T.C. Memo. 2012-294
UNITED STATES TAX COURT
ANTHONY M. BENTLEY, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10132-11. Filed October 22, 2012.
Anthony M. Bentley, pro se.
Jane J. Kim, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined a deficiency in petitioner’s 2007
Federal income tax of $4,9441 as a result of various disallowed deductions. The
issues for decision are:
1
All dollar amounts are rounded to the nearest dollar.
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[*2] (1) whether petitioner is entitled to a $1,390 deduction for charitable
contributions claimed on Schedule C, Profit or Loss From Business.2 We hold that
he is not;
(2) whether petitioner is entitled to a $17,610 deduction for mortgage interest
claimed on Schedule C. We hold that he is not.
(3) whether petitioner is entitled to a $1,369 deduction for utility expenses
claimed on Schedule C. We hold that he is not; and
(4) whether we should impose sanctions under section 66733 on petitioner for
presenting frivolous or groundless arguments before the Court or delaying the case.
We shall not.
FINDINGS OF FACT
At the time the petition was filed, petitioner resided in New York.
2
In the notice of deficiency respondent allowed petitioner a $1,390 deduction
on Schedule A, Itemized Deductions, for the charitable contributions denied on
Schedule C. However, because petitioner’s itemized deductions would not exceed
the standard deduction even considering the additional $1,390, moving the
charitable contribution deduction from Schedule C to Schedule A effectively
increases petitioner’s taxable income by $1,390.
3
Unless otherwise indicated, all section references are to the Internal Revenue
Code (Code) in effect for the year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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[*3] Petitioner was the proprietor of three sole proprietorships, each of which was
related to his practice of law and was operated out of the studio apartment in which
he resided during 2007. Petitioner attached three Schedules C to his 2007 tax
return, one Schedule C for each of his three businesses.
On the first Schedule C, for the business Anthony M. Bentley, Esq., petitioner
deducted $1,390 in charitable contributions in the “Other Expenses” category. On
the second Schedule C, for the business “Virtual Judge (IHL)”, petitioner deducted
$17,610 in mortgage interest. On the third Schedule C, for the business Dauphin
Web Enterprises, petitioner deducted $3,080 in utility expenses.4
On February 1, 2011, respondent issued a notice of deficiency to petitioner
for 2007. Petitioner timely filed a petition contesting the deficiency.
OPINION
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,
4
As a result of a division between petitioner’s personal and business use of
his apartment, respondent disallowed only $1,369 of the claimed utility expenses.
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[*4] 115 (1933). Deductions are a matter of legislative grace, and taxpayers bear
the burden of proving that they have met all requirements to be entitled to the
claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992).
Petitioner’s primary arguments relate to the burden of proof or production.
Petitioner’s first argument is that respondent bears the burden of proof under Rule
142(a)(1) because respondent raised new matter in his answer. When petitioner
filed his petition, he attached only the notice of deficiency; he did not include the
waiver and the audit statement (detailing the changes respondent made to
petitioner’s 2007 Federal tax due) which were sent to him with the notice of
deficiency. In the answer to the petition respondent attached the notice of
deficiency as well as the waiver and the audit statement. Petitioner argues that the
information in the waiver and the audit statement (including information regarding
the disallowance of deductions on his Schedules C for the charitable contributions,
mortgage interest, and utility expenses) is thus new matter with which respondent
bears the burden of proof. We disagree.
We have previously stated that “New matter does not refer to allegations
that are merely a refinement of a theory or limitation on a theory already set forth
in the notice of deficiency but rather refers to a theory which is inconsistent with
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[*5] the determination in the deficiency notice.” Barton v. Commissioner, T.C.
Memo. 1992-118, 1992 Tax Ct. Memo LEXIS 139, at *16, aff’d without published
opinion, 993 F.2d 233 (11th Cir. 1993). The information in the waiver and the audit
statement was not inconsistent with the determination in the notice of deficiency.
Indeed, the waiver and the audit statement together explain the deficiencies
determined in the notice of deficiency. As a result, we reject petitioner’s Rule
142(a)(1) argument.
Petitioner’s second argument is that respondent bears the burden of
production under section 7491(c). That section provides in relevant part that “the
Secretary shall have the burden of production in any court proceeding with respect
to the liability of any individual for any penalty, addition to tax, or additional amount
imposed by this title.” Petitioner argues that the amount respondent determined to
be due is either an addition to tax or an additional amount within the purview of
section 7491(c).5 We disagree.
Section 6211(a) defines “deficiency” as the amount by which the correct tax
imposed by the Code exceeds the amount of tax shown on the return, plus the
amount of tax previously assessed, less any rebates. Clearly, the amount shown on
5
Petitioner notes that the waiver and the audit statement included with the
notice of deficiency refer to the determined amount as both a deficiency and an
“increase in tax” at various points.
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[*6] the notice of deficiency (resulting from disallowed deductions) was a
deficiency rather than an addition to tax or an additional amount imposed.6 As a
result, we reject petitioner’s section 7491(c) argument.
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. After considering the relevant facts and law, we find that petitioner 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. Whether an expenditure is ordinary and necessary is generally a
question of fact. Commissioner v. Heininger, 320 U.S. 467, 475 (1943). To be
“necessary” within the meaning of section 162, an expense must be “appropriate
and helpful” to the taxpayer’s business. Welch v. Helvering, 290 U.S. at 113. For
an expense to be ordinary “the transaction which gives rise to it must be of
common or frequent occurrence in the type of business involved.” Deputy v. du
Pont, 308 U.S. 488, 495 (1940) (citing Welch v. Helvering, 290 U.S. at 114).
6
We note that additions to tax and additional amounts are found in ch. 68 of
the Code, which includes secs. 6651 through 6751. Respondent’s adjustments to
petitioner’s 2007 tax are not based on these sections.
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[*7] 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).
Petitioner deducted $1,390 in charitable contributions on the Schedule C for
Anthony M. Bentley, Esq.--$1,000 was donated to Fordham Law School, with
smaller donations made to a Jewish community organization, the American Judges
Foundation, the Penn Club of New York Christmas Fund, and the Disabled
American Veterans organization. Petitioner declined to testify regarding the
donations, choosing instead to “rest on the administrative file”, which was the only
piece of evidence introduced. While the administrative record confirms that
charitable contributions were made to each organization and lists the amount of each
contribution, there was no information provided showing that the contributions were
ordinary and necessary expenses of Anthony M. Bentley, Esq. In addition,
petitioner made no argument on brief regarding the business purpose of the
charitable contributions. Considering the facts, we find that petitioner failed
to meet his burden of proving that the charitable contributions were ordinary and
necessary business expenses deductible on the Schedule C for Anthony M.
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[*8] Bentley, Esq. We thus sustain respondent’s determination with respect to this
issue.
Petitioner deducted $3,080 in utility expenses on the Schedule C for Dauphin
Web Enterprises. Respondent disallowed $1,369 of these claimed expenses as a
result of his division between petitioner’s personal and business use of his
apartment. While the administrative record in evidence does contain several credit
card statements which list payments of various utility expenses, there is no evidence
regarding petitioner’s division of his personal and business use of the utility
expenses, many of which were for utilities provided to his studio apartment.
Petitioner did not address the issue at trial and made no argument regarding the
deductibility of the utility expenses under section 162 in his brief. Considering the
facts, we find that petitioner has not satisfied the burden of proof regarding the
utility expenses and sustain respondent’s determination with respect to the issue.
Petitioner deducted $17,610 in mortgage interest on the Schedule C for
Virtual Judge (IHL). Respondent disallowed the entire deduction. The
administrative record introduced in evidence contains a security agreement entered
into on April 27, 1997, regarding the studio apartment where petitioner lived and
maintained his businesses. The security agreement is between petitioner and a
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[*9] person named Michael (whose last name and address are blacked out). The
agreement provides that its purpose is--
To secure the payment of an indebtedness in the amount of
$68,000 with interest, payable as falls
(a) 9.00% per annum simple interest;
(b) 180 monthly installments of $689.70 to commence May 27,
1997;
(c) principal balance may be repaid in whole or in part at any
time without penalty, payments thereafter to be re-calculated
Another page in the administrative record written and signed by petitioner states
that “Due to deteriorating financial conditions (mine) the loan was modified in or
after 2001, and, as modified * * * was recorded on 6/17/03.” Several partially
illegible documents followed this page, which supported petitioner’s claim that a
loan modification was recorded in June 2003.
In arguments regarding the burden of proof at trial, petitioner stated that the
mortgage holder was a friend of his who orally agreed to allow him to accrue the
mortgage interest rather than pay it monthly. However, petitioner declined to
testify when offered the chance to explain the facts under oath. No evidence exists
which substantiates petitioner’s claims regarding accrual of mortgage interest.
Likewise, there is no evidence that any mortgage interest for 2007 was ever paid.
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[*10] Indeed, there was no evidence presented that the mortgage still existed in
2007. Considering these facts, we find that petitioner has not satisfied the burden of
proof regarding the mortgage interest and sustain respondent’s determination with
respect to the issue.
III. Section 6673 Sanctions
In his pretrial memorandum respondent stated that he “intend[ed] to file a
Motion to Impose Penalty Under I.R.C. § 6673” in response to a motion for a
protective order petitioner filed. While respondent never filed such a motion, he did
request in his response to petitioner’s motion for a protective order that we “provide
such other sanctions as * * * [we] may deem appropriate.” We denied petitioner’s
motion for a protective order at trial.
Section 6673(a)(1) authorizes the Court to require a taxpayer to pay a penalty
to the United States in an amount not to exceed $25,000 whenever it appears to the
Court that the taxpayer instituted or maintained the proceeding primarily for delay or
that the taxpayer’s position in the proceeding is frivolous or groundless. At our
discretion we decline to impose sanctions against petitioner.
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[*11] IV. Conclusion
We sustain respondent’s determinations regarding the charitable contribution,
mortgage interest, and utility expense deductions petitioner claimed on the
Schedules C. However, we choose not to impose sanctions against petitioner under
section 6673.
To reflect the foregoing,
Decision will be entered
for respondent.