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The United States Tax
Court now posts Summary Opinions in small tax cases in Adobe Acrobat (.pdf) format
on its web site, www.ustaxcourt.gov.
As a service to those interested in small tax cases, the Tax Court S
Cases and Pro Se Petitioners Task Force of the Low Income
Taxpayers Committee has begun posting summaries of those cases in a
searchable format on this page.
These summaries currently begin with
cases decided December 1, 2001, and run through May 2002, with the exception of April 2002; those cases have not yet been summarized. The summaries are provided as a guide to certain
cases available on the Tax Court's website. Summaries should
not be relied upon as authoritative.Pursuant
to Internal Revenue Code Section 7463(b), Summary Opinions in small
tax cases may not be treated as precedent for any other case.
To search these
summaries by key word or Code section, use Ctrl-F. Or
use the pull-down menu to jump to a particular month's
decisions.
These summaries were written by Low
Income Taxpayer Committee members Michele Halloran of Michigan State University
– Detroit College of Law; Elizabeth Hay of The Legal Aid Society (New York); Joyce Heller of South Brooklyn Legal Services; and
Susan Morgenstern of the Legal Aid Society of Cleveland. To
assist in this project or make suggestions,
contact Leandra Lederman.
MAY 2002
NAME AND CITE: Valdez v Commissioner, T.C. Summary Opinion 2002-64
DECISION DATE: May 31, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioners pro se; Dennis R. Onnen for respondent
PETITIONER’S RESIDENCE: New Mexico
KEY WORDS: Accuracy-related penalty; frivolous protest penalty
CODE SECTIONS: §§ 6662(a); 6673(a)
FACTS: For the taxable years 1997, 1998 and 1999, petitioners retained
the services of a tax return preparer who prepared returns claiming itemized
deductions consisting of charitable contributions, miscellaneous itemized
deductions and unreimbursed employee business expenses, even though petitioners
had only offered documentation relating to home mortgage interest and real
estate taxes. Petitioners did not review the returns except to review the
amounts claimed as refunds. Respondent disallowed their claimed itemized
deductions, instead according them the standard deduction for each year.
ISSUES: (1) Can petitioners avoid application of the § 6662(a) penalty
for the reason that they relied upon the advice of a tax return preparer? (2)
Are petitioners liable for the § 6673(a) frivolous proceeding penalty?
HOLDINGS: (1) The accuracy-related penalty applies. Petitioners are not
absolved from liability for penalty on grounds that they relied upon the advice
of their tax return preparer because they made no effort to verify the return
preparer’s expertise, and knew that the claimed deductions were false. (2)
Petitioners are liable for the § 6673(a) frivolous proceeding penalty because
their claims before the Tax Court were groundless, and they have wasted precious
court resources. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: LaRue v Commissioner, T.C. Summary Opinion
2002-63
DECISION DATE: May 31, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner pro se; Douglas S. Polsky for respondent
PETITIONERS’ RESIDENCE: New Mexico
KEY WORDS: Accuracy-related penalty; Frivolous proceedings penalty
CODE SECTIONS: 6662(a); 6673(a)
FACTS: For each of the years 1997, 1998 and 1999, petitioners claimed
substantial itemized deductions for charitable contributions and unreimbursed
employee expense, as well as for other items. These itemized deductions far
exceeded any amounts petitioners spent for these items and, according to
petitioners, were amounts their tax return preparer recommended that they put on
their federal income tax returns. Respondent disputed their charitable
contribution and unreiumbursed employee expense deductions and, although
petitioners provided satisfactory proof of their other itemized deductions, the
allowed itemized deductions did not exceed the standard deduction for each year.
Thus, respondent accorded petitioners their standard deduction for each of the
three years. Petitioners agreed to the deficiencies, but contested the penalties
imposed under § 6662(a) on grounds that they justifiably relied on the advice
provided by their tax return preparer.
ISSUES: (1) Did respondent properly assess petitioners for the § 6662(a)
accuracy-related penalty under circumstances in which petitioners claimed
certain itemized deductions far in excess of amounts they actually paid on the
advice of their tax return preparer? (2) Are petitioners liable for the §
6673(a) penalty for maintaining proceedings that are frivolous or intended to
delay?
HOLDINGS: A § 6662(a) accuracy-related penalty is imposed in instances
in which the taxpayer has failed to make a reasonable effort to comply with the
dictates of the Internal Revenue Code or has disregarded the rules or
regulations. A taxpayer who otherwise would be liable for the penalty may be
excused if he shows reasonable cause for the underpayment of tax and that he
acted in good faith with respect to the underpayment. The most critical factor
to be considered is whether the taxpayer made efforts to accurately determine
his liability. In certain instances, a taxpayer may be relieved of the penalty
upon a showing that he relied upon the advice of a competent tax return preparer
equipped with expertise and knowledge of the facts pertinent to the taxpayer.
However, this fact alone is simply one fact to be considered in this "facts
and circumstances" determination, and will not automatically exonerate the
taxpayer from liability for the penalty. In this case, petitioners are liable
for the § 6662(a) accuracy-related penalty because they knew their return
preparer did not consider information they provided to substantiate their
claimed itemized deductions, and also knew that the returns, as prepared, were
incorrect. Moreover, petitioners must pay an additional penalty under § 6673(a)
because they had no reasonable basis upon which to challenge imposition of the
accuracy-related penalty before the Tax Court, and in continuing to maintain
their case, interfered with the functions of the Court, the needs of other
parties with legitimate issues, and the work of counsel. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Cooper v Commissioner, T.C. Summary Opinion 2002-65
DECISION DATE: May 31, 2002
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioners pro se; Jack T. Anagnostis for respondent
PETITIONERS’ RESIDENCE: New Jersey
KEY WORDS: Itemized deductions; dividend income;
interest income; Cohan rule; 2% of adjusted gross income
threshold
CODE SECTIONS: § 6001; 61(a)(4)
FACTS: On their federal income tax returns for the years 1994, 1995 and
1996, the taxpayers claimed itemized deductions for medical expenses, charitable
contributions, miscellaneous expenses (including unreimbursed employee business
expense) and personal property taxes. Respondent disallowed all of these
deductions as undocumented, with the exception of a small amount of unreimbursed
employee business expense petitioners were able to document. For two of the tax
years involved, petitioners received dividend and interest income they did not
report on their tax returns.
ISSUES: (1) Can petitioners receive the benefit of itemized deductions
for medical expenses, charitable contributions, unreimbursed employee business
expense and personal property taxes without providing documentation to
substantiate the deductions? (2) Did petitioners fail to report interest and
dividend income on their tax returns for two years?
HOLDINGS: Petitioners cannot take itemized deductions for medical
expenses, charitable contributions and personal property taxes because they
provided no documentation verifying that they made these expenditures. Although
the rule set forth in Cohan v Commissioner, 39 F2d 540, 543-544 (2nd
Cir, 1930), allows the Tax Court to estimate the amount of a deduction that
the taxpayer has shown he has paid, the taxpayer must provide a basis upon which
the estimate may be made. Although respondent conceded that the taxpayers had
substantiated that they paid a small amount in unreimbursed employee business
expenses, they are not entitled to an itemized deduction for this miscellaneous
amount because aggregate miscellaneous itemized do not exceed 2% of petitioner’s
adjusted gross income for the years involved. Petitioners conceded that they
were required to report certain interest and dividend income on their 1994 and
1995 returns. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Turner v Commissioner, T.C. Summary Opinion 2002-60
DECISION DATE: May 28, 2002
SPECIAL TRIAL JUDGE: Vasquez
ATTORNEYS: Petitioner pro se; Stephen P. Baker for respondent
PETITIONERS’ RESIDENCE: Alaska
KEY WORDS: Loss deduction; sale of residence; accuracy-related
penalty
CODE SECTIONS: § 165; 6662(a); 6651(a)(1)
FACTS: Petitioners purchased a home in Anchorage in 1983 and lived there
until May 1994. In 1994, they listed their Anchorage property for sale in
"as is" condition for $7,000 less than they had paid for it the
previous year. They then moved from their Anchorage property to a house in
Wasilla. The listing on their Anchorage house expired without a sale, and
petitioners made substantial improvements to the property to make it saleable.
Later in the year, they re-listed the property for $20,000 less than their
purchase price and almost immediately received a full-price offer. Petitioners
did not rent the property at any time while they were attempting to sell it or
make renovations to it. Petitioners’ tax preparer, with whom they had annually
counseled over a long term, advised them that the Anchorage property had been
converted to a business property, and that the loss on the sale of the property
therefore constituted a business loss. On the 1994 federal income tax return
prepared for petitioners by their tax preparer, petitioners claimed a
significant business loss on the sale of the Anchorage property, and also showed
a one-week early occupancy rental as income on Schedule E.
ISSUES: (1) Are petitioners entitled to claim a loss on the sale of their
personal residence on their 1994 federal income tax return? (2) Are petitioners
liable for the § 6662(a) accuracy-related penalty?
HOLDINGS: IRC § 165(c) states that individual taxpayers may deduct
losses incurred in a trade or business. Deductible losses include those incurred
in connection with any transaction entered into for profit even if not connected
with a trade or business, and casualty losses not connected with a trade or
business. A taxpayer’s loss on the sale of his personal residence is not
deductible except in instances in which the taxpayer no longer uses the property
as his personal residence and has converted it to a for-profit use. Conversion
to a for-profit use does not occur simply because the taxpayer offers it for
sale or receives rent in the interim pending sale of the property. In this case,
petitioners failed to show a business or income-producing use of the property
because they continued to use, or have the right to use, the Anchorage property;
they never were in a position to rent out the premises; and they demonstrated an
intent to quickly dispose of the property in lieu of attempting to secure its
appreciation. Petitioners are not liable for the § 6662(a) accuracy-related
penalty because they reasonably relied upon the advice of their tax return
preparer in determining how to treat the sale of their Anchorage property.
Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Barajas v Commissioner, T.C. Summary Opinion
2002-59
DECISION DATE: May 28, 2002
SPECIAL TRIAL JUDGE: Wolfe
ATTORNEYS: Petitioner pro se; John W. Strate for respondent
PETITIONER’S RESIDENCE: California
KEY WORDS: Earned income credit, qualifying child; eligible foster
child
CODE SECTIONS: § 32(a)(1)
FACTS: Petitioner claimed two of his siblings as qualifying children for
an earned income credit he claimed on his 1999 federal income tax return. During
that year, he lived with his non-English-speaking mother and three siblings in
an apartment, received wages as a machinist, assisted in raising his siblings,
was the monetary provider for his family, and cared for his mother, who suffered
from cancer. Respondent disallowed the earned income credit claimed by
petitioner.
ISSUES: Are petitioner’s two siblings "eligible foster
children" so that petitioner is entitled to an earned income credit on his
1999 federal income tax return?
HOLDINGS: Under § 32(c)(3)(a), a qualifying child for purposes of the
earned income credit must satisfy a residency test, an age test, and a
relationship test. Here, the residency and age tests were easily met. As for the
relationship test, petitioner’s siblings were eligible foster children because
the FACTS demonstrated that petitioner assumed a parental role toward them and
cared for them as if they were his own children. The Tax Court sustained
petitioner’s entitlement to an earned income credit for tax year 1999. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Patterson v Commissioner, T.C. Summary Opinion
2002-57
DECISION DATE: May 23, 2002
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner pro se; Robert E. Marum for respondent
PETITIONERS’ RESIDENCE: New York
KEY WORDS: Material participation; passive activity
CODE SECTIONS: §§ 162; 469
FACTS: Petitioners owned a rental condominium in North Carolina that was
managed by an outside company. Petitioners earned rental income through their
ownership of the unit and paid corresponding management fees. On average,
renters used the unit for 5.6 days during 1996. Petitioners paid utility bills
for the unit and annually personally undertook some maintenance at the property
consisting of minor repairs, carpet cleaning, winterizing, and readying the unit
for rental in the spring. On their 1994 and 1996 federal income tax returns,
petitioners claimed losses relating to their rental unit. Respondent disallowed
the losses, contending that the losses were nondeductible passive activity
losses because petitioners "did not materially participate in the day to
day operations" of the unit.
ISSUES: Did petitioners materially participate in the day to day
operations of their rental condominium so as to enable them to deduct their
losses in taxable years 1994 and 1996?
HOLDINGS: Although the passive activity requirements of IRC § 469
generally preclude a taxpayer from receiving a loss deduction for rental
activities, the term "rental activity" does not include circumstances
in which customer rentals occur, on average, for 7 days or less. Here, average
customer rental occurred for a period of 5.6 days during one of the years in
issue, so that the question is whether the taxpayers materially participated in
the rental of their unit to render it a non-passive activity. Material
participation occurs if a taxpayer’s involvement in an activity is regular,
continuous and substantial. The regulations set forth seven tests to be used in
determining material participation, any one of which a taxpayer may satisfy to
substantiate his right to a loss deduction. Petitioners in this case claimed to
meet a test that allows for a finding of substantial participation if the
taxpayer participates in the activity for more than 100 hours during the taxable
year and the taxpayer’s activity is not less than the participation of another
during the same year. Petitioners were unable to show that they met the 100 hour
test, so the Tax Court determined that their operation of the rental unit was a
passive activity for which loss deductions could not be taken. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Waters v Commissioner, T.C. Summary Opinion 2002-62
DECISION DATE: May 30, 2002
SPECIAL TRIAL JUDGE: Armen
ATTORNEYS: Petitioner pro se; Alexandra E. Nicholaides for
respondent
PETITIONERS’ RESIDENCE: Michigan
KEY WORDS: Casualty loss deductions; foreclosure sale losses;
accuracy-related penalty; addition to tax
CODE SECTIONS: §§ 165(a); 165(c)(2); 1001; 6662(a); 6651(a)
FACTS: Petitioners, with others, purchased an apartment building on land
contract in 1986 for an undisclosed amount. In 1987, they received a warranty
deed for the property that recited that the land contract vendors received
consideration of $55,000 for the sale. The next year, certain owners conveyed
their interest to petitioners and petitioner Robert Waters’ father for
$50,000. Petitioners later obtained a $70,000 mortgage secured by the building.
In May 1994, petitioners leased the property to a nonprofit housing corporation
which began to use the property as a homeless shelter. Petitioners regained
possession of the property in 1996 to find that the property had been gutted by
the former tenants. Over time, petitioners experienced difficulty making their
mortgage payments, and in 1996 the bank foreclosed on the property and acquired
a sheriff’s deed to it at public auction. Although petitioners could have
redeemed the property during a six month period in 1996, they did not do so.
Before the Tax Court, petitioners claimed they did not surrender possession to
the property to the bank until mid-January 1997. On the 1997 federal income tax
return dated April 28, 1998, petitioners took a variety of positions, only some
of which were contested before the Tax Court. On Schedule A, they claimed an
itemized deduction of $295,000 for a casualty or theft loss for their property;
the loss calculation was premised upon a fair market value for the property
before the loss of $360,000.
ISSUES: (1) Are petitioners entitled to a loss deduction for
taxable year 1997 attributable to the unauthorized removal of furnishings and
fixtures from an apartment building and for the foreclosure of the building
during 1996? (2) Are petitioners liable for the accuracy-penalty for negligence
or intentional disregard of the rules or regulations? (3) Are petitioners liable
for an addition to tax for failure to timely file an income tax return?
HOLDINGS: Although petitioners were entitled to deductions for casualty
losses and with respect to foreclosure of their apartment building, the loss
occurred during 1996, not 1997, the year in which petitioners claimed the loss
deductions on their federal income tax return. Casualty losses are sustained
during the year in which the taxpayer discovers the loss. Petitioners admitted
at trial that they discovered the loss of fixtures and furnishings on this
property when they regained possession of the property in 1996. Contrary to
petitioners’ contentions, loss sustained upon foreclosure of their property is
not a casualty loss, but instead is a loss treated as a sale or exchange under
§ 1001. Petitioners incurred their foreclosure-related loss during 1996 when
their failure to redeem the property vested all ownership rights in the bank.
The fact that petitioners may have retained physical possession of the property
for a short time in 1997 makes no difference to this determination. Petitioners
cannot claim a foreclosure-related loss for 1997 because no loss occurred during
that year. Petitioners are not liable for the accuracy-related penalty insofar
as it is attributable to these loss deduction ISSUES because a reasonable basis
existed for their belief that they sustained their losses in 1997; however, the
penalty is imposed with respect to conceded items. Finally, petitioners are
liable for the addition to tax because they filed their 1997 return beyond the
deadline without obtaining an extension of time in which to file, and provided
no basis upon which the Tax Court could ascertain that reasonable cause existed
for their late filing. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Olde Raleigh Realty Corporation v
Commissioner, T.C. Summary Opinion 2002-61
DECISION DATE: May 29, 2002
SPECIAL TRIAL JUDGE: Pajak
ATTORNEYS: Edgar H. Bridger for petitioner; Linda P. Azmon for
respondent.
PETITIONERS’ RESIDENCE: North Carolina
KEY WORDS: FICA; FUTA; personal expense payments;
constructive dividend; addition to tax; accuracy-related penalty
CODE SECTIONS: § 6656; 6662(a); 3111; 3301; 3121(a); 3306(b)
FACTS: Petitioner is an S-corporation operating a brokerage/real estate
company and is 100% owned by William Henderson. During taxable years 1995 and
1996, Henderson worked approximately 32 hours per week for petitioner,
performing a variety of services relating to the company’s business
activities. During 1995, other persons worked for petitioner and were recognized
as petitioner’s employees. Petitioner timely filed quarterly federal tax
returns and the annual unemployment tax return in 1995 and 1996. Petitioner
issued neither a W-2 nor a 1099-MISC to Henderson in either 1995 or 1996,
although it paid substantial sums to Henderson during those years for
"personal expenses." Petitioner filed Forms 1120S for each of the
taxable years, reporting ordinary income which it disclosed on Schedules K-1.
Henderson and his spouse timely filed their individual income tax returns for
the taxable years on which they reported the amounts shown in the Schedule K-1’s.
Respondent assessed petitioner for FICA and FUTA taxes on grounds that the
amounts paid for Henderson’s personal expenses constituted wages to which the
taxes were properly subjected. Henderson claimed that the payments instead were
funds advanced pursuant to an oral agreement between Henderson and the
corporation that enabled Henderson to avoid his creditors; that they were loan
repayments; or that they were payments advanced in a "trust" capacity.
ISSUES: (1) Should personal expense payments petitioner made to or on
behalf of an employee be re-characterized as wages subject to federal employment
taxes? (2) Is petitioner liable for the additions to tax imposed under § 6656?
(3) Is petitioner liable for accuracy-related penalties?
HOLDINGS: Petitioner failed to produce evidence substantiating the
existence of an oral agreement between it and Henderson to advance the so-called
"personal expense" funds. Moreover, petitioner did not satisfactorily
show that its payments to Henderson were loan repayments, as it provided no
documentary evidence, other than a $9,000 promissory note, to substantiate the
existence of these alleged debts. As for the $9,000 promissory note, no evidence
linked that obligation to the payments petitioner made to Henderson for personal
expenses. Nor do the contested payments consist of constructive dividends paid
to Henderson to which FICA and FUTA taxes do not apply. Henderson was the sole
shareholder of petitioner but received no salary during the taxable years.
Petitioner’s earnings were derived through Henderson’s substantial,
significant efforts. The personal expense payments in question constitute wages,
and petitioner is liable for FICA and FITA taxes on these amounts. Petitioner
must pay the 10% addition to tax because it presented no evidence to show that
its failure to timely deposit FICA and FUTA taxes was the result of reasonable
cause and not willful neglect. Similarly, petitioner’s failure to establish
that it was not negligent or that it did not disregard rules or regulations in
failing to remit FICA and FUTA taxes warrants imposition of the accuracy-related
penalty. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Harrington v Commissioner, T.C. Summary Opinion
2002-58
DECISION DATE: May 28, 2002
SPECIAL TRIAL JUDGE: Beghe
ATTORNEYS: Petitioners pro se; Anne W. Durning for respondent
PETITIONERS’ RESIDENCE: New Mexico
KEY WORDS: Hobby loss; horse breeding; loss deductions
CODE SECTIONS: §§ 183(a); 183(b); 162; 212; 7491(a); 195(a)
FACTS: Petitioner Julius Harrington, a sociology professor with a
knowledge of horses, engaged in horse-breeding activities that generated
substantial losses over a considerable period of years. Petitioner did not
develop a business plan for this activity that would enable him to ascertain its
profitability. Petitioners deducted losses attributable to the horse-breeding
activities on their 1996, 1997 and 1998 federal income tax returns. Respondent
disallowed the losses, contending that petitioners’ activity was not engaged
in for profit.
ISSUES: Did petitioners engage in horse-breeding activities for profit,
so that they could deduct losses incurred in the activities for taxable years
1996, 1997 and 1998?
HOLDINGS: To sustain their loss deductions, petitioners were required to
show that they engaged in their horse-breeding activities with an honest profit
motive. Although many factors may be considered in ascertaining the existence of
a profit motive, an important factor is the taxpayers’ record of generating
repetitive substantial losses and the likelihood of profit. Consideration also
is given to whether petitioners operated the activity in a business-like
fashion. Here, petitioners did not develop any business plan or budget designed
to show an intent to derive a profit from the activity. They made no changes to
their activity in an effort to make it profitable. They consistently sustained
large losses over many years. Another factor to consider is the taxpayer’s
expertise relative to the activity for which loss deductions are claimed.
Petitioner Harrington failed to show that skills he acquired were designed to
enhance the activity’s profitability. A third factor – the amount of time
devoted to the activity – was not met here, either. Although Petitioner
devoted personal time to his project, he maintained his full-time employment and
only devoted recreational, after-hours time to breeding horses. Although an
appreciation in value of the assets used in the activity is a fourth factor to
consider, petitioners’ assertion that their land increased in value because of
their horse-breeding activities was not borne out; the Tax Court viewed the
holding of land as an activity separate from horse breeding. A fifth factor is
the taxpayers’ success in pursuing other activities. The Tax Court declined to
find that petitioner Harrington’s success as a university professor in the
field of sociology has import in the context of his horse breeding activities.
In fact, this factor was deemed to work against petitioners, to the extent that
they clearly had the capability of quickly discerning that their activities
would never yield a profit. A sixth factor to be considered is the taxpayers’
history of income and losses with respect to the alleged for profit activity.
Petitioners in this case sustained significant losses over 9 straight years.
Although petitioners claimed that the 9 years for which they sustained losses
were during the 15 year start-up phase of their horse-breeding enterprise, they
would not be entitled to an immediate loss deduction for initial losses, but
instead are required to amortize them over a period of not less than 60 months
after the end of the startup phase. Nor can these losses justifiably be viewed
as having been incurred during the activity’s startup phase, as the FACTS do
not disclose the need for a protracted startup. A seventh factor is the amount
of occasional profits derived from the activity. Petitioners had none at all.
With respect to the eighth factor, the taxpayers’ financial status, the
taxpayers were successful in their employment and investment endeavors – and
thus had substantial income from other sources – and were motivated to use the
horse-breeding losses to achieve significant tax benefits. Finally, petitioners
derived significant pleasure or recreation from their work with horses, despite
their protestations that the activity was "backbreaking activity."
Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Delgarito v Commissioner, T.C. Summary Opinion
2002-56
DECISION DATE: May 23, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioners pro se; Dennis R. Onnen for respondent
PETITIONERS’ RESIDENCE: New Mexico
KEY WORDS: Accuracy-related penalty; frivolous proceeding penalty
CODE SECTIONS: §§ 6662(a); 6673(a)
FACTS: Petitioners filed federal income tax returns for 1997, 1998
and 1999, on which they claimed itemized deductions in amounts that were
substantial in relationship to their gross income. None of the itemized
deductions were substantiated, and petitioners conceded adjustments respondent
made to their returns that eliminated the itemized deductions, replacing them
with the standard deduction. Petitioners engaged the services of a tax return
preparer to prepare their returns for the taxable years in issue. Although they
supplied the preparer with minimal income and expense records, the itemized
deductions shown on their returns did not at all correspond with the records
petitioners had supplied. Petitioners did not review their returns before filing
them. Before the Tax Court, petitioners contended that they are not liable for
the accuracy-related penalty because they relied upon the advice of a competent
tax professional.
ISSUES: (1) Are petitioners relieved from liability for the
accuracy-related penalty for taxable years 1997, 1998 and 1999 because they
relied upon the advice of their tax return preparer in making their returns? (2)
Are petitioners liable for a 6673(a) frivolous proceeding penalty?
HOLDINGS: Petitioners are liable for the accuracy-related penalty because
they took no steps to verify the expertise of their tax return preparer, did not
review the prepared returns, and made no effort to confirm the accuracy of the
returns. Moreover, petitioners must pay an additional penalty under § 6673(a)
because their challenge to the accuracy-related penalty was groundless and
frivolous. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Reid v Commissioner, T.C. Summary Opinion 2002-55
DECISION DATE: May 22, 2002
SPECIAL TRIAL JUDGE: Panuthos
ATTORNEYS: Petitioners pro se; Michele A. Yates for respondent
PETITIONERS’ RESIDENCE: Virginia
KEY WORDS: Settlement proceeds
CODE SECTIONS: § 104(a)
FACTS: In 1998, petitioner Arthur Reid received a $5,000 settlement in
resolution of an employment-related lawsuit he filed in Florida State court.
Petitioners did not report the settlement as income on their joint 1998 federal
income tax return, and subsequently claimed that the settlement represented
payment for pain and suffering and physical injury, and so was not includable in
income. Petitioners offered differing versions of how the injury occurred to
respondent. Respondent disputed petitioners’ characterization of the injury,
instead asserting that the settlement proceeds represented payment in settlement
of a wrongful discharge lawsuit and that such amount is not excludable from
income under § 104(a)(1) or (2).
ISSUES: Are petitioners entitled to exclude $5,000 they received in
settlement of a wrongful discharge lawsuit from income for taxable year 1998?
HOLDINGS: Petitioners are not entitled to exclude the settlement proceeds
under § 104(a)(1) because, although the suit was initiated under a Florida
worker’s compensation statute, the claims made in the suit were for wrongful
discharge, intimidation, coercion and harassment, nor for an occupational
injury. Nor may petitioners exclude this sum under § 104(a)(2) because the term
"damages received" as used in this provision excludes worker’s
compensation damages. The settlement in question consisted of non-occupational
injury worker’s compensation damages. The Tax Court also questioned the
relationship between the injury and the lawsuit and settlement, and stated that
the lawsuit was not clearly founded upon the existence of a physical injury to
which §104(a)(2) is addressed. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Delara v Commissioner, T.C. Summary Opinion 2002-54
DECISION DATE: May 17, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioners pro se; Douglas S. Polsky for respondent
PETITIONERS’ RESIDENCE: New Mexico
KEY WORDS: Accuracy-related penalty; frivolous proceeding penalty
CODE SECTIONS: §§ 6662(a); 6673(a)
FACTS: Petitioners retained the services of a tax preparer to
prepare their 1999 federal income tax return, on which they claimed a
substantial amount of itemized deductions in relationship to their gross income.
Petitioners did not assess the qualifications of the preparer, did not supply
him with documentation to substantiate the itemized deductions shown on the
return, and did not review the return he prepared. Respondent disallowed some of
the claimed itemized deductions, adjusted others, and allowed one that had not
been originally claimed. In the Tax Court, petitioners contended that they are
not liable for the accuracy-related penalty because they relied upon their tax
return preparer in preparing their 1999 return.
ISSUES: (1) Are petitioners relieved from liability for the
accuracy-related penalty for taxable year 1999 because they relied upon the
advice of their tax return preparer in making their return? (2) Are petitioners
liable for a 6673(a) frivolous proceeding penalty?
HOLDINGS: The accuracy-related penalty is lawfully imposed because
petitioners did not ascertain the professional expertise of their tax return
preparer and made no reasonable effort to verify the accuracy of the content of
their return. They never offered their preparer information from which the
correct amount of itemized deductions could be determined, and knew that the
amount of deductions claimed on this return exceeded what they had shown on
previous years’ returns. Petitioners also are liable for the § 6673(a)
penalty because they had no sound factual or legal basis upon which to challenge
application of the accuracy-related penalty, and have interfered with the
functioning of the Tax Court by continuing to maintain their challenge to the
accuracy-related penalty. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Tkac v Commissioner, T.C. Summary Opinion 2002-53
DECISION DATE: May 14, 2002
SPECIAL TRIAL JUDGE: Gerber
ATTORNEYS: Petitioner pro se; Roger W. Bracken for respondent
PETITIONER’S RESIDENCE: Maryland (per earlier decision)
KEY WORDS: Costs
CODE SECTIONS: §§ 7430; 6702
FACTS: Petitioner filed a motion for recovery of administrative and
litigation costs relating to a previously decided Tax Court case, in which the
Court found that it did not have jurisdiction over frivolous income tax
penalties in a lien and levy action. In the prior case, respondent conceded that
it could not collect petitioner’s tax liability for 1992. The costs associated
with the early case were attributable to the amount of time petitioner spent
arguing the case, and his expenditures for postage, copying, travel and legal
fees.
ISSUES: (1) Did petitioner unreasonably protract the prior Tax Court
proceeding? (2) Are petitioner’s costs reasonable?
HOLDINGS (1) Petitioner did not unreasonably protract the prior Tax Court
proceeding. (2) Petitioner may not recover costs attributable to the amount of
time he engaged in the administrative hearing and subsequent litigation. Nor may
he recover costs related to legal fees, as he did not provide sufficient detail
for those fees. Likewise, travel expenses are unrecoverable under the Internal
Revenue Code. However, petitioner may recover the fees associated with filing
the petition, as well as costs attributable to postage and copying expenses.
Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Kallmyer v Commissioner, T.C. Summary Opinion
2002-52
DECISION DATE: May 9, 2002
SPECIAL TRIAL JUDGE: Powell
ATTORNEYS: Petitioner pro se; Stephen J. Neubeck for respondent
PETITIONERS’ RESIDENCE: Ohio
KEY WORDS: Individual retirement accounts; additional tax
CODE SECTIONS: §§ 72; 6212
FACTS: Respondent assessed petitioners for delinquent taxes, and sought
to collect the amount due by threatening to levy petitioner’s retirement
accounts. After the assessment, petitioner made distributions, totaling $42,870,
which were commingled with other funds when they were deposited into petitioners’
checking account. Petitioners then paid $15,000 to satisfy the
previously-assessed tax liability. Petitioners failed to report the
distributions on their joint 1996 income tax returns. Respondent issued a notice
of deficiency in 1999, asserting that the total amount of distributions was
includable on their 1996 income tax returns, and that petitioners were liable
for the deficiency plus penalties, as well as an additional tax under § 72.
Petitioners contacted respondent by mail to try to negotiate a settlement. In
their letter, petitioners claimed that the additional tax should not be imposed.
After receipt of the letter, respondent issued a revised notice of deficiency
that petitioners disagreed with. Petitioners then contacted a representative of
respondent, and claimed that the representative assured them that the additional
tax would be abated. Relying on this agreement, petitioners paid $11,818 to
satisfy the deficiency. In February 2000, petitioners received a second notice
of deficiency relating to the same year and filed a timely petition in the Tax
Court contesting this notice.
ISSUES: (1) Is respondent barred from issuing a second notice of
deficiency for the additional tax imposed by § 72? (2) Did respondent concede
the additional tax in a settlement agreed to before the issuance of the second
notice of deficiency? (3) Are petitioners liable for the additional tax for
distributions from their individual retirement accounts?
HOLDINGS: (1) Petitioners did not file a petition with the Tax Court
challenging the initial deficiency, which is required to bar issuance of a
second notice of deficiency; accordingly, respondent was not barred from issuing
the second deficiency notice. (2) No settlement existed because petitioners
never accepted the offer to settle, nor did they suffer a legally-cognizable
detriment by relying on the offer. (3) Petitioners voluntarily made withdrawals
from the retirement accounts, had possession of the distributions, and used them
for purposes other than for paying off their tax liabilities. Petitioners are
liable for the § 72 additional tax. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Quintero v Commissioner, T.C. Summary Opinion
2002-47
DECISION DATE: May 6, 2002
SPECIAL TRIAL JUDGE: Carluzzo
ATTORNEYS: Larry Fedro for petitioners; John T. Lortie for
respondent
PETITIONER’S RESIDENCE: Florida
KEY WORDS: Independent contractor; non-employee compensation
CODE SECTIONS: §§ 1; 1401; 1402; 3121; 6662
FACTS: During 1997, petitioner was employed as a
"trainee-helper" by AAA, an automobile repair shop where he wore a
uniform, used tools provided by AAA, and was supervised by an AAA manager. Upon
agreeing to work for AAA, petitioner signed an "Independent Contractor
Agreement," under which he agreed to perform services for AAA as an
independent contractor. While working under this arrangement, petitioner’s
schedule was set and maintained by AAA. AAA paid petitioner a total of $23,552
according tot his schedule, although petitioner claims that he received much
less. Petitioner failed to file an income tax return claiming the amount earned
as income from AAA. Respondent sent petitioner a notice of deficiency, claiming
that the monies petitioner earned constituted self-employment income and adding
penalties.
ISSUES: (1) How much compensation did petitioner receive from AAA for
taxable year 1997? (2) Does the compensation petitioner received from AAA
constitute self-employment income subject to tax under § 1401? (3) Did
petitioner substantially understate the amount of his income tax liability for
taxable year 1997?
HOLDINGS: (1) AAA’s contentions concerning the amount of compensation
it paid petitioner ($23,552) were more reliable than the various and
inconsistent claims offered by petitioner, and were accepted. (2) AAA possessed
and exercised sufficient control over petitioner so as to earmark petitioner as
AAA’s employee. Therefore, petitioner’s compensation does not constitute
self-employment income. (3) The underpayment of tax under these circumstances is
not a substantial understatement because the difference between the tax owed and
the amount shown on petitioner’s return is less than $5,000. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Lewis v Commissioner, T.C. Summary Opinion 2002-49
DECISION DATE: May 7, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner pro se; Elaine T. Fuller for respondent
PETITIONER’S RESIDENCE: California
KEY WORDS: Basis; educational expense deduction
CODE SECTIONS: §§ 1001(a); 1012; 162; 6651; 6654
FACTS: Petitioner failed to file a tax return for 1997. Respondent issued
a deficiency and charged additions for failure to file the return. Petitioner
owned stock in General Electric and contributed to his account by reinvesting
his dividends. The account was initially opened sometime before October 26,
1994, the opening date of the only GE statement petitioner produced at trial.
During 1997, he engaged in several transactions related to this account.
Petitioner closed the account on May 19, 1997 by receiving a stock certificate
for 100 shares of GE and cash for the remaining shares. Petitioner pursued an
MBA degree at UCLA during the taxable year, although he did not specifically
detail the amount of his educationally-related expenditures at trial.
ISSUES: (1) What is petitioner’s basis in General Electric stock which
he sold or converted into cash during 1997? (2) Is petitioner entitled to a
deduction under § 162(a) for educational expenses? (3) Is petitioner liable for
the additions to tax?
HOLDINGS: (1) Because petitioner’s stock transaction records were
minimal, the Court looked to the best information available – the cost of the
earliest-identified lost – and arrived at a basis of $336.36. (2) Petitioner
cannot deduct his educational expenses because his course of study qualified him
for a new trade or business. (3) The additions to tax apply because petitioner
conceded liability for the additions if the deficiency is appropriate. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Richey v Commissioner, T.C. Summary Opinion 2002-50
DECISION DATE: May 9, 2002
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner pro se; John Aletta for respondent
PETITIONER’S RESIDENCE: New York
KEY WORDS: Additions to tax; reasonable cause defense
CODE SECTIONS: §§ 6651; 6654(a)
FACTS: Petitioner suffered from several diseases during the taxable years
1995 and 1996 and received numerous medical treatments for his ailments. Despite
his medical condition, petitioner was able to maintain employment and the upkeep
of a small business. During 1996, his new spouse assisted him with his finances.
Petitioner requested and received extensions of time to file both his 1995 and
1996 tax returns until October 15, 1996 and 1997, respectively. However,
petitioner did not file his returns until October, 1999. Respondent prepared
substitute returns and issued notices of deficiency that included additions to
the tax for failure to file a return, failure to pay in a timely manner, and
failure to make estimated payments.
ISSUES: (1) Is petitioner liable for additions to tax for failure to file
returns and pay the tax amounts shown on the returns? (2) Is petitioner liable
for additions to tax for failure to timely pay the tax shown on a return? (3) Is
petitioner liable for the addition to tax for failure to make estimated income
tax payments for taxable years 1995 and 1996?
HOLDINGS: (1) Petitioner failed to demonstrate reasonable cause for his
failure to file the returns and timely pay the tax. Although he was ill during
this time, he was able to continue employment and run his own business.
Moreover, he divorced and remarried during his illness, had his spouse assist
him with his financial affairs, and used the services of an accountant. (2) With
respect to the additions to tax for failure to make estimated payments,
petitioner offered no evidence to show that the addition does not apply, no
reasonable cause exception exists in this context, and petitioner is liable for
the additions. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Thornton v Commissioner, T.C. Summary Opinion
2002-45
DECISION DATE: May 3, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioners pro se; Douglas S. Polsky for respondent
PETITIONER’S RESIDENCE: New Mexico
KEY WORDS: Accuracy-related penalty; frivolous protest penalty
Code Section: §§ 6662(a); 6673(a)
FACTS: Petitioners retained the services of a tax preparer who
substantially overstated itemized deductions consisting of charitable
contributions and unreimbursed employee expenses for two taxable years, 1999 and
2000. Petitioners submitted minimal documentation to the preparer in support of
the claimed deductions. Respondent disallowed these deductions, and also
assessed petitioners for penalties under § 6662(a). Before the Tax Court,
petitioners contended that they questioned the amounts, but that the tax
preparer explained that they were acceptable.
ISSUES: (1) Are petitioners relieved from payment of penalties imposed
under § 6662(a) for taxable years 1999 and 2000 for returns that substantially
overstated itemized deductions because they relied upon the advice of their
return preparer? (2) Are petitioners liable for the § 6673(a) frivolous
proceeding penalty?
HOLDINGS: Petitioners cannot avoid imposition of § 6662(a) penalties
because they did not ascertain the expertise of the return preparer, and knew
the returns were incorrect but failed to question other professionals about the
accuracy of the returns. Moreover, petitioners are liable for the frivolous
proceeding penalty imposed by § 6673(a) because their contentions were
groundless and they have wasted precious judicial resources. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Gentner v Commissioner, T.C. Summary Opinion
2002-46
DECISION DATE: May 6, 2002
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner pro se; John Aletta for respondent
PETITIONER’S RESIDENCE: New York
KEY WORDS: Dependency exemption deductions; child tax credit
CODE SECTIONS: §§ 151(a); 152(a); 152(e)(1); 24(a); 24(c)(1)(A)
FACTS: Petitioner was subject to a court order requiring him to pay $780
monthly in child support for his four children. None of the children resided
with him during the taxable year 1998. Petitioner also paid for his children’s’
medical insurance, as well as for other home-related expenditures (insurance and
mortgage payments). For taxable year 1998, Petitioner, who at the time was
separated from his spouse, filed a return showing married filing separately
status. On the return, he claimed all four children as exempt dependents, and
also claimed a child tax credit for each.
ISSUES: (1) Is petitioner entitled to four dependency exemption
deductions for his children for taxable year 1998? (2) Is petitioner entitled to
child tax credits for his four children for taxable year 1998?
HOLDINGS: (1) Because he was a noncustodial parent who did not receive a
written declaration from the custodial parent relinquishing the dependency
exemption deduction to him, petitioner could not lawfully claim dependency
exemption deductions for his four children. (2) Petitioner cannot avail himself
of child tax credits for his four children because they are not his qualifying
children, as he is not entitled to claim them as exempt dependents. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Singer v Commissioner, T.C. Summary Opinion 2002-48
DECISION DATE: May 2, 2002
SPECIAL TRIAL JUDGE: Armen
ATTORNEYS: Petitioner pro se; Michael W. Berwind for respondent
PETITIONER’S RESIDENCE: California
KEY WORDS: For-profit activity; unreimbursed employee
expenses; charitable contributions; accuracy-related penalty
CODE SECTIONS: §§ 183(a), (b) and (c); 274(d); 162; 212
FACTS: Petitioner, a retired stockbroker, obtained the title
"bishop" from the Universal Life Church, and later received a
certificate as a certified "lymphologist" from "The International
Academy of Lymphology." He engaged in multi-level marketing schemes
purportedly designed to help people make money. Petitioner did not maintain
separate records of his activities, and made no profit. He characterized most of
the checks he wrote – including most of those for personal expenditures – as
unreimbursed employee expenses. On the 1996 and 1997 federal income tax returns
he filed, he reported significant passive income, and showed a substantial
"business loss" from what he characterized as a "health, wealth
and healing ministry" activity. On his 1997 return, petitioner reported
$1,400 as Schedule C income, claimed charitable deductions in the amount of
one-half of his reported adjusted gross income, and listed a huge charitable
deduction "carryover" to the next year. A portion of the claimed
charitable deduction consisted of donated property. Respondent issued a notice
of deficiency, in which it found that petitioner’s activity was not engaged in
for profit; disallowed Schedule C expenses for 1997; and greatly reduced the
amount of claimed charitable contributions.
ISSUES: (1) Did petitioner engage in an activity for profit, so that he
could take deductions concerning that activity for taxable years 1996 and 1997?
(2) Is petitioner entitled to his claimed Schedule C deductions for the year in
which he reported Schedule C income (1997)? (3) Is petitioner entitled to
itemized deductions for charitable contributions for taxable year 1997 in excess
of the amount conceded by respondent? (4) Is petitioner liable for the §
6662(a) accuracy-related penalty for taxable years 1996 and 1997?
HOLDINGS: (1) Petitioner did not engage in his "health, wealth and
healing ministry" activity for profit during either of the taxable years
1996 and 1997. (2) Respondent’s disallowance of 1997 Schedule C deductions is
sustained, but on the basis of the fact that, even if the deductions were
recognized as permissible, the outcome, if favorable to petitioner, has no tax
consequences. (3) Petitioner failed to offer evidence to substantiate charitable
contributions in excess of the amount acknowledged by respondent. (4) Petitioner
is liable for the § 6662(a) accuracy-related penalty; his contest of the notice
of deficiency is frivolous, and although he claimed he relied upon the advice of
various consultants who informed him that no Code provision imposes tax
liability, his did not show that the consultants were knowledgeable
professionals or that he relied on their pronouncements in good
faith. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Timmerman v Commissioner, T.C. Summary Opinion
2002-51
DECISION DATE: May 9, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner pro se; Donald Brachfeld for respondent
PETITIONER’S RESIDENCE: New Jersey
KEY WORDS: Rollover distributions; accuracy-related penalty
CODE SECTIONS: §§ 61(a) and (b); 402(a); 408(d)(3); 402(c)(9); 6662(a)
FACTS: Petitioner, the sole beneficiary of his brother’s profit-sharing
plan, received the total net distribution from the plan in 1998. The proceeds
were made payable to petitioner individually. The next year, petitioner placed
these same funds into an existing investment account entitled "Martin C.
Timmerman in Trust for James Timmerman." Petitioner added some of his own
money to this account, and later renamed the account. Petitioner received a
1099-R for taxable year 1998 showing this distribution and the tax withheld;
however, the he did not show this income on the 1998 federal income tax return
he filed. Although, before the Tax Court, petitioner claimed that he had
completed an election form specifying that the distribution would be made in
annual installments, the election form was never sent. Respondent issued a
notice of deficiency to petitioner contending that the distribution proceeds
were includable in income.
ISSUES: (1) Is the net distribution made to petitioner out of his
deceased brother’s profit-sharing plan taxable to him? (2) Is petitioner
liable for the § 6662(a) accuracy-related penalty?
HOLDINGS: (1) A lump sum distribution made to a non-spousal beneficiary
is ineligible for rollover treatment and is taxable to the beneficiary.
Petitioner did not receive these funds in his capacity as the personal
representative of his brother’s estate, but instead received them in his
individual capacity. (2) Petitioner must pay the § 6662(a) accuracy-related
penalty because he provided no evidence to establish reasonable cause for his
underpayment. Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
APRIL 2002
[to be added]
MARCH 2002
NAME AND CITE: Guido Lemos and Adabelle Herrera-Lemos v. CIR,
T.C. Summ. Op. 2002-29
DECISION DATE: March 29, 2002
SPECIAL TRIAL JUDGE: Carluzzo
ATTORNEYS: Petitioners: pro se; Respondent: Nancy L. Spitz
P’s RESIDENCE: Florida
KEY WORDS: employee business expenses; business expense
deductions
CODE SECTIONS: 162; 262; 274
FACTS: Petitioners filed jointly. He was an employee of a
company and she was self-employed. He sought to deduct business
expenses related to travel expenses. She sought to deduct expenses
related to her business as a real estate agent.
ISSUES: 1. Whether petitioner can deduct business expenses
for job-related tasks performed outside of the scope of his
employment. 2. Whether petitioner can deduct expenses related to her
self-employment where the records are no longer available due to
their theft.
HOLDINGS: 1. In order for business expenses to be deductible,
they must be incurred as part of his job. Since petitioner’s use
of his car was outside the scope of his employment, "the
expenses, even if incurred, are not deductible." 2.
Self-employment related deductions are subject to a strict
substantiation standard which applies even if the original records
have been lost due to theft. The burden is on the petitioner to
reconstruct the records to the best of her ability. Even without
that reconstruction, the court disallowed petitioner’s deductions
for clothes and cleaning because these are personal in nature,
allowed 60% of the car expense, and disallowed the balance of the
expenses due to petitioner’s failure to substantiate them.
Pursuant to Internal Revenue Code Section 7463(b), this
opinion may not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Peter and Mary Possas v. CIR, Tax Ct. Summ. Op.
2002-28
DECISION DATE: March 29, 2002
SPECIAL TRIAL JUDGE: Panuthos
ATTORNEYS: Petitioners: pro se; Respondent: Monica Miller
P’s RESIDENCE: Florida
KEY WORDS: accuracy related penalty; unreported income; business
expense deduction
CODE SECTIONS: 7491/TC Rule 142; 6001; 162; 6662
FACTS: Petitioner ran a hairdressing business out of her house. She
did not keep accurate records, and therefore estimated her income.
They deducted business expenses, but could substantiate only a
portion. The IRS used bank records and Bureau of Labor Statistics to
estimate petitioners’ income.
ISSUES: 1. Which party bears the burden of proof on a new issue
presented at trial. 2. Whether the Commissioner’s reconstruction of
petitioners’ income is accurate and permissible. 3. Whether
petitioners’ business expenses (for advertising) are allowable. 4.
Whether it is appropriate to impose the accuracy related penalty.
HOLDINGS: 1. Respondent bears the burden of proof on issues newly
presented at trial, pursuant to Tax Court rule 142 (IRC Section 7491
was not in effect at the time the audit commenced). 2. Respondent’s
reconstruction of petitioners’ income is allowable where petitioners’
fail to substantiate their income, so long as that reconstruction is
"reasonable in light of all facts and circumstances. Both bank
records and Bureau of Labor Statistics information are acceptable
methods. 3. Petitioners’ business expense was allowed because
respondent failed to meet its burden of proof. 4. The accuracy related
penalty is imposed where the underpayment of tax is attributable to
negligence or disregard of the rules, and is appropriate here where
petitioners "failed to make any effort to calculate their income
and expenses." Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Norma Ramirez-Ota v. CIR, TC Summary Opinion
2002-27
DECISION DATE: March 28, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner: pro se; Respondent: Rachel Zepeda
P’s RESIDENCE: Arizona
KEY WORDS: head of household status, earned income credit
CODE SECTIONS: 2, 32
FACTS: Petitioner lived "on and off" in her former
in-laws’ home. While there, she did not pay rent and her former
in-laws did not provide any other financial assistance to petitioner
or her children. She also resided her brother’s residence where she
lived with her parents, brother and sister. There, she paid rent and
the cable bill. Petitioner paid for the children’s clothing, school
supplies and some food. While residing with her in-laws, they paid for
the majority of the food. Petitioner’s parents were employed during
the tax year at issue and earned more than her.
ISSUES: Whether petitioner can claim head of household status and
the earned income credit.
HOLDINGS: Petitioner is not entitled to head of household status
because she failed to prove that she paid more than fifty percent of
maintaining either of the households in which she resided. She is not
entitled to the earned income credit because her income was less than
that of her parents and/or because she did not show that her income
exceeded her in-laws’ adjusted gross income. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: J. Michael and Susan L. Reimer v. CIR, T.C.
Summ. Op. 2002-26
DECISION DATE: March 28, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner: John J. Morrison; Respondent: Jennifer
Nuding
P’s RESIDENCE: Illinois
KEY WORDS: business losses; activity for profit
CODE SECTIONS: 162; 183
FACTS: Petitioners ran a horse breeding business as well as a
water and air filtration business. Their net loss for the businesses
was approximately $217,356. They filed schedules C and F seeking to
deduct certain expenses associated with these endeavors.
ISSUES: To what extent are the losses associated with running
these two businesses allowable, and what limitations, if any, should
apply.
HOLDINGS: The court reviewed the nine factors set forth at 26
CFR Sec. 1.183-2(b) and held that petitioners did not intend to
engage in a business for profit because, "based on the totality
of the circumstances and the objective facts," they did not
adequately follow business formalities and turn either business into
a profitable enterprise. "[P]etitioners were unreasonably
willing to sustain massive losses in spite of the improbability of
profits." Therefore, petitioners’ business losses were
disallowed. (Note: this is a lengthy decision with a detailed
discussion of the relevant statutory and caselaw.) Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Terence Taylor v. CIR, TC Summary Opinion 2002-25
DECISION DATE: March 28, 2002
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner: pro se; Respondent: Raymond Boulanger
P’s RESIDENCE: New York
KEY WORDS: earned income credit, head of household, dependency
exemptions
CODE SECTIONS: 2, 32, 151, 152
FACTS: Petitioner claimed his three children as dependents, claimed
head of household filing status, and claimed the earned income credit
for two children. He and the children’s mother lived together, but
had not married and had never entered into a formalized custody
agreement.
ISSUES: Whether the absence of a legally established custody
arrangement precludes petitioner from claiming dependency exemptions,
head of household filing status, and the earned income credit.
HOLDINGS: Petitioner does not need to have a formalized legal
custody agreement to claim dependency exemptions, head of household
status and the earned income credit where his testimony credibly
supports his relationship with his children. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Karen Ann Cicchini v. CIR, TC Summary Opinion 2002-24
DECISION DATE: March 26, 2002
SPECIAL TRIAL JUDGE: Armen
ATTORNEYS: Petitioner: pro se; Respondent: John W. Strate
P’s RESIDENCE: California
KEY WORDS: dependency exemption and child support; child tax credit
CODE SECTIONS: 24, 151, 152
FACTS: Petitioner’s ex-husband was awarded the dependency
exemption for the couple’s two children in connection with the
parties’ divorce so long as he was current in his child support
payments. He became seriously delinquent in his payments, but then
"had an epiphany" and made a huge child support payment
toward his very large arrearage. However, he did not fully discharge
his child support obligation and an arrearage was still owed.
ISSUES: Whether petitioner is entitled to the dependency exemption
and child tax credit where a child support arrearage is owed.
HOLDINGS: Petitioner is entitled to the dependency exemption and
child tax credit because the child support had not been fully paid.
The Court aggregated the arrearage, and held that because petitioner’s
ex-husband was not current in his child support payments she was
entitled to the exemptions and child tax credits because the divorce
decree had conditioned the ex-husband’s claim for dependency
exemptions on full and current child support payments. Since he was in
arrears, she was entitled to the exemptions and credit. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case.Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Robin E. Schmidt a.k.a. Robin Tripaldi v. CIR, TC
Summary Opinion 2002-23
DECISION DATE: March 26, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner: pro se; Respondent; Gary M. Slavett
P’s RESIDENCE: California
KEY WORDS: casualty loss
CODE SECTIONS: 165
FACTS: Petitioner owned a condo in California. It was damaged in
the 1994 earthquake. Petitioner filed her 1995 return and claimed a
casualty loss of $21,935.29 attributable to the 1994 earthquake, based
on a list of necessary repairs prepared by her insurer. Petitioner
never undertook the repairs.
ISSUES: Whether petitioner is able to claim a casualty loss either
because of the estimate of necessary repairs or because of the
diminution in fair market value of the residence.
HOLDINGS: Petitioner cannot claim a casualty loss where she failed
to make any of the repairs. In order to use this repair method of
claiming the casualty loss, repairs and expenditures must be actually
made. Alternatively, petitioner does not succeed with the diminution
in fair market value argument because she failed to present more than
"sparse testimony" to substantiate this method of proving
her loss. Appropriate proof could have included "expert
testimony, appraisal reports, or other documents to support her basis
for the fair market value." Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Matthew Morgan v. Commissioner, TC Summary Opinion
No. 2002-21
DECISION DATE: March 11, 2002
SPECIAL TRIAL JUDGE: Wolfe
ATTORNEYS: Petitioner – pro se; Respondent – Sylvia
Shaughnessy
P’s RESIDENCE: California
KEY WORDS: dependency exemption
CODE SECTIONS: 151, 152
FACTS: Petitioner claimed a dependency deduction for his mother on
his 1997 tax return. He lived with her in her apartment for 10 months
during 1997. He did not contribute towards the rent, and testified,
with minimal additional proof, that he spent approximately $850 per
month on supporting his mother. His income was from his employment;
hers was Social Security benefits of $8,310.
ISSUES: Whether petitioner can claim a dependency deduction for his
mother.
HOLDINGS: Petitioner cannot claim the dependency exemption for his
mother where he failed to prove the total amount of her support and
his contribution to that support. In order to claim the exemption,
petitioner had to show the total support for the dependent, and that
he paid more than half of that amount. Since social security benefits
are an element of that support, petitioner’s burden was to prove
that he paid more than the amount of his mother’s social security
benefit amount of $8310. Since he could not substantiate either the
total cost of his mother’s support for the year or his contribution
towards that amount, he was denied the deduction. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Haloftis v. Commissioner, TC Summary Opinion 2002-20
DECISION DATE: March 5, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner – pro se; Respondent – Richard A.
Stone
P’s RESIDENCE: Maryland (tax year: 1998)
KEY WORDS: student loan interest; alternative minimum tax (AMT)
CODE SECTIONS: 221; 55,56
FACTS: Petitioners’ (husband and wife) adjusted gross income in
1998 was $101,471.67. They deducted $2,257.77 for student loan
expenses. (Petitioners also claimed other deductions, totaling
$43,819.43.) They did not file Form 6251, Alternative Minimum Tax –
Individuals, with their 1998 return.
ISSUES: (1) Whether petitioners may deduct the full amount of their
student loan expenses. (2) Whether petitioners were subject to the
Alternative Minimum Tax.
HOLDINGS: (1) The student loan interest deduction was limited by
sec. 221 to $1000 in 1998. However, the deduction is phased out as a
taxpayer’s’ income increases above $60,000, and is completely
phased out at a modified adjusted gross income level of $75,000. See
sec. 221(b). Since petitioners’ AGI was higher than the phase-out
amount, they are not entitled to any sec. 221 deduction. (2)
Petitioners were subject to the alternative minimum tax because their
tentative minimum tax exceeded the applicable exemption amount of
$45,000 allowed to them by sec. 55. Pursuant to
Internal Revenue Code Section 7463(b), this opinion may not be treated
as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Hilton H. Hackley v. Commissioner, T.C. Summary
Opinion 2002-19
DECISION DATE: March 1, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner – pro se; Angelique Neal for
respondent
P’s RESIDENCE: Los Angeles, California
KEY WORDS: schedule A mortgage interest and real estate tax
deductions; dependency exemptions; head of household filing status
CODE SECTIONS: § § 163, 164, 151, 152, 2
FACTS: Petitioner’s years at issue were 1995 and 1996. During
those years, he lived without his sister in the house titled in her
name. Her name was also on the mortgage documents. He paid the
mortgage directly to the lender, and paid the taxes, homeowner’s
insurance, repairs and maintenance costs. His common-law wife’s
daughter and his nieces stayed with him "on and off" during
the years at issue.
ISSUES: (1) Where real property is not titled in the taxpayer’s
name, can the taxpayer take the mortgage interest and real estate tax
deductions where he pays those costs in full? (2) Where minor children
stay with taxpayer sporadically during the year, can he claim
dependency exemptions and head of household filing status?
HOLDINGS: (1) In order to claim the real estate interest deduction,
taxpayer has to show he has legal or equitable interest in property.
This interest is determined by state law (California in this case).
Petitioner’s sister had full interest in the property. Since there
was no objective evidence presented showing the nature of the payment
arrangement between the petitioner and his sister which could have
supported a finding of equitable ownership, petitioner failed to meet
his burden of proof and the mortgage interest deduction was
disallowed. The real estate tax deductions were disallowed for the
same reason. (2) Petitioner’s dependency exemptions and head of
household filing status were disallowed because he failed to meet his
burden of proof. He offered only his testimony, which did not include
such information as the total amount of support provided to the
children from all sources. "[P]etitioner’s testimony [was]
vague, incomplete and self-serving." He had also stipulated that
the children did not reside with him. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
FEBRUARY 2002
NAME AND CITE: Newhouse v. Commissioner, T.C. Summary Opinion
2002-18
DECISION DATE: February 28, 2002
SPECIAL TRIAL JUDGE: Dean
ATTORNEYS: Petitioner -- pro se; Michael W. Berwind for
respondent
P's RESIDENCE: California
KEY WORDS: Business expense deductions; independent contractor
CODE SECTIONS: 162; 280A; 6651(a)(1)
FACTS: Petitioner Richard Newhouse earned wages as a geography
professor at several colleges, and reported some of the wages on
Schedule C of his 1995 federal income tax return. He included other
teaching wages, as well as wages from different employment, as line 7
wages. On Schedule C, petitioner deducted business expenses allegedly
related to his activities as a geography professor, although part of
the expenses were attributable to the rental of other so-called
business property (warehouse space and his home). Although petitioner
purchased items for use in his teaching activities out of his own
funds, he had deferred compensation amounts deducted from his teaching
pay for two institutions, and used classrooms, schedules and students
provided by the colleges. Petitioners’ 1995 federal income tax
return was signed and dated April 14, 1998.
ISSUES: (1) Is petitioner Richard Newhouse an independent
contractor entitled to Schedule C deductions for business expenses?
(2) Is petitioner Richard Newhouse entitled to business expense
deductions consisting of rental expenses in excess of those allowed by
respondent? (3) Did petitioners fail to timely file their income tax
return without reasonable cause?
HOLDINGS: (1) For taxable year 1995, petitioner Richard Newhouse is
an employee, not an independent contractor, because the colleges at
which he taught exercised sufficient control over his activities for
him to be deemed an employee. Supportive of this determination are the
FACTS that the colleges, not petitioner, invested in the teaching
facilities, and were dedicated to the business of teaching; petitioner
received fixed pay from the colleges; petitioner received employee
benefits from two colleges; and the colleges issued W-2’s to
petitioner evidencing their determination that he was their employee.
(2) Petitioner cannot deduct rental expense attributable to public
warehouse space because he did not show that the rental expenses are
ordinary and necessary. Petitioner’s maintenance of an entire
library of books, maps and other items is extraordinary and personal
in nature. With respect to his home, petitioner failed to show that
the property was used for his employer’s convenience or that it was
his principal place of business. (3) Although the parties stipulated
that petitioners had timely filed their 1995 income tax return, the
Tax Court disregarded the stipulation in the exercise of its
discretion because the stipulation contravened evidence that showed
that petitioners in fact had not filed their return until two years
after the return’s due date. Petitioners offered no evidence that
their failure to timely file their return was due to reasonable cause
and not willful neglect. Pursuant to Internal
Revenue Code Section 7463(b), this opinion may not be treated as
precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Murdoch v. Commissioner, T.C. Summary Opinion
2002-17
DECISION DATE: February 27, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner -- pro se; David R. Jojola for
respondent
P's RESIDENCE: California
KEY WORDS: Additions to tax; trade or business expense deductions
CODE SECTIONS: 6651(a)(1)
FACTS: Respondent issued a notice of deficiency to petitioner
covering four tax years for which petitioner failed to file returns,
and made additions to tax for each of the years. Petitioner conceded
the deficiencies and contested the additions to tax, but failed to
appear for her scheduled trial. Petitioner also claimed trade or
business expense deductions for dog breeding activities.
ISSUES: (1) Is petitioner liable for the additions to tax
determined by respondent? (2) Is petitioner entitled to claim
deductions for expenses incurred in dog breeding activities?
HOLDINGS: (1) Petitioner is liable for the additions to tax
determined by respondent because she provided no rationale for her
failure to file returns for the affected years. (2) Petitioner cannot
claim deductions for expenses incurred in dog breeding activities
because she provided no factual data or evidence relating to the
activity. Pursuant to Internal Revenue Code
Section 7463(b), this opinion may not be treated as precedent for any
other case. Click the link to
obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Kwan v. Commissioner, T.C. Summary Opinion 2002-16
DECISION DATE: February 25, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner -- pro se; Charlotte A. Mitchell for
respondent
P’s RESIDENCE: California
KEY WORDS: Depreciation deduction; mileage expense deduction;
entertainment expense deduction record keeping; accuracy-related
penalty
CODE SECTIONS: 6662(a); 162(a); 274(d); 179; 167a
FACTS: Petitioner worked full time as an electrical engineer, but
also conducted a business activity consisting of a travel agency, a
telecommunications service and a silk import entity. On his 1997
federal income tax return, petitioner reported income and expense
relating to his business activity that generated a substantial net
loss. One of the expenses consisted of a depreciation/§ 179 expense
relating to computers purchased for the business. Respondent
disallowed certain Schedule C expenses, and also determined that
petitioner is liable for an accuracy-related penalty.
ISSUES: (1) Is petitioner entitled to deduct mileage expenses in
excess of the amount allowed by respondent? (2) Is petitioner entitled
to a depreciation expense deduction in connection with his business
activities? (3) Is petitioner entitled to a travel, meal and
entertainment expense deduction in connection with his business
activities? (4) Did respondent properly impose an accuracy-related
penalty for negligence or disregard of rules or regulations?
HOLDINGS: (1) Petitioner failed to produce evidence to satisfy the
strict substantiation requirements of § 274(d) and cannot deduct
mileage expenses in excess of the amount respondent allowed. (2)
Petitioner is not entitled to any § 179 expense deduction for taxable
year 1997, both because he failed to prove the cost, identity and
purchase of the computers, and because he had no taxable income from
his trade or business for that year. (3) Petitioner cannot claim a
travel, meal and entertainment expense deduction for expenses incurred
in connection with his business activities because he failed to
provide documentary evidence in support of the claimed expenses, and
did not demonstrate that the expenses were primarily business related.
(4) Petitioner is liable for the accuracy-related penalty for
negligence or intentional disregard of rules or regulations because he
failed to show due care in claiming the expense items, and did not
maintain adequate books and records to support the claimed deductions.
Pursuant to Internal Revenue Code Section
7463(b), this opinion may not be treated as precedent for any other
case. Click the link to obtain the
full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Gauthier v. Commissioner, T.C. Summary Opinion
2002-15
DECISION DATE: February 15, 2002
SPECIAL TRIAL JUDGE: Powell
ATTORNEYS: Petitioner -- pro se; Scott T. Welsh for
respondent
P's RESIDENCE: Louisiana
KEY WORDS: Late-filed return; retirement plan distribution;
additions to tax
CODE SECTIONS: 72(t); 6651
FACTS: Petitioner filed his 1998 federal income tax return in July
1999 without an automatic extension of time in which to file in place.
On the return, petitioner included two retirement plan distributions
in gross income, but did not pay any additional tax under § 72(t),
despite the fact that he had not reached the age of 59-1/2 during the
taxable year. Petitioner stated that he made the withdrawals to pay
for his mother’s medical bills. Before the Tax Court, petitioner
claimed that the distribution made from his ESOP was not a
distribution by a qualified plan. As to the 401(k) distribution,
petitioner claimed that the medical care exception described in
72(t)(2)(B) applies.
ISSUES: (1) Is petitioner required to pay the additional tax set
forth in § 72(t)(1) on his ESOP and 401(k) retirement plan
distributions? (2) Can petitioner be subjected to an addition to tax
under § 6651(a)(1) for failure to timely file his 1998 income tax
return?
HOLDINGS: (1) The ESOP is a qualified retirement plan as to which
the 10% additional tax applies. As to the 401(k) distribution, the
medical care exception outlined in § 72(t)(2)(B) applies only to
payments deductible under § 213. Because petitioner failed to
establish that he paid over one-half of his mother’s total support
for taxable year 1998, his mother is not his dependent, and the
taxpayer cannot claim deductions for her medical expenses. Moreover,
petitioner did not originally claim his mother as a dependent on his
return. The § 72(t)(2)(B) exception to the additional tax does not
apply. (2) Petitioner is subject to the addition to tax set forth in
§ 6651(a)(1) because his return indisputably was filed late for no
identified reason. Pursuant to Internal Revenue
Code Section 7463(b), this opinion may not be treated as precedent for
any other case. Click the link to
obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Vega v. Commissioner, T.C. Summary Opinion 2002-14
DECISION DATE: February 15, 2002
SPECIAL TRIAL JUDGE: Powell
ATTORNEYS: Petitioner -- pro se; Susan Smith Canavello for
respondent
P's RESIDENCE: Louisiana
KEY WORDS: Retirement distribution; interest income; failure to
timely file
CODE SECTIONS: 6651; 402(a)(1)
FACTS: Petitioner received a distribution from a retirement plan
[akin to a 401(k) plan] in 1998 which his broker deposited into a cash
management account. Petitioner also had an IRA account with the same
brokerage firm, and believed that he had instructed his broker to
deposit the distribution into that account, not the cash management
account. During 1998, petitioner’s savings account at a bank
generated interest income, although petitioner did not withdraw the
interest from his account. Petitioner obtained extensions of time in
which to file his 1998 income tax return to October 15, 1999, but did
not actually file his return until October 19, 1999. On the return
filed, petitioner did not report the retirement plan distribution or
the bank interest income. Respondent determined a tax deficiency and
also imposed an addition to tax for petitioner’s failure to timely
file his 1998 return.
ISSUES: (1) Is petitioner required to include a retirement plan
distribution in gross income for the 1998 taxable year? (2) Did
petitioner fail to report a certain amount of interest income for
1998? (3) Is petitioner liable for the addition to tax determined by
respondent for failure to timely file his 1998 return?
HOLDINGS: (1) Petitioner’s retirement plan distribution is
properly included in his 1998 gross income because none of the
exceptions to the general rule of inclusion apply. Petitioner did not
transfer the distribution into an eligible retirement plan, but
instead deposited it into a cash management account. The case relied
on by petitioner, Wood v Commissioner, 93 T.C. 114 (1989), does
not assist his contention because the Wood petitioner
demonstrated substantial compliance with the applicable statutory
provision, whereas this petitioner did not. (2) Petitioner
constructively received bank interest income in 1998, and that amount
is taxable. (3) Respondent properly assessed petitioner for a 5%
addition to tax because petitioner offered no evidence to show that
his failure to timely file his 1998 income tax return was due to
reasonable cause and not willful neglect.
Pursuant to Internal Revenue Code Section 7463(b), this opinion may
not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Franklin v. Commissioner, T.C. Summary Opinion
2002-13
DECISION DATE: February 14, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner -- pro se; Matthew A. Mendizabal for
respondent
P's RESIDENCE: California
KEY WORDS: Trade or business expenses; Cohan rule; life
insurance distribution; gross income; accuracy-related penalty
CODE SECTIONS: 162(a); 6001; 274(d)
FACTS: During the taxable year in issue, 1996, petitioner was
engaged in the mortgage brokerage business, and received commissions
for his efforts. On the joint income tax return he filed with his
spouse for 1996, he reported income and expenses relating to the
mortgage brokerage business on Schedule C, reflecting a net loss.
Respondent allowed some expenses, but disallowed unsubstantiated
expenses consisting of outside services, appraisal fees, telephone,
postage, and mileage. Petitioner also received a life insurance
company distribution in 1996 as to which a 1099-R was issued, showing
the distribution to be partially taxable. Petitioner did not include
the taxable portion of the distribution on his 1996 return. In the Tax
Court, petitioner claimed the contested distribution consisted of a
life insurance policy loan, not gross income.
ISSUES: (1) Can petitioner properly claim trade or business expense
deductions under § 162(a) in excess of those allowed by respondent?
(2) Did a portion of a life insurance company distribution petitioner
received in 1996 constitute gross income? (3) Is petitioner liable for
the accuracy-related penalty set forth in § 6662(a)?
HOLDINGS: (1) Petitioner cannot claim excess trade or business
deductions because he offered no documentary evidence whatsoever to
support the claimed deductions. The Cohan rule allowing a court
to estimate the amount of an appropriate deduction is inapplicable
here, where the taxpayer has not shown his right to a claimed
deduction. In addition, certain of petitioner’s claimed expenses (e.g.,
mileage) fall within the strict substantiation requirements of §
274(d), and were not documented by petitioner. (2) Petitioner failed
to document that the life insurance company distribution represented a
policy loan instead of gross income. (3) Petitioner is liable for the
accuracy-related penalty prescribed by § 6662(a) because of trial
admissions he made about certain unreported items (a state income tax
refund and unemployment compensation benefits). Petitioner is not
liable for the penalty as to taxable life insurance proceeds because
he did not claim a credit for taxes withheld by the payor, and there
was no underpayment of tax with respect to the item.
Pursuant to Internal Revenue Code Section 7463(b), this opinion may
not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Benitez v. Commissioner, T.C. Summary Opinion
2002-12
DECISION DATE: February 13, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner -- pro se; Igor Drabkin for respondent
P's RESIDENCE: California
KEY WORDS: Filing status; EIC
CODE SECTIONS: 32; 6013
FACTS: Petitioner, whose husband was disabled and out of work in
1997, filed a 1997 income tax return through an income tax prepare as
head of household, claiming two of her three children as exempt
dependents, the standard deduction for head of household, and
childcare and earned income credits. Her husband did not file a 1997
federal income tax return. Respondent disallowed petitioner’s
claimed earned income credit because § 32(d) provides that a person
who is married as of the close of her taxable year is eligible for the
earned income credit only if a joint return is filed.
ISSUES: Can petitioner change her filing status from head of
household to married filing jointly for the taxable year 1997 so as to
enable her to qualify for an earned income credit?
HOLDINGS: Petitioner cannot change her filing status as a
consequence of the limitations set forth in § 6013(b)(2): (1) She
failed to file a joint return within three years from the last date
prescribed for filing her 1997 return; and (2) A notice of deficiency
was issued to her, and she timely filed a petition to the Tax Court. Pursuant
to Internal Revenue Code Section 7463(b), this opinion may not be
treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Carlisle v. Commissioner, T.C. Summary Opinion
2002-11
DECISION DATE: February 13, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner -- pro se; Nguyen-Hong K. Hoang for
respondent
P's RESIDENCE: California
KEY WORDS: Dependency exemption; earned income credit; qualifying
child
CODE SECTIONS: 151(c); 32
FACTS: For the first five months of 1996, petitioner and her minor
son lived with the son’s court-appointed guardian, Mrs. White, and
her family in an apartment leased by the Whites for a monthly rental
of $740. Petitioner contributed $300 per month toward rent, utilities
and food. Mrs. White paid for all of the son’s clothing for all of
1996, and did grocery shopping and cooking. When petitioner moved out
of the White household, her son remained with the Whites, and later in
1996 accompanied them in a move to New York, where he attended school.
Petitioner contributed $150 per month in support after her son’s
move to New York, and shipped items her son requested. On her 1996
return, petitioner claimed a dependency exemption deduction for her
son as well as an earned income credit. Respondent disallowed both the
deduction and the credit.
ISSUES: (1) Is petitioner entitled to a dependency exemption
deduction for her son for taxable year 1996? (2) Is petitioner
entitled to an earned income credit for taxable year 1996?
HOLDINGS: (1) To establish a right to claim a dependency exemption
deduction for a minor child under § 151(c), a taxpayer must show that
she provided over one-half of the minor’s total support. Although
Petitioner credibly testified to the amount of support she provided
her son, she failed to establish the total support provided for him in
1996 (and the amount could not be reasonably inferred from competent
evidence offered at trial), and she therefore is not entitled to the
dependency exemption deduction. (2) Petitioner is ineligible for the
earned income credit for the taxable year 1996 because relevant parts
of § 32 require that she have a qualifying child, defined as a minor
who shares the same principal place of abode in the United States with
the taxpayer for more than one-half of the taxable year. Because
petitioner lived with her minor child for only five months of 1996,
she was not entitled to an earned income credit.
Pursuant to Internal Revenue Code Section 7463(b), this opinion may
not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Arhontes v Commissioner, T.C. Summary Opinion
2002-10
DECISION DATE: February 8, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioners -- pro se; Henry C. Bonney, Jr. for
respondent
P's RESIDENCE: California
KEY WORDS: Cohan rule; cost of goods sold; depreciation;
mileage expense
CODE SECTIONS: 6662(a); 6001; 274(d); 167(a); 162
FACTS: Respondent determined that petitioners had a tax deficiency
for taxable year 1997, and also assessed an accuracy-related penalty
under § 6662(a). During 1997, both petitioners were employed by a
city transportation entity. During that year, petitioner Steven
Arhontes also operated a sports card business out of his residence.
That year, he sold all of the inventory of the sports card business,
and discontinued it. On the Schedule C petitioners filed with their
1997 income tax return, they reported a negative gross income from the
business consisting of gross receipts reduced by cost of goods sold.
They also claimed deductions for car and truck expenses, and a small
amount of depreciation, showing a net loss. Respondent disallowed all
of the claimed cost of goods sold, the car and truck expenses and the
claimed depreciation expense, and determined that petitioners are
liable for the § 6662(a) accuracy-related penalty.
ISSUES: (1) Are petitioners entitled to reduce gross receipts by a
cost of goods sold in connection with the sports card business? (2)
Can petitioners properly deduct mileage expenses in connection with
the sports card business? (3) Are petitioners entitled to a
depreciation deduction in connection with the sports card business?
(4) Are petitioners liable for the accuracy-related penalty under §
6662(a) for negligence or disregard of rules or regulations?
HOLDINGS: (1) Petitioners established that they had goods on hand
at the beginning of 1997, and they are entitled to reduce gross
receipts for that year by some amount under the Cohan rule,
which permits the court to estimate the amount allowable for a
deduction where the taxpayer has shown entitlement to the deduction..
The Tax Court allowed a cost of goods sold reduction to gross receipts
in an amount significantly less than that claimed by petitioners. (2)
Although it applies to the derivation of cost of goods sold, the Cohan
rule that allows estimates of cost does not apply to travel expenses.
A taxpayer instead must adhere to the stringent substantiation
requirements for travel expenses set forth in § 274(d). Here,
petitioners failed to present evidence comporting with § 274(d)’s
strict substantiation requirements, and accordingly cannot deduct the
claimed expenses. (3) Petitioners are not eligible to claim a
depreciation deduction for an asset they cannot identify. (4)
Petitioners are liable for the accuracy-related penalty because they
failed to present evidence to justify the bulk of their claimed
deductions, and made no showing that they had reasonable cause to take
the deductions. Pursuant to Internal Revenue
Code Section 7463(b), this opinion may not be treated as precedent for
any other case. Click the link to
obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Shelton v. Commissioner, T.C. Summary Opinion 2002-9
DECISION DATE: February 6, 2002
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner -- pro se; Chang Ted Li for respondent
P's RESIDENCE: Maryland
KEY WORDS: Depreciation; rents and expenses; record keeping
CODE SECTIONS: 61; 168; 212; 6001; 167; 168
FACTS: Petitioner owned residential rental property, and at various
times rented portions of the property to tenants. When petitioner
failed to file tax returns for taxable years 1994 through 1997,
respondent prepared substitute returns that included rental income.
Petitioner contested respondent’s derivation of taxable income, and
at trial offered income and expense schedules relating to his rental
property. These scheduled showed different income amounts and
significant, although unsubstantiated, expenditures for each year,
generating net losses.
ISSUES: (1) What amount of rental income did petitioner derive for
taxable years 1994 through 1997? (2) Is petitioner entitled to deduct
all of the expenses (insurance, mortgage interest, utilities,
supplies, repair and taxes) disclosed in the schedule he presented at
trial? (3) Is petitioner entitled to claim a depreciation deduction
for his rental property, and if so, in what amount?
HOLDINGS: (1) Petitioner demonstrated through credible unrebutted
testimony that income attributable to operation of rental property was
less than that set forth in respondent’s notice of deficiency, and
was in the amounts petitioner testified to. (2) Petitioner is entitled
to deduct those expenses he was able to document (mortgage interest,
real property taxes, water and repairs). (3) Petitioner may take a
depreciation deduction for each of the four years in issue using the
straight-line method, a 27.5 year recovery period, and the midmonth
convention. The calculations petitioner provided are correct, except
that petitioner erroneously included both land and building when
depreciation for tangible property is inapplicable to land.
Pursuant to Internal Revenue Code Section 7463(b), this opinion may
not be treated as precedent for any other case. Click
the link to obtain the full text of the case in pdf format at www.ustaxcourt.gov.
NAME AND CITE: Rose v. Commissioner, T.C. Summary Opinion 2002-8
DECISION DATE: February 5, 2002
SPECIAL TRIAL JUDGE: Couvillion
ATTORNEYS: Petitioner -- pro se; Timothy F. Salel for
respondent
P's RESIDENCE: California
KEY WORDS: Travel expense; labor expense; depreciation; adjusted
basis
CODE SECTIONS: 162(a); 263(a)(1); 1011(a); 1012
FACTS: At the time petitioner was a commercial airline pilot, he
resided in San Diego, but was required by his employer to take on a
flight base at a location distant from his residence. Before the Tax
Court, the parties stipulated that petitioner’s tax home was a place
other than San Diego. As retirement became imminent, he became
involved in air racing activities that took place in San Diego and in
other places to bolster his financial resources. Later, petitioner
designed and built his own racing aircraft. Petitioner also became
involved in buying, restoring and selling classic automobiles. In
1989, he purchased a 1970 Plymouth Barracuda for restoration. He sold
the vehicle seven years later at a loss. On his federal income tax
returns for 1995, 1996 and 1997, petitioner claimed substantial travel
and labor expenses related to his air racing endeavors. Among these
expenses were expenses for lodging and meals that petitioner
calculated on a per diem basis for each day he was in San Diego.
Petitioner also deducted labor expenses that respondent contended were
incurred in constructing a racing aircraft, and that therefore were
subject to capitalization. Respondent disallowed all travel expenses,
and allowed only a portion of petitioner’s claimed labor expenses
for each year. For taxable year 1996, petitioner reported a
substantial loss from the sale of the Barracuda, and respondent
disallowed a portion of the claimed basis in the automobile. These
adjustments prompted adjustments to petitioner’s itemized
deductions.
ISSUES: (1) For the taxable years in issue, may petitioner deduct
travel expenses consisting of per diem and other amounts relating to
his air racing activities? (2) Is petitioner entitled to deduct
certain labor expenses for the taxable years in issue in connection
with air racing activities? (3) Is petitioner entitled to a
depreciation deduction for a racing aircraft he constructed? (4) Did
respondent properly disallow petitioner’s claimed adjusted basis in
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