Birdsill v. Comm'r

WHERRY, Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. ¹ Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.

This case is before the Court on a petition for redetermination of a deficiency with respect to petitioners' 2003 Federal income tax. After concessions by both parties, ^2*59 the issue remaining is whether respondent may require $ 23,756 of depreciation recapture in 2003 on a 1998 GMC Suburban for which Michael R. Birdsill (petitioner) and Melanie J. Birdsill (Mrs. Birdsill) claimed a section 179 expense deduction on their 2002 joint Federal income tax return. ^3*60

Some of the facts have been stipulated. The stipulations, with accompanying exhibits, are incorporated herein by this reference. At the time the petition was filed, petitioner resided in Chico, California.

Petitioner has over 30 years' experience in the broadcast industry. During 2003, petitioner was a full-time chief engineer and operations manager for California State University at Chico, California. In January 2002 petitioner started a broadcast engineering consulting business. In connection with that business he created his own database on digital transmission radio towers in order to capitalize on the new Federal Communications Commission rules approving a digital broadcast standard for radio stations. He believed that many radio stations would require new antenna systems.

To create the database petitioner surveyed approximately 35 digital transmission *61 radio tower sites in northern California in 2003. Approximately half of the radio tower sites that petitioner surveyed required one visit by petitioner, while the other half required two visits.

Petitioner owned three vehicles during 2003: (1) A 1993 Ford F-250 truck that was purchased in 2000; (2) a 1998 GMC Suburban sport utility vehicle with all-wheel drive that was purchased in 1998; and (3) a 1997 Pontiac that was purchased in 1997. ⁴

Petitioner placed the GMC Suburban into use for his business in 2002 and deducted a depreciation expense of $ 26,396 on his and Mrs. Birdsill's 2002 joint Form 1040, U.S. Individual Income Tax Return. Petitioner placed the Ford F-250 into use for his business on January 3, 2003, and deducted a depreciation expense of $ 11,968 on his and Mrs. Birdsill's 2003 joint Form 1040. ⁵

On petitioner and Mrs. Birdsill's 2003 joint Form 1040 Schedule C, Profit or Loss From Business, petitioner reported $ 171 in income and claimed $ 21,558 in deductions for his broadcast *62 engineering consultancy business. With respect to his motor vehicles, petitioner deducted a $ 2,920 car and truck expense and a $ 720 insurance expense for the Ford F-250. Petitioner did not deduct any expenses for the GMC Suburban.

Petitioner attached Form 4562, Depreciation and Amortization, to the joint Form 1040. In Section A, Depreciation and Other Information, of Form 4562, petitioner listed as "Property used more than 50% in a qualified business use" the Ford F-250. ⁶ In Section B, Information on Use of Vehicles, petitioner listed 8,110 miles for both business and total mileage of the Ford F-250.

On December 15, 2006, respondent mailed to petitioners the aforementioned notice of deficiency that determined a deficiency of $ 11,314 for taxable year 2003. Petitioner and Mrs. Birdsill timely petitioned this Court. Their petition stated:

Item 7(b) of the Notice-Depreciation Recapture-is totally without Merit. In fact, that issue was "added" to the Audit Report after an Appeal Request was Filed with the Appeals Office in Sacramento, California. This smacks of a retaliatory action by the Auditor.

All other Items are in Dispute. An offer *63 to Settle was not given any consideration by the Appeals Office; this Case has landed in this Forum because the Appeals Office did nothing for 14 Months (April 2005June 2006), and then the Appeals Officer tried to goad the Taxpayer into Signing an Extension of the Statute of Limitations. Taxpayer indicated that the Extension would only be signed if the Document was limited in its duration and in the scope of the issues involved. Appeals Officer refused and issued the Notice of Deficiency.

Petitioner and Mrs. Birdsill's divorce became effective on June 28, 2007, pursuant to a decree issued on August 30, 2007. On October 4, 2007, Mrs. Birdsill filed an amended petition requesting innocent spouse relief. An attachment to the amended petition indicated that petitioner did not object to Mrs. Birdsill's request. At trial on November 7, 2007, in Reno, Nevada, respondent conceded that Mrs. Birdsill was entitled to innocent spouse relief pursuant to section 6015(b); there was no objection by petitioner.

As a general rule, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is improper. *64 See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). However, pursuant to section 7491(a), the burden of proof on factual issues that affect the taxpayer's tax liability may be shifted to the Commissioner where the "taxpayer introduces credible evidence with respect to * * * such issue." The burden will shift only if the taxpayer has, inter alia, complied with substantiation requirements pursuant to the Internal Revenue Code and "cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews". Sec. 7491(a)(2). In the instant case, petitioner did not argue that the burden should shift, and he failed to comply with the substantiation requirements. Accordingly, the burden of proof remains on petitioner.

Petitioner alleges that the depreciation recapture is a retaliatory action by the revenue agent who conducted his and Mrs. Birdsill's audit because it became an issue only after petitioner and Mrs. Birdsill filed an appeal request with respondent's Appeals Office.⁷As a general rule, this Court will not look behind a notice of deficiency. It does not usually examine the evidence used or the propriety *65 of the Commissioner's motives, policy, or procedures in making audit determinations. See Riland v. Commissioner, 79 T.C. 185, 201 (1982); Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327-328 (1974); Human Engg. Inst. v. Commissioner, 61 T.C. 61, 66 (1973); Suarez v. Commissioner, 58 T.C. 792, 814 (1972), overruled in part Guzzetta v. Commissioner, 78 T.C. 173 (1982).

However, this Court has recognized an exception to the rule when there is substantial evidence of unconstitutional conduct on the Commissioner's part and the integrity of the judicial process would be impugned if the Court permitted the Commissioner to benefit from his *66 conduct. Suarez v. Commissioner, supra; see Greenberg's Express, Inc. v. Commissioner, supra at 328. But even in these limited situations, this Court has refused to hold the notice of deficiency null and void. Human Engg. Inst. v. Commissioner, supra; Suarez v. Commissioner, supra; see Greenberg's Express, Inc. v. Commissioner, supra.

Although petitioner alleged retaliatory action in his petition, he offered no independent evidence to support his allegation. Furthermore the record does not indicate that any of respondent's agents engaged in conduct that violated petitioner's rights. As petitioner has not shown that respondent's deficiency determination was arbitrary or erroneous, or that the determination was not supported by the proper foundation, it is inappropriate for this Court to look behind the notice of deficiency to examine the basis for, or reasons behind, respondent's determination. See Riland v. Commissioner, supra.The notice of deficiency, therefore, is valid, and respondent's deficiency determination is presumed correct.

A. General Rules

Deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he is entitled to any *67 claimed deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Taxpayers must maintain records relating to their income and expenses and must prove their entitlement to all claimed deductions, credits, and expenses in controversy. See sec. 6001; Rule 142(a); INDOPCO, Inc. v. Commissioner, supra; Welch v. Helvering, supra.

Section 274(d) applies to: (1) Any traveling expense, including meals and lodging away from home; (2) entertainment, amusement, and recreational expenses; (3) gift expenses; or (4) the use of "listed property", as defined in section 280F(d)(4), including automobiles. To deduct such expenses, the taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony: (1) The amount of the expenditure or use, which includes mileage in the case of automobiles; (2) the time and place of the travel, entertainment, or use; (3) its business purpose; and in the case of an entertainment or gift expense, (4) the business relationship to the taxpayer of each expenditure or use. Sec. 274(d).

To satisfy the adequate records *68 requirement of section 274(d), a taxpayer must maintain records and documentary evidence that in combination are sufficient to establish each element of an expenditure or use. Sec. 1.274-5T(c)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Although a contemporaneous log is not required, corroborative evidence to support a taxpayer's reconstruction "of the elements * * * of the expenditure or use must have a high degree of probative value to elevate such statement" to the level of credibility of a contemporaneous record. Sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

Under Cohan, if a factual basis exists to do so, the Court may approximate the allowable expense, bearing heavily against the taxpayer who failed to maintain adequate records. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, section 274(d) overrides the Cohan rule with respect to section 280F(d)(4) "listed property" and thus specifically precludes the Court from allowing automobile expenses on the basis of any approximation or the taxpayer's uncorroborated testimony. Sec. 1.274-5T(a)(4), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

A taxpayer may elect to deduct as a current expense the cost of any section 179 property, with certain dollar limitations, that is acquired by purchase in the active conduct of a trade or business and placed in service during the taxable year. Sec. 179(a), (b), (d)(1); see sec. 1.179-4(a), Income Tax Regs. To deduct depreciation pursuant to section 179 for property subject to section 280F, such as automobiles, a taxpayer must establish that business use exceeds 50 percent. Sec. 280F(b)(3); sec. 1.179-1(d), Income Tax Regs. If business use of listed property falls to 50 percent or less, then it is subject to the depreciation recapture rules of sections 179(d)(10) and 280F(b)(2), respectively. The recapture rule of section 280F(b)(2) takes precedence. Sec. 1.179-1(e)(1), Income Tax Regs.

Section 280F(b)(2) provides:

(2) Recapture. --

(A) Where business use percentage does not exceed 50 percent. -- If --