1997 Tax Ct. Memo LEXIS 641 | Tax Ct. | 1997
Decision will be entered under Rule 155.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARR, JUDGE: Respondent determined deficiencies in, and additions to, petitioner's Federal income taxes as follows:
Additions to Tax | |||
Year | Deficiency | Sec. 6651(a)(1) | Sec. 6653 |
1979 | $ 25,292 | $ 3,823 | $ 1,745 |
1980 | 35,137 | 9,248 | 1 2,150 |
All section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated. All dollar amounts are rounded to the nearest dollar, unless otherwise indicated.
For 1979 and 1980, petitioner made estimated tax payments of $10,000 and $6,000, respectively. Petitioner, however, did not file his 1979 and 1980 Federal income tax returns 1997 Tax Ct. Memo LEXIS 641">*642 until January 10, 1992. Respondent issued the notice of deficiency for 1979 and 1980 on November 2, 1994. Accordingly, the notice of deficiency is valid since it was issued within 3 years of the date petitioner filed his returns for the taxable years in issue. Sec. 6501(a). 1
After concessions by the parties, 2 the issues for decision are: (1) Whether petitioner may claim Schedule A deductions for taxes and interest in excess of the amounts allowed by respondent for the taxable years in issue. We hold he may, to the extent set out below. (2) Whether pursuant to
1997 Tax Ct. Memo LEXIS 641">*644 FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulated facts and the accompanying exhibits 3 are incorporated into our findings by this reference. At the time the petition in this case was filed, petitioner resided in Surfside, Florida.
PETITIONER
During 1979, petitioner was a real estate attorney and partner at the law firm of Robinson, Silverman, Pearce, Aronsohn, Sand & Berman (Robinson Silverman or the firm) in New York City. While at Robinson Silverman, petitioner began working on transactions of the Bank of New York (the bank), one of the firm's larger and more active clients. At that time, petitioner was representing the bank in negotiating and closing multi-million dollar construction loans for large hotels, condominiums, and office buildings all over the country.
Robinson Silverman was not the only firm representing the bank during 1979. Robert Greenbaum (Greenbaum), a partner 1997 Tax Ct. Memo LEXIS 641">*645 at another New York law firm, also represented the bank on construction loan transactions. Petitioner and Greenbaum had been friends for some time. They had worked together at a firm in Brooklyn, New York, after graduating from law school, and petitioner was the best man at Greenbaum's wedding.
Sometime before 1979, Jimmy Hamilton (Hamilton), an officer at the bank, approached petitioner and Greenbaum with a proposition. The bank was dissatisfied with the way Robinson Silverman and Greenbaum's firm were handling the bank's business. Knowing that petitioner and Greenbaum were old friends, Hamilton suggested that they both leave their respective firms and form a boutique law firm which would represent the bank. The bank was starting a new project in Miami, Florida, known as the Turnberry Isle Yacht and Racquet Club (Turnberry Isle), a planned luxury condominium complex on the Intercoastal Waterway. The Turnberry Isle Project alone would entail construction loans in excess of $300 million, to be financed by the bank, with the legal representation of the bank to be exclusively by petitioner and his new law firm. The bank had other similar construction deals in Florida, which would be 1997 Tax Ct. Memo LEXIS 641">*646 directed to their new firm. If petitioner and Greenbaum agreed, they would be permitted to represent other clients with the bank's approval. Petitioner and Greenbaum immediately accepted the bank's offer. Until petitioner and Greenbaum left their respective jobs the bank continued to give their firms business.
Sometime in 1980 petitioner, Greenbaum, and Dickey, another attorney, formed the new law firm known as Dickey, Greenbaum & Fingar (Dickey Greenbaum). Dickey Greenbaum was located in a downtown office space selected by the bank and close to it.
THE BLUE CHIP
In 1976, petitioner purchased the Blue Chip (Blue Chip or the boat), a year-old, 37-foot sailboat for $29,000. Petitioner paid $5,000 in cash and financed the rest at an interest rate of 9-1/2 percent. During the taxable years in issue, petitioner used the boat to entertain clients.
OPINION
At the outset, we note that the recordkeeping by petitioner for the years in issue was inconsistent and disorganized. While we found petitioner generally to be a credible witness, his lack of consistent recordkeeping and his disorganized presentation at trial caused the Court much additional effort in reviewing the record and sorting out 1997 Tax Ct. Memo LEXIS 641">*647 the issues. Thus, the responsibility for any omissions in the record lies with petitioner. Given that petitioner has the burden of proof, such omissions weigh against him.
ISSUE 1. SCHEDULE A DEDUCTIONS
Respondent determined that for 1979 and 1980, petitioner is not entitled to deduct taxes and interest in excess of the amounts allowed in the notice of deficiency. 4 Petitioner asserts that the amounts claimed for taxes and interest have been sufficiently substantiated, both through his oral testimony and the documentary evidence presented at trial.
As a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous.
Failure to prove the exact amount of an otherwise deductible item is not fatal, because generally, unless precluded by
Respondent determined that petitioner is entitled to deduct taxes of $5,091 and $422 for 1979 and 1980, respectively. Petitioner deducted taxes of $17,000 for 1979 and $17,300 for 1980. 51997 Tax Ct. Memo LEXIS 641">*649
Petitioner estimated his deduction for general sales tax, on the basis of a sales tax of 6 percent multiplied by the various purchases he made for the boat, the car, and other miscellaneous expenditures he incurred during the taxable years in issue. Petitioner's explanation, although logical, is implausible. He deducted $10,000 in general sales tax for each year. Assuming a sales tax of 6 percent, petitioner would have had to purchase $166,666 worth of items subject to sales tax in 1979 and 1980 to have incurred $10,000 in general sales tax for each of those years. This is unlikely, given that petitioner reported income for 1979 and 1980 of $99,558 and $89,779, respectively. It is reasonable to infer, however, that petitioner made purchases in connection with his boat and car, and for other miscellaneous items. Accordingly, we hold that petitioner may deduct general sales tax of $1,000 for 1979 and $1,000 for 1980.
For 1997 Tax Ct. Memo LEXIS 641">*650 1979, respondent concedes that petitioner paid New York State income taxes of $4,188. For 1980, respondent did not allow petitioner to deduct any State income taxes, because he failed to substantiate that he incurred such expenditures. Petitioner testified, however, that he paid State and local income taxes for 1980 but was unable to get a copy of his cashed checks because the bank he had used went out of business. Given that petitioner's income did not substantially fluctuate from 1979 to 1980, it is reasonable to infer that petitioner paid approximately the same amount of State income taxes in 1980 as he did in 1979. Accordingly, we allow petitioner to deduct $4,000 in State income taxes for 1980.
Respondent determined that petitioner is entitled to deduct interest of $1,010 and zero for 1979 and 1980, respectively. Petitioner deducted interest of $7,200 for 1979 and $10,000 for 1980.
Petitioner presented no documentation to substantiate the interest deductions 1997 Tax Ct. Memo LEXIS 641">*651 claimed, except for $1,010 which respondent conceded for 1979. Petitioner testified that he tried to obtain a copy of his cashed checks for 1979 and 1980 from his bank, but the bank was no longer in existence. During these years petitioner had outstanding a $25,000 loan on his sailboat and a $7,000 loan on his car. It is thus reasonable to infer that petitioner incurred interest expenses in excess of the amounts allowed by respondent in the notice of deficiency. Using our best estimate, we hold that petitioner may deduct interest of $3,200 in 1979 and $3,200 in 1980.
ISSUE 2. UNREIMBURSED BUSINESS EXPENSES
Respondent determined that for 1979 and 1980, petitioner is not entitled to deduct automobile expenses, travel and entertainment expenses, and expenses incurred in connection with his boat in excess of the amounts allowed in the notice of deficiency. 6
Respondent determined that petitioner may deduct $530 in automobile expenses for 1979 and $0 1997 Tax Ct. Memo LEXIS 641">*652 for 1980. Petitioner asserts that he used his Jaguar XJ-12-L (the car) solely for business purposes; therefore his deductions for the taxable years in issue are fully allowable.
For 1979 and 1980, petitioner deducted $23,000 and $30,000, respectively, for business travel and entertainment expenses. Petitioner's automobile expenses are included in these amounts. The record, however, is unclear as to the specific amount that petitioner claimed for automobile expenses. In the notice of deficiency for 1979, respondent allowed petitioner as a reasonable deduction 55 miles per week at 18.5 cents per mile or $530. For 1980, respondent did not allow petitioner a deduction for any expenses he incurred in connection with the car.
Respondent argues that petitioner did not maintain a mileage log nor did he record the business purpose of his auto expenses. Accordingly, respondent contends that petitioner failed to establish the total business miles driven during the taxable years in issue.
At 1997 Tax Ct. Memo LEXIS 641">*654 trial, petitioner testified that he used his car to transport clients to and from closings. He further testified that he did not drive to work but used the subway to commute. Furthermore, petitioner stressed that because he lived in Manhattan, he did not need a car; that maintaining a car in New York City was extremely expensive; and that he used the car solely for business to transport clients. Given the availability of mass transportation in New York City, the constant traffic congestion, and the high cost of, as well as the restrictions on, parking, we find highly persuasive petitioner's testimony that he did not use his car for commuting.
At trial, respondent conceded that for 1979 and 1980, petitioner substantiated automobile expenses of at least $3,162 and $1,739 respectively. Thus, on the basis of the entire record, we hold that petitioner may deduct $3,162 in 1979 and $1,739 in 1980.
Respondent determined that for 1979 and 1980 petitioner is not entitled to deduct any expenses incurred in connection with the ownership and operation of the Blue Chip, because he failed to establish that the expenses he incurred in connection with the boat were ordinary and necessary 1997 Tax Ct. Memo LEXIS 641">*655 under
For tax years beginning in 1979,
Accordingly, we hold that petitioner cannot deduct any expenses incurred in connection with the Blue Chip. 8
Respondent determined that petitioner is entitled to deduct $1,136 1997 Tax Ct. Memo LEXIS 641">*656 in travel and entertainment (T&E) expenses for 1979 and $1,950 for 1980. Petitioner deducted T&E expenses of $23,000 for 1979 and $30,000 for 1980. Petitioner asserts that he provided respondent with receipts to verify that he incurred such expenses; therefore, he argues that his T&E deductionS for the taxable years in issue are fully allowable.
A taxpayer is required under
At trial, petitioner's testimony regarding his travel, meal, 1997 Tax Ct. Memo LEXIS 641">*657 and entertainment expenses was vague and in many instances incoherent. Although petitioner submitted various receipts and a personal diary for each tax year establishing that he incurred expenses, these documents fail to establish the business purpose and business relationship of these expenses. Accordingly, petitioner has failed to meet the strict substantiation requirements of
ISSUE 3. HOME OFFICE DEDUCTIONS
Respondent determined that petitioner is not entitled to a home office deduction for the taxable years in issue. Petitioner asserts that during 1979 his home office was used for many meetings "with the bank people, and with Greenbaum and Dickey, plotting our escape from our respective firms." Similarly, in 1980, petitioner asserts that he used his home office to meet with clients from Robinson and Silverman and to wind down his old business.
Petitioner has failed to establish that he used a portion of his apartment exclusively on a regular basis for business. Petitioner testified that the alleged home office was located in a dining area between the living room and the kitchen. There is no indication that the room was partitioned off from the rest of the apartment. Furthermore, the evidence does not enable us to find that petitioner used his home office to regularly meet with clients. Finally, petitioner has failed 1997 Tax Ct. Memo LEXIS 641">*659 to establish that his home office was his principal place of business. The evidence is clear that during the taxable years in issue, the principal places of petitioner's law practice were at Robinson Silverman and Dickey Greenbaum, where petitioner had an office and a secretary, spent most of his time, and earned his livelihood. For the reasons discussed herein, we sustain respondent's determination on this issue.
ISSUE 4. UNREPORTED INTEREST INCOME
For 1980, respondent determined that petitioner failed to report interest income of $853 from the Irving Trust Co. Petitioner asserts that he received $2,291 of interest income in 1980 and that he correctly reported that amount on his 1980 Federal income tax return.
As a general rule, interest received by or credited to a taxpayer within the taxable year, including interest on savings or other bank deposits constitutes gross income and is fully taxable.
At trial, respondent submitted five Forms 1099 totaling $1,429 (the Forms 1099) to establish that petitioner has unreported income of $853 for 1980. However, the Forms 1099 on which respondent relies refer to 1979, not to 1980. Moreover, none of the Forms 1997 Tax Ct. Memo LEXIS 641">*660 1099 are from the Irving Trust Co. Accordingly, we hold that petitioner correctly reported his interest income for 1980.
ISSUE 5. THEFT LOSS
As a general rule, in computing taxable income, a taxpayer may deduct, pursuant to
At trial and on brief, petitioner asserts that he is entitled to a $1,739 theft loss deduction not previously claimed on his 1979 return for camera equipment allegedly stolen from his car in March of 1979. Petitioner, however, has not established that he has met the requirements of
ISSUE 6.
For 1979 and 1980, respondent determined that petitioner, pursuant to
Petitioner did not file his income tax returns for 1979 and 1980 until January 10, 1992. He failed to present any evidence that his failure to timely file was due to anything other than willful neglect. Accordingly, we sustain respondent's determination on this issue.
ISSUE 7.
For 1979 and 1980, respondent determined that petitioner, pursuant to
Petitioner did not address the
To reflect the foregoing,
Decision will be entered under Rule 155.
Footnotes
1. On brief, respondent argues that pursuant to
sec. 6653(a) , petitioner is subject to a $ 1,150 addition to tax for 1980. However, in the notice of deficiency, respondent determined thesec. 6653(a)↩ addition to tax for 1980 to be $ 2,150. We find the $ 1,150 amount to be a typographical error.1. It appears respondent improperly assessed petitioner for 1979 and 1980 on the basis of a substitute return filed under sec. 6020(b) without issuing a notice of deficiency, in violation of sec. 6213(a). As a result of a question from the Court, respondent released the lien for 1979 but did not release the lien for 1980, apparently because petitioner's 1980 purported liability, as determined by respondent, was not satisfied.↩
2. At trial and on brief, respondent concedes that petitioner correctly reported his share of his then law firm's partnership income of $96,340 for 1979 and $88,428 for 1980.
Respondent further concedes that petitioner correctly claimed Keogh plan deductions of $4,766 for 1979 and $4,150 for 1980.
Respondent further concedes that petitioner provided receipts to verify the amounts set out below were spent by petitioner for 1979 and 1980.
↩ Item 1979 Amount Verified 1980 Amount Verified Taxes $ 4,188 -0- Interest 1,010 -0- Auto 3,162 $ 1,739 Sailboat 13,572 17,270 T&E 3,109 1,950 3. At trial, petitioner offered Exs. 11, 12, 13, 14, 86, 89, and 90 into evidence. Respondent objected on the grounds of relevancy. Upon consideration, we find that the exhibits fail to address the issues in the instant case. Accordingly, respondent's objections are sustained.↩
4. In the notice of deficiency, respondent allowed petitioner to deduct the following amounts:
↩ Item 1979 Amount Allowed 1980 Amount Allowed Taxes $ 5,091 $ 422 Interest 1,010 -0- 5. The $17,000 in taxes that petitioner deducted in 1979 includes $6,000 for State and local income taxes, $1,000 for State and local gasoline tax, and $10,000 for general sales tax.
The $17,300 in taxes that petitioner deducted in 1980 includes $6,000 for State and local income taxes, $1,300 for personal property tax, and $10,000 for general sales tax.
6. In the notice of deficiency, respondent allowed petitioner to deduct the following amounts:
↩ Item 1979 Amount Allowed 1980 Amount Allowed Auto $ 530 -0- T&E 1,136 $ 1,950 Sailboat -0- -0- 7.
Sec. 274(d)(4) was added to apply to years beginning after 1985.Sec. 274(d)(4)↩ requires specific substantiation for expenses "with respect to any listed property (as defined in section 280F(d)(4))". Sec. 280F(d)(4) includes any passenger automobile as listed property.8. At trial and on brief, petitioner asserts that he is entitled to a depreciation deduction for the Blue Chip not previously claimed on his 1979 and 1980 returns. Given our holding, however, that petitioner's boat is an entertainment facility within the meaning of
sec. 274(a)(1)(B)↩ , a depreciation deduction with respect to the boat is disallowed.