The opinion
United States Tax Court
T.C. Summary Opinion 2023-30
JOSEPH AMUNDSEN AND ANNA AMUNDSEN,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 7601-19S. Filed October 3, 2023.
—————
Joseph Amundsen, pro se.
Dillon T. Haskell, Thomas A. Deamus, and Mimi M. Wong, for
respondent.
SUMMARY OPINION
CARLUZZO, Chief 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 reviewable by any other court, and this
Opinion shall not be treated as precedent for any other case.
In a notice of deficiency dated March 7, 2019 (notice), respondent
determined a deficiency in petitioners’ 2015 federal income tax and a
section 6662(a) accuracy-related penalty. The issues for decision are
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and
Rule references are to the Tax Court Rules of Practice and Procedure. All monetary
amounts have been rounded to the nearest whole number.
Served 10/03/23
2
whether petitioners 2 are (1) entitled to the cost of goods sold reported on
Schedule C, Profit or Loss From Business, included with their 2015
federal income tax return (return); (2) entitled to any deductions for
trade or business expenses; and (3) liable for a section 6662(a) penalty.
Background
Petitioner is a certified public accountant (CPA) licensed in
California and New York who operates an accounting practice as a sole
proprietor from his house in Pennsylvania, where he lived when the
Petition was filed. As best can be determined from what has been
submitted, much of his accounting practice involved the preparation of
federal income tax returns. 3
Petitioner is a member of the Yale Club in New York City. He
frequently traveled from his residence to the club during the year in
issue. According to petitioner, he met some of his clients there. At the
time petitioner also maintained what he refers to as a “virtual office” in
downtown New York City. Little information has been provided with
respect to that “office” other than a Wall Street address for purposes of
receiving mail and having an “answering service” available. Nothing in
the record suggests that petitioner was required to maintain an office in
New York as a CPA licensed to practice there.
Petitioner prepared the return. The return includes a Schedule
C that shows: (1) $66,976 as “gross receipts”; (2) $69,233 as “cost of goods
sold”; and (3) a negative $2,257 as “gross profit” (which is also shown as
the net loss from business). A detailed computation of the cost of goods
sold is not shown on the return; instead the $69,233 is merely shown as
“other costs.” The cost of goods sold is disallowed in the notice. No
deductions are claimed on the Schedule C. Petitioner now acknowledges
that he improperly included what might otherwise be allowable trade or
2 References to petitioner are to Joseph Amundsen. By Order served January
17, 2023, the case was dismissed for lack of prosecution as to Anna Amundsen; she did
not appear for trial and neither petitioner agreed to stipulate any facts. The decision
to be entered with respect to her will be consistent with the decision to be entered with
respect to Joseph Amundsen that will take into account the resolution of the issues
here under consideration.
3 Contrary to the obligation imposed upon the parties to stipulate uncontested
facts, see Rule 91, petitioners refused to do so. Any gaps in the factual background of
this case, more likely than not, are attributable to their refusal.
3
business expense deductions in the cost of goods sold shown on the
Schedule C.
Discussion
I. Burden of proof
In general, the Commissioner’s determinations set forth in a
notice of deficiency are presumed correct, and the taxpayer bears the
burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Petitioners do not contend, and the record does not
establish, that the burden of proof should shift to respondent under
section 7491(a)(1).
II. Whether petitioners are entitled to the cost of goods sold shown on
the Schedule C
No. Little else really need be said on the point. Petitioners did
not suggest, much less establish, that they may reduce the gross receipts
shown on the Schedule C for any amount attributable to cost of goods
sold.
III. Whether petitioners are entitled to any deductions for trade or
business expenses
As we have observed in countless opinions, deductions are a
matter of legislative grace, and the taxpayer bears the burden of proving
entitlement to any claimed deduction. 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). A taxpayer claiming a deduction on a federal
income tax return must demonstrate that the deduction is allowable
pursuant to a statutory provision and must further substantiate that
the expense to which the deduction relates has been paid or incurred.
§ 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90 (1975), aff’d per
curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer must substantiate
deductions claimed by keeping and producing adequate records that
enable the Commissioner to determine the taxpayer’s correct tax
liability. § 6001; Hradesky, 65 T.C. at 89–90.
Under section 162(a), a deduction is allowed for “ordinary and
necessary expenses paid or incurred . . . in carrying on any trade or
business.” An ordinary expense is one that commonly or frequently
occurs in the taxpayer’s line of business. Deputy v. du Pont, 308 U.S.
488, 495 (1940). A necessary expense is one that is appropriate and
4
helpful in carrying on the taxpayer’s business. Commissioner v.
Heininger, 320 U.S. 467, 471 (1943); Treas. Reg. § 1.162-1(a).
As a general rule, if a taxpayer provides sufficient evidence that
he or she 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, 543–44 (2d Cir. 1930). 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, 742–43 (1985). Moreover, the Court may not estimate
expenses under Cohan in situations where section 274 requires specific
substantiation, such as with respect to travel expenses. See § 274(d);
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), aff’d per curiam, 412
F.2d 201 (2d Cir. 1969); Temp. Treas. Reg. § 1.274-5T(a).
Although they are not identified on the Schedule C, from
petitioner’s presentation at trial it appears that his trade or business
expenses can be divided into office or operating expenses, travel
expenses, and home office expenses. To substantiate these expenses,
petitioners introduced a variety of documents that include bank
statements, credit card account summaries, canceled checks, and a
variety of self-created financial records, such as a general ledger listing
both personal and business expenses.
A. Office or operating expenses
Petitioners claim that petitioner incurred a variety of office or
operating expenses, including advertising, bank charges, dues and
subscriptions, internet expenses, credit card interest, administrative
costs, and tax software expenses. They have given us no specific
amounts for any of these expenses.
Nevertheless, some of these expenses are substantiated in their
financial documents. Petitioners’ bank statements and credit card
statements contain entries for the purchase and use of tax preparation
software petitioner apparently used to file his clients’ returns. They also
contain entries for the licensing costs petitioner incurred to maintain his
CPA licenses.
We find that petitioners have substantiated $5,688 in tax
preparation software expenses, $50 for a payment made to the
California Board of Accountancy, and $500 for a payment made to the
5
Public Company Accounting Oversight Board. Petitioners are entitled
to deduct each of these expenses, which total $6,238.
Beyond these items, the remaining expenses petitioners report
petitioner incurred in his business are unsubstantiated, or if
substantiated, are personal expenses unrelated to petitioner’s business.
The evidence petitioners offered is insufficient for us to estimate, under
Cohan, amounts for these other expenses. See Vanicek, 85 T.C.
at 742–43.
B. Travel expenses
Section 274(d) prescribes more stringent substantiation
requirements to be met before a taxpayer may deduct certain categories
of expenses, including travel expenses, meals and lodging while away
from home, and expenses with respect to listed property as defined in
section 280F(d)(4), which includes passenger automobiles. 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.
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. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-
5T(c)(2). Substantiation by other sufficient evidence requires the
production of corroborative evidence in support of the taxpayer’s
statement specifically detailing the required elements. Temp. Treas.
Reg. § 1.274-5T(c)(3).
Petitioners claim that petitioner incurred various expenses to
travel back and forth between his residence and New York City. These
claimed expenses include meals, automobile expenses, subway tickets,
and bus tickets. With respect to meals, petitioners claim that they
should be entitled to deductions, at least for some days, computed with
reference to the federal per diem rate. See Rev. Proc. 2011-47, § 4.03,
2011-42 I.R.B. 520.
6
As proof of petitioner’s reported travel expenses, petitioners
offered a “tax diary” and a calendar showing appointments and travel
days. While these documents contain to-do lists and lists of
appointments, it is not clear from these entries which were related to
petitioner’s accounting practice. Nor did petitioner’s testimony specify
details with respect to his travel and meals. We find that petitioners
have not satisfied the substantiation requirements of section 274(d) and,
accordingly, that they are not entitled to deduct travel or meal expenses.
C. Home office expenses
A taxpayer is generally not entitled to deduct expenses related to
a dwelling unit used as a residence during the taxable year. § 280A(a).
Section 280A(c)(1) provides an exception for certain business uses of a
dwelling unit, provided that a portion of the dwelling unit is exclusively
used on a regular basis, as relevant, “(A) as the principal place of
business for any trade or business of the taxpayer” or “(B) as a place of
business which is used by patients, clients, or customers in meeting or
dealing with the taxpayer in the normal course of his trade of business.”
§ 280A(c)(1)(A) and (B).
Petitioners argue that petitioner’s home office expenses consist of
mortgage interest, real estate taxes, depreciation, utilities, and
maintenance. They claim that four out of ten rooms in their house were
used exclusively for petitioner’s accounting business—specifically, three
computer rooms and one meeting room. Petitioners multiplied alleged
expenses with respect to the use of their house by 40% to arrive at the
deduction they now seek for home office expenses.
Other than petitioner’s inconsistent testimony on the point, the
only evidence petitioners offered for the business use of their home was
a drawing of the floorplan identifying a “conference room,” “accounting
room,” “tax room,” and “staff room.” Petitioner’s testimony was general
and did not provide sufficient information explaining the different
functions of these rooms nor their need and use in his business. We find
that petitioners have failed to satisfy section 280A(c), and they are not
entitled to a deduction for the business use of their residence.
IV. Accuracy-related penalty
Section 6662(a) imposes a penalty equal to 20% of the portion of
an underpayment of tax attributable to a substantial understatement of
income tax. § 6662(a), (b)(2). A “substantial understatement” includes
an understatement of income tax that exceeds the greater of 10% of the
7
tax required to be shown on the return or $5,000. See § 6662(d)(1)(A);
Treas. Reg. § 1.6662-4(b).
The Commissioner bears the burden of production with respect to
a penalty imposed by section 6662(a) and is required to present
sufficient evidence showing that the penalty is appropriate. See
§ 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001). This
includes showing compliance with the procedural requirements of
section 6751(b)(1). See § 7491(c); Graev v. Commissioner, 149 T.C. 485,
493 (2017), supplementing and overruling in part 147 T.C. 460 (2016).
Section 6751(b)(1) provides that no penalty shall be assessed
unless “the initial determination” of such assessment was “personally
approved (in writing) by the immediate supervisor of the individual
making such determination.” The record shows that the initial penalty
determination for 2015 was made by respondent’s revenue agent on
November 14, 2018, and approved in writing by her immediate
supervisor on the same day. We find that respondent complied with all
procedural requirements in asserting an accuracy-related penalty under
section 6662(a) for 2015.
Petitioners’ understatement of income tax likely exceeds the
greater of 10% of the amount of tax required to be shown on their joint
2015 return or $5,000. See § 6662(d)(1)(A). Assuming that it does, we
find that respondent has met his burden of production to show that
petitioners’ understatement of income tax for 2015 was “substantial.”
A taxpayer may avoid a section 6662(a) penalty by showing that
there was reasonable cause for the underpayment and that the taxpayer
acted in good faith. § 6664(c)(1); Higbee, 116 T.C. at 448. The
determination of whether a taxpayer acted with reasonable cause and
in good faith is made on a case-by-case basis, taking into account all
pertinent facts and circumstances, including the taxpayer’s efforts to
assess the proper tax liability and the taxpayer’s knowledge, experience,
and education. Treas. Reg. § 1.6664-4(b)(1).
Petitioners have presented inadequate substantiation for many of
the trade or business expenses they now claim. Worse, they treated
otherwise ordinary and necessary business expenses as components
includible in cost of goods sold while engaged in a trade or business that
did not require accounting for inventories. Petitioners offered no
reasonable explanation for doing so. As a CPA who prepared the return,
petitioner should have known better. Accordingly, to the extent Rule
8
155 computations show there is a substantial understatement of income
tax, we sustain respondent’s imposition of a section 6662(a) penalty.
To reflect the foregoing,
Decision will be entered under Rule 155.