David W. Bauer v. Commissioner, TC Memo 2012-156 , Code
Sec(s) 162; 6662; 7491.
DAVID W. BAUER, Petitioner v. COMMISSIONER OF INTERNAL
REVENUE, Respondent .
Case Information:
Code Sec(s): 162;
6662; 7491
Docket: Docket
No. 16638-10.
Date Issued: 06/4/2012
HEADNOTE
XX.
Reference(s): Code Sec. 162; Code Sec. 6662; Code Sec. 7491
Syllabus
Official Tax Court Syllabus
Keith Howard Johnson, Adam L. Heiden, and Kenneth M.
Bracewell, Jr., for petitioner.
Counsel
Anne M. Craig and Robert Walter Dillard, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: On July 1, 2010, respondent issued a notice of
deficiency determining the following deficiencies in petitioner's Federal
income taxes and accuracy-related penalties under section 6662(a): 1
Penalty
Year Deficiency Sec. 6662(a) 2006 $15,576 $3,115.20 2007
15,840 3,168.00 2008 10,871 2,174.20 The issues for decision are: (1) whether
petitioner is entitled to deduct contract labor expenses in excess of the
expenses allowed by respondent 2 and (2) whether petitioner is liable for
accuracy-related penalties under section 6662(a). 3
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The
stipulation of facts and the exhibits received in evidence are incorporated
herein by this reference. Petitioner resided in Florida when the petition was
filed.
During 2006, 2007, and 2008, the tax years at issue,
petitioner was an independent contractor hired to relocate families and
individuals by moving their furniture, appliances, and other household goods.
In a typical transaction petitioner was responsible for packing household
goods, loading them into a truck or trailer, transporting the goods, and, upon
reaching the designated destination, unloading and unpacking the goods.
Petitioner generally hired contract laborers to help pack,
load, and unload household goods, appliances, and furnishings. To hire contract
laborers, petitioner would contact the local moving company agent. At most the
contract laborers were hired for three to four days, which included one to two
days for packing and one to two days for loading the truck. Although petitioner
might retain the same contract laborer for more than one day, the number of
contract laborers hired for packing as compared to loading differed. Petitioner
paid the contract laborers about $10 to $15 per hour, which, per worker,
typically did not exceed $600. 4 Payments were made in cash because, according
to petitioner, contract laborers hired “on the road” do not accept any other
form of payment.
Except for a logbook 5 in which petitioner recorded the sums
of his expenses for a relocation project, he did not document details of how
much he paid each contract laborer. Petitioner did not record the names or
Social Security numbers of the contract laborers he employed because, as he
testified at trial, they generally did not want to give their identification
and Social Security numbers to a transient truck driver. Petitioner did not
issue any Forms 1099-MISC, Miscellaneous Income, reporting the amounts paid.
For each tax year at issue petitioner filed a Form 1040,
U.S. Individual Income Tax Return, and attached a Schedule C, Profit or Loss
From Business, reporting gross receipts from his relocation business of
$199,031, $183,865, and $187,773, respectively. Petitioner also reported
corresponding contract labor expenses of $55,729, $53,698, and $42,250.
On July 1, 2010, respondent issued a notice of deficiency to
petitioner disallowing in part his claimed expense deductions for contract labor.
6 Petitioner timely filed a petition with the Court.
OPINION
I. Burden of Proof Generally, the Commissioner's
determinations in a notice of deficiency are presumed correct, and the taxpayer
bears the burden of proving them wrong. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 [12 AFTR 1456] (1933). Taxpayers also bear the burden of
proving that they are entitled to any deductions claimed. See 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). Taxpayers must maintain
sufficient records to establish the amounts of allowable deductions and to
enable the Commissioner to determine the taxpayers' correct tax liabilities.
See sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999); sec.
1.6001-1(a), Income Tax Regs.
Section 7491(a) provides an exception that shifts the burden
of proof to the Commissioner. The burden of proof regarding a claimed deduction
shifts to the Commissioner if the taxpayer introduces credible evidence
regarding relevant factual issues and meets certain statutory requirements,
including substantiation of any item. Sec. 7491(a). Taxpayers bear the burden
of proving that they have met the requirements to shift the burden of proof to the
Commissioner. Rolfs v. Commissioner, 135 T.C. 471, 483 (2010), aff'd, 668 F.3d
888 [109 AFTR 2d 2012-828] (7th Cir. 2012).
Petitioner claims that he met the requirements to shift the
burden of proof to respondent because he substantiated his contract labor
expenses with a logbook and testimonial evidence. Although the logbook purports
to document petitioner's daily expenses during the tax years at issue, its
omission of periods of time and, as petitioner acknowledges, 7 its mathematical
errors and other inconsistencies, undermine the credibility of the logbook and
the expenses recorded therein. The Court does not accept the logbook as
credible evidence within the meaning of section 7491(a), nor does the Court
accept petitioner's uncorroborated and self-serving testimony to overcome the
logbook's unreliability. See, e.g., Tokarski v. Commissioner, 87 T.C. 74, 77
(1986). Thus, the Court holds that petitioner has not shown that he complied
with the requirements of section 7491(a), and the burden of proof remains with
him.
II. Contract Labor Expenses Section 162(a) allows a
deduction for ordinary and necessary expenses paid or incurred by a taxpayer in
carrying on a trade or business. In general, payments made or incurred by a
trade or business for personal services rendered are ordinary and necessary
business expenses and may be deducted under section 162(a). Sec. 1.162-7(a),
Income Tax Regs.
If a taxpayer establishes that he or she paid a deductible
business expense but cannot substantiate the precise amount, the Court may
estimate the amount of the deductible expense, bearing heavily upon the
taxpayer whose inexactitude is of his own making. See Cohan v. Commissioner, 39
F.2d 540, 544 [8 AFTR 10552] (2d Cir. 1930). In order for the Court to estimate
the amount of an expense, the Court must have some basis upon which an estimate
may be made. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
For the tax years at issue petitioner claimed business
expense deductions for contract labor payments, which respondent, without
disputing that the payments are ordinary and necessary within the meaning of
section 162(a), disallowed in part for lack of substantiation. To estimate
petitioner's allowable deductions for contract labor expenses, respondent used
the 2006 average contract labor expense ratio for sole proprietors of
long-distance freight trucking as reported by BizStats (BizStats reports). 8 At
trial petitioner disagreed with the BizStats reports and, as an alternative
basis upon which to estimate his contract labor expenses, submitted a BizMiner
report for a sole proprietor's household goods transport business (BizMiner
report). 9 Although neither report defines the respective industries, both
parties agreed that long-distance freight trucking was not the exact industry
in which petitioner was engaged. 10
Despite respondent's attempt to show that the BizStats
reports are a reasonable basis upon which the Court may estimate petitioner's
expenses for contract labor, the Court declines to use the BizStats reports.
The Court holds that petitioner's relocation business is not long-distance
freight trucking because it includes additional services such as packing and
moving furniture and other household goods. 11 Moreover, unlike moving freight,
which is generally palletized and transported in a container, moving household
goods and furniture requires additional care to prevent damage to the items.
The Court therefore finds that petitioner's relocation business is more
appropriately characterized as a household goods transport business, as
analyzed by the BizMiner report. Accordingly, the Court holds that, pursuant to
theCohan rule, petitioner can deduct an estimated amount of contract labor
expenses for each tax year at issue using the 2006 average ratio found in the BizMiner
report. 12
III. Accuracy-Related Penalties A taxpayer is liable for an
accuracy-related penalty on any part of an underpayment attributable to, among
other things, negligence or disregard of rules or regulations. Sec. 6662(a) and
(b)(1). Negligence includes any failure to make a reasonable attempt to comply
with the law, including any failure to maintain adequate books and records or
to substantiate items properly. Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs. Disregard of rules or regulations includes any careless, reckless, or
intentional disregard. Sec. 1.6662-3(b)(2), Income Tax Regs.
Under section 7491(c), the Commissioner bears the burden of
production with regard to penalties. See Higbee v. Commissioner, 116 T.C. 438,
446 (2001). Respondent has met the burden of production because, except for an
incomplete and inaccurate logbook, petitioner failed to maintain any books or
records to properly substantiate his contract labor expenses for the tax years
at issue.
Taxpayers may, however, avoid the accuracy-related penalty
under section 6662(a) by establishing that they acted with reasonable cause and
in good faith. Sec. 6664(c)(1); Higbee v. Commissioner, 116 T.C. at 448. The
decision as to whether taxpayers acted with reasonable cause and in good faith
is made on a case-by-case basis, taking into account all the pertinent facts
and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Although inadequate to substantiate his expenses,
petitioner's logbook demonstrates that, given the circumstances of his
profession, he made a good faith effort to maintain a record of his contract
labor expenses for substantiation purposes. Petitioner paid each contract
laborer less than the $600 reporting threshold amount of section 6041(a). 13
Therefore, except for substantiation purposes, petitioner did not have a
business reason to keep detailed records of payments made to contract laborers.
Moreover, because petitioner generally hired itinerant workers, he was
compelled to make payments in cash. Although he did not use the more reliable
recording options available for other types of payments, petitioner kept hand
notations of his cash payments in a logbook.
Accordingly, even though petitioner's attempt to keep a
record of his contract labor payments fell short for substantiation purposes,
his recordkeeping demonstrates that he made a good faith effort for purposes of
section 6662(a). Accordingly, the Court holds that petitioner acted with
reasonable cause and good faith. Petitioner is therefore not liable for
accuracy-related penalties under section 6662(a) for tax years 2006 through
2008.
The Court has considered the parties' arguments and, to the
extent not addressed herein, concludes that they are moot, irrelevant, or
without merit.
To reflect the foregoing, Decision will be entered under
Rule 155.
1
Unless otherwise
indicated, section references are to the Internal Revenue Code in effect for
the tax years at issue, and Rule references are to the Tax Court Rules of
Practice and Procedure. 2
Respondent allowed
petitioner to deduct contract labor expenses of $12,240, $11,308, and $11,548
for tax years 2006, 2007, and 2008, respectively. Petitioner claims that he is
entitled to deduct additional contract labor expenses of $43,489, $42,390, and
$30,702 for the same tax years. 3
Other adjustments
made to petitioner's Federal income tax returns are computational. The
computational adjustments are not in controversy and will not be discussed. 4
Although petitioner
testified that he sometimes paid a contract laborer up to $20 per hour, this
rate was reserved for jobs involving (1) an expensive locale, e.g.,
Massachusetts, (2) stairs, e.g., a third floor walkup, and (3) high-end
furniture. 5
At trial petitioner
acknowledged that the logbook was incomplete and, at times, inaccurate. Not
only is the logbook missing entries for periods during the tax years at issue,
but also the sums of petitioner's contract labor expenses do not match the
expenses claimed on his returns. According to petitioner's testimony, the
logbook supposedly documents contract labor expenses totaling $40,390, $45,260,
and $39,298 for 2006, 2007, and 2008, respectively. 6
See supra note 2. 7
See supra note 5. 8
BizStats collects
and analyzes public data to provide a free online source for small business
statistics. See BizStats, http://www.bizstats.com (follow “About” hyperlink)
(last visited May 30, 2012). BizStats is owned and operated by Brandow Co.,
which also owns and operates BizMiner, discussed below. Id.
The BizStats reports list, among other things, the average
ratio of contract labor expenses to sales for 2006, which is 6.15%. Respondent
did not use average ratios, if available, for 2007 and 2008 and instead repeats
the 2006 ratio for tax years 2007 and 2008. Using the BizStats reports
respondent multiplies the 2006 ratio for contract labor expenses by
petitioner's Schedule C gross income for each tax year at issue. The result:
contract labor expenses equal to $12,240, $11,308, and $11,548 for 2006, 2007,
and 2008, respectively, the same amounts allowed by the notice of deficiency. 9
Similar to BizStats,
BizMiner is an online resource that provides industry statistical reports. See
BizMiner, http://bizminer.com (follow “About BizMiner” hyperlink) (last visited
May 30, 2012). According to the BizMiner report, the “Contract
Labor-Commissions” line item is reserved for nonemployee labor, sales, and
related costs. The 2006 average ratio of contract labor expenses to revenue is
6.39%. This ratio, when applied to petitioner's Schedule C gross income for
each tax year at issue, generates the following contract labor expenses:
$12,718, $11,749, and $11,999 for 2006, 2007, and 2008, respectively. 10
At trial
respondent's witness, Minnie Vaughan, the tax compliance officer who reviewed
petitioner's returns for the tax years at issue, described long-distance
freight trucking as an “over the road trucker”. When asked by respondent
whether long-distance freight trucking was the exact industry that petitioner
was engaged in, Ms. Vaughan said no. 11
The BizStats reports
did not include a definition of long-distance freight trucking. According to
the North American Industry Classification System, a standard used by Federal
statistical agencies in classifying businesses, long distance general freight
trucking businesses handle a wide variety of commodities, generally palletized
and transported in a container or van trailer. See http://www.census..... NAICS
Search (last visited May 30, 2012). Unlike freight trucking, moving household
goods includes incidental services such as packing and storage. See
http://www.census..... NAICS Search (last visited May 30, 2012). 12
Respondent applied
the 2006 average ratio from the BizStats report for each tax year at issue,
without providing the Court the 2007 and 2008 average ratios, if available. The
Court, therefore, holds that the 2006 average ratio from the BizMiner report
similarly applies for each tax year at issue. 13
Sec. 6041(a) for the
tax years at issue required all persons engaged in a trade or business and
making payment in the course of such trade or business of $600 or more to file
appropriate returns using a Form 1099-MISC.
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