The opinion
T.C. Summary Opinion 2007-135
UNITED STATES TAX COURT
GARY S. AND JULIE A. BROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7001-04S. Filed August 2, 2007.
Gary S. Brown and Julie A. Brown, pro sese.
Alan H. Cooper, for respondent.
CARLUZZO, Special Trial Judge: This case for the
redetermination of a deficiency was heard pursuant to the
provisions of section 7463.1 Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
1
Section references are to the Internal Revenue Code of
1986, as amended, in effect for the relevant period, and Rule
references are to the Tax Court Rules of Practice and Procedure.
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this opinion shall not be treated as precedent for any other
case.
Respondent determined a $6,271 deficiency, a $1,698.15
section 6651(a)(1) addition to tax, and a $1,254.20 section
6662(a) accuracy-related penalty with respect to petitioners’
1997 Federal income tax.
The issues for decision are: (1) Whether petitioners are
entitled to a trade or business expense deduction for rent in
excess of the amount allowed by respondent; (2) whether
petitioners failed to file a timely 1997 Federal income tax
return, and if so, whether their failure was due to reasonable
cause; and (3) whether the underpayment of tax required to be
shown on petitioners’ 1997 Federal income tax return is due to
negligence or intentional disregard of rules or regulations.
Background
Some of the facts have been stipulated and are so found. At
all times relevant petitioners were married to each other.2 They
filed a joint Federal income tax return for 1997. References to
petitioner are to Gary S. Brown.
Petitioner is an attorney. During all times relevant, he
conducted the practice of law as sole proprietorship in the Los
Angeles, California, area. From May 1992 through November 1995,
2
Petitioners separated and divorced from each other
following the year in issue.
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his law offices were located in leased space pursuant to a
sublease (the lease)3 petitioner entered into with a Georgia
partnership (the lessor). As relevant here, the lease obligated
petitioner to make rental payments of $3,700 per month from
January through October 2003, and $6,900 per month thereafter.
Petitioner paid only portions of the rent due under the lease
during 1993 and 1994, and he made none of the rent payments due
under the lease during 1995, as shown on the following table
(amounts are rounded and include incidental charges):
Year Rent (Annual) Due Per Lease Rent Paid
1993 $55,395 $43,900
1994 84,738 57,248
1995 84,915 - 0 -
In connection with his law practice, petitioner also rented
a storage facility where he stored client records. He paid $500
per month for the storage facility throughout the years 1993
through 1995.
Towards the end of 1995, petitioner’s rental arrearages
under the lease were substantial. As it turned out, he was sued
by the lessor in October 1995, and according to petitioner “the
amount in controversy” in that lawsuit “exceed[ed] $100,000”.
Ultimately the law suit was settled by agreement between
petitioner and the lessor. In accordance with that settlement
3
The term of the sublease ran from May 15, 1992 until
Sept. 30, 1996.
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agreement, payments totaling $137,150 were made by petitioner to
the lessor during 1997. Petitioner vacated the premises covered
by the lease as of November 30, 1995. As best can be determined
from the record, petitioner relocated his law offices and
continued his law practice sometime towards the end of 1995 or
beginning of 1996.
Petitioners filed joint Federal income tax returns for the
years 1993, 1994, and 1995. Each of the those returns includes a
Schedule C, Profit or Loss From Business, on which items of
income and expense deductions relating to petitioner’s practice
of law are claimed. Each Schedule C shows a deduction for “rent”
“other business property” as follows:
Year Amount
1993 $48,493
1994 65,852
1995 85,092
Petitioners also filed a joint Federal income tax return for
1997, and that return also includes a Schedule C relating to
petitioner’s law practice. As relevant here, on that Schedule C
petitioner claims a $23,822 deduction for “rent” “other business
property”. During the course of the examination of petitioners’
1997 return, an amended Schedule C was submitted to the revenue
agent conducting the examination. The amended Schedule C shows a
$160,972 deduction for “rent” “other business property”,
consisting of the amount originally claimed, plus the $137,150
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payment made by petitioner to settle the lawsuit involving the
lease.
Petitioners’ 1997 return was prepared by Julie Brown, who
also had some responsibility for bookkeeping and check writing in
connection with petitioner’s law practice, but who has no
specialized training in accounting or bookkeeping. At trial, she
testified to the many errors and irregularities in connection
with the records of petitioner’s law practice, as well as items
shown on their 1997 return. Taking into account an extension to
file, that return was due to be filed on or before August 15,
1998,4 but it was not filed until October 16, 1998.
In the notice of deficiency that forms the basis for this
case, respondent allowed $62,501 of the rent deduction claimed on
the amended Schedule C. According to respondent, the portion of
the rent deduction not allowed ($98,471) is the amount that
duplicates rent with respect to the lease already deducted and
allowed on petitioners’ 1993, 1994, and 1995 Federal income tax
returns. Other adjustments made in the notice of deficiency have
been agreed to by the parties and need not be discussed.
4
The parties stipulated that the Apr. 15, 1998, normal
filing due date was extended at least until Aug. 15, 1998. No
explanation has been provided regarding the computation in the
notice of deficiency showing the due date as Apr. 15, 1998.
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Discussion
The nature of the issue in this case calls into question the
method of accounting used by petitioner in his law practice
during the year in issue, as well as the years 1993, 1994, and
1995. The stipulation of facts filed in this case is silent with
respect to the method of accounting used by petitioner in
computing the income and deductions shown on the Schedules C for
his law practice for those years. Given the nature of the
disputed issue in this case, the failure to stipulate what would
seem to be a fundamental point leads us to conclude that there is
no agreement between the parties with respect to it. In the
absence of an agreement between the parties regarding
petitioner’s accounting method, and in the absence of any
persuasive evidence as to petitioner’s accounting method,5 we
proceed without making any specific finding regarding the method
of account used by petitioner in computing the income and
deductions of his law practice, or whether that method changed
from year to year.
According to petitioners, petitioner is entitled to a
deduction for the $137,150 paid to the lessor in 1997 in
settlement of the lawsuit regarding the lease. Respondent agrees
5
According to the Schedules C, petitioner used the “cash”
method of accounting, but the many errors and irregularities on
the Schedule C included with petitioners’ 1997 return invite us
to ignore much of the information reported on the Schedules C.
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that the payment might have otherwise given rise to a deduction
for 1997 under section 162, but claims that $98,471 of that
payment duplicates expenses already deducted by petitioner in
prior years. As respondent views the matter, petitioners are not
entitled twice to deduct the same expense. Petitioners agree
with that principle, but argue that the rent deductions claimed
in 1993, 1994, and 1995 do not relate entirely to the lease.
According to petitioners, the rent expense deductions claimed in
1993, 1994, and 1995 include, in part, rent expenses connected to
the lease, and, in part, rent expenses not connected to the
lease.
For example, petitioners claim that they paid $500 per month
in storage fees for client records not stored on the premises
covered by the lease. They also suggest that a portion of the
rental expense deduction shown in 1993, 1994, and 1995 might have
included some office in the home expenses.
We reject petitioners’ claim on this latter point. There is
insufficient evidence in the record to support any finding
regarding the use of petitioners’ residence for business purposes
during any of the relevant periods. We accept their claim,
however, that a portion of the rent deduction claimed in the
years 1993, 1994, and 1995 related to rent expenses not connected
with the lease.
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Our finding in this regard has the following consequences.
There is no duplication with respect to the rent expense
deduction claimed on the Schedules C for the years 1993 and 1994.
So much of respondent’s reduction of the $137,150 settlement
payment as is attributable to a duplication for those years is
rejected. With respect to 1995, we find that all but $6,000 of
the $85,092 rent deduction claimed for that year has been
duplicated in the rent deduction claimed for 1997. Therefore
$79,000 of the $137,150 settlement payment is not allowable in
1997.
Respondent imposed an addition to tax under section
6651(a)(1). Briefly stated, that section provides for an
addition to tax if a return is not filed on or before the date
that the return is due, unless the delay in filing is due to
reasonable cause and not willful neglect.
Petitioners’ 1997 return was received and filed by
respondent on October 16, 1998. According to respondent’s
records, that return was due to be filed on or before August 15,
1998. Petitioners do not dispute the date that respondent claims
to have received their 1997 return; furthermore, they make no
claim that imposition of the addition to tax is inappropriate
because they had reasonable cause for their failure to file a
timely return. Instead, they claim that their 1997 return was
not filed late. According to petitioners, they had been granted
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an additional extension until October 15, 1998, to file that
return, and they did so in a timely fashion. See sec. 7502.
Respondent has no record of the additional extension, and
petitioners’ evidence on the point is less than compelling.
Respondent’s imposition of the section 6651(a)(1) addition to tax
is sustained, but in an amount that takes into account the August
15, 1998, extended due date of petitioners’ 1997 return.
Respondent also imposed a section 6662(a) penalty on the
underpayment of tax required to be shown on petitioners’ 1997
return. In addition to other reasons, if any portion of an
underpayment of tax required to be shown on a taxpayer’s return
is due to negligence, then the section 6662(a) penalty is
applicable. The many errors and irregularities admitted to by
petitioners with respect to their 1997 return make it clear that
the imposition of the section 6662(a) penalty is appropriate with
respect to the entire underpayment of tax, which in this case is
computed in the same manner as the deficiency. See sec. 6664(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.