Brandon Brown & Christi Cloaninger Brown v. Commissioner , 2018 T.C. Summary Opinion 6 ( 2018 )

T.C. Summary Opinion 2018-6UNITED STATES TAX COURT
BRANDON BROWN AND CHRISTI CLOANINGER BROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2809-16S. Filed February 5, 2018.
James G. McGee, Jr., and William H. Webb, for petitioners.
Jerrika C. Anderson and Horace Crump, for respondent.
SUMMARY OPINION
LARO, 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
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code of 1986 (Code), as amended and in effect for the tax year at issue,
and all Rule references are to the Tax Court Rules of Practice and Procedure.
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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.
Respondent determined a $6,514 deficiency in petitioners’ 2013 Federal
income tax, and a $1,302.80 section 6662(a) accuracy-related penalty which he
has conceded. The sole issue we decide is whether petitioners properly claimed
$27,646 as deductible repair expenses instead of depreciable capital expenditures.
We hold that petitioners did not properly so claim, and we sustain respondent’s
determination.
Background
The parties submitted this case fully stipulated under Rule 122. The
stipulation of facts is incorporated herein. Petitioners resided in Mississippi when
their petition was filed.
Petitioners listed four properties as commercial on their 2013 Schedule E,
Supplemental Income and Loss. For that year petitioners claimed a deduction of
$48,466 for rental repairs on two of the four properties: $45,361 on one property
and $3,105 on the other.
On November 30, 2015, respondent issued a notice of deficiency for the
year at issue, in which he allowed $20,820 as a deduction for rental repairs and
disallowed the remaining $27,646, determining that the latter amount was a capital
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expenditure that must be added to petitioners’ bases in the properties and
depreciated over the applicable recovery period. Accordingly, respondent
determined that petitioners’ depreciation deduction for 2013 should be increased
from $8,654 to $10,244. In view of these adjustments, respondent determined a
$6,514 deficiency and a $1,302.80 section 6662(a) accuracy-related penalty for
petitioners’ 2013 taxable year (which penalty he has conceded).
The parties have stipulated that the following represents the expenditures
for which petitioners were denied a current deduction:
Item Cost
Carpet--Suite B $2,085
Carpet and install vinyl composition tile--Suite A 3,788
Carpet--HOYA 4,498
Carpet--Suite E 5,435
Remodeled (stained ceiling tiles, removed walls, cut 2,700
out 3 openings, applied door sweeps)--Suite A
Replaced condensing unit and install clean-kit 2,119
Remodeled (built walls and removed doorways)-- 4,000
Suite A
Install new ceiling and tiles--Ridgeland 2,850
Wiring (wired circuitry to reconnect outlets, installed 1,604
emergency fixtures, two exit fixtures, and replaced
ballast and lamps)
We note that the total of these stipulated expenses is $29,079, or $1,433 more than
the $27,646 for which respondent disallowed a deduction in the notice of
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deficiency. The parties have not explained this discrepancy, but it is not material
to our resolution of the case.
Petitioners timely filed with this Court a petition contesting respondent’s
determination. See sec. 6213(a).
Discussion
I. Overview
A. Burden of Proof
Generally, the Commissioner’s determination of a taxpayer’s liability for an
income tax deficiency is presumed to be correct, and the taxpayer bears the burden
of proving the determination improper by a preponderance of the evidence. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In certain instances,
where a taxpayer has introduced credible evidence with respect to any factual
issue relevant to ascertaining his tax liability, the burden of proof shifts to the
Commissioner, but only if the taxpayer has complied with substantiation
requirements, maintained all records required by the Code, and cooperated with
the Government’s reasonable requests for witnesses, information, documents,
meetings, and interviews. Sec. 7491(a).
Deductions are a matter of legislative grace, and the taxpayer must prove his
entitlement to any deductions claimed. INDOPCO, Inc. v. Commissioner, 503
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U.S. 79, 84 (1992). Taxpayers are obligated to maintain sufficient records to
substantiate expenses underlying their claimed deductions. Sec. 6001; see also
Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff’d, 540 F.2d 821 (5th
Cir. 1976). Self-serving declarations generally are not a sufficient substitute for
records. Weiss v. Commissioner, T.C. Memo. 1999-17, 1999 WL 34813, at *9.
B. Deductibility of Business Expenses
Taxpayers may deduct “all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business”. Sec.
162(a). However, no deduction is allowed for amounts “paid out for new
buildings or for permanent improvements or betterments made to increase the
value of any property or estate.” Sec. 263(a)(1). Such amounts instead must be
capitalized. See sec. 1.263(a)-3, Income Tax Regs. It is a factual determination
whether an expense is a deductible repair or an expenditure that must be
capitalized. Gibson & Assocs., Inc. v. Commissioner, 136 T.C. 195, 233 (2011).
Only those expenditures may be deducted that are made to restore property
to a sound state or to mend it, with the purpose of keeping the property in an
ordinarily efficient operating condition. Ill. Merchs. Tr. Co. v. Commissioner,
4 B.T.A. 103, 106 (1926). Such expenditures do not add to the property’s value,
nor do they appreciably prolong its life; instead they merely keep the property in
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an operating condition over its probable useful life for the uses for which it was
acquired. Id.; see also Gibson & Assocs., Inc. v. Commissioner, 136 T.C. at 233.
On the other hand, expenditures for replacements, alterations,
improvements, or additions which prolong a property’s life, increase its value, or
make it adaptable to a different use are treated as additions to capital. Ill. Merchs.
Tr. Co. v. Commissioner, 4 B.T.A. at 106; see also Gibson & Assocs., Inc. v.
Commissioner, 136 T.C. at 233. An expenditure made for an item as part of a
general plan of rehabilitation, modernization, and improvement of the property
must be capitalized, even if, standing alone, the item appropriately may be
classified as a deductible repair. Niv v. Commissioner, T.C. Memo. 2013-82, at
*19-*20. Furthermore, an expenditure to acquire an asset with a useful business
life exceeding one year generally is treated as a capital investment and is not
deductible currently as an ordinary and necessary business expense. Webb v.
Commissioner, 55 T.C. 743, 744-745 (1971). Useful life is “the period over which
the asset may reasonably be expected to be useful to the taxpayer in his trade or
business or in the production of his income”, sec. 1.167(a)-1(b), Income Tax
Regs., and the burden of proving it falls upon the taxpayer, see Barr v.
Commissioner, T.C. Memo. 1989-69, 56 T.C.M. (CCH) 1255, 1261 (1989).
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II. The Parties’ Arguments
Petitioners contend that the disputed expenditures should be classified as
deductible ordinary and necessary rental property repair expenses and thus should
not be reclassified as capital expenditures. More than half of the disputed
expenditures were to repair or replace carpeting that had been damaged or worn
during the ordinary course of tenancy, they argue, in order to lease the properties
to new tenants. Petitioners point out that the work did not involve a wholesale
replacement of each property’s flooring but was limited to carpeting that needed to
be removed or repaired. Similarly, petitioners maintain that the remodeling
expenses were to paint damaged walls and replace stained or worn ceiling tiles,
remedial repairs made only to the extent necessary to comply with the terms of
various lease agreements. The remaining expenditures too, they claim, were
remedial and did not extend the property’s useful life by more than one year, being
intended to restore the leased property to a suitable condition. In all, petitioners
argue, the disputed expenditures were made to keep the properties in operating
condition over their useful life and neither prolonged either property’s life nor
increased its value. These expenses are properly deductible, they contend, because
they were not incurred as part of a grand scheme to rehabilitate or modernize the
premises but were incurred through routine maintenance.
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Respondent asserts that the burden of proof respecting the disputed
expenses falls upon petitioners because they have not satisfied the requirements in
section 7491(a) to shift the burden to him; according to respondent, petitioners
have not carried this burden. Respondent maintains that the disputed repairs
constitute capital expenditures because they are replacements or improvements.
He argues that, aside from their self-serving declarations, petitioners have failed to
provide any information about the expenditures other than that they were incurred.
To the extent that the expenditures were related to new items replacing old ones,
respondent contends that petitioners have offered no evidence showing when the
originals were placed in use or their condition upon replacement. Petitioners have
not demonstrated that the expenditures did not add value to the properties,
respondent asserts, such as by providing information about the values of the
properties before and after renovation. Respondent also contends that petitioners
have failed to show that the useful life of any of the disputed repairs is less than
one year or that the expenditures should not be deemed a general plan of
improvement. Finally, he asserts that, notwithstanding petitioners’ assertion that
the expenses were incurred through routine maintenance and to comply with the
terms of various lease agreements, they have provided no evidence of such
agreements or that the work performed was done on a recurring basis. Ultimately,
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respondent argues, petitioners cannot rely on mere allegations unsupported by the
record, see Wages v. Commissioner, T.C. Memo. 2017-103, and their failure to
introduce favorable evidence within their control supports an inference that such
testimony or documentation would not support their position, see Wichita
Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d
513 (10th Cir. 1947).
III. Petitioners’ Burden of Proof
We agree with respondent that petitioners have failed to satisfy their burden
of proof. As we observed above, the burden is on the taxpayer to prove by a
preponderance of the evidence that the notice of deficiency is incorrect. See Rule
142(a); Welch v. Helvering, 290 U.S. at 115. As the short background section of
this opinion attests, the record in this case is sparse. All that is before the Court is
a three-page stipulation of facts (without any corresponding exhibits) establishing
that petitioners, in the course of their commercial rental business, incurred certain
expenses for which respondent denied a deduction. While we have before us an
itemized list of the work performed and the costs therefor, we have no evidence
about the context in which that work was performed, nor its effect on the value or
the useful life of either property. Petitioners on brief have provided certain
explanations that purport to establish such a context. However, because
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petitioners’ statements are not supported by any evidence--that is, by any
stipulation or exhibit thereto, or any other source--those statements cannot be
treated as anything more than unsworn allegations. See Rule 143(c).
As respondent points out, petitioners’ case suffers from the same defect as
that of the taxpayers in Wages: assertions made on brief that are not supported by
the record. Had petitioners timely offered further stipulations of fact, witness
testimony, lease contracts, valuation or inspection reports, or any other evidence,
we would have been able to consider the ways in which such evidence supported
petitioners’ contentions. In the absence of this, we can look no further than the
facts stipulated by the parties and summarized in this opinion’s background
section. Those facts do not controvert respondent’s determination in the notice of
deficiency of petitioners’ tax liability.
Because petitioners have not adduced any evidence tending to show
respondent’s determination of their tax liability to be improper, the burden of
proof remains with them. Cf. sec. 7491(a). And because of their failure to present
contradictory evidence, petitioners by necessity cannot prove that determination
improper by a preponderance of the evidence. Accordingly, the presumption of
correctness attached to respondent’s determination as set forth in the notice of
deficiency holds, and we must sustain it.
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IV. Conclusion
Petitioners have failed to present evidence corroborating their position that
respondent improperly reclassified $27,646 of their business expenses as
depreciable capital expenditures instead of deductible repair costs. Thus we find
that petitioners have failed to satisfy their burden of proving by a preponderance
of the evidence that the notice of deficiency is incorrect.
We have considered all of the parties’ arguments, and to the extent not
discussed above, conclude that those arguments are irrelevant, moot, or without
merit.
To reflect the foregoing,
Decision will be entered for
respondent as to the deficiency and
for petitioners as to the accuracy-
related penalty under section 6662(a).