T .C . Memo . 2008-249
UNITED STATES TAX COUR T
DAVID A . HU HES, etitioner v .
COMMISSIONER OF IN ERNAL REVENUE, Responden t
Docket No . 4486-07 .
P claimed numerous deduc income tax return and d d not income in his taxable i come .
CAL .
STA'T
JUDO ?
FILE S
Filed November 3, 2008 .
1 1 ions on his 2001 Federal include distributio n R determined a deficiency, an addition to tax pursuant to sec .
6651(a)(1), I .R .C ., and an acdurac'y-related penalty pursuant to sec . 6662(a , I .R .C .
` Held : P is liable for the deficiency, the addition to tax, and th accuiacy-related penalty .
David A . Hughes, .pro s e
Susan S . Hu , for respondent .
SERVED NOV -3 7008
2 -MEMORANDUM FINDINGS OF FACT AND OPINIO N --WHERRY, Judge : This case is before the Court on a petition for redetermination of a Federal income tax deficiency, an addition ' to, tax , under section 6651 ( a)(1), and a penalty unde r sect . i on .,6662 .(a) that respondent determined with respect to pettioner :' s-2001 tax year . ' The issues for decision are : .(1)-Whether petitioner is entitled to $40,936 of deduction s for unreimbursed employee business expenses, tax preparatio n fees, tax advice , job search expenses , and medical and denta l expenses claimed on Schedule A, Itemized Deductions ; (2) whether petitioner is entitled to deductions of $6,410 for expenses related to pension and profit-sharing plans and $2,888 for depreciation and section 179 expenses, claimed on Schedule C, Profit or Loss From Business ;
(3) whether the $18,312 in distributions that petitione r received from Wescom Credit Union is includable in his taxabl e income ;
.(4) whether petitioner is liable, - for the 10-percent additional tax under section 72(t) ;
(5) whether petitioner is liable under section 6651(a)(1 ) for a $3,161 .75 addition to tax ; an d 'All section references are to the Internal Revenue Code of 1986, as amended an in effect for the tax year at issue . The Rule references are to the Tax Court Rules of Practice and Procedure .
(6) whether petitioner is liable under section 6662(a) for a $2,557 .80 accuracy-related penalty .
FINDINGS O FAC T
Some of the facts have een stipulated, and the stipulated facts and accompanying exhib'ts'are hereby incorporated by reference into our findings . At the-time he filed his petition , petitioner resided in Califo nia .
Petitioner filed his 20C1 Forn 1040, U .S . Individual Income Tax3Return, with respondent n March 3, 2004 . On his return, petitioner reported receiving $18, 12 in distributions from Wescom Credit Union in 2001 . Petitioner also claimed deduction s on Schedule A and Schedule C .
On Schedule A petitione27 deducted, inter alia, (1) $35,256 for unreimbursed employee business expenses, specifically $20,159 for vehicle expenses, $4,450 for n novernight travel expenses, $7,225 for overnight travel xpens s, $1,654 for other business expenses, and $1,768 for meals and entertainment expenses ; (2) $625 for tax preparation fee ; (3) $1,500 for tax advice ; and (4) $2,536 for job search expens s . Oft Schedule C he deducted, amon g other things, $6,410 for exp nses elated to pension and profitsharing plans and $2,888 for depre iation and section 17 9 expenses .
On November 28, 2006, respondent issued a notice o f deficiency to petitioner forlhis 2,01 tax year . Petitioner filed a timely petition=with this .Court on February 26, 2007 . Therein , he states that (1) "the company Iwas . employedsby was purchase d by another company and has been unable to supply T & E policy fo r the year in question " ; '( 2) he "had gone through a divorse [sic] and spouse a t the = time ,will not supply ' copies , of important ,tax info in their care" ; a I d (3) , "Several personnal [ sic] address changes as well as divorse [ sic] and time passed caused some information to be misplaced " . He also asserts that "any penalties due-for any tax that maybe due should be waived since there was . . no, malace [sic],simply , errors" . A , tr- ial was held- : .o n May 7, 2008 °, in Los-Angeles, California . ` OPINIO N Whether Petitioner is Entitled to Deductions Claimed on Schedules A and C Deductions are a matter of legislative grace, and taxpayer s bear the burden of proving entitlement to any claimed deductions .
INDOPCO, Inc . v . Commissioner, 503 U .S . 79, 84 (1992) . As par t of their burden, taxpayers must substantiate the amount of thei r claimed deductions . A taxpayer is required to maintain record s sufficient to establish the amount of any deduction . claimed . Sec . 6001 ; sec . 1 .6001-1(a), Income Tax Regs .
Even when .a taxpayer is unable to substantiate the amount o f a deduction, the Court may still allow the deduction, or a portion thereof, if there is an evidentiary basis for doing so . Cohan v . Commissioner , 39 F .2d 540, 543-544 (2d Cir . 1930) ;
Vanicek v . Commissioner , 85 T .C . 731, 742-743, (1985) ., In thos e instances , the Court may_est mate heavily if appropriate again t the he allowable expense, bearing taxpayer 1whose inexactitude i s of his or her own making . Cohan v .l Commissioner , supra at 544 . ' The Cohan rule does not appl'', however, with respect t o deductions that are subject to the strict substantiation requirements of . section 274 . Sec . .1 .274-5T(a), Temporary Income Tax Regs ., 50 Fed . Reg . 4601 (Nov . .6, 1985) .
Petitioner claimed ava iety f`deductions on his 2001 return, each-,of which . has it .own specific rules and requirements . Although we w ll adress each of them in turn , petitioner-is ultimately unableto establish' entitlement to an y of- .them because he has failed to p :ovide any substantiatin g evidence .
A . Unreimbursed Employee Business Expenses -Section 162(a) authoriz,s 'a d,duction for "all the ordinar y and necessary expenses paid ; r incurred during the taxable yea r in carrying on any trade or usine s" . An expense is ordinary i f is normal or customary wi hin a particular trade, business, o r industry . Deputy v . du Pont , 308 U .S . 488, 495 (1940) . A n expense is necessary if it-io ' :appropriate-and helpful" for th e development of the business .
113 (1933) . Services perforied a s Welch v . Helvering , 290 U .S . 111 , an employee generall y constitute a trade .or business for purposes of section 162(a) .
6 -, O'Malley v . Commissioner , :91 T : .C . . 352, 363-364 .(1988) . However ; . if an employee's expenses are,reimbursable by his or .her employer, those expenses are .not-necessary„and cannot be deducted . Orvis v . Commissioner , 788,F .2d 14`06, 1408 .(,9th Cir . 1586), affg, . T . C :-,Memo . 1984-533 .
As mentioned,, certain business expenses -described' in= section 274 .(d) are subject to strict . substantiation .rules .that supersedethe Cohan rule . Sanford v . Commissioner , . 50 T- .C . 823,E 827-828 (1968), affd . 412 F .2d 201 .(2d -Cir . 1969) . ; sec . :1 .274-'5T(a) ,` Temporary Income TaxRegs ., supra ., Section 274(d) applies to : (1) Any . traveling ; expense, including meals and lodging . away from home ; (2) entertainment,,amusement, and recreational expenses ; (3) any expense for gifts ; or (4) the use of listed,property, , as' defined in section 280F(d)(4), including passenger automobiles .` To deduct such expenses, the taxpayer must substantiate by adequate : records or evidence sufficient to corroborate the taxpayer's own testimony : . (1) The amount of the expenditure or, use, . which includes mileage in the case of-automobiles ; (2) the : time and place of . the travel, entertainment, or use ; (3) its business purpose ; and in the case of entertainment :, (4) the . . business relationship to the taxpayer of each expenditure or use' . Sec . 274(d) (flush language) ., - 7 B . Tax Preparation Fee Section 212(3) provide s deduction all the ordinary a incurred during the taxable and Tax Advic e that `there shall be allowed as a d necessary expenses paid o r ear * * * in connection with th e determination, collection, o refund of any tax ."
C . Job Search Expense s
Section 162(a) allows a taxpayer to deduct expenses incurred in searching for new employment within the same trade or business . See Primuth v . Co missi ner, 54T .C . 374, 378-379 (1970) ; see also Mur ata v . Commissioner, T .C . Memo . 1996-321 . A deduction is not allowed for expenses incurred while seeking employment in a new trade or business . See Frank v . Commissioner , 20 T .C . 511, 5 3-514 (1953) .
D . Employer Contributi
Plan s
An employer's contribut plans are not deductible and deductible under section 16 2 See E dwin's, Inc . . Unite d 1974)- ; sec . 1 .404(a)-1(b), I allows as a deduction "a rea other compensation for pers o E . Depreciation and Se A,taxpayer may elect to cost, within certain dollar ns t o ons t Pension or Profit-Sharin g > pension or profit-sharin g resection 404 unless they ar e as ordinary and necessary expenses .
tates , 501 F .2d 675, 679 (7th Cir .
come Tax Regs . Section 162(a)(1)
onabl allowance for salaries or ai .se vices actually rendered" .-tion 79 Expens e deduct as a current expense the imitations, of any section 179 d 8 -property that is used in an active trade or business and placed in service during the taxable year . Sec . 179(a), (b), (d)(1) ; see sec . 1 .179-4(a), Income Tax : Regs . ,The election must specifythe total section 179 expense deduction claimed and the-portion of that deduction allocable to each specific item . Sec .
179(c)(1) ; sec . 1 .179-5(a), Income Tax Regs . The taxpayer must make a separate election for each taxable year, and such election must be made on the first income tax return for the taxable year to which the election applies . Sec . 179(c)(1)(B) ; sec . 1 .1797 5(a), Income TaxRegs . The taxpayer must also maintain records reflecting how and from whom the section 179 property was acquired and when it was placed in service . Sec . 1 .179-5(a), Income Tax Regs . A taxpayer who fails to make the election is not entitled to section 179 treatment . See- Jackson v . Commissioner , T .C . Memo . 2008-70 ; Visin v . Commissioner , T .C . Memo . 2003-246, affd . 122 Fed . Appx . 363 (9th Cir . 2005) . F .
Petitioner Failed to Substantiate the Amounts of the
Deductions He Claimed on Schedules A and C
There is no evidence of record to substantiate any . of petitioner's claimed deductions . Petitioner admits as much . At trial, .he . .claimed that his accountant has the necessary evidence . In his petition, he asserts that .his former spouse or th e acquirer of his former employer has the evidence .or that it was simply misplaced . Even assuming that substantiating evidence exists and is in the possession of third parties, petitioner has but h .s` failed to do so . If-th e third parties were uncoopera to issue subpoenas duces te c parties to . appear at .tria l addition, there is no indic a under section 179 .
Petitioner sought a con~inua n session ostensibly to permit necessary to substantiate hi in respondent's opinion not respondent opposed the conti continuance but set the-tria petitioner time to locate hi documents were . forthcoming a conclusion is inescapable :
entitlement to any of the de t' .
ive, Rule 147 permitted petitione r m ~thatt would have required thir d d bri .g written records . I n F ion thjat petitioner made an election ` e only days before the tria l him t locate the document s deduLtions . Because petitioner had ooper ted in the pretrial process,- , uance . The Court then denied th e ,,for ~ date \9 days,later to provid e documents . Nevertheless, no the t rial : Accordingly, ;ou r etitioner has failed to demonstrat e CH t ions at issue .2 u c 'At trial, the parties r reported his $6,410 deductio plans incorrectly and that h amount as a deduct-ion-for re machinery, vehicles, and equ substantiate that deductio n In addition, as a resul demonstrate entitlement to t portion of his deduction fo r disallowed . Sec . 213(a) al l medical and dental expense s percent of the taxpayer's ad ention d that petitioner may hav e for pension and profit-sharin g may ta,l e pment ither ave intended to claim tha t penses for business, There is no evidence t o oaf p titioner's failure t o e ded ctions described'above, a m medical and dental expenses must b e wslfo .the deduction of personal o the extent that they exceed 7 . 5 usted gross income (AGI) . In ligh t of our conclusion above, petftione 's AGI and 7 .5-percent floor (continued . . .)
II .
Whether the $18,312 in Distributions Petitioner Received from Wescom Credit Union Should be Included in His Taxable Incom e Section 63(a) generally defines taxable income as gross income minus, deductions . Section 61(a) in turn specifies that, "Except as otherwise provided"," gross income includes "all income from whatever source derived"
. Generally, income from annuities and pensions is included in gross income . Sec . 61(a)(9), (11) . Section 72 further provides that distributions from qualified retirement plans are included in gross income . See secs . 72(a), 402(a) .
In addition, .a taxpayer who receives a distribution from a qualified retirement plan before attaining the age of 59-1/2 is generally subject to an additional 10-percent tax pursuant to section 72(t)(1 .) on the amount 'of the distribution unless the' taxpayer can . prove that an exception under section 72(t)(2)
applies . See Bunney v . Commissioner , 114 T .C . 25'9, 265-266 (2000) .
The Commissioner's determination of a deficiency is generally presumed correct, and the taxpayer bears the burden of proving that the determination is improper . See Rule 142(a) ; 2 ( .
. . continued )
must be adjusted upward, which, precludes petitioner from deducting the entire amount of medical and dental expenses reported on his 2001 return .
Welch v . Helvering , 290 U .S . at 11 . Although section 7491(a) f11 e Commissioner in specified may shift the burden of prop ' L circumstances petitioner has notatisfied the prerequisites under section 7491(a)(1) and (2) for such a shift . Petitioner concedes that he "[received] distributions from pensions and annuities in-the amou t of $18,312 .0'0 in the 2001 taxable year from Wescom Credit Unon ." On his Federal income tax return, he reported rece ving :hat amount as "Total IRA distributions", but he did not inc ude it in his gross income . At trial, he stated that he invested the money into his business and that his accountant had old him that he would have losses to offset the distribution inco e . T ese are not reasons to exclude the distributions from petit oner's gross income, and petitioner has not otherwise met his biz den o proving that respondent' s determination of a deficiency is proper . Accordingly, wewil l i t sustain the deficiency determined by respondent with respect to the $18,312 in distributions received from Wescom Credit Union in 2001 .
We will also sustain re pondent's imposition of a 10-percent
.additional tax under section 72' .(t) for petitioner's earl y distributions froma qualifi d ret'rement plan . Petitioner does not dispute that he was unde the age of'59-1/2 when he receive d the distributions and has not othe wise disputed the additiona l tax or shown'that an exception under section 72(t)(2) applies .
Respondent determined that petitioner was liable for an addition to tax under section 6651(a) .(1) . Section 66 .51(a)(1) imposes an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and not willful neglect .- See United States v . Boyle , 469 U .S . 241, 245 (1985) . Pursuant to section 7491(c), respondent has the burden of production with respect to this addition to tax and is therefore required to "come forward with sufficient evidence indicating that it is appropriate to impose the relevant penalty ." See Higbee v . Commissioner , 116 T .C . 438, 446 (2001) . Petitioner concedes that he filed his 2001 Federal income tax return on March 3, 2004--well beyond .the April 15, 2002, due date . Moreover, he has not disputed the addition to tax or presented any evidence to suggest that his failure to file timely was due to reasonable cause . Accordingly, we shall sustain respondent's imposition of the addition . to tax under section 6651(a)(1) .
Respondent determined that petitioner was liable for a penalty under section 6662(a) ., Respondent bears the burden of production with respect to petitioner's-liability for that penalty . See sec . 7491(c) . This means that respondent "must come forward with sufficient evidence indicating that it is - 13 , appropriate to impose the re Levant . penalty` . Higbee v . Commissioner , supra at 446 .
Section 6662(a) imposes an accuracy-related penalty of 20
.percent of any underpayment that i attributable to one of th e causes listed in subsection b) . One such cause is negligence or disregard of rules or regulations, with negligence including "any failure by the taxpayer to keep adequate books and records or to substantiate items properly ." Sec . 6662(b)(1) ; sec . 1 .66623 (b) (1) , Income Tax Regs . . . .A other cause is° .any substantial understatement of income tax defi ed for individuals as a n understatement that exceeds hegr ater of (1) 10 . percent of the tax required to be shown on he .` re urn for . the taxable year'or° (2) $5,000 . Sec . 6662(b),(2) (d) ( ) (A) .
There is an exception t the section 6662 ( a) penalty when-a taxpayer can demonstrate (1)° reasonable cause for the underpayment and (2) that-th taxpayer . acted in good faith wit h respect to the underpayment . Sec . 6664(c)(1) . Regulation s promulgated under section 66 4(c) provide further that th e determination of reasonable ause and good faith "is made on a case -by-case basis, taking i circumstances ." Sec . 1 .6664Respondent, asserts tha t 6662 penalty "because there of income tax" and "because to .ac ount all .pertinent facts and 4 (b) ( ) , Income Tax Regs .
petitioner is liable for the section as been a substantial understatemen t e acte d with negligence and 14 -disregard of the rules . Respondent explains that petitioner "has failed to provide respondent with evidence that he maintained books or records" .
On his 2001 return, petitioner indicated, that the total tax due was $2,133 . Respondent determined a deficiency of $12,789 .
Petitioner's understatement of tax is substantial under section 6662(d)(1)(A) because it exceeds .$5,000 and is greater than 10 percent of the amount required to be shown on the return . Although petitioner argues in his petition that the penalties should be waived because he did not act with malice,-he has not shown that he acted with reasonable cause or in good faith, . which is the proper statutory test, . Accordingly, we sustain respondent's determination that petitioner is liable for the section 6662(a) penalty for the 2001 tax year . .
The Court has considered all of petitioner's contentions, arguments, requests, and statements . To the extent not discussed herein, we .conclude that they are meritless, moot, or irrelevant . To reflect the foregoing, Decision will be entere d for respondent .