Kenneth Nordeen v. Commissioner , 2011 T.C. Summary Opinion 104 ( 2011 )

T.C. Summary Opinion 2011-104UNITED STATES TAX COURT
KENNETH NORDEEN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9840-09S. Filed August 29, 2011.
Kenneth Nordeen, pro se.
Michael J. Gabor, for respondent.
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.1 Pursuant to
section 7463(b), the decision to be entered is not reviewable by
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure. All dollar amounts are rounded to the nearest
dollar.
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any other court, and this opinion shall not be treated as
precedent for any other case.
Respondent determined a $5,239 deficiency in petitioner’s
1999 Federal income tax and a $7,752 deficiency in petitioner’s
2000 Federal income tax. Respondent also determined section
6651(a)(1) additions to tax of $1,310 and $1,938 for 1999 and
2000, respectively. After concessions,2 the issues for decision
for the tax year 1999 are: (1) Whether petitioner is entitled to
a deduction for expenses in excess of $253,355 claimed on
Schedule C, Profit or Loss From Business, and (2) whether
petitioner is liable for an addition to tax under section
6651(a)(1).3
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the accompanying exhibits are
incorporated herein by this reference. Petitioner resided in
Florida at the time the petition was filed.
Petitioner worked as a self-employed general contractor on
various properties owned by Thomas Hoy (Mr. Hoy) during the year
at issue. Mr. Hoy paid petitioner by check. Petitioner cashed
2
Respondent conceded that there is no deficiency or addition
to tax due from petitioner for the taxable year 2000.
3
Respondent also determined that petitioner is liable for
self-employment tax of $3,113. This is a computational
adjustment and was not addressed at trial.
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the checks, using some of the proceeds to purchase supplies and
materials for the construction of Mr. Hoy’s home. Petitioner
retained some records with respect to his income-producing
activity; however, many of petitioner’s records were destroyed in
a hurricane.
Mr. Hoy issued a Form 1099-MISC, Miscellaneous Income,
reflecting that he paid petitioner $274,366 in nonemployee
compensation in 1999.4 Petitioner filed his 1999 Form 1040, U.S.
Individual Income Tax Return, on December 19, 2005, as married
filing separately and reported gross receipts and gross income of
$275,386. Petitioner deducted expenses of $278,575, reflecting a
loss of $3,189.
Petitioner’s Schedule C reflected the following deductions:
Description Amount Claimed
Depreciation and section 179 expense $3,800
deduction
Insurance 3,500
Legal and professional services 2,800
Rent or lease (vehicles, machinery, and 5,100
equipment)
Supplies 125,000
Deductible meals and entertainment 275
Wages 135,000
4
Mr. Hoy included on Form 1099 funds he paid petitioner to
purchase supplies. See our discussion infra.
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Other expenses (cell phone) 3,100
Total expenses 278,575
Petitioner did not initially provide respondent with any
documents to substantiate the expenses deducted on Schedule C.
Respondent allowed $253,355 of Schedule C deductions by using a
gross profit percentage based on industry norms for 1999.
Respondent mailed petitioner a notice of deficiency on January
27, 2009.5
Discussion
I. Burden of Proof
A notice of deficiency is generally presumed correct, and
the taxpayer bears the burden of proving otherwise. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). If the
taxpayer satisfies certain substantiation and recordkeeping
requirements, the burden of proof regarding factual matters may
shift to the Commissioner. See sec. 7491(a). Petitioner has not
alleged, and we do not find, that the burden of proof should
shift to respondent. See sec. 7491(a)(2)(A) and (B).
5
At some point before trial petitioner found some records
relating to his Schedule C activity. Also at some point before
trial petitioner claimed entitlement to dependency exemption
deductions and a medical expense deduction for the taxable year
1999. The dependency exemption deductions and the medical
expense deduction were not claimed on the Federal income tax
return, nor were these issues raised in the petition. The Court
permitted petitioner the opportunity to raise these issues and
present evidence at trial. Petitioner, however, did not present
any evidence at trial, and accordingly, no adjustments are
allowed for these claims.
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Income tax deductions are a matter of legislative grace, and
the burden of clearly showing the right to the claimed deduction
is on the taxpayer. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). A taxpayer is generally allowed deductions under
section 162 for all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business. To qualify as a 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 Association, 403 U.S. 345,
352 (1971); Commissioner v. Flowers, 326 U.S. 465, 470 (1946);
Deputy v. du Pont, 308 U.S. 488, 495 (1940). An expense is
necessary if it is appropriate and helpful in carrying on the
trade or business. Commissioner v. Heininger, 320 U.S. 467, 471
(1943); Welch v. Helvering, supra at 113; Heineman v.
Commissioner, 82 T.C. 538, 543 (1984). An expense is ordinary
when it is “of common or frequent occurrence in the type of
business involved.” Deputy v. du Pont, supra at 495.
A taxpayer must maintain sufficient records to enable the
Commissioner to determine his correct tax liability. Sec. 6001;
sec. 1.6001-1(a), Income Tax Regs. A taxpayer must also
substantiate the purpose and amount of the deductions claimed.
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Higbee v. Commissioner, 116 T.C. 438, 440 (2001); Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976). Merely claiming a deduction on a Federal
income tax return is not sufficient to substantiate those
deductions. Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979);
Roberts v. Commissioner, 62 T.C. 834, 837 (1974).
Within the limitations set by section 274(d), if a taxpayer
is unable to substantiate his deductions, the Court is permitted
to estimate the deductible amount after the taxpayer has
established that he incurred deductible expenses. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). A taxpayer
must provide sufficient evidence to establish a rational basis
upon which we can make the estimate. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
II. Schedule C Expense Deductions
Respondent allowed petitioner a deduction of $253,355 for
1999. Although petitioner was able to provide some documentation
of expenses for 1999, petitioner’s testimony, combined with the
records produced, does not support deductible expenses in excess
of the amount respondent allowed. Because petitioner has been
unable to substantiate deductions in excess of $253,355 for 1999,
we sustain respondent’s determination.
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We note that respondent’s revenue agent indicated to the
Court that she believed the Form 1099-MISC overstated gross
income, in that the Form 1099-MISC included funds Mr. Hoy gave
petitioner to purchase supplies and materials for the
construction of Mr. Hoy’s home. Assuming the Court were to
conclude that the Form 1099-MISC was overstated as respondent’s
agent suggested, we would be inclined to sustain respondent’s
deficiency determination in any event.
Petitioner credibly testified that he took a weekly “draw”
from funds received from Mr. Hoy as his pay for work done.
Petitioner indicated that the amount of the draw was
approximately $450 for the first 5-1/2 half months of 1999 and
approximately $900 for the following 6-1/2 months. Accepting
petitioner’s testimony, we could conclude that petitioner
received approximately $36,450 of gross income during 1999.6
Petitioner did not present any evidence of expenses to offset
this income. Thus, under this theory, we could conclude that the
amount of the deficiency would be greater than that determined by
respondent. As respondent did not raise this alternative theory
nor make any claim for an increased deficiency, we do not
consider this question any further. This discussion simply
6
We compute this amount on the basis of 23 weeks x $450 =
$10,350 + 29 weeks x $900 = $26,100. This equals $36,450.
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illustrates that by his own testimony, petitioner appears to have
understated his taxable income.
III. Addition to Tax
Section 6651(a)(1) generally provides that there will be an
addition to tax for a failure to file a timely return unless a
taxpayer can show that the failure to file is on account of
reasonable cause and not willful neglect.
Respondent satisfied his burden of production under section
7491(c) by establishing that petitioner did not file his 1999
Federal income tax return by its due date. Therefore, petitioner
bears the burden of proving that his failure to file a return was
due to reasonable cause and not due to willful neglect. See sec.
6664(c); Higbee v. Commissioner, supra at 446; Ruggeri v.
Commissioner, T.C. Memo. 2008-300.
A taxpayer can establish that his failure to timely file was
due to reasonable cause if he exercised ordinary business care
and prudence and was nevertheless unable to file his return in
time. United States v. Boyle, 469 U.S. 241, 246 (1985); Crocker
v. Commissioner, 92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. Willful neglect is the conscious,
intentional failure to file, or reckless indifference to the
obligation to file a tax return. United States v. Boyle, supra
at 245.
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Petitioner has not offered, and we do not find, that he had
reasonable cause for failing to file his 1999 Federal income tax
return by the date prescribed by law.
To reflect the foregoing and on the basis of the
concessions,
Decision will be entered
for respondent as to 1999 and
for petitioner as to 2000.