T.C. Memo. 2019-149
UNITED STATES TAX COURT
KEVIN M. TABE AND THERESIA Z. TABE, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 26975-17, 7579-18, Filed November 5, 2019. 14514-18.
Kevin M. Tabe and Theresia Z. Tabe, pro sese.
Hannah K. Wilkins and Airelle L. Mills-Johnson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: In these consolidated cases respondent issued Kevin
Tabe (petitioner husband) notices of deficiency for 2013, 2015, and 2016. For
1 Cases of the following petitioners are consolidated herewith: Kevin Mbeh Tabe, docket No. 7579-18; and Kevin M. Tabe, docket No. 14514-18. -2-
[*2] these years, respondent determined the following deficiencies, penalties, and
additions to tax with respect to petitioner husband’s Federal income tax:
Penalty Addition to tax Year Deficiency sec. 6662(a) sec. 6651(a)(1) 2013 $48,472 $9,694 $7,271 2015 26,312 5,262 1,238 2016 23,189 4,638 -0-
Respondent issued petitioner husband and Theresia Z. Tabe (petitioner
wife) (collectively, petitioners) a notice of deficiency for 2014.2 Respondent
determined an $86,482 deficiency and a $17,296 section 6662(a) penalty with
respect to petitioners’ 2014 Federal income tax.
Unless otherwise indicated, all section references are to the Internal
Revenue Code (Code) in effect at all relevant times, and all Rule references are to
the Tax Court Rules of Practice and Procedure. We round all monetary amounts
to the nearest dollar.
After concessions the issues for consideration are: (1) whether petitioner
husband may deduct various expenses reported on Schedule C, Profit or Loss
From Business, for 2013; (2) whether petitioner husband may deduct charitable
contributions and unreimbursed employee business expenses reported on Schedule
2 For 2013-16 (years at issue) petitioners filed a joint return for only 2014. -3-
[*3] A, Itemized Deductions, for 2013; (3) whether petitioner husband may claim
head of household filing status for 2013; (4) whether petitioner husband’s
S corporation may deduct its reported business expenses; (5) whether petitioner
husband had unreported flowthrough income from the S corporation for 2015 and
2016; (6) whether petitioner husband is liable for additions to tax under section
6651(a)(1) for 2013 and 2015; (7) whether petitioners may deduct various
expenses reported on Schedule C for 2014; and (8) whether petitioners may deduct
tuition and fees pursuant to section 222 for 2014.3 Other adjustments are
computational and will flow from the Court’s resolution of the issues remaining in
dispute.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. Petitioners resided in
Texas when they timely filed their petitions.
Petitioner husband is a licensed attorney specializing in construction,
business, real estate, and immigration law. Petitioner husband holds a bachelor’s
degree in law, a master’s degree in law, and a master of laws degree in litigation
and dispute resolution. During 2013 and 2014 petitioner husband was
3 In respondent’s posttrial brief respondent conceded penalties pursuant to sec. 6662(a) and corrected math errors made in the stipulation of settled issues, filed May 20, 2019. Petitioners did not file a posttrial brief. -4-
[*4] self-employed and the principal attorney at his firm, the Law Offices of Kevin
M. Tabe, P.C. For 2015 petitioner husband incorporated his law firm under the
name Tabe & Associates, P.C., and had the law firm elect to be treated as an
S corporation. During 2015 and 2016 petitioner husband provided his legal
services through his S corporation.
Petitioner wife was a nurse. Petitioners were married and lived together
throughout the years at issue.
On January 7, 2015, petitioner husband filed his Federal income tax return
for 2013, claiming head of household status. Petitioner husband’s only source of
income for 2013 was his law firm, and he reported $231,648 in gross receipts on
his Schedule C less the following business expenses: -5-
[*5] Expense Amount Advertising $3,000 Car and truck 28,100 Contract labor 50,060 Depreciation 7,734 Office 15,610 Supplies 4,201 Travel 8,000 Utilities 7,100 Other (dry cleaning) 7,146 Business use of home 5,078 Total 136,029
On Schedule A for 2013 petitioner husband reported $9,132 in cash
charitable contributions, $318 in noncash charitable contributions, and $58,815 in
unreimbursed employee business expenses. Petitioner husband reported the
unreimbursed employee business expenses on Form 2106, Employee Business
Expenses, as follows: -6-
[*6] Expense Amount Vehicle expense $36,963 Parking fees, tolls, and transportation 4,036 Business 12,642 Meals and entertainment 10,347
The notice of deficiency for 2013 disallowed Schedule A deductions for all
of petitioner husband’s reported unreimbursed employee business expenses,
charitable contributions, a portion of Schedule C office expenses, and all of the
advertising, car and truck, contract labor, travel, and “other” expenses.
On July 13, 2015, petitioners filed their joint Federal income tax return for
2014. Petitioners claimed a $4,000 deduction for tuition and fees pursuant to
section 222(a). On petitioner husband’s Schedule C, he reported $323,107 in
gross receipts and the following business expenses for his law firm: -7-
[*7] Expense Amount Advertising $3,250 Car and truck 6,748 Commissions and fees 183,842 Depreciation 2,651 Insurance 6,000 Office 1,500 Repairs and maintenance 400 Supplies 8,200 Taxes and licenses 900 Travel 510 Other: Office rents 16,431 Telephone/internet services 4,800 Bad debts 2,350 Bank charges/credit card fees 2,388 Postage 1,305 Dues and subscriptions 1,000 Dry cleaning 4,259 Professional fees 7,000 Total 253,534
The notice of deficiency for 2014 disallowed the deduction for tuition and fees and
the following expenses reported on Schedule C: advertising, supplies, -8-
[*8] commissions and fees, bad debts, credit card fees, postage, dues and
subscriptions, dry cleaning, and a portion of the professional fees. Respondent
concedes that petitioners may deduct $2,461 for supplies and $20,158 for other
expenses.
On November 7, 2016, petitioner husband filed his Federal income tax
return for 2015 and reported $83,846 in wages. Petitioner husband did not report
his law firm’s business operations on Schedule C for 2015. Instead, he reported a
$14,918 nonpassive loss on Schedule E, Supplemental Income and Loss.
For 2015 petitioner husband incorporated his law firm under the name Tabe
& Associates, P.C., and had it elect to be treated as an S corporation. Petitioner
husband was the S corporation’s sole shareholder and director. On Form 1120S,
U.S. Income Tax Return for an S Corporation, petitioner husband’s law firm
reported $158,537 in gross receipts and the following expenses: -9-
[*9] Expense Amount Salaries and wages $83,846 Rents 35,948 Advertising 8,365 Other: Miscellaneous 249 Printing 1,322 Tools 1,600 Job materials 1,222 Salaries 40,903 Total 173,455
On April 16, 2017, petitioner husband filed his Federal income tax return
for 2016 and reported $7,385 of wages from his law firm. Petitioner husband did
not file a Schedule C or E with his 2016 Federal income tax return.
Petitioner husband’s law firm operated in 2016 as an S corporation. It did
not file a Federal income tax return for 2016. During 2016 petitioner’s law firm
received the following payments: - 10 -
[*10] Payor Amount Western World Insurance Co. $55,000 Twin City Fire Insurance Co. 12,861 Nationwide Insurance Co. 9,000 State Farm Fire and Casualty Co. 9,100 Geico Casualty Co. 6,885 Geico General Insurance Co. 16,000 Total 108,846
The payors listed above classified the payments as “attorney’s fees” on the Forms
1099-MISC, Miscellaneous Income, that they filed with respondent to report the
payments to petitioner husband’s law firm. Respondent prepared a substitute for
return for the law firm that characterized these payments as taxable income.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,
115 (1933). Deductions are a matter of legislative grace, and the taxpayer - 11 -
[*11] likewise bears the burden of proving his or her entitlement to deductions
allowed by the Code and substantiating the amounts of claimed deductions.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934); sec. 1.6001-1(a), Income Tax Regs.
Under section 7491(a), in certain circumstances the burden of proof may shift
from the taxpayer to the Commissioner. Petitioners have not claimed or shown
that they have met the specifications of section 7491(a) to shift the burden of proof
to respondent as to any relevant factual issue.
II. Expense Deductions
Generally, an S corporation shareholder determines his or her tax liability
by taking into account a pro rata share of the S corporation’s income, losses,
deductions, and credits. Sec. 1366(a)(1). Where, as here, a notice of deficiency
includes adjustments for S corporation items with other items unrelated to the
S corporation, we have jurisdiction to determine the correctness of all adjustments.
See Winter v. Commissioner, 135 T.C. 238 (2010).
Section 162(a) allows a taxpayer to deduct all ordinary and necessary
expenses paid or incurred in carrying on a trade or business. A taxpayer claiming
a deduction on a Federal income tax return must demonstrate that the deduction is
allowable pursuant to a statutory provision and must further substantiate that the - 12 -
[*12] expense to which the deduction relates has been paid or incurred. Sec.
6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d per curiam, 540
F.2d 821 (5th Cir. 1976). A taxpayer may not deduct a personal, living, or family
expense unless the Code expressly provides otherwise. Sec. 262(a).
An ordinary expense is one that commonly or frequently occurs in the
taxpayer’s business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary
expense is one that is appropriate and helpful in carrying on the taxpayer’s
business, Commissioner v. Heininger, 320 U.S. 467, 471 (1943); sec. 1.162-1(a),
Income Tax Regs. Normally, the Court may estimate the amount of a deductible
expense if a taxpayer establishes that an expense is deductible but is unable to
substantiate the precise amount. See Cohan v. Commissioner, 39 F.2d 540,
543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
This principle is often referred to as the Cohan rule. See, e.g., Estate of Reinke v.
Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff’g T.C. Memo. 1993-197.
Certain expenses specified in section 274 are subject to strict substantiation
rules. No deductions under section 162 shall be allowed for “listed property”, as
defined in section 280F(d)(4), “unless the taxpayer substantiates [them] by
adequate records or by sufficient evidence corroborating the taxpayer’s own - 13 -
[*13] statement”. Sec. 274(d). Listed property includes passenger automobiles
and other property used for transportation. Sec. 280F(d)(4)(A)(i) and (ii).
To meet these strict substantiation rules, a taxpayer must substantiate by
adequate records or by sufficient evidence corroborating the taxpayer’s own
statement: (1) the amount of the expense, (2) the time and place the expense was
incurred, and (3) the business purpose of the expense. Sec. 274(d). To
substantiate by adequate records, the taxpayer must provide (1) an account book, a
log, or similar record and (2) documentary evidence, which together are sufficient
to establish each element of an expenditure. Sec. 1.274-5T(c)(2)(i), Temporary
Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary evidence
includes receipts, paid bills, or similar evidence. Sec. 1.274-5(c)(2)(iii), Income
Tax Regs. To substantiate by sufficient evidence corroborating the taxpayer’s
own statement, the taxpayer must establish each element by his or her own
statement and by documentary evidence or other direct evidence. Sec.
1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6,
1985).
Petitioner husband contends that he is entitled to deductions for a portion of
the office expenses and for all of the advertising, car and truck, contract labor,
travel, and “other” expenses reported on his Schedule C for 2013. Petitioners - 14 -
[*14] contend that they are entitled to deduct the following expenses reported on
their 2014 Schedule C: advertising, supplies, commissions and fees, bad debts,
credit card fees, postage, dues and subscriptions, dry cleaning, and a portion of the
professional fees. Travel expenses and car and truck expenses are subject to the
strict substantiation rules of section 274(d). Secs. 274(d)(1), (4), 280F(d)(4)(A)(i)
and (ii).
The documents petitioner husband produced do not provide enough
information for us to determine what expenses he actually incurred and to what
extent these expenses had a business purpose. Petitioner husband has provided no
receipts linking his car and truck expenses and travel expenses to his business.
The strict substantiation requirements of section 274(d) with respect to travel
expenses and car and truck expenses were not met for 2013.
Substantiation requirements with respect to the advertising, office,
commissions and fees, supplies, contract labor, and “other” (telephone/internet
services, bad debts, bank charges/credit card fees, postage, dues and subscriptions,
dry cleaning, or professional fees) expenses have not been met. No documents
were provided that would allow these expenses to be estimated and that show
these expenses have business purposes. For 2013 petitioner husband may not - 15 -
[*15] deduct any additional expenses. For 2014 petitioners may not deduct any
additional expenses.
III. Schedule A Expenses
On his 2013 Federal income tax return, petitioner husband claimed a
$67,829 deduction for Schedule A expenses, including unreimbursed employee
business expenses and charitable contributions. In the notice of deficiency for
2013 respondent disallowed petitioner husband’s Schedule A deductions for
charitable contributions and unreimbursed employee business expenses.
A. Charitable Contributions
Section 170(a)(1) allows a deduction for contributions made to charitable
organizations defined in section 170(c). Section 170(f)(8) provides substantiation
requirements for certain charitable contributions. Specifically, section
170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a) for
any contribution of $250 or more unless the taxpayer substantiates the
contribution by a contemporaneous written acknowledgment of the contribution
by the donee organization that meets the requirements of subparagraph (B).”
For donations of cash the donee’s written acknowledgment must state the
amounts contributed, indicate whether the donee organization provided any goods
or services in consideration for the contribution, and provide a description and a - 16 -
[*16] good-faith estimate of the value of any goods or services provided by the
donee organization. See sec. 170(f)(8)(B); sec. 1.170A-13(f), Income Tax Regs.
Section 170(f)(17) provides: “No deduction shall be allowed under
subsection (a) for any contribution of a cash, check, or other monetary gift unless
the donor maintains as a record of such contribution a bank record or a written
communication from the donee showing the name of the donee organization, the
date of the contribution, and the amount of the contribution.” For noncash
contributions a taxpayer must maintain for each contribution a receipt from the
donee showing the name of the donee, the date and location of the contribution,
and a description of the donated property in detail reasonably sufficient under the
circumstances. See sec. 1.170A-13(b)(1), Income Tax Regs.
Petitioner husband’s charitable contribution deduction for 2013 consists of
$9,132 for cash and check contributions and $318 for noncash charitable
contributions. Petitioner husband testified that these contributions were donations
to his church. Respondent argues that petitioner husband is not entitled to any
deduction because he did not substantiate any of the contributions. Petitioner
husband did not provide receipts, bank records, or documentation for the cash or
check contributions. Petitioner husband likewise did not produce the required - 17 -
[*17] documents to substantiate the noncash contributions claimed as a deduction.
Respondent’s disallowance of these deductions is sustained.
B. Unreimbursed Employee Business Expenses
A taxpayer may deduct unreimbursed employee business expenses as
ordinary and necessary business expenses under section 162. Lucas v.
Commissioner, 79 T.C. 1, 7 (1982). Miscellaneous itemized deductions, such as
the deduction for unreimbursed employee business expenses, are allowed only to
the extent that the total of such deductions exceeds 2% of adjusted gross income.
Sec. 67(a). Unreimbursed employee business expenses are similar to Schedule C
business expenses in that taxpayers are required to substantiate the expense
underlying the claimed deduction by maintaining records sufficient to establish the
amount and to enable the Commissioner to determine the correct tax liability. Sec.
6001; Higbee v. Commissioner, 116 T.C. 438, 440 (2001).
On Form 2106 petitioner husband reported a $36,963 vehicle expense; a
$4,036 parking fees, tolls, and transportation expense; a $12,642 business
expense; and a $10,347 meals and entertainment expense as the underlying
expenses for his claimed unreimbursed employee business expense deduction for
2013. - 18 -
[*18] At trial petitioner husband testified inconsistently that the underlying
expense for his claimed unreimbursed employee business expense deduction was
actually bad debts. He contended that some of the expenses were related to his
law practice, and he could not explain how these expenses differed from expenses
reported on his Schedule C or why these expenses were not reported on his
Schedule C.
Petitioner husband’s vehicle and meals and entertainment expenses are
subject to the strict substantiation rules of section 274. He failed to provide an
account book, a log, a similar record, or other sufficient evidence to substantiate
these reported expenses. Since petitioner husband failed to meet the strict
substantiation requirements of section 274(d), respondent’s disallowance of
deductions for these expenses is sustained.
Petitioner husband did not provide any receipts, invoices, or other
documents to substantiate the remaining expenses. He likewise did not provide
sufficient evidence to permit us to estimate the amounts of the expenses.
Petitioner husband did not prove that these expenses were connected with his
business. Respondent’s disallowance of the deductions for these expenses is
sustained. - 19 -
[*19] IV. Tuition and Fees Deduction
In 2014 petitioners claimed a $4,000 tuition and fees deduction on their
joint Federal income tax return. In the notice of deficiency for 2014 respondent
disallowed this deduction.
For qualifying individuals, section 222(a) allows a taxpayer to deduct an
amount equal to qualified tuition and related expenses paid by the taxpayer during
the taxable year. See sec. 25A(f)(1). Petitioners failed to substantiate a qualified
tuition and related expense. Petitioners produced a document which notified
petitioner husband that his payment to the University of Tulsa had been returned
because of insufficient funds. Respondent’s disallowance of this deduction is
sustained.
V. Head of Household
Section 1(b) provides a special tax rate for an individual who qualifies as
head of household. Section 2(b)(1) defines a head of household as an individual
taxpayer who, among other things, is “not married at the close of his taxable year
* * * [and] is not a surviving spouse”. Petitioner husband testified that he was
married to and living with petitioner wife throughout 2013. His correct filing
status for 2013 is married filing separately. See sec. 1(d). - 20 -
[*20] VI. Unreported Income
Section 61(a) provides that gross income includes “all income from
whatever source derived”. See also Commissioner v. Glenshaw Glass Co., 348
U.S. 426, 430 (1955). Section 1366(a) provides that income, losses, deductions,
and credits of an S corporation are passed through pro rata to its shareholders on
their individual income tax returns. The character of each item of income is
determined as if it were realized directly from the source from which the
corporation realized it or incurred in the same manner as it was by the corporation.
Sec. 1366(b). A shareholder’s gross income includes his or her pro rata share of
the S corporation’s gross income. Sec. 1366(c).
Petitioner husband had his law firm opt to be treated as an S corporation as
of 2015. The law firm did not file a Form 1120S tax return for 2016. As a result
respondent created for the S corporation a substitute for return pursuant to section
6020. Respondent determined that petitioner’s law firm had $108,846 of income
for 2016 on the basis of information reported to respondent on Forms 1099-MISC.
Petitioner husband acknowledges that he received the payments made to his
law firm but claims that he distributed the funds to his clients. He produced no
evidence at trial to support his claim. We conclude that the $108,846 paid to - 21 -
[*21] petitioner husband’s law firm is taxable income to him as the sole
shareholder of the S corporation.
VII. S Corporation Business Expenses
The substantiation requirements for section 162 also apply to business
expense deductions for S corporations. Sec. 1363(b). Petitioner husband was the
sole shareholder and director of his law firm. On his law firm’s 2015 Form 1120S
it reported $158,537 in gross receipts and reported various expenses totaling
$173,455. Petitioner husband contended that his law firm had expenses for 2016.
He did not offer any receipts or other evidence to substantiate these claimed
expenses. His law firm may not deduct any business expenses for 2015 and 2016.
Therefore, with the exception of an expense for the wages of $7,385 that the S
corporation paid to petitioner husband and that he reported on his personal returns,
no deductions reduce the flowthrough income to him.
VIII. Section 6651(a)(1) Additions to Tax
Respondent determined that petitioner husband is liable for additions to tax
because he did not timely file his 2013 and 2015 Federal income tax returns.
Section 6651(a)(1) provides for an addition to tax for failure to timely file a
Federal income tax return unless it is shown that such failure was due to
reasonable cause and not willful neglect. See also United States v. Boyle, 469 - 22 -
[*22] U.S. 241, 245 (1985). A failure to file a timely Federal income tax return is
due to reasonable cause if the taxpayer exercised ordinary business care and
prudence but nevertheless was unable to file the return within the prescribed time.
See sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Petitioner husband filed his 2013 Federal income tax return on January 7,
2015. He filed his 2015 Federal income tax return on November 7, 2016.
Respondent has shown that petitioner husband failed to timely file his Federal
income tax returns for 2013 and 2015. Consequently, we conclude that
respondent has satisfied the burden of production under section 7491(c).
Petitioner husband failed to introduce any evidence that he is not liable for
the additions to tax or that his failure to timely file was due to reasonable cause
and not willful neglect. Accordingly, petitioner husband is liable for the additions
to tax pursuant to section 6651(a)(1).
Any contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered under
Rule 155.