1989 Tax Ct. Memo LEXIS 146 | Tax Ct. | 1989
MEMORANDUM FINDINGS OF FACT AND OPINION
WRIGHT,
The issues for decision are: (1) whether certain business expenses claimed by petitioner were ordinary and necessary expenses under
1989 Tax Ct. Memo LEXIS 146">*150 FINDINGS OF FACT
Some of the facts of this case have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
Petitioner resided in Hollywood, California, at the time he filed his petition. Petitioner filed his Federal income tax return using the cash receipts and disbursements method of accounting for the year in issue. During 1981, petitioner worked full-time as a plumber for Air Conditioning Company, Inc. (ACCO). Petitioner was also engaged part-time in a "rooter service" activity during weekends and evenings. During 1981, petitioner worked a total of 73 hours in his rooter service and earned gross receipts of $ 1,457. Petitioner used his 1979 Chevrolet van (the Chevrolet van) for his rooter service until the van was stolen on August 6, 1981. Petitioner received insurance reimbursement for the stolen Chevrolet van in the amount of $ 5,839. On August 17, 1981, petitioner purchased a 1979 Dodge van (the Dodge van) to replace the stolen Chevrolet van. The purchase price was $ 4,330 for the Dodge van plus sales tax of $ 259.80 for a total price of $ 4,589.80. Petitioner made a cash1989 Tax Ct. Memo LEXIS 146">*151 downpayment of $ 1,092.80 and financed the remaining $ 3,497 over 30 months at an annual interest rate of 21.40 percent. Petitioner also used his Dodge van for his rooter service. During 1981, petitioner used his Chevrolet and Dodge vans to travel 1,383 miles for his rooter service. Petitioner also used his vans in his employment with ACCO. He carried tools and materials to and from job sites for ACCO and traveled between sites in his capacity as foreman. ACCO reimbursed petitioner for the mileage he incurred in the course of his employment.
In 1975, petitioner purchased rental property located at 11738, 11738-1/4, 11738-1/2, and 11740 Runnymede Street, North Hollywood, California (the Runnymede property). The Runnymede property consisted of 4 units -- 2 three-bedroom units and 2 one-bedroom units. During 1981, petitioner occupied one of the three-bedroom units, 11738 Runnymede. Petitioner rented 11738-1/4 Runnymede to Theodore Laferet during 1981. During the year in issue, petitioner rented 11740 Runnymede to Megeal Angel Romero until approximately June 9, 1981. Petitioner's unit at 11740 Runnymede was unoccupied for the remainder of 1981. Petitioner's property located1989 Tax Ct. Memo LEXIS 146">*152 at 11738-1/2 Runnymede was unoccupied for the entire year 1981.
On his 1979 income tax return, petitioner claimed an investment tax credit in the amount of $ 1,240 with respect to his purchase of the Chevrolet van. Petitioner's 1979 income tax return was examined by the Internal Revenue Service (the Service) in 1981. After the audit, petitioner was only allowed a credit of $ 739 for the Chevrolet van.
On his 1981 income tax return, petitioner reported gross receipts of $ 1,457 less total deductions of $ 7,624 for a net loss of $ 6,167 on a Schedule C for his rooter service. Petitioner's deductions were as follows:
Vehicle expenses | $ 2,549 |
Depreciation | 1,078 |
Insurance | 1,340 |
Interest | 257 |
Taxes | 400 |
Telephone | 200 |
Tools | 1,800 |
$ 7,624 |
In his notice of deficiency, respondent disallowed $ 6,922 of these claimed expenses.
Petitioner also claimed a $ 3,675 theft loss for his stolen Chevrolet van and personal property that he claimed was in the van. In computing the loss, petitioner reported an insurance reimbursement of $ 5,100. Respondent determined that petitioner was only entitled to a theft loss of $ 3,071. Petitioner claimed an investment tax1989 Tax Ct. Memo LEXIS 146">*153 credit of $ 425 for the 1981 purchase of the Dodge van. Respondent disallowed petitioner's claimed investment tax credit. In addition, respondent determined that petitioner must recapture the $ 1,240 investment tax credit claimed on his 1979 income tax return.
On Schedule E of his 1981 income tax return, petitioner reported gross rental income of $ 3,386 less depreciation of $ 2,211 and total other expenses of $ 10,818 for a net rental loss of $ 9,643. The claimed expenses, some of which reflected an adjustment for 25 percent personal usage, were as follows:
Taxes | $ 504 |
Insurance | 338 |
Interest | 1,157 |
Cleaning and hauling | 61 |
Repairs | 5,130 |
Replacements | 3,200 |
Utilities | 428 |
$ 10,818 |
The replacements expense of $ 3,200 reflected cash payments purportedly made to James Patrick Clausman, petitioner's 16-year-old son. Respondent disallowed $ 9,399 of petitioner's claimed rental expenses.
Through discussions with his certified public accountant, petitioner was aware of the requirement of keeping adequate books and records for tax purposes. Other than canceled checks supporting some of his claimed expenditures, petitioner did not maintain any books, 1989 Tax Ct. Memo LEXIS 146">*154 diaries or other records detailing or otherwise explaining the nature, character or purpose of the amounts paid or claimed to have been paid during 1981.
OPINION
The first issue for our consideration is whether petitioner was entitled to deduct the amounts claimed for his rooter service activity.
Petitioner argues that the canceled checks introduced into evidence, as corroborated and supplemented by his testimony, 1989 Tax Ct. Memo LEXIS 146">*155 satisfy the requirements of
Respondent's determinations are presumed correct, and accordingly, petitioner bears the burden of proof on the issues before us.
Petitioner initially argues that respondent has placed in issue the adequacy of petitioner's records under section 6001. Petitioner maintains that in several audits prior to 1981 the Service accepted petitioner's canceled1989 Tax Ct. Memo LEXIS 146">*156 checks as an adequate method of keeping records. Petitioner maintains that this acceptance of his method as adequate precludes respondent from now challenging the adequacy of petitioner's method without timely notice. Petitioner's argument does not, however, address the issues before the Court. Respondent does not seek to invoke his administrative power under section 6001 to require upon notice that petitioner keep certain records. Rather, respondent's disallowance is based upon petitioner's lack of proof showing an entitlement to deduction under
Petitioner testified at trial that it was his practice to write checks for the expenses of his rooter service activity and mark "JC Enterprises" on the memo1989 Tax Ct. Memo LEXIS 146">*158 line of the check. Petitioner further testified that all of the checks introduced into evidence in support of his claimed business expenses were for the operation of his rooter business. Petitioner introduced canceled checks to support some of his claimed expenses. Other than the canceled checks and purchase contract for the Dodge van introduced into evidence, petitioner produced no invoices or sales receipts to support the business purpose of his claimed expenditures. Petitioner's case at trial consisted of his testimony regarding the nature of each individual canceled check. Accordingly, we shall discuss the disallowed expenses separately.
We first address petitioner's claimed vehicle expense. Expenses deductible under
Because the evidence indicates at least two uses of petitioner's vans -- for his rooter business and his employment1989 Tax Ct. Memo LEXIS 146">*160 with ACCO -- we will discuss the deductibility of the respective vehicle expenses separately. With respect to his rooter business, petitioner has only proved that he used his vans for 1,383 miles. The evidence before us indicates additional usage which precludes us from allowing petitioner 100 percent of his claimed expenditures as an ordinary and necessary business expense of his rooter business. This Court does have some discretion to estimate local automobile transportation expenses, weighing heavily against the taxpayer whose inexactitude is of his own making. 2 Petitioner has not, however, introduced evidence of the number of miles driven for ACCO or the total miles he drove in 1981. Nor has he introduced any evidence from which we can estimate the percentage of business use for the vans. Accordingly, we are unable to arrive at a deductible amount greater than the amount already allowed by respondent in his notice of deficiency. 3
1989 Tax Ct. Memo LEXIS 146">*161 We next address petitioner's argument that his use of his vans in his employment with ACCO entitles him to a deduction for the costs of maintaining the vans. The deduction under
We next address the deductibility of the automobile insurance expense claimed by petitioner. Insurance premiums paid in connection with a trade or business are deductible under
We agree with respondent. The deductibility of petitioner's insurance expense depends upon the extent the insured vehicles were used in a trade or business. In our previous discussion on vehicle expense we held that petitioner did not establish what part of the usage of his vehicles was for his trade or business. Accordingly, petitioner failed to meet his burden of proving the incorrectness of respondent's determination.
The next issue before us involves petitioner's claimed interest expense associated with the purchase of the Dodge van.
The issue before us is whether interest was paid on indebtedness. At trial, petitioner introduced into evidence a copy of the sales contract for the Dodge van he purchased in 1981. Although the contract bears an interest rate of 21.40 percent and provides for monthly payments, petitioner introduced no evidence that the monthly payments were actually made. This evidence merely proves the existence of indebtedness, which is only one of the elements required under
We now address petitioner's claimed deductions for taxes.
The contract introduced into evidence does reflect that petitioner was charged $ 259.80 in sales tax for the purchase of the Chevrolet van. The total contract price of the van included the sales tax. The contract further shows that petitioner made a downpayment of $ 1,092.80. Petitioner testified that he understood that part of the downpayment was to cover the sales tax. Assuming, arguendo, that petitioner's downpayment did not cover the sales tax, petitioner would still be entitled to a deduction for the sales tax because it was paid with funds borrowed from a third party.
We next1989 Tax Ct. Memo LEXIS 146">*166 address petitioner's claimed deduction for the tools used in his rooter business.
It is common knowledge that plumbers break, wear out, lose or leave behind, many1989 Tax Ct. Memo LEXIS 146">*167 tools on a frequent basis resulting in a useful life of less than one year. Therefore, the small plumber's tools would not be tangible property of a character subject to the allowance for depreciation used in a trade or business.
In his notice of deficiency respondent allowed petitioner an expenditure for tools of $ 900. Respondent further maintains that petitioner is not entitled to currently deduct the amount expended for tools, but rather must recover his cost through depreciation. In his notice of deficiency, respondent allowed petitioner a deduction under section 168(b) of $ 225 ($ 900 X 25 percent).
At trial, petitioner produced canceled checks totaling $ 382.21 that he testified were expenditures for tools. Petitioner also testified that he purchased tools from a plumber going out of business for $ 1,000 in cash. Petitioner further testified that he had no receipt for the tools and could only remember that he thought the seller's name was Dan. Petitioner also testified that he expended the remaining amount of claimed expenditures for tools at various cash sales. We do not find petitioner's testimony credible and hold that petitioner has not proved expenditures in excess1989 Tax Ct. Memo LEXIS 146">*168 of the $ 900 allowed by respondent. Petitioner offers no legal authority why his expenses for plumber's tools should be deductible. Petitioner's conclusory statement in his brief regarding the "common knowledge" that plumber's tools have a useful life of less than one year is wholly unsupported and bears no evidentiary weight.
We now address the final deduction claimed by petitioner for his rooter service.
The next issue before us relates to petitioner's claimed deductions for repairs to the Runnymede property that was held for rental.
A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was acquired. * * * [
Petitioner argues that his claimed deduction was for repairs that were ordinary and necessary rental expenses. Petitioner further maintains that the claimed expenses did not extend the life of the Runnymede property, increase its value, or change the character of the property and thus were properly deductible as repairs rather than nondeductible capital expenditures. 4 Respondent argues that petitioner has failed to prove that the claimed expenditures were for repairs rather than nondeductible capital expenditures.1989 Tax Ct. Memo LEXIS 146">*171 Respondent also argues that when petitioner's claimed repairs for 1981 are considered with those claimed in 1980 a plan of capital improvement is shown.
Petitioner has produced canceled checks in support of his claimed deduction of $ 5,130. Petitioner testified that these expenditures were for repair and replacement of broken and worn parts of the property. Included in these checks was a check payable to Timberline Lodge in the amount of $ 47.70. Petitioner testified that this expenditure was incurred in a trip to Timberline to investigate the possibility of investing in rental property and perhaps moving his rooter business. Petitioner also testified that the two checks payable to Sight & Sound totaling $ 433.52 were for the purchase of a television set that he offered to rent to his tenants, as an incentive for them to choose his apartments over others in the area. Petitioner further testified that a check payable to Linda Foltz in the amount of $ 350 was for furniture1989 Tax Ct. Memo LEXIS 146">*172 for the rental property. With regard to some of the other expenditures, petitioner testified that they were for various building supplies, either wood, electrical, or plumbing. Petitioner admitted that these expenditures could be for "any number of things."
We hold that petitioner has failed to prove that the claimed expenditures were ordinary and necessary for the maintenance or repair of his rental property. 5 Petitioner's testimony reveals numerous claimed expenditures that are wholly inappropriate as deductible repairs: the trip to Timberline, the television set, and the furniture. Moreover, petitioner's vague uncorroborated testimony as to the general repair nature of his claimed deductions is not persuasive. Accordingly, we hold for respondent on this issue.
Petitioner maintains that he paid his 16-year-old son $ 3,2001989 Tax Ct. Memo LEXIS 146">*173 in cash for work performed on the rental property. Respondent argues that petitioner has failed to prove payment of the amount. Petitioner testified that he paid his son in cash rather than writing him checks because of the difficulty his son would have in cashing the check. Petitioner also testified that he determined the amount to pay weekly based on a large wall calendar that reflected the hours worked. Petitioner failed, however, to introduce any evidence whatsoever supporting this claim and instead introduced a summary of his monthly payments to his son.
We hold that petitioner has failed to prove the deductibility of any of the amount at issue. Petitioner's testimony is not credible, and we give no weight to the summary purporting to represent the amounts paid.
The final rental activity issue relates to the allocation of rental expenses to reflect petitioner's use of part of the Runnymede property as a personal residence. The rental expenses at issue are: taxes, insurance, interest, utilities, and depreciation. 61989 Tax Ct. Memo LEXIS 146">*174
In support of his argument, petitioner testified that he occupied 25 percent1989 Tax Ct. Memo LEXIS 146">*175 of the rental property.7 However, petitioner contradicted this testimony by also testifying that he resided in a three-bedroom, two-bath unit with separate garage, which was larger than the 2 one-bedroom units, and presumably of equal size to the other three-bedroom unit. This testimony suggests petitioner's usage to be something greater than 25 percent. Moreover, petitioner did not introduce plans, blueprints, or any other evidence from which we could determine the proper allocation. Petitioner's failure to produce evidence within his possession "which, if true, would be favorable to him, gives rise to the presumption that if produced it would be unfavorable."
1989 Tax Ct. Memo LEXIS 146">*176
The next issue before us is petitioner's claimed loss from the theft of his Chevrolet van and personal property he claimed was in the van.
At trial petitioner testified that he made a list of the tools stolen. The list, however, was not introduced into evidence. 8 Furthermore, no police report or insurance claim was introduced into evidence. The only evidence of the claimed loss is petitioner's testimony of the items purportedly stolen and that the replacement value of the stolen tools was approximately $ 4,000. Without corroborating evidence, we decline to accept this self-serving statement.
We now address whether petitioner was entitled to the investment credit of $ 425 he claimed for the purchase of the Dodge van.
The final issue before us involves the proper amount of investment tax credit recapture on petitioner's stolen Chevrolet van. 1989 Tax Ct. Memo LEXIS 146">*179
Respondent offers no other argument why petitioner must recapture the amount initially claimed rather than the credit eventually allowed after the audit of the 1979 return. Indeed, the increase in tax for recapture is "* * * an amount equal to the aggregate decrease in the credits
1989 Tax Ct. Memo LEXIS 146">*182 In light of the foregoing,
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. We note that in his brief, petitioner argues that once he furnishes "general" proof of expenditure, we should make an allowance for an amount we "conscientiously" feel is ordinary and necessary in the circumstances of petitioner's business. In support of this argument, petitioner cites
(2d Cir. 1970), a case which we further note does not remotely support such a proposition. Accordingly, we shall follow the well-settled principle ofRegal, Inc. v. Commissioner, 435 F.2d 922">435 F.2d 922 (2d Cir. 1930), for determining whether petitioner is entitled to a reasonable estimate.Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540↩3. Respondent allowed petitioner a deduction in the amount of $ 277 representing 1,383 miles at $ .20 per mile.↩
4. In his argument petitioner again resorts to a discussion of the adequacy of his books and records. As we have previously explained, this issue is not before the Court and we will not address it further.↩
5. In the event that we disallow his claimed deduction, petitioner urges us to allow him a partial deduction under the auspices of
As with petitioner's claimed vehicle expenses, we are unable to reasonably estimate a deduction after taking petitioner's inexactitude into consideration.Cohan v. Commissioner, supra.↩ 6. In his brief, petitioner challenges respondent's determination of depreciation. In his notice of deficiency, respondent determined petitioner's allowance for depreciation by applying the rental percentage (60 percent) to the depreciation claimed by petitioner ($ 2,211). Petitioner asserts that his claimed depreciation already reflected an adjustment for 25 percent personal usage. Such adjustment, however, is not apparent on the supplemental schedule for petitioner's 1981 return, which only states his depreciable basis. Petitioner's unsupported assertions in his brief are not evidence.
Rule 143(b)↩ . Without proof of petitioner's initial cost basis, we are unable to further address this issue.7. At trial, petitioner argued that the 25 percent allocation was from a prior examination by the Service. He apparently has abandoned this argument in his brief.↩
8. In his brief, petitioner appears to argue that his showing the list to respondent throughout the administrative levels of examination of review is proof of the loss. This argument is meritless.
Rule 143(b)↩ .9.
Fed. R. Evid. 408 provides in part that:Evidence of (1) furnishing or offering or promising to furnish, or (2) accepting or offering or promising to accept, a valuable consideration in compromising or attempting to compromise a claim which was disputed as to either validity or amount, is not admissible to prove liability for or invalidity of the claim or its amount. * * * This rule does not require the exclusion of any evidence otherwise discoverable merely because it is presented in the course of compromise negotiations. * * *.↩
10. We note that
sec. 47(a)(5)(D) , added by section 211(g) of Pub. L. 97-34, 95 Stat. 172, apparently resolves this issue for property placed in service after December 31, 1980, by providing that the recapture tax shall be applied only to the extent that the credit allowed undersection 38 reduced tax liability. Because petitioner's Chevrolet van was placed in service in 1979,section 47(a)(5)(D)↩ is inapplicable. Section 211(i)(1), Pub. L. 97-34.11. In a revenue ruling involving recapture the Service reasoned that:
Section 47(a) of the Code is designedto place the taxpayer in the same position at the close of the recapture year as he would have been in had he claimed the actual life of the "section 38 property" disposed initially in computing the amount of investment credit earned in the credit year.Rev. Rul. 72-221, 1 C.B. 15">1972-1 C.B. 15↩ , 16 (emphasis added).