Aaron Kirman v. Commissioner, TC Memo 2011-128 , Code Sec(s) 162; 170; 274;
6662; 7491.
AARON KIRMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent .
Case Information:
Code Sec(s): 162; 170; 274;
6662; 7491
Docket: Docket No.
22461-08.
Date Issued: 06/8/2011
Judge: Opinion by WHERRY
HEADNOTE
XX.
Reference(s): Code Sec. 162 ; Code Sec. 170 ; Code Sec. 274 ; Code Sec.
6662 ; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
R found additional interest income, disallowed certain business expense
deductions and itemized deductions P
claimed on his 2005 tax return, and determined a deficiency in income tax
and an accuracy-related penalty under
sec. 6662(a), I.R.C., for P's 2005 tax year.
Held : P is liable for the deficiency to the extent decided herein.
Held, further, P is liable for the accuracy-related penalty under sec. 6662(a), I.R.C.
Counsel
Adam L. Karp and Samuel C. Landis, for petitioner.
Sarah A. Herson, for respondent.
Opinion by WHERRY
MEMORANDUM FINDINGS OF FACT AND OPINION
This case is before the Court on a petition for redetermination of an
income tax deficiency and a section
6662(a) accuracy-related penalty that respondent determined for petitioner's
2005 tax year. 1 After concessions by the parties, 2 the issues for
determination are: (1) Whether petitioner is entitled to certain deductions
claimed on Schedule C, Profit or Loss From Business; (2) whether petitioner is
entitled to a deduction claimed on Schedule A, Itemized Deductions, for
(7) petitioner is not entitled to a $40,000 deduction for self- employed
SEP, simple, and qualified plans expenses; (8) petitioner is not entitled to a
$3,228 Schedule A deduction for home mortgage interest; (9) petitioner is
entitled to an $8,170 Schedule C deduction for car and truck expenses; and (10)
petitioner is entitled to a $5,168 Schedule C deduction for meals and
entertainment expenses, computed after the 50 percent limitation. charitable
contributions; and (3) whether petitioner is liable for a section 6662(a) accuracy-related penalty.
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulated facts, with
accompanying exhibits, are incorporated herein by this reference. At the time
his petition was filed, petitioner resided in California.
During 2005 petitioner worked as a real estate agent, working at two
different agencies during the year. He began the 2005 tax year working at
Mossler, Deasy, & Doe but then transferred to Hilton & Hyland.
Petitioner hired Raul Urquiola to prepare his 2005 Form 1040, U.S.
Individual Income Tax Return. Mr. Urquiola graduated from California State
University in 1974 with a degree in accounting. Mr. Urquiola did not prepare
tax returns full time; rather, he did it “on the side”. Petitioner told Mr.
Urquiola that his files were unorganized; but Mr. Urquiola assured petitioner
that if he brought his source documentation, they would “go through it
together”. Petitioner, who had never prepared a tax return, relied entirely on
Mr. Urquiola to prepare his 2005 tax return.
Respondent received petitioner's 2005 Form 1040 on June 5, 2006. On the
attached Schedule C, petitioner reported gross receipts or sales of $608,683
and claimed total business expense deductions of $335,942. On the attached
Schedule A, petitioner claimed total itemized deductions of $38,859.
Respondent inter alia disallowed $231,445 of petitioner's claimed Schedule
C deductions and $21,197 of petitioner's claimed Schedule A deductions and on
August 19, 2008, issued a notice of deficiency showing a deficiency in income
tax of $105,889 and a section 6662(a)
accuracy-related penalty of $21,177.80 for petitioner's 2005 tax year.
Petitioner timely petitioned this Court. Trial was held on March 12, 2010, in
Los Angeles, California. The parties have conceded several issues. See supra
note 2. The remaining issues center around whether petitioner has adequately
substantiated certain deductions that he claimed on Schedules A and C of his
2005 tax return and the applicability of the
section 6662(a) accuracy-related penalty.
OPINION
I. Preliminary Evidentiary Matters At trial petitioner attempted to
introduce into evidence stipulated Exhibits 3-P through 8-P, 10-P, and 12-P,
which in the stipulations noted certain objections by respondent. Respondent
objected, and the Court reserved ruling on the admissibility of the exhibits.
We apply the Federal Rules of Evidence applicable in nonjury trials in the U.S.
District Court for the District of Columbia.
Sec. 7453; Rule 143(a); see Clough v. Commissioner, 119 T.C. 183, 188 (2002).
A. Exhibits 3-P and 4-P Exhibit 3-P is a one-page document dated February
1, 2010, entitled “Aaron B. Kirman Profit & Loss January through December
2005”. Exhibit 4-P is a 66-page document dated February 1, 2010, entitled
“Aaron B. Kirman General Ledger as of December 31, 2005”. Respondent, in the
stipulation, objected to both exhibits on the grounds of hearsay and relevancy,
and at trial on the additional ground of authentication.
Rule 801(c) of the Federal Rules of Evidence defines “Hearsay” as “a
statement, other than one made by the declarant while testifying at the trial
or hearing, offered in evidence to prove the truth of the matter asserted.”
Hearsay is generally excluded from evidence unless an exception applies. See
Fed. R. Evid. 802; Snyder v. Commissioner,
93 T.C. 529, 532 (1989).
Rule 401 of the Federal Rules of Evidence defines “Relevant evidence” as
“evidence having any tendency to make the existence of any fact that is of
consequence to the determination of the action more probable or less probable
than it would be without the evidence.”
Rule 901(a) of the Federal Rules of Evidence provides that “The requirement
of authentication or identification *** is satisfied by evidence sufficient to
support a finding that the matter in question is what its proponent claims.”
Rule 901(b) of the Federal Rules of Evidence sets forth a nonexclusive list of
“examples of authentication or identification conforming with the requirements
of [rule 901]".
We first address respondent's assertion that Exhibits 3-P and 4-P were not
properly authenticated. In the stipulation, the parties stipulated that “all
exhibits referred to herein and attached hereto may be accepted as authentic
and are incorporated in this stipulation and made a part hereof; provided,
however, that either party has the right to object to the admission of any such
facts and exhibits in evidence on the grounds of materiality and relevancy”.
Therefore, we find that respondent has conceded the authenticity of all the
stipulated exhibits.
We now turn to respondent's hearsay objection. We find that Exhibits 3-P
and 4-P are hearsay. We have not found an applicable exception to the hearsay
rule, nor has petitioner advanced one. Petitioner might conceive that Exhibit
4-P is a record of his regularly conducted activities. However, because Exhibit
4-P was not made “at or near the time” the expenses listed on Exhibit 4-P were
allegedly incurred, it does not fall within the exception to hearsay for
records of regularly conducted activities. See Fed. R. Evid. 803(6).
Finally, we look to see whether rule 1006 of the Federal Rules of Evidence,
which provides that the contents of voluminous writings that cannot
conveniently be examined in court may be presented in the form of a chart,
summary, or calculation, is grounds for admitting either exhibit. We find that
rule 1006 does not justify the admission of this evidence. Petitioner provided
no information about who created either exhibit or when either was created. He
further provided no information about the sources of all of the amounts listed
in Exhibit 3-P. While we can ascertain that most of the amounts listed in
Exhibit 4-P came from Exhibits 5-P and 6-P, there is information in Exhibit 4-P
such as payee names that we do not know the source of. Additionally, Exhibit
4-P is a breakdown of petitioner's expenses, yet petitioner never provided
information as to how he categorized each expense. Accordingly, we sustain
respondent's objections to Exhibits 3-P and 4-P.
B. Exhibits 5-P, 6-P, 7-P, and 8-P
Exhibit 5-P is copies of petitioner's monthly American Express credit card
statements for January 3 through December 18, 2005. Exhibit 6-P is copies of
petitioner's monthly bank statements for a Platinum Checking Account at
Washington Mutual Bank for December 21, 2004, through December 20, 2005.
Exhibit 7-P is copies of petitioner's monthly bank statements for a Gold
Overdraft Line of Credit Checking Account at Washington Mutual Bank for December
8, 2004, through December 7, 2005. Exhibit 8- P is copies of petitioner's
monthly bank statements for a Portfolio Management Account with Wells Fargo for
January 1 through December 31, 2005.
Respondent objected to Exhibits 5-P through 8-P on the grounds of hearsay,
relevancy, and authentication. As discussed above, we find that respondent has
conceded the authenticity of the disputed exhibits. All four exhibits are
relevant because they tend to make the issue of whether petitioner incurred and
paid deductible expenses more or less likely.
With regard to the hearsay objection, respondent asserts that the exhibits
do not fit within rule 803(6) of the Federal Rules of Evidence because
petitioner has not provided declarations or certifications that the four
exhibits meet the requirements of that rule.
Rule 803(6) of the Federal Rules of Evidence is a hearsay exception for
records of regularly conducted activity. Pursuant to rule 803(6), the following
are not excluded on the basis of hearsay:
A memorandum, report, record, or data compilation, in any form, of acts,
events, conditions, opinions, or diagnoses, made at or near the time by, or
from information transmitted by, a person with knowledge, if kept in the course
of a regularly conducted business activity, and if it was the regular practice
of that business activity to make the memorandum, report, record or data
compilation, all as shown by the testimony of the custodian or other qualified
witness, or by certification that complies with Rule 902(11), 902(12), or a
statute permitting certification *** Under rules 902(11) and (12) of the
Federal Rules of Evidence, a certification includes a written declaration of a
custodian or other qualified person certifying that a record
(A) was made at or near the time of the occurrence of the matters set forth
by, or from information transmitted by, a person with knowledge of those
matters;
(B) was kept in the course of the regularly conducted activity; and
(C) was made by the regularly conducted activity as a regular practice.
Petitioner did not provide any declarations or certifications that Exhibits
5-P through 8-P meet the requirements of rule 803(6) of the Federal Rules of
Evidence. Consequently, respondent was never afforded a fair opportunity to
challenge them and the underlying exhibits. We recognize that in Oglesby v.
Commissioner, T.C. Memo. 2011-93 [TC
Memo 2011-93], we held that the business records exception was satisfied when
the taxpayer established through testimony that receipts from a maintenance
shop should be considered the taxpayer's own business records. In Oglesby, we
held it irrelevant that a representative from the maintenance shop failed to
build a foundation for the receipts. Here, because we find that rule 807 of the
Federal Rules of Evidence provides a basis for admitting Exhibits 5-P through
8-P, we need not reach a decision as to whether Oglesby and the cases cited
therein could potentially apply in this case. We note that petitioner did not
testify regarding the documents or his business records, unlike the taxpayer in
Oglesby.
Under rule 807 of the Federal Rules of Evidence, hearsay not covered by the
exceptions in rules 803 or 804 of the Federal Rules of Evidence, but having
equivalent circumstantial guaranties of trustworthiness, is not excluded by
rule 802 of the Federal Rules of Evidence if the court determines that (A) the
statement is offered as evidence of a material fact; (B) the statement is more
probative on the point for which it is offered than any other evidence which
the proponent can procure through reasonable efforts; and (C) the general
purposes of *** [the Federal Rules of Evidence] and the interests of justice
will best be served by admission of the statement into evidence. *** Rule
801(a) of the Federal Rules of Evidence defines “statement” as "(1) an oral
or written assertion or (2) nonverbal conduct of a person, if it is intended by
the person as an assertion.” As Exhibits 5-P through 8-P are written
assertions, they are statements within the meaning of rule 807 of the Federal
Rules of Evidence.
We find that rule 807 provides a sound basis for admitting these documents.
3 We are convinced that the exhibits possess circumstantial guaranties of
trustworthiness equivalent to those of the other hearsay exceptions. According
to their dates, they were produced by financial institutions at or near the
time the event recorded occurred, are material, and are probative on the issue
of whether petitioner incurred and paid deductible expenses. Accordingly, we
admit Exhibits 5-P through 8-P into See Karme v. Commissioner, 673 F.2d 1062, 1065 [49 AFTR 2d 82-1223] (9th
evidence. Cir. 1982) (rule 807 of the Federal Rules of Evidence authorizes a
court to admit a record into evidence so long as the record is material,
probative, and trustworthy), affg. 73
T.C. 1163 (1980); see also United States v. Linn, 880 F.2d 209, 216 (9th Cir.
1989) (the Court of Appeals for the Ninth Circuit has granted lower courts
broad discretion to decide whether a particular record is trustworthy).
C. Exhibit 10-P Exhibit 10-P is a 34-page document apparently printed from
the Internet on February 15, 2010. Each page of Exhibit 10-P contains
information such as prices and closing dates, as well as handwritten notes, for
various houses petitioner claims to have sold during 2005. Respondent objected
on grounds of hearsay and authentication. As discussed above, we find that
respondent has conceded that the exhibits were properly authenticated.
Petitioner argues that Exhibit 10-P meets the hearsay exceptions under rules
803(6), 803(8), and 807 of the Federal Rules of Evidence.
As with Exhibits 5-P through 8-P, petitioner provided no declaration or
certification that Exhibit 10-P meets the requirements of rule 803(6) of the
Federal Rules of Evidence. Accordingly, Exhibit 10-P does not meet the rule
803(6) exception for records of regularly conducted activity. Rule 803(8) of
the Federal Rules of Evidence provides an exception to the hearsay rule for:
“Records, reports, statements, or data compilations, in any form, of public
offices or agencies, setting forth (A) the activities of the office or agency”.
Petitioner has not presented any evidence to establish that the Web site from
which Exhibit 10-P was printed is that of a public office or agency, and
therefore Exhibit 10-P does not meet the exception to hearsay provided in rule
803(8) of the Federal Rules of Evidence.
We are not convinced that rule 807 of the Federal Rules of Evidence
provides a basis for admitting Exhibit 10-P. Exhibit 10-P contains handwritten
notes that petitioner never even attempted to explain to the Court, and the Web
site from which it was printed is not generally accessible absent registration
and payment of a fee. And while Exhibit 10-P does contain prices of certain
properties petitioner sold, a price is not proof of actual payment or even who
was paid a commission upon sale of the property. Accordingly, we sustain
respondent's objection that Exhibit 10-P is hearsay that does not fit within an
exception. 4
Even though we have found that Exhibit 10-P constitutes hearsay, we realize
that some of the information in Exhibit 10-P can be verified and confirmed
through other publicly available sources such as county government recording
and assessment records, various real estate listing services, and news media
reports. Therefore, we will, to the extent possible, take judicial notice that
certain properties were sold for certain prices and on certain dates. See Fed.
R. Evid. 201(b) (matters may be so capable of verification by resort to sources
whose accuracy cannot reasonably be questioned as to be beyond reasonable
dispute and hence proper subjects of judicial notice).
D. Exhibit 12-P
Exhibit 12-P is a 25-page document consisting of third-party declarations
and invoices. Exhibit 12-P contains 12 declarations, 3 from witnesses and 9
from nonwitnesses. Respondent objected to the declarations on the grounds of
hearsay that he was prejudiced because he did not have an opportunity to
cross-examine the declarants and that petitioner made no showing that the
declarants were unavailable. See Fed. R. Evid. 804, 806. The declarations from
the three witnesses follow their trial testimony and add no new evidence to the
record. With regard to the additional declarations, respondent was denied the
chance to cross-examine those witnesses, and petitioner provided no evidence
that any of the declarants was unavailable. Additionally, Exhibit 12-P was not
provided to respondent within 14 days of trial. Accordingly, we sustain
respondent's objections to the declarations.
Page 11 of Exhibit 12-P is a declaration of Michael J Park, and pages 12
through 22 are invoices of “M.J. PARK GENERAL CONTRACTOR/RESIDENTIAL INSPECTION
SERVICE”. Petitioner requested that the Court admit pages 11 through 22 under
the business records exception to hearsay, asserting that page 11 of Exhibit
12-P meets the declaration or certification requirement of rule 803(6) of the
Federal Rules of Evidence because it was signed and dated. We are not persuaded
by petitioner that signing and dating something satisfies rule 803(6) of the
Federal Rules of Evidence. Accordingly, we sustain respondent's objection.
II. Burden of Proof In general, the Commissioner's determination of a
taxpayer's tax liability is presumed correct, and the taxpayer bears the burden
of proving that the Commissioner's determination is improper. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115
[12 AFTR 1456] (1933). Pursuant to
section 7491(a), the burden of proof as to factual matters shifts to the
Commissioner under certain circumstances. Petitioner has neither alleged
that section 7491(a) applies nor
established his compliance with the substantiation and recordkeeping
requirements. See sec. 7491(a)(2)(A) and
(B). Petitioner therefore bears the burden of proof.
This case revolves around certain claimed deductions on Schedules A and C
of petitioner's 2005 tax return. Deductions are a matter of legislative grace,
and taxpayers bear the burden of proving entitlement to any claimed deduction.
Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992). Taxpayers are required to
identify each deduction available and show that they have met all requirements
as well as to keep books or records to substantiate all claimed
deductions. Sec. 6001; Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974).
Under Cohan v. Commissioner, 39 F.2d
540, 543-544 [8 AFTR 10552] (2d Cir. 1930), if a taxpayer claims a deduction
but cannot fully substantiate it, the Court, subject to certain exceptions, may
approximate the allowable amount, bearing heavily against the taxpayer whose
inexactitude in substantiating the amount of the deduction is of his own
making. However, in order for the Court to estimate the amount of a deduction,
the Court must have some basis upon which an estimate may be made. Vanicek v.
Commissioner, 85 T.C. 731, 742-743
(1985). Without such a basis, any allowance would amount to unguided largesse.
Williams v. United States, 245 F.2d 559,
560-561 [51 AFTR 594] (5th Cir. 1957).
III. Whether Petitioner Is Entitled to Certain Expense Deductions Claimed
on Schedule C After the parties' concessions, the remaining issues relating to
expense deductions claimed on Schedule C are: (1) Whether petitioner is
entitled to deduct $7,665 for travel expenses in addition to $1,200 already
conceded by respondent;
(2) whether petitioner is entitled to deduct $5,750 for insurance
(other than health) expenses in addition to $1,750 already conceded by
respondent; (3) whether petitioner is entitled to deduct $90,781 for
commissions and fees expenses in addition to $55,177 already conceded by
respondent; (4) whether petitioner is entitled to deduct $13,750 for
advertising expenses; and (5) whether petitioner is entitled to deduct $133,500
for repairs and maintenance expenses.
Section 162(a) authorizes a
deduction for “all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business”. A trade or business
expense is ordinary for purposes of
section 162 if it is normal or customary within a particular trade,
business, or industry and is necessary if it is appropriate and helpful for the
development of the business. Commissioner v. Heininger, 320 U.S. 467, 471 [31 AFTR 783] (1943);
Deputy v. du Pont, 308 U.S. 488, 495 [23
AFTR 808] (1940).
A. Travel Expenses
On his 2005 Schedule C petitioner claimed an $8,865 deduction for travel
expenses, but he now contends he should have claimed $11,092. Respondent
conceded that petitioner was entitled to a $1,200 deduction for travel expenses
he incurred on a trip to Las Vegas. Petitioner testified that in 2005 he
traveled to Brazil, Sydney, and London on business matters and to Greece for
personal matters. He spent 12 days in Brazil, 5 days in Sydney, and 2 days in
London. Petitioner asserts that his trip to Brazil was 70 percent business and
his trip to London 100 percent business; and while he first claimed his trip to
Sydney was 100 percent business, he later acknowledged that he also did
sightseeing there.
A deduction is allowed for ordinary and necessary travel expenses incurred
while away from home in the pursuit of a trade or business. Sec. 162(a)(2); see Bruns v.
Commissioner, T.C. Memo. 2009-168 [TC
Memo 2009-168]. If a taxpayer travels to a destination at which he engages in
both business and personal activities, the travel expenses to and from the
destination are deductible only if the trip is related primarily to the
taxpayer's trade or business. Sec.
1.162-2(b)(1), Income Tax Regs.
In order to deduct travel expenses, taxpayers must not only satisfy the
general requirements of section 162;
they must also satisfy the strict substantiation requirements of section 274(d). No deduction is allowed for
expenses incurred for travel away from the taxpayer's home (including meals and
lodging) unless the taxpayer substantiates, by adequate records or by
sufficient evidence corroborating the taxpayer's own statement, each of the
following elements: (1) The amount of each separate expenditure;
(2) the dates of departure and return and the number of days spent on
business; (3) the place of destination by name of city or town; and (4) the
business reason or expected business benefit from the travel. Sec. 274(d);
, sec. 1.274-5T(b)(2), (c), Temporary Income Tax Regs., 50 Fed. Reg.
46014, 46016 (Nov. 6, 1985).
Additionally, for foreign travel,
section 274(c)(1) generally disallows a deduction for the portion of the
foreign travel expenses that is not allocable to the income-producing activity.
See sec. 1.274-4(f), Income Tax
Regs. Section 274(c)(1) does not apply
if the travel does not exceed 1 week or the portion of the time of travel outside
the United States which is not attributable to the pursuit of the taxpayer's
trade or business is less than 25 percent of the total time on such The Cohan
doctrine cannot be used to estimate a travel. deduction for travel expenses.
Schladweiler v. Commissioner, T.C. Memo.
2000-351 [TC Memo 2000-351], affd. 28
Fed. Appx. 602 [89 AFTR 2d 2002-820] (8th Cir. 2002); sec. 1.274-5T(a), Temporary Income Tax Regs.,
50 Fed. Reg. 46014 (Nov. 6, 1985).
Petitioner never provided evidence to establish the dates he departed and
returned or the cities in Brazil he visited. Further, while he testified as to
his alleged business reasons for each trip, he never provided any documentary
evidence supporting his testimony. Even if the Court were to admit Exhibit 4-P
into evidence, it does not contain the necessary information including the
business purpose behind each expense or the city petitioner was in when each
expense was incurred. Because of these deficiencies, petitioner has not met his
burden of proof. We sustain respondent's determination and hold that petitioner
is not entitled to a greater deduction for travel expenses than that already
conceded by respondent.
B. Insurance (Other Than Health) Expenses On Schedule C, petitioner claimed
a $7,500 deduction for insurance (other than health) expenses. Mr. Urquiola
arrived at $7,500 on the basis of what petitioner told him; he does not recall
seeing a bill or a receipt. Respondent conceded that petitioner is entitled to
a $1,750 deduction for insurance (other than health) expenses. 5
Petitioner's claimed insurance expenses were for “errors and omissions”
insurance. The two real estate agencies petitioner worked for during 2005 had
different errors and omissions insurance policies. Hilton & Hyland required
agents to pay a flat fee of $1,750 for the year no matter how many houses they
sold. Even though petitioner worked only part of the year at Hilton &
Hyland, the $1,750 fee was not prorated. Respondent's concession that
petitioner was entitled to a $1,750 deduction for insurance expenses was based
on petitioner's payment to Hilton & Hyland for errors and omissions
insurance.
Mossler, Deasy, & Doe charged $250 per transaction for errors and
omissions insurance. Petitioner did not write a check or hand over cash each
time he sold a house; rather, each time he sold a house, the $250 was paid out
of escrow.
From the record, petitioner's argument appears to be that he sold 12 houses
while working at Mossler, Deasy, & Doe, that he paid $3,000 for errors and
omissions insurance on account of these 12 houses, and therefore that he is
entitled to a $3,000 deduction. However, petitioner never introduced
documentation of Mossler, Deasy, & Doe's policy regarding errors and
omissions insurance. Further, even if we were to admit Exhibit 10-P, because it
contains no proof of payment it does not, by itself, substantiate his claimed
deduction.
Most importantly, petitioner claims that he has no proof of payment because
the $250 per transaction was paid directly from escrow before he received his
commission. Petitioner never provided documentation establishing this policy.
In any event, if $250 was paid directly out of escrow for errors and omissions
insurance before petitioner received his commission check, petitioner would
need to establish that he included $250 per sale in his gross income. He did
not do this. If petitioner never included these amounts in gross income, he
would not be entitled to an offsetting deduction. Therefore, we sustain
respondent's determination on this issue and hold that petitioner is not
entitled to a greater deduction for insurance (other than health) expenses than
that allowed by respondent. 6
C. Commissions and Fees Expenses
On his 2005 Schedule C, petitioner claimed a $55,440 deduction for
commissions and fees expenses. Mr. Urquiola testified that he arrived at
$55,440 on the basis of handwritten receipts provided by petitioner. Respondent
conceded that petitioner is entitled to a deduction of $55,177 for commissions
and fees expenses. Petitioner now claims he is entitled to a $145,958 deduction
for commissions and fees expenses, a $90,781 increase from $55,177 conceded by
respondent.
Generally, in a real estate transaction a contract is signed with a
specified commission; and when the property is sold, the selling agent and the
buying agent split the commission in a predetermined manner. Further, agents
will sometimes split their commission with other agents who assisted them with
the listing or referred the property to them. Petitioner testified that he paid
approximately 30 percent of his commission in referral fees. Additionally, the
real estate agency receives an override of the agent's commission, in this
instance 20 percent.
The record does not reveal exactly how petitioner handled his commissions.
Petitioner testified about four specific houses he sold in 2005. The first was
15560 Woodvale Road, from the sale of which petitioner made a commission of
$44,000, keeping $17,600 and paying $26,400 to other agents. On the second,
1151 Maybrook Drive, the total commission was allegedly $60,000, of which
petitioner kept $24,000 and paid $36,000 to other agents. On the third, 11535
Rochester Avenue No. 301, the total commission was $16,975, of which petitioner
claimed he kept $6,790 and paid $10,185 to other agents. On the fourth, 1900
Westholme Avenue, the total commission was $36,878, of which petitioner
testified he kept $14,751 and paid $22,127 to other agents. 7
However, the record is not clear whether 1900 Westholme Avenue was sold in
2005 or in 2004.
David Mimoun, another agent who worked with petitioner on the sales of the
four houses, testified that the commissions were split 50-50 between himself
and petitioner but that his father (Mr. Mimoun Senior) always took half of his
commissions and may have taken some portion of petitioner's commissions. Hence,
petitioner's and Mr. Mimoun's memories regarding how much commission petitioner
paid to other agents may in some respects contradict each other.
Petitioner relies on his self-serving and uncorroborated testimony as well
as Exhibits 9-P and 10-P to substantiate his claimed deduction. However, the
exhibits do not support petitioner's position as neither contains proof of payment.
In fact, petitioner has not provided this Court with any proof of payment and
admits that he does not have any canceled checks or other documentation.
Petitioner claims he is entitled to a $145,958 deduction. But Mr. Urquiola
testified that at most petitioner had provided to him documentation indicating
he was entitled to a deduction of $55,440.
If a taxpayer establishes a deductible expense but is unable to
substantiate the precise amount, we may, after “bearing heavily *** upon the
taxpayer whose inexactitude is of his own making”, estimate the amount,
provided we are convinced that the taxpayer incurred such an expense and we
have a basis upon which Cohan v. Commissioner, 39 F.2d at 543-544; to make an
estimate. Vanicek v. Commissioner, 85
T.C. at 743. We believe that petitioner incurred the commissions and fees
expenses originally claimed on his 2005 Schedule C and, therefore, hold that he
is entitled to a total deduction for commissions and fees expenses of $55,440,
an increase of $263 from that conceded by respondent.
D. Advertising Expenses
On his 2005 Schedule C, petitioner claimed a $12,756 deduction for gifts.
At trial and on brief, petitioner claimed that the amount expended was actually
$13,750 and that the expenditure should have been classified as an advertising
expense and not a gift expense.
The $13,750 expenditure arises from petitioner's claim that he bought two
pictures for a client in an attempt to get the client to let petitioner retain
the client's real estate listing when petitioner transferred to another real
estate agency. According to petitioner, he “bought what was some expensive art
as an alternative marketing means to be able to show my commitment to selling
the property”. Petitioner does not know whether the paintings will stay with
the house when it is sold or the client is going to take them along with other
personal property.
Advertising expenses to promote a taxpayer's trade or business are
deductible pursuant to section 162(a).
Brallier v. Commissioner, T.C. Memo. 1986-42
[¶86,042 PH Memo TC]; sec. 1.162-1(a),
Income Tax Regs. The test for deductibility is whether the taxpayer reasonably
intended that the expenditure would advertise his business. See Rodgers Dairy
Co. v. Commissioner, 14 T.C. 66 (1950).
Petitioner argues that the paintings given to his client were “not a gift
in the traditional sense [and limited to a deductible maximum amount of $25
by section 274(b)(1)], but rather a
needed advertising expense to sell the house”. Yet petitioner never established
that the paintings promoted his business or even helped sell the house. He even
acknowledged it was unclear whether the paintings would be sold with the house
or retained by his client. Even if petitioner had proven that the paintings
generated business and were therefore “advertising” expenses, petitioner has
not substantiated this deduction. Petitioner relies on his testimony and a line
in Exhibit 4-P, which was not admitted into evidence, stating that two checks
for $6,875 each, dated April 1, 2005, were paid to Scott Lurie and Craig Lurie
but does not indicate what the payment was for. Petitioner has not sufficiently
substantiated his claimed deduction, and accordingly, we sustain respondent's
determination and hold that petitioner is not entitled to an additional $13,750
deduction for advertising expenses. 8
E. Repairs and Maintenance Expenses
On his 2005 Schedule C, petitioner claimed a $57,546 deduction for repairs
and maintenance expenses. Mr. Urquiola testified that he arrived at this number
on the basis of “Ninety percent of receipts”. Later, at trial and on brief,
petitioner argued that he had incurred at least $133,500 of repairs expenses
even though petitioner's attorney, Mr. Karp, acknowledged that there “is very
little documentation to substantiate” even the $57,546 claimed as a deduction
on petitioner's tax return. Petitioner arrived at $133,500 by relying on his
memory and trial testimony as to different properties he repaired before
selling.
Petitioner testified as to the following properties and amounts: (1) 17450
Rancho Street—between $12,000 and $15,000; (2) 1151 Maybrook Drive—$10,000; (3)
527 Whiting Woods—$3,000; (4) 1061 Laguna Avenue—$3,000; (5) 15045 Sunstone
Place—$5,000; (6) 9091 Wonderland Park Avenue—$3,000; (7) 3012 Roscomare
Road—$7,000; (8) 5757 Trancas Canyon Road—$10,000; (9) 17425
Tramonto Drive—$10,000; (10) 21900 Briarbluff Street—$5,500; (11) 666
Sarbonne Road—$7,000; and (12) 5371 Vanalden Avenue-$1,000. 9 Yet petitioner
never offered any receipts or other documentary evidence as to the repairs he
allegedly made. According to petitioner, he had receipts but “lost [my] box”,
and while he allegedly paid with checks, he could not find or made no attempt
to find copies of the canceled checks.
Mr. Mimoun testified that 1151 Maybrook Drive had several problems
including the tennis courts, a pool, the driveway, and water pumps. He stated
that he contributed $10,000 to help cover the cost of the repairs and that
petitioner was required to match this amount, yet Mr. Mimoun also indicated
that the cost of the repairs was paid out of “the syndicate checkbook” and his
father “controlled the funds”. Woodvale Road was a property petitioner bought
into as an investment property for which, according to Mr. Mimoun's “best ***
knowledge”, petitioner contributed $30,000 for repairs.
Mr. Mimoun explained that two of the properties petitioner sold needed
repairs, but it is unclear who actually paid for the repairs. Petitioner did
not carry his burden of proving that he paid for the repairs, as opposed to
having the cost of the repairs taken out of his commission, or that he alone paid
for the repairs instead of splitting the cost with other agents. If the costs
were paid from his commission, the record does not explain whether he reported
the gross or the net commission as his taxable income. This shortcoming is
exacerbated by real estate agent David Kramer's testimony that it is “rare that
[we will] pay in advance” for repairs and similar things.
In total the record does establish that in order to prepare some of the
properties for sale, petitioner incurred some repairs and maintenance expenses.
The Court will not, however, allow petitioner a $133,500 deduction that is
based almost exclusively on his and Mr. Mimoun's testimony. Using our best
judgment and the record before us, we hold that petitioner is entitled to a
repairs and maintenance expenses deduction of $19,182, none of which is
attributable to the Woodvale Road property. 10 See Cohan v. Commissioner, 39
F.2d at 543-544.
IV. Whether Petitioner Is Entitled to A Deduction for Charitable
Contributions After the parties' concessions, the sole issue remaining with
regard to petitioner's claimed Schedule A deductions is whether petitioner is
entitled to a $9,850 itemized deduction for charitable contributions by cash or
check. Section 170(a)(1) allows a
deduction for a charitable contribution as defined in section 170(c) if verified under applicable
regulations. Generally, a cash contribution can be substantiated by (1) a
canceled check, (2) a receipt from the donee organization, or (3) other
reliable written records showing the name of the donee, the date of the
contribution, and the amount of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs. For a
contribution of $250 or more, a taxpayer must substantiate the contribution by
a written acknowledgment by the donee organization. 11 Sec. 170(f)(8)(A). The written
acknowledgment must include:
(i) The amount of cash and a description (but not value) of any property
other than cash contributed.
(ii) Whether the donee organization provided any goods or services in
consideration, in whole or in part, for any property described in clause (i).
(iii) A description and good faith estimate of the value of any goods or
services referred to in clause (ii) or, if such goods or services consist
solely of intangible religious benefits, a statement to that effect. Sec. 170(f)(8)(B). To be considered
contemporaneous, the written acknowledgment must be obtained by the taxpayer
before the earlier of the due date of the return, including extensions, or the
filing of the return. Sec. 170(f)(8)(C).
Petitioner testified that he donated money to the Architectural Historical
Society in “an attempt to get into the right community that” had access to
architectural homes. He claimed that the amount he donated was $7,000 or $8,000
but admitted that he could neither “remember the exact amount” nor find the
canceled check. 12
Petitioner has not met the requirements of
section 170. First, he failed to prove that the Architectural Historical
Society was an organization specified in
section 170(c). Second, he failed to adequately substantiate his claimed
charitable contribution or meet the requirements of section 170(f)(8)(A). The evidence relating
to the claimed charitable contribution is limited to petitioner's trial
testimony and is unsupported by any written substantiation in the form of
canceled checks, bank records, or receipts from the donee organization.
Petitioner urges application of the doctrine of Cohan v. Commissioner,
supra at 543-544. Under the Cohan doctrine, if a taxpayer claims a deduction
but cannot fully substantiate it, the court may approximate the allowable
amount. Here the single contribution claimed is over $250; thus by statute it
does not qualify as a section 170
charitable contribution absent a written See
sec. 170(f)(8)(A). 13 receipt from the donee.
Because petitioner failed to meet the requirements of section 170, he is not entitled to a
charitable contribution deduction. Accordingly, we sustain respondent's
adjustment with regard to this issue.
V. Section 6662 Accuracy-Related
Penalty Under section 7491(c),
respondent bears the burden of production with respect to petitioner's
liability for the section 6662(a)
penalty. This means that respondent “must come forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty.” See Higbee
v. Commissioner, 116 T.C. 438, 446
(2001).
Section 6662(a) imposes an
accuracy-related penalty of 20 percent on any underpayment that is attributable
to causes specified in subsection (b). Respondent asserts two causes justifying
the imposition of the penalty: Negligence and a substantial understatement of
income tax. Sec. 6662(b)(1) and (2). "[N]egligence” includes “any
failure to make a reasonable attempt to comply with the provisions of *** [the
Internal Revenue Code]". Sec.
6662(c). Under caselaw, “Negligence is a lack of due care or failure to do what
a reasonable and ordinarily prudent person would do under the circumstances.”
Freytag v. Commissioner, 89 T.C. 849,
887 (1987) (quoting Marcello v. Commissioner,
380 F.2d 499, 506 [19 AFTR 2d 1700] (5th Cir. 1967), affg. on this
issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299 [¶64,299 PH Memo TC]),
affd. 904 F.2d 1011 [66 AFTR 2d 90-5322] (5th Cir. 1990), affd. 501 U.S. 868 [68 AFTR 2d 91-5025] (1991).
Negligence can also include any failure by the taxpayer to keep adequate
records and to substantiate items properly.
Sec. 1.6662-3(b)(1), Income Tax Regs. A substantial understatement of
income tax is an understatement that exceeds the greater of $5,000 or 10
percent of the tax required to be shown on the return. Sec. 6662(d)(1)(A). In the light of
petitioner's failure to keep tax records and substantiate his claimed
deductions, respondent has met his burden of production with regard to the section 6662(a) accuracy-related penalty.
There is an exception to the section
6662(a) penalty when a taxpayer can demonstrate: (1) Reasonable cause for the
underpayment and (2) that the taxpayer acted in good faith with respect to the
underpayment. Sec. 6664(c)(1).
Regulations promulgated under section
6664(c) provide that the determination of reasonable cause and good faith “is
made on a case-by-case basis, taking into account all pertinent facts and
circumstances”. Sec. 1.6664-4(b)(1),
Income Tax Regs.
Reliance on professional advice may constitute reasonable cause and good
faith, but “it must be established that the Freytag v. Commissioner, supra at
888; reliance was reasonable.” see also United States v. Boyle, 469 U.S. 241,
251 [55 AFTR 2d 85-1535] (1985); sec.
1.6664-4(b)(1), Income Tax Regs.
In sum, 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 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 Associates, P.A. v.
Commissioner, 115 T.C. 43, 99,
affd. 299 F.3d 221 [90 AFTR 2d 2002-5442]
(3d Cir. 2002); see also Charlotte's Office Boutique, Inc. v. Commissioner, 425 F.3d 1203, 1212 [96 AFTR 2d 2005-6451]
& n.8 (9th Cir. 2005) (quoting with approval the above three-prong test),
affg. 121 T.C. 89 (2003).
Petitioner argues that he should not be held liable for the section 6662(a) penalty because “he was
reasonable and prudent [in] hiring an accountant to file his tax return”. We
analyze petitioner's claims using the three-prong test listed above. With
regard to the first prong, petitioner has failed to establish that Mr. Urquiola
was a competent professional who had sufficient expertise to justify reliance.
"[R]eliance may not be reasonable or in good faith if the taxpayer knew,
or reasonably should have known, that the advisor lacked knowledge in the
relevant aspects of Federal tax law.”
Sec. 1.6664-4(c)(1), Income Tax Regs. Petitioner hired Mr. Urquiola
because he “realized [he] was about to be out of compliance in getting [his]
2005 tax return done” and had been referred to Mr. Urquiola by his mother's
boyfriend. While Mr. Urquiola has a degree in accounting, there is no evidence
that he is a certified public accountant. Mr. Urquiola did not prepare tax
returns full time; rather, he did them “on the side”. Accordingly, we find that
petitioner has not established that his reliance on Mr. Urquiola was justified.
With regard to the second prong, petitioner must establish that he provided
necessary and accurate information with respect to all items reported on his
tax return, such that the incorrect return resulted from error on the part of
the adviser. See, e.g., Westbrook v. Commissioner, 68 F.3d 868, 881 [76 AFTR 2d 95-7397] (5th
Cir. 1995), affg. T.C. Memo. 1993-634
[1993 RIA TC Memo ¶93,634]; Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 173 (1978); Pessin v.
Commissioner, 59 T.C. 473, 489 (1972).
On the basis of the record, we cannot conclude that petitioner provided Mr.
Urquiola with all of the necessary and accurate information. For example, Mr.
Urquiola did not remember seeing a bill or receipt for petitioner's claimed
insurance expenses; petitioner did not provide him with any Forms 1099 for the
claimed commissions and fees expenses; and the documentation presented to Mr.
Urquiola regarding the claimed charitable contribution was “not 100 percent”.
Further, petitioner conceded that he was not entitled to certain of his claimed
deductions and that he was liable for tax on interest income that he had not
See supra note 2. reported on his Form 1040.
Turning to the third prong, petitioner had a duty to read his tax return to
ensure that it was correct. See Magill v. Commissioner, 70 T.C. 465, 479-480 (1978), affd. 651 F.2d 1233 [47 AFTR 2d 81-1483] (6th Cir.
1981). Unconditional reliance on a preparer or adviser does not always constitute
reasonable reliance; the taxpayer must also exercise “Diligence and prudence”.
Marine v. Commissioner, 92 T.C. 958,
992-993 (1989), affd. without published opinion 921 F.2d 280 (9th Cir. 1991).
Petitioner did not sign the original return and relied entirely on Mr.
Urquiola. In the end, reliance on his accountant does not excuse petitioner's
failure to closely examine his 2005 tax return. See Pritchett v.
Commissioner, 63 T.C. 149, 174 (1974)
(”The general rule is that the duty of filing accurate returns cannot be
avoided by placing responsibility on an agent.”). Petitioner is not permitted
to ignore his obligation to ensure that his tax return accurately reflected his
income for the 2005 tax year.
On the basis of the above, we hold that petitioner has failed to meet the
burden of proof with regard to the
section 6664(c)(1) exception. Therefore, we sustain respondent's
imposition of a section 6662(a)
accuracy-related penalty for petitioner's 2005 tax year.
The Court has considered all of petitioner's contentions, arguments,
requests, and statements. To the extent not discussed herein, we conclude that
they are meritless, moot, or irrelevant.
To reflect the foregoing, Decision will be entered under Rule 155.
1
Unless otherwise indicated, all
section references are to the Internal Revenue Code of 1986, as amended and in
effect for the year at issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
2
At the recall of this case on Mar.
8, 2010, the parties presented a stipulation of settled issues which is
incorporated by this reference. The parties later agreed to two additional oral
stipulations which were read into the record at trial on Mar. 12, 2010, and
which are also incorporated by this reference. The parties agreed to the
following: (1) Petitioner is entitled to a $1,750 Schedule C deduction for
insurance expenses; (2) petitioner is liable for income taxes on $2,301 of
interest income; (3) petitioner is not entitled to a $38,740 Schedule C
deduction for wage expenses; (4) petitioner is entitled to a $1,200 Schedule C
deduction for travel expenses; (5) petitioner is entitled to a $13,418 Schedule
C deduction for legal and professional services expenses; (6) petitioner is
entitled to a $55,177 Schedule C deduction for commissions and fees expenses;
3
Fed. R. Evid. 807 also provides
that “a statement may not be admitted under this exception unless the proponent
of it makes known to the adverse party sufficiently in advance of the trial or
hearing to provide the adverse party with a fair opportunity to prepare to meet
it, the proponent's intention to offer the statement, and the particulars of
it, including the name and address of the declarant”. Respondent did not argue
that he did not receive the stipulated exhibits in time. Further, it appears
that the exhibits were submitted at least 2 weeks before trial in accordance
with this Court's pretrial order.
4
At trial, petitioner placed
emphasis on the Web site from which Exhibit 10-P was printed, comparing a price
listed in Exhibit 10-P to a stock price, stating: “without having a witness
here to testify from the Securities or Exchange Commission or an affidavit
signed by an employee of the SEC, I believe the Court might be able to consider
evidence of the price of a stock at the time in question.” One problem with this
Court's accepting as evidence the price and sell date of houses listed in
Exhibit 10-P is that we have found conflicting information. For example, 1900
Westholme Avenue is listed in Exhibit 10-P as having been sold for $1,475,126
on Feb. 3, 2005, but other Internet sources apparently list this same property
as having been sold for $1,475,500 on Dec. 14, 2004. The discrepancies are
exacerbated by the fact that petitioner himself and not a third party prepared
the information in Exhibit 10-P.
5
Even though petitioner argues he is
entitled to his total claimed deduction of $7,500, petitioner also acknowledges
that he proved only an additional $3,000 of insurance (other than health)
expenses at trial.
6
The lack of evidence precludes the
application of the Cohan doctrine. See Cohan v. Commissioner, 39 F.2d 540, 543-544 [8 AFTR 10552] (2d Cir.
1930).
7
Petitioner claims he sold 1900
Westholme Avenue in 2005.
8
The lack of evidence precludes the
application of the Cohan doctrine. See Cohan v. Commissioner, 39 F.2d at
543-544.
9
Petitioner's testimony regarding
5757 Trancas Canyon Road and 17425 Tramonto Drive is confusing. He initially
testified he spent $10,000 in grading repairs for 5757 Trancas Canyon Road but
then retracted his testimony, correcting it by stating that he actually spent
$10,000 in grading repairs for 17425 Tramonto Drive and did not make repairs
for 5757 Trancas Canyon Road.
10
We would treat the Woodvale Road
property expenses to the extent, if any, that they have been substantiated as
an investor's capital contribution. See, e.g.,
secs. 162, 704, 1001.
We come up with $19,182 on the basis of petitioner's testimony, Mr.
Urquiola's testimony, Mr. Mimoun's testimony, and petitioner's supporting
statement to his 2005 Schedule C contained in Exhibit 1-J. The supporting
statement indicates that his originally claimed repairs and maintenance
expenses comprised painting—$8,943, landscaping—$9,894, fences—$7,340, doors
and windows—$6,990, pool maintenance and repairs—$5,922, carpet repairs—$5,128,
tile floor repairs—$3,784, and occasional labor—$9,545 for total expenses of
$57,546. This Court is persuaded that petitioner incurred some maintenance and
repairs expenses although he does not provide receipts or canceled checks. On
the basis of petitioner's testimony (including the additional amounts claimed
at trial, but excluding the claimed $30,000 Woodvale Road property expense) and
that of Mr. Mimoun regarding repairs made to specific houses, and Mr.
Urquiola's testimony that he arrived at $57,546 using “ninety percent of
receipts”, we will allow petitioner one-third of the amount listed on Schedule
C, or $19,182. In doing so we have borne heavily upon the taxpayer whose lack
of records is the principal cause of our inexactitude.
11
Separate contributions of less than
$250 are not subject to the requirements of
sec. 170(f)(8), regardless of whether the sum of the contributions made
by a taxpayer to a donee organization during a taxable year equals $250 or
more. See sec. 1.170A-13(f)(1), Income
Tax Regs.
12
While petitioner testified that he
donated money to the Architectural Historical Society, Mr. Urquiola testified
that he arrived at petitioner's claimed charitable contribution using
petitioner's statements that he gave money to churches, schools, Goodwill, the
Salvation Army, and like charities. Mr. Urquiola remembered that there was some
documentation presented to him regarding the claimed charitable contribution
but it was “not 100 percent”.
13
In order for Cohan to apply, the taxpayer
must provide reasonable evidence from which to estimate the deductible amount,
and even then the court will bear heavily against the taxpayer. Vanicek v.
Commissioner, 85 T.C. 731, 742-743
(1985). Even if Cohan were applicable, the lack of evidence with respect to the
claimed charitable contribution in this case would preclude us from even
attempting to approximate the allowable amount of the deduction.
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