Embroidery Express, LLC v. Comm'r
This text of 2016 T.C. Memo. 136 (Embroidery Express, LLC v. Comm'r) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Decisions will be entered under
PARIS,
For Embroidery Express, the issue*134 for decision after concessions2 is whether Embroidery Express is entitled to depreciation and interest expense deductions for vehicles subject to the strict substantiation requirements of
*138 For Mr. and Mrs. McMinn, the issues for decision after concessions3 are whether they: (1) operated a cattle and deer activity and a resort activity with profit objectives; (2) are entitled to deduct business expenses in amounts greater than respondent allowed; (3) are entitled to a loss deduction from the sale of a motor home; (4) are entitled to deduct charitable contributions in amounts greater than respondent allowed;*135 and (5) are liable for accuracy-related penalties under
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners4 resided in Missouri, and Embroidery Express had its principal place of business in Missouri, at the time of filing their timely petitions.
*139 Before the years at issue Mrs. McMinn formed a successful and growing*136 embroidery business, and Mr. McMinn worked as a construction contractor. As Mrs. McMinn's business continued to grow, Mr. McMinn left the construction business to build the embroidery business with his wife. Mr. McMinn had a high school education and during the years at issue had assumed primary responsibility for petitioners' embroidery business.
Mrs. McMinn educated their six children at home. In 2004 the children, K.M., Dylan, Travis, Courtney, Kyle, and Bryan, were 8, 11, 13, 17, 19, and 21 years old, respectively.5 During the years at issue petitioners claimed K.M., Dylan, and Travis as dependents on their Federal income tax returns. In addition to the embroidery business, petitioners had a deer hunting preserve and cattle activity and a resort activity. Petitioners had titled most of their assets in the name of B.L.M. Trust, a joint revocable grantor trust established by petitioners (petitioners' trust).
Mr. McMinn grew up working on a farm, where his family raised cattle. Before the*137 years at issue petitioners acquired 176 acres of land that surrounded their residence, to raise cattle. However, by the years at issue Mr. McMinn had decided that raising cattle was no longer profitable, and he decided to use the land for a deer hunting preserve. Therefore, during the years at issue petitioners no longer had any cattle.
Petitioners did not have a written business plan or consult with experts for advice on developing a deer hunting preserve but instead relied on acquaintances for advice. They had no experience in developing a deer hunting preserve. They had a separate bank account for the deer hunting preserve and maintained records of the activity's assets to deduct depreciation expenses. As petitioners were considering the development of a deer hunting preserve, they intended to continue deducting previously incurred depreciation expenses for assets related to the cattle activity.
Petitioners did not market a deer hunting preserve, nor did they purchase any deer.
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Decisions will be entered under
PARIS,
For Embroidery Express, the issue*134 for decision after concessions2 is whether Embroidery Express is entitled to depreciation and interest expense deductions for vehicles subject to the strict substantiation requirements of
*138 For Mr. and Mrs. McMinn, the issues for decision after concessions3 are whether they: (1) operated a cattle and deer activity and a resort activity with profit objectives; (2) are entitled to deduct business expenses in amounts greater than respondent allowed; (3) are entitled to a loss deduction from the sale of a motor home; (4) are entitled to deduct charitable contributions in amounts greater than respondent allowed;*135 and (5) are liable for accuracy-related penalties under
Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners4 resided in Missouri, and Embroidery Express had its principal place of business in Missouri, at the time of filing their timely petitions.
*139 Before the years at issue Mrs. McMinn formed a successful and growing*136 embroidery business, and Mr. McMinn worked as a construction contractor. As Mrs. McMinn's business continued to grow, Mr. McMinn left the construction business to build the embroidery business with his wife. Mr. McMinn had a high school education and during the years at issue had assumed primary responsibility for petitioners' embroidery business.
Mrs. McMinn educated their six children at home. In 2004 the children, K.M., Dylan, Travis, Courtney, Kyle, and Bryan, were 8, 11, 13, 17, 19, and 21 years old, respectively.5 During the years at issue petitioners claimed K.M., Dylan, and Travis as dependents on their Federal income tax returns. In addition to the embroidery business, petitioners had a deer hunting preserve and cattle activity and a resort activity. Petitioners had titled most of their assets in the name of B.L.M. Trust, a joint revocable grantor trust established by petitioners (petitioners' trust).
Mr. McMinn grew up working on a farm, where his family raised cattle. Before the*137 years at issue petitioners acquired 176 acres of land that surrounded their residence, to raise cattle. However, by the years at issue Mr. McMinn had decided that raising cattle was no longer profitable, and he decided to use the land for a deer hunting preserve. Therefore, during the years at issue petitioners no longer had any cattle.
Petitioners did not have a written business plan or consult with experts for advice on developing a deer hunting preserve but instead relied on acquaintances for advice. They had no experience in developing a deer hunting preserve. They had a separate bank account for the deer hunting preserve and maintained records of the activity's assets to deduct depreciation expenses. As petitioners were considering the development of a deer hunting preserve, they intended to continue deducting previously incurred depreciation expenses for assets related to the cattle activity.
Petitioners did not market a deer hunting preserve, nor did they purchase any deer. They had previously built fences for the cattle activity, but did not upgrade the fences for a deer hunting preserve. To maintain a deer hunting *141 preserve they were required to obtain a permit. Petitioners*138 researched the permit issues with the Missouri Department of Conservation and with game wardens, but they ultimately decided not to pursue the deer hunting preserve because there was too much risk. Therefore, they did not obtain the permit for the deer hunting preserve. Consequently petitioners did not open or operate the deer hunting preserve during the years at issue.
Petitioners purchased several parcels of land for the cattle and deer activity. Petitioners purchased their first parcel of land for $100,000 in 1988. They subsequently purchased additional parcels for the deer hunting preserve, but the purchase prices of those parcels are not in the record nor is the total acreage of the property used for the activity. However, for the years at issue petitioners' cost bases in assets for the cattle and deer activity, including the land, buildings, and equipment, totaled $222,013, $193,187, and $195,024, respectively. Petitioners purchased the last parcel to be used for the deer hunting preserve approximately in 2006. After the years at issue, petitioners listed the property for sale at $4.4 million. For the years at issue petitioners attached Schedules F, Profit or Loss From Farming,*139 to their joint Forms 1040, U.S. Individual Income Tax Return, for the cattle and deer activity. A 22.5-acre portion of their land was enrolled in a Federal conservation program, and most of the gross receipts reported from the *142 cattle and deer activity were received on the condition that petitioners keep that portion of the land clear of crops and harvesting.6 For the years at issue petitioners derived total gross income of $3,142 from the activity. On the Schedules F petitioners claimed net losses of $18,155, $6,751, and $9,590, respectively, for the deer hunting preserve activity.
In 2004 petitioners formed Spring Lake Resort, LLC (Spring Lake Resort), with the purpose of developing land as a resort. They purchased the land and titled it in the name of petitioners'*140 trust. The property includes a lake.
Petitioners completed significant improvements on the land to create the resort. Before the formation of Spring Lake Resort petitioners built a pavilion on the resort property that included restrooms and three campsites that could accommodate recreational vehicles. After additional improvements, the resort area included jet ski docks, fish pads, automatic fish feeders, and fire pits; a dam *143 was rebuilt, and a bridge was added. Petitioners spent at least $95,000 on the improvements.
After the improvements were completed petitioners intended to rent campsites and market the property as a resort. They planned to charge $100 per day for use of the pavilion and $2.50 per pound of fish caught from the lake. A church occasionally rented the resort's pavilion during the years at issue for $100 per day.
For the years at issue petitioners did not pay for any advertising of the resort and did not publicly advertise access to the resort. They did not have a written business plan or any expertise in the development of a resort. They did not maintain separate books and records or a separate bank account for the resort. However, they did maintain depreciation schedules*141 for tax reporting purposes. They claimed depreciation deductions for 50% of the property values for 2004 and 33% for 2005 and 2006 in order to account for personal use. For the years at issue they owned jet skis that they used on the lake. In 2008 they built a new house by the lake.
For the years at issue petitioners reported a total gross income of $2,105 for Spring Lake Resort, and claimed net losses of $8,412, $3,938, and $1,181, respectively.
During the years at issue petitioners' embroidery business was primarily involved in acquiring used embroidery machinery, refurbishing it, and selling it. Petitioners' embroidery business involved significant travel because they purchased and sold embroidery machinery across the country and abroad. They would purchase embroidery machinery and transport it back to their facilities in rural Missouri to refurbish. Once petitioners had refurbished the machinery, they would sell it and transport it for the buyer. They had also acquired expertise in the transportation of large commercial embroidery machinery and would provide unrelated embroidery companies with specialized transportation services.
Petitioners would*142 purchase and refurbish approximately 300 to 500 embroidery machines a year. Each machine would cost between $10,000 and $75,000. The average machine that petitioners would purchase was 20 to 21 feet long and weighed approximately 3,500 pounds. The business was very successful, and petitioners averaged $8,750,000 in sales per year.
*145 To effect their business, petitioners formed several related entities: Embroidery Express; Advanced Embroidery Supply; Stitch It International, Inc. (Stitch It); and Embroidery Services, Inc. (Embroidery Services).7
Embroidery Express was incorporated on August 16, 2002, and was taxed as a subchapter C corporation. Embroidery Express was organized primarily to rent and sell embroidery machines in Mexico.
Embroidery Express owned three passenger automobiles throughout the years at issue. On December 1, 2003, Embroidery Express purchased a 2004 BMW for $53,325. The BMW was used to transport clients from the airport and to entertain them while they were visiting petitioners' office.8 Embroidery Express purchased a Toyota Avalon for $30,741 on May 2, 2006, and*143 subsequently sold it on March 16, 2007. On June 4, 2007, Embroidery Express purchased a Toyota Corolla for $15,203. For the years at issue, Embroidery Express claimed business expense deductions for depreciation expenses and interest expenses for the three passenger automobiles.
Advanced Embroidery Supply was used to pay petitioners' minor children. Petitioners reported the income and expenses of Advanced Embroidery Supply on Schedule C, Profit or Loss From Business (Sole Proprietorship), attached to their Federal income tax return for each of the years at issue. For the years at issue, petitioners claimed business expense deductions for total wages paid to K.M., Dylan, Travis, and Courtney of $46,516, $50,913, and $64,650, respectively. Advanced Embroidery Supply issued Forms W-2, Wage, and Tax Statement, to the children for the wages they received. The children reported the wages on their own tax returns using the Forms W-2.
During the years at issue Advanced Embroidery Supply paid the children by the job with each child receiving a large payment*144 at yearend that was based at least partially on the performance of petitioners' embroidery business. Petitioners did not pay the children by the hour. The children had access to the money that Advanced Embroidery Supply paid them, but they were required to save some money so that when each child reached the age of 16, he or she could purchase a vehicle that cost at least $10,000. Each child was therefore able to purchase his or her own vehicle at the age of 16. The children also were required to save some of the amounts paid as wages and tithe other amounts, and they could spend the *147 remaining amounts as they chose. Some of the children also saved to purchase recreational vehicles.
The children completed a variety of tasks. In 2004 K.M., who was then only 8, was limited in her duties, and Advanced Embroidery Supply did not pay K.M. in 2004. In 2005 and 2006 K.M. would clean petitioners' office. The office included bathrooms, a kitchen, and a break room. K.M. would also assist petitioners' business with inventory and cleaning machines. Advanced Embroidery Supply paid K.M. wages in 2005 and 2006. In 2006 Advanced Embroidery Supply paid K.M. $200, $500, $350, and $10,000 on February 24,*145 May 26, July 28, and December 22, respectively, for a total of $11,050. Petitioners claimed K.M. as a dependent on their Federal income tax returns for the years at issue.
Dylan and Travis both assisted with the transportation of embroidery machines, which required out-of-State trips. Moreover, Dylan and Travis assisted petitioners' employees with refurbishing embroidery machines. Dylan and Travis also provided lawn care services for petitioners' properties. In 2004 Dylan received wages of $65, $146.25, and $9,000 on May 18, August 10, and December 22, respectively, for a total of $9,211.25. In 2004 Travis received wages from Advanced Embroidery Supply of $55, $140, and $9,000 on May 18, August 10, *148 and December 22, respectively, for a total of $9,195. In 2006 Dylan received wages of $1,000, $2,000, $300, $1,000, and $21,000 on February 24, May 26, June 9, July 28, and December 22, respectively, for a total of $25,300. In 2006 Travis received wages of $1,000, $2,000, $300, $1,000, and $24,000 on February 24, May 26, June 9, July 28, and December 22, respectively, for a total of $28,300. Both Travis and Dylan were claimed as dependents on petitioners' Federal income tax returns for the*146 years at issue.
Before the years at issue Courtney had completed her home schooling, and during the years at issue she worked full time for petitioners. Courtney was a receptionist for their embroidery business, sorting the mail, answering calls, and scheduling appointments. She would also prepare documents for the transportation of embroidery machines. In 2004 Courtney received wages of $110, $3,000, $12,000, and $13,000 on April 9, October 25, December 22, and December 24, respectively, for a total of $28,110. Advanced Embroidery Supply paid her wages of $5,000 in 2005 and did not pay her wages in 2006. Petitioners paid Courtney on the basis of what they had paid former secretaries. For the years at issue Courtney was not claimed as a dependent on petitioners' Federal income tax return. Courtney married in May 2006.
*149 For 2005 Advanced Embroidery Supply deducted $50,913 of business expenses for wages. In contrast to what they had done for 2004 and 2006, petitioners did not provide a complete accounting of the wages paid to each child for 2005, but they introduced copies of checks written to the children. Dylan received checks for $165 and $2,000 dated May 23 and October 28, respectively.*147 Travis received a check for $4,800 dated December 9.9 The parties stipulated that Advanced Embroidery Supply paid Courtney wages of $5,000 in 2005.
Stitch It was incorporated on November 24, 1998, and was taxed as a subchapter S corporation. Petitioners used Stitch It as their primary entity to purchase and sell embroidery machinery.
Mr. McMinn would travel to embroidery conventions and auctions to purchase and sell embroidery machinery. Petitioners would travel to approximately 14 conventions a year. Petitioners purchased a motor home in the belief that it would be more convenient and cost effective than hotels to travel to *150 embroidery conventions.10 Petitioners would attach a trailer to the motor home to transport embroidery machines that they purchased or intended to sell*148 at the conventions. In addition to using the motor home for their embroidery business, petitioners used it for personal use and allocated expenses accordingly. However, after petitioners built the resort, they used the motor home less for personal use.
The motor home included two sets of motor home equipment. Stitch It valued the motor home and equipment at $519,783. Because Stitch It did not use the motor home solely for business, it calculated the motor home's depreciable basis as $484,838.11 Petitioners claimed deductions for depreciation expenses with respect to the motor home on Schedules K-1, Partner's Share of Income, Deductions, Credits, etc., attached to their Federal income tax returns for the years at issue.
For the years at issue petitioners started using the motor home less frequently because their business had become more international, and they could purchase and sell embroidery machinery through Internet auctions. The motor *151 home and equipment were therefore sold on April 8, 2006, and*149 Stitch It claimed a loss deduction. Petitioners reported the loss on their 2006 Federal income tax return.
Stitch It used a 2005 Chevy Equinox, a 2005 green Chevy Silverado, a 2005 blue Chevy Silverado, and a 2005 black Chevy truck. The three trucks were owned jointly by Mr. McMinn and Stitch It.
Mr. McMinn was the primary driver of the 2005 Chevy Equinox. Stitch It calculated that the 2005 Chevy Equinox was used 50% of the time for business and depreciated the vehicle accordingly.
The three trucks were full-size heavy-duty trucks that were used to move embroidery machinery. Petitioners purchased and sold approximately 300 to 500 embroidery machines a year. The embroidery machines were generally moved at least twice because petitioners would purchase a machine, move it to their facilities in rural Missouri, refurbish it, sell it, and deliver it for the buyer. In addition to moving machines that Stitch It purchased and sold, petitioners would use their expertise to move commercial embroidery machines for unrelated embroidery companies.
*152 For the years at issue petitioners claimed business expense deductions for depreciation expenses with respect to the vehicles. Stitch It maintained*150 logs of their trips in the trucks but did not produce those logs for this proceeding.
Stitch It claimed various business expense deductions for the years at issue, including a home phone, cellular phones, property taxes, repair and maintenance for the motor home, airline tickets, satellite television, and lawn care.
Stitch It claimed business expense deductions for the years at issue for a phone in petitioners' home. Mr. McMinn testified that the business purpose of the phone was for employees and clients to contact him after business hours.
Stitch It claimed business expense deductions for cellular phones for employees who traveled, including Mr. McMinn. Stitch It also paid for cellular phones for Mrs. McMinn, petitioners' daughter Courtney, and a subcontractor.
Stitch It claimed business expense deductions for satellite television. The satellite TV was available in petitioners' office for clients to watch while waiting for appointments. Petitioners also had satellite television in their home.
Embroidery Services was incorporated on July 28, 1999, and was taxed as a subchapter S corporation. The primary purpose of Embroidery Services was to sell*151 machines wholesale from Stitch It to two customers in Mexico.
Embroidery Services purchased a 1999 Toyota Tacoma truck on December 21, 2003. Kyle McMinn was the primary driver. The 1999 Toyota Tacoma was used with a small trailer to transport embroidery machinery. Embroidery Services allocated 80% of the costs associated with the 1999 Toyota Tacoma for business use and the remaining 20% for personal use. Embroidery Services claimed interest expense deductions with respect to the 1999 Toyota Tacoma.
In addition to the primary purpose of Embroidery Services, petitioners also purportedly used it as an entity to buy and sell land purchased in Patton, Missouri. Petitioners acquired land in 2004 and 2005 in the name petitioners' trust.12 Embroidery Services deducted interest expenses that petitioners claimed on Schedules K-1 attached to their Federal income tax returns for the years at issue.
During the years at issue Mrs. McMinn operated*152 Juice Plus. Juice Plus was designed as a downline distribution network where products of National Safety Associates (NSA) were sold to distributors who would recruit associates. The primary products sold were vitamins, supplements, and health foods. Petitioners operated Juice Plus out of their residence. Juice Plus was a sole proprietorship, and petitioners reported the income and deducted the expenses of Juice Plus on Schedules C during the years at issue.13
To operate the business Juice Plus had a 2006 Toyota Sequoia, a 2004 Toyota Highlander, a computer, and exercise equipment. The 2006 Toyota Sequoia was acquired on May 7, 2006. Mrs. McMinn used the vehicle to attend presentations on products and to sell NSA products. Petitioners did not keep a mileage log for the 2006 Toyota Sequoia but claimed depreciation deductions on their 2006 return. For the years at issue Juice Plus also claimed depreciation deductions for the 2004 Toyota Highlander.*153
*155 Petitioners purchased the computer on November 18, 2004. The invoice is addressed to Stitch It and includes the handwritten notation "Lynne-Juice Plus". Petitioners claimed depreciation expense deductions under
Petitioners purchased several pieces of exercise equipment throughout the years at issue on behalf of Juice Plus. Mr. McMinn testified that the exercise equipment was used as a marketing tool for the NSA nutritional products, and that clients paid to use the exercise equipment. The exercise equipment was in a partitioned room in the office building used by petitioners' embroidery business. Juice Plus did not advertise or market the availability of a gym or exercise equipment. Mrs. McMinn was not a personal trainer during the years at issue, but she was studying to become one. Petitioners claimed depreciation expense deductions*154 for the exercise equipment on their Federal income tax returns for the years at issue on the basis of 80% of the equipment's value.
*156 IV.
Petitioners were successful entrepreneurs and would tithe regularly. For the years at issue petitioners claimed charitable contribution deductions for these donations on Schedules A, Itemized Deductions, attached to their Federal income tax returns.
Petitioners donated $15,600 and $16,050 to Faith Tabernacle World Outreach in 2004 and 2005, respectively. In 2004 and 2005 petitioners donated a total of $1,500 to Youth With A Mission. In 2005 petitioners donated $200 to the Church of Corinth. In 2006 petitioners donated $43,879 to Faith Family Worship Center. Petitioners claimed charitable contribution deductions with respect to these donations.
In 2004 petitioners donated $2,600 to Kayit's Children's Home. Kayit's Children's Home is based in Mexico and is not organized as a charity in the United States. Petitioners claimed a charitable contribution deduction on their 2004 Federal income tax return for the donation to Kayit's Children's Home.
Petitioners donated to Children's Research Foundation (CRF) in 2004 and 2005. CRF*155 is a partner of the Juice Plus program, and donations to CRF would *157 appear on Forms 1099-MISC, Miscellaneous Income, that petitioners received.15 In 2004 petitioners paid CRF $112, $129, and $381. In 2005 petitioners paid CRF $168 and $1,356. Petitioners claimed charitable contribution deductions for the donations paid to CRF in 2004 and 2005.
For the years at issue petitioners donated $3,000, $6,300, and $2,135, respectively, to R.L. Montgomery Ministries. R.L. Montgomery Ministries is not a registered tax-exempt organization in the United States. R.L. Montgomery is the purported operator of R.L. Montgomery Ministries and the purported agent of Ranch House Ministries. Petitioners claimed the amounts donated to R.L. Montgomery Ministries as charitable contribution deductions for the years at issue.
In 2004 petitioners donated office equipment and office*156 furniture to Faith Family Worship Center. On their 2004 Federal income tax return they claimed charitable contribution deductions for the donations. They valued the office equipment at $4,050 and the office furniture at $2,900. They described the office equipment and office furniture as "office products & computers" and "office *158 furniture" on a Form 8283, Noncash Charitable Contributions, attached to their 2004 return. They attached a contemporaneous written acknowledgment from Faith Family Worship Center that generically described the property. They did not have the office equipment or office furniture independently valued.
Petitioners also donated a 2002 Chevy Suburban to Faith Family Worship Center in 2004. They valued it at $26,245 by using the Kelly Blue Book Web site. They attached the Kelly Blue Book valuation to their 2004 Federal income tax return. They claimed a charitable contribution deduction of $15,245 for the donation and reported receiving $11,000 cash from Faith Family Worship Center. Petitioners reported a gain of $3,694 on the disposition of the vehicle.
For 2005 petitioners claimed charitable contribution deductions that flowed through from their entities Embroidery*157 Services and Stitch It of $1,000 and $1,200, respectively. Stitch It claimed $1,000 of the $1,200 for a donation to R.L. Montgomery.
In 2006 Mr. McMinn traveled to Jamaica with the pastor of his church to visit church missions and find a location to build a children's home. Petitioners claimed $3,013 as a charitable contribution deduction for unreimbursed travel expenses with respect to the trip. Petitioners did not obtain a contemporaneous *159 written acknowledgment from the church or any other qualified organization for the trip.
Petitioners hired a full-time bookkeeper to maintain records for their activities. Petitioners also hired a licensed certified public accountant (CPA) to prepare their Federal income tax returns for the years at issue. The CPA also prepared all of petitioners' entities' returns, including the tax returns for Embroidery Express for the fiscal tax years at issue. The CPA had 31 years of experience and had prepared petitioners' tax returns for 19 years.
To prepare petitioners' tax returns the CPA would receive copies of petitioners' records from the bookkeeper, review the records, and make corresponding adjustments in the*158 financial statements. Because petitioners owned several vehicles, the CPA would review reports from petitioners' bookkeeper that stated the ratio of business use to personal use for a particular vehicle, determine that the vehicle was used entirely for business use, or discuss the use of the vehicle with petitioners. While preparing petitioners' tax returns, the CPA would also meet with petitioners to discuss issues on the returns and review petitioners' documentation. The CPA credibly testified that the process of preparing petitioners' tax returns was extensive and that petitioners had provided the CPA
*160 with all the necessary documentation to prepare the returns. In addition to preparing the tax returns, the CPA acted as a business adviser to petitioners.
Respondent issued Embroidery Express and petitioners timely notices of deficiency on December 17, 2010, and both timely petitioned this Court.16 In petitioners' notice of deficiency, respondent determined, inter alia, that they: (1) had not operated their cattle and deer activity and their resort activity with profit objectives; (2) had not properly substantiated certain business expenses; (3) were*159 not entitled to a loss deduction from the sale of their motor home; (4) had not properly substantiated certain charitable contributions; and (5) were liable for accuracy-related penalties under
In Embroidery Express' notice of deficiency, respondent determined, inter alia, that it had not properly substantiated depreciation expenses and interest expenses with respect to its three passenger automobiles.
Generally, the Commissioner's determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of showing the determination is in error.
In determining whether an activity is engaged in for profit for purposes of
Whether a taxpayer engaged in an activity with the requisite profit objective is determined from all the facts and circumstances.
Respondent disallowed net loss deductions of $18,155, $6,751, and $9,590 for the years at issue, respectively, because petitioners did not prove that the cattle and deer*163 activity was operated for profit under
The fact that the taxpayer carries on an activity in a businesslike manner may indicate a profit objective.
Petitioners did not prepare a business plan or advertise the deer hunting preserve. Petitioners did not keep cattle or deer during the years at issue. Petitioners had purchased property used in the cattle and deer activity from 1988 to 2006 and knew by the years at issue that raising cattle was no longer a profitable venture. They also had determined that the deer hunting preserve involved too much risk to pursue. Petitioners provided no evidence*164 that during the years at issue they attempted to change course to make the activity profitable. Petitioners kept a bank account for the activity and tracked depreciation expenses, but on the instant record the Court cannot conclude that petitioners carried on the activity in a businesslike manner. Accordingly, this factor favors respondent.
"The taxpayer's expertise, research, and extensive study of an activity, as well as his or her consultation with experts, may indicate a profit motive."
The taxpayer's devotion of much of his or her personal time and effort to carrying on an activity may indicate a profit motive, particularly if the activity does not involve substantial personal or recreational aspects.
Petitioners did not provide any details about the amount of time spent on the cattle and deer activity. Their embroidery business was successful during the *167 years at issue, and the Court finds that they spent most of their time on that business and they did not spend significant time on developing the deer hunting preserve. Neither did they ever obtain the required permit to carry out the deer hunting preserve. Accordingly, this factor favors respondent.
An expectation that assets used in the activity may appreciate in value may indicate a profit objective even if the taxpayer derives no profit from current operations.
Petitioners purchased the first parcel of land for the cattle and deer activity for $100,000, and after the*166 years at issue, the property was listed for sale at $4.4 million, but petitioners had not sold it. Although the record does not indicate the purchase price of the other parcels, petitioners' tax returns show that the total cost basis in the assets for the activity did not exceed $225,000. Petitioners did not testify that there was an expectation that the land would appreciate; however, the *168 Court may infer this when the appreciation exceeds the losses accumulated in prior years. Because petitioners' property substantially appreciated in excess of the losses, this factor favors petitioners.
Petitioners did not prove that they have had success in similar activities. They presented no evidence that they have ever operated a successful deer hunting preserve. They are successful entrepreneurs and had developed a successful embroidery machine business but failed to*167 prove that they were successful in a business related to a deer hunting preserve or raising cattle. Accordingly, this factors favors respondent.
A history of continued losses with respect to an activity may indicate that the taxpayer lacked a profit objective.
Petitioners' cattle and deer activity had net losses of $18,155, $6,751, and $9,590, respectively, for the years at issue. Petitioners enrolled 22.5 acres of the land in a Federal conservation program, and most of the gross receipts that they reported for the cattle and deer activity were received from that program on the condition that petitioners keep the*168 land clear of crops and harvesting.19 Petitioners had a total gross income during the years at issue of $3,142. Accordingly, these factors favor respondent.
Substantial income from sources other than the activity may indicate that the activity*169 is not engaged in for profit.
Because petitioners had substantial income from their embroidery business, they could afford a hobby with losses that offset other income. Accordingly, this factor favors respondent.
The presence of personal motives and recreational elements in carrying on an activity may indicate that the activity is not engaged in for profit.
On the record before us, the Court concludes that petitioners have failed to prove that they engaged in the cattle and deer activity with the objective of making a profit. Although the land used for the activity appreciated substantially, petitioners spent little time on the activity, had no expertise in the activity, received little income compared to the amounts*170 of the losses, had the resources to incur the losses, and received personal benefits from the activity. Accordingly, respondent's determination is sustained.
Respondent disallowed petitioners' claimed losses for their resort activity, Spring Lake Resort, for the years at issue of $8,412, $3,938, and $1,181, respectively, because petitioners failed to prove that they engaged in the activity with a profit objective. After careful consideration of the factors in
Petitioners did not have a written business plan for the resort activity and petitioners did not conduct a financial analysis of the activity. They did not *172 maintain separate books and records or a separate bank account for the resort activity. However, they maintained depreciation schedules for tax reporting purposes. They did not publicly advertise the resort activity, and there were no road signs indicating the existence of a resort. Accordingly,*171 this factor favors respondent.
Petitioners did not have any expertise in developing a resort and did not hire an expert to advise them. Accordingly, this factor favors respondent.
Petitioners did not provide any evidence about the amount of time spent developing the resort. Petitioners had a successful embroidery business, and the Court finds that their time was spent primarily on that business. Accordingly, this factor favors respondent.
Petitioners did not prove that they had an expectation that the assets used for the resort activity would appreciate. Neither did they prove that the assets did appreciate, but presumably the property did appreciate because petitioners took several steps to improve it, spending approximately $95,000 on improvements.
*173 However, the appreciation also benefited petitioners personally because their new residence was near the resort's lake and their trust owned the property. Accordingly, this factor is neutral at best.
Petitioners did not prove that they had*172 been successful in similar activities. They presented no evidence that they had ever operated a successful resort. They were successful entrepreneurs, who had created a successful embroidery business, but they failed to prove that they were successful in businesses related to a resort. Accordingly, this factor favors respondent.
The resort activity showed a loss for each of the years at issue. Petitioners contend that the resort made a profit in later years from renting out the property for weddings, but they provided no documentary evidence to prove this claim. Additionally, for the years at issue the resort had minimal gross receipts totaling $2,105. Accordingly, these factors favor respondent.
Petitioners have substantial income from their embroidery business but only minimal income from the resort activity. Because their embroidery business had *174 such substantial income, they could afford a hobby with losses that offset some of their other income. Accordingly, this factor favors respondent.
Petitioners renovated the resort property extensively by adding a pavilion with three campsites, restroom facilities, jet ports, decks, docks, fire rings, a bridge, fish pads, auto fish feeders, and a dam. They built a personal residence near the resort's lake. They used the lake for personal pleasure and owned jet skis to use on the lake. Additionally, they used their motor home less because the family could use the resort. Thus, the resort had significant elements of personal pleasure and recreation. Accordingly, this factor favors respondent.
On the record before us, the Court concludes that petitioners have not proved that they engaged in the resort activity with the objective of making a profit. Although the land used for the activity may have appreciated, petitioners spent little time on the activity, had no expertise in the activity, received little income compared to the amount of the losses, had the resources to incur the losses, and received significant personal pleasure and recreation from the activity. *175 Accordingly, respondent's determination with respect to the resort activity is sustained.
Deductions*174 are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed on a return.
With respect to the deductibility of salaries,
In addition to the general business expense deduction rule of
A taxpayer ordinarily must maintain adequate records to substantiate the amounts of income and entitlement to any deductions claimed.
Under
Although the
Respondent disallowed deductions that Embroidery Express claimed for depreciation expenses of $4,900, $4,487, and $5,560 for fiscal years ending June 30, 2005 through 2007, respectively, and interest expenses of $1,525, $1,970, and $1,688 for fiscal years ending June 30, 2005 through 2007, respectively, arising from three passenger automobiles. The Court must therefore determine whether Embroidery Express is entitled to the claimed deductions.
*180 The three passenger automobiles are: a 2004 BMW, a Toyota Avalon, and a Toyota Corolla. The passenger automobiles are listed property,
Respondent disallowed petitioners' deductions for wages that Advanced Embroidery Supply paid to their children, K.M., Travis, Dylan, and Courtney.20 Advanced Embroidery Supply paid petitioners' children $46,516, $50,913, and $64,650 during the years at issue, respectively. The children reported the wages on their own tax returns using Forms W-2 that Advanced Embroidery Supply *181 issued. The Court must determine whether petitioners are entitled to the business expense deductions for the children's wages.
As stated above,
Courtney had completed school and was a full-time employee during the years at issue. Courtney was 17 in 2004, older than the other children, and not a dependent of petitioners. K.M., Dylan, and Travis were still in school and could work only after school. Because the Court finds that the arrangement with *182 Courtney was different from arrangements with the other children, the Court will analyze the wages paid to Courtney separately from those paid to the other children.
Mr. McMinn credibly testified*181 about the work the children performed. K.M. cleaned the office of petitioners' embroidery business, assisted with inventory, and helped clean embroidery machines. Dylan and Travis assisted with repairs to embroidery machines, delivery of the machines, and lawn care. Although petitioners paid their children by the job, they failed to maintain adequate records to substantiate the expenses.21*182 Petitioners did not present any documentary evidence proving the nature or frequency of the jobs the children completed throughout the years at issue. Petitioners would have presumably maintained such records if the amounts paid at yearend were for jobs that the children had completed during that year. However, because the Court finds that petitioners' children performed some work for petitioners' embroidery business *183 but petitioners failed to maintain adequate records that prove the amount of work the children completed, the Court will attempt to determine whether there is a sufficient basis to estimate the amount of reasonable compensation and allow deductions accordingly.
Mr. McMinn and three of petitioners' children testified regarding the children's work. Some testimony about the children's work was corroborated by an unrelated party. The Court finds this testimony credible to establish that the children actually worked for petitioners' embroidery business and that the children were paid by the job. On the basis of the record and after considering each child's education, skills, and available time for their ages, the Court finds that the amounts paid throughout the first 11 months of the year were reasonable for the work each child completed for petitioners' embroidery business.22*184 Petitioners are therefore allowed to deduct those payments. The Court's further inquiry will focus on payments to the children in December of each year. *184 The children were generally paid small amounts throughout the year*183 for the jobs that they completed, and bonuses in December of each year. Petitioners placed little economic value on the jobs their children completed throughout the year but paid them significant bonuses at yearend, partially on the basis of the performance of petitioners' embroidery business. Although Mr. McMinn testified that he paid the children on the basis of what he would pay an unrelated party, petitioners introduced no evidence proving that an unrelated party would receive a similar bonus for the same work. The bonuses were the largest part of the children's wages and were paid at yearend after petitioners had the opportunity to determine the financial status of the business. The Court is therefore not convinced that unrelated parties would act similarly.
Although the children had access to the money that they received, they were required to save certain amounts and tithe other amounts, and they were allowed to spend some amounts. K.M., Dylan, and Travis were also claimed as petitioners' dependents. The record thus supports a finding that the bonuses were not typical of a bona fide employer-employee relationship but were partially for familial support of petitioners' dependent children. However, because the Court is convinced that the children did work for petitioners' embroidery business and the wages paid throughout the year adequately represent each child's services, *185 petitioners are allowed to deduct the average of the child's other monthly payments in that year, and the remaining balance of the December payments is disallowed.23*185
Petitioners did not provide an itemized accounting of the wages paid or the dates those wages were paid to the children in 2005. Petitioners introduced copies of two checks to Dylan and one check to Travis for 2005. Petitioners are allowed to deduct the payments to Dylan of $165 and $2,000 on May 23 and October 28, 2005, respectively. The payment to Travis was for $4,800 on December 9, 2005. This yearend payment is not deductible for the same reasons addressed above, and the deduction will be limited to the average allowed deduction for Travis' wages in 2004 and 2006.24*186 The remaining deductions for wage expenses for 2005 are *186 disallowed because petitioners did not prove that they incurred any additional wage expenses.25
Before the years at issue Courtney had completed her home schooling, and during the years at issue she worked full-time for petitioners. She acted as a receptionist for petitioners' embroidery business, sorting the mail, answering calls, and scheduling appointments. She would also prepare documents for the transportation of embroidery machines. In 2004 Courtney received wages of $110, $3,000, $12,000, and $13,000 on April 9, October 25, December 22, and December 24, respectively, for a total of $28,110. Advanced Embroidery Supply paid her wages of $5,000 in 2005 and did not pay her wages in 2006.
The Court finds that Courtney was petitioners' full-time employee. Although petitioners paid her in an unusual fashion, Courtney and Mr. McMinn both credibly*187 testified regarding her duties for petitioners' embroidery business. Petitioners paid Courtney on the basis of what they had paid former secretaries. She was not claimed as a dependent of petitioners for any of the years at issue, and *187 she married in 2006. For the amount of work Courtney completed as a fulltime employee, the wages paid were not unreasonable. Petitioners may therefore claim business expense deductions for wages paid to Courtney.
Respondent disallowed depreciation expense deductions that Stitch It claimed because petitioners failed to properly substantiate the deductions for a motor home, motor home equipment, a 2005 Chevy Equinox, a 2005 green Chevy Silverado, a 2005 blue Chevy Silverado, and a 2005 black Chevy truck. Respondent also disallowed deductions for home and cell phones, property taxes, motor home repair and maintenance, airline tickets, satellite TV, and lawn care as personal expenses. The Court must determine whether petitioners are entitled to the deductions.
Respondent disallowed depreciation deductions that petitioners reported on Schedules K-1 from Stitch It attached to their Federal income tax returns for the years*188 at issue. Stitch It claimed depreciation deductions for a motor home and equipment, a 2005 Chevy Equinox, a 2005 green Chevy Silverado, a 2005 blue Chevy Silverado, and a 2005 black Chevy truck.
*188 All of the vehicles are listed property,
The motor home and equipment were used while petitioners were traveling to approximately 14 conventions and auctions annually to buy and sell embroidery machines. Petitioners would attach a trailer to the motor home to transport the embroidery machines that they purchased or intended to sell. The motor home was also used for personal recreation. Although Mr. McMinn testified that the motor home was used less for personal recreation after the resort was built, petitioners' business use of the motor home appears to be minimal because petitioners attended*189 only 14 conventions a year and did not provide any documentation as to location or dates; i.e., convention or booth registration. Therefore, the record does not allow the Court to conclude that the motor home and equipment were substantially used in petitioners' business for "providing to unrelated persons services consisting of transportation of persons or property for *189 compensation or hire."
Petitioners did not provide a mileage log for the motor home and have provided no evidence that complies with the substantiation requirements of
The 2005 Chevy Equinox was driven primarily by Mr. McMinn. Petitioners did not present any evidence about the use of this vehicle and did not provide any evidence that satisfies the requirements of
The three trucks were used to transport embroidery machines. Petitioners transported approximately 300 to 500 embroidery machines a year. Petitioners would purchase an embroidery machine and transport it to their warehouse to refurbish it. After it was refurbished, they would sell it and transport it for the buyer. They would also provide transportation services to embroidery companies. *190 A client of petitioners testified that he hired petitioners to transport his embroidery machines. Petitioners' children transported the embroidery machines and had their own personal vehicles so they did not need to drive the trucks for personal use. The Court therefore finds that the three trucks meet the
Because the three trucks are not listed property, the Court may estimate the expense that petitioners incurred.
Personal expenses are generally not deductible.
Cellular phones, airline tickets, and motor homes are all subject to the strict substantiation requirements of
Respondent disallowed business expense deductions for cellular phone expenses of Mrs. McMinn, petitioners' daughter Courtney, and a subcontractor. Petitioners did not produce logs showing personal and business use of the cellular phones. Because cellular phones are listed property,
Petitioners claimed business expense deductions for airline tickets. Airline tickets are subject to the strict substantiation requirements of
Petitioners claimed business expense deductions for motor*193 home repairs and maintenance. The motor home is listed property.
Petitioners claimed business expense deductions for property taxes, a home phone, and lawn care that are not listed property, but they must maintain adequate records to substantiate the expenses or provide the Court some basis to estimate them.
With respect to the satellite television, petitioners had satellite television available in the reception area of their office for clients to enjoy while waiting for appointments. Petitioners also had satellite television in their home. Petitioners provided no evidence except Mr. McMinn's testimony that the satellite television had different receivers to show that the bills were separate and that this was not a personal expense.
Respondent disallowed deductions for interest expenses for land in Patton, Missouri, and for a 1999 Toyota Tacoma with respect to Embroidery Services. The Court must therefore determine whether petitioners are entitled to the disallowed deductions.
The 1999 Toyota Tacoma was driven primarily by petitioners' son Kyle McMinn. Although vehicles are generally listed property,
*195 Because the 1999 Toyota Tacoma is not listed property, the Court may estimate the allowable expense.
Respondent also disallowed interest deductions relating to land in Patton, Missouri. Petitioners contend that Embroidery Services is entitled to deductions for interest expenses under
*196 Petitioners may individually be entitled to deductions for the interest if*197 they can prove the property was held as an investment. Petitioners failed to present any documentary evidence showing an investment motive. Petitioners did not present any evidence that parcels of the property had been sold or listed for sale. The record includes only a bank receipt with a handwritten notation that acreage was sold to Bryan McMinn. The bank receipt does not state exactly what acreage was sold or whether it was the property at issue. Petitioners have thus failed to prove that the land was held as an investment. Accordingly, respondent's determination with respect to the interest expense deductions for the land is sustained.
Respondent disallowed depreciation deductions for a 2006 Toyota Sequoia, a computer, and exercise equipment claimed on petitioners' Federal income tax returns with respect to Juice Plus for the years at issue. The Court must therefore determine whether petitioners are entitled to the deductions.
Respondent's revenue agent believed that the 2006 Toyota Sequoia was used in the Juice Plus business and allowed petitioners standard mileage rate deductions. Petitioners did not keep a contemporaneous mileage log for the 2006 Toyota Sequoia. Mr.*198 McMinn testified that his wife needed the vehicle to attend presentations for Juice Plus. The 2006 Toyota Sequoia is a passenger automobile *197 and therefore is listed property.
Respondent disallowed depreciation expense deductions for a computer because petitioners did not prove that Juice Plus actually incurred the expense. The invoice for the computer is addressed to Stitch It. Computers are listed property,
Respondent*200 disallowed depreciation deductions claimed for exercise equipment because petitioners did not prove that the expenses were for a business purpose.
Petitioners sold their motor home and equipment in 2006 and claimed a loss deduction. Respondent disallowed the deduction because petitioners failed to prove that the motor home and equipment were used in a trade or business. The Court has previously held that the motor home and equipment are subject to the strict substantiation requirements of
(i) The amount of cash and a description (but not value) of any property other than cash contributed. (ii) Whether the donee organization provided any goods or services in consideration, in whole or in part, for any property described in clause (i). (iii) A description and good faith estimate of the value of any goods or services referred to in clause (ii) * * * .
For a charitable contribution of property other than money, a deduction is allowed for the fair market value of the property as of the date contributed.
Generally, an appraisal is "qualified" if it (1) is prepared no more than 60 days before the contribution date by a "qualified appraiser" and (2) incorporates specified information, including a statement that the appraisal was prepared for income tax purposes, a description of the valuation method used to determine the *203 contributed property's fair market value, and a description of the specific basis for the valuation.
A charitable contribution deduction is allowed for unreimbursed expenditures made incident to performing services for an organization, including traveling expenses.
Petitioners claimed several charitable contribution deductions during the years at issue that respondent disallowed. Respondent allowed most of the charitable contribution deductions, including the charitable contributions to Faith Tabernacle World Outreach, Youth With A Mission, Church of Corinth, and Faith Family Worship Center. The Court considers now each disallowed charitable contribution deduction.
Petitioners claimed a charitable contribution deduction of $2,600 on their 2004 return for a donation to the Kayit's Children Home, a children's home in Mexico. Respondent disallowed the deduction because Kayit's Children's home is not organized as a charity within the United States. A charitable contribution*206 deduction is allowed only if the donee is operated exclusively for religious or charitable purposes and the donee is organized in the United States.
Petitioners claimed charitable contribution deductions of $112, $129, and $381 for donations to CRF in 2004. Petitioners also claimed charitable contribution deductions of $168 and $1,356 for donations to CRF in 2005. The parties stipulated that "[t]he Children's Research Foundation, which is linked to the Juice Plus program, is shown on the Forms 1099 issued to the McMinns." Respondent contends that the Court should not allow the deductions because petitioners did not introduce the Forms 1099 or provide contemporaneous written acknowledgments.
*205 A taxpayer is required to maintain for each contribution either a canceled check or a receipt from the donee organization showing the donee, the date of the contribution, and the amount of the contribution.
A contemporaneous written acknowledgment that satisfies
Petitioners claimed charitable contribution deductions of $3,000, $6,300, and $2,135 for the years at issue, respectively, for donations to R.L. Montgomery Ministries. R.L. Montgomery Ministries is not a registered tax-exempt organization in the United States. R.L. Montgomery is an individual who claims to be an agent of Ranch House Ministries. Petitioners contend that they are *207 entitled to charitable contribution deductions for the donations to R.L. Montgomery Ministries because its operator, R.L. Montgomery, was an agent of Ranch House Ministries, which is a tax-exempt organization in the United States.
Even if the Court were to agree with petitioners that R.L. Montgomery was an agent*209 of Ranch House Ministries, petitioners have not proven that the funds were transferred to Ranch House Ministries. Additionally, petitioners have not proven that they satisfied the contemporaneous written acknowledgment requirements of
Petitioners claimed charitable contribution deductions for 2004 for the donation of office equipment and office furniture to Faith Family Worship Center, valued at $4,050 and $2,900, respectively. Petitioners attached a Form 8283 to their 2004 return and generically described the property as "office products & computers" and "office furniture". They also attached to their 2004 return a contemporaneous written acknowledgment from Faith Family Worship Center that generically described the donated property. Petitioners' receipt fails to provide a "description of the property in detail reasonably sufficient under the circumstances".
In 2004 petitioners donated a 2002 Chevy Suburban valued at $26,245 to Faith Family Worship Center. Petitioners claimed a charitable contribution deduction of $15,245 on their 2004 tax return for the donation and reported receiving $11,000 cash from Faith Family Worship Center. Petitioners reported a gain of $3,694 on the disposition of the Suburban. Because petitioners failed to obtain a qualified appraisal, respondent disallowed $10,245.01 of the $15,245 charitable contribution deduction. Respondent also disallowed petitioners' claimed depreciation expense deductions with respect to the Suburban. After adjustment for the*211 disallowed depreciation, petitioners' basis in the Suburban increased, which reduced petitioners' reported gain on the disposition of the Suburban from $3,694 to $2,064. The Court must decide whether petitioners' gain *209 on the disposition of the vehicle should be reduced and whether petitioners are entitled to a greater charitable contribution deduction than respondent allowed.
Petitioners claimed the depreciation deductions for the 2002 Chevy Suburban on Schedules C for a vehicle and equipment rental activity for the years at issue. Respondent initially disallowed the deductions because petitioners had not shown that they conducted a trade or business under
To substantiate the claimed charitable contribution deduction, petitioners attached to their 2004 return a page from the Kelly Blue Book Web site indicating the fair market value of the Suburban as $26,245. An appraisal summary by a qualified appraiser is required for charitable contributions deductions exceeding $5,000.
In 2005 petitioners claimed charitable contribution deductions that flowed through to petitioners' Federal income tax return from Embroidery Services and Stitch It of $1,000*213 and $1,200, respectively. Of Stitch It's deduction, $1,000 is from an amount donated to R.L. Montgomery. Petitioners contend that this amount was transferred to Ranch House Ministries. For the same reasons that the Court disallowed the deductions to R.L. Montgomery Ministries,
For 2006 petitioners claimed a charitable contribution deduction of $3,013 for unreimbursed travel expenses for a mission trip to Jamaica. Respondent disallowed the deduction because petitioners did not obtain a contemporaneous written acknowledgment and did not comply with the recordkeeping requirements.
Under
Pursuant to
Respondent contends that petitioners are liable for the
Petitioners argue that they acted in good faith and with reasonable cause because they relied on their*216 bookkeeper and their CPA. Mr. McMinn had a high school education, and to maintain records he hired a full-time bookkeeper. A CPA was also hired to review the bookkeeper's records and prepare the tax returns. The CPA had been licensed for 31 years, and he had prepared petitioners' tax returns for 19 years. To prepare petitioners' tax returns the CPA would review the *214 bookkeeper's records, make corresponding adjustments in the financial statements, and meet with Mr. McMinn to discuss positions on the return as well as his business ventures. The CPA credibly testified that the process of preparing the tax returns was extensive, and that Mr. McMinn had provided the CPA with all the necessary documentation to prepare the returns. To calculate the depreciation deductions for the vehicles, the CPA either received a report from the bookkeeper showing the percentage of business and personal use derived from mileage logs, decided that the vehicle was 100% for business use, or discussed with Mr. McMinn the ratio of business and personal use of the vehicle. The CPA also testified that he believed the 2002 Chevy Suburban deduction was properly substantiated.
The record indicates that Mr. McMinn*217 relied heavily on both his bookkeeper and his CPA of 19 years to maintain financial information and properly substantiate deductions. Mr. McMinn believed that his tax positions were conservative and that he had properly complied with the Code. Although a taxpayer is ultimately responsible for his own recordkeeping,
Because we find that petitioners acted with good faith and reasonable cause, a discussion of whether petitioners are liable for negligence is not warranted.
The Court has considered all of the arguments made by the parties and to the extent they are not addressed herein, they are considered unnecessary, moot,*218 irrelevant, or without merit.
To reflect the foregoing,
Footnotes
1. All section references are to the Internal Revenue Code (Code) in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩
2. The parties agree that Embroidery Express: (1) did not have additional dividend income of $9,108 and $116,325 for the fiscal tax years ending June 30, 2005 and 2006, respectively and (2) is not entitled to foreign tax credits of $169 and $14,234 for the fiscal tax years ending June 30, 2005 and 2006, respectively. Respondent concedes on brief that Embroidery Express: (1) had long-term gain of $175 and ordinary gain of $18,560 for the fiscal tax year ending June 30, 2006, from the sale of a 2004 BMW and (2) is not liable for
sec. 6662(a)↩ penalties for fiscal tax years ending June 30, 2005 and 2006.3. The parties agree that Mr. and Mrs. McMinn: (1) received no dividend income during the years at issue; (2) did not have additional income of $7,507 related to the sale of timber in 2005; and (3) received additional income of $1,015 in 2004 from a legal settlement. Respondent concedes on brief that petitioners: (1) conducted a trade or business activity related to their vehicle equipment rental business and do not have income adjustments related to that business for the years at issue and (2) do not have additional income of $12,000 and $12,000 for 2004 and 2005, respectively, flowing from Anchor Leasing, Inc.↩
4. When the Court uses the term "petitioners", it is to refer to Mr. and Mrs. McMinn and not Embroidery Express.↩
5. Pursuant to
Rule 27(a)(3)↩ this Court refers to minor children by their initials. K.M. was petitioners' only minor child at the time they filed their petition.6. Only a 22.5-acre portion of the land was enrolled in the Federal conservation program. The parties stipulated that the contract period was from July 27, 2005, to September 30, 2007. However, the contract states that the period was from July 27, 2004, to September 30, 2007. Accordingly, the Court will disregard the parties' stipulation.
See Cal-Maine Foods, Inc. v. Commissioner , 93 T.C. 181, 195↩ (1989)7. The Court uses the term "embroidery business" to collectively refer to these entities.↩
8. Petitioners' office was in Patton, Missouri, which is approximately 120 miles from the nearest commercial airport.↩
9. The other checks written to the children were from entities other than Advanced Embroidery Supply or were dated in 2006. The record does not include any checks to K.M. for 2006. Petitioners also introduced bank deposit forms for the children; but because those deposit forms do not show who paid the funds, the Court does not find them relevant to its analysis.↩
10. Stitch It also claimed deductions for hotel expenses for the years at issue.↩
11. For the years at issue petitioners claimed that 6%, 9%, and 0%, respectively, of the motor home's use was personal.↩
12. Petitioners contend that Embroidery Services owned the land, and petitioners' trust held the land for estate planning purposes. Petitioners presented no documentary evidence to prove that Embroidery Services had an ownership interest in the land.↩
13. Petitioners attached two separate Schedules C for each of the years at issue labeled "NSA - Juice Plus" for Mr. McMinn and"NSA - Juice Plus (Spouse)" for Mrs. McMinn. In 2006 Mrs. McMinn operated Juice Plus as Constructive Health Services, LLC.↩
14. Petitioners also purchased a second computer for Juice Plus on February 15, 2005, and claimed depreciation expense deductions for that computer for 2005 and 2006. The expenses related to that computer do not appear to be at issue.↩
15. The Forms 1099 are not part of the record, but the parties stipulated that petitioners received the forms from CRF. Petitioners did not explain with specificity the Juice Plus program, but from the record the Court discerns that NSA would issue petitioners a Form 1099 for products sold during a year and that form included the payments to CRF.↩
16. Generally the period of limitations on assessment is three years after the return was filed.
See sec. 6501(a) . The notices of deficiency were issued after the expiration of the general periods of limitations for the years at issue. The parties did not offer into evidence Forms 872, Consent to Extend the Time to Assess Tax, extending the period of limitations on assessment.See sec. 6501(c)(4) . However, petitioners do not raise the period of limitations or the validity of the notices of deficiency as an issue. Because petitioners timely filed a petition, we have jurisdiction.See secs. 6213(a) ,6214(a)↩ .17.
Sec. 7491(a)(2)↩ requires a taxpayer to substantiate any item and maintain all records required under the Code.18. The Court considers together the two factors in the heading.↩
19. In
Morehouse v. Commissioner , 769 F.3d 616 (8th Cir. 2014)rev'g and remanding 140 T.C. 350 (2013) , the U.S. Court of Appeals for the Eighth Circuit, to which an appeal in this case would lie absent a stipulation to the contrary,see sec. 7482(b)(1)(A) ,(2)↩ , held that conservation reserve program payments were not subject to self-employment tax when the taxpayer did not actively operate a farming business. The parties did not dispute petitioners' self-employment tax liability with respect to the cattle and deer activity. Petitioners reported self-employment tax for 2006 only with respect to the Juice Plus business. Additionally, although the activities on the 22.5 acres of land enrolled in the conservation program may have been conducted with a profit objective, petitioners did not argue that this was a separate activity. In fact, petitioners reported income and expenses for the entire property on the same Schedules F for the years at issue. Accordingly, the Court considers the activity in its entirety.20. Petitioners' other children also received wages from petitioners' other entities. Courtney also received wages from Embroidery Services. Respondent did not disallow deductions for these wages.↩
21. Respondent objects on the grounds of relevance to the admission of undated timecards that petitioners seek to have admitted into evidence. Petitioners did not argue on brief why the timecards are relevant, nor did they rely on them in their argument. The timecards do not describe the work that the children completed, nor do they state when the work was completed. The Court does not rely on the timecards in its analysis and will therefore overrule respondent's objection as moot.
22. Dylan and Travis also provided significant lawn care services that took at least two days a week. Petitioners failed to prove whether the embroidery business required lawn services or whether the lawn services were for petitioners' other activities. The Court has already found that petitioners' other activities were not operated for profit,
see supra part I, and therefore deductions for wages would be limited,see sec. 183(b)(2) . Because petitioners are allowed to deduct only minimal wages for Dylan and Travis and the two children provided services other than lawn care, the Court is satisfied that the allowed amounts were for services actually provided to petitioners' embroidery business.23. Petitioners made bonus payments to the children December 22, 2004 and 2006. Deductions for these payments are disallowed but for an average monthly payment amount determined for each child. Petitioners are allowed to deduct $350 (payments in the first 11 months to K.M. in 2006: $200 + 500 + 350 = $1,050 / 3 = $350) of the $10,000 yearend payment to K.M. in 2006. For Dylan petitioners are allowed to deduct $105.63 for 2004 and $1,075 for 2006 of the yearend payments. For Travis petitioners are allowed to deduct $97.50 for 2004 and $1,075 for 2006 of the yearend payments.
24. Travis completed similar work for each of the years at issue. Because the work during 2005 is substantially similar to the work in 2004 and 2006, petitioners are entitled to deduct the average of the allowed wage deductions of 2004 and 2006 for 2005. The Court has allowed total wage deductions of $292.50 for 2004 and $5,375 for 2006. Petitioners are therefore allowed to deduct $2,833.75 for 2005.
25. The Court also allows $5,000 of wage deductions for Courtney in 2005.
See infra↩ part II.B.2.26. For taxable years beginning after December 31, 2009, cellular phones are no longer in the definition of listed property in
sec. 280F(d)(4) , which was amended by the Small Business Jobs Act of 2010,Pub. L. No. 111-240, sec. 2043(a), 124 Stat. at 2560 . Because the years at issue are before 2009, petitioners' cellular phones are subject to the strict substantiation requirements ofsec. 274(d)↩ .27. Property taxes are generally deductible,
see sec. 164↩ , but petitioners provided no evidence as to whether, for example, Stitch It owned the property or they owned the property that incurred the liability or the nature of the property.28. Petitioners' activities that were not operated with a profit objective,
see supra↩ part I, required lawn care. If some of these lawn care expenses are for those activities, they would not be deductible for Stitch It.29. Petitioners also claimed depreciation expense deductions for a 2004 Toyota Highlander with respect to Juice Plus during the years at issue. The Court is unable to determine whether respondent disallowed the depreciation expense deductions with respect to this vehicle. If so, petitioners did not provide any evidence, such as a mileage log, with respect to this vehicle, and the depreciation expense deductions would be disallowed.↩
30. Computers are not listed property if they are used exclusively at a regular business establishment and are owned or leased by the person operating the establishment.
Sec. 280F(d)(4)(A)(iv) ;Whalley v. Commissioner , T.C. Memo. 1996-533, slip op. at 24Secs. 280F(d)(4)(B) ,280A(c)(1)(A) and(B)↩ . Petitioners do not argue that this exception applies, and the Court finds that it does not apply because Juice Plus did not purchase the computer.31. Petitioners purchased a second computer for Juice Plus on February 15, 2005. Neither party provided any evidence or argument with respect to the second computer. The Court therefore does not address it.↩
32. Expenses of a taxpayer that qualify him or her for a new trade or business are not deductible as business expenses.
Sec. 1.162-5(b)(3), Income Tax Regs.↩ 33. A taxpayer who lacks a donee receipt is required to keep reliable written records containing, among other things: (i) the name and address of the donee organization to which the contribution was made; (ii) the date and location of the contribution; (iii) a description of the property in detail reasonable under the circumstances (including the value of the property); and (iv) the fair market value of the property at the time the contribution was made and the method used to determine the fair market value.
Sec. 1.170A-13(b)(2)(ii), Income Tax Regs. ;see also Van Dusen v. Commissioner , 136 T.C. 515, 532↩ (2011)34. Respondent contends that petitioners are entitled to deduct only $4,999.99 because an appraisal is required for charitable contribution deductions of $5,000 or more. However,
sec. 170(f)(11)(C)↩ requires a qualified appraisal for "a deduction of more than $5,000". Therefore, the maximum that petitioners can deduct without a qualified appraisal is $5,000.
Related
Cite This Page — Counsel Stack
2016 T.C. Memo. 136, 112 T.C.M. 76, 2016 Tax Ct. Memo LEXIS 133, Counsel Stack Legal Research, https://law.counselstack.com/opinion/embroidery-express-llc-v-commr-tax-2016.