Gallo v. Commissioner

T.C. Memo. 1998-100

UNITED STATES TAX COURT

JOHN GALLO, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 20845-95. Filed March 11, 1998.

John Gallo, pro se.

Jeffrey A. Schlei, for respondent.

MEMORANDUM OPINION

NAMEROFF, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3)1 and Rules 180, 181, and

182. Respondent determined a deficiency in petitioner’s Federal

income tax for the taxable year 1992 in the amount of $806. The

1

All section references are to the Internal Revenue Code

in effect for the year at issue. All Rule references are to the

Tax Court Rules of Practice and Procedure.

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sole issue for decision is whether petitioner is entitled to

claim a Schedule C loss in the amount of $8,293 from his

“paralegal/boat repair business” for the taxable year 1992.

During these proceedings, petitioner filed a Motion to Dismiss

for Respondent’s Intentional Dirty Tricks, Bad Faith, and

Obstructive Behavior (motion). The Court took the motion under

submission at the conclusion of the trial.

Some of the facts have been stipulated, and they are so

found. The stipulation of facts and the attached exhibits are

included herein by this reference. Petitioner resided in Santa

Ana, California, at the time he filed his petition.

From 1959 to 1985, petitioner earned his living primarily as

a freelance boat worker/repairer. Petitioner would paint or

varnish a boat, do minor engine repairs (e.g., changing the

belts, sparkplugs, and pumps), transport a boat, or do just about

anything a client would need. Suffice it to say that petitioner

enjoyed working in the outdoors on boats. During this period,

petitioner purchased a substantial number of hand tools for use

in the boat repair activity. These included special fasteners

and bolts, screwdrivers, wrenches, power tools, drills, and

routers. In addition, petitioner purchased a bench saw, a band

saw, and a drill press.

Because of a series of unrelated injuries, petitioner was

forced to suspend his activities as a boat worker/repairer.

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Hoping and expecting that some day he would be able to return to

the business, petitioner stored his tools in a commercial

facility. In 1992, the cost of the storage was $1,980. Near the

end of 1993 or the beginning of 1994, petitioner disposed of the

tools.

Before 1989, petitioner enrolled in Coastline Community

College (Coastline) and studied in its real estate program.

Petitioner earned an AA degree and a certificate in real estate.

He then obtained a real estate salesman’s license. In addition,

he studied the escrow field and obtained an escrow certificate.

Moreover, in early 1989, petitioner obtained from Coastline a

certificate of achievement in legal assisting, which licensed

petitioner as a paralegal. Prior to that time, petitioner was

involved in a serious car accident that required substantial

medical care and physical therapy.

Petitioner’s physical condition was such that he was not

able to accept work as a paralegal until December 1989. In 1989

and 1990, petitioner earned $220 and $8,430, respectively,

working as a paralegal “temp” for an agency that placed

paralegals in either temporary or permanent positions. Also in

1990, petitioner earned $2,696 as an employee of a paralegal

services company that did on-site and off-site paralegal project

work for various law firms and other entities. The parties have

stipulated that “in 1989 and 1990, the petitioner regularly

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donated paralegal services to the Coastline Community College

legal clinic, where, for some work he did for them in 1990, they

paid him $114.58.”

In 1991 and 1992, petitioner suffered additional injuries

and accidents. We will not dwell on the details of these

incidents, except to note that petitioner’s physical and mental

conditions were such that he was incapable of working for any

extended period of time without incurring substantial physical

pain.

While petitioner was previously working as an employee for

various agencies, he was of the opinion that he could earn income

as an independent contractor by working as a paralegal out of his

home, thereby creating his own work schedule. In furtherance of

this plan, in 1990, petitioner acquired a legal library at a cost

of $2,936.49, and a facsimile machine and supplies costing $650.

In 1991, petitioner moved into a larger apartment and acquired

office furniture, bookcases, computer software, a printer and

copier, legal text updates for his 1990 legal library, and other

items for the purpose of completing his home office for his

paralegal activities.

During 1991 and 1992, petitioner did not earn any income as

a paralegal primarily due to his physical incapacity. Petitioner

had to turn down several opportunities because of his condition.

Petitioner was under constant doctors’ care, although his medical

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providers generally gave a positive prognosis for his full

recovery. On the Schedule C attached to petitioner’s 1992 return,

petitioner reported no income from his paralegal/boat repair

business2 and claimed the following expenses:

Depreciation $1,222

Office expense 465

Pension and profit

sharing plans 35

Rent 3,600

Repairs and

maintenance 25

Storage 1,980

Trade books 916

Paralegal association 50

Total 8,293

As indicated earlier, the storage costs of $1,980 pertain to

his boat activity. The $35 for pension and profit sharing plans

was a maintenance fee for his Keogh plan. All of the other

expenses are directly related to petitioner’s paralegal activity.

Petitioner has adequately substantiated the above amounts, and

substantiation is not an issue in this case.

Because a possible remedy would be to dismiss this case in

favor of petitioner if we were to grant petitioner’s motion, we

will deal with the motion first. In his motion, petitioner

contends that respondent’s actions with regard to petitioner’s

discovery request and at the “Branerton conference”3 violated

2

Petitioner’s reported income was from withdrawals from an

individual retirement account.

3

Branerton Corp. v Commissioner, 61 T.C. 691 (1974), is

(continued...)

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petitioner’s constitutional rights of due process and equal

protection and were so egregious as to require dismissal of the

case in favor of petitioner. Petitioner also contends that

respondent’s actions in this case demonstrated persecution,

vindictiveness, and bad faith.

During these proceedings, petitioner, a 64-year-old

individual at the time of trial, was financially destitute and

the victim of a series of unfortunate incidents. Nevertheless,

we must view the issues without regard to the special

circumstances in which petitioner finds himself.

Petitioner’s complaint with regard to respondent’s failure

to comply with his discovery requests stems from petitioner’s

response to a conference invitation letter from respondent’s

counsel dated May 6, 1997. In respondent’s letter, as “Discovery

request No. one”, respondent’s counsel informally requested “all

documentation, records, notes, statements, memoranda or

correspondence in your possession and any legal authority,

statutory or case law which supports your claim that you are

entitled to claim a Schedule C loss of $8,293 for the taxable

year 1992.” Discovery request No. two requested the identity of

3

(...continued)

the seminal case setting the requirements for informal

consultation prior to embarking on formal discovery. See also

Rule 70.

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each and every person expected to be called as a witness and the

substance of his or her expected testimony.

In response thereto, petitioner agreed to a meeting and

concluded his letter dated May 9, 1997, with two similar

discovery requests. Respondent failed to comply with

petitioner’s discovery requests. The Court did not receive a

formal request from petitioner to enforce his discovery requests.

By order dated March 17, 1997, this case was continued from

the Court’s trial session in Los Angeles, California, on March

17, 1997, and recalendared for June 2, 1997.

Rule 70 contains general provisions for discovery in this

Court. Rule 70(a)(2) provides, in part: “Discovery shall not be

commenced, without leave of the Court, before the expiration of

30 days after joinder of issue * * * and shall be completed,

unless otherwise authorized by the Court, no later than 45 days

prior to the date set for call of the case from a trial

calendar.” Rule 72(a) provides that “Any party may, without

leave of Court, serve on any other party a request to” produce

documents. Rule 72(b), however, provides, in part: “The party

upon whom the request is served shall serve a written response

within 30 days after service of the request. The Court may allow

a shorter or longer time.” Rule 72(b) further provides:

To obtain a ruling on an objection by the responding

party, on a failure to respond, or on a failure to

produce or permit inspection, the requesting party

shall file an appropriate motion with the Court and

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shall annex thereto the request, with proof of service

on the other party, together with the response and

objections if any. Prior to moving for such a ruling,

neither the request nor the response shall be filed

with the Court.

If we assume that petitioner’s discovery request is a

request for production of documents, from the above it can

readily be seen that petitioner’s informal discovery request was

commenced less than 30 days prior to trial and could not possibly

have been completed “no later than 45 days prior to the date set

for call of the case from a trial calendar.” Rule 70(a)(2).

Moreover, petitioner failed to file an appropriate request for

review of respondent’s failure to respond in accordance with Rule

72(b). Petitioner merely complained about it. Accordingly,

petitioner’s unsuccessful discovery request is not grounds to

grant his motion and sanction respondent. The fact that

respondent made an equally unenforceable informal discovery

request, with which petitioner attempted to comply, is

irrelevant.

As indicated in respondent’s informal discovery request,

petitioner was requested to bring numerous documents. In

attempting to comply with this request, petitioner assembled two

boxes of records, one of which he painfully carried from the

parking lot at respondent’s office building to the conference.

Petitioner complains that respondent failed to look at any of the

documents he had brought. Notwithstanding respondent’s rejected

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offer to carry the box back to petitioner’s car, petitioner then

incurred great pain and aggravation returning to his car with the

box. We do not believe that this vignette requires us to

sanction respondent’s counsel.

Finally, petitioner characterizes respondent’s actions as

demonstrating obstructionism, vindictiveness, and general bad

faith. Considering respondent’s motion to dismiss for lack of

jurisdiction on the grounds of an untimely filed petition,

subsequently denied, respondent’s motion to dismiss for lack of

prosecution upon petitioner’s failure to appear at the original

call of this case on March 6, 1997, and the aforementioned

problems with discovery and the “Branerton” conference,

petitioner characterizes himself as a victim due to his penury

and physical and mental impairments, and, as such, prays that the

case be dismissed. Each of the incidents of which petitioner

complains was not by itself irregular, and they have only become

heightened in combination by reason of petitioner’s particular

situation. We do not ascribe any vindictiveness or bad faith to

respondent’s individual actions, which had, at each time, some

justification. Accordingly, we find no grounds to grant

petitioner’s motion, and it shall be denied.

We now turn to the merits of this case. Section 162 allows

deductions for all the ordinary and necessary expenses paid or

incurred during the taxable year in carrying on any trade or

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business. As a threshold matter, this section requires that a

taxpayer incur the expenses in “carrying on” a trade or business.

Sec. 162(a). Whether petitioner is engaged in a trade or

business and the nature of that trade or business are questions

of fact. Ford v. Commissioner, 56 T.C. 1300, 1307 (1971), affd.

per curiam 487 F.2d 1025 (9th Cir. 1973). The temporary

cessation of a trade or business does not preclude a finding that

a taxpayer was carrying on a trade or business during the period

of cessation. Haft v. Commissioner, 40 T.C. 2, 6 (1963). Thus,

even an unemployed taxpayer may be considered to be carrying on a

trade or business if the taxpayer was previously involved in and

intended to return to a particular trade or business. Id. In

order to take advantage of what is described as the “hiatus

principle”, a taxpayer must show that during the hiatus he

intended to resume the same trade or business. See Estate of

Rockefeller v. Commissioner, 762 F.2d 264, 270 (2d Cir. 1985)

(citing Sherman v. Commissioner, T.C. Memo. 1977-301), affg. 83

T.C. 368 (1984). In Haft v. Commissioner, supra at 6, we stated

as follows:

Plainly, petitioner did not cease to be in the

costume jewelry business in 1957 and 1958 merely

because he temporarily had no merchandise to sell. It

was a period of transition in which he was actively

seeking another connection that would enable him to

continue to serve the same customers with whom he had

previously dealt. We think that the respondent’s

position that petitioner was not carrying on a trade or

business in these circumstances gives an unduly narrow

interpretation to the statute. His failure to make

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sales in 1958 by reason of his temporary lack of access

to a source of costume jewelry to sell is not

controlling. * * *

The present case involves petitioner’s claim for deductions

for expenses from two separate activities, boat repair and

paralegal work. Petitioner was engaged in the boat repair

business from 1959 through 1985 during which he accumulated a

substantial number of tools and supplies. In 1992, petitioner

incurred expenses for storage for these tools and supplies.

After 1985, petitioner did not perform boat repairs and did not

earn any income from that activity. As the years passed, it

became less and less likely that petitioner would ever return to

that activity or that his services would be desired by boat

owners or previous clients. There is no indication in the record

that petitioner maintained contact with his former clients in

this regard.

On the other hand, petitioner, after 1985, sought other

means of earning a living. He obtained his paralegal certificate

in 1989 and attempted to obtain employment. Beginning in

December 1989, he was successful through 1990, earning in excess

of $10,000 from that activity. All earnings from the paralegal

activity were as an employee. However, it became clear that

because of his physical infirmities, he would be unable to handle

the time restraints required of an employee, but he honestly and

sincerely believed that he could still function and earn money as

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a paralegal as an independent contractor out of his home. In

accordance with his belief, petitioner set up his home office

with the necessary research materials and equipment. During 1991

and 1992, while petitioner did not derive income from his

paralegal skills, he was hopeful that he was on the road to

recovery based upon the representations of his medical providers.

Clearly the activities of a boat repair person and a

paralegal are separate and distinct. It is not logical that

these two activities be combined as one trade or business on one

Schedule C. Accordingly, we hold that the income and expenses

for each activity should be treated separately. We further hold

that petitioner, in 1992, realistically had no likelihood of

reentering the boat repair field. His maintenance of the tools,

some of which were monogrammed, was more for sentimental reasons

than for business potential. Consequently, in 1992, he was no

longer in hiatus from that activity and thus no longer “carrying

on” that trade or business. Accordingly, petitioner is not

entitled to deduct the storage expense incurred for his boat

supplies and tools.

On the other hand, petitioner was in hiatus from earning his

living as a paralegal. Indeed, the actions he took in 1991 and

1992 to bolster his opportunities and abilities to earn a living

from that profession support this conclusion. Respondent’s

contentions that petitioner was merely in a startup phase of his

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independent contractor business pertains only to the form of the

activity and not its substance. Having been engaged in the

paralegal business as an employee, see Primuth v. Commissioner,

54 T.C. 374, 377 (1970), petitioner did not change the general

nature of his business activities by working out of his home

office. Therefore, we conclude that petitioner, in 1992, was

carrying on a trade or business as a paralegal and is entitled to

deduct all of the other expenses at issue, with the exception of

the two following items.

The first item is the claimed expenses for $3,600 for a

portion of the rent associated with petitioner’s residential

premises. As applicable herein, section 280A provides that no

deduction shall be allowed with regard to the use of residential

property of the taxpayer. Some exceptions are provided in

section 280A(c). However, section 280A(c)(5) clearly provides

that no deduction shall be allowable in excess of the

income derived from such use. In other words, no deduction for

use of a residential unit can be taken if said deduction gives

rise to a loss. Accordingly, even though petitioner’s use of his

residence may have qualified as one of the exceptions under

section 280A(c)(1) through (4), section 280A(c)(5) disallows the

claimed rental expense deduction, as petitioner had no paralegal

income for 1992.

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Moreover, it is irrelevant whether petitioner claims the

deduction under section 212 if it is not allowable under section

162. It is well established that a taxpayer is not entitled to a

home office expense deduction for a section 212 activity that

does not rise to the level of a trade or business within the

meaning of section 162. Moller v. United States, 721 F.2d 810,

813 (Fed. Cir. 1983); Curphey v. Commissioner, 73 T.C. 766, 770

(1980).

The second item, petitioner’s expenditure of $35 for

maintenance of his Keogh plan, would not be an expense of

carrying on petitioner’s paralegal activity but would be

deductible under section 212 as a Schedule A itemized deduction.

See Rev. Rul. 84-146, 1984-2 C.B. 61.

In his reply brief, petitioner alleges that if the Court

sustains the disallowance of some of the claimed expenses, he has

additional unclaimed expenses as an offset. Attached to the

reply brief were copies of numerous documents which were not

offered at trial. Petitioner contends that he is entitled to

claim the additional expenses under Rule 155. Petitioner is

wrong. The time for presenting evidence is at trial. Generally,

the Court does not try a case piecemeal. New issues may not be

raised after the trial has been concluded and the record closed.

Moreover, evidence may not be submitted or attached to posttrial

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briefs. Petitioner’s claim for additional expense deductions is,

therefore, denied.

An order will be issued

denying petitioner’s motion,

and decision will be entered

under Rule 155.