Haeder v. Commissioner, Docket No. 12109-98.
| Decision Date | 17 January 2001 |
| Docket Number | Docket No. 12109-98. |
| Citation | 81 T.C.M. 987 |
| Parties | Richard and Judith Haeder, v. Commissioner. |
| Court | U.S. Tax Court |
Richard Haeder, pro se.
Blaine C. Holiday, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined the following deficiencies, additions to tax, and accuracy-related penalties with respect to petitioners' Federal income taxes:1
Addition
to tax Accuracy-related penalty
sec. sec. sec
Year Deficiency 6651(a)(1) 6662(b)(1) 6662(b)(2)
1989 ........................ $ 6,646 $1,915 -- $1,532
1990 ........................ 10,146 1,805 -- 2,026
1991 ........................ 3,546 -- $686 --
1992 ........................ 268 -- 78 --
1993 ........................ 3,210 -- -- 1,136
After concessions,2 the issues remaining for decision are:
(1) Whether petitioners are entitled to deductions for wage expenses of $1,918 for 1989 and of $2,000 for each of the years 1990 through 1993;
(2) whether petitioners' income from wages should be reduced by $2,000 for each of the years 1989 through 1993;
(3) whether petitioners are entitled to deductions for medical plan expenses of $3,446, $4,197, $13,140, $4,568, and $8,914 for 1989, 1990, 1991, 1992, and 1993, respectively;
(4) whether petitioner Judith Haeder is entitled to deductions for contributions to an individual retirement account (IRA) of $2,000 for each of the years 1989 through 1993 (5) whether petitioners are entitled to additional deductions for legal and professional expenses on petitioner Richard Haeder's Schedules C, Profit or Loss From Business (Sole Proprietorship), of $3,976 and $1,305 for the years 1990 and 1991, respectively;
(6) whether petitioners are entitled to additional deductions for travel expenses of $3,535, $558, $1,764, $2,738, and $2,512 for 1989, 1990, 1991, 1992, and 1993, respectively;
(7) whether petitioners are entitled to additional deductions for meal and entertainment expenses of $1,592, $597, $324, $886, and $2,104 for 1989, 1990, 1991, 1992, and 1993, respectively;
(8) whether petitioners are entitled to a bad debt deduction of $300 for 1991;
(9) whether petitioners are entitled to a deduction for a repair expense of $2,956 for 1993;
(10) whether petitioners omitted $1,085 from business income for 1989;
(11) whether petitioners omitted $2,223 of income from prizes for 1989;
(12) whether petitioners' dividend income should be reduced by $8,732 for 1992;
(13) whether petitioners are liable for additions to tax for late filing under section 6651 for 1989 and 1990;
(14) whether petitioners are liable for accuracy-related penalties under section 6662(a) and (b)(1) for 1991 and 1992 because of negligence or disregard of rules or regulations; and
(15) whether petitioners are liable for accuracy-related penalties under section 6662(a) and (b)(2) for 1989, 1990, and 1993 because of substantial understatements of their income tax.
Some of the facts have been stipulated and are so found. The stipulation of facts filed by the parties is incorporated in this opinion by this reference.
Petitioners resided in Rapid City, South Dakota, when they filed their petition. Hereinafter, references to petitioner are to Richard Haeder, and references to Mrs. Haeder are to Judith Haeder. For each of the years in issue, petitioners claimed dependency exemptions for two minor children.
After completing a clerkship in Washington, D.C., petitioner had started working for a large law firm located in Portland, Oregon, in 1967. During the years at issue, petitioner was an attorney licensed to practice law in the States of Oregon and South Dakota. His practice in Oregon primarily involved labor and personal injury law.
In 1986, petitioners moved to Rapid City, South Dakota. There, petitioner began practicing law as a sole proprietor. To establish his practice in the Rapid City area, petitioner spent many hours in the years following the relocation performing pro bono legal work for the elderly and for Pennington County Legal Aid, giving talks and seminars and meeting people in the community. He volunteered in the community to enhance his reputation. When necessary, petitioner traveled to Oregon to perform legal services.
Petitioners filed a joint Federal individual income tax return for each of the years at issue on the following dates:
Year Date Filed
1989 ................................ 2/01/94
1990 ................................ 1/10/94
1991 ................................ 2/15/94
1992 ................................ 3/30/94
1993 ................................ 4/15/94
Petitioner included a Schedule C relating to his law practice with each of the returns. On those Schedules C, petitioner reported the following gross receipts, total expenses, and net profit or loss:
Gross Total Net profit
Year Receipts Expenses or (loss)
1989 ................................. $153 $19,695 $(19,542)
1990 ................................. -- 23,462 (23,462)
1991 ................................. 209 24,144 (23,935)
1992 ................................. -- 13,991 (13,991)
1993 ................................. -- 23,769 (23,769)
Most of the income reported on petitioners' returns for 1989 through 1993 was investment income.
Respondent audited petitioners' returns for the years in issue and made adjustments to income and deductions. We address the issues remaining for decision below.
In Rapid City, South Dakota, petitioner maintained his law office in his residence. He had no office help outside of whatever assistance Mrs. Haeder gave him. Mrs. Haeder usually answered the telephone, greeted visitors, and cleaned the house, including petitioner's office. At his residence, petitioner initially had only one telephone line for both business and personal use. Eventually he had a second line installed to accommodate a fax machine.
On a date that does not appear in the record, petitioner decided to start paying Mrs. Haeder a salary. Petitioner did not determine Mrs. Haeder's salary on the basis of hours worked or services performed; instead, he based her salary on the maximum amount a qualified individual could deduct for qualifying contributions to an IRA. Mrs. Header did not have a written employment contract with petitioner. She had no set work schedule, and she did not maintain any time or performance records for work allegedly performed for petitioner.
On petitioner's 1989 Schedule C, petitioner claimed a wage expense of $1,918. On each of the Schedules C for 1990 through 1993, petitioner claimed a wage expense of $2,000. On petitioners' tax returns for the years at issue, Mrs. Haeder reported $2,000 as income from wages for each of the years in issue and also claimed a $2,000 IRA deduction for each of those years.
Petitioner did not pay the purported salary directly to Mrs. Haeder. For 1990, 1992, and 1993, on December 31 of each year, petitioner had his brokerage firm transfer $2,000 from petitioner's account into an IRA maintained in Mrs. Haeder's name.4 For 1991, petitioner wrote a check dated December 31, 1991, in the amount of $1,847 and drawn on petitioners' joint account. Petitioner wrote that check payable to himself, Mrs. Haeder endorsed it, and Mrs. Haeder deposited it into her IRA on January 7, 1992.
Petitioner did not issue a Form W-2, Wage and Tax Statement, to Mrs. Haeder for each of the years 1989 through 1992. With the returns they filed for 1990 and 1991, petitioners included a "Wages Schedule", which reported that petitioner had paid wages of $2,000 to Mrs. Haeder for those years. The 1990 wages schedule reported no information relating to FICA or Medicare tax withholding. The 1991 wages schedule reported that petitioner had deducted FICA taxes of $124 and Medicare taxes of $29. For 1993, petitioner issued a Form W-2 to Mrs. Haeder showing $2,000 in wages, $124 in FICA, and $29 in Medicare taxes.
In the notice of deficiency, respondent determined that petitioners were not entitled to deduct the amounts claimed on the Schedules C for wages paid to Mrs. Haeder for the years in issue. Respondent also reduced petitioners' income by the amounts Mrs. Haeder had reported as income from wages. In addition, respondent determined that petitioners were not entitled to claim the IRA deductions for the years in issue.
Effective January 1, 1988, on the advice of his accountant, John H. Fuller (Mr. Fuller), petitioner adopted an agreement entitled "Employee Medical-Dental Expense Reimbursement Plan [for] Richard Haeder, Attorney at Law" (plan). The agreement stated that it covered "all employees of RICHARD HAEDER, ATTORNEY AT LAW" and the spouse and dependents of any covered employee. Pursuant to the agreement:
2. REIMBURSEMENT FOR MEDICAL & DENTAL CARE EXPENSES:
Effective 1-01-88 and until termination of the Plan, RICHARD HAEDER, ATTORNEY AT LAW shall reimburse each covered employee, medical and dental expenses, as defined in section 3 herein; provided, however, that the total reimbursement to any covered employee during any one calendar year shall not exceed the sum of $10,000.00. Reimbursement to each covered employee shall be made at least annually, or more frequently at the discretion of RICHARD HAEDER, ATTORNEY AT LAW. Upon submission of proof of payment by the employee, RICHARD HAEDER, ATTORNEY AT LAW may, at his discretion, pay any or all of the...
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