The opinion
T.C. Memo. 2008-280
UNITED STATES TAX COURT
MOSHE SHAFRIR AND LILIA VALITOVA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8482-07. Filed December 15, 2008.
Moshe Shafrir, pro se.
Catherine G. Chang, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency of $8,270
in petitioners’ Federal income taxes for 2004, a $1,675 addition
to tax under section 6651(a)(1), and a $1,654 accuracy-related
penalty under section 6662(a).
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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 2004, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
At issue is petitioner Moshe Shafrir’s entitlement to
deductions for business expenses, dependency exemptions, and Hope
Scholarship credits beyond those allowed by respondent.
Petitioner Lilia Valitova is a petitioner only because she filed
a 2004 joint Federal income tax return with her husband.
References to petitioner are to Moshe Shafrir.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed petitioner resided in
California.
In 1980 petitioner graduated from the Technion-Israel
Institute of Technology in Israel with a bachelor’s degree in
architecture and town planning. Thereafter, petitioner married,
moved to the United States, and eventually became licensed as an
architect in California.
In 2004 petitioner was employed as an architect in San Jose,
California, and in San Francisco, California. Petitioner also
worked as an independent architect.
At his home petitioner maintained a cellular telephone line
and three telephone land lines. All of the telephone lines were
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used by petitioner and his family in their personal affairs and
also by petitioner in his work as an independent architect.
In 2004 petitioner took 29 automobile trips totaling 7,320
miles to various cities in California, and petitioner kept a
mileage log relating thereto. The trips were described in
petitioner’s mileage log as being taken for the purpose of either
“meeting with potential clients” (837 miles) or “marketing,
urban, and architectural study” (6,483 miles). With respect to
trips described as made for the purpose of meeting with potential
clients, petitioner also noted in his log the client’s name, the
location and subject of the meeting, and the architectural work
involved.
With respect to trips described as made for the purpose of
marketing, urban, and architectural study, petitioner made no
further notes in his log, but petitioner explained at trial that
these trips were not made in connection with a particular client
or a particular architectural work assignment but were made to
generally inform petitioner as to the current urban planning and
architecture of the cities visited. On these trips petitioner
generally stayed overnight with friends or at campsites in
National parks, and petitioner occasionally brought his family
along with him.
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In 2004 petitioner’s son and daughter attended college as
full-time students, and petitioner’s son also worked as a full-
time chef at a restaurant.
On his 2002 and 2003 Federal income tax returns, petitioner
claimed Hope Scholarship credits for education expenses he
incurred in 2002 and 2003 on behalf of his son and daughter.
In 2005 petitioner’s son timely filed his own 2004
individual Federal income tax return on which he claimed himself
as a dependent and on which he reported $27,309 in income
relating to his employment as a chef.
On January 18, 2006, petitioner late filed his 2004 return
to which petitioner attached a Schedule C, Profit or Loss From a
Business (Sole Proprietorship), relating to his work as an
independent architect, petitioner reported business expenses of
$11,478. Petitioner also claimed $6,200 in dependency exemptions
and $3,000 in Hope Scholarship credits with respect to his son
and daughter.
On audit respondent determined that petitioner had not
substantiated and therefore was not entitled to the claimed
$11,478 Schedule C expenses, the $6,200 dependency exemptions,
and the $3,000 Hope Scholarship credits. Respondent also
determined that petitioner was liable for the addition to tax
under section 6651(a)(1) and the accuracy-related penalty under
section 6662(a).
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On April 16, 2007, petitioner filed with this Court his
petition relating to respondent’s statutory notice of deficiency.
On April 26, 2008, petitioner’s son filed with respondent a
Form 1040X, Amended U.S. Individual Income Tax Return, for 2004
on which he disclaimed himself as a dependent and with which he
included a $493 payment for the additional taxes owed in
connection with his disclaimer of his dependency exemption.
Before trial the parties entered into various settlement
concessions with respect to the disallowed Schedule C expenses
relating to petitioner’s work in 2004 as an independent
architect. The schedule below reflects the expenses claimed by
petitioner on the Schedule C attached to his 2004 return, the
amounts conceded by either petitioner or respondent, and the
amounts still in dispute:
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Claimed Conceded Conceded Still
Claimed Schedule by by by in
C Expenses Petitioner Petitioner Respondent Dispute
Advertising $495 $0 $0 $495
Computer depreciation 328 328 0 0
Software depreciation 976 0 0 976
Heater depreciation 5 0 0 5
Legal/prof. services 416 0 300 116
Office supplies 358 0 0 358
Repairs/maintenance 385 0 0 385
Prof. literature 756 0 0 756
Mailing/shipping 321 0 0 321
Printing/copying 401 0 0 401
Prof. training 1,305 0 0 1,305
Architect’s license 200 0 200 0
Telephone 1,973 0 0 1,973
Trips 2,711 0 314 2,397
*
Total amount $10,630 $328 $814 $9,488
*
It is unclear from the record the reason for the
discrepancy between the $11,478 claimed expenses on the
Schedule C attached to petitioner’s 2004 tax return and the
$10,630 total expenses listed in the above schedule.
The parties also agreed that the claimed dependency
exemption for petitioner’s daughter was allowable.
OPINION
Generally, as to claimed deductions a taxpayer bears the
burden of proof, and respondent’s determinations are entitled to
a presumption of correctness.1 Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933); Durando v. United States, 70 F.3d 548,
550 (9th Cir. 1995). A taxpayer is required to maintain and to
submit to respondent upon request documentation sufficient to
1
Petitioner makes no argument that he qualifies under sec.
7491(a) for a shift in the burden of proof.
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establish the amount and purpose of deductions claimed. Sec.
6001; sec. 1.6001-1(a), Income Tax Regs.
Where appropriate, the Court may estimate the amount of the
expenses and allow deductions therefor. Cohan v. Commissioner,
39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85
T.C. 731, 742-743 (1985).
Under section 162 a taxpayer is allowed to deduct all
ordinary and necessary business expenses paid or incurred during
the year. However, deductions for personal, living, or family
expenses are not allowed unless expressly provided under the
Code. Sec. 262(a).
At trial petitioner submitted documentation relating only to
the telephone and travel expenses. No documentation was
submitted with regard to the other claimed Schedule C expenses
still in dispute.
With regard to the telephone expenses of $1,973, the
documentation petitioner submitted does not provide sufficient
information to distinguish which expenses were incurred in
petitioner’s work as an architect and which expenses were
incurred in petitioner’s personal and family affairs. Petitioner
has not properly substantiated the claimed telephone expenses and
has not submitted sufficient evidence for us to make an estimate
of deductible telephone expenses. See Vanicek v. Commissioner,
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supra at 742-743. The $1,973 in disputed telephone expenses are
not allowed as ordinary and necessary business expenses.
Regarding the $2,397 travel expenses still in dispute
(relating just to the trips described as made for the purpose of
marketing, urban, and architectural study), expenses incurred by
a taxpayer to further his general education are generally treated
as nondeductible personal expenses unless they qualify as
business expenses under section 162. Sec. 274(m)(2); Boser v.
Commissioner, 77 T.C. 1124, 1133-1134 (1981), affd. without
published opinion (9th Cir., Dec. 22, 1983); sec. 1.262-1(b)(9),
Income Tax Regs.
In Postman v. Commissioner, T.C. Memo. 1974-145, we held
that an architect’s expenses incurred while traveling with his
family in Europe for the purpose of acquiring increased
understanding of various architectural styles did not qualify as
deductible ordinary and necessary business expenses. See also
Cole v. Commissioner, T.C. Memo. 1983-88 (expenses incurred on
businessman’s travel to different cities to educate himself
generally on store management and good business practices did not
qualify as deductible ordinary and necessary expenses).
The business purpose of the $2,397 travel expenses still in
dispute has not been adequately substantiated and the $2,397 are
not allowed as ordinary and necessary business expenses.
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Regarding petitioner’s claimed dependency exemption for his
son, generally a taxpayer is allowed an exemption for a dependent
if, among other things, the taxpayer has provided over one-half
of the dependent’s support and the dependent has not claimed
himself as a dependent for the same year. Secs. 151(a), (c),
152(a).
In determining whether a taxpayer provided over one-half of
the support for a claimed dependent, the amount of support
provided by the taxpayer is compared to the total amount of
support which the claimed dependent received from all sources.
Sec. 1.152-1(a)(2)(i), Income Tax Regs. “[S]upport” is defined
as, among other things, food, shelter, clothing, education, and
medical and dental care. Id.
Where a claimed dependent has income in the year in which he
is claimed as a dependent, only that portion of the claimed
dependent’s income which is actually spent on the claimed
dependent’s support is considered in determining total “support”
under section 152. See Carter v. Commissioner, 55 T.C. 109, 112
(1970).
Petitioner claims that in 2004 his son did not spend any of
the $27,309 earned as a chef for his own support, that petitioner
provided over one-half of his son’s support, and that because of
his son’s disclaimer on his son’s amended 2004 tax return,
petitioner should be allowed the exemption for his son.
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Petitioner has submitted no credible evidence to corroborate
that he provided over one-half of his son’s support for 2004 and
that his son did not provide over one-half of his own support.
Petitioner’s son does not qualify under section 152(a), and
petitioner may not treat his son under section 151(a) and (c) as
a dependent for 2004.
Under section 25A(b)(2), Hope Scholarship credits may be
claimed for the first 2 years of a student’s postsecondary
education. Because petitioner claimed Hope Scholarship credits
for 2002 and 2003 with respect to his son and daughter, the Hope
Scholarship credits petitioner claims for 2004 are disallowed.
Section 6651(a)(1) imposes an addition to tax for a
taxpayer’s failure to timely file a tax return unless the
taxpayer proves that such failure is due to reasonable cause and
not willful neglect. See United States v. Boyle, 469 U.S. 241,
245 (1985). By virtue of the adjustments that we sustain herein,
respondent has carried his burden of production under section
7491(c) as to the addition to tax and the penalty.
Petitioner provided no explanation and submitted no evidence
to suggest that his failure to timely file his 2004 return was
due to reasonable cause. We sustain respondent’s imposition of
the section 6651(a)(1) addition to tax.
Section 6662(a) and (b)(1) imposes an accuracy-related
penalty equal to 20 percent of the underpayment of the taxes
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required to be shown on a return where the underpayment, or a
portion thereof, is due to negligence or disregard of rules or
regulations.
For purposes of section 6662(b)(1), the term “negligence”
includes “any failure by the taxpayer to keep adequate books and
records or to substantiate items properly.” Sec. 1.6662-3(b)(1),
Income Tax Regs.
Where a taxpayer can demonstrate reasonable cause for the
underpayment, an exception to the section 6662(a) penalty may be
granted. Sec. 6664(c)(1).
Petitioner has not explained his failure to keep and
maintain proper documentation to substantiate the Schedule C
expenses that we disallow and his expenses relating to the
dependency exemption for his son that we disallow. The claimed
Hope Scholarship credits for his son and daughter were clearly
not allowable.
We sustain respondent’s imposition of the accuracy-related
penalty under section 6662(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.