Nwabasili v. Comm'r
2016 Tax Ct. Memo LEXIS 217
Tax Ct.2016Background
- Petitioner Chinweike Nwabasili worked for wages and, with his brother, operated two businesses in 2011: event promotion (concerts) and exporting used cars to Nigeria.
- Nwabasili filed a single Schedule C reporting $6,350 receipts and $56,252 in business expenses. The IRS disallowed deductions in three Schedule C categories: travel, meals and entertainment, and other expenses.
- At trial Nwabasili identified $25,336 of specific payments (concert fees, venue rent, airfare, meals, hotels, car purchases, shipping, internet/cell service) he alleged were business expenses he (or his brother) paid.
- The Court found the payments were in fact made by either Nwabasili or his brother and that the brothers operated the two businesses as a partnership.
- Because the businesses were partnerships, partnership expenses are deductible by the partnership and flow through to partners only after computing partnership income/loss and each partner’s outside basis. Nwabasili failed to prove the partnership’s gross income, overall deductions, or his adjusted basis.
- The Court sustained the IRS disallowance of the disputed Schedule C deductions and upheld a section 6662 accuracy-related penalty for negligence (no reasonable cause/good faith shown).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether disputed payments are deductible on Nwabasili's Schedule C | Payments were business expenses paid by Nwabasili (or reimbursed to brother) and thus deductible | Payments either were not paid by Nwabasili personally or were partnership expenses that must be claimed by partnership | Disallowed on Nwabasili’s Schedule C because expenses were partnership expenses and petitioner failed to prove partnership income/deductions or his basis, so he cannot deduct them under §704(d) |
| Whether Nwabasili and his brother formed a partnership | Nwabasili testified they agreed to share income/expenses and jointly operated businesses | IRS argued each brother ran his own business and petitioner must prove the expenses relate to his business | Court found the brothers did form partnerships for both businesses (intent, sharing of tasks and profits) |
| Burden of proof for disputed facts (payments and substantiation) | Nwabasili attempted to show payments via bank withdrawals and receipts; argued reimbursements occurred | IRS challenged reliability of receipts and argued petitioner did not meet substantiation/recordkeeping | Burden remained with petitioner; Court found receipts and testimony showed payments occurred but petitioner still failed to carry overall burden to claim partnership loss on his return |
| Penalty under I.R.C. §6662(a) for 2011 | Nwabasili did not explicitly assert reasonable cause or good faith | IRS asserted negligence and possible substantial understatement | Court imposed the 20% accuracy-related penalty for negligence; taxpayer failed to prove reasonable cause or good faith (amount of understatement to be computed under Rule 155) |
Key Cases Cited
- Commissioner v. Tower, 327 U.S. 280 (finding partnership exists when persons join money, labor or skill with community of interest in profits and losses)
- Welch v. Helvering, 290 U.S. 111 (taxpayer bears burden of proof absent statutory allocation)
- Ayrton Metal Co. v. Commissioner, 299 F.2d 741 (partnership existence not dependent on filing of partnership return)
- Klein v. Commissioner, 25 T.C. 1045 (partner may not deduct partnership expenses directly; partnership must account for them)
- Higbee v. Commissioner, 116 T.C. 438 (burden-shifting rules and taxpayer’s burden to prove reasonable cause for penalties)