Do Not Lose Your Tax Deductions

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DO NOT Lose Your Tax Deductions

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One must keep, cross reference and file more than just a canceled check. The IRS Requires the taxpayer to show the purpose of the deductions. In Paul E. and Jane Anne Gladden Emerson (T.C. Memo. 2001-186) the Court allowed some of the expenses as business related, but, in the absence of additional documentation, found that some of the other expenses appeared to be personal.

The courts (usually the IRS will disallow the deduction) can allow a deduction even without adequate documentation under the Cohan rule. (This exception does not apply to travel and entertainment expenses.) In this same case the Court found that the taxpayers had enough documentation in the form of canceled checks and credit card statements related to their medical expenses that the Court had a basis for estimating an amount. Note. The Cohan rule requires some basis for estimation. If you have no receipts or supporting documentation, it's unlikely the court will try to help you.

T.C. Memo. 2001-186

UNITED STATES TAX COURT

PAUL E. AND JANE ANNE GLADDEN EMERSON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10221-99. Filed July 23, 2001.

Paul E. and Jane Anne Gladden Emerson, pro se.

Joanne B. Minsky, for respondent.

MEMORANDUM OPINION

PAJAK, Special Trial Judge: Respondent determined a deficiency in

petitioners' Federal income tax in the amount of $6,046 and a section

6662(a) penalty in the amount of $1,209.20 for the taxable year 1995.

Unless otherwise indicated, section references are to the Internal Revenue

Code in effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

This Court must decide: (1) Whether petitioners substantiated Schedule

A medical expenses of $6,393, Schedule A interest expenses of $3,165, a

net operating loss carryover of $16,505, Schedule C expenses of $6,260

related to an attorney/sales consultant activity, Schedule C expenses,

including cost of goods sold, of $3,433 related to an antiques and jewelry

activity, and Schedule C expenses of $26,927 related to an oil and gas

activity; (2) whether petitioners are liable for self-employment tax on

the income from their Schedule C activities and are entitled to the

corresponding deduction; and (3) whether petitioners are liable for the

accuracy-related penalty. If petitioners' itemized deductions are less

than the standard deduction, petitioners will be entitled to the standard

deduction under section 63(b).

Some of the facts in this case have been stipulated and are so found.

Petitioners resided in Bradenton, Florida, at the time they filed their

petition.

In 1995, Paul Emerson (petitioner), an attorney, was engaged in the

business of an "Attorney/Sales Consultant" and in the business of "Sales-

Antiques & Jewelry". As an attorney/sales consultant, petitioner worked

with others and anticipated becoming the general counsel of an Ohio

corporation. Petitioner worked from home. During 1995, Jane Emerson (Mrs.

Emerson) was not employed outside the home. Petitioners also had an

oil/gas operating interest.

Respondent contends that petitioners did not provide adequate

substantiation for the disallowed items. Petitioner presented numerous

receipts into evidence. Petitioner also tried to submit evidence at trial,

which we excluded as it was not presented to respondent within 15 days of

trial as required by our Standing Pre-Trial Order. Schaefer v.

Commissioner, T.C. Memo. 1998-163, affd. in unpublished opinion 188 F.3d

514 (9th Cir. 1999).

Deductions are strictly a matter of legislative grace. INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering,

292 U.S. 435, 440 (1934). Taxpayers must substantiate claimed deductions.

Hradesky v. Commissioner, 65 T.C. 87, 89 (1975), affd. per curiam 540 F.2d

821 (5th Cir. 1976). Moreover, taxpayers must keep sufficient records to

establish the amounts of the deductions. Meneguzzo v. Commissioner, 43

T.C. 824, 831 (1965); sec. 1.6001-1(a), Income Tax Regs. Generally, except

as otherwise provided by section 274(d), when evidence shows that a

taxpayer incurred a deductible expense, but the exact amount cannot be

determined, the Court may approximate the amount bearing heavily if it

chooses against the taxpayer whose inexactitude is of his own making.

Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The Court,

however, must have some basis upon which an estimate can be made. Vanicek

v. Commissioner, 85 T.C. 731, 742-743 (1985).

Respondent disallowed $6,393 of petitioners' claimed medical expenses.

Section 213(a) provides that a deduction is allowed for expenses paid

during the taxable year, not compensated for by insurance or otherwise,

for medical care of the taxpayer, his or her spouse, or a dependent to the

extent that such expenses exceed 7.5 percent of adjusted gross income. The

term "medical care" means amounts paid for the diagnosis, cure,

mitigation, treatment, or prevention of disease, or for the purpose of

affecting any structure or function of the body or for insurance covering

the aforementioned items. Sec. 213(d)(1)(A), (C). "Medical care" also

includes expenses for medicine and drugs. Sec. 1.213-1(a)(1), Income Tax

Regs. A deduction is allowable only to individuals and only with respect

to medical expenses actually paid during the taxable year. Sec. 1.213-

1(a)(1), Income Tax Regs.

Petitioner testified that he had high blood pressure for which he took

medicine. He spent $81.35 for his prescription every 90 days. Mrs. Emerson

was on five different medications. The medicines were for blood pressure,

fibromyalgia, and hormones. At the time of trial, Mrs. Emerson was

undergoing radiation treatments for cancer.

Petitioner presented canceled checks and credit card statements for

purchases from Phar-Mor, Walgreens, and Park West Pharmacy in the amount

of $1,255.13. Petitioner testified that these expenses were for

prescriptions. He admitted that it was possible that some of these amounts

were for items other than prescriptions.

Petitioner presented canceled checks made out to Golden Rule Insurance

in the amount of $5,473.37 and Liberty Fund Inc. in the amount of $40.50

The checks made out to Golden Rule Insurance were paid quarterly.

Petitioner testified that they were for health insurance. Petitioner was

not sure whether Liberty Fund Inc. was for health insurance. Petitioner

also presented checks in the amount of $343 made out to doctors and

medical laboratories.

It is clear that petitioners incurred medical expenses. Under the Cohan

doctrine, we estimate the allowable amounts of expenses as follows. We

allow $880 for prescription expenses, all of the insurance payments to

Golden Rule Insurance of $5,473.37, and all of the doctor and medical

laboratory expenses of $343, for a total of $6,696.37, which is more than

the $6,393 petitioners claimed on their return. This deduction is subject

to a floor of 7.5 percent of adjusted gross income.

Respondent disallowed $3,165 of interest expense. A deduction for

interest paid on indebtedness during the year is generally allowed under

section 163(a). However, section 163(h)(1) provides that no deduction is

allowed for personal interest. "Personal interest" does not include any

"qualified residence interest". Sec. 163(h)(2)(D). "Qualified residence

interest" means interest which is paid during the year on acquisition

indebtedness or home equity indebtedness with respect to any qualified

residence of the taxpayer. Sec. 163(h)(3)(A). A "qualified residence" may

be the principal residence of the taxpayer. Sec. 163(h)(5)(A)(i)(I).

In this case, petitioners had a mortgage on the home they lived in.

Petitioners paid "interest payments" on their mortgage to "Retirement

Account Inc., F.O.B. Allen S. Lewis IRA" (Allen Lewis). During 1995,

petitioners wrote 11 checks which were written out to or referenced Allen

Lewis and totaled $16,425. Petitioners also had a mortgage on their home

with West Coast Bank. During 1995, petitioners wrote 32 checks for the

"interest payments" to West Coast Bank in the total amount of $21,698.71.

Petitioners claimed $3,165 of mortgage interest expense on their 1995

return, which petitioner prepared himself. On their 1994 return,

petitioners claimed $8,450 of mortgage interest expense. Petitioners’ 1994

return was prepared by an accountant. While we believe that petitioners'

payments did not consist solely of interest expense, we find that a

portion of these payments must have been for mortgage interest on their

home. Although the interest portion of the payments probably was higher

than the amount claimed on the 1995 return, petitioners did not provide

sufficient evidence of the amount which was interest. We allow petitioners

to deduct only the $3,165 of mortgage interest expense that they claimed

on their 1995 return.

On their 1995 return, under "Other income", petitioners included

$16,505 as negative income for a net operating loss carryover. Under

section 172(b), a net operating loss may be carried back to the 3

preceding taxable years and thereafter carried forward to the next 15

taxable years. Petitioner did not provide any evidence, other than the

1994 return, to support the claimed net operating loss carryforward. The

fact that a return is signed under penalty of perjury is not sufficient to

substantiate deductions claimed on the return. Wilkinson v. Commissioner,

71 T.C. 633, 639 (1979). We find the evidence insufficient. Accordingly,

we uphold respondent's disallowance of the net operating loss in full.

In regards to petitioners' Schedule C activities, petitioner presented

canceled checks and credit card statements for amounts paid for: telephone

services; office supplies; an accountant's services for preparing taxes;

professional dues and fees; postal service; a computer rental; insurance

on the home; electric service in the home; travel expenses such as out-of-

town motels, restaurants, and gas; truck rental; and auto maintenance.

Petitioner testified that he conducted his legal services, the antiques

business, and the oil and gas activities out of 700 square feet of his

home. Petitioner testified that the above expenses were for his

businesses, but with the exception of the travel expenses, petitioner did

not state to which Schedule C business the receipts for the expenses

related.

We believe that some of these expenses were personal expenses.

Moreover, petitioner did not adequately substantiate his travel, car and

truck, and computer expenses under the strict requirements of section

274(d). Travel, car and truck, and computer expenses cannot be estimated

under Cohan. Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), affd.

per curiam 412 F.2d 201 (2d Cir. 1969). Based on the record, we allow

petitioners to claim $2,000 of expenses on the Attorney/Sales Consultant

Schedule C, $1,000 of cost of goods sold and $100 of expenses on the Sales-

Antiques & Jewelry Schedule C, and $12,000 of expenses on the Oil/Gas

Operating Interest Schedule C.

Section 1401 imposes a tax upon a taxpayer's self-employment income.

Self-employment income includes the net earnings from self-employment

derived by an individual during the taxable year. Sec. 1402(b). Net

earnings from self-employment consist of gross income derived by an

individual from any trade or business carried on by such individual, less

the allowable deductions that are attributable to such trade or business,

plus certain items not relevant here. Sec. 1402(a). A deduction for one

half of the self-employment tax is allowed under section 164(f). We find

that petitioners are liable for self-employment tax on the income earned

from the Schedule C businesses and are entitled to the corresponding

deduction.

Respondent contends that petitioners are liable for the accuracy-

related penalty under section 6662(a). Section 6662(a) provides for an

accuracy-related penalty in the amount of 20 percent of the portion of an

underpayment of tax attributable to, among other things, negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1). Negligence is

defined to include any failure to make a reasonable attempt to comply with

the provisions of the Internal Revenue laws. Sec. 6662(c); sec. 1.6662-

3(b)(1), Income Tax Regs. Moreover, negligence is the failure to exercise

due care or the failure to do what a reasonable and prudent person would

do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947

(1985). Disregard is defined to include any careless, reckless, or

intentional disregard of rules or regulations. Sec. 6662(c); sec. 1.6662-

3(b)(2), Income Tax Regs. Petitioners presented no evidence regarding the

accuracy-related penalty. They failed to keep adequate records as required

by section 6001. We find that petitioners are liable for the accuracy-

related penalty which must be recalculated under Rule 155.

To the extent that we have not addressed any of the parties' arguments,

we have considered them and find them to be without merit.

Decision will be entered

under Rule 155.

Solutions are dependent upon facts & circumstances, law and the objectives. These elements vary from one time to another, from one circumstance to another and from person or entity to another

For any expenditure you believe or want to claim as a tax deduction, then whenever you pay for the item:

Pay be check whenever possible - a credit card is next best, but be certain you keep the proof as shown below for either credit card payments or payments by check
Paid bill or receipt
Write on the check and paid bill (or a separate logbook) an explanation that will prove the product or service was used in your business or is one of the items that are tax deductible as an individual -
- Date
- Place
- Business use or purpose
- How much - the cost of the product or service, the number of miles on a car use, etc.
- If this is a travel, entertainment or meal expenditure, describe the business relationship and general purpose of incurring the expense with the individuals or business entity involved

My Name

Tax Year

Date

Place

Business Use

Cost

Number of Miles

Business Relationship and general purpose