PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE. T.C. Summary Opinion 2014-7
UNITED STATES TAX COURT
MARVIN DOUGLAS, JR. AND K. ELDER-DOUGLAS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12600-10S. Filed January 15, 2014.
Marvin Douglas, Jr., and K. Elder-Douglas, pro sese.
Audra M. Dineen, for respondent.
SUMMARY OPINION
PANUTHOS, Chief Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in effect when the
petition was filed. 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 -2-
for any other case. Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in Marvin Douglas (petitioner) and K.
Elder-Douglas’ (Ms. Elder-Douglas) 2007 Federal income tax of $15,232 and an
accuracy-related penalty under section 6662(a) of $3,046.40. Respondent also
determined a deficiency in their 2008 Federal income tax of $22,885 and an
accuracy-related penalty under section 6662(a) of $4,577.
After concessions,1 the issues for decision are: (1) whether petitioner is
entitled to deductions claimed on Schedules C, Profit or Loss From Business, for
the years in issue; (2) whether petitioner is entitled to unreimbursed employee
business expense deductions claimed on Schedule A, Itemized Deductions, greater
than those respondent allowed for the years in issue; (3) whether petitioner is
entitled to a casualty loss deduction for 2008; and (4) whether petitioners are
1 Ms. Elder-Douglas was granted innocent spouse relief for 2007 and 2008 with respect to certain adjustments attributable to petitioner. Ms. Elder-Douglas has conceded any remaining adjustments attributable to her for the years in issue, and petitioner did not dispute these adjustments. Thus, the only remaining issue with respect to Ms. Elder-Douglas is whether the accuracy-related penalty under sec. 6662(a) applies with respect to any underpayments attributable to her for the years in issue. -3-
liable for the accuracy-related penalties under section 6662(a) for the years in
issue.
Background
Some of the facts have been stipulated, and we incorporate the stipulation of
facts, the supplemental stipulation of facts, and the stipulation of settled issues by
this reference.2 At the time the petition was filed, petitioner resided in California
and Ms. Elder-Douglas resided in Illinois.
Petitioner worked full time as an air traffic controller for the Federal
Aviation Administration (FAA). The FAA did not require petitioner to travel
during the years in issue. Petitioner also pursued various multilevel marketing
activities during the years in issue.3 On petitioner’s 2007 Schedules C he reported
losses with respect to five multilevel marketing activities. These activities
2 On November 1, 2011, respondent filed a request for admissions. Petitioners filed no response, and the requested matters were deemed admitted. See Rule 90(c). Some of the matters deemed admitted here have been stipulated in the stipulation of settled issues and the stipulation of facts. In the stipulation of settled issues, with respect to an unreported State tax refund petitioners received in 2007, petitioners agreed to an amount of $2,748, while in the stipulation of facts and the request for admissions petitioners agreed to and admitted to an amount of $2,781. We presume the correct amount is $2,781. 3 Multilevel marketing generally refers to direct sales where the sales force is compensated for sales they personally generate as well as for sales of the other salespeople that they recruit. -4-
included: (1) Sales Prepaid Legal, a company that sold prepaid legal services; (2)
American Travel Bureau, a company that provided travel services; (3) World
Leadership Group (WLG), a company that marketed real estate, financial services,
insurance, and investments and sold mortgages; (4) Global Domains International,
a company that sold domain names; and (5) Veretekk, a company that provided
online marketing services. During 2008 petitioner continued to participate in the
five foregoing activities and began participating in two additional activities:
Direct Sales, a company for which there is no description, and Cyberwize Sales, a
company that sold nutritional products.
Petitioner traveled throughout 2007 and 2008 to attend meetings and
training seminars for his multilevel marketing activities. He spent amounts on
airfare, hotel accommodations, and rental vehicles.4
4 After trial the parties filed a supplemental stipulation of facts attaching numerous documents. Respondent objected to virtually all of the proposed exhibits on the basis of lack of foundation and hearsay. Some of the proposed exhibits were copies of hotel, car rental, and airline receipts.
In general, the Court conducts trials in accordance with the rules of evidence for trials without a jury in the U.S. District Court for the District of Columbia, and accordingly, follows the Federal Rules of Evidence. Sec. 7453; Rule 143(a); Clough v. Commissioner, 119 T.C. 183, 188 (2002). However, Rule 174(b) carves out an exception for trials of small tax cases under the provisions of sec. 7463(a). Under Rule 174(b), the Court conducts small tax cases as informally as possible and consequently may admit any evidence that the Court deems to (continued...) -5-
Petitioner claimed deductions for the following expenses on his 2007 and
2008 Schedules C for his multilevel marketing activities:
Sales Prepaid Legal
2007 2008
Advertising $17 $20 Car and truck --- 64 Depreciation 142 101 Office --- 25 Supplies 64 65 Travel 75 13 Meals and entertainment 27 41 Utilities 239 540 Other 469 829 Business use of home --- 1,526 Total 1,033 3,224
American Travel Bureau
Advertising $486 1,386 Car and truck 9,642 22,587 Commissions and fees --- 20 Depreciation 12,930 7,758 Legal and professional 174 179 Rent or lease --- 2,156 Supplies 210 175 Taxes and licenses 120 110 Travel 600 1,526 Meals and entertainment 45 42 Utilities 1,389 1,320 Other 144 98 Business use of home 1,292 5,950 Total 27,032 43,307
4 (...continued) have probative value. Schwartz v. Commissioner, 128 T.C. 6, 7 (2007). The documents that petitioners offered are highly probative of expenses petitioner seeks to deduct for his multilevel marketing activities. Therefore, we overrule respondent’s evidentiary objections, and the exhibits are admitted into evidence. -6- World Leadership Group
Advertising $672 644 Car and truck 9,114 21,413 Depreciation 410 246 Legal and professional 174 174 Office 90 90 Rent or lease --- 275 Supplies 608 226 Taxes and licenses 510 510 Travel 2,800 5,037 Meals and entertainment 225 1,380 Utilities 3,712 3,389 Other --- 455 Business use of home --- 1,526 18,315 35,365
Global Domains International
Advertising $205 $205 Car and truck 4,477 5,512 Supplies 160 140 Meals and entertainment 160 217 Utilities 252 220 Business use of home --- 1,526 5,254 7,820
Veretekk
Car and truck $949 1,453 Depreciation 1,200 --- Legal and professional --- 312 Meals and entertainment --- 67 Business use of home --- 883 Total 2,149 2,715 -7- Direct Sales
Car and truck $2,481 Supplies 3,559 Business use of home 1,526 Total 7,566
Cyberwize Sales
Car and truck $2,443 Commissions and fees 200 Depreciation 5,060 Interest 510 Supplies 1,495 Travel 1,895 Meals and entertainment 62 Utilities 816 Other 2,694 Business use of home 1,526 Total 16,701
Petitioner also claimed deductions for job expenses and certain
miscellaneous deductions on his 2007 and 2008 Schedules A of $12,654 and
$24,834, respectively. These deductions related to travel, job training,
membership dues for the National Black Coalition of Federal Aviation Employees
(NBCFAE), union dues, tax preparation fees, and attorney’s and accountant’s
fees.5
5 Petitioner did not contest respondent’s disallowance of deductions for tax preparation fees and attorney’s and accountant’s fees for 2007 and 2008. Accordingly, the disallowed amounts are deemed conceded by petitioner. See (continued...) -8-
Petitioner’s insurance company determined that his vehicle was
unsalvageable after it was involved in an auto accident in 2008, and he claimed a
$12,020 casualty loss deduction on his 2008 Schedule A for this loss.
Respondent disallowed all of the claimed 2007 and 2008 Schedule C
expense deductions. Respondent also disallowed certain Schedule A expense
deductions for 2007 and 2008 and the casualty loss deduction for 2008.
Discussion
In general, the Commissioner’s determination set forth in a notice of
deficiency is presumed correct, and the taxpayer bears the burden of proving that
the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Pursuant to section 7491(a), the burden of proof as to factual matters
shifts to the Commissioner under certain circumstances. Petitioners did not allege
that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore,
petitioners bear the burden of proof. See Rule 142(a).
A taxpayer must substantiate amounts claimed as deductions by maintaining
the records necessary to establish he or she is entitled to the deductions. Sec.
6001. Section 162(a) provides a deduction for certain business-related expenses.
5 (...continued) Rule 149(b). -9-
To qualify for the deduction under section 162(a), “an item must (1) be ‘paid or
incurred during the taxable year,’ (2) be for ‘carrying on any trade or business,’ (3)
be an ‘expense,’ (4) be a ‘necessary’ expense, and (5) be an ‘ordinary’ expense.”
Commissioner v. Lincoln Sav. & Loan Ass’n, 403 U.S. 345, 352 (1971); Deputy v.
du Pont, 308 U.S. 488, 495 (1940) (to qualify as “ordinary”, the expense must
relate to a transaction “of common or frequent occurrence in the type of business
involved”). Whether an expense is ordinary is determined by time, place, and
circumstance. Welch, 290 U.S. at 113-114. Generally, the performance of
services as an employee constitutes a trade or business, Primuth v. Commissioner,
54 T.C. 374, 377 (1970), and the ordinary and necessary expenses paid in
connection with that trade or business are deductible, sec. 162(a); Boyd v.
Commissioner, 122 T.C. 305, 313 (2004).
Section 274(d) applies to certain business expenses including, among other
things, expenses for gifts, listed property and travel (including meals and lodging
while away from home). To substantiate a deduction attributable to travel
expenses, a taxpayer must maintain adequate records or present corroborative
evidence to show the following: (1) the amount of each travel expense; (2) the
time and place of travel; and (3) the business purpose for travel. Sec. 1.274-
5T(b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). - 10 -
I. Schedules C Travel Expenses--2007 and 2008
Petitioner traveled in 2007 and 2008, attending seminars and conferences
for his multilevel marketing activities. Petitioner provided documentation and
substantiation that he incurred expenses of $705.606 for hotel stays, $631.46 for
car rental, and $872.25 for airfare for WLG conferences in 2007, and $933 for
airfare for a WLG conference in 2008.
We are satisfied that petitioner has met the strict substantiation requirements
of section 274(d) for the foregoing expenses by providing a combination of airfare
tickets, hotel receipts, car rental receipts, seminar brochures, and his own
testimony.
With respect to the remaining claimed travel expense deductions on his
2007 and 2008 Schedules C, petitioner did not substantiate the expenses or satisfy
the substantiation requirements of section 274(d). Therefore, the Court sustains
respondent’s disallowance of the remaining claimed travel expense deductions.
II. Remaining Schedule C Expenses--2007 and 2008
Petitioner claimed expense deductions on his 2007 and 2008 Schedules C
related to his multilevel marketing activities. The expense deductions were for
6 This cost relates to two conferences petitioner attended in 2007. The costs of the respective hotel stays were $281.94 and $423.66. - 11 -
advertising, car and truck, commissions and fees, depreciation, legal and
professional, rent or lease, supplies, taxes and licenses, meals and entertainment,
utilities, business use of home, and other expenses.
Petitioner provided documentation that he paid $299 and $98 in 2007 for
accreditation to perform his WLG activity in two States and that he paid a $175
WLG conference registration fee in 2007. Petitioner also provided documentation
that he paid a $50 registration fee in 2008 for a WLG event.
The Court is satisfied that the foregoing expenses were ordinary and
necessary for petitioner’s WLG activity in the years indicated.7 Petitioner did not
substantiate the remaining claimed Schedule C expense deductions or otherwise
contest respondent’s determination, and we sustain respondent’s disallowance of
the remaining expense deductions.
III. Schedule A Unreimbursed Employee Business Expenses
Petitioner claimed unreimbursed employee business expense deductions for
2007 and 2008 for travel, job training, and union and membership dues. We
discuss each item below in turn.
7 To the extent these expenses are subject to the strict substantiation requirements of sec. 274(d), we are satisfied that petitioner has satisfied the requirements of that section. - 12 -
A. Travel
It has been deemed admitted that petitioner was not required to travel for
employment during the years in issue. In any event, petitioner failed to provide
any evidence to substantiate the business purpose of the travel. Respondent’s
determination is sustained.
B. Job Training and Union and Membership Dues
Subject to certain exceptions, education expenditures may be deducted as
trade or business expenses if the education maintains or improves the skills
required by a taxpayer in his or her employment or if the education meets the
express requirements of the taxpayer’s employer. Sec. 1.162-5(a)(1) and (2),
Income Tax Regs.
Petitioner paid membership dues and attended NBCFAE training. He
testified that the training was beneficial and qualified him for promotion.
Although petitioner undoubtedly benefited from the training, he did not
demonstrate that his membership and training were required by his employer, that
without the training he could not have maintained his then-established
employment relationship, or that the training maintained or improved the skills
required for his employment. See sec. 1.162-5(c)(2), Income Tax Regs. With
respect to union dues, petitioner did not substantiate these expenses for 2007 or - 13 -
2008. Therefore, we sustain respondent’s disallowance of the foregoing claimed
unreimbursed employee business expense deductions.
IV. 2008 Casualty Loss
A taxpayer is allowed a deduction for an uncompensated loss that arises
from fire, storm, shipwreck, or other casualty. Sec. 165(a), (c)(3). However, any
“loss * * * shall be allowed only to the extent that the amount of the loss to such
individual arising from each casualty * * * exceeds $100” and only to the extent
that the net casualty loss “exceeds 10 percent of the adjusted gross income”.
Sec. 165(h).
The amount of the casualty loss allowed under section 165 is the lesser of:
(1) the fair market value of the property immediately before the casualty reduced
by the fair market value of the property immediately after the casualty or (2) “[t]he
amount of the adjusted basis prescribed” in section 1.1011-1, Income Tax Regs.,
“for determining the loss from the sale or other disposition of the property
involved.” Sec. 1.165-7(b)(1), Income Tax Regs.
Petitioner claimed a $12,020 deduction for the loss of his vehicle in 2008.
The amount claimed was the difference between the $60,020 original value of the
vehicle in 2006 and the $48,000 paid by insurance after it was determined that it
was unsalvageable in 2008. After petitioner paid a $50 deductible, his primary - 14 -
and gap insurance covered the remaining balance of $47,950. Petitioner offered
evidence of the value of the car at the time of the original lease. However, he
failed to establish the value immediately before the accident and the value
immediately following the accident. See sec. 1.165-7(b), Income Tax Regs.
Without further evidence we cannot conclude that the car’s value at the time of the
accident was that of a new car. Therefore, respondent’s determination on this
issue is sustained.
V. Accuracy-Related Penalty
Section 6662(a) and (b)(1) and (2) imposes a penalty of 20% of the portion
of an underpayment of tax attributable to the taxpayer’s negligence, disregard of
rules or regulations, or substantial understatement of income tax. “Negligence”
includes any failure to make a reasonable attempt to comply with 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” 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);
sec. 1.6662-4(b), Income Tax Regs.
The section 6662(a) accuracy-related penalty does not apply with respect to
any portion of an underpayment if the taxpayer proves that there was reasonable - 15 -
cause for such portion and that he acted in good faith with respect thereto. Sec.
6664(c)(1). The determination of whether a taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circumstances, including the
taxpayer’s efforts to assess the proper tax liability; the knowledge and the
experience of the taxpayer; and any reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the most
important factor is the taxpayer’s effort to assess the taxpayer’s proper tax
liability. Id.
The Commissioner has the burden of production under section 7491(c) with
respect to the accuracy-related penalty under section 6662. To satisfy that burden,
the Commissioner must produce sufficient evidence showing that it is appropriate
to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Respondent determined the accuracy-related penalty for each year was due to
negligence or a substantial understatement of income tax. Respondent has
satisfied his burden by producing evidence that petitioners failed to maintain
adequate books and records. In addition, the underpayment of tax with respect to
petitioner8 is a result of substantial understatements of income tax for 2007 and
8 As a result of the mutual concessions wherein respondent granted partial relief under sec. 6015 and Ms. Elder-Douglas conceded the remaining (continued...) - 16 -
2008 because the understatements of $15,232 and $22,885, respectively, exceed
$5,000, which is greater than 10% of the tax required to be shown on the returns.9
Accordingly, because respondent has met his burden of production, petitioners
must come forward with persuasive evidence that the accuracy-related penalties
should not be imposed with respect to the underpayments because they acted with
reasonable cause and in good faith. See sec. 6664(c)(1); Rule 142(a); Higbee v.
Commissioner, 116 T.C. at 446.
Petitioners failed to provide evidence of most of the claimed expense
deductions on Schedules C and Schedule A and failed to explain the conceded
amounts. Petitioners have not demonstrated that they acted with reasonable cause
and in good faith with respect to the recordkeeping requirements; therefore, the
Court sustains respondent’s determination on this issue.
We have considered all of the parties’ arguments, and, to the extent not
addressed herein, we conclude that they are moot, irrelevant, or without merit.
8 (...continued) adjustments, the accuracy-related penalties under sec. 6662(a) do not apply to Ms. Elder-Douglas as to the items for which respondent granted innocent spouse relief. See sec. 1.6015-1(h)(4), Income Tax Regs. 9 The allowed expenses for 2007 and 2008 would not reduce either understatement below $5,000 with respect to petitioner. - 17 -
To reflect the foregoing,
Decision will be entered
under Rule 155.