Moussa I. Kourouma v. Commissioner

2008 T.C. Summary Opinion 120

• Court: United States Tax Court
• Decided: September 11, 2008
• Docket: 20515-06S
• Status: Unpublished

Opinion

T.C. Summary Opinion 2008-120

UNITED STATES TAX COURT

MOUSSA I. KOUROUMA, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20515-06S. Filed September 11, 2008.

Moussa I. Kourouma, pro se.

Harry J. Negro and JoAnn F. Zidanic, for respondent.

JACOBS, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

at the time 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 for any other

case. Subsequent section references are to the Internal Revenue

Code (Code) as amended, and all Rule references are to the Tax

Court Rules of Practice and Procedure. - 2 -

Respondent determined deficiencies of $11,649 and $11,209,

respectively, in petitioner’s 2003 and 2004 Federal income tax.1

In addition, respondent determined that petitioner is liable for

accuracy-related penalties under section 6662 of $2,329.80 for

2003 and $2,241.80 for 2004. After concessions by petitioner,

the issues remaining for decision are: (1) Whether an activity

carried on by petitioner (operated under the name Excelix)

constituted a trade or business within the purview of section

162, and if so, whether petitioner is entitled to deduct certain

expenses he claims he incurred with respect to the Excelix

activity in 2003 and/or 2004; (2) whether petitioner is entitled

to charitable contribution deductions for 2003 and/or 2004;2 and

(3) whether petitioner is liable for accuracy-related penalties

under section 6662 for 2003 and/or 2004.

1 Respondent determined that petitioner’s correct tax liability for 2003 is $10,962, rather than $227 as reported on petitioner’s 2003 tax return. Also, respondent disallowed an additional child tax credit of $914; thus, the deficiency determined for 2003 is $11,649. Respondent determined that petitioner’s correct tax liability for 2004 is $10,209, rather than zero as reported on petitioner’s 2004 tax return. Also, respondent disallowed an additional child tax credit of $1,000; thus, the deficiency determined for 2004 is $11,209. 2 Respondent, in his notice of deficiency, disallowed various other claimed deductions. Petitioner either explicitly conceded those items or did not address them at trial. Consequently, petitioner is deemed to have conceded entitlement to such deductions pursuant to Rule 34(b)(4). - 3 -

Background

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. At the time petitioner

filed his petition, he resided in Delaware.

Petitioner, a native of Guinea, is an electrical engineer.

From 2002 to 2007 petitioner worked full time as an

analyst/trader for PHI Service Co. (PHI), a company which trades

(i.e., purchases and sells) electrical power.

Commencing in 2002, petitioner attempted to interest

electric companies in acquiring software that he had developed

which could be used to predict the future price of electricity.

Accurately predicting the price of electricity enabled the

electric company to purchase electricity when prices were low and

sell electricity when prices were high. In 2004 the State of

Delaware issued a business license to petitioner to conduct this

activity under the name Excelix.

Petitioner’s Excelix activity did not generate any revenues

in 2002. Petitioner’s Excelix activity generated $750 of

revenues, from one customer, in 2003. Petitioner’s Excelix

activity did not generate any revenues in 2004. Excelix did not

have any employees during 2003 or 2004. Petitioner’s Excelix

activity was ultimately unsuccessful, generating $5 million of

unpaid liabilities and/or losses by the time of trial. - 4 -

Petitioner timely filed Forms 1040, U.S. Individual Income

Tax Return, for 2003 and 2004, reporting $750 of income from

Excelix in 2003 and no income from Excelix in 2004. On a

Schedule C, Profit or Loss from Business, attached to each

return, petitioner claimed an array of deductions stemming from

his Excelix activity amounting to $43,473 in 2003 and $35,787 in

2004.

On Schedules A, Itemized Deductions, petitioner claimed

charitable contribution deductions of $22,180 in 2003 and $10,500

in 2004. Petitioner reported tax of $227 on his 2003 return and

no tax obligation on his 2004 return. After taking into account

wage withholdings and child tax credits, petitioner claimed that

he was entitled to tax refunds of $16,049 for 2003 and $14,207

for 2004.

Respondent asserts that: (1) Petitioner’s Excelix activity

in 2003 and 2004 did not constitute a trade or business for which

deductions under section 162 are available; and (2) even if

petitioner’s Excelix activity constituted a trade or business,

petitioner failed to substantiate his claimed deductions with

respect thereto.

Respondent contends that any contributions petitioner made

in 2003 and 2004 were not deductible under section 170 because

they were not made to an organization created or organized in the

United States. Respondent further claims that petitioner did not - 5 -

adequately substantiate his claim that he made deductible

charitable contributions. Finally, respondent asserts that

petitioner is liable for the section 6662 accuracy-related

penalty for 2003 and 2004 for substantial understatements of

income tax.

Discussion

As a general rule, the Commissioner’s determinations in the

notice of deficiency are presumed correct, and the burden of

proving an error is on the taxpayer. Rule 142(a). However,

pursuant to section 7491(a), the burden of proof with respect to

any factual issue relating to ascertaining the liability for tax

shifts to the Commissioner if the taxpayer: (1) Maintained

adequate records; (2) satisfied the substantiation requirements;

(3) cooperated with the Commissioner’s agents; and (4) during the

Court proceeding introduced credible evidence with respect to the

factual issue involved. The taxpayer bears the burden of proving

that he has met the requirements of section 7491(a)(2). Miner v.

Commissioner, T.C. Memo. 2003-39; Nichols v. Commissioner, T.C.

Memo. 2003-24, affd. 79 Fed. Appx. 282 (9th Cir. 2003).

Although neither party has directly raised section 7491(a)

as an issue, for the reasons discussed infra we conclude that

petitioner has neither complied with all substantiation

requirements of the Code nor maintained all required records.

See secs. 6001, 7491(a)(2). Consequently, petitioner has the - 6 -

burden of proof respecting factual issues relevant to his

liability for the deficiencies in tax determined by respondent.

Petitioner’s Excelix Activity

Respondent determined that petitioner’s Excelix activity did

not constitute an active trade or business for which deductions

under section 162 are available.

To be engaged in a trade or business within the meaning of

section 162(a), an individual taxpayer must be involved in the

activity with continuity, regularity, and the primary purpose of

deriving a profit. Commissioner v. Groetzinger, 480 U.S. 23, 35

(1987). Whether the taxpayer is carrying on a trade or business

requires an examination of all of the facts in each case. Id. at

36.

Although a reasonable expectation of profit is not required,

the taxpayer’s profit objective must be actual and honest.

Dreicer v. Commissioner, 78 T.C. 642, 644-645 (1982), affd.

without published opinion 702 F.2d 1205 (D.C. Cir. 1983); sec.

1.183-2(a), Income Tax Regs. Whether a taxpayer has an actual

and honest profit objective is a question of fact to be answered

from all of the relevant facts and circumstances. Hastings v.

Commissioner, T.C. Memo. 2002-310; sec. 1.183-2(a), Income Tax

Regs.

The pertinent regulations set forth a nonexhaustive list of

factors that may be considered in deciding whether a profit - 7 -

objective exists. These factors include: (1) The manner in

which the taxpayer carries on the activity, (2) the expertise of

the taxpayer or his advisers, (3) the time and effort expended by

the taxpayer in carrying on the activity, (4) the expectation

that assets used in the activity may appreciate in value, (5) the

success of the taxpayer in carrying on other similar or

dissimilar activities, (6) the taxpayer’s history of income or

losses with respect to the activity, (7) the amount of occasional

profits, if any, which are earned, (8) the financial status of

the taxpayer, and (9) the elements of personal pleasure or

recreation. Golanty v. Commissioner, 72 T.C. 411, 426 (1979),

affd. without published opinion 647 F.2d 170 (9th Cir. 1981);

sec. 1.183-2(b), Income Tax Regs. No single factor or group of

factors is determinative. Golanty v. Commissioner, supra at 426.

A final determination is made only after a consideration of all

of the relevant facts and circumstances.

We do not believe it necessary to analyze each of the

factors enumerated in section 1.183-2(b), Income Tax Regs., in

determining whether petitioner engaged in the Excelix activity

with an actual and honest objective of making a profit. Rather,

we focus on the factors we believe more important and applicable

in this case. Our analysis of those factors leads to the

conclusion that petitioner’s Excelix activity was not a trade or

business for purposes of section 162. - 8 -

The record shows that petitioner’s Excelix activity

generated $750 of revenue in 2003, and no revenue in 2002 or

2004. Moreover, it appears that the Excelix activity did not

generate revenues in any subsequent year. Consequently, the

Excelix activity generated a substantial amount of debt and/or

losses.

It does not appear that petitioner kept contemporaneous or

methodical records of any kind with respect to his Excelix

activity. The scant documentation that petitioner submitted at

trial in support of his claim that he incurred deductible

business expenses was unreliable and contradictory.3 Petitioner

did not hire any employees or advisers in connection with his

Excelix activity, with the possible exception of one person, in

2002.4 In sum, petitioner failed to carry his burden of proving

3 For example, petitioner attempted to substantiate claimed travel expenses by submitting a mileage summary showing that in 2003 he made sixty-seven 64-mile trips to Valley Forge, Pa., fourteen 72-mile trips to Baltimore, Md., four 283-mile trips to Albany, N.Y., twelve 316-mile trips to Pittsburgh, Pa., twelve 283-mile trips to Rensselaer, N.Y., and fourteen 295-mile trips to Holyoke, Mass. Petitioner submitted a calendar which purported to reflect meetings he attended in pursuit of his Excelix activity. We do not find this evidence credible because in our opinion the timing and frequency of such meetings would have been incompatible with contemporaneous full-time employment at PHI. 4 Petitioner did not sufficiently investigate the background of that person, also a native of Guinea, to determine whether that person was in the United States lawfully. Following the arrest of that person, petitioner posted a bond, and thereafter the person absconded. While these events do not reflect on the (continued...) - 9 -

that he was involved in the Excelix activity with the requisite

continuity and regularity and with the primary purpose of

deriving a profit. See Commissioner v. Groetzinger, supra at 35.

Because we agree with respondent’s determination that

petitioner’s Excelix activity was not a trade or business for

purposes of section 162, we hold that petitioner is not entitled

to the deductions for expenses he claims he incurred with respect

to the Excelix activity in 2003 and 2004.

Respondent’s determination with respect to this issue is

sustained.

Petitioner’s Charitable Contribution Deductions

Petitioner claimed charitable contribution deductions of

$22,180 in 2003 and $10,500 in 2004.

Section 170 (a)(1) allows a deduction for charitable

contributions during the taxable year if verified as provided in

the regulations. The term “charitable contribution” includes a

contribution or gift to a corporation, trust, or community chest,

fund, or foundation, with certain provisos. Sec. 170(c). For

example, the recipient organization must have been “created or

organized in the United States or in any possession thereof, or

4 (...continued) expertise of the person as an adviser to petitioner with respect to his Excelix activity (if, as petitioner claims, the person did actually advise petitioner with respect to the Excelix activity), they highlight petitioner’s lack of a businesslike approach to his selection of an adviser as well as to his Excelix activity generally. - 10 -

under the law of the United States, any State, the District of

Columbia, or any possession of the United States”. Sec.

170(c)(2)(A). Furthermore, no part of the net earnings of a

qualified organization may inure to the benefit of any private

shareholder or individual. Sec. 170(c)(2)(C).

The charitable contribution deduction is subject to certain

substantiation requirements. Sec. 170(f)(8). No deduction is

allowed for any contribution of $250 or more unless the taxpayer

substantiates the contribution by a contemporaneous written

acknowledgment of the contribution from the qualified donee

organization. Sec. 170(f)(8)(A). This written acknowledgment

must state the amount of cash and a description (but not

necessarily the value) of any property other than cash the

taxpayer donated and whether any consideration was given to the

taxpayer. Sec. 1.170A-13(f)(2), Income Tax Regs.

It appears that the charitable contributions petitioner

claimed in 2003 and 2004 related to an organization in Guinea,

and not to an organization described in section 170(c)(2)(A).

Petitioner did not provide any documentary evidence, such as

checks or wire transfers, of having made payments to any

charitable organization, either in the United States or

elsewhere. Therefore, we hold that petitioner did not carry his

burden of proving his entitlement to the claimed charitable

contribution deductions. - 11 -

Petitioner’s Liability for Accuracy-Related Penalties

Under section 7491(c) the Commissioner has the burden of

production with respect to any penalty. Once the Commissioner

meets the burden of production, the taxpayer continues to have

the burden of proof with respect to whether the Commissioner’s

determination of the penalty is correct. Rule 142(a); Higbee v.

Commissioner, 116 T.C. 438 (2001).

Respondent determined that petitioner is liable for the

section 6662(a) penalty because he underpaid his tax for both

2003 and 2004 and that those underpayments are attributable to

substantial understatements of income tax within the meaning of

section 6662(b)(2). For purposes of section 6662(b)(2), an

understatement is equal to the excess of the amount of tax

required to be shown in the tax return over the amount of tax

shown in the return, sec. 6662(d)(2)(A), and is substantial in

the case of an individual if the amount of the understatement for

the taxable year exceeds the greater of 10 percent of the tax

required to be shown in the return for that taxable year or

$5,000, sec. 6662(d)(1)(A).

Petitioner’s 2003 return reported tax of $227. Respondent

determined, and we agree, that the tax required to be shown on

the return was $10,962. Petitioner’s 2004 return reported no - 12 -

tax. Respondent determined, and we agree, that the tax required

to be shown on the 2004 return was $10,209. The understatement

for each year exceeds 10 percent of the tax required to be shown

in the returns and for each year the amount of the understatement

is greater than $5,000. There are substantial understatements

for both 2003 and 2004. See sec. 6662(d)(1)(A).

The accuracy-related penalty under section 6662(a) does not

apply to any portion of an underpayment if it is shown that there

was reasonable cause for, and that the taxpayer acted in good

faith with respect to, such portion. Sec. 6664(c)(1). The

determination of whether the taxpayer acted with reasonable cause

and in good faith depends on the pertinent facts and

circumstances, including the taxpayer’s efforts to assess the

taxpayer’s proper tax liability, the knowledge and experience of

the taxpayer, and the reliance on the advice of a professional,

such as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.

Reliance on the advice of a professional, such as an accountant,

does not necessarily demonstrate reasonable cause and good faith

unless, under all the circumstances, such reliance was reasonable

and the taxpayer acted in good faith. Id. In this connection, a

taxpayer must demonstrate that his/her reliance on the advice of

a professional concerning substantive tax law was objectively

reasonable. Chamberlain v. Commissioner, 66 F.3d 729, 732-733

(5th Cir. 1995), affg. in part and revg. in part T.C. Memo. 1994- - 13 -

228; Goldman v. Commissioner, 39 F.3d 402, 408 (2d Cir. 1994),

affg. T.C. Memo. 1993-480.

Petitioner has not carried his burden of proving that he had

reasonable cause and acted in good faith with respect to the

underpayment for either 2003 or 2004. Petitioner testified that

he relied on a person who lived in the same housing complex as he

did as his “tax and legal assistant” and later discovered that

person was not qualified to render legal or accounting advice.

There is no corroborating evidence to substantiate petitioner’s

claim that he relied on the assistance or collaboration of

another person in connection with the preparation of either his

2003 or his 2004 tax return. Assuming that petitioner relied on

another person, petitioner admitted that person was not qualified

to render legal or accounting advice. In any event, there is

nothing in the record to enable us to hold that petitioner’s

reliance on that other person was reasonable. Finally, we are

mindful that neither the 2003 nor the 2004 tax return was signed

by a tax return preparer. Therefore, we cannot hold that

petitioner reasonably relied on the informed and studied advice

of a competent tax professional.

Although petitioner does not have a background in taxation,

he is an educated professional. We doubt that petitioner

reasonably and in good faith could have believed that he was

entitled to the deductions which respondent disallowed. Because - 14 -

petitioner has failed to prove that he is entitled to relief

under section 6664(c)(1), we reject petitioner’s arguments that

he should be relieved of the section 6662 penalties.

To reflect the foregoing and concessions by petitioner,

Decision will be entered

for respondent.