T.C. Memo. 1998-368
UNITED STATES TAX COURT
KENNETH AND SHEILA SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16296-97. Filed October 8, 1998.
Gregory G. McGill and Douglas G. Wymore, for petitioners.
Anne W. Durning, for respondent.
MEMORANDUM OPINION
DINAN, Special Trial Judge: This case was heard pursuant
to the provisions of section 7443A(b)(3) and Rules 180, 181, and
182.1
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable year in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
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Respondent determined a deficiency in petitioners' Federal
income tax for 1994 in the amount of $9,200.
After a concession by respondent,2 the issue remaining for
decision is whether petitioners are entitled to business expense
deductions.
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioners resided in Phoenix,
Arizona, on the date the petition was filed in this case. All
references to petitioner in the singular are to Kenneth Smith.
All of respondent's substantive adjustments in the statutory
notice of deficiency involve amounts claimed with respect to
petitioner's involvement with Tracstar Simulcasting, Inc.
(Tracstar).3 Tracstar provided live satellite transmission of
dog and horse races to various off-track betting (OTB) locations.
It installed all of the equipment at the racetracks and the OTB
locations necessary for sending and receiving the satellite
signals. The racetracks were generally located in Arizona, but
2
In the event that the Court holds that petitioners are
not entitled to the claimed Schedule C deduction for interest
paid with respect to their motor homes, respondent concedes that
petitioners are entitled to an additional sec. 163(h)(3)
qualified residence interest deduction for such interest.
3
Respondent's adjustment to petitioners' liability for
alternative minimum tax is computational and will be resolved by
the Court's holding on the issue in this case.
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the satellite signals were transmitted to OTB locations
throughout the United States.
During 1994, petitioner was the owner of record of
approximately half of Tracstar's outstanding shares of voting
stock. He served as Tracstar's vice president and as a member of
its board of directors.
Petitioner was in charge of Tracstar's day-to-day
operations. He supervised the engineering staff and their
installation of equipment in the field. He represented Tracstar
at various trade shows. He was also responsible for raising
additional capital for Tracstar's future projects.
Petitioner was often required to purchase equipment to be
installed at Tracstar's sites. In lieu of obtaining financing
for the equipment, petitioner was authorized to charge the
equipment on Tracstar's American Express Corporate credit card
(the Corporate card).4 He charged other Tracstar expenses on the
Corporate card, including his travel and meal expenses incurred
in connection with Tracstar's business. Petitioner also charged
personal expenses on the Corporate card.
Petitioner also had an American Express Gold credit card
(the Gold card) in his own name. As with the Corporate card, he
charged Tracstar's business expenses on the Gold card. During
4
Tracstar's employees David C. Lunder and Jim Pitcher
were also authorized to use the Corporate card. Their itemized
charges are stated separately from petitioner's on the monthly
statements.
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1994, petitioner Sheila Smith, and petitioners' daughter, Tara
Smith, were also authorized to use the Gold card. The monthly
statements separately identified petitioner's, Sheila's, and
Tara's charges. Each of them regularly charged personal expenses
on the Gold card. Petitioners also had numerous Visa credit
cards which were used solely for charging personal expenses.
The monthly statements for both the Corporate card and the
Gold card were forwarded to Tracstar. Kathy Parsons, Tracstar's
bookkeeper during 1994, would review each of the itemized charges
and determine whether a charge constituted a business expense of
Tracstar or a personal expense. Regardless of the nature of the
charges, Tracstar would pay the entire account balance. To the
extent that personal expenses were charged to the Corporate Card
and the Gold card by petitioner and his family, the amounts of
such personal expenses which were paid by Tracstar were debited
to an account labeled "Due from Officer Smith" (the personal
expense account).5 Tracstar's balance sheet dated December 31,
1993, shows a debit balance in the personal expense account in
the amount of $19,717.28.
In early August of 1994, Tracstar's management, including
petitioner, decided to begin issuing periodic bonuses to its
5
This accounting procedure was not followed for the Dec.
22, 1994, Gold Card statement. Rather, after making her
determination of the personal versus business nature of the
expenses, Ms. Parsons forwarded the statement to petitioner for
him to pay in full and credited the personal expense account by
the amount of the business expenses for the billing period.
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officers. The after-tax amounts of petitioner's bonus payments
were credited against the debit balance in the personal expense
account. In other words, the bonus payments were used to repay
the amount owed by petitioner to Tracstar for personal expenses
charged to the Corporate card and the Gold card. The total
amount credited to the personal expense account in this manner
during 1994 was $21,798.66. Tracstar's balance sheet dated
December 31, 1994, shows a debit balance in the personal expense
account in the amount of $20,289.68.
Petitioner ceased working for Tracstar in January 1995. He
disputes his liability for some of the charges which Ms. Parsons
characterized as personal expenses and debited to the personal
expense account. Litigation over the amounts payable by
petitioner and Tracstar was ongoing at the time of the trial in
this case.
Petitioners filed a joint Federal income tax return for
1994. Their return was prepared by Tracstar's accountant,
Michael Klecka. Petitioners reported the total of petitioner's
regular ($65,000 = 26 payments times $2,500) and bonus
compensation ($31,680 = 11 payments times $2,880) from Tracstar
as wages and other compensation on petitioners' 1994 return.
Petitioners claimed a Schedule C business loss deduction in
the amount of $19,553. In the statutory notice of deficiency,
respondent disallowed the claimed deduction. The Schedule C and
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a self-prepared statement attached to petitioners' return reports
no gross receipts and claims the following expenses:
Car and truck expenses $97
Depreciation 13,428
Motor home $8,133
Motor home 4,777
Computer 518
Interest 5,579
Mortgage 1,757
Other 3,822
Office expense 193
Rental of vehicles, machinery,
& equipment 101
Travel, meals, & entertainment 231
After 50% limitation 115
Miscellaneous expense 40
Petitioners claimed a Schedule A deduction for unreimbursed
employee business expenses in the amount of $23,494, after the
section 67(a) limitation. In the statutory notice of deficiency,
respondent disallowed the claimed deduction. Petitioners
attached a Form 2106-EZ and a self-prepared statement which list
the claimed expenses, before the limitation, as follows:
Travel expenses $862
Repairs & maintenance 2,522
Various gifts 318
Computer & office supplies 29
Telephone 169
Tracstar Simulcasting, Inc #XX-XXXXXXX 21,169
At trial and in their opening brief,6 petitioners made no
distinction between the claimed Schedule C trade or business
expenses and the claimed Schedule A employee business expenses.
Their accountant, Michael Klecka, was not called to testify as to
6
Petitioners did not submit a reply brief as they were
instructed to by the Court.
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the origins of the amounts claimed. In general, petitioner's
testimony focused on disputing Ms. Parsons' characterization of
the Corporate card and the Gold card charges. Other than the
claimed deductions related to the motor homes, petitioners have
offered no persuasive evidence in the record to account for the
amounts claimed on their 1994 return.
Respondent's determinations in the statutory notice of
deficiency are presumed to be correct, and petitioners bear the
burden of proving otherwise. Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). Moreover, deductions are strictly a
matter of legislative grace, and petitioners bear the burden of
proving their entitlement to any deductions claimed. Rule
142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
Section 162(a) allows a deduction for the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business, including the trade or business
of being an employee. Commissioner v. Flowers, 326 U.S. 465
(1946). Taxpayers are required to substantiate amounts claimed
as deductions by maintaining the records needed to establish
entitlement to the deductions claimed. Sec. 6001; sec. 1.6001-
1(a), Income Tax Regs.
Disputed Credit Card Charges
Petitioners argue that the disputed credit card charges are
Tracstar's business expenses. The disputed charges highlighted
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by petitioner total approximately $17,500. Petitioner contends
that he is entitled to deductions for these expenses because they
constitute business expenses paid by him during 1994.
To the extent that the disputed expenses are personal in
nature, they are not deductible pursuant to section 262. To the
extent that the disputed expenses are Tracstar's business
expenses, they are not deductible by petitioner because he has
failed to establish that his unreimbursed payment of Tracstar's
business expenses qualifies as an ordinary and necessary expense
of his own business under section 162(a). Deputy v. du Pont, 308
U.S. 488 (1940); Kaplan v. Commissioner, 21 T.C. 134, 146 (1953).
The litigation over the nature of the expenses will
ultimately determine who is liable for the disputed charges. If
any of the expenses are found to be business in nature,
petitioner is likely to be reimbursed by Tracstar to the extent
he paid for them with his bonus payments. We hold that
petitioner is not entitled to deductions for the disputed
expenses.
Motor Home Interest and Depreciation
In 1990, petitioners purchased a 1989 Southwind motor home.
On or about November 1, 1994, petitioners replaced the 1989
Southwind motor home with a 1994 Dynasty motor home. On their
1994 return, petitioners claimed deductions for interest and
depreciation for both of the motor homes. Petitioners did not
maintain a log of the business use of the motor homes. In their
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opening brief, petitioners take the position that only the 1989
Southwind motor home was used in connection with Tracstar's
business.
Based on the record, we find that petitioners have not
substantiated with adequate records the extent, if any, that
their motor homes were used for business purposes during 1994.
We refuse to rely on petitioner's self-serving testimony of the
alleged business use of the motor homes because it is not
corroborated by any other individual's testimony or any written
records of business use. Niedringhaus v. Commissioner, 99 T.C.
202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77
(1986). Other than petitioner's uncorroborated testimony, the
only evidence of any business use of the motor homes is several
photographs. We find these photographs unreliable because they
do not reveal when they were taken and do not identify the motor
home pictured. We hold that petitioners are not entitled to
interest and depreciation deductions for business use of their
motor homes.7
To reflect the foregoing,
Decision will be entered
under Rule 155.
7
Respondent concedes that petitioners are entitled to an
additional qualified residence interest deduction in the amount
of $5,579 for interest paid with respect to the motor homes
during 1994. See supra note 2.