C, respectively. In the
notice of deficiency respondent allowed $3,376 of petitioner’s claimed 2006 meal
and entertainment expense deductions but allowed none of the claimed 2007
deduction. After trial respondent conceded $3,190 of the reported 2007 expenses
but no additional 2006 expenses. Respondent allowed both the 2006 and 2007
expenses on a per diem basis.
In support of his claimed meal and entertainment expense deductions,
petitioner introduced numerous receipts from restaurants around the country. In
addition to the meal receipts, petitioner also introduced a multitude of other receipts
from movie theaters, parks, and stores, as well as other evidence of expenditures,
such as copies of checks/money orders.
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A large number of petitioner’s records are insufficient in various ways: (1)
many of the meals were paid for with Ms. Tarwater’s credit card;7 (2) many of the
receipts do not clearly reflect the business purpose of the expenditure;8 and (3)
many receipts are illegible or else the item purchased is unclear. After reviewing the
records petitioner supplied, we find that he has failed to prove entitlement to any
additional deductions for meal and entertainment expenses above those already
allowed by respondent in the notice of deficiency or conceded after trial.
III. Section 163 Mortgage Interest Deduction
Section 163(a) allows a deduction for all interest paid or accrued within the
taxable year on indebtedness. As an exception, section 163(h) generally disallows a
deduction for personal interest. Personal interest, however, does not include
qualified residence interest. Sec. 163(h)(2)(D). In general a qualified residence is
defined as a taxpayer’s principal residence and one other home that is used as a
residence by the taxpayer. Sec. 163(h)(4)(A)(i). Qualified residence interest means
any interest paid or accrued during a tax year on acquisition indebtedness or home
7
As Ms. Tarwater and petitioner were not married in 2006 or 2007
(petitioner’s filing status was “single” during those years), petitioner is not entitled
to deduct expenses paid by Ms. Tarwater.
8
For example a Best Buy receipt for $1,798 was included in petitioner’s
records. The receipt appears to be for a camera and a warranty. No business
purpose for this expense was provided.
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equity indebtedness with respect to the taxpayer’s qualified residence. Sec.
163(h)(3)(A).
Although petitioner introduced a Form 1098 reflecting $4,390 in total interest,
points, and mortgage insurance premiums paid, as well as a timeshare agreement,
those items are not sufficient in this case to prove petitioner paid the interest he
claims to have paid. The Form 1098 listed three people as the borrowers:
petitioner, John D. Morris, and Denise R. Morris. The amount paid by each was not
specified. In addition, the timeshare agreement was unsigned and, in any case,
listed Ms. Tarwater’s credit card information on the page entitled “Authorization for
Auto Pay”. After reviewing the relevant evidence, we find that petitioner has failed
to prove that he paid qualified resident interest above the $874 respondent already
allowed in the notice of deficiency.
IV. Section 6651(a)(1) Failure To File Addition to Tax for 2006
Section 6651(a)(1) provides for an addition to tax for failure to timely file
Federal income tax returns (determined with regard to any extension of time for
filing) unless the taxpayer shows that such failure was due to reasonable cause, and
not willful neglect. Mendes v. Commissioner, 121 T.C. 308, 320 (2003).
Regarding the amount of the addition to tax, section 6651(a)(1) provides that “there
shall be added to the amount required to be shown as tax on such return 5 percent of
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the amount of such tax if the failure is for not more than 1 month, with an additional
5 percent for each additional month or fraction thereof during which such failure
continues, not exceeding 25 percent in the aggregate”.
Petitioner filed his 2006 return on October 16, 2007, one day after the return
was due. Petitioner testified that he “planned on filing the weekend before the
deadline, but * * * was delayed in Southern Oklahoma due to work.” However,
petitioner did not present any additional facts to support whether the delay was due
to reasonable cause. Similarly, petitioner did not introduce any facts or argument
regarding why he would not have been able to file before leaving for southern
Oklahoma. Considering the facts we find petitioner has not established that the
delay in filing was due to reasonable cause. Accordingly, we find that petitioner is
liable for a 5% section 6651(a)(1) addition to tax.
V. Section 6662(a) Accuracy-Related Penalties
Section 6662(a) and (b)(1) and (2) imposes a 20% accuracy-related penalty if
any part of an underpayment of tax required to be shown on a return is due to,
among other things, negligence or disregard of rules or regulations or a substantial
understatement of income tax. The penalty is 20% of the portion of the
underpayment of tax to which the section applies. Sec. 6662(a).
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The Commissioner bears the burden of production on the applicability of an
accuracy-related penalty in that he must come forward with sufficient evidence
indicating that it is proper to impose the penalty. See sec. 7491(c); see also Higbee
v. Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner meets this
burden, the burden of proof remains with the taxpayer, including the burden of
proving that the penalty is inappropriate because of reasonable cause and good faith.
See Higbee v. Commissioner, 116 T.C. at 446-447.
The Commissioner satisfies his burden of production by showing that the
understatement meets the definition of “substantial”. See Janis v. Commissioner,
T.C. Memo. 2004-117, aff’d, 461 F.3d 1080 (9th Cir. 2006), and aff’d, 469 F.3d
256 (2d Cir. 2006). An understatement of income tax is “substantial” if it exceeds
the greater of 10% of the tax required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). An “understatement” is defined as the excess of the tax required to
be shown on the return over the tax actually shown on the return, less any rebate.
Sec. 6662(d)(2)(A). Even considering the additional deductions we have found
petitioner to be entitled to, the understatement of income tax still exceeds the greater
of 10% of the tax required to be shown on the return or $5,000 and is thus
“substantial”. Respondent has therefore met his burden of production.
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The amount of an understatement shall be reduced by that portion of the
understatement which is attributable to: (1) the tax treatment of any item by the
taxpayer if there is or was substantial authority for such treatment; or (2) any item if
the taxpayer adequately disclosed relevant facts affecting the item’s tax treatment in
the return or in a statement attached to the return and there is a reasonable basis for
the tax treatment of the item by the taxpayer. Sec. 6662(d)(2)(B). Considering the
facts and law, we find that neither of these reductions applies in this case.9
Pursuant to section 6664(c)(1), the accuracy-related penalty under section
6662 does not apply to any portion of an underpayment for which a taxpayer
establishes that he or she: (1) had reasonable cause; and (2) acted in good faith.
Dunlap v. Commissioner, T.C. Memo. 2012-126, slip op. at 69. Whether a
taxpayer has acted with reasonable cause and in good faith depends on the pertinent
facts and circumstances, including efforts to assess the proper tax liability, the
taxpayer’s knowledge and experience, and the extent to which the taxpayer relied
on the advice of a tax professional. Sec. 1.6664-4(b)(1), Income Tax Regs.
9
Petitioner made no argument at trial on this point and did not submit a pre- or
post-trial brief.
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“Generally, the most important factor is the extent of the taxpayer’s effort to assess
the taxpayer’s proper tax liability.” Id.
Petitioner prepared his own tax return for 2006 using various receipts and
logs, most of which were introduced into evidence. As previously discussed, such
evidence was insufficient for us to sustain most deductions petitioner claimed for
2006. Petitioner introduced no other relevant evidence which could establish
reasonable cause and good faith in the preparation of his 2006 tax return. Although
petitioner testified that many of his records were destroyed, he introduced no
corroborating evidence.
Unlike the 2006 return, petitioner’s 2007 return was prepared by an
unidentified certified public accountant. Petitioner testified that he gave the
accountant all relevant information, including a “box of receipts”. Although
petitioner claims to have followed the advice given to him by his accountant, he has
made an insufficient attempt to establish that the reliance was reasonable. See
Freytag v. Commissioner, 89 T.C. 849, 888 (1987), aff’d on another issue, 904 F.2d
1011 (5th Cir. 1990), aff’d, 501 U.S. 868 (1991); sec. 1.6664-4(b)(1), Income Tax
Regs. We have previously held that--
for a taxpayer to rely reasonably upon advice so as possibly to negate a
section 6662(a) accuracy-related penalty determined by the
Commissioner, the taxpayer must prove * * * that the taxpayer meets
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each requirement of the following three-prong test: (1) The adviser
was a competent professional who had sufficient expertise to justify
reliance, (2) the taxpayer provided necessary and accurate information
to the adviser, and (3) the taxpayer actually relied in good faith on the
adviser’s judgment. * * *
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299
F.3d 221 (3d Cir. 2002). Considering the records petitioner produced at trial, and
the lack of information supplied regarding the accountant and the records petitioner
supplied to the accountant, we find that petitioner did not satisfy these three
requirements.
Considering the facts and law, we find that petitioner has also failed to prove
he meets the reasonable cause defense of section 6664(c)(1). As previously
discussed, petitioner has also failed to show substantial authority or a reasonable
basis for the positions he took on his 2006 and 2007 tax returns. As a result, we
hold petitioner is liable for the 20% accuracy-related penalty with respect to those
deficiencies for which we have found him liable.
VI. Conclusion
We find petitioner is entitled to deduct $1,950 and $3,106 of the disputed
2006 and 2007 Schedule C expenses, respectively. We also find that petitioner is
not entitled to deduct mortgage interest for 2007 in excess of the $874 respondent
already allowed. Further, we find petitioner liable for the 5% addition to tax under
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section 6651(a)(1) for 2006, as well as the 20% section 6662(a) accuracy-related
penalty for both 2006 and 2007.
To reflect the foregoing and concessions by the parties,
Decision will be entered
under Rule 155.