Miller v. Commissioner
| Decision Date | 24 September 1996 |
| Docket Number | Docket No. 7900-94. |
| Citation | 72 T.C.M. 709 |
| Parties | James B. Miller, Jr. v. Commissioner |
| Court | U.S. Tax Court |
James B. Miller, Jr., pro se. Alison W. Lehr, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies and accuracy-related penalties relating to petitioner's 1990 and 1991 Federal income taxes as follows:
Accuracy-Related Penalty
------------------------
Year Deficiency Sec. 6662(a)
1990 .............. $21,617 $4,323
1991 .............. $18,156 $3,631
After settlement of some issues, the issues for decision are: (1) Whether petitioner is entitled to deduct expenses relating to a home office; (2) whether petitioner has adequately substantiated claimed business expenses relating to his scrap metal recycling business; and (3) whether petitioner is liable for the accuracy-related penalties.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. At the time he filed his petition, petitioner resided in Lake Worth, Florida.
During 1990 and 1991, petitioner owned and operated as a sole proprietorship a scrap metal recycling business. Suppliers would deliver scrap metal to the warehouse petitioner rented for his business, or petitioner or his employees would pick up scrap metal from suppliers and bring it to petitioner's warehouse. None of the scrap metal was ever brought to petitioner's residence in which petitioner maintained an office (home office) for the performance of administrative and management work relating to his scrap metal recycling business.
At petitioner's warehouse, scrap metal was prepared for resale and shipped or delivered personally by petitioner or his employees to wholesalers throughout southern Florida.
Petitioner maintained the home office because there was no suitable space in the warehouse for him to perform necessary administrative and management work relating to his scrap metal recycling business. Most of the time during which petitioner worked on his scrap metal recycling business, petitioner was physically located in his home office.
Petitioner used the home office mainly to place telephone calls to potential customers and to maintain data and spreadsheets on his computer relating to operation of his scrap metal recycling business. Over the telephone from his home office, petitioner generally made arrangements for the purchase and resale of scrap metal. Telephone calls received at the warehouse were routed first to the home office and then, if not answered at the home office, were transferred to the warehouse.
Petitioner prepared at his home office advertising material, brochures, and fliers to mail to customers. On such material, the address indicated for petitioner's business was the warehouse address, not petitioner's home address.
Petitioner often would meet with customers at their places of business. Other than for entertainment, petitioner never met with customers in his home office.
Petitioner visited the warehouse frequently in order to, among other things, check on employees and operations at the warehouse, deliver supplies, and pick up and deliver cash — the form of payment typically used in petitioner's scrap metal recycling business.
During most of 1990, petitioner lived in a rented residence with two of his daughters and his girlfriend at 7350 Estrella Court, West Palm Beach, Florida (Estrella residence). The Estrella residence consisted of a kitchen, a combined living and dining room area, a family room, four bedrooms, 3.5 bathrooms, an attached garage, and a swimming pool. Petitioner often entertained personal and business guests at dinner parties at the Estrella residence.
From the end of 1990 through 1991, petitioner lived in a condominium that petitioner owned at 614 N.W. 13th Street, Boca Raton, Florida (condominium). The condominium consisted of a kitchen, a combined living and dining room area, two bedrooms and 1.5 bathrooms. Two of petitioner's daughters occasionally lived with petitioner in the condominium.
During 1990 and 1991, petitioner's home office relating to his scrap metal recycling business was located in the combined living and dining room area of both the Estrella residence and the condominium. Petitioner furnished the living and dining room area with desks, file cabinets, a computer, and calculators. The record does not indicate what other furniture was located in the living and dining room area. Petitioner had six telephone lines running into the home office.
As indicated, petitioner paid employees of his scrap metal recycling business in cash. Employees of petitioner's scrap metal recycling business were generally hired on a temporary basis by petitioner's warehouse foreman. The employees generally were transient or homeless individuals and worked in the warehouse. Employees of petitioner's scrap metal recycling business were required to sign a written agreement, but there was no line on the agreement to indicate an employee's Social Security number or personal address, and neither petitioner nor the warehouse foreman generally obtained Social Security numbers or addresses of the employees.
Petitioner did not prepare and submit Forms W-2 or 1099 with respect to wages paid to employees of his scrap metal recycling business, and petitioner withheld no Federal or State taxes with regard to wages paid to his employees.
At the end of each day, petitioner's warehouse foreman would prepare a written cash report and would indicate thereon amounts paid and received that day from the purchase and resale of scrap metal, wages paid to employees, and expenses paid at the warehouse. Generally, at the end of each day the warehouse foreman also would call petitioner and provide petitioner with information concerning the cash received and spent at the warehouse that day.
The cash reports that were prepared each day by the warehouse foreman would be reviewed every few days by petitioner, who would enter data from the cash reports onto spreadsheets petitioner maintained on the computer located in his home office. Prior to trial, the majority of the written daily cash reports relating to petitioner's scrap metal recycling business were lost or misplaced. Petitioner's computer spreadsheets with regard to employee wage expenses incurred at the warehouse generally correspond with information with regard thereto as reflected in the limited number of daily cash reports that are in the record.
According to petitioner's computer spreadsheets, the warehouse foreman received total wages of $19,798 in 1990 and $20,956 in 1991.
Petitioner's employees occasionally incurred traffic fines for speeding and other traffic violations while picking up or delivering scrap metal.
During 1990 and 1991, petitioner's warehouse was broken into and burglarized several times. Reports were made to the police, but petitioner did not retain copies of the police reports or other records indicating what was stolen from petitioner's warehouse.
In late 1990, due apparently to pending litigation involving a former employee and to a child custody dispute with his former spouse, petitioner filed for bankruptcy and paid legal fees in connection with the bankruptcy proceeding.
In 1991, petitioner paid medical expenses relating to his daughters, to employees of his warehouse, and to his own medical needs.
Petitioner often traveled in his automobile to meet with customers and prospective customers. Petitioner provided refreshments for customers at his warehouse, and occasionally petitioner purchased lunch for employees, for customers, and for himself during meetings at restaurants.
On his 1990 and 1991 Federal income tax returns, petitioner claimed deductions for alleged expenses relating to his scrap metal recycling business. The deductions claimed include alleged miscellaneous expenses relating to petitioner's home office, rent and utilities relating to petitioner's home office and to the warehouse, employee wages, fines and losses from burglaries, legal fees, employee benefits, medical expenses, travel expenses, and meal and entertainment expenses.
Allegedly due to a loss of many of petitioner's books and records during the bankruptcy proceeding, the only records relating to petitioner's scrap metal recycling business that petitioner produced to respondent's revenue agent during the audit and at trial were: (1) Copies of the computer spreadsheets reflecting alleged daily and monthly expenses by category for all of 1990 and 1991 except for one month of 1990; and (2) some of the daily cash reports and receipts for 1990 and 1991.
On audit, respondent determined that petitioner's claimed home office expenses did not qualify for a deduction and that petitioner's books and records did not adequately substantiate many of the claimed cash expenses relating to petitioner's scrap metal recycling business, and respondent generally disallowed all expenses claimed as deductions where the nature and amount of the expenses could not be substantiated by specific receipts or billing statements.
Respondent refused to accept petitioner's computer spreadsheets as adequate substantiation of expenses incurred by petitioner in his scrap metal recycling business because respondent determined that the backup documentation was inadequate. For example, during the audit and at trial, respondent did not allow or concede deductions for claimed expenses for employee wages where petitioner could not identify either Social Security numbers or addresses of the employees, but respondent did allow or concede deductions for wage expenses indicated on the computer spreadsheets for employees for whom petitioner...
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