The opinion
T.C. Memo. 1997-487
UNITED STATES TAX COURT
RICHARD WALTER DRAKE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6119-96. Filed October 28, 1997.
Richard Walter Drake, pro se.
Robert W. Mopsick and William F. Halley, for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Petitioner originally elected to have his case heard as a
small tax case. See sec. 7463. Thereafter, pursuant to
petitioner's motion, the "S" designation was removed.
2
determined a deficiency in petitioner's Federal income tax for
the year 1993 in the amount of $2,972 and an accuracy-related
penalty in the amount of $534 pursuant to section 6662(a). The
issues for decision are: (1) Whether petitioner is entitled to
Schedule E deductions in excess of the amount allowed by
respondent; (2) whether petitioner is entitled to a deduction for
a contribution to an Individual Retirement Account (IRA); (3)
whether petitioner is entitled to itemized deductions; and (4)
whether petitioner is liable for an accuracy-related penalty.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated by this reference. Petitioner resided in Elberon,
New Jersey, at the time his petition was filed.
Petitioner purchased the property located at 60 Norwood
Avenue in Elberon, New Jersey, approximately 20 years prior to
the year in issue. The property was part of an old estate of
approximately 2-1/2 acres. The original buildings included a
farmhouse, a cottage, a carriage house, a cow barn, and a second
barn. Petitioner restored and rebuilt the property, and
converted four of the buildings into rental units. Petitioner
lived on the upper level of the carriage house and used the lower
level as a studio and storage area.
During the year in issue, petitioner made various repairs
and additions to the property. After a sewer line broke,
3
petitioner paid $7212 to have the basement of one of the houses
power washed and sanitized and $1,390 for repairs to the floor
due to water damage from the sewer line break. In addition,
petitioner had the exteriors of the houses power washed,
primarily in preparation for painting, at a cost of $1,616.
Petitioner also purchased various supplies, including paint,
paint supplies, and lumber, in order to repair and maintain the
property. Petitioner purchased and installed a "Stop" sign along
the driveway of the property. The sign cost $29. Petitioner
also paid $30 for computer software to produce lease forms.
During the year in issue, petitioner owned two vehicles.
Petitioner owned a van which he and Brian Hegarty, who helped him
perform work on the property, used to haul items on the property
itself. Petitioner also owned a car.
In addition to petitioner’s activities with respect to the
rental property during the year in issue, petitioner was employed
by Delta Air Lines (Delta) as a flight attendant. Petitioner had
been employed by Pan American since 1963. Sometime prior to the
year in issue, petitioner became an employee of Delta as a result
of Delta's purchase of a portion of Pan American's routes.
Petitioner was required to purchase his uniforms for use as a
flight attendant with Delta. Petitioner was permitted to charge
these expenses which Delta recorded as an account receivable from
2
All amounts have been rounded.
4
petitioner. Petitioner's Form W-2 issued by Delta indicates that
petitioner was a participant in Delta's pension plan during 1993.
On Schedule E of his Federal income tax return filed for
1993, petitioner reported rents received in the amount of $21,995
and claimed deductions for expenses as follows:
Advertising $340
Auto and travel 1,710
Cleaning and maintenance 2,617
Insurance 2,602
Legal and other professional fees 127
Mortgage interest 27,263
Repairs 4,896
Supplies 78
Taxes 13,780
Utilities 1,721
Total $55,134
Thus petitioner claimed a loss of $33,139 from rental real
estate. Petitioner claimed a deduction of $2,000 for a
contribution to an IRA. Petitioner did not claim itemized
deductions but rather claimed a standard deduction of $5,450.
In the notice of deficiency respondent allowed petitioner
Schedule E deductions for mortgage interest and real estate taxes
in the amounts of $20,447 and $11,481, respectively. Respondent
determined that the remaining mortgage interest and real estate
taxes were paid with respect to the portion of the property that
was petitioner's home and office. Respondent allowed petitioner
a deduction for office expense of $5,322 and allowed petitioner
Schedule A deductions totaling $5,322. Respondent disallowed the
remaining expense claimed on petitioner's Schedule E with the
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exception of supplies in the amount of $78. As a result of these
adjustments, respondent increased petitioner's taxable income by
$17,806. Respondent disallowed petitioner's deduction for an IRA
contribution in full. In addition, respondent determined that
petitioner was liable for an accuracy-related penalty of $534
pursuant to section 6662(a) for negligence or intentional
disregard of rules or regulations.
At trial, petitioner filed a Schedule A for 1993 claiming
deductions for mortgage interest of $3,407, real estate taxes of
$1,913, charitable contributions of $300, and miscellaneous
expenses of $1,050 before the 2-percent floor. The Court filed
this document as petitioner's amendment to petition.
Respondent's determinations are presumed to be correct, and
the burden is on petitioner to prove that the determinations are
erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933). Further, deductions are a matter of legislative grace,
and petitioner must prove entitlement to any deductions claimed.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). A
taxpayer must maintain adequate records to substantiate the
amount of any deductions claimed. Sec. 6001; sec. 1.6001-1(a),
Income Tax Regs.
Generally, when evidence shows that a taxpayer has incurred
a deductible expense, but the exact amount cannot be determined,
the Court may approximate the amount. Cohan v. Commissioner, 39
6
F.2d 540 (2d Cir. 1930). However, the Court may bear heavily
against the taxpayer "whose inexactitude is of his own making."
Id. at 544. An exception to the Cohan rule is section 274(d),
which requires strict substantiation of certain expenses,
including those paid or incurred with respect to certain listed
property. Sec. 274(d). Listed property includes automobiles.
Sec. 280F(d)(4). Section 274(d) requires substantiation of these
expenses either "by adequate records or by sufficient evidence
corroborating the taxpayer's own statement". Sec. 274(d).
Rental Expenses
Section 469 limits the allowance of passive activity losses.
Section 469(a) provides that for an individual, no passive
activity loss will be allowed for a taxable year. Section
469(c)(2) defines the term "passive activity" to include any
rental activity. A "passive activity loss" is the amount by
which losses from passive activities exceed income from such
activities. Sec. 469(d). The disallowance set forth in section
469(a) shall not apply to the portion, not to exceed $25,000, of
the passive activity loss which is attributable to all rental
real estate activities with respect to which an individual
taxpayer actively participated in the taxable year. Sec. 469(i).
Petitioner argues that section 469 does not apply to his
rental activity. Petitioner contends that he is entitled to
claim a loss from rental real estate in the amount of $27,817.
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Respondent concedes that petitioner actively participated in his
rental activity in the year in issue. Respondent, however,
argues that petitioner has not substantiated expenses in excess
of those allowed in the notice of deficiency.3
Petitioner presented numerous receipts and his own testimony
to substantiate his expenses. Based upon the record, we find
that petitioner has substantiated cleaning, maintenance, and
repair expenses totaling $3,727 related to the sewer line break
and other power washing. We have reviewed petitioner's remaining
receipts for purchases of items for repairs. The majority of the
purchases were made at home improvement or hardware stores and
are for amounts under $100 each. It is not readily apparent what
every receipt is for--some do not contain a description of the
items purchased. However, most of the receipts contain a
description of the items purchased including paint, drop cloths,
boards, caulking materials, and other related materials.
Petitioner's own testimony concerning the purchases did little to
explain the purpose of the purchases as it was extremely general.
The receipts reflect purchases totaling approximately $2,400,
excluding the repairs related to the sewer line break. Based on
the record, we find that petitioner paid additional repair
expenses in the amount of $1,800.
3
Respondent's brief, due on or before May 27, 1997, was
postmarked May 25, 1997, and was filed by the Court on May 28,
1997. Petitioner requests that we strike respondent's brief as
untimely. We deny petitioner's request.
8
Petitioner presented receipts in an attempt to substantiate
additional cleaning expenses. The purchases total approximately
$200. It is not clear from the record for what purposes these
purchases were made, and we find that petitioner has not
established that he paid cleaning expenses above those paid for
the power washing as above.
In an attempt to substantiate his claimed advertising
expenses, petitioner presented receipts and credit card
statements. Petitioner testified that he made copies of color
photographs of the property, and the evidence includes receipts
for $3 for the cost of such copies. Petitioner testified that he
was attempting to sell the property and that he provided the
copies to a real estate agent or to potential buyers. The credit
card statements include charges for the Asbury Park Press
classified section totaling $173. Petitioner testified that he
paid these charges in connection with advertisements he placed in
the paper in an attempt to sell the property. The final receipt
in this category is a restaurant bill for $81. There is no
convincing evidence concerning the purpose for this expenditure.
Petitioner's advertising expenses were not related to his rental
activity. Petitioner testified that his real estate activity
included selling properties; however, petitioner presented no
other evidence concerning this matter, and we are unconvinced by
9
his testimony alone. Therefore, petitioner has not established
that he is entitled to a deduction for advertising expense.
Petitioner presented two bills for fire insurance premiums
from 1992 in an attempt to substantiate his insurance expense.
Petitioner has not established through his testimony or other
evidence that he paid any amounts for fire insurance during the
year in issue.
Petitioner presented three receipts in an attempt to
substantiate additional rental expenses that he identified as
"legal" expenses. The purchases include $29 for the stop sign
and $30 for the lease form software. Based on the record, we
find that petitioner has established that he paid additional
expenses with respect to his rental activity in the amount of
$59.
Finally, petitioner presented four receipts for purchases of
automobile parts and two receipts for purchases of gasoline. In
addition, petitioner presented two receipts for amounts of $660
and $216 paid for repairs to the van. Based on petitioner's
testimony and that of Brian Hegarty, we are satisfied that the
van was used exclusively with respect to petitioner's rental
activity. Petitioner has established that he paid $876 in
expenses with respect to the van during the year in issue.
Petitioner has not established the purpose for the remaining
expenditures evidenced by the other receipts. Petitioner also
10
presented a bill in the amount of $1,263 for automobile insurance
premiums for three vehicles; two cars and a pick-up truck.
Petitioner has not established that he used any of these vehicles
in his rental activity or that the amount of this bill was paid
in the year in issue. Petitioner has established that he is
entitled to a deduction for automobile expense in the amount of
$876.
Petitioner presented no evidence to establish that he paid
any utilities expense during the year in issue. Petitioner has
not established that he incurred a loss in excess of $25,000, and
therefore we need not reach petitioner's argument that section
469 does not limit a loss in excess of $25,000.
IRA Deduction
Generally, an individual is allowed a deduction for
contributions to an IRA in an amount not in excess of the lesser
of $2,000, or an amount equal to the compensation includable in
the taxpayer's gross income. Sec. 219(a) and (b)(1). Section
219(g) limits the allowable deduction where the individual is an
"active participant" in a qualified retirement plan. In the case
of an unmarried taxpayer, the $2,000 limitation is reduced by an
amount determined using a ratio in which the excess of the
taxpayer's adjusted gross income, subject to certain adjustments,
over $25,000 is divided by $10,000. Sec. 219(g)(2) and (3). As
relevant here, adjusted gross income is determined after the
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application of section 469. Sec. 219(g)(3). An "active
participant" is defined to include an individual who is an
"active participant" in any of certain specified plans. Sec.
219(g)(5).
Petitioner did not raise the issue of whether the Delta
pension plan is of the type listed in section 219(g)(5).
Therefore, we find that petitioner has conceded that the plan is
among those so listed. However, petitioner contends that he was
not an active participant in Delta's pension plan. He therefore
argues that he is entitled to a deduction for a $2,000 IRA
contribution.
Respondent contends that petitioner was an active
participant in Delta's plan. Respondent apparently concedes that
petitioner made a $2,000 contribution to an IRA for the year in
issue. Respondent argues that petitioner is prohibited from
deducting any amount contributed to an IRA during the year in
issue. Respondent relies on section 1.219-1(b)(2), Income Tax
Regs.
Petitioner testified that he was not a participant in
Delta's pension plan during the year in issue. The only other
evidence in the record is the Form W-2 issued by Delta indicating
that petitioner was a participant in its pension plan. Based on
the scant evidence in the record, we find that petitioner has
12
failed to establish that he was not an active participant within
the meaning of section 219(g) during the year in issue.
Petitioner's IRA contribution deduction is subject to the
limitations provided in section 219(g). We do not agree with
respondent that petitioner's deduction is necessarily disallowed
in full. Section 1.219-1(b)(2), Income Tax Regs., provides that
no deduction is allowable under section 219(a) to an individual
if such individual is an active participant in any of the plans
listed therein. Clearly, section 1.219-1(b)(2), Income Tax
Regs.,4 is not consistent with the current version of section
219(g) to the extent that the latter allows a deduction to an
unmarried individual who is an active participant in a qualified
plan and who has adjusted gross income of less than $35,000. If
petitioner’s adjusted gross income for 1993 is less than $35,000,
he is entitled to a deduction under section 219 of $2,000 less
the amount disallowed by application of section 219(g), to be
calculated in the Rule 155 computation.
Itemized Deductions
Petitioner contends that he is entitled to itemized
deductions for the year in issue. Petitioner contends that he
made charitable contributions in the amount of $300 and that he
incurred unreimbursed employee expenses in the amount of $1,050.
4
Sec. 1.219-1(b)(2), Income Tax Regs., was published in 1980
prior to the enactment in 1986 of sec. 219(g), allowing a
deduction to active participants in certain circumstances.
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Respondent contends that petitioner has failed to establish that
he made any contributions or that he paid any additional expenses
during the year.
Section 170 allows a deduction for any charitable
contributions made during the taxable year. Petitioner testified
that he made cash donations in the amount of $25 each month to
the Episcopal church he attended, but provided no other evidence
to substantiate this amount. We find that petitioner is entitled
to a deduction for charitable contributions in the amount of
$150. See Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).
Petitioner contends that he paid deductible unreimbursed
employee business expenses during the year in issue. Petitioner
testified that he paid $211 for luggage which he was required to
purchase as a flight attendant. Petitioner also testified that
he paid amounts for meals in excess of the amounts reimbursed by
Delta. Petitioner did not present any other evidence to
substantiate these expenses. Petitioner has not convinced us
that these amounts were paid in the year in issue.
Petitioner also contends that he paid $519 for new uniforms
he purchased as a Delta employee. Petitioner presented copies of
his "Employee's accounts receivable statement" issued by Delta in
an attempt to substantiate this amount. The first statement is
dated September 15, 1992, and reflects a previous balance of $517
and new charges of $117 for uniforms and accessories. Thus, the
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ending balance was $634. However, there is no evidence
indicating the charges for which the beginning balance of $517
was derived. A statement dated November 15, 1992, shows a
balance forward of $634, new uniform charges of $100.18, and an
ending balance of $734. A statement dated March 15, 1993, shows
a balance forward of $734, other charges of $15, and an ending
balance of $749. Petitioner has only established that he charged
uniforms in the amount of $217. Petitioner testified that he
paid the balance on his account by the end of 1993 because he
stopped working for Delta at that time. Based on the record,
petitioner has established that he purchased uniforms at a cost
of $217, and he is entitled to a deduction for unreimbursed
employee expenses in this amount subject to the 2-percent floor.
Accuracy-Related Penalty
Respondent determined that petitioner is liable for an
accuracy-related penalty for negligence and disregard of rules or
regulations under section 6662(a). Petitioner bears the burden
of proving that respondent's determination is erroneous. Rule
142(a); Bixby v. Commissioner, 58 T.C. 757, 791 (1972).
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the portion of any underpayment of tax that is due
to negligence or disregard of rules or regulations. Sec. 6662(a)
and (b)(1). "Negligence" is any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
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Code. Sec. 6662(c). "Disregard" includes any careless,
reckless, or intentional disregard. Id. The failure to maintain
adequate records may constitute negligence. Zafiratos v.
Commissioner, T.C. Memo. 1992-135, affd. without published
opinion 993 F.2d 880 (3d Cir. 1993).
Petitioner did not present any evidence to establish that
the accuracy-related penalty should not apply. Respondent is
sustained on this issue.
To reflect the foregoing,
Decision will be entered
under Rule 155.