T.C. Summary Opinion 2016-66
UNITED STATES TAX COURT
JAMES CLEMENT POWELL AND LUCY HAMRICK POWELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9562-14S. Filed October 6, 2016.
James Clement Powell and Lucy Hamrick Powell, pro se.
Timothy B. Heavner and Matthew S. Reddington, for respondent.
SUMMARY OPINION
WELLS, 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. All section
references are to the Internal Revenue Code (Code) in effect for the years in issue,
-2-
and all Rule references are to the Tax Court Rules of Practice and Procedure,
unless otherwise indicated. All dollar amounts are rounded to the nearest dollar.
Respondent determined a deficiency of $11,611 against petitioners for tax
year 2010. Petitioners timely filed their petition on April 29, 2014.
Background
Petitioners timely filed a Form 1040, U.S. Individual Income Tax Return,
for the taxable year 2010. Petitioners also timely filed a 2010 Form 1120, U.S.
Corporation Income Tax Return, for WPL, Inc. (WPL), an S corporation wholly
owned by petitioner husband. On December 9, 2013, petitioners submitted a Form
1040X, Amended U.S. Individual Income Tax Return, for 2010 showing a tax
overpayment of $13,873. Respondent did not accept the Form 1040X for filing
and made no adjustments to petitioners’ tax liability as a result of its submission.
Instead, on February 3, 2014, respondent mailed petitioners a statutory notice of
deficiency determining a deficiency in income tax of $11,611. Petitioners dispute
the entire $11,611 deficiency and demand the overpayment reported in their
amended return. Additionally, petitioners seek $40,000 in damages from
respondent under section 7433.
-3-
I. Notice of Deficiency
In the notice of deficiency, respondent disallowed a WPL vehicle expense
deduction of $19,687; a WPL employee benefit expense deduction of $5,832; and
a loss carryforward deduction of $33,006 claimed on Schedule C, Profit or Loss
From Business. Respondent also reduced petitioners’ self-employment tax, and
the related self-employment tax deduction, by excluding WPL’s income from the
self-employment tax calculation. As a result of these adjustments, respondent also
disallowed the “Make work pay/government retiree” credit petitioners claimed on
their 2010 return.
II. WPL
WPL is engaged in petroleum acquisitions and sales. WPL’s workforce
includes petitioner husband, two consultants, one full-time employee, and
petitioner wife, who keeps the books. Petitioner husband kept a daily logbook
during 2010 showing all of WPL’s activities with respect to its customers, only
some of which involved travel. During 2010 WPL workers traveled to several
States for various business purposes. The relevant logbook entries show dates,
customer names, the purpose or description of the work, hours spent and billed,
and miles driven. Petitioners reported on an attachment to the return that 39,375
business miles were driven during 2010.
-4-
Roughly two-thirds of the entries listing mileage specify the city traveled to
in the “purpose or description of work” section. The remaining entries either
include the State traveled to or do not list any location. All mileage entries are
multiples of 25. For a trip totaling 501.2 miles, for example, petitioner would
have recorded 500 miles. There is also an entry for each month showing the sum
of miles driven for marketing, client development, and bank errands. Petitioner
husband recorded the miles driven for each marketing and client development
event, but the logbook does not break down the dates, locations, or mileage of
each event. Nor does the entry separate the marketing and development entries
from the banking entries. The banking entries were determined by estimating the
number of WPL workers’ trips to the bank for the month.
WPL also deducted $5,832 in employee benefits. The notice of deficiency
does not explain why the deduction was disallowed. Petitioner husband testified
that there was never an explanation given for why it was denied. Petitioners
believed the deduction was denied on a legal basis, rather than a factual basis.
Petitioners litigated their 2008 and 2009 tax years before the Tax Court, and the
opinion issued in that case discusses the deductibility of WPL’s employee benefits
as a legal issue, not a factual one. See Powell v. Commissioner, T.C. Memo.
2014-235, at *12-*13 (discussing section 162(l) and Rev. Rul. 91-26, 1991-1 C.B.
-5-
184, 185-186 to determine whether petitioners’ inclusion of the benefit amount in
income was required for WPL to be entitled to the deduction), aff’d in part,
vacated in part, and remanded, ___F. App’x ___, 117 A.F.T.R.2d (RIA) 2016-
2089 (4th Cir. June 14, 2016). On appeal of that case, respondent conceded,
among other things, the entitlement to the health insurance deduction of $5,832 for
each of the two tax years. Powell v. Commissioner, 117 A.F.T.R.2d (RIA)
2016-2089. In the instant case, respondent’s sole contention in the pretrial
memorandum is that the expense was denied for lack of substantiation. At trial,
however, respondent echoed the previous litigation by asking whether the
employee benefits were included in petitioners’ personal income as well as in the
WPL deductions. Petitioner husband answered no and also testified that the
amount deducted was the amount paid for long-term healthcare. Petitioners
submitted into evidence a detailed list of expenses, which was filed with the
return, showing the $5,832 expense as “employee health insurance”.
III. Loss Carryforward Deduction
Petitioners claimed a loss carryforward deduction of $33,006 related to
claimed losses from the tax years 2008 and 2009. As discussed above, petitioners’
2008 and 2009 tax years were litigated before the Tax Court. See Powell v.
Commissioner, T.C. Memo. 2014-235. The final decision determined that for tax
-6-
years 2008 and 2009 petitioners had deficiencies in income tax totaling $44,545
and penalties totaling $8,908.96. Id. (order dated April 22, 2015). Petitioners
concede that their 2010 loss carryforward is determined by the 2008 and 2009
litigation, the decision from which they appealed. Respondent largely prevailed
on appeal, although a few concessions were made. Powell v. Commissioner, 117
A.F.T.R.2d (RIA) 2016-2089. The concessions, which consist of a deduction of
$5,832 for each year, an $839 increase in the basis of sold property, and a $15,000
reduction of the amount realized upon the sale of the real property, will reduce the
amounts of the deficiencies determined in the Tax Court’s decision, but will not
eliminate them.
Discussion
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). Furthermore, deductions are a matter of legislative grace, and a
taxpayer must prove his or her entitlement to a deduction. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Under section 7491(a), in certain
circumstances the burden of proof may shift from the taxpayer to the
Commissioner. Petitioners have not claimed or shown that they meet the
-7-
specifications of section 7491(a) to shift the burden of proof to respondent as to
any relevant factual issue.
I. WPL
We must determine whether WPL properly claimed its deductions for 2010
before we can determine the effect on petitioners’ return for 2010. Generally, an S
corporation shareholder determines his or her tax liability by taking into account a
pro rata share of the S corporation's income, losses, deductions, and credits. Sec.
1366(a)(1). Where a notice of deficiency includes adjustments for S corporation
items with other items, we have jurisdiction to determine the correctness of all
adjustments. See Winter v. Commissioner, 135 T.C. 238 (2010). Respondent
disallowed two expense deductions related to WPL, vehicle expenses and
employee health insurance expenses. As a result, respondent increased the
corresponding flowthrough business income that petitioners reported on their 2010
Form 1040. We now turn to the two expenses.
A. Vehicle Expenses
Taxpayers are required to substantiate expenses underlying each claimed
deduction by maintaining records sufficient to establish the amount of the expense
and to enable the Commissioner to determine the correct tax liability. Sec. 6001;
Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Certain expenses specified in
-8-
section 274, such as vehicle expenses, are subject to strict substantiation rules.
Secs. 274(d)(4), 280F(d)(4)(A)(i). In deducting vehicle expenses, in lieu of
calculating expenses using actual expenditures, a taxpayer may use a standard
mileage rate as established by the Internal Revenue Service (IRS). Kavuma v.
Commissioner, T.C. Memo. 2016-101, at *19; sec. 1.274-5(j)(2), Income Tax
Regs. To meet these strict substantiation rules, for each claimed expense a
taxpayer must substantiate, by adequate records or by sufficient evidence
corroborating the taxpayer’s own statement, (1) the amount, (2) the time and place
of the travel or use, and (3) the business purpose. Sec. 274(d).
Petitioners claimed deductions for WPL’s vehicle expenses using the IRS
standard mileage rate. Adequate records substantiating vehicle expenses when
using the standard mileage rate generally consist of an account book, a diary, a
log, a statement of expense, trip sheets, or a similar record made at or near the time
of the expenditure or use, along with supporting documentary evidence. Sec.
1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
The degree of substantiation necessary to establish business purpose varies
depending upon the facts and circumstances of each case. Id. subdiv. (ii)(B), 50
Fed. Reg. 46018. Mileage logs, even contemporary ones, that report only the State
to which the taxpayer traveled fall short of the strict reporting requirements
-9-
because they fail to specify the location. Adams v. Commissioner, T.C. Memo.
2013-92.
Petitioners’ log book largely meets the strict substantiation rules. The
entries specify dates traveled, the number of miles driven, the city driven to, and
the client or business purpose. Respondent contends that petitioners’ logbook
entries must be estimates because the mileage numbers all end in 0 or 5. Petitioner
husband testified that the numbers were not estimated, but rather rounded. We
find petitioner to be a credible witness and believe his testimony that the miles
listed are based on actual, contemporaneous calculations of the miles driven.
Certain of the entries, however, do not amount to adequate substantiation.
The entries listing a State, rather than a specific location, for example, are too
vague to satisfy the regulations. The client and market development and banking
entries also fail to satisfy the regulations. Petitioner husband explicitly testified
that the banking entries were estimates, and we cannot untangle the client and
market development mileage from the banking mileage. Nor do we have locations
or dates for the client and market development entries, rendering them too vague
to satisfy the regulations.
Pursuant to this analysis, petitioners substantiated that during 2010 WPL
workers drove 10,725 miles. For 2010 a deduction of 50 cents was allowed for
- 10 -
each mile driven related to business. See Rev. Proc. 2009-54, sec. 2.01, 2009-51
I.R.B. 930, 930. Accordingly, petitioners’ deduction for travel is limited to
$5,363.
B. Health Insurance Expenses
WPL is entitled to deductions for health insurance benefits paid on behalf of
petitioner husband. See sec. 1372; Powell v. Commissioner, at *13; Rev. Rul. 91-
26, supra. In the instant case, respondent contends that petitioners did not provide
any evidence beyond self-serving testimony that any expense had actually been
paid. However, we have found petitioner husband to be a reliable witness, and the
reliability of his records and testimony is bolstered by the consistent treatment of
the expense throughout several tax years, as well as respondent’s previous years’
concessions. See Exxon Corp. v. Commissioner, T.C. Memo. 1993-616, 1993 WL
534017, at *59; Koufman v. Commissioner, T.C. Memo. 1976-330, 1976 WL
3510 (“The petitioner’s testimony on this issue was consistent with all the other
circumstances, and we found it to be credible and reliable.”). Accordingly, WPL
is entitled to the claimed health insurance expense deduction.
II. Carryforward Loss
Petitioners concede that the loss carryforward deduction they claimed from
the 2009 tax year is determined by their previous litigation. In the litigation, the
- 11 -
Tax Court sustained a determined deficiency for petitioners’ 2009 tax year, rather
than a loss. Powell v. Commissioner, T.C. Memo. 2014-235. Although
respondent conceded on appeal that petitioners were entitled to certain
adjustments, the amounts involved in the concessions are insufficient to change
the deficiency into a loss. See Powell v. Commissioner, 117 A.F.T.R.2d (RIA)
2016-2089. Accordingly, petitioners are not entitled to a carryforward loss
deduction for the 2010 tax year.
III. Other Adjustments
Petitioners’ filings discuss several additional adjustments in the notice of
deficiency, such as the “Make work pay/government retiree” credit, amounts for
personal exemptions, an increase in petitioners’ AGI, and the calculation of self-
employment tax and its accompanying deduction. The changes to petitioners’
adjusted gross income due to the adjustments discussed above will affect the
operation of items such as credits. Any computational issues that remain will be
adjusted and confirmed in the Rule 155 computations.
IV. Section 7433 Damages
Petitioners seek $40,000 in damages from respondent under section 7433.
Section 7433(a) provides that a taxpayer may bring a civil action for damages
against the United States for intentional, reckless, or negligent disregard of any
- 12 -
provision of the Code or any regulation promulgated under the Code by any
officer or employee of the IRS in connection with any collection of Federal tax.
Section 7433(a) further provides that the taxpayer must bring the civil action in a
District Court of the United States and that (except as provided in section 7432)
the civil action in District Court “shall be the exclusive remedy for recovering
damages resulting from such actions.” Therefore, we lack jurisdiction to hear
petitioners’ section 7433 claim. See, e.g., Powell v. Commissioner, at *20-*21;
Petito v. Commissioner, T.C. Memo. 2002-271, 2002 WL 31415493, at *7.
Any contentions we have not addressed we deem irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered under
Rule 155.