Nicole Harrison ( 2022 )

United States Tax Court
T.C. Summary Opinion 2022-6NICOLE HARRISON,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 12170-19S. Filed May 12, 2022.
—————
Nicole Harrison, pro se.
Jane J. Kim, for respondent.
SUMMARY OPINION
PANUTHOS, 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 any other court, and this opinion shall
not be treated as precedent for any other case.
In a notice of deficiency dated April 9, 2019, respondent
determined a deficiency in petitioner’s federal income tax of $26,054, a
section 6651(a)(1) failure to timely file addition to tax of $5,322, and a
section 6662(a) accuracy-related penalty of $5,210.80 for petitioner’s
taxable year 2015 (year in issue).
1Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references
are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant
times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Served 05/12/22
2
After concessions, 2 the issues for decision are:
(1) whether petitioner is entitled to deduct charitable
contributions and unreimbursed employee expenses reported on
Schedule A, Itemized Deductions;
(2) whether petitioner is entitled to certain expense deductions
relating to her consulting activity reported on Schedule C, Profit or Loss
From Business;
(3) whether petitioner is entitled to deduct real estate activity
expenses reported on Schedule E, Supplemental Income and Loss; and
(4) whether petitioner is liable for an addition to tax for failure to
timely file pursuant to section 6651(a)(1).
Background
Some of the facts have been stipulated, and we incorporate the
Stipulation of Facts and accompanying exhibits by this reference. The
record consists of the Stipulation of Facts with Attached Exhibits and
petitioner’s testimony.
Petitioner resided in New York when the Petition was timely
filed.
I. Petitioner’s Employment
Petitioner was employed full time by Samsung Electronics during
the year in issue. Petitioner worked as a “corporate strategy”
consultant. In late 2014, while she was still employed at Samsung, she
became interested in a sole proprietorship venture relating to her
experience in corporate strategy. She described her venture work as
consultative, providing insights, trends, and data to businesses.
II. Petitioner’s Charitable Contributions
Petitioner made several charitable contributions during the year
in issue. She made cash contributions to charitable organizations, most
of which were processed through a PayPal account linked to her
2Respondent concedes that petitioner is not liable for the section 6662(a)
accuracy-related penalty of $5,210.80.
3
checking account. In addition, she regularly donated clothing, shoes,
and jewelry to organizations such as Goodwill and Dress for Success.
III. Petitioner’s Travel Expenses
As part of petitioner’s role at Samsung in corporate strategy, she
managed cross-functional projects that involved consulting with
management and headquarters in Korea. She traveled frequently to
and from Korea. Although Samsung did not require petitioner to book
business class, it was considered accepted practice that she would book
business class flights for work travel for which she was reimbursed.
During her time at Samsung, the corporate travel reimbursement policy
changed, and under the new policy, reimbursement was not allowed for
business class flights for employees below the director level. After the
change in policy, petitioner continued to book business flights as she had
before. She received reimbursement from Samsung for her flights, at
the coach level, resulting in a differential that she deducted on her
Schedule A for the year in issue. To substantiate the expenses,
petitioner submitted bank statements of her corporate card at Samsung.
IV. Petitioner’s Schedule C Expenses
Petitioner expressed interest in launching a corporate strategy
consulting business, NH Strategy & Growth Solutions. To build her
brand, she contracted with a company, TemplateMonster, to set up a
website, techstrategynews.com, through which she published
assessments about technology trends and developments. She also paid
TemplateMonster to host the website on a server. Petitioner also
purchased several website domains that had similar sounding names in
order to redirect patrons to her website.
In order to build up clientele and build her brand, she began
networking and participating in speaking engagements during the year
in issue. She traveled for at least two clients, in Buffalo, New York, and
Ohio, and spoke at a conference in Atlanta, Georgia.
Petitioner worked from her rental apartment. She renovated part
of it to convert it into office space which included lighting, flooring, and
cabinets. She also purchased a laptop for her work for which she
provided a receipt.
4
V. Mortgage Payments
In 2014, before the year in issue, petitioner and a relative co-
signed a mortgage for a three-family house in Brooklyn, New York. One
floor of the house was occupied by petitioner’s relative, while the other
two floors were rented to third parties. Petitioner contributed to the
mortgage by sending cash payments via Venmo to her relative. She did
not receive any income from the property. Petitioner claimed passive
activity losses on Schedule E for remediating a flooded basement,
insurance, and other house-related expenses.
VI. Petitioner’s Tax Return
Petitioner filed Form 1040, U.S. Individual Income Tax Return,
for tax year 2015 on October 10, 2017. Petitioner reported wages
received from her employer as $130,663. Her tax return for the year in
issue also included:
Schedule A
Charitable contributions $7,550
Unreimbursed employee expenses 24,150
Schedule C 3
Depreciation 9,477
Legal and professional services 5,000
Repairs and Maintenance 25,000
Travel 2,000
Car and Truck 25,875
Utilities 1,500
Other 4,500
Schedule E
Passive Activity loss limitation
25,000
deduction
3Petitioner also reported $400 in gross receipts on her Schedule C.
5
On April 9, 2019, respondent issued a Notice of Deficiency to
petitioner for tax year 2015, disallowing her Schedule A, C, and E
deductions and determining an addition to tax and a penalty under the
provisions of sections 6651(a)(1) and 6662(a).
Discussion
I. Burden of Proof
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). 4 Deductions are a matter of
legislative grace, and the taxpayer bears the burden of proving that she
is entitled to any deduction claimed. See Rule 142(a); Deputy v. du Pont,
308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934). If the taxpayer is able to establish that he or she paid
or incurred a deductible expense but is unable to substantiate the
precise amount, the Court generally may approximate the deductible
amount, but only if the taxpayer presents sufficient evidence to establish
a rational basis for making the estimate. See Cohan v. Commissioner,
39 F.2d 540, 543–44 (2d Cir. 1930).
II. Schedule A
A. Charitable Contributions
Petitioner claimed $7,550 in charitable contribution deductions,
all of which respondent disallowed. A taxpayer may deduct charitable
contributions during the year as long as the taxpayer satisfies statutory
and regulatory substantiation requirements. See § 170(a)(1); Treas.
Reg. § 1.170A-13. The substantiation requirements depend on the size
of the contribution and whether the contribution is a gift of cash or
property. Subject to various exceptions, if property other than money is
donated, “the amount of the contribution is the fair market value of the
property at the time of the contribution.” Treas. Reg. § 1.170A-1(c)(1).
The term “fair market value” is defined as “the price at which the
property would change hands between a willing buyer and a willing
4Pursuant to section 7491(a), the burden of proof may shift to the
Commissioner if the taxpayer introduces credible evidence with respect to any factual
issues relevant to ascertaining the taxpayer’s tax liability. Because she has not alleged
or shown that section 7491(a) applies, the burden of proof remains on petitioner.
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seller, neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts.” Id. subpara. (2).
A charitable contribution of money must be substantiated by at
least one of the following: (1) a canceled check; (2) a receipt from the
donee charitable organization showing the name of the donee, the date
of the contribution, and the amount of the contribution; or (3) in the
absence of a canceled check or receipt from the donee charitable
organization, other reliable written records showing the name of the
donee, the date of the contribution, and the amount of the contribution.
See Treas. Reg. § 1.170A-13(a)(1). The reliability of the record is
determined on the basis of all of the relevant facts and circumstances.
See id. subpara. (2)(i). No deduction is allowed for any monetary gift
unless the donor maintains a record of the contribution or a written
communication showing the name of donee organization, the date of the
contribution, and the amount of the contribution. See § 170(f)(17).
A charitable contribution of property must be substantiated by a
receipt showing (1) the name of the donee; (2) the date and location of
the contribution; and (3) a description of the property in detail
reasonably sufficient under the circumstances. Treas. Reg. § 1.170A-
13(b)(1). A receipt is not required if the contribution is made in
circumstances where it is impractical to obtain a receipt. See id. The
reliability of the records is determined on the basis of all of the relevant
facts and circumstances. See id. subpara. (2).
If the donation is a small amount, any written or other evidence
from the donee charitable organization acknowledging receipt is
generally sufficient. See id. para. (a)(2)(i)(C). Nevertheless,
contributions of $250 or more require donee written acknowledgment
containing specified information. See § 170(f)(8). Furthermore,
additional information is required to support a deduction exceeding
$500 for a charitable contribution of property. Specifically, the taxpayer
must also maintain written records establishing (1) the item’s manner
of acquisition as well as either the item’s approximate date of acquisition
or date the property was substantially completed and (2) the cost or
other basis, adjusted as provided by section 1016, of property donated
by the taxpayer during the taxable year. See § 170(f)(11)(A)(i), (B);
Treas. Reg. § 1.170A-13(b)(3)(i).
With respect to noncash contributions, petitioner presented
limited testimony and receipts. She testified she donated bags
containing clothing, shoes, and jewelry to Goodwill and Dress for
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Success. While she provided some receipts to respondent before trial,
other receipts were presented for the first time at the trial. She
described the items in the bags as “used clothing in good condition” and
valued the items at cost, discounted by 50%. No further description was
provided through receipts or testimony as to the contents of the bags or
the ages or the costs of the contents. While we have no doubt that
petitioner made some contributions of clothing and other items, the
failure to provide sufficient and timely receipts until trial, despite
requests from the IRS, works against her. The record lacks approximate
dates of acquisition of the items, detailed descriptions of the items, and
the costs or other bases. Under these circumstances, the Court is
burdened with attempting to place a value on property with insufficient
information. Using our best judgment, we allow petitioner $500 for
noncash contributions.
With respect to cash contributions, petitioner presented some
very general testimony that she had used Paypal linked to her bank
account to make contributions throughout the year. She reviewed
contributions from a prior tax year to estimate the contributions for the
year in issue. Petitioner did not provide any documentation from her
bank or Paypal in support and provided only one receipt for $100
contributed to “Fund for Animals.” Given this record, we conclude that
petitioner did not provide sufficient substantiation. We allow petitioner
$100 for cash contributions.
B. Unreimbursed Employee Business Expenses
Petitioner deducted $24,150 in travel expenses as unreimbursed
employee business expenses for the year in issue, all of which
respondent disallowed. Section 162 generally allows a deduction for “all
the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.” Boyd v. Commissioner, 122
T.C. 305, 313 (2004). The taxpayer bears the burden of proving that
expenses were of a business nature rather than personal and that they
were ordinary and necessary. Rule 142(a); Welch v. Helvering, 290 U.S.
at 115. Performing services as an employee constitutes a trade or
business. See O’Malley v. Commissioner, 91 T.C. 352, 363–64 (1988);
Primuth v. Commissioner, 54 T.C. 374, 377–78 (1970).
Certain expenses including travel expenses require strict
substantiation through adequate records or by sufficient evidence
corroborating the taxpayer’s own statement as to the amount, time,
place, and business purpose of these expenditures. § 274(d).
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Substantiation by adequate records requires the taxpayer to maintain
an account book, a diary, a log, a statement of expense, trip sheets, or a
similar record prepared contemporaneously with the expenditure and
documentary evidence (e.g., receipts or bills) of certain expenditures.
Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-5T(c)(2).
Substantiation by other sufficient evidence requires the production of
corroborative evidence in support of the taxpayer’s statement
specifically detailing the required element. Temp. Treas. Reg. § 1.274-
5T(c)(3).
In order to deduct employee business expenses, a taxpayer must
not have received reimbursement, and must not have had the right to
obtain reimbursement, from his employer. See Orvis v. Commissioner,
788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. The
taxpayer bears the burden of proving that he is not entitled to
reimbursement from his employer for such expenses. See Fountain v.
Commissioner, 59 T.C. 696, 708 (1973). The taxpayer can prove that he
was not entitled to reimbursement by showing, for example, that he was
expected to bear these costs. See id.; see also Dunkelberger v.
Commissioner, T.C. Memo. 1992-723 (finding that management team
expected taxpayer to bear expense of business lunches with vendors).
At trial, petitioner testified that she regularly took business class
flights to Korea for her work as an employee of Samsung. To
substantiate these expenses, she produced her Samsung corporate card
statements, personal bank account statements, and Samsung’s travel
reimbursement policy. Petitioner also testified that she attempted to
obtain reimbursement from her employer for the business class flights
which had been granted in the past. Pursuant to the modified policy,
Samsung reimbursed petitioner for travel expenses only at the coach
level. Petitioner testified credibly that while she was not expected to
take business class flights, it had been customary for her to do so before
a change in policy.
Nonetheless, petitioner has not met the strict substantiation
requirements of adequate records or sufficient evidence under section
274(d). While the bank statements list flight and hotel expenses, they
do not provide flight details. From the record, the Court is unable to
determine when the flights were taken and for what purposes.
Petitioner has not provided records that demonstrate times, places, and
business purposes for these expenditures.
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Accordingly, we conclude that petitioner is not entitled to deduct
unreimbursed employee business expenses for the year in issue.
III. Schedule C Business Expenses
Section 162(a) does not permit deductions for startup or
preopening expenses incurred by a taxpayer before beginning business
operations. See § 195(a). A preliminary search for a potential business
opportunity would not qualify the taxpayer for deductions under section
162, 165, or 212. Dean v. Commissioner, 56 T.C. 895, 902 (1971). While
petitioner reported $400 of gross receipts for the venture, she has not
demonstrated that she was carrying on a trade or business. Petitioner
continued to work full time at Samsung during the year in issue. At
best, it appears that her activity for the year in issue was in the
exploratory stages of forming a business. To substantiate her expenses,
she provided a mileage log of trips taken to various networking events,
receipts for home renovations, and an invoice for website creation.
Petitioner testified that she was trying to build a brand by creating a
website and participating in speaking engagements, precisely to solicit
potential clients. Carrying on a trade or business requires more than
initial research into business potential and the solicitation of potential
customers. See Christian v. Commissioner, T.C. Memo. 1995-12.
Thus, we find that petitioner’s activity did not rise to the level of
carrying on a trade or business during the year in issue. As a result, the
Court need not address whether petitioner has met the substantiation
requirements of section 274(d). Accordingly, petitioner is not entitled to
deduct, under section 162(a), any other business expenses.
IV. Schedule E Passive Activity Loss
Sections 162 and 212 permit a taxpayer to deduct certain business
and investment expenses. If a taxpayer is an individual, however,
section 469(a) generally disallows any “passive activity loss” for the
taxable year. A passive activity loss is defined as the excess of the
aggregate losses from all passive activities for that year over the
aggregate income from all passive activities for such year. § 469(d)(1).
A passive activity is any trade or business in which the taxpayer
does not materially participate. § 469(c)(1). Rental activity is generally
treated as per se passive regardless of whether the taxpayer materially
participates. § 469(c)(2). There are two exceptions to the general rule
that rental real estate activities are per se passive activities: (1) passive
activity losses up to $25,000 under section 469(i) and (2) certain
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taxpayers in real property trades or businesses (real estate
professionals) under section 469(c)(7). Moss v. Commissioner, 135 T.C.
365, 368 (2010).
Section 469(i) allows taxpayers who “actively participated” in
rental real estate activities during any taxable year to deduct up to
$25,000 of the passive activity losses attributable to those activities in
that year. § 469(i)(1) and (2). This Court has determined that the active
participation standard is met if a taxpayer participates in a significant
and bona fide sense in making management decisions or arranging for
others to provide services such as repairs. Madler v. Commissioner, T.C.
Memo. 1998-112.
Petitioner did not provide evidence that she qualifies for the
active participation exception. Petitioner testified that she co-signed the
mortgage documents but did not provide copies. She also claims that
she contributed to the mortgage payments through Venmo, but she did
not provide any receipts or further evidence that she participated in the
rental activity. Further, she claimed that she did not receive any income
from the property. Thus, petitioner has not demonstrated she qualifies
for the active participation exception, under section 469(i), to the
disallowance of passive activity losses by individuals. Accordingly,
petitioner is not entitled to deduct any expenses under section 162(a).
V. Section 6651(a)(1) Failure To Timely File
Section 6651(a)(1) imposes an addition to tax for failure to file a
return on the date prescribed (including extensions) unless the taxpayer
can establish that the failure is due to reasonable cause and not due to
willful neglect. Respondent bears the burden of production with respect
to petitioner’s liability for the addition to tax under section 6651(a)(1).
See § 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001).
Petitioner’s 2015 Form 1040 was due on April 18, 2016.
Respondent has satisfied the burden of production since the parties
stipulated that respondent received petitioner’s 2015 tax return on
October 10, 2017. Therefore, petitioner bears the burden of proving that
her failure to file a timely return was due to reasonable cause rather
than willful neglect. See Higbee, 116 T.C. at 446. Petitioner has not
offered any evidence that her failure was due to reasonable cause and
not due to willful neglect.
11
We conclude that petitioner has not shown her failure to timely
file a return was due to reasonable cause. Accordingly, she is liable for
the section 6651(a)(1) addition to tax.
We have considered all of petitioner’s arguments, and, to the
extent not addressed herein, we conclude that they are moot, irrelevant,
or without merit.
To reflect the foregoing conclusions and respondent’s concessions,
Decision will be entered under Rule 155.