T.C. Summary Opinion 2015-24
UNITED STATES TAX COURT
PADRAIC WILLIAM BURKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19391-12S. Filed March 31, 2015.
Padraic William Burke, pro se.
Julie L. Payne, Alicia H. Eyler, and My V. Vo, for respondent.
SUMMARY OPINION
PANUTHOS, Chief 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
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to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined Federal income tax deficiencies and accuracy-
related penalties as follows:
Penalty
Year Deficiency sec. 6662(a)
2007 $12,966 $2,593.20
2008 6,780 1,356.00
2009 5,893 1,178.60
After concessions, the issues for decision are: (1) whether petitioner
omitted gross income from his 2009 income tax return; (2) whether petitioner is
entitled to deductions claimed on Schedules C, Profit or Loss From Business, for
the years in issue; and (3) whether petitioner is liable for accuracy-related
penalties under section 6662(a) for the years in issue.
Background
Some of the facts have been stipulated, and we incorporate the stipulation of
facts and the stipulation of settled issues by this reference. At the time the petition
was filed, petitioner resided in the Laos People’s Democratic Republic.
During the taxable years in issue, petitioner owned and operated a land use
consulting business that helped landowners create special evaluations (similar to
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conservation easements for property taxes) in Washington and conservation
easements in Washington and Nebraska. The conservation easements were then
donated to petitioner’s own section 501(c)(3) tax-exempt organization, Northwest
Conservation Stewardship Fund. On September 12, 2012, in a stipulated decision
executed by the parties and entered by the Tax Court, it was decided that as of
January 1, 2003, Northwest Conservation Stewardship Fund was not qualified as
an organization described in section 501(c)(3) and is not exempt from taxation
under section 501(a). See Nw. Conservation Stewardship Fund v. Commissioner,
T.C. Dkt. No. 6521-11X (Sept. 12, 2012).
Petitioner had had a home office since he started his land use consulting
business in the 1980s. In 1981 petitioner set up a private office in Pioneer Square
in Seattle, Washington. Sometime in the mid-1980s Northwest Conservation
Stewardship Fund started paying some expenses including rent, phone bills, and
Internet service at the Pioneer Square office. In either 2003 or 2004 the Pioneer
Square office became the principal office of Northwest Conservation Stewardship
Fund. Petitioner continued to occasionally use the Pioneer Square, office for his
consulting business as well. Petitioner met clients related to his consulting
business at the Pioneer Square office and used the Pioneer Square office as his
business address for his consulting business for all of the years in issue. Petitioner
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met the revenue agent at the Pioneer Square office when the revenue agent
examined petitioner’s 2007, 2008, and 2009 tax returns.
Petitioner used the Pioneer Square office approximately 109 days a year.
Petitioner’s consulting business generally required him to view the clients’
property, so petitioner mainly met his clients at the clients’ property locations.
Petitioner consulted with clients at his home between 5 and 10 times a year. In
each of petitioner’s residences for the years in issue, petitioner sometimes used
some space to conduct his land use consulting business.
In 2007 and 2008 petitioner used one bedroom in a two-bedroom house as a
home office. The bedroom was approximately 300 square feet and contained a
desk, a chair, and three or four filing cabinets. The desk in this room was not
petitioner’s desk; he had another desk in the dining room alcove. There was only
about enough space in this room to get at the desk and the filing cabinets.
Petitioner’s home in 2007 and 2008 was approximately 1,800 square feet.
In 2009 petitioner lived at two different homes. From January through June
2009 petitioner lived on Country Club Road. The Country Club Road house had
three bedrooms and a basement. From July through December 2009 petitioner
lived in Lynnwood. The Lynnwood house had four bedrooms.
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In 2008 and 2009 petitioner began to develop a business in student
association development consulting in addition to his existing business in land use
consulting. This activity was conducted through an organization that petitioner
created called the U.S./Libyan Education Facilitator. In 2008 petitioner went to
Libya to help Libyan students come to the United States for postgraduate
education. Petitioner created a Web page for this business. Petitioner did not
receive any income from this activity.
While in Libya in 2008, petitioner visited some Greek and Italian ruins.
Petitioner wrote a paper about these ruins and submitted it to an international
conference on conservation in the Middle East.
Petitioner received $20,000 from Northwest Conservation Stewardship
Fund in 2009. Respondent determined that $19,308 of these proceeds were
additional Schedule C gross receipts not reported as income on petitioner’s 2009
tax return.
Petitioner reported multiple expenses on his Schedules C for the years in
issue including car and truck expenses, legal and professional expenses, office
expenses, travel expenses, other expenses, and expenses for the business use of his
home that are in dispute. Petitioner claimed on his 2007, 2008, and 2009 tax
returns that he used 25% of his home as a home office. To the extent petitioner
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presented records of his activities, said records were disorganized. Likewise,
petitioner’s testimony was quite disorganized.
Petitioner claimed deductions for the following expenses that are still in
dispute on his 2007, 2008, and 2009 Schedules C for his consulting business, and
respondent allowed the following amounts:
2007
Claimed Allowed
Car and Truck $12,653 $6,053
Legal and Professional 6,774 2,243
Office 7,750 1,039
Travel 9,975 ---
1
Travel, meals and ent. 2,337 4,232
Other 51,548 42,365
Business use of home 6,800 ---
Total 97,837 55,932
2008
Claimed Allowed
Car and Truck $13,015 $6,609
Office 9,742 ---
2
Travel 13,732 6,422
Other 9,191 1,832
Business use of home 850 ---
Total 46,530 14,863
2009
Claimed Allowed
Car and Truck $5,710 $3,338
Office 14,734 ---
Other 6,894 4,654
Business use of home 5,698 ---
Total 33,036 7,992
1
Petitioner claimed on his 2007 tax return $9,975 for travel expenses and $2,337 for meals and
entertainment expenses. Respondent allowed $4,232 of travel and meals and entertainment expenses.
2
The travel expenses respondent disallowed for 2008 are related to petitioner’s travel to Libya.
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Discussion
In general, the Commissioner’s determination set forth in a notice of
deficiency is presumed correct,1 and the taxpayer bears the burden of proving that
the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Pursuant to section 7491(a), the burden of proof as to factual matters
shifts to the Commissioner under certain circumstances. Petitioner did not allege
or otherwise show that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B).
Therefore, petitioner bears the burden of proof. See Rule 142(a).
A taxpayer must substantiate amounts claimed as deductions by maintaining
the records necessary to establish he or she is entitled to the deductions. Sec.
6001. Section 162(a) provides a deduction for certain business-related expenses.
To qualify for the deduction under section 162(a), “an item must (1) be ‘paid or
incurred during the taxable year,’ (2) be for ‘carrying on any trade or business,’ (3)
be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.”
Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971); Deputy v.
du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense must
relate to a transaction “of common or frequent occurrence in the type of business
1
To the extent respondent determined omitted income, the presumption of
correctness does not play any role in our decision. See the discussion relating to
Schedule C gross receipts, infra pp. 8-9.
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involved”). Whether an expense is ordinary is determined by time, place, and
circumstance. Welch v. Helvering, 290 U.S. at 113-114.
Section 274(d) applies to certain business expenses including, among other
things, expenses for gifts, listed property, and travel (including meals and lodging
while away from home). To substantiate travel expenses, a taxpayer must
maintain adequate records or present corroborative evidence of his own statement
to show the following: (1) the amount of each travel expense; (2) the time and
place of travel; and (3) the business purpose for travel. Sec. 1.274-5T(b)(2),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
I. Schedule C Gross Receipts--2009
On February 10, 2014, respondent filed his first request for admissions. The
request for admissions included the statements “Petitioner reported $38,500.00 in
Schedule C1 Gross receipts for taxable year 2009.” and “Petitioner had Schedule
C1 Gross receipts of $57,808 for taxable year 2009.” Petitioner admitted both of
these facts in his response to requests for admission filed on March 10, 2014.
Under Rule 90(f), the facts petitioner admitted in the response to requests for
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admission are conclusively established and are so found. Therefore, respondent’s
determination of $19,308 of unreported income is sustained.2
II. Schedule C Car and Truck Expenses--2007, 2008 and 2009
Petitioner testified that he drove 470 miles3 from Chelan to Bainbridge
Island, Washington, and back 23 to 25 times in 2007. The business mileage rate in
2007 was 48.5 cents per mile. Rev. Proc. 2006-49, sec. 2, 2006-2 C.B. 936, 937.
If petitioner drove 470 miles 25 times in 2007, his car and truck expense using the
standard mileage rate would be $5,699. Respondent has allowed a deduction of
$6,053 for car and truck expenses for 2007. Respondent estimated the business
mileage using petitioner’s calendar and allowing petitioner the standard mileage
2
Even without this admission, respondent’s determination in this regard
would be sustained. Petitioner claimed that the additional gross receipts were
actually loan repayments. To support this position petitioner provided three
checks totaling $20,000. The memo section of two of the checks stated that the
checks were for repayment of loans. Petitioner also presented an unsigned copy of
the Form 990 Return of Organization Exempt From Income Tax, for Northwest
Conservation Stewardship Fund for 2009. The Form 990 showed that the loan
from petitioner had increased during 2009. In addition, the Form 990 showed that
there was a written agreement for this loan. Petitioner did not produce a copy of
this loan agreement. By his own admission, petitioner did not report any interest
income from a loan to Northwest Conservation Stewardship Fund. We would not
conclude on the basis of this record that the payments from Northwest
Conservation Stewardship Fund were repayments of a loan.
The Court makes no conclusion regarding the actual distance between
3
Chelan and Bainbridge Island, Washington.
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rate. Petitioner has failed to establish that he is entitled to a deduction for car and
truck expenses based on mileage greater than the amount respondent allowed.
Petitioner also provided a list of ferry expenses totaling $4,551. These
ferry expenses were not included in the amounts respondent allowed because those
amounts were calculated purely on the basis of estimated mileage petitioner
traveled. We are satisfied that petitioner has met the strict substantiation
requirements of section 274(d) for the ferry expenses by providing a combination
of testimony and a list of amounts charged to his credit card by WS Ferries. The
Court sustains respondent’s disallowance of the deduction for car and truck
expenses greater than $10,604 for 2007.4
Petitioner did not attempt to substantiate his car and truck expenses for 2008
or 2009 or otherwise provide evidence disputing respondent’s determinations for
those years. Accordingly, the disallowed amounts for car and truck expenses for
2008 and 2009 are deemed conceded by petitioner. See Rule 149(b).
III. Schedule C Legal and Professional Expenses--2007
Other than providing some evidence of legal and professional expenses
related to a settled issue, petitioner did not substantiate his legal and professional
expenses for 2007 or otherwise provide evidence disputing respondent’s
4
$6,053 allowed by respondent + $4,551 of ferry expenses = $10,604.
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determination for 2007.5 Accordingly, the disallowed amounts for legal and
professional expenses for 2007 are deemed conceded by petitioner. See id.
IV. Schedule C Office Expenses--2007, 2008 and 2009
Petitioner did not substantiate his office expenses for 2007, 2008, or 2009
or otherwise provide evidence disputing respondent’s determinations for those
years. Accordingly, the disallowed amounts for office expenses for 2007, 2008
and 2009 are deemed conceded by petitioner. See id.
V. Schedule C Travel and Meals and Entertainment Expenses--2007
Petitioner did not substantiate his travel and meals and entertainment
expenses for 2007 or otherwise provide evidence disputing respondent’s
determinations for 2007. Accordingly, the disallowed amounts for travel and
meals and entertainment expenses in 2007 are deemed conceded by petitioner.
See id.
VI. Schedule C Travel Expenses--2008
The travel expenses respondent disallowed for 2008 relate to petitioner’s
travel to Libya. Petitioner engaged in two activities in Libya which could
potentially permit part or all of his expenses to be deductible as ordinary and
5
The legal and professional expenses related to the settled issue are not
deductible on petitioner’s Schedule C because petitioner agreed to capitalize them.
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necessary business expenses under section 162. First, in 2008 and 2009 petitioner
began to develop a business in student association development consulting. In
2008 petitioner traveled to Libya to help Libyan students come to the United
States for postgraduate education. Second, petitioner appears to argue that the
travel expenses should be deductible as an ordinary and necessary expense of his
land use consulting business because he wrote a paper about some ruins that he
visited in Libya.
A. Student Association Development Consulting Business
First we analyze whether the expenses for the travel to Libya are deductible
because petitioner was developing a business in student association development
consulting. Section 162(a) allows a deduction for ordinary and necessary
expenses incurred in “carrying on any trade or business.” The phrase “carrying on
any trade or business” means that a taxpayer may take advantage of the provision
only for an operational existing business. Pino v. Commissioner, T.C. Memo.
1987-28. Generally, preoperational expenses are not deductible under section
162(a). Id. Petitioner did not receive any income from student association
development consulting. There are no facts in the record indicating that this
activity became operational. Therefore, petitioner was not engaged in an active
trade or business of student association development consulting. The expenses for
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the travel to Libya related to the investigation or development of petitioner’s
potential student association development consulting business are not deductible
under section 162(a).
B. Land Use Consulting Business
Next we analyze whether the expenses related to the travel to Libya are
deductible with respect to petitioner’s land use consulting business. Petitioner
appears to argue that they are ordinary and necessary business expenses since he
wrote a paper about Greek and Italian ruins that he visited during the trip.
Petitioner has the burden of proving that these travel expenses are ordinary and
necessary expenses proximately related to petitioner’s trade or business. See
Mack v. Commissioner, T.C. Memo. 1976-359. Considering that petitioner’s land
use consulting business related to special valuations in Washington and
conservation easements in Washington and Nebraska, petitioner’s trip to Libya to
write a paper about Greek and Italian ruins does not appear to be related to
petitioner’s land use consulting business. Therefore, the expenses for travel to
Libya are not deductible because they are not sufficiently related to petitioner’s
land use consulting business. The Court sustains respondent’s disallowance of the
deduction for travel expenses greater than $6,422 for 2008.
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VII. Schedule C Other Expenses--2007, 2008 and 2009
Petitioner did not substantiate his other expenses for 2007, 2008, or 2009 or
otherwise provide evidence disputing respondent’s determinations for those years.
Accordingly, the disallowed amounts for other expenses for 2007, 2008, and 2009
are deemed conceded by petitioner. See Rule 149(b).
VIII. Schedule C Business Use of Home Expenses -- 2007, 2008, 2009
In general, a taxpayer is not entitled to deduct any expenses related to the
taxpayer’s use of a dwelling unit as a residence during the taxable year. See sec.
280A(a). However, expenses attributable to a home office are excepted from this
general rule if the expenses are allocable to a portion of the residence which is
exclusively used on a regular basis as the principal place of business for the
taxpayer’s trade or business. See sec. 280A(c)(1)(A). Expenses attributable to a
home office are also excepted from the general rule if the expenses are allocable to
a portion of the residence which is exclusively used on a regular basis by clients in
meeting with the taxpayer in the normal course of his trade or business. See sec.
280A(c)(1)(B).
A. Exclusively Used
Petitioner testified that he used the Pioneer Square office exclusively for
Northwest Conservation Stewardship Fund and his home office exclusively for his
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consulting business. Petitioner’s testimony was disorganized and sometimes
inconsistent. Petitioner’s testimony was also inconsistent with the filed stipulation
of facts. In addition, the activities of Northwest Conservation Stewardship Fund
and petitioner’s land use consulting business are so interrelated and intermingled
that it is unlikely that petitioner could have bifurcated the work done for one
versus the work done for the other at separate offices. We are not required to find
petitioner’s self-serving and unsupported testimony to be sufficient to prove that
petitioner used his home office exclusively for his consulting business. See
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Because the record lacks any
evidence other than petitioner’s self-serving testimony, we conclude that petitioner
has not met the burden of proving that he used his home office exclusively for his
consulting business. Petitioner is therefore not entitled to a home office deduction
under either section 280A(c)(1)(A) or (B).
B. Principal Place of Business
As an alternative reason to disallow the home office expenses because
petitioner does not meet the requirements of section 280A(c)(1)(A), we analyze
whether petitioner met his burden of proving that his home office was the
principal place of business of his land use consulting business. In deciding
whether a residence is the principal place of business, we compare the business
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use of the residence to the business use of all of the other places where business is
transacted. See Commissioner v. Soliman, 506 U.S. 168, 174 (1993). The
Supreme Court laid out a two-part test to determine whether a taxpayer’s residence
qualifies as a principal place of business: (1) the relative importance of the
activities undertaken at each business location and (2) the time spent at each
location. Id. at 175. A principal place of business also includes “a place of
business which is used by the taxpayer for the administrative or management
activities of any trade or business of the taxpayer if there is no other fixed location
of such trade or business where the taxpayer conducts substantial administrative or
management activities of such trade or business.” Sec. 280A(c)(1).
In addition to petitioner’s home office, petitioner used the Pioneer Square
office for his consulting business and met his clients at their property locations.
Petitioner did not provide any evidence as to the business activities that he
performed in his home office or the Pioneer Square office. Petitioner also did not
provide any evidence regarding the amount of time that he spent at his home office
or at his clients’ properties. Therefore, we conclude that petitioner did not meet
his burden of proving that his home office was the principal place of business for
his consulting business.
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C. Used on a Regular Basis for Meeting Clients
As an alternative reason to disallow the home office expenses under section
280(a)(1)(B), we analyze whether petitioner met his burden of proving that he
regularly used his home office to meet clients of his land use consulting business.
In order for petitioner to prove that he used his home office regularly to meet his
clients, he must prove that he met his clients in his home more often than
incidentally or occasionally. See Jackson v. Commissioner, 76 T.C. 696, 700
(1981). Petitioner consulted with clients at his home between 5 and 10 times a
year. Meeting clients in a home office only 5 or 10 times a year does not rise to
the level of regularly using a home office to meet clients. Therefore, we conclude
that petitioner used his home only occasionally to meet his clients and did not
meet clients at his home regularly.
D. Conclusion Regarding Home Office Expenses
Because we conclude that petitioner failed to establish that (1) he used his
home office exclusively for his consulting business, (2) his home office was the
principal place of business for his consulting business and (3) he regularly met
clients at his home, petitioner is not entitled to a home office deduction for 2007,
2008, or 2009. Respondent’s determinations in this regard are sustained.
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IX. Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a penalty of 20% of the portion
of an underpayment of tax attributable to the taxpayer’s negligence, disregard of
rules or regulations, or substantial understatement of income tax. “Negligence”
includes any failure to make a reasonable attempt to comply with 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” is an understatement of income tax that exceeds the greater of
10% 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.
The section 6662(a) accuracy-related penalty does not apply with respect to
any portion of an underpayment if the taxpayer proves that there was reasonable
cause for such portion and that he acted in good faith with respect thereto. Sec.
6664(c)(1). The determination of whether a taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circumstances, including the
taxpayer’s efforts to assess the proper tax liability; the knowledge and the
experience of the taxpayer; and any reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most
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important factor is the taxpayer’s effort to assess the taxpayer’s proper tax
liability. Id.
The Commissioner has the burden of production under section 7491(c) with
respect to the accuracy-related penalty under section 6662. To satisfy that burden,
the Commissioner must produce sufficient evidence showing that it is appropriate
to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent determined the accuracy-related penalty for each year was due to
negligence or a substantial understatement of income tax.6 Respondent has
satisfied his burden by producing evidence that petitioner failed to maintain
adequate books and records. Accordingly, because respondent has met his burden
of production, petitioner must come forward with persuasive evidence that the
accuracy-related penalties should not be imposed with respect to the
underpayments because he acted with reasonable cause and in good faith. See sec.
6664(c)(1); Rule 142(a); Higbee v. Commissioner, 116 T.C. at 446-447.
After respondent’s concessions and the allowance of the ferry expenses, it
6
is unclear whether any or all of petitioner’s understatements exceed the greater of
$5,000 and 10% of the tax required to be shown on the return for the applicable
year and are thus substantial understatements as defined by sec. 6662(d)(1). In
any event, we conclude that the underpayments of tax were due to negligence. See
sec. 6662(c).
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Petitioner failed to report income and to provide evidence of most of the
reported expenses on Schedules C. Petitioner has not demonstrated that he acted
with reasonable cause and in good faith with respect to the recordkeeping
requirements; therefore, the Court sustains respondent’s determinations on this
issue.
We have considered all of the parties’ arguments, and, to the extent not
addressed herein, we conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.