Biswesh B. Mali v. Commissioner, TC Memo 2011-121 , Code
Sec(s) 162; 274; 6651; 7491.
BISWESH B. MALI, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent .
Case Information:
Code Sec(s):
162; 274; 6651; 7491
Docket: Docket
No. 18668-07.
Date Issued:
06/2/2011
Judge: Opinion by
GALE
HEADNOTE
XX.
Reference(s): Code Sec. 162 ; Code Sec. 274 ; Code Sec. 6651
; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
Counsel
Biswesh B. Mali, pro se.
Mark S. Schwarz, for respondent.
Opinion by GALE
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $3,409 and an addition
to tax under section 6651(a)(1) 1 of
$852 with respect to petitioner's 2003 Federal income tax. After concessions, 2
the issues for decision are: (1) Whether petitioner is entitled to a deduction
of $724 for meals and entertainment expenses; 3 (2) whether petitioner is
entitled to a deduction of $3,456 for car and truck expenses; (3) whether
petitioner is entitled to a deduction of $10,130 for supplies expenses; 4 and
(4) whether petitioner is liable for an addition to tax under section 6651(a)(1) of $852.
FINDINGS OF FACT
Some facts are stipulated and are so found. The stipulation
of facts, with accompanying exhibits, is incorporated herein by this reference.
At the time the petition was filed, petitioner resided in Nevada.
Petitioner was self-employed in the business of graphic
design during 2003 as a sole proprietor. As part of his business, he produced
T-shirts, promotional flyers, billboard advertisements, and television
commercials. Petitioner reported $22,290 in gross receipts on his Schedule C
from his graphic design business and claimed $22,466 in expenses. Respondent
disallowed the deduction for $17,656 of the expenses.
Petitioner conducted the graphic design business from his
residence.
Petitioner has two bachelor's degrees: One in microbiology
from a university in his native Nepal and the other in graphic design from
Midwestern State University in Texas.
Respondent concedes that petitioner was granted an extension
of time to file his 2003 Federal income tax return until August 15, 2004.
Respondent received petitioner's 2003 return on April 19, 2006.
OPINION
I. Meals and Entertainment Expenses Respondent disallowed a
deduction for meals and entertainment expenses of $1,200 as petitioner
originally claimed. Petitioner now concedes that his meals and entertainment
expenses did not exceed $724. Petitioner bears the burden of proving error in
respondent's determination. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933); see
also INDOPCO, Inc. v. Commissioner, 503
U.S. 79, 84 [69 AFTR 2d 92-694] (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 [13 AFTR 1180] (1934). 5
Furthermore, deductions are a matter of legislative grace, and the taxpayer
bears the burden of proving entitlement to any claimed deductions. Rule
142(a)(1); INDOPCO, Inc. v. Commissioner, supra at 84; New Colonial Ice Co. v.
Helvering, supra at 440.
Where a taxpayer establishes that he paid or incurred a
deductible expense but does not establish the amount of the deduction to which
he may be entitled, we may in certain circumstances estimate the amount
allowable. See Cohan v. Commissioner, 39
F.2d 540, 543-544 [8 AFTR 10552] (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). However, certain
categories of expenses, including those for meals and entertainment, must also
satisfy the strict substantiation requirements of section 274(d) in order to be deductible.
See sec. 274(d)(2); sec. 1.274-5T(b)(3), Temporary Income Tax
Regs., (1998), 1998-3 C.B. 747, 993-996 (taxpayer has the burden of proving
that he meets prerequisites for application of
sec. 7491(a)). A prerequisite to a shift in the burden of proof
under sec. 7491(a) is that the taxpayer
cooperate with reasonable requests for information and meetings. Sec. 7491(a)(2)(B). Petitioner conceded that
he did not respond to a request from respondent to meet and exchange
information before trial as required by Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). See Krohn v.
Commissioner, T.C. Memo. 2005-145 [TC
Memo 2005-145]; Lopez v. Commissioner,
T.C. Memo. 2003-142 [TC Memo 2003-142], affd. on this issue 116 Fed. Appx. 546 [94 AFTR 2d 2004-7075]
(5th Cir. 2004). 50 Fed. Reg. 46015 (Nov. 6, 1985). The Cohan rule may not be
used to estimate expenses covered by
section 274(d). See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per
curiam 412 F.2d 201 [24 AFTR 2d 69-5021]
(2d Cir. 1969); sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
To substantiate a deduction pursuant to section 274(d), the taxpayer must, through
adequate records or sufficient evidence corroborating the taxpayer's own
statement, show (1) the amount of the expense; (2) the time and place of the
expense; (3) the business purpose of the expense; and (4) the business relationship
of the taxpayer to the persons entertained (if applicable). See sec. 1.274-5T(b)(2) and (3), Temporary Income
Tax Regs., 50 Fed. Reg. 46014-46015 (Nov. 6, 1985).
Petitioner testified that he incurred meals and
entertainment expenses, both in Las Vegas, Nevada, where he resided during the
year at issue, and in California, where he claimed he traveled on business.
Besides his general and vague testimony, petitioner has not presented any
evidence that these claimed meals and entertainment expenses were for business
purposes. The only documentary evidence that petitioner presented to
substantiate meals and entertainment expenses totaling $724 was five credit
card receipts from restaurants (totaling $165) and a receipt from a bowling
alley (for $26). The restaurant receipts were all for restaurants in Las Vegas,
precluding any claim they were for meals while traveling on business. The
receipts do not indicate who was present at the meals or their business
purpose, and petitioner's general claim in his testimony does not fill that
gap. Similarly, the bowling alley receipt standing alone does not substantiate
a business purpose, nor does petitioner's testimony suggest a business purpose.
We conclude that petitioner has not substantiated the meals and entertainment
expenses he claimed and sustain respondent's disallowance of all such expenses.
II. Car and Truck Expenses Respondent disallowed
petitioner's claimed deduction for car and truck expenses of $3,456. Petitioner
testified that he used his car 80 percent for business and that he drove it to
California for business and to several client sites within Las Vegas.
Passenger automobiles are subject to the substantiation
requirements of section 274(d) because
they are listed property as defined in
section 280F(d)(4)(A)(i). For automobile expenses, taxpayers must
substantiate: (1) The amount of the expenditure;
(2) the mileage for each business use of the automobile and
the total mileage for all purposes during the taxable period; (3) the date of
the business use; and (4) the business purpose of the use. See sec. 1.274-5T(b)(6), Temporary Income Tax
Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Petitioner has not established either the total miles driven
or the miles driven for business purposes. The only documentary evidence
petitioner provided was a repair receipt for his car that does not list the
cost of the repair and a receipt for $299 for a rental car. The repair receipt
includes an odometer reading, but standing alone such a reading does not
establish total mileage driven during the year. There is no evidence regarding
the business purpose of the car rental other than petitioner's general claim
that it was for business purposes.
Petitioner has not substantiated any business use of his car
or any other car and truck expenses as required by section 274. We accordingly sustain
respondent's disallowance of all such expenses.
III. Supplies Expenses At trial petitioner claimed entitlement
to a deduction for supplies expenses of $10,130. To the extent he provided
substantiation, it reveals that he used the supplies category to denominate a
range of expenditures, including those for equipment, supplies, graphic design
production items, cellular telephone equipment and service, utilities, and
other items. Petitioner offered into evidence various invoices, receipts, and
canceled checks that he contends substantiate the expenses he claims were for
supplies. We will discuss petitioner's proffered substantiation as best we can
categorize it.
A. Equipment
Petitioner testified that he made the following purchases in
2003 for use in his graphic design business: $2,000 for a laptop, $900 for a
video camera, $1,100 for a digital camera, $800 for another laptop, and an
unspecified amount for a desk. The only documentary evidence petitioner offered
concerning the foregoing was a credit card receipt for the purchase of a video
camera for $1,072 in 2003. There is no substantiation for any of the other claimed
purchases; accordingly, no deduction for any other equipment is allowable.
See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
A video camera is listed property subject to the
substantiation requirements of section
274(d), see sec. 280F(d)(4)(A)(iii); sec. 1.280F-6T(b)(3), Temporary Income Tax
Regs., 50 Fed. Reg. 46041 (Nov. 6, 1985), with certain exceptions. 6
Petitioner's general claim that the video camera was used for business purposes
does not satisfy the substantiation requirements of section 274(d), under which the
The temporary regulation was made final on June 25, 2004,
effective for property placed in service after July 7, 2003, and is
redesignated sec. 1.280F-6(b)(3), Income
Tax Regs. See T.D. 9133, 2004-2 C.B. 25. The video camera at issue was
purchased on Jan. 31, 2003. periods of business use and overall use must be
shown. See sec. 1.274-5T(b)(6),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Therefore,
petitioner is not entitled to any additional deduction for the expenditure
represented by the receipt for the video camera. 7
B. Supplies
Petitioner offered into evidence credit card receipts for
2003 for purchases totaling $238 at Circuit City, CompUSA, and Office Max.
Petitioner claimed $590 for “office expense” on the Schedule C, which
respondent allowed. Petitioner has not shown that the amounts represented by
the foregoing credit card receipts have not already been allowed as office
expenses. He therefore is not entitled to any additional deduction for the expenditures
reflected in these receipts.
C. Graphic Design Production Expenses
Petitioner offered into evidence invoices and cancelled
checks for 2003 (including some checks with completed memo entries) that he
testified reflected payment for services related to his graphic design
business. Upon our examination of this evidence we are satisfied that
petitioner has substantiated payments for graphic-design-related items as
follows: 8
Payment
Vendor Substantiated Tee Shirts of Nevada $186 Full Color
Printing 3,186 Envelopes of Nevada 892 WOW Printing 740 Pappapetru's (diemaker)
365 Final Cut Letterpress 751 Rotocolor, Inc. (label maker) 23 United Parcel
Service, Inc. (shipping from
Rotocolor, Inc.) 31
Banner Outlet 16
Creative Eye Embroidery (cap embroiderer) 109
Discount Labels, Inc. 73
Dare to Dream Digital, Inc. 437
Pictographics 100
Rory Rehm (for banners) 90
Glenn Grayson (for audiovisual services) 650
Peter Chmiel (for DVD compressor) 300
Total 7,949
We accordingly hold that petitioner has demonstrated
entitlement to a deduction for Schedule C expenses totaling $7,949 not
previously allowed.
We further find that petitioner failed to show a business
purpose for payments during 2003 to the following individuals and
organizations: David Ban, Joey Franco, Drivers License Renewal [sic],
CCSN-Board of Regions [sic], BMG Music, Apple, Server City, Cox, Fleet, and
Indian Hills, or for a draft invoice for Jeep Window Vision. Therefore,
petitioner has not shown entitlement to a deduction for these expenditures as
trade or business expenses under section
162.
Petitioner also offered into evidence a cancelled check for
$358 payable to the “IRS”. Except in circumstances which petitioner has not
shown apply, payments of Federal tax are See
sec. 275(a). 9 generally not deductible. Petitioner has not shown
entitlement to a deduction for this expenditure.
D. Cellular Telephone Expenses
Petitioner offered into evidence a number of receipts and
cancelled checks that appear to relate to the purchase of a cellular telephone
and service for either a cellular or other telephone. Certain receipts from
“good guys!” indicate that he made payments totaling $134 to purchase a
cellular telephone and possibly to purchase some portion of a service package.
The checks to Sprint and Sprint PCS indicate that he made additional payments
of $1,281 for cellular telephone service or alternatively for other telephone
service. As discussed above, certain listed property is subject to stricter substantiation
requirements under section 274(d)(4).
For 2003 cellular telephones were listed property, 10 and both the purchase of,
including any possible depreciation deduction or expensing, and service for,
cellular telephones were subject to the substantiation requirements of section 274(d). See sec. 280F(d)(4)(A)(v); Lang v.
Commissioner, T.C. Memo. 2010-152 [TC
Memo 2010-152]; Singh v. Commissioner,
T.C. Memo. 2009-36 [TC Memo 2009-36]; Vaksman v. Commissioner, T.C. Memo. 2001-165 [TC Memo 2001-165],
affd. 54 Fed. Appx. 592 [90 AFTR 2d
2002-7639] (5th Cir. 2002); Whalley v. Commissioner, T.C. Memo. 1996-533 [1996 RIA TC Memo
¶96,533]; see also sec. 280F(d)(1); sec.
1.179-1(d)(3), Income Tax Regs. To meet the substantiation requirements for a
cellular telephone, petitioner must substantiate: (1) The amount of the
expenditure;
(2) the total time that the cellular telephone was used for
business purposes and the total overall time that the cellular telephone was
used; (3) the date of the business use; and (4) the business purpose of the
use. See sec. 274(d); sec. 1.274- 1985).
Petitioner has not provided any testimony or other evidence that would indicate
the total time that the cellular telephone was used, either for business
purposes or overall. Petitioner has also not provided any testimony or provided
any documentary evidence indicating the dates of cellular telephone use. On the
alternative assumption that some of the checks to Sprint were for conventional
“landline” telephone service, they are not deductible because there is no
showing that these payments were for an additional telephone line. Basic local
telephone service for a first line to a personal residence is a nondeductible
personal expense. See sec. 262(b).
Therefore, petitioner has not shown entitlement to any deduction for the
foregoing telephone expenditures.
E. Utilities Expenses
Petitioner introduced into evidence several cancelled checks
for 2003 payable to Nevada Power and to Southwest Gas that totaled $588 and
$146, respectively. However, petitioner claimed $1,620 for “utilities” expenses
on the Schedule C, which respondent allowed. Petitioner has not shown that the
amounts represented by the cancelled checks payable to Nevada Power and to
Southwest Gas have not already been allowed. He therefore is not entitled to
any additional deduction for the expenditures reflected in these checks.
F. Other Payments
Petitioner introduced into evidence a 2003 cancelled check
for $173 payable to the City of Las Vegas for a business license. Petitioner
claimed $499 for “taxes and licenses” on his Schedule C, which respondent
allowed. Petitioner has not shown that the amount represented by this cancelled
check has not already been allowed. He therefore is not entitled to any
additional deduction for the expenditure reflected in this check.
IV. Section
6651(a)(1) Addition to Tax Section 6651(a)(1)
imposes an addition to tax for any failure to file a return by its due date.
The addition is equal to 5 percent of the amount required to be shown as tax on
the return for each month or portion thereof that the return is late, up to a
maximum of 25 percent. Sec. 6651(a)(1).
The addition is imposed on the net amount due, calculated by reducing the
amount required to be shown as tax on the return by any part of the tax which
is paid on or before its due date. Sec.
6651(b)(1). Under section 7491(c),
respondent has the burden of production for any addition to tax.
The addition will not apply if it is shown that the failure
to file a timely return was due to reasonable cause and not due to willful
neglect. See sec. 6651(a)(1); see also
United States v. Boyle, 469 U.S. 241,
245 [55 AFTR 2d 85-1535] (1985). A failure to file is due to reasonable cause
“If the taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed time”. Sec. 301.6651-1(c)(1), Proced. & Admin.
Regs.; see United States v. Boyle, supra at 246. Willful neglect is interpreted
as a “conscious, intentional failure or United States v. Boyle, supra at 245.
reckless indifference.”
Petitioner was granted an extension under which his 2003
Federal income tax return was due on August 15, 2004. See secs. 6072(a), 6081(a);
sec. 1.6081-4(a), Proced. & Admin. Regs. Respondent received his
return on April 19, 2006. These undisputed facts satisfy respondent's burden of
production under section 7491(c) and establish petitioner's liability for
the section 6651(a)(1) addition to tax
unless petitioner can establish that his failure to file timely was due to
reasonable cause and not willful neglect. See
sec. 6651(a)(1); see also United States v. Boyle, supra at 245.
Petitioner testified that he filed late because he was
experiencing acute financial difficulties and because he did not understand
that he would incur a penalty that increased over time for his failure to file
timely. As there is no evidence that petitioner was unable to manage other
matters at the due date and during the period of the delinquency, petitioner's
explanation falls short of reasonable cause for a failure to file timely. See
Campbell v. Commissioner, T.C. Memo. 2011-42
[TC Memo 2011-42]; Wright v. Commissioner,
T.C. Memo. 1998-224 [1998 RIA TC Memo ¶98,224], affd. without published
opinion 173 F.3d 848 [83 AFTR 2d
99-2621] (2d Cir. 1999); Bear v. Commissioner,
T.C. Memo. 1992-690 [1992 RIA TC Memo ¶92,690], affd. without published
opinion 19 F.3d 26 [73 AFTR 2d 94-1611]
(9th Cir. 1994). Accordingly, petitioner did not have reasonable cause for
failure to file timely, and petitioner is liable for the addition to tax under section 6651(a)(1) in an amount to be computed
under Rule 155.
To reflect the foregoing, Decision will be entered under
Rule 155.
1
All section
references are to the Internal Revenue Code of 1986, as in effect for the year
in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure. All dollar amounts are rounded to the nearest dollar.
2
The notice of
deficiency disallowed $13,000 that petitioner claimed as a wages expense on his
Schedule C, Profit or Loss From Business. Petitioner conceded at trial that he
had no wages expense. Petitioner has not disputed respondent's determination
that he is liable for self-employment tax of $2,495 (computed on the assumption
that the other adjustments in the notice of deficiency will be sustained).
Accordingly, petitioner is deemed to have conceded this issue. See Rule
34(b)(4).
3
Petitioner claimed
meals and entertainment expenses of $1,200 on his Schedule C but conceded at
trial that the expenses did not exceed $724.
4
Petitioner did not
claim any supplies expenses on his Schedule C but contended at trial that he
had $10,130 in supplies expenses.
5
Petitioner has not
shown entitlement to a shift in the burden of proof to respondent under sec. 7491(a) with respect to any factual
issue. See H. Conf. Rept. 105-599, at 239-242
6
A video camera is
not listed property if it is used exclusively in connection with the taxpayer's
principal business or exclusively at the taxpayer's regular business
establishment. See sec.
1.280F-6T(b)(3)(ii), Temporary Income Tax Regs., 50 Fed. Reg. 46041 (Nov. 6,
1985). Petitioner has not shown that his use of the video camera was confined
in either of these ways.
7
Petitioner elected
a sec. 179 expense deduction of $768 for
a “camera” on a Form 4562, Depreciation and Amortization, attached to his
Schedule C, that was carried over to 2004. Even if one assumes that the camera
for which a $768 expensing election was made is the video camera reflected in
the $1,072 credit card receipt in evidence, petitioner has not shown
entitlement to any deduction in 2003 with respect to the camera because it is
listed property subject to the substantiation rules of sec. 274(d), and petitioner has not shown
that he satisfied those requirements, as discussed above. See sec. 1.274-5T(b)(6), Temporary Income Tax
Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985); see also Singh v. Commissioner, T.C. Memo. 2009-36 [TC Memo 2009-36]; Whalley
v. Commissioner, T.C. Memo. 1996-533
[1996 RIA TC Memo ¶96,533].
8
In many instances,
invoices and cancelled checks can be matched. In other situations, we are
persuaded on the basis of other contextual evidence that invoices lacking
cancelled checks or cancelled checks lacking invoices still substantiate
payment.
23
31
16
73
90
9
Although petitioner
was self-employed and one-half of any Federal self-employment tax paid is
deductible, see secs. 164(f), 275(a), there is no evidence that petitioner
paid any self- employment tax in 2003. Indeed, respondent determined a
deficiency in self-employment tax of $2,495 for 2003 which petitioner has not
disputed.
10
Effective for
taxable years beginning after Dec. 31, 2009, cellular telephones are no longer
listed property. See Small Business Jobs Act of 2010, Pub. L. 111-240, sec. 2043, 124 Stat. 2560.
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