Jones v. Comm'r, T.C. Memo. 2013-132

• Decision Date: 29 May 2013
• Docket Number: T.C. Memo. 2013-132,Docket No. 20591-10
• Parties: PAUL FREDRICK JONES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

PAUL FREDRICK JONES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2013-132

Docket No. 20591-10

UNITED STATES TAX COURT

Filed May 29, 2013

Paul Fredrick Jones, pro se.

Randall B. Childs, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MORRISON, Judge: The respondent (the IRS) issued a notice of deficiency to the petitioner, Mr. Paul Fredrick Jones, for the 2007 tax year. In the notice the IRS determined a deficiency of $13,590, a section 6651(a)(1) addition to tax of $3,057.75, a section 6651(a)(2) addition to tax of $1,630.80, and a section 6654(a)addition to tax of $618.52.¹ Jones timely filed a petition under section 6213(a) requesting that we redetermine the deficiency and the additions to tax. We have jurisdiction under section 6214.

After concessions,² the issues for decision are:

(1) whether Jones is entitled to deduct $45,011.72 for business expenses reported on Schedule C, Profit or Loss From Business;

(2) whether Jones is liable for the section 6651(a)(1) addition to tax;

(3) whether Jones is liable for the section 6651(a)(2) addition to tax; and

(4) whether Jones is liable for the section 6654(a) addition to tax.

Background

Preliminary matters

Before trial the Court ordered that paragraphs 1 through 12 of the IRS's proposed stipulation of facts be deemed admitted under Rule 90. The Courtreserved ruling on whether paragraphs 13 and 14 should be deemed admitted. The IRS has now conceded that paragraphs 13 and 14 are incorrect. Therefore, the Court will order that these paragraphs shall not be deemed admitted.

Jones resided in Florida when he filed the petition.

Jones's business

Jones worked as an independent sales associate for Pre-Paid Legal Services, a publicly traded company that provided legal insurance to businesses and individuals. Jones sold memberships to the customers of Pre-Paid Legal Services and was entitled to commissions for these sales. He also recruited new sales associates for Pre-Paid Legal Services and, pursuant to its multilevel marketing arrangement, was entitled to a percentage of the revenue they generated. Jones received nonemployee compensation of $50,894 from Pre-Paid Legal Services.

Besides Pre-Paid Legal Services, Jones participated in other multilevel marketing arrangements. He did not earn any money, but his participation allowed him to meet people to recruit as sales associates for Pre-Paid Legal Services.

Jones worked from his house in the area of Orlando, Florida.

Jones did not file a federal income tax return for 2006 or 2007. For 2007 the IRS prepared a substitute for return on Jones's behalf, as authorized by section6020(b). Jones did not make any payments of federal income tax or estimated tax for 2007.

Discussion

1. Deficiency

In deficiency proceedings before the Tax Court, the burden of proof generally rests with the taxpayer. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491 imposes the burden of proof on the IRS with respect to a given factual issue where a taxpayer (1) introduces credible evidence with respect to that issue, (2) meets all applicable substantiation requirements, (3) complies with all recordkeeping requirements, and (4) cooperates with any reasonable requests for information. Sec. 7491(a); Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001). The record reflects that Jones did not meet recordkeeping and substantiation requirements. Thus, the burden of proof remains on Jones.

Section 162(a) provides that "[t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * * * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in thepursuit of a trade or business". No deduction is allowed for personal, living, or family expenses. Sec. 262(a). The cost of a taxpayer's own meals, unless the taxpayer is on overnight business travel, is a nondeductible personal expense. United States v. Correll, 389 U.S. 299, 299-307 (1967); Strohmaier v. Commissioner, 113 T.C. 106, 114-116 (1999). Taxpayers are required to maintain records sufficient to establish the amounts of allowable deductions and to enable the IRS to determine the correct tax liability. Sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999).

It is a general rule, established in Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), that if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to fully substantiate the precise amount of the deduction, the Court should estimate the amount of the deductible expense and allow a deduction to that extent. In making such estimates, the Court may bear heavily against the taxpayer, who caused the inexactitude. Id. at 544. For the Court to estimate the amount of an expense, there must be some basis on which an estimate may be made. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

In an exception to the Cohan rule, section 274(d) provides that a taxpayer must satisfy strict substantiation requirements for certain kinds of expenses, such as for travel away from home, for entertainment, for gifts, and for "listed property" (as that term is defined in section 280F(d)(4)). To deduct these expenses the taxpayer "[must] substantiate[] by adequate records or by sufficient evidence corroborating the taxpayer's own statement" the amounts, times, places, and purposes related to the expenses. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b), (c)(1) and (2) (2010); Dowell v. United States, 522 F.2d 708, 715 (5th Cir. 1975) (holding each separate expense must be substantiated).

The expenses of traveling away from home are subject to strict substantiation requirements. Sec. 274(d)(1); 26 C.F.R. sec. 1.274-5T(a)(1), (b)(2) (2010). To deduct travel expenses the taxpayer must substantiate the amount of each expense, the dates of departure and return for each trip, the destination of travel, and the business reason for the trip. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b)(2) (2010).

Entertainment expenses are subject to strict substantiation requirements. Sec. 274(d)(2). Entertainment expenses include the costs of business meals. See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff'd, 412 F.2d 201 (2d Cir. 1969). To deduct entertainment expenses the taxpayer must substantiate theamount of each expense, the date of the entertainment, the place where the entertainment occurred, the business reason for the entertainment, the nature of any business discussion or activity, and enough information about the person entertained to establish the business relationship of that person to the taxpayer. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b)(3) (2010).

Gift expenses are subject to strict substantiation requirements. Sec. 274(d)(3). To deduct gift expenses, the taxpayer must substantiate the cost of the gift, the date of the gift, a description of the gift, the business reason for the gift, and enough information about the recipient of the gift to establish the business relationship of that person and the taxpayer. Sec. 274(d); 26 C.F.R. sec. 1.274-5T(b)(5) (2010).

Passenger automobile expenses require strict substantiation. Secs. 274(d)(4), 280F(d)(4)(A)(i).³ A taxpayer is permitted to use the standard mileage rate in lieu of substantiating the actual cost of using a passenger automobile. See 26 C.F.R. sec. 1.274-5(j)(2) (2010). A taxpayer who opts to use the standardmileage rate is not relieved of the obligation to substantiate the amount of business mileage and the time and place of each business use of the passenger vehicle. Id. Thus, these items of information (the amount of business mileage and the time and place of each business use of the passenger vehicle) must be substantiated through adequate records or sufficient evidence corroborating the taxpayer's own statement. See 26 C.F.R. sec. 1.274-5T(b)(2), (c) (2010).

Cellular telephone expenses are subject to strict substantiation requirements. Secs. 274(d)(4), 280F(d)(4)(A)(v).⁴ To deduct cell phone expenses a taxpayer must substantiate the amount of business use and the total use for the cell phone. See Trupp v. Commissioner, T.C. Memo. 2012-108, slip op. at 14; 26 C.F.R. sec. 274-5T(b)(6)(i)(B) (2010).

The expenses of internet service are not subject to strict substantiation requirements. See Bogue v. Commissioner, T.C. Memo. 2011-164, slip op. at 41 (strict substantiation does not apply to utility expenses, such as home internet service).

Section 280A(a) provides that for individual taxpayers "no deduction otherwise allowable under this chapter [which includes section 162] shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence." Section 280A(c)(1) contains an exception to section 280A(a). It provides: "Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis * * * (A) as the principal place of business for any trade or business of the taxpayer". Some portion of the dwelling unit must be used exclusively for business; otherwise, no deductions for expenses related to the dwelling unit are excepted by section 280A(c)(1). See Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987).

The expense of telephone service (other than cellular telephone service) is not subject to strict substantiation requirements. See, e.g., Lang v. Commissioner, T.C. Memo. 2010-152, slip op. at 14-15; Aref v. Commissioner, T.C. Memo. 2009-118, slip op. at 11. Section 262(b) provides that the expense of the first telephone line in a taxpayer's residence is treated as a personal expense.

Jones had only one bank account, which was at Bank of America. He had two credit...