Bentley v. Comm'r

GOEKE, Judge: Respondent determined a deficiency in petitioner's 2007 Federal income tax of $4,944 ¹ as a result of various disallowed deductions. The issues for decision are:

*295 (1) whether petitioner is entitled to a $1,390 deduction for charitable contributions claimed on Schedule C, Profit or Loss From Business. ² We hold that he is not;

(2) whether petitioner is entitled to a $17,610 deduction for mortgage interest claimed on Schedule C. We hold that he is not.

(3) whether petitioner is entitled to a $1,369 deduction for utility expenses claimed on Schedule *295 C. We hold that he is not; and

(4) whether we should impose sanctions under section 6673³ on petitioner for presenting frivolous or groundless arguments before the Court or delaying the case. We shall not.

At the time the petition was filed, petitioner resided in New York.

*296 Petitioner was the proprietor of three sole proprietorships, each of which was related to his practice of law and was operated out of the studio apartment in which he resided during 2007. Petitioner attached three Schedules C to his 2007 tax return, one Schedule C for each of his three businesses.

On the first Schedule C, for the business Anthony M. Bentley, Esq., petitioner deducted $1,390 in charitable contributions in the "Other Expenses" category. On the second Schedule C, for the business "Virtual Judge (IHL)", petitioner deducted $17,610 in mortgage interest. On the third Schedule C, for the business Dauphin Web Enterprises, petitioner deducted $3,080 in utility expenses. ^4*296

On February 1, 2011, respondent issued a notice of deficiency to petitioner for 2007. Petitioner timely filed a petition contesting the deficiency.

The Commissioner's determinations in a notice of deficiency are presumed correct, and taxpayers bear the burden of proving that the Commissioner's determinations are incorrect. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 54 S. Ct. 8, 78 L. Ed. 212, 1933-2 C.B. 112, 115 (1933)*297 . Deductions are a matter of legislative grace, and taxpayers bear the burden of proving that they have met all requirements to be entitled to the claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84, 112 S. Ct. 1039, 117 L. Ed. 2d 226 (1992).

Petitioner's primary arguments relate to the burden of proof or production. Petitioner's first argument is that respondent bears the burden of proof under Rule 142(a)(1) because respondent raised new matter in his answer. When petitioner filed his petition, he attached only the notice of deficiency; he did not include the waiver and the audit statement (detailing the changes respondent made to petitioner's 2007 Federal tax *297 due) which were sent to him with the notice of deficiency. In the answer to the petition respondent attached the notice of deficiency as well as the waiver and the audit statement. Petitioner argues that the information in the waiver and the audit statement (including information regarding the disallowance of deductions on his Schedules C for the charitable contributions, mortgage interest, and utility expenses) is thus new matter with which respondent bears the burden of proof. We disagree.

We have previously stated that "New matter does not refer to allegations that are merely a refinement of a theory or limitation on a theory already set forth in the notice of deficiency but rather refers to a theory which is inconsistent with *298 the determination in the deficiency notice." Barton v. Commissioner, T.C. Memo. 1992-118, 1992 Tax Ct. Memo LEXIS 139, at *16, aff'd without published opinion, 993 F.2d 233 (11th Cir. 1993). The information in the waiver and the audit statement was not inconsistent with the determination in the notice of deficiency. Indeed, the waiver and the audit statement together explain the deficiencies determined in the notice of deficiency. As a result, we reject petitioner's *298 Rule 142(a)(1) argument.

Petitioner's second argument is that respondent bears the burden of production under section 7491(c). That section provides in relevant part that "the Secretary shall have the burden of production in any court proceeding with respect to the liability of any individual for any penalty, addition to tax, or additional amount imposed by this title." Petitioner argues that the amount respondent determined to be due is either an addition to tax or an additional amount within the purview of section 7491(c). ⁵ We disagree.

Section 6211(a) defines "deficiency" as the amount by which the correct tax imposed by the Code exceeds the amount of tax shown on the return, plus the amount of tax previously assessed, less any rebates. Clearly, the amount shown on *299 the notice of deficiency (resulting from disallowed deductions) was a deficiency rather than an addition to tax or an additional amount imposed. ^6*299 As a result, we reject petitioner's section 7491(c) argument.

Petitioner has not argued that section 7491(a) applies in this case, and the record does not support a conclusion that the requirements of section 7491(a) have been met. After considering the relevant facts and law, we find that petitioner bears the burden of proof.

Section 162 allows a deduction for all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Whether an expenditure is ordinary and necessary is generally a question of fact. Commissioner v. Heininger, 320 U.S. 467, 475, 64 S. Ct. 249, 88 L. Ed. 171, 1944 C.B. 484 (1943). To be "necessary" within the meaning of section 162, an expense must be "appropriate and helpful" to the taxpayer's business. Welch v. Helvering, 290 U.S. at 113. For an expense to be ordinary "the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved." Deputy v. du Pont, 308 U.S. 488, 495, 60 S. Ct. 363, 84 L. Ed. 416, 1940-1 C.B. 118 (1940) (citing Welch v. Helvering, 290 U.S. at 114). *300 Taxpayers are *300 required to maintain records sufficient to establish the amounts of allowable deductions and to enable the Commissioner to determine the correct tax liability. Sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999). No deduction is allowed for personal, living, and family expenses. Sec. 262(a).

Petitioner deducted $1,390 in charitable contributions on the Schedule C for Anthony M. Bentley, Esq.—$1,000 was donated to Fordham Law School, with smaller donations made to a Jewish community organization, the American Judges Foundation, the Penn Club of New York Christmas Fund, and the Disabled American Veterans organization. Petitioner declined to testify regarding the donations, choosing instead to "rest on the administrative file", which was the only piece of evidence introduced. While the administrative record confirms that charitable contributions were made to each organization and lists the amount of each contribution, there was no information provided showing that the contributions were ordinary and necessary expenses of Anthony M. Bentley, Esq. In addition, petitioner made no argument on brief regarding the business purpose of the charitable contributions. Considering the facts, *301 we find that petitioner failed to meet his burden of proving that the charitable contributions were ordinary and necessary business expenses deductible on the Schedule C for Anthony M. *301 Bentley, Esq. We thus sustain respondent's determination with respect to this issue.

Petitioner deducted $3,080 in utility expenses on the Schedule C for Dauphin Web Enterprises. Respondent disallowed $1,369 of these claimed expenses as a result of his division between petitioner's personal and business use of his apartment. While the administrative record in evidence does contain several credit card statements which list payments of various utility expenses, there is no evidence regarding petitioner's division of his personal and business use of the utility expenses, many of which were for utilities provided to his studio apartment. Petitioner did not address the issue at trial and made no argument regarding the deductibility of the utility expenses under section 162 in his brief. Considering the facts, we find that petitioner has not satisfied the burden of proof regarding the utility expenses and sustain respondent's determination with respect to the issue.

Petitioner deducted $17,610 in mortgage interest *302 on the Schedule C for Virtual Judge (IHL). Respondent disallowed the entire deduction. The administrative record introduced in evidence contains a security agreement entered into on April 27, 1997, regarding the studio apartment where petitioner lived and maintained his businesses. The security agreement is between petitioner and a *302 person named Michael (whose last name and address are blacked out). The agreement provides that its purpose is—