The opinion
T.C. Summary Opinion 2017-32
UNITED STATES TAX COURT
JAGTAR SINGH KHINDA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23584-14S. Filed May 11, 2017.
Jagtar Singh Khinda, pro se.
Marissa J. Savit, for respondent.
SUMMARY OPINION
CARLUZZO, Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect when the
petition was filed.1 Pursuant to section 7463(b), the decision to be entered is not
1
Unless otherwise indicated, section references are to the Internal Revenue
(continued...)
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reviewable by any other court, and this opinion shall not be treated as precedent
for any other case.
In a notice of deficiency dated August 7, 2014 (notice), respondent
determined deficiencies in, and penalties with respect to, petitioner’s
Federal income tax for 2011 and 2012 as follows:
Penalty
Year Deficiency sec. 6662(a)
2011 $8,219 $1,643.80
2012 10,936 2,187.20
Respondent’s answer has been amended to assert increased deficiencies and
section 6662(a) penalties for the years in issue.
The issues for decision arising from the notice and the amendments to
answer are whether petitioner: (1) is entitled to deductions claimed on Schedules
A, Itemized Deductions; (2) is entitled to various deductions claimed on Schedules
C, Profit or Loss From Business; (3) is entitled to deductions for student loan
interest for 2011 and 2012; (4) is entitled to a tuition and fees deduction for 2012;
(5) is entitled to education credits under section 25A for 2011; (6) must include in
his 2012 income a State income tax refund he received that year; (7) is entitled to a
1
(...continued)
Code (Code) of 1986, as amended, in effect for the years in issue. Rule references
are to the Tax Court Rules of Practice and Procedure.
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nonbusiness energy credit for 2012; and (8) is liable for a section 6662(a)
accuracy-related penalty for either year in issue. Additionally, we are called upon
to determine whether petitioner’s proper filing status is single or married filing
separate.2
Background
Some of the facts have been stipulated and are so found. At the time the
petition was filed, petitioner resided in New York.
I. Petitioner’s Marital Status and Employment History
Petitioner and Patricia O’Sullivan3 married in 1979. They have four
children: Maryanne, Elizabeth, John, and Andrew. None of their children are
disabled, and all were more than 25 years old as of the close of 2011.
Petitioner’s marital status as of the close of each year in issue is less than
clear. Consequently, we make no finding on the point. Regardless, petitioner
resided with Ms. O’Sullivan in a two-bedroom apartment in New York, N.Y.
(apartment 4G) during both years in issue. John resided in apartment 4G as well.
2
Petitioner claimed head of household filing status on his 2011 and 2012
Federal income tax returns. Petitioner now concedes that he is not entitled to head
of household filing status for either year in issue.
3
Patricia O’Sullivan is sometimes referred to as Patricia Khinda in the
record.
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Ms. O’Sullivan purchased apartment 4G in 1993. Petitioner is not, and has never
been a record owner of that property.
During the years in issue petitioner, a licensed engineer in the State of New
York, was employed full time as a civil structural engineer for the New York City
Department of Transportation (NYCDOT); at the same time he performed services
as a civil structural engineer on an independent contractor basis (consulting
business) for ModuTank, Inc. (ModuTank).
Petitioner began employment with NYCDOT around August 3, 1998. From
the time he started working there he was assigned to the Division of Bridges.
Within that division petitioner worked specifically for the East River/Movable
Bridges Bureau as a seismic expert/seismic projects engineer. His duties included,
among other things: preparing requests for proposals and reviewing reports for
seismic evaluation and retrofit of 4 East River bridges and 25 movable bridges;
reviewing and resolving comments associated with various versions of the
NYCDOT seismic design criteria guidelines; reviewing plans, specifications and
estimate packages; providing advice to technical problems; and staying up to date
on the latest practice techniques and advances in his field. His office was in the
financial district of New York City.
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Apparently, with permission from the NYCDOT petitioner attended
lectures, seminars, and conferences related to his profession. As relevant here,
NYCDOT’s reimbursement policy allowed reimbursement for telephone expenses
related to “calls placed only for official business” and “travel expenditures
associated with local or out of town transportation, carfare or tolls and mileage
when using own vehicle”. This reimbursement policy apparently was in effect
only if reimbursement funds were available. According to a March 18, 2014,
letter from the NYCDOT, “Mr. Khinda did request permission and reimbursement
to go to various lectures, seminars and conferences in 2011 and 2012 from his
Deputy Chief Engineer--in charge, but due to budget constraints at the department,
he was not reimbursed for any of the expenses for these activities and he paid all
the expenses from his own pocket.”
As noted, in addition to his employment with NYCDOT petitioner also
provided structural engineering consulting services to ModuTank during the years
in issue. No onsite testing or travel was required to provide these services, and all
work, including the composition of handwritten reports, was performed from a
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two-bedroom, one-bathroom apartment in New York, N.Y. (apartment 3B), owned
jointly by petitioner and Ms. O’Sullivan.4
II. American Society of Civil Engineers
Petitioner was a member of the American Society of Civil Engineers
(ASCE) during the years in issue. As such, and without compensation, he lectured
and conducted seminars to train “young engineers”. Petitioner used his personal
automobile in connection with his travel to the ASCE lectures and seminars.
III. Records and Schedules
In preparation for trial petitioner prepared spreadsheets for each year in
issue that categorize expenses shown on receipts, checks, and credit card account
statements. Each entry on the spreadsheets includes only the category of expense
and an amount. Handwritten notations accompanying the spreadsheets, receipts,
and credit card account statements attempt to tie each expenditure to a deduction
claimed on petitioner’s 2011 or 2012 Federal income tax return.
Petitioner also maintained a mileage log that contains a single entry for
2011 and a single entry for 2012. The entries show a beginning and ending
odometer reading for each year, as well as the total miles driven. Notably, the
4
Apartment 4G and apartment 3B are in the same vicinity, if not the same
apartment complex.
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mileage log does not identify a beginning or ending destination, nor does it
identify whether he was traveling on behalf of his employment with the NYCDOT
or his consulting business or ASCE or for personal use. Petitioner also compiled a
noncontemporaneous one-page document titled “Miles driven--Monthly/every 4
weeks”, approximating that he drove 300 miles a week. Although that document
does not identify any dates, we presume that he intended the document to be an
estimate of miles driven each week during each year in issue.
According to two Forms 1098, Mortgage Interest Statement, petitioner paid
mortgage interest of $1,844.21 and $204.97 to two mortgagees during 2011 with
respect to apartment 3B.
IV. Petitioner’s Tax Returns
Petitioner claimed head of household filing status on his 2011 and 2012
Federal income tax returns; as noted, he now concedes that he does not qualify as
a head of household for either year.
A. Petitioner’s 2011 Tax Return
The $67,974 adjusted gross income reported on petitioner’s 2011 self-
prepared Federal income tax return takes into account his $61,066 of wages from
NYCDOT, a loss from his consulting business, a deduction of $210 for student
loan interest, and other items that are not here in dispute.
-8-
Petitioner’s 2011 return includes a Schedule A on which petitioner claimed
various deductions including, as relevant here, real estate taxes of $3,709, home
mortgage interest of $2,049, and miscellaneous expenses of $23,930 (before the
application of the 2% limitation prescribed in section 67(a)) that consist almost
entirely of unreimbursed employee business expenses.
A Form 2106-EZ, Unreimbursed Employee Business Expenses, included
with petitioner’s 2011 return shows the detail of the deduction for unreimbursed
employee business expenses as follows: (1) vehicle expenses of $5,858;
(2) parking fees and tolls of $6,129; (3) travel expenses while away from home of
$532; and (4) other business expenses of $11,111.
Petitioner’s 2011 return also includes a Schedule C on which the income
and expenses attributable to his consulting business are shown as follows:
Income
Gross receipts or sales $11,500
Gross income 11,500
Expenses
Car and truck 2,725
Office 3,694
Rent or lease of other
business property 13,472
Travel 2,560
Meals and entertainment 2,138
Utilities 4,931
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Other1 1,600
Total 31,120
Net profit (loss) (19,620)
1
The deduction for “other expenses” includes the cost of “photo processing,
publications, [and] printing copies”, however, petitioner’s return does not identify
a specific amount for each expense.
Also included with petitioner’s 2011 return is a Form 8863, Education
Credits (American Opportunity and Lifetime Learning Credits) (AOTC). On the
Form 8863 petitioner claimed an AOTC of $2,191 ($876 of which he treated as
refundable and the balance, $1,315, as nonrefundable). According to the form, the
credit is attributable to John’s education expenses.
B. Petitioner’s 2012 Tax Return
The $54,180 adjusted gross income shown on petitioner’s 2012 self-
prepared Federal income tax return includes his $62,384 of wages from NYCDOT,
a loss from his consulting business, a $331 deduction for student loan interest, a
$3,500 deduction for tuition and fees, and other items that are not here in dispute.
Petitioner’s 2012 return includes a Schedule A on which petitioner claimed
various deductions including, as relevant here, real estate taxes of $3,770, home
mortgage interest of $1,947, and miscellaneous expenses of $21,486 (before the
application of the 2% limitation prescribed in section 67(a)). The miscellaneous
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expense deduction includes unreimbursed employee business expenses of
$21,486.
A Form 2106-EZ included with petitioner’s 2012 return shows the detail of
the deduction for unreimbursed employee business expenses as follows:
(1) vehicle expenses of $6,105; (2) parking fees and tolls of $5,392; (3) travel
expenses while away from home of $1,793; and (4) other business expenses of
$6,574. Also included in the computation of petitioner’s unreimbursed employee
business expenses is union and professional dues of $1,622, which is shown on an
additional statement attached to petitioner’s 2012 return.
Petitioner’s 2012 return also includes a Schedule C on which the income
and expenses attributable to his consulting business are shown as follows:
Income
Gross receipts or sales $2,500
Gross income 2,500
Expenses
Car and truck 2,810
Office 2,818
Rent or lease of other
business property 14,825
Travel 2,244
Meals and entertainment 4,645
Utilities 4,407
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Other1 1,600
Total 33,349
Net profit (loss) (30,849)
1
The deduction for “other expenses” includes the cost of “photo processing,
publications, [and] printing copies”, however, petitioner’s return does not identify
a specific amount for each expense.
Also included with petitioner’s 2012 return is a Form 5695, Residential
Energy Credits, on which he claimed a $160 nonbusiness energy property credit
attributable to apartment 3B.
For 2011 petitioner claimed a $5,506 deduction for State income taxes paid
to New York State. In 2012, as reflected on a Form 1099-G, Certain Government
Payments, petitioner received a State income tax refund of $4,652 from the State
of New York for the 2011 tax year, and this amount was not reported on his 2012
return.
V. Notice of Deficiency
In the notice and as relevant here, respondent: (1) disallowed $17,548 of
the $23,630 deduction claimed for unreimbursed employee business expenses on
the 2011 Schedule A;5 (2) disallowed the entire unreimbursed employee business
5
In the notice respondent allowed Schedule A unreimbursed employee
business expense deductions of $2,881 for car and truck expenses, $1,635 for
transit expenses, and $1,578 for cell phone expenses for 2011. The allowance for
(continued...)
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expenses deduction claimed on the 2012 Schedule A; (3) disallowed in full the
deductions claimed on the Schedules C for rent or lease of other business property
for 2011 and 2012; (4) disallowed $2,275 of the $4,931 utilities deduction claimed
on the 2011 Schedule C; (5) disallowed the entire utilities deduction claimed on
the 2012 Schedule C; (6) disallowed $623 of the $2,138 meals and entertainment
expense deduction claimed on the 2011 Schedule C; (7) disallowed the entire
meals and entertainment expense deduction claimed on the 2012 Schedule C;
(8) disallowed $1,860 of the $2,560 travel expense deduction claimed on the 2011
Schedule C; (9) disallowed the entire travel expense deduction claimed on the
2012 Schedule C; (10) disallowed in full the student loan interest deductions
claimed for both years in issue; (11) disallowed the entire tuition and fees
deduction claimed on petitioner’s 2012 return; (12) disallowed the AOTC for
2011; (13) determined petitioner’s proper filing status to be single instead of head
of household for 2012; and (14) imposed a section 6662(a) accuracy-related
penalty on various grounds for each year. Other adjustments made in the notice
5
(...continued)
car and truck expenses, transit expenses, and cell phone expenses totals $6,094.
However, subtracting the amount of Schedule A unreimbursed employee business
expenses disallowed in the notice, $17,548, from the amount petitioner claimed,
$23,630, totals $6,082. The parties do not explain the seeming $12 discrepancy.
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need not be discussed as they are computational or have no consequence to the
deficiencies here in dispute.
VI. Amendments to Answer
In the amendments to answer respondent: (1) asserted an increased
deficiency for 2012 attributable to petitioner’s failure to include the $4,652 New
York State income tax refund in his income for that year; (2) disallowed
petitioner’s claimed Schedule A deductions for real estate tax and home mortgage
interest for 2011 and 2012; (3) disallowed the nonbusiness property energy credit
petitioner claimed for 2012; (4) changed petitioner’s filing status from head of
household to single for 2011; and (5) increased the section 6662(a) penalty for
each year accordingly.
Discussion
As we have observed in countless opinions, deductions and credits are a
matter of legislative grace, and the taxpayer bears the burden of proof to establish
entitlement to any claimed deduction or credit.6 Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). Respondent bears the burden of proof with respect to the
6
Petitioner does not claim and the record does not otherwise demonstrate
that the provisions of sec. 7491(a) are applicable here, and we proceed as though
they are not.
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increased deficiencies and section 6662(a) accuracy-related penalties asserted in
the amendments to answer. See Rule 142(a)(1).
A taxpayer claiming a deduction on a Federal income tax return must
demonstrate that the deduction is allowable pursuant to some statutory provision
and must further substantiate that the expense to which the deduction relates has
been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.
Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.
Taxpayers may deduct ordinary and necessary expenses paid in connection
with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C.
305, 313 (2004). Generally, the performance of services as an employee
constitutes a trade or business. Primuth v. Commissioner, 54 T.C. 374, 377
(1970). To be ordinary the expense must be of a common or frequent occurrence
in the type of business involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940).
To be necessary an expense must be appropriate and helpful to the taxpayer’s
business. Welch v. Helvering, 290 U.S. 111, 113 (1933). If, as a condition of
employment, an employee is required to incur certain expenses, then the employee
is entitled to a deduction for those expenses, unless reimbursed by his or her
employer. See Fountain v. Commissioner, 59 T.C. 696, 708 (1973); Spielbauer v.
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Commissioner, T.C. Memo. 1998-80. An employee business expense is not
deductible as “ordinary and necessary” if the employee is entitled to
reimbursement from his or her employer but fails to seek reimbursement. See
Podems v. Commissioner, 24 T.C. 21, 22-23 (1955); Noz v. Commissioner, T.C.
Memo. 2012-272. On the other hand, section 262(a) generally disallows a
deduction for personal, living, or family expenses.
As a general rule, if a taxpayer provides sufficient evidence that the
taxpayer has incurred a trade or business expense contemplated by section 162(a)
but is unable to adequately substantiate the amount, the Court may estimate the
amount and allow a deduction to that extent. Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930). However, in order for the Court to estimate the
amount of an expense, there must be some basis upon which an estimate may be
made. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Otherwise, any
allowance would amount to unguided largesse. Williams v. United States, 245
F.2d 559, 560 (5th Cir. 1957).
Deductions for expenses attributable to travel (“including meals and lodging
while away from home”), entertainment, gifts, and the use of “listed property” (as
defined in section 280F(d)(4) and including passenger automobiles), if otherwise
allowable, are subject to strict rules of substantiation. See sec. 274(d); Sanford v.
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Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.
1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov.
6, 1985). With respect to deductions for these types of expenses, section 274(d)
requires that the taxpayer substantiate either by adequate records or by sufficient
evidence corroborating the taxpayer’s own statement: (1) the amount of the
expense; (2) the time and place the expense was incurred; (3) the business purpose
of the expense; and (4) in the case of an entertainment or gift expense, the
business relationship to the taxpayer of each expense incurred. For “listed
property” expenses, the taxpayer must establish the amount of business use and
the amount of total use for such property. See sec. 1.274-5T(b)(6)(i)(B),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
Substantiation by adequate records requires the taxpayer to maintain an
account book, a diary, a log, a statement of expense, trip sheets, or a similar record
prepared contemporaneously with the expenditure and documentary evidence
(e.g., receipts or bills) of certain expenditures. Sec. 1.274-5(c)(2)(iii), Income Tax
Regs.; sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017
(Nov. 6, 1985). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s statement
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specifically detailing the required elements. Sec. 1.274-5T(c)(3), Temporary
Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985).
With these fundamental principles of Federal income taxation in mind, we
consider petitioner’s entitlement to the various deductions and credits here in
dispute.
I. Schedule A Deductions
A. Real Estate Tax
Petitioner claimed a $3,709 deduction and a $3,770 deduction for real estate
tax on Schedules A for 2011 and 2012, respectively. According to petitioner, he
paid real estate tax for apartment 3B during the years in issue. Respondent does
not challenge whether petitioner paid these amounts with respect to apartment 3B
but contends that because petitioner now claims that apartment 3B was not his
residence during the years in issue, the deduction for real estate tax should be
disallowed.
Taxpayers may deduct State and local real property taxes paid or accrued
within the taxable year. Sec. 164(a). There is no requirement for the real property
to be the taxpayer’s residence. Accordingly, petitioner is entitled to the
deductions claimed for real estate tax on his 2011 and 2012 returns.
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B. Home Mortgage Interest
Petitioner claimed a $2,049 deduction and a $1,947 deduction for home
mortgage interest on Schedules A for 2011 and 2012, respectively. The
deductions relate to apartment 3B. Respondent does not challenge whether
petitioner paid these amounts with respect to apartment 3B but contends that
because apartment 3B was not petitioner’s “residence” during the years in issue
the deductions should be disallowed.
Section 163(a) allows a deduction for interest paid or accrued within the
taxable year on indebtedness. Taxpayers other than corporations are not allowed
to deduct “personal” interest. Sec. 163(h)(1). Individuals, however, are allowed a
deduction for “qualified residence interest”. Sec. 163(h)(3). A qualified residence
is the taxpayer’s principal residence and one other residence of the taxpayer. Sec.
163(h)(4)(A).
According to petitioner, he never resided in apartment 3B. Instead, he
claims that he used apartment 3B as an office for the services he provided to
ModuTank. Taking petitioner at his word, we find that apartment 3B is not a
qualified residence and that petitioner is not entitled to deductions claimed on his
2011 and 2012 Schedules A for home mortgage interest. See infra pp. 21-23.
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C. Unreimbursed Employee Business Expenses
Petitioner claimed a $23,630 deduction and a $21,486 deduction for
unreimbursed employee business expenses on Schedule A for 2011 and 2012,
respectively. The deduction for unreimbursed employee business expenses for
2011 includes vehicle expenses of $5,858, parking fees and tolls of $6,129, travel
expenses while away from home of $532, and other business expenses of $11,111.
As noted supra note 5, in the notice respondent allowed Schedule A unreimbursed
employee business expense deductions of $2,881 for car and truck expenses,
$1,635 for transit expenses, and $1,578 for cell phone expenses for 2011. The
deduction for unreimbursed employee business expenses for 2012 includes vehicle
expenses of $6,105, parking fees and tolls of $5,392, travel expenses while away
from home of $1,793, and other business expenses of $6,574.
In support of the above-referenced deductions, petitioner submitted
spreadsheets, handwritten notations accompanying the spreadsheets, checks,
receipts, and credit card account statements, all of which we have carefully
reviewed. For the following reasons, we find that petitioner is not entitled to a
deduction for unreimbursed employee business expenses for 2011 or 2012 in
excess of any amount respondent has already allowed.
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Petitioner described the spreadsheets he created for trial as the “best” and
most “accurate” recordkeeping system for connecting an item of substantiation to
a deduction claimed on his return. Suffice it to say, we do not share petitioner’s
view with respect to the significance and/or usefulness of his records.
As best we can tell from the spreadsheets and accompanying records, the
deductions include substantial amounts for personal expenses such as Netflix,
Time Warner Cable, Allstate Insurance Co., the New York Yankees, round trip
plane tickets to Santo Domingo, Dominican Republic, and a subscription to the
New York Times. Many of these personal expenses are recurring monthly
expenses.
Deductions for other expenses were not substantiated by written evidence,
or if so, the written evidence fails to meet the strict rules of substantiation
requirements of section 274(d) that apply to expenses for car and truck, travel, and
meals and entertainment. By way of example, petitioner provided a mileage log
and a monthly estimate of the miles driven during 2011 and 2012. The mileage
log and monthly estimates fail to identify a single date on which petitioner
purportedly made a business trip. Moreover, neither document identifies a
business purpose for the miles recorded, and petitioner acknowledged that at least
some, if not much, of the miles driven did not relate to his employment with the
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NYCDOT or his consulting business but rather related to the ASCE seminars and
lectures.
Otherwise, with respect to certain expense deductions not subject to the
strict rules of substantiation of section 274(d), petitioner has failed to establish the
expenses are ordinary and necessary expenses related to his employment with the
NYCDOT.
Accordingly, petitioner is not entitled to deductions for unreimbursed
employee business expenses for 2011 and 2012 in excess of the amounts
respondent has already allowed.
II. Schedule C Deductions
A. Rent or Lease of Other Business Property
Petitioner claimed a $13,472 deduction and a $14,825 deduction for rent or
lease of other business property on Schedules C for 2011 and 2012, respectively.
According to petitioner, the expenses relate to maintenance fees and mortgage
interest paid with respect to apartment 3B. Respondent agrees that petitioner was
engaged in a consulting trade or business during each year in issue, but according
to respondent, petitioner failed to substantiate the amounts claimed or establish
that the expenses were ordinary and necessary trade or business expenses of that
business. As respondent views the matter, it was not “necessary” for petitioner to
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incur the expenses of an office, particularly an office as large as petitioner’s, given
the nature of his consulting business. Furthermore, questions posed to petitioner
during his cross-examination at trial suggest that respondent had a suspicion that
petitioner’s “office” was, in fact, his residence. Circumstances suggest that
respondent’s suspicion might have merit, but in the absence of any direct evidence
supporting that suspicion we are reluctant to make such a finding.
Instead, we accept petitioner’s claim that apartment 3B was used as his
office in connection with his consulting business. Nonetheless, the checks
petitioner provided to substantiate his purported maintenance fees appear instead
to be principal and interest payments made to Park Terrace Manor, Inc., in respect
of a mortgage relating to apartment 3B. The portion of the loan repayments
attributable to principal is not deductible. See Porter v. Commissioner, T.C.
Memo 2015-122. However, the portion relating to interest is deductible as a trade
or business expense under section 162. Sec. 162(a); Robinson v. Commissioner,
119 T.C. 44, 48 (2002); see sec. 163(a) (allowing a deduction for “all interest paid
or accrued within the taxable year on indebtedness”, with certain exceptions).
Accordingly, we find that petitioner is entitled to a $2,049 deduction and a $1,947
deduction for mortgage interest on Schedules C for 2011 and 2012, respectively,
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but is not entitled to any additional deduction for rent or lease of other business
property for either year in issue.
B. Utilities
Petitioner claimed a $4,931 deduction and a $4,407 deduction for utilities
on Schedules C for 2011 and 2012, respectively.7 According to respondent,
petitioner has failed to substantiate the amounts claimed or establish that the
expenses were ordinary and necessary trade or business expenses of his consulting
business.
Petitioner testified that he incurred expenses for utilities during the years in
issue but has presented no substantiating documents for the expenses. Such
expenses, if incurred, should be readily substantiated with copies of bills from the
service providers or copies of checks evidencing payment of those bills.
Petitioner’s generalized testimony on the point provides neither proper support for
the deductions nor any basis for us to estimate the amounts of these expenses that
he might have incurred during the years in issue. See Cohan v. Commissioner, 39
F.2d at 543-544; see also Vanicek v. Commissioner, 85 T.C. at 742-743 (1985).
7
As noted, in the notice respondent disallowed $2,275 of the $4,931
deduction claimed on the Schedule C for utilities for 2011 and the entire deduction
claimed on the Schedule C for utilities for 2012.
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Accordingly, petitioner is not entitled to deductions for utilities in excess of any
amounts respondent already allowed.
C. Meals and Entertainment
Petitioner claimed a $2,138 deduction and a $4,645 deduction for meals and
entertainment expenses on Schedules C for 2011 and 2012, respectively.8
Petitioner did not explain how these meals and entertainment expenses related to
his consulting business. According to respondent, petitioner has not established
that the meals and entertainment expenses satisfy the strict substantiation
requirements of section 274 or shown that they were ordinary and necessary to his
consulting business.
Petitioner provided copies of numerous receipts from restaurants but no
evidence, such as a business purpose, see sec. 274(d), establishing that any of the
expenses were other than personal. See sec. 262(a). These items were not
substantiated as required by section 274(d). Accordingly, petitioner is not entitled
to deductions for meals and entertainment expenses in excess of any amounts
respondent already allowed.
8
As noted, in the notice respondent disallowed $623 of the $2,138 deduction
claimed on the Schedule C for meals and entertainment for 2011 and the entire
deduction claimed on the Schedule C for meals and entertainment for 2012.
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D. Travel
Petitioner claimed a $2,560 deduction and a $2,244 deduction for travel on
Schedules C for 2011 and 2012, respectively.9 Petitioner did not explain how
these travel expenses related to his consulting business. According to respondent,
petitioner has not established that the travel expenses satisfy the strict
substantiation requirements of section 274 or shown that they were ordinary and
necessary to his consulting business.
Among other items, petitioner provided credit card statements evidencing
monthly payments for AAA membership dues and expenses related to the New
York City subway. The substantiation provided establishes that petitioner paid the
amounts claimed as travel expenses, however, petitioner provided no evidence,
such as a business purpose, see sec. 274(d), establishing that any of the expenses
were other than personal. See sec. 262(a). Moreover, petitioner was not required
to, and did not, travel with respect to the consulting services provided to
ModuTank. Accordingly, petitioner is not entitled to deductions for travel
expenses in excess of any amounts respondent already allowed.
9
As noted, in the notice respondent disallowed $1,860 of the $2,560
deduction claimed on the Schedule C for travel for 2011 and the entire deduction
claimed on the Schedule C for travel for 2012.
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III. Student Loan Interest
Petitioner claimed a $210 deduction and a $331 deduction for student loan
interest on his 2011 and 2012 returns, respectively. According to respondent,
petitioner has failed to substantiate the amounts claimed for these deductions.
Section 221(a) provides: “In the case of an individual, there shall be
allowed as a deduction for the taxable year an amount equal to the interest paid by
the taxpayer during the taxable year on any qualified education loan.”
Neither petitioner’s testimony nor any other evidence included in the record
addresses the deductions for student loan interest here in dispute. Petitioner has
failed to establish he is entitled to the deduction for either year. Accordingly,
respondent’s disallowances of those deductions are sustained.
IV. Tuition and Fees
Petitioner claimed a $3,500 deduction for tuition and fees on his 2012
return. According to respondent, in addition to other reasons that support the
disallowance of the deduction, petitioner failed to substantiate the amount
claimed.
Section 222(a) allows a taxpayer to deduct “qualified tuition and related
expenses” paid during the taxable year. “Qualified tuition and related expenses”
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includes tuition and fees paid by a taxpayer on behalf of a dependent. See secs.
25A(f)(1)(A)(iii), 222(d)(1).
Petitioner’s evidence includes receipts showing payments of approximately
$1,500 in tuition and related fees paid with respect to his son, John’s, attendance
at HB Studio. Although less than clear, it appears that John enrolled in several
classes at HB Studio called “Groom Acting with the Camera”. The tuition and
related fees were paid using a MasterCard credit card, however, the holder of the
MasterCard credit card account is not identified. Petitioner did not provide a
MasterCard credit card statement showing that the account was his or that he paid
the relevant charges. Petitioner has not established that he paid the tuition and
fees expenses for which he claimed a deduction. See sec. 6001. Accordingly,
petitioner is not entitled to a deduction for tuition and fees for 2012.
V. AOTC
On Form 8863 attached to petitioner’s 2011 return, petitioner claimed an
AOTC of $2,191 related to John’s education expenses. Respondent disallowed
that credit for a variety of reasons, including lack of substantiation.
The AOTC is a modified version of the Hope Scholarship Credit. Sec.
25A(i). It provides for a credit for qualified tuition and related expenses paid by a
taxpayer for education furnished to an eligible student. The credit is equal to “(A)
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100 percent of so much of the qualified tuition and related expenses paid by the
taxpayer during the taxable year * * * as does not exceed $2,000, plus (B) 25
percent of such expenses so paid as exceeds $2,000 but does not exceed $4,000.”
Sec. 25A(i)(1).
Having found that petitioner failed to establish that he paid the tuition and
fees expenses related to John’s attendance at HB Studio, we find that petitioner is
not entitled to the AOTC here in dispute.
VI. State Income Tax Refund for 2012
Petitioner deducted New York State income tax of $5,506 on his 2011
Federal income tax return. The Form 1099-G indicates that he received a $4,652
State income tax refund in 2012, which was not reported as income on that return.
As a general rule, gross income includes a refund of State income tax in the
year received to the extent that the payment of such tax was claimed as a
deduction in a prior taxable year which resulted in a reduction of Federal income
tax. See sec. 111(a); Kadunc v. Commissioner, T.C. Memo. 1997-92.
According to petitioner, he is not required to include the 2011 State income
tax refund in his 2012 income because the deduction for State income taxes paid
in 2011 did not result in a tax benefit. This is so, according to petitioner, because
he was liable for the alternative minimum tax for 2011. The income tax liability
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shown on petitioner’s 2011 return does include the alternative minimum tax.
However, it would appear that after taking into account the adjustments made in
the notice for 2011 as addressed in this Summary Opinion, petitioner’s liability for
the alternative minimum tax will have been eliminated. Accordingly, petitioner’s
$4,652 State income tax refund is includable in his 2012 income.
VII. Nonbusiness Energy Property Credit for 2012
Petitioner claimed a $160 nonbusiness energy property credit related to
apartment 3B on his 2012 return.
Section 25C provides that “[i]n the case of an individual, there shall be
allowed as a credit against the tax imposed by this chapter for the taxable year an
amount equal to the sum of: (1) 10 percent of the amount paid or incurred by the
taxpayer for qualified energy efficiency improvements installed during such
taxable year; and (2) the amount of the residential energy property expenditures
paid or incurred by the taxpayer during such taxable year.” Section 25C further
provides that “qualified energy efficiency improvements” and “residential energy
property expenditures” must be, as relevant, “installed in or on a dwelling unit”
that is “used by the taxpayer as the taxpayer’s principal residence (within the
meaning of section 121). Sec. 25C(c)(1)(A), (d)(1)(A).
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Although petitioner listed apartment 3B as his “main home” on Form 5695,
he now claims that he never resided there. Because he never resided in apartment
3B, that property can hardly qualify as his principal residence as required by
section 25C. Accordingly, he is not entitled to the nonbusiness energy property
credit claimed on his 2012 return.
VIII. Filing Status
Petitioner claimed head of household filing status on his 2011 and 2012
returns. Petitioner now concedes that he is not entitled to head of household filing
status. In the notice respondent determined that petitioner was entitled to single
filing status for 2012. We see no reason why petitioner’s filing status should be
other than single for the years in issue as respondent determined in the notice with
respect to 2012.
IX. Section 6662(a) Accuracy-Related Penalties
Lastly, we consider whether petitioner is liable for a section 6662(a)
accuracy-related penalty. As relevant here, section 6662(a) imposes a penalty of
20% of the portion of an underpayment of tax attributable to the taxpayer’s:
(1) negligence or disregard of rules or regulations or (2) substantial
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understatement of income tax.10 Sec. 6662(a) and (b)(1) and (2). “Negligence”
includes any failure to make a reasonable attempt to comply with the provisions of
the Code, including any failure to keep adequate books and records or to
substantiate items properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax
Regs.
Petitioner failed to make a reasonable attempt to comply with the provisions
of the Internal Revenue Code or to exercise ordinary and reasonable care in the
preparation of his tax returns. Further, respondent established that petitioner
failed to keep books and records to adequately substantiate his claimed deductions
for both 2011 and 2012. As a result, we find that respondent met his burden of
production with respect to the negligence penalty.
The accuracy-related penalty does not apply to any part of an underpayment
of tax if it is shown that the taxpayer acted with reasonable cause and in good faith
with respect to that portion. Sec. 6664(c)(1). The determination of whether a
taxpayer acted in good faith is made on a case-by-case basis, taking into account
all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner bears the burden of proving that he had reasonable cause and acted in
10
In this case the deficiency, underpayment of tax, and understatement of tax
are all computed in the same manner. See secs. 6211, 6662(d)(2), 6664(a).
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good faith with respect to the underpayment (except for the increased portions of
the accuracy-related penalty raised in the amendment to answer). See Higbee v.
Commissioner, 116 T.C. 438, 449 (2001). Respondent bears the burden of proof
as to the increased portions of the accuracy-related penalty raised in the
amendments to answer. See Rule 142(a)(1).
Petitioner has failed to produce sufficient evidence to substantiate the
majority of the deductions here in dispute. Moreover, many of the deductions
have been disallowed because they relate to personal rather than business
expenses. Petitioner has not shown reasonable cause, substantial authority, or any
other basis for treating any personal expenses as business expenses. Other
adjustments, such as those relating to home mortgage interest and the nonbusiness
energy credit, have been sustained as a result of petitioner’s concession that
apartment 3B was not a residence during the years in issue, even though petitioner
clearly took an alternative position on his returns. Accordingly, respondent’s
imposition of a section 6662(a) accuracy-related penalty for each year in issue is
sustained.
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To reflect the foregoing,
Decision will be entered
under Rule 155.