T.C. Summary Opinion 2015-54

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UNITED STATES TAX COURT

DAVID WILLIAM LAUDON, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27380-11S.

Filed September 8, 2015.

David William Laudon, pro se.

Christina L. Cook and John Schmittdiel, for respondent.

SUMMARY OPINION

HOLMES, Judge: David Laudon is a chiropractor licensed in Minnesota.

He made nearly $290,000 in bank deposits from 2007 to 2009 yet reported only a

bit less than $210,000 in gross receipts on his returns. He deducted as business

expenses for his chiropractic home office a Microsoft Xbox 360, Nintendo Wii,

and numerous pieces of hair-salon equipment. He also claimed deductions for

SERVED SEP - 8 2015

-2driving tens of thousands of miles throughout Minnesota and the Dakotas--both to

treat patients and to perform an assortment of other services. The Commissioner

thought thishas a stretch and urges us to support his adjustments.¹

Background

Laudon owns and operates a rather unconventional chiropractic business in

Detroit Lakes, Minnesota. He treats some of his patients in his home and claims to

use roughly half of his house--the basement and half of the garage--for business.

Like many chiropractic offices, Laudon's has beds, tables, and a waiting area. But

unlike most,|his also comes equipped with a Wii, Xbox 360, big-screen TVs and,

for a time, a!working hair salon.

Laudon testified that he also makes "house calls" and reported that he

racked up between 40,000 and 60,000 miles per year in his business vehicles. He

said that his patients often called him a psychiatrist, chauffeur, physician, peace

officer, or even a pheasant hunter 2 Some of Laudon's stated reasons for making

¹ We iried this small case in St. Paul under Internal Revenue Code section

7463(f). (All section citations are to the Code in effect for the years in issue, and

all Rule refeirences are to the Tax Court Rules of Practice and Procedure.) Trial as

a small case means that this decision isn't reviewable by any other court, and this

opinion shouldn't be cited as precedent.

2 But hot a ghostbuster. The Commissioner rhetorically asserted that some

of Laudon'sjtrips might have made more sense if he was claiming to be a

(continued...)

-3 -

these trips strain credibility: for example, driving to a "schizophrenic" patient who

was--on more than one occasion--"running scared of demons" down a rural

Minnesota highway, or driving to a patient's home in a Minneapolis suburb-expensing 261 miles--because he had received a call from police that she had

overdosed on OxyContin prescribed by her physician. Laudon claimed to have

driven hundreds of miles per day--sometimes without a valid license--to see

patients, but several of these trips were for medical procedures he was not licensed

to perform. Even his testimony about multiple entries in the logs where he wrote

"DUI" was not credible: He claimed that these were not references to being

stopped by police while under the influence, or driving while his license was

suspended, but instead were his misspellings of a patient named "Dewey"--a

supposed patient of his. He testified that he took one business trip to pick up a

patient left stranded due to a domestic dispute with his girlfriend. And he even

testified about trips he made to test his patients' urine:

2(...continued)

ghostbuster. Laudon then disclaimed any employment as a ghostbuster. In his

reply brief the Commissioner conceded that Laudon was not "employed or under

contract to perform work as a ghostbuster during the tax years at issue in this

case." We therefore need make no finding on the existence of a market for

"supernatural elimination" in west-central Minnesota. See "Ghostbusters"

(Columbia Pictures 1984).

Absolutely we do * * * [test urine]. It's part of the--I believe it's

Federal, you know, that they have--we have to abide by that. It's

specific gravity. You're basically, looking for sugar, let alone height,

weight, blood pressure. Make sure they're not drunk, doing illegal

drugs.

We firid Laudon not credible in his testimony regarding his business

mileage, and this finding affects our views of his testimony's credibility on every

other issue in the case.

These other issues arise from his unusual returns that reported no net

income:S

Year

Gross Receipts

Expenses

Taxable Income

2007

$59,056

$111,250

$(60,944)

2008

67,068

71,005

(65,081)

2009

33,952 .

56,313

(84,393)

Laudon did, however, make unexplained deposits into his bank accounts. The

Commissioner analyzed these accounts and discovered that Laudon had put nearly

$80,000 more into them than he'd reported on his tax returns. The Commissioner

3 The sross receipts and expenses come from Laudon's Schedules C, which

constitute th biggest part of his returns. He combined his Schedule C losses with

other items--Schedule A itemized deductions or the standard deduction depending

on the year, his personal exemption, and large "other income" items that were

carried-forward losses--to arrive at his taxable income.

-5added this amount to Laudon's income and disallowed many deductions. The

notice of deficiency determined:

Year

Gross Receipts

Expenses

Taxable Income

2007

$71,056

$11,319

$46,766

2008

105,997

28,780

62,812

2009

62,014

23,290

26,138

Laudon filed a timely petition, and we tried his case in St. Paul. Laudon

remains a Minnesota resident, as he was when he began his case.

Discussion

Income

We first ask whether Laudon underreported his income. Laudon did not

keep records of his income in any decipherable form; and when this happens the

Commissioner may reconstruct a taxpayer's income by using any rational method

that separates taxable income from nontaxable income and expenses. A bankdeposits analysis is an acceptable method. See, e.g., Caulfield v. Commissioner,

33 F.3d 991, 993 (8th Cir. 1994), aff'g T.C. Memo. 1993-423.

For us to accept his bank-deposits analysis, the Commissioner must show

that Laudon operated an income-producing business for the tax years at issue, and

made regular deposits into this business's bank accounts. He may then compute

-6net taxable ihcome by distinguishing taxable deposits from deposits of nontaxable

income and income from years not at issue. See United States v. Abodeely, 801

F.2d 1020, 1023 (8th Cir. 1986). Using this long-accepted method, the

Commissioner determined that Laudon had made net taxable deposits for the tax

years before|us:4

Yeg

Total Deposits

Reported and

non-taxable

income

Total unreported

taxable income

2007

$99,578

$87,578

$12,000

2008

113,448

74,519

38,929

2009

74,862

46,800

28,062

Total

287,888

208,897

78,991

Because the Commissioner used an acceptable method of income

reconstruction, Laudon has the burden of proving that the Commissioner made

some mistak¢. See Caulfield, 33 F.3d at 993; Dodge v. Commissioner, 981 F.2d

350, 354 (8th Cir. 1992), a_fff'g 96 T.C. 172 (1991). Laudon contends that the

Commissioner failed to classify certain deposits as nontaxable, including

insurance papments for damage to several vehicles, one of which was involved in

a "high speegl police chase" with a man "high on meth and cocaine." He also

4 The Commissioner did concede that one $900 deposit shouldn't be

included in the bank-deposits analysis due to a bank error.

-7claims he had proceeds from car sales gone awry, the sale of scuba equipment,

compensation for lost luggage, and payments from Best Buy and FedEx for

damage to his laptop computer on two different occasions. And he claims that

"Wells Fargo lost [a] cash deposit" of $6,000 or maybe $7,850.

But because he didn't produce any evidence verifying that these amounts

were deposited into the relevant accounts, Laudon hasn't met his burden of proof.

Cf. Caulfield, 33 F.3d at 993-94. The Commissioner calculated Laudon's income

by adding the deposits in his personal accounts and business account for each of

the years at issue. He then reduced the total by Laudon's reported income and by

any deposits identified as nontaxable. We therefore accept the Commissioner's

reconstruction of Laudon's income.

Deductions

We next look at Laudon's deductions. The Commissioner allowed very few

of them:

Schedule C expenses

Year

Amount reported

on return

Amount allowed

by exam

Adjustment

2007

$111,250

$11,319

$99,931

2008

71,005

28,780

42,225

2009

. 56,313

23,290

33,023

Total

238,568

63,389

175,179

The Commissioner's reason was simple: Like any taxpayer, Laudon can claim

business-expense deductions only for the ordinary and necessary expenses of his

business, see sec. 162(a), and he bears the burden of proof, see Rule 142(a);

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers usually

meet this burden with records of some kind. See sec. 6001; Hradesky v.

Commissioner, 65 T.C. 87, 89-90 (1975); sec. 1.6001-1(a)-(e), Income Tax Regs.

And for some kinds of expenses, those records must be particularly detailed. See

sec. 274(d).

Car and Truck Expenses

We look first at the very large deductions that Laudon claimed for his travel

throughout and between the Dakotas and Minnesota. The Commissioner objected

to all of thess on the ground that Laudon's records didn't substantiate them:

Car and truck expenses

Amount reported

on return

Amount allowed

by exam

Adjustment

2007

$30,645

2008

24,899

2009¡

23,741

_9_

Laudon's problem is that car-and-truck expenses are governed by section

274(d), which requires his records to show (1) the amount of each expense, (2) the

dates that he drove for business purposes, (3) where he was going, and (4) his

business reason for going there. See sec. 274(d).

Laudon had a mileage log, but it fails to meet section 274(d)'s standards.

The July 31, 2007 entry, for example, describes his purpose as "[t]ravel to and

from places." Even Laudon conceded that his log was "not a complete itemized

thing." We find this log to be both incomplete and incomprehensible and disallow

Laudon's mileage deductions in full.

Home Office Expenses

Laudon also took deductions for using his basement and garage as a home

office in 2007 and 2009:

Business use of home expense

Year

Amount reported

on return

Amount allowed

by exam

Adjustment

2007

$5,235

2009

$1,787

Section 280A(c)(1) allows a taxpayer to claim a deduction for the portion of his

home allocated for business use. A taxpayer claiming a deduction under this

section must, however, show that he used the portion of his home exclusively for

- 10business. IA; Langer v. Commissioner, 980 F.2d 1198, 1199 (8th Cir. 1992), aff'g

T.C. Memo. 1990-268.

While we accept that Laudon treated patients in his home at least some of

the time, we don't find credible his testimony that his basement was used

exclusively for his business. We particularly disbelieve his claim that the Xbox,

Wii, big-scréen TVs, and other electronics in his basement were used exclusively

for chiropractic purposes since this claim conflicts with his much more plausible

admission to the IRS examiner during audit that his daughter and his girlfriend's

son would play these video games while he was on the phone.5 Laudon also

admitted that he used his garage to store the cars that he used personally. This is

an entirely plausible use of a garage, but it means we won't find that he used the

garage exclusively for business purposes. We also deny these deductions because

5 Laudon further undermined his credibility by claiming that he used the Wii

and Xbox 3d0 to keep his patients "active and moving." These are well-known

games whose features are not subject to reasonable dispute and are "generally

known withih the trial court's territorial jurisdiction.'' Fed. R. Evid. 201(b)(1).

One can imagine the Wii--with games such as Wii Bowling and Wii Fit that

feature motion-based controllers requiring physical activity from its users--might

be used for its physical benefits. But no reasonable person could think that the

Xbox 360 could be--Microsoft didn't introduce the Kinect until late 2010, just in

time for Chr stmas and before the years at issue in this case. Before Kinect, Xbox

playing was more of the vegging-out-on-the-couch variety.

- 11 Laudon failed to substantiate his claimed home-office expenses with any records

or other documentation.

Insurance, Repairs, Utilities, Office Expenses, and Wages Expenses

We'll dispose of some other contested deductions on Laudon's returns:

Insurance, repairs, utilities, office expenses, and wages

Year

Expense