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Tuesday, April 2, 2013
274 expenses Niv v Commissioner
Ron Niv v.
Commissioner, TC Memo 2013-82 ,
Deduction Rules Deductions are a matter of “legislative grace”, and “a taxpayer
seeking a deduction must be able to point to an applicable statute and show
that he comes within its terms.” New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 [13 AFTR 1180] (1934); see also Rule 142(a). As a general rule,
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”. An expense is ordinary for purposes of this section if it is normal
or customary within a particular trade, business, or industry. Deputy v. du
Pont, 308 U.S. 488, 495 [23 AFTR 808] (1940). An expense 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).
in contrast, precludes deduction of “personal, living, or family expenses.” The
breadth of section 162(a) is tempered by the requirement that any amount
claimed as a business expense must be substantiated, and taxpayers are required
to maintain records sufficient therefor. Sec. 6001;Hradesky v. Commissioner, 65
T.C. 87, 89-90 (1975), aff'd, 540 F.2d 821 [38 AFTR 2d 76-5935] (5th Cir.
1976); sec. [*9] 1.6001-1(a), Income Tax Regs.
taxpayer adequately establishes that he or she paid or incurred a deductible
expense but does not establish the precise amount, we may in some circumstances
estimate the allowable deduction, bearing heavily against the taxpayer whose
inexactitude is of his or her own making.Cohan v. Commissioner, 39 F.2d 540,
543-544 [8 AFTR 10552] (2d Cir. 1930).
however, be sufficient evidence in the record to provide a basis upon which an
estimate may be made and to permit us to conclude that a deductible expense,
rather than a nondeductible personal expense, was paid or incurred in at least
the amount allowed. Williams v. United States, 245 F.2d 559, 560 [51 AFTR 594]
(5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without
such a basis, any allowance would amount to unguided largesse. Williams, 245
F.2d at 560-561.
certain business expenses described in section 274 are subject to rules of
substantiation that supersede the Cohan rule. Sanford v. Commissioner, 50 T.C.
823, 827-828 (1968), aff'd, 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). Section 274(d) provides that no deduction shall be allowed for, among
other things, traveling expenses, entertainment expenses, gifts, and expenses
with respect to listed property (as defined in section 280F(d)(4) that includes
passenger automobiles) [*10] “unless the taxpayer substantiates by adequate
records or by sufficient evidence corroborating the taxpayer's own statement”:
(1) the amount of the expenditure or use; (2) the time and place of the
expenditure or use, or date and description of the gift; (3) the business
purpose of the expenditure or use; and (4) in the case of entertainment or
gifts, the business relationship to the taxpayer of the recipients or persons
entertained. Sec. 274(d). II.
Burden of Proof The Commissioner's
determination of a deficiency is generally presumed correct, and the taxpayer
bears the burden of proving that the determination is improper. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR 1456] (1933). However,
pursuant to section 7491(a)(1), the burden of proof as to a factual issue that
affects the taxpayer's tax liability may be shifted to the Commissioner. This
occurs where the “taxpayer introduces credible evidence with respect to ***
[that] factual issue” and the taxpayer has, inter alia, complied with
substantiation requirements pursuant to the Code and “maintained all records
required under this title and has cooperated with reasonable requests by the
Secretary for witnesses, information, documents, meetings, and interviews”.
not argue that the burden should shift, and he failed to maintain required
records [*11] or comply with the substantiation requirements. Accordingly, the
burden of proof remains on petitioner. III.
Expenses Subject to Strict Substantiation Under Section 274(d) A. Travel
Expenses On his Schedules C petitioner claimed travel expense deductions of
$11,823 on his 2006 return and $6,856 on his 2007 return.
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, but they must
also satisfy the strict substantiation requirements of section 274(d).
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 time and [*12] destination city or town, date of return, and the time
spent on business; and (3) 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).
The Cohan rule
cannot be used to estimate a deduction for travel expenses. Schladweiler v.
Commissioner, T.C. Memo. 2000-351 [TC Memo 2000-351], aff'd, 28 Fed. Appx. 602
[89 AFTR 2d 2002-820] (8th Cir. 2002).
B. Car and Truck Expenses On his Schedules C
petitioner claimed car and truck expense deductions totaling $9,173 for driving
14,652 business miles in 2006 and $6,111 for driving 10,652 business miles in
2007. Passenger automobiles are subject to the strict [*13] substantiation
requirements of section 274(d). 3 If an expense is subject to the strict
substantiation requirements of section 274(d), no deduction is allowable on the
basis of any approximation or the taxpayer's unsupported d testimony.
McLauchlan v. Commissioner, T.C. Memo. 2011-289 [TC Memo 2011-289].
C. Meals and Entertainment Expenses For
reasons similar to those set forth under car and truck expenses, petitioner is
not entitled to any meals and entertainment expense deductions because of his
failure to meet the strict substantiation requirements of section 274(d). See
Sanford v. Commissioner, 50 T.C. at 827-828. [*14] D.
Expenses Computers are also listed property, which is subject to the strict
substantiation requirements of section 274(d). 4 However, computers may be
excepted from this requirement provided they are used exclusively at a regular
business establishment and are owned or leased by the person operating such
establishment. Section 280F(d)(4)(B). On the record before us, we hold that
petitioner is not entitled to any deduction for his computer purchase because
he failed to meet the requirements set forth in section 274(d).
Office Expenses Petitioner claimed office
expense deductions of $24,690 and $8,943 on his Schedules C for 2006 and 2007,
respectively. In the absence of substantiating records where we are persuaded
that deductible expenses were in fact paid, trade or business expense
deductions may be estimated. Cohan v. Commissioner, 39 F.2d at 543-544.
However, the Court must have a reasonable basis on which to make an estimate.
Vanicek v. Commissioner, 85 T.C. at 742-743. During trial petitioner made
general statements about office expenses that were associated with his business.
The basic requirement is that there be
sufficient evidence to satisfy the Court that at least the amount allowed in
the estimate was in fact spent for the stated purpose, which was not met. See
id. at 560. Consequently, he is not entitled to deduct any of these disallowed
expenses for 2006 or 2007. 2
Petitioner provided some bank and credit card statements that indicate he paid
promotion expenses for 2006 and 2007. Some of these expenses include an invoice
for a banner for “Platinum Real Estate Fund” as well as credit card charges
[*18] for a real estate broadcasting service. To the extent that petitioner has
met his burden by providing substantiating documents and in application of the
Cohan rule, we find that he may deduct the $4,158.26 expense with respect to
his 2006 Schedule C promotion expenses and $180 with respect to his 2007
Schedule C promotion expenses. 3.
Petitioner provided credit card statements that listed purchases of fixtures,
lighting, and lumber for 2006 and 2007. In corroboration of petitioner's
testimony that he was engaged not only as a real estate agent, but also as a
real estate investor, it is reasonable that he incurred some expenses for materials
associated with his real estate investment activities. Petitioner testified
that he renovated a property he owned during one of the years at issue that was
not his personal residence, but did not state which year he purchased materials
for the renovation. As set forth above, we found most charges relating to the
purchase of fixtures, lighting, and lumber were attributable to 2006. These
expenses, coupled with petitioner's testimony, provide a reasonab
le basis for
us to conclude that he incurred some business costs for materials for 2006.
Section 162(a) allows for the deduction of “all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
[*19] business”. In contrast, section 263 generally prohibits deductions for
capital expenditures include “Any amount paid out *** for permanent
improvements or betterments made to increase the value of any property”. Sec.
263(a)(1). In contrast, deductible expenditures include those made merely to
maintain property in operating condition. See Ill. Merchs. Trust Co. v.
Commissioner, 4 B.T.A. 103, 106 (1926) (”A repair is an expenditure for the
purpose of keeping the property in an ordinarily efficient operating
condition.”). The distinction between a nondeductible capital expenditure and a
deductible repair is summarized in section 1.162-4, Income Tax Regs.:
The cost of
incidental repairs which neither materially add to the value of the property
nor appreciably prolong its life, but keep it in an ordinarily efficient
operating condition, may be deducted as an expense, provided the cost of
acquisition or production or the gain or loss basis of the taxpayer's plant,
equipment, or other property, as the case may be, is not increased by the amount
of such expenditures.
Repairs in the
nature of replacements, to the extent that they arrest deterioration and
appreciably prolong the life of the property, shall either be capitalized and
depreciated in accordance with section 167 or charged against the depreciation
reserve if such an account is kept. *** The deductibility of repair expenses
also depends upon the context in which the repairs are made. An expenditure
made for an item which is part of a “general plan” of rehabilitation,
modernization, and improvement of the property must be capitalized, even
though, standing alone, the item may appropriately be classified [*20] as one
of repair. Smith v. Commissioner 300 F.3d 1023, 1036 [90 AFTR 2d 2002-5747]
n.14 (9th Cir. , 2002), aff'g Vanalco, Inc. v. Commissioner, T.C. Memo.
1999-265 [1999 RIA TC Memo ¶99,265].
Upon the record before us and absent evidence
to the contrary, we believe that the purchasing of raw lumber, lighting,
fixtures, and doors and windows was for improvements or replacements that added
to the value of petitioner's investment property.
petitioner was required to capitalize the cost of those materials. We conclude,
applying the Cohan rule, that petitioner is entitled to capitalize expenses of
$17,978 for materials on his 2006 Schedule C and $2,516.20 for materials on his
2007 Schedule C. 4. Commissions, Referrals, and Fees Expenses Under part V of
his Schedules C petitioner claimed deductions of $33,176 and $14,592 for
referrals, commissions and marketing expenses for 2006and 2007, respectively.
a real estate transaction, a contract is signed with a specified commission;
and when the property is sold, the selling agent and, if applicable, the
buyer's agent split the commission in a predetermined manner. Further, agents
[*22] will sometimes split their commission with other agents who assisted them
with the listing or referred the seller or buyer to them. Kirman v.
Commissioner , T.C. Memo. 2011-128 [TC Memo 2011-128].
testified that he paid anywhere from 20 to 50% of his commissions in referral
fees to other licensed real estate agents. Petitioner never provided any
specific information with respect to how much he earned in commissions from his
real estate activities. Petitioner testified that most of his income was offset
by referrals he paid out to other licensed real estate agents who gave him
leads on transactions and that he paid these fees with checks.
petitioner neither maintained a contemporaneous log of the fees paid nor
provided this Court with check copies or a check registry. In order to estimate
petitioner's commission and referral fees, there must be some basis upon which
the Court can make a reasonable estimate. Vanicek v. Commissioner, 85 T.C. at
742-743. As previously noted, without such a basis, any allowance would amount
to unguided largesse. Williams, 245 F.2d at 560.
6651(a)(1) Addition to Tax Section 6651(a)(1) imposes an addition to tax for
failure to file a return by its due date. The addition equals 5% of the amount
required to be shown as tax on the return for each month or fraction thereof
that the return is late, not to exceed 25%. Sec. 6651(a)(1). The burden of
production with respect to the imposition of the section 6651(a)(1) addition to
tax determined in the notice of deficiency rests with respondent. See sec.
burden of production has been satisfied. [*24] “A failure to file a tax return
on the date prescribed leads to a mandatory penalty unless the taxpayer shows
that such failure was due to reasonable cause and not due to willful neglect.”
McMahan v. Commissioner, 114 F.3d 366, 368 [79 AFTR 2d 97-2808] (2d Cir. 1997),
aff'g T.C. Memo. 1995-547 [1995 RIA TC Memo ¶95,547]. A showing of reasonable
cause requires a taxpayer to show that the taxpayer exercised “ordinary
business care and prudence” but was nevertheless unable to file the return
within the prescribed time. United States v. Boyle, 469 U.S. 241, 246 [55 AFTR
2d 85-1535] (1985); sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioner first appears to argue that his
failure to timely file his returns was due to reasonable cause because he
relied on his tax accountant to file his returns for him. However, petitioner's
reliance on his tax accountant does not excuse him from responsibility to
timely file returns. See Boyle, 469 U.S. at 250-252; McMahan v. Commissioner,
114 F.3d at 371.
Despite petitioner's testimony, he produced no
evidence indicating that his disability caused him to be incapacitated and
unable to prepare his returns on the dates that they were due . Therefore, we
conclude these circumstances are not reasonable cause for petitioner's late
filing and he is liable for section 6651(a)(1) additions to tax for 2006 and
2007. [*25] VI. Section 6662(a) Accuracy-Related Penalty Section 6662(a) and
(b)(2) imposes a penalty of 20% of the portion of the underpayment of tax
attributable to a substantial understatement of income tax.
understatement of income tax is substantial within the meaning of section
6662(b)(2) if, as relevant here, the understatement exceeds the greater of 10%
of the tax required to be shown on the tax return or $5,000. See sec. 6662(d);
sec. 1.6662- 4(b), Income Tax Regs. Respondent bears the burden of production
with respect to the imposition of the penalty,see sec. 7491(c), and that burden
has been satisfied because the understatement of income tax, which equals the
deficiency, exceeds the greater of 10% of the tax required to be shown on the
tax return or $5,000,see secs. 6211, 6662(d)(2), 6664(a). It is petitioner's
burden to establish that because of reasonable cause, the imposition of the
penalty is not appropriate. See Higbee v. Commissioner, 116 T.C. 438, 447
6664(c)(1) provides an exception to the imposition of the accuracy-related
penalty if the taxpayer establishes that there was reasonable cause for, and
the taxpayer acted in good faith with respect to, the underpayment. Sec.
1.6664- 4(a), Income Tax Regs. The determination of whether the taxpayer acted
with reasonable cause and in 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 [*26] Regs.
petitioner testified that he has a learning disability that affects his ability
to recognize his responsibilities; however, he provided no evidence that
verified his self-diagnosis. Absent any evidence of petitioner's inability to
timely and accurately file his tax returns, he failed to establish that he
acted in good faith with respect to any portion of the underpayment of tax or
that any portion of the underpayment is due to reasonable cause. Petitioner is
liable for the section 6662(a) accuracy-related penalty for 2006 and 2007. 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 (Code) of 1986, as amended and in
effect for the taxable years at issue. The Rule references are to the Tax Court
Rules of Practice and Procedure. 2
property” includes passenger automobiles and computers., Sec. 280F(d)(4)(A)(i),
(iv). 4 Computers are capital items that can be depreciated over a
five-year period. Sec. 168(e)(3)(B)(iv), (i)(2)(A)(i). A taxpayer may elect to
write off certain capital items, which include computers, as deductible
expenses by filing a Form 4562, Depreciation and Amortization, along with the
tax return for the year in which the expense was paid. Secs. 179(c)(1),
263(a)(1)(G). Petitioner did not file a Form 4562 with his 2006 tax return.
Absent the election, if sec. 274(d) and 280F(d)(4)(B) requirements were met,
petitioner would have to recoup his computer costs through depreciation. See
Jackson v. Commissioner, T.C. Memo. 2008-70 [TC Memo 2008-70].