Small Tax Case Project
Last updated August 1, 2002

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

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 (2^nd 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: 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

FEBRUARY 2002

JANUARY 2002

DECEMBER 2001

NAME AND CITE: Robert Henry Lehmuth v. Commissioner, T.C. Summary Opinion 2001-190
DECISION DATE: December 28, 2001
SPECIAL TRIAL JUDGE: Wolfe
ATTORNEYS: Petitioner - pro se; Respondent - James J. Posedel
P’s RESIDENCE: California
KEY WORDS: Personal injury settlement; actual or constructive receipt of income.
CODE SECTIONS: 61
FACTS: Petitioner, along with other individuals, filed a class action law suit against a former employer (Kits) for damages for failure to pay overtime compensation and for failure to pay earned wages. Petitioner was represented by James S. Davis. Mr. Davis also represented former store managers in a similar but separate case against Kits. Kits settled with petitioner and another individual who was also represented by Mr. Davis. The settlement agreement required petitioner to release all claims against Kits. It also provided that a check for $45,000 would be made out to Mr. Davis, $15,000 each to be allocated for petitioner, Mr. Davis and the other individual involved in the settlement.
Mr. Davis sent $12,500 to petitioner and indicated that the remaining $2,500 would be delivered at a later time. However, despite petitioner’s request, Mr. Davis never sent him the remaining $2,500.
Petitioner did not report any of the proceeds from the settlement on his 1998 income tax return. Respondent determined that petitioner should have included the entire $15,000 in his gross income because he had actually received the $12,500 and constructively received $2,500 during that year.
ISSUES: (1) Whether the amounts petitioner actually or constructively received in settlement of a suit for unpaid overtime wages constitute gross income to petitioner. (2) If so, whether petitioner constructively received a portion of the settlement proceeds that his attorney did not remit to him.
HOLDING: The $12,500 that the petitioner actually received should have been included in gross income, but he did not constructively receive the $2,500 being held by his attorney.
(1) Section 61 provides that all income, from whatever source, is includable in gross income unless specifically excluded by another provision. Compensation for services is explicitly included as part of gross income. Section 61(a)(1), With respect to damages received as a result of a law suit, the nature of the underlying action determines the tax consequences of the resolution of the claim. This applies whether the claim is resolved through litigation or a settlement. The relevant question is, in lieu of what were the damages awarded? In this case, petitioner received the damages in lieu of compensation for services and therefore constitute gross income to the petitioner. The failure of petitioner’s employer to withhold federal income tax, or provide him with a W-2 or 1099, does not absolve petitioner of his duty to report the income.
(2) A taxpayer who reports income under the cash method of accounting must report income for the taxable year when actually or constructively received. Section 1.451-1(a), Income Tax Regs. Income is constructively received by a taxpayer in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. Section 1.451-2(a), Income Tax Regs. A taxpayer recognizes income when the taxpayer has an unqualified, vested right to receive immediate payment. Generally, receipt of payment by an agent is considered constructive receipt by the taxpayer. There is an exception to this rule if there is an unauthorized use of funds from which the principal derives no benefit. Mr. Davis was acting as petitioner’s agent but Mr. Davis was not authorized to retain that money, and petitioner received no benefit from this unauthorized use because he was precluded from participating in the law suit by the settlement agreement. Therefore petitioner did not constructively receive the $2,500 held by Mr. Davis. Only the $12,500 he actually received should have been included in his 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: Wayne Robert and Patricia A. Rogers v. Commissioner, TC Summary Opinion 2001-188
DECISION DATE: December 21, 2001
SPECIAL TRIAL JUDGE: Armen
ATTORNEYS: Petitioners - pro se; Respondent - Louise R. Forbes
P’s RESIDENCE: Massachusetts
KEY WORDS: Travel expenses, employee benefit programs, insurance.
CODE: 261, 262
FACTS: In 1997 and 1998, petitioners filed joint returns with Schedule C, Profit or Loss from Business. Petitioner Wayne Robert Rogers worked as a self employed computer consultant for the years in question. He claimed deductions for car and truck expenses, employee benefit programs, and insurance. Petitioner had only one client, and car and truck expenses represented costs incurred in traveling from home to that office and back. Employee benefit programs represented the cost of certain family vacations. The insurance deduction represented the cost of monthly life insurance premiums. The IRS disallowed all of the above deductions, on the grounds that they are not deductible as a matter of law.
ISSUES: Whether petitioner properly deducted car and truck expenses, when he was traveling between home and work; whether petitioner properly deducted employee benefit programs when this represented the cost of family vacations; whether petitioner properly deducted insurance when this represented monthly premiums for life insurance purchased by petitioner to provide income security for his family.
HOLDING: These items are nondeductible personal expenses. Section 261 states "In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part." Section 262 specifies "no deduction shall be allowed for personal, living, or family expenses." The cost of commuting to and from a taxpayer’s place of business is a non-deductible, personal expense. Family vacations and life insurance premiums paid by the insured are also nondeductible, personal expenses. The petitioner contends that these expenses should be deductible to achieve parity of treatment between employees and the self-employed. But what should be deductible is a question for Congress and absent a constitutional defect, courts are constrained to apply the law as written. 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: Ronald and Nancy Sweet v. Commissioner, T.C. Summary Opinion 2001-187
DECISION DATE: December 21, 2001
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner - Charles A. Borek and Robb Longman; Respondent - Chang Ted Li
P’s RESIDENCE: Maryland
KEY WORDS: Business expenses, reasonable cause, willful neglect.
CODE SECTIONS: 6001, 162(a), 262(a), 6651(a)(1), 6653(a)(1)
FACTS: Petitioners filed joint tax returns for the years 1988, 1989 and 1993. Petitioner Ronald Sweet worked as a window installation contractor and tax return preparer from 1988 through 1993. The 1993 return was timely filed but the 1988 and 1989 returns were not received by the Cincinnati Service Center until June 17, 1997. Ronald Sweet filed separate Federal income tax returns for tax years 1990, 1991 and 1992. These returns were also received June 17, 1997. Respondent disallowed certain Schedule C deductions and cost of goods sold. Respondent also held petitioner liable for additions to tax for failure to timely file returns for tax years 1988 to 1992 and an addition to tax for negligence for tax year 1988.
ISSUES: (1) Whether petitioners are entitled to deduct certain Schedule C expenses. (2)Whether petitioners are liable for additions to tax for failure to timely file returns under section 6651(a). (3) Whether petitioners are liable for an addition to tax for negligence under section 6653(a)(1).
HOLDING: Petitioners were not entitled to the deductions in controversy and they were liable for all additions to tax determined by respondent.
(1) Petitioner claimed deductions for costs of goods sold and expenses incurred for hiring sub-contractors. Section 162(a) allows a tax payer to deduct all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. No deduction is allowed for personal, living or family expenses. Section 262(a). Generally, if a claimed business expense is deductible and the taxpayer is unable to substantiate it, the court may make as close an approximation as it can, bearing heavily against the taxpayer whose inexactitude is of his or her own making. This estimate must have a reasonable evidentiary basis. Respondent disallowed deductions claimed by petitioners due to a lack of adequate substantiation. Although petitioner may have had expenses for goods sold and for subcontractors, he failed to produce record books or any corroborating witnesses at trial, and failed to establish any reasonable evidentiary basis, for these expenses.
(2) Section 6651(a)(1) imposes an addition to tax for failure to timely file a tax return and respondent determined additions to tax as a result of petitioners’ failure to timely file their respective tax returns for tax years 1988 to 1992. These additions are applicable unless petitioners establish that their failure to timely file the return was due to reasonable cause and not willful neglect. Section 6651(a)(1). Petitioner offered no explanation for their failure to timely file their tax returns and accordingly, they are liable for the additions to tax under section 6651(a)(1).
(3) Section 6653(a)(1) provides that if any portion of an underpayment of tax is due to negligence or disregard of rules or regulations, an amount equal to 5 percent of the underpayment is added to the tax. Negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances. A particular taxpayer’s experience and the nature of the business may be considered in making this determination. Petitioner was a tax preparer during the years in issue and should have understood the substantiation requirements for deductions claimed on their Schedule C. Because they failed to offer any credible explanation for their lack of due care in preparing and filing their 1988 return, they are liable for an addition to tax under section 6653(a)(1). 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: George N. Seman v. Commissioner, T.C. Summary Opinion 2001-186
DECISION DATE: December 17, 2001
SPECIAL TRIAL JUDGE: Goldberg
ATTORNEYS: Petitioner - pro se; Respondent - Richard A. Stone
P’s RESIDENCE: Maryland
KEY WORDS: Self employment tax.
CODE SECTIONS: 1401, 1402(a), 1402(b)
FACTS: Petitioner is in the business of operating a dump truck as an independent contractor. Petitioner was retired from military service and was receiving a military pension and Social Security benefits. In a notice of deficiency, respondent determined that petitioner’s Schedule C income was subject to self-employment tax for 1997.
ISSUES: Whether petitioner’s Schedule C, profit or Loss from Business, net profit is subject to self-employment tax.
HOLDING: There is no exception to the self-employment tax provisions and petitioner is subject to self-employment tax. Petitioner argued that he should not be subject to self-employment tax since he will not gain any additional benefit while he is receiving a military pension and Social Security benefits. But though petitioner believes this is unfair, he is bound by the law as written. Section 1401 imposes a tax on an individual’s self-employment income. Self employment income is defined as "net earnings from self-employment." Section 1402(b). Net earnings from self-employment are defined as an individual’s gross income from a trade or business carried on by such individual less the deductions attributable to such trade or business. Section 1402(a). . 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: Cynthia S. Al-Murshidi v. Commissioner, TC Summary Opinion 2001-185
DECISION DATE: December 13, 2001
SPECIAL TRIAL JUDGE: Powell
ATTORNEYS: Petitioner - pro se; Respondent - Dustin M. Starbuck
P’s RESIDENCE: Virginia
KEY WORDS: medical expense deduction, cosmetic surgery
CODE SECTIONS: 213
FACTS: Petitioner claimed a deduction on her 1996 tax return for costs of 3 surgical procedures to remove skin mass on abdomen. She underwent these procedures after losing over 100 lbs., resulting in mass of loose hanging skin which interfered with her mobility and was subject to infection and irritation.
ISSUES: Whether petitioner was entitled to deduction for cost of surgical procedures.
HOLDINGS: Petitioner may claim cost of surgical procedures as medical expense in that she suffered from morbid obesity, and continued to suffer from effects of condition after losing weight. Surgery was necessary to promote proper function of her body and treat her disease, and was not merely "cosmetic surgery" which is non-deductible pursuant to IRC §213(d)(9). Plastic surgeon’s description of procedures as "cosmetic" was not dispositive. 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: Hugh T. Brown, Jr. & Kristi L. Brown v. Commissioner, T.C. Summary Opinion 2001-184
DECISION DATE: December 12, 2001
SPECIAL TRIAL JUDGE: Wolfe
ATTORNEYS: Petitioners - Kelly Abreu; Respondent - James J. Posedel
P’s RESIDENCE: California
KEY WORDS: business expenses, profit making activity, gold mining
CODE SECTIONS: 183, 162, 212
FACTS: In 1996 and 1997 claimed deductions for business losses related to gold mining activity. Petitioner was employed during this time by the U.S. Army Corps of Engineers and devoted weekends to the gold mining activity. Expenses for this activity exceeded the income in both years, and respondent disallowed the deductions, although it conceded that petitioners incurred all the expenses claimed.
ISSUES: Whether the mining activity constituted a bona fide business venture entered into for profit under Section 183, and whether the expenditures made in connection with the mining activity were deductible business expenses.
HOLDINGS: Court found that expenses claimed by petitioners were deductible business expenses, insofar as they had bona fide profit motive for the gold mining activity, even if there was no reasonable expectation of profit. This determination rested on analysis of the circumstances presented under a set of factors set forth in Sect. 1.183-2(b) of Income Tax Regs. Primary factors weighing in favor of petitioner’s profit motive were amount of time he devoted to activity, improvement in profitability of enterprise in years subsequent to those in issue, lack of substantial income from other sources and hardships endured to carry on 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: Mehdi H. Hajiyani v. Commissioner, T.C. Summary Opinion 2001-183
DECISION DATE: December 12, 2001
SPECIAL TRIAL JUDGE: Dean
ATTORNEYS: Petitioner, pro se; Respondent, Roger W. Bracken
P’s RESIDENCE: Maryland
KEY WORDS: trade/business of lending money, business expenses, business bad debts, real estate rental loss, passive activity loss.
CODE SECTIONS:162, 166, 183, 469, 7491
FACTS: Petitioner, who was employed as a chemistry professor since 1971, made loans or purchased notes representing loans, and reported interest income from this activity between 1985 and 1994. He also engaged in the purchase of residential property for leasing and resale, beginning in 1976. In 1992, 1993, and 1994 he filed a Schedule C reporting interest income (and claiming business expenses) in varying amounts. In 1993 he offset an amount claimed for bad debts resulting in a net bad debt loss of $733,928, plus business expenses of $28,103. Petitioner reported total rental losses of $62,903, $35,456, and $82,230 on Schedule E for 1992, 1993, and 1994 respectively. Respondent determined deficiencies based on disallowance of business expenses associated with the lending activity in all three years, disallowance of the bad debt deduction, and disallowance of the rental income losses.
ISSUES: (1) Whether petitioner was in the trade or business of lending money, and if so, whether he was entitled to deductions for business expenses associated with this activity; (2) whether he was entitled to deduct various business bad debts, and the net operating losses therefrom;
(3) whether petitioner was entitled to deduct real estate rental losses in excess of $25,000.
HOLDINGS: (1) The Court rejected respondent’s argument that petitioner’s lending activity lacked a profit motive, and noted that his work as a chemistry professor did not in itself preclude him from engaging in another trade or business. The Court found that factors such as the total number of loans made, the adequacy and nature of the taxpayers records, whether the loan activities were kept separate and apart from the taxpayer’s other records, whether the taxpayer actively sought out lending business, the amount of time and effort expended in the lending activity, and the relationship between the taxpayer and his debtors, were indicative of petitioner being in the trade or business. It held, accordingly, that he was entitled to deduct business expenses associated with his lending activity for the years 1992 through 1994.
(2) Petitioner failed to show the requisite elements to deduct the various bad debt expenses that he had claimed, namely, that each such debt was worthless, and the year it became worthless. Petitioner bore the burden of proof, insofar as he made no argument that the burden shifting provisions of Section 7491(a)(1) applied, and did not offer any evidence of compliance with Section 7491(a)(2). Although Section 166 of the Code provides for deduction of a debt in the taxable year in which it becomes wholly or partly worthless, petitioner did not raise the issue of partial worthlessness and the Court therefore did not consider it. Petitioner failed to establish, by a preponderance of the evidence, that any of the loans claimed as bad debts became wholly worthless within any of the years at issue. The Court noted that in the case of one such loan, petitioner still received payments on the debt; in others, events predating the years at issue indicated no reasonable hope of recovery, and in others, petitioner never made any attempt to collect on the loans, suggesting that they had become worthless prior to the years in question. In the case of some of the real estate loans, petitioner failed to produce evidence of any events which fixed the year of total worthlessness. Although there was evidence that one of the personal loans became worthless in 1994, petitioner failed to establish that the motivation for the two loans made to friends was business related. The Court found that petitioner was therefore not entitled to a deduction for his unpaid loans, except to the extent that the Commissioner had allowed a $3000 investment loss on Schedule D in each of the years of 1992, 1992, and 1994. The Court found it unnecessary to reach the issue of whether petitioner had established his bases in the various loans.
(3) With respect to the real estate rental losses, section 469(a) prohibits deductions for passive activity losses. Except for real estate professionals engaged in a real property business after December 31, 1993, all rental activity is considered passive activity. However, under section 469(i), if an individual actively participates in rental real estate activities, the 469(a) disallowance will not apply to a maximum of $25,000 of passive activity losses. Since the Commissioner had determined that petitioner actively participated in rental activities, petitioner was entitled to deductions for passive activity losses up to $25,000 in 1992, and the remainder could be carried over to the next year for application against income from passive activities and the $25,000 offset. Petitioner did not establish that he was entitled to treatment as a real estate professional in 1994 in that he did not show that more than half the personal services he performed in that year were performed in real property trades or businesses in which he materially participated, nor that he performed more than 750 hours of services in real property trades or businesses. The Court found that the only evidence of petitioner’s personal services performed in 1994 with respect to his real estate rental property consisted of petitioner’s vague testimony and two calendars that did not describe the amount of time spent. Petitioner was therefore limited to deduction for passive activities allowed by Commissioner. 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: Roy Robert Botts v. Commissioner, TC Summary Opinion 2001-182
DECISION DATE: December 11, 2001
SPECIAL TRIAL JUDGE: Pajak
ATTORNEYS: Petitioner - pro se; Respondent - James E. Gray
P’s RESIDENCE: North Carolina
KEY WORDS: 401(k) retirement plan, early distribution
CODE SECTIONS: 72
FACTS: In 1997 petitioner received a distribution of $55,404 from his 401(k) retirement account but did not report this on his tax return. Bank making distribution withheld federal and state income tax, as well as additional amount it attributed to loan payoff. Petitioner testified, without any evidence offered in support of his contention, that he had not taken out any loan and believed additional amount was withheld to cover 10% additional tax due under Internal Revenue Code 72(t) on early distribution from 401(k).
ISSUES: Whether petitioner was liable for 10% additional tax based on early distribution from 401(k).
HOLDINGS: Petitioner’s testimony was not credible. Record showed that petitioner received loan and bank applied part of distribution to loan repayment. Petitioner was therefore liable for unpaid 10% additional tax on his 401(k) distribution. 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: Jose Corona v. Commissioner, T.C. Summary Opinion 2001-181
DECISION DATE: December 10, 2001
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner, pro se; Respondent, Peter C. Rock
P’s RESIDENCE: California
KEY WORDS: head of household, earned income credit, dependency exemption, child tax credit
CODE SECTIONS: 2, 24, 32, 151, 152,
FACTS: In 1997 and 1998 petitioner filed tax returns reporting income of $9,337, and $19,616, respectively. He claimed head of household status, dependency exemptions for his two children, and the earned income credit both years. He also claimed the child tax credit for one child in 1998. The Commissioner found deficiencies based on changing his filing status to single, and disallowing the dependency deductions, EIC and child tax credit. Petitioner was apparently married but separated from his wife since 1995. He testified that his daughter lived with him throughout 1997 and 1998 and that he supported her, and that his son lived with him until mid-1997 when his wife removed the boy without his consent. Petitioner’s wife’s testified that the children resided with and were supported by her from September, 1997 through 1998.
ISSUES: Whether petitioner was entitled to file as head of household for 1997 and/or 1998. Whether petitioner was entitled to dependency deductions for either child. Whether petitioner was entitled to the earned income credit for either child. Whether petitioner was entitled to the child tax credit.
HOLDINGS: The Court did not find petitioner’s testimony credible and accepted the version of FACTS presented by petitioner’s wife. It held that petitioner was entitled to file as head of household for 1997, and to claim the earned income credit that year, insofar as his children lived with him for more than one half of the year and he provided over half the cost of maintaining his home. However, he was not entitled to the dependency exemption for either year, or the child tax credit, in that he did not support the children in 1998, and his income level of only $9,337 in 1997 indicated that the children probably had other sources of 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: Gail Marie Harmon v. Commissioner, TC Summary Opinion 2001-180
DECISION DATE: December 10, 2001
SPECIAL TRIAL JUDGE: Dinan
ATTORNEYS: Petitioner - pro se; Respondent - H. Clifton Bonney, Jr.
P’s RESIDENCE: California
KEY WORDS: Rental Activity expenses; travel & transportation expenses.
CODE SECTIONS:6001, 274(d), 262(a), 212.
FACTS: Petitioner filed a Schedule E, Supplemental Income and Loss, for tax year 1996, claiming deductions for cleaning and maintenance, repairs, and supplies for two rental properties. She also claimed miscellaneous itemized deductions for travel and transportation expenses incurred in travel to different investment properties. The Commissioner determined that the petitioner was not entitled to deduct a portion of the expenses claimed with respect to these rental properties because it had not been established that any of the amounts disallowed both were paid during the taxable year and were ordinary and necessary business expenses.
ISSUES: Whether petitioner properly substantiated her claims and is entitled to various rental activity expense deductions and miscellaneous itemized deductions.
HOLDING: The petitioner was not entitled to deduct a portion of the expenses claimed because she lacked proper substantiation of her claims. Pursuant to Internal Revenue Code §6001, a taxpayer must generally keep records sufficient to establish the amounts of the items reported on her Federal income tax return. The court may estimate the amount of a deductible expense if a taxpayer establishes that an expense has been paid and the taxpayer presents evidence sufficient to provide some basis upon which an estimate may be made. However, section 274(d) precludes any deduction for travel expenses under section 212 absent strict substantion of amount, time, place and business purpose of the expense. The court found the evidence provided by petitioner, consisting of summaries constructed from bridge receipts, with estimates of amounts paid to individuals identified by first name only, and sticky notes indicating amounts paid for supplies, to be unreliable, and they did not find her testimony to be credible. The court also rejected petitioner’s summaries of travel and transportation expenses as insufficient under section 274(d). In addition, expenses for travel to properties owned by a family trust for which petitioner was neither trustor nor trustee, were non-deductible personal 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.

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