Jeffrey McCarty & Ulondra McCarty v. Commissioner

2014 T.C. Summary Opinion 81

• Court: United States Tax Court
• Decided: August 25, 2014
• Docket: 15225-11S
• Status: Unpublished

Opinion

PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-81

UNITED STATES TAX COURT

JEFFREY MCCARTY AND ULONDRA MCCARTY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 15225-11S. Filed August 25, 2014.

Jeffrey McCarty and Ulondra McCarty, pro se.

Whitney N. Moore, for respondent.

SUMMARY OPINION

CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the -2-

petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

In a notice of deficiency dated March 25, 2011 (notice), respondent

determined a $7,124 deficiency in petitioners’ 2007 Federal income tax and

imposed a $1,424.80 section 6662(a) accuracy-related penalty. The issues for

decision are: (1) whether petitioners are entitled to deductions claimed on a

Schedule A, Itemized Deductions, in excess of the amounts now allowed by

respondent; and (2) whether petitioners are liable for a section 6662(a)

accuracy-related penalty.

Background

Some of the facts have been stipulated and are so found. At the time the

petition was filed, petitioners resided in California.

Both petitioners hold advanced college degrees and were employed as

special education teachers during 2007. Mr. McCarty is and was at all times

relevant employed as a special education teacher in the Azusa Unified School

District; in 2007 he taught sixth, seventh, and eighth grade students. Mrs.

1 Unless otherwise indicated, section references are to the Internal Revenue Code of 1986, as amended, in effect for the year in issue. Rule references are to the Tax Court Rules of Practice and Procedure. -3-

McCarty switched places of employment during 2007 from the Azusa Unified

School District to the Rowland Unified School District; during 2007 she taught

special education to students in kindergarten through sixth grade.

As special education teachers petitioners worked with children with a

variety of special needs, described by them to include “learning disabilities,

emotional disorders, explosive behavioral disorders, traumatic brain injury,

autism, aphasia, speech and language disorders, and physical disabilities.”

The State of California required petitioners to adhere to a mandated

curriculum and to develop an individual education plan for each student. To

comply with these requirements petitioners typically implemented a variety of

teaching techniques depending on the needs of the individual student. If the

school district did not provide petitioners with the resources necessary to achieve

compliance with State requirements, then petitioners, from time to time, would

incur out-of-pocket expenses to acquire the necessary resources.

The Azusa Unified School District’s employee business expense

reimbursement policy (reimbursement policy) provided that teachers were entitled

to monthly reimbursements as follows: $500 for elementary schools; $700 for

middle schools; $1,000 for high schools; and $500 for other departments. The -4-

reimbursement policy also imposed various conditions and limitations depending

upon the amount of reimbursement requested.

Both petitioners were active members of their church during 2007, and both

were engaged in missionary work during that year. Mrs. McCarty taught Sunday

school and volunteered for other church-related activities. She was also involved

in charity work with Angel Tree, an organization that provides foster parents to

children whose parents are incarcerated.

Petitioners’ self-prepared, untimely filed joint 2007 Federal income tax

return includes a Schedule A. As relevant here, on the Schedule A petitioners

claimed: (1) a $9,833 deduction for medical and dental expenses;2 (2) a $17,113

deduction for charitable contributions; and (3) a miscellaneous itemized deduction

that takes into account certain unreimbursed employee business expenses relating

to their respective employment as teachers.

In the notice respondent disallowed: (1) the deduction for medical and

dental expenses; (2) the deduction for charitable contributions; and (3) so much of

the miscellaneous itemized deduction as is attributable to unreimbursed employee

2 For the year in issue medical and dental expenses are deductible only to the extent they exceed 7.5% of a taxpayer’s adjusted gross income. Sec. 213(a). References to the “deduction for medical and dental expenses” take into account petitioners’ adjusted gross income. -5-

business expenses.3 According to the notice, the underpayment of tax required to

be shown on petitioners’ 2007 return is due to “negligence or disregard of rules or

regulations” and is a “substantial understatement of income tax”. Therefore,

according to the notice, petitioners are liable for a section 6662(a) accuracy-

related penalty. Other adjustments made in the notice are computational and will

not be addressed.

Discussion

I. Schedule A Deductions

As we have observed in countless opinions, deductions are a matter of

legislative grace, and the taxpayer bears the burden of proof to establish

entitlement to any claimed deduction.4 Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Commissioner,

292 U.S. 435, 440 (1934). This burden requires the taxpayer to substantiate

deductions claimed by keeping and producing adequate records that enable the

Commissioner to determine the taxpayer’s correct tax liability. Sec. 6001;

3 Respondent now concedes that petitioners are entitled to: (1) a $4,020 deduction for medical and dental expenses; (2) a $9,820 deduction for charitable contributions; and (3) a miscellaneous itemized deduction of $143 after taking into account allowable unreimbursed employee business expenses. 4 Petitioners do not claim that the provisions of sec. 7491(a) are applicable, and we proceed as though they are not. -6-

Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540 F.2d

821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965).

A taxpayer claiming a deduction on a Federal income tax return must demonstrate

that the deduction is allowable pursuant to some statutory provision and must

further substantiate that the expense to which the deduction relates has been paid

or incurred. See sec. 6001; Hradesky v. Commissioner, 65 T.C. at 89-90; sec.

1.6001-1(a), Income Tax Regs.

Informed by these fundamental principles of Federal income taxation, we

turn our attention first to the deductions here in dispute.

A. Medical and Dental Expenses

In general, section 213(a) allows a deduction for expenses paid during the

taxable year for medical care that are not compensated for by insurance or

otherwise and to the extent that such expenses exceed 7.5% of adjusted gross

income.

As noted, petitioners claimed a $9,833 deduction for medical and dental

expenses on their 2007 return. In support of their claim to this deduction,

petitioners submitted a summary schedule showing entries for various

expenditures. The total of the expenses shown on the summary schedule,

however, is not consistent with the amount of medical expenses shown on the -7-

Schedule A. After a careful review of the summary schedule, which lists some

personal, nondeductible expenditures, see sec. 262, duplicates other items, and

contains other mistakes,5 we find that petitioners are entitled to a medical expense

deduction totaling $1,126.50 more than now allowed by respondent.

B. Charitable Contributions

Generally, section 170(a) allows a deduction for any charitable contribution

made by the taxpayer. Charitable contribution deductions are subject to the

recordkeeping requirements of section 1.170A-13(a), Income Tax Regs., for

contributions of money, or section 1.170A-13(b), Income Tax Regs., for

contributions of property other than money. Any contribution of $250 or more

must also satisfy the requirement of section 1.170A-13(f)(1), Income Tax Regs.,

which provides that to be allowed a charitable contribution deduction of $250 or

more, the taxpayer must substantiate the contribution with a contemporaneous

written acknowledgment from the donee organization.6 If a taxpayer makes a

5 On the medical and dental expense schedule for 2007, petitioners incorrectly included a charitable contribution as well as several expenditures apparently paid or incurred during years other than 2007. 6 Separate contributions of less than $250 are not subject to the requirements of sec. 170(f)(8), regardless of whether the sum of the contributions made by a taxpayer to a donee organization during a taxable year totals $250 or more. See sec. 1.170A-13(f)(1), Income Tax Regs. -8-

charitable contribution of property other than money in excess of $500, the

taxpayer must maintain written records showing the manner of acquisition of the

item and the approximate date of the acquisition. See sec. 1.170A-13(b)(3),

Income Tax Regs.

The $17,113 charitable contribution deduction claimed on the return and

disallowed in the notice of deficiency consists in part of cash donations, in part of

donations made in property, and in part of mileage.7 Petitioners submitted a

summary schedule showing $15,630.33 in charitable contributions. They have

provided no explanation for the variance between the amount shown on the

summary schedule and the amount shown on the Schedule A.

Petitioners did not maintain a mileage log for the charitable contribution

deduction related to mileage, nor did they maintain adequate substantiation for

many of the donations made in property. According to petitioners’ summary

schedule, most of the donations were made to their church, one or more of the

schools that their children attended, and Goodwill. After a careful review of their

summary schedule, we find that petitioners are entitled to a deduction for

charitable contributions totaling $120 more than now allowed by respondent.

7 As noted, on the basis of adequate substantiation that petitioners provided, respondent now concedes that they are entitled to a $9,820 deduction for charitable contributions. -9-

C. Unreimbursed Employee Business Expenses

Section 162 generally allows a deduction for ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. The term “trade or business” as used in section 162(a) includes the trade

or business of being an employee. Primuth v. Commissioner, 54 T.C. 374, 377-

378 (1970); Christensen v. Commissioner, 17 T.C. 1456, 1457 (1952). The

determination of whether an expenditure satisfies the requirements for

deductibility under section 162 is a question of fact. See Commissioner v.

Heininger, 320 U.S. 467, 475 (1943). In general, an expense is ordinary if it is

considered normal, usual, or customary in the context of the particular business

out of which it arose. See Deputy v. du Pont, 308 U.S. 488, 495 (1940).

Ordinarily, an expense is necessary if it is appropriate and helpful to the operation

of the taxpayer’s trade or business. See Commissioner v. Tellier, 383 U.S. 687

(1966); Carbine v. Commissioner, 83 T.C. 356, 363 (1984), aff’d, 777 F.2d 662

(11th Cir. 1985). On the other hand, section 262(a) generally disallows a

deduction for personal, living, or family expenses. -10-

On the Schedule A petitioners claimed a miscellaneous itemized deduction

that takes into account certain unreimbursed employee business expenses.8 They

submitted a summary schedule showing $20,190.29 in unreimbursed employee

business expenses paid in 2007. As with the other deductions, no explanation has

been given for the variance between the amounts shown on the summary schedule

and the amount shown on the Schedule A. The summary schedule includes

numerous unidentified expenses and some expenses that appear to be more

personal than employment related. Taking into account the items shown on the

summary schedule, the amounts petitioners claim to have expended, the

connection of certain items with petitioners’ employment as teachers, and the

reimbursement policy, we find that petitioners are entitled to a deduction for

miscellaneous itemized expenses, including unreimbursed employee business

expenses, totaling $2,218.50 more than now allowed by respondent.

II. Section 6662(a) Accuracy-Related Penalty

As relevant here, section 6662(a) imposes a penalty of 20% of the portion of

an underpayment of tax attributable to the taxpayer’s: (1) negligence or disregard

8 As noted, respondent now concedes that petitioners are entitled to a $143 miscellaneous itemized deduction that takes into account allowable unreimbursed employee business expenses. -11-

of rules or regulations; or (2) substantial understatement of income tax.9 Sec.

6662(a) and (b)(1) and (2). “Negligence” includes any failure to make a

reasonable attempt to comply with the provisions of the Code, including any

failure to keep adequate books and records or to substantiate items properly. See

sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. A “substantial

understatement of income tax” includes an understatement of income tax that

exceeds the greater of 10% of the tax required to be shown on the return or

$5,000. See sec. 6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs. Respondent

bears the burden of production with respect to the imposition of the section

6662(a) accuracy-related penalty. See sec. 7491(c); Higbee v. Commissioner, 116

T.C. 438, 446-447 (2001).

Section 6664(c)(1) provides an exception to the imposition of the

accuracy-related penalty if the taxpayer establishes that there was reasonable cause

for, and the taxpayer acted in good faith with respect to, the underpayment. Sec.

1.6664-4(a), Income Tax Regs. The determination of whether the taxpayer acted

with reasonable cause and in good faith is made on a case-by-case basis, taking

into account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income

9 In this case the deficiency, underpayment of tax, and understatement of tax are all computed in the same manner. See secs. 6211, 6662(d)(2), 6664(a). -12-

Tax Regs. It is the taxpayer’s burden to establish that he acted in good faith and

that there was reasonable cause for the underpayment. See Higbee v.

Commissioner, 116 T.C. at 449; see also Rule 142(a); Welch v. Helvering, 290

U.S. 111, 115 (1933).

The amounts shown on petitioners’ summary schedules for the various

expense deductions here in dispute are not consistent with the deductions claimed

for those expenses on the Schedule A. The inconsistency has not been explained.

To the extent that the deficiency and, correspondingly, the underpayment and

understatement of income tax required to be shown on petitioners’ 2007 return

exceeds $5,000, we find that: (1) respondent has met his burden of production

with respect to the imposition of a section 6662(a) accuracy-related penalty; and

(2) petitioners have not established that they had reasonable cause for the

underpayment. Otherwise, we find that respondent has not met his burden of

production with respect to the imposition of the section 6662(a) accuracy-related

penalty upon the ground of negligence or intentional disregard of rules or

regulations. -13-

To reflect the foregoing,

Decision will be entered

under Rule 155.