Opinion
6245-21S
11-08-2023
Elena Cristea & Umberto C. Cristea, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Mark V. Holmes Judge
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit herewith to petitioner and to respondent a copy of the pages of the of the trial of the above case before Judge Mark V. Holmes at Hartford, Connecticut on October 3, 2023, containing his oral findings of fact and opinion rendered after the conclusion of trial.
In accordance with the oral findings of fact and opinion, a decision for Rule 155 will be entered.
Bench Opinion by Judge Mark V. Holmes October 3, 2023 Elena Cristea &Umberto C. Cristea v. Commissioner of Internal Revenue Docket No. 6245-21S
THE COURT: The Court has decided to render oral findings of fact and opinion and the following represents the Court's oral findings of fact and opinion. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986 as amended and Rule 152 of the Tax Court's Rules of Practice and Procedure.
This case involves the 2010 and 2011 taxes of the Cristeas.
FINDING OF FACT
The Cristeas were residents of Connecticut at the time they filed their petition. But really, the key fact here is that Ms. Cristea lost her job at IBM during the Great Recession back, in her case, in 2009. That meant" that at the start of 2010, she was unemployed and looking hard to find a new job or maybe start a business of her own to bring some money into her family.
She was entirely credible in her testimony about how hard she worked to improve herself through taking self-improvement courses and taking seminars and trying to find a job in another field, going on job-hunting expeditions all the way back, to Romania. And in fact, she finally did get a management job again back in 2012. But she reported her efforts, and the money she spent on her MH job search, in a way that was almost guaranteed to attract an audit.
Three parts of her return with her husband, in fact, got audited. These were expenses that she reported as unreimbursed employee business expenses on her Schedule A, five categories of expenses on her Schedule C, and a large number of expenses that she reported on her Schedule E. Each of these requires some discussion.
OPINION
I'll begin to take each of these in alphabetical order. On her Schedule A, the Cristea's reported unreimbursed employee business expenses in 2010 of $7,525 and in 2011 of $6,694. These were mostly travel in vehicle expenses. However, during those years, Ms. Cristea simply wasn't an employee. If you're not an employee, then you can't take unreimbursed employee business expenses. See for example, Whittington v. Commissioner, 110 T.C.M. 170, 172 (2015). I sustained the disallowance of Schedule A expenses on the ground alone.
Her Schedule C expenses are somewhat more complicated. They were, as I said, in five different categories. Cost of goods sold, travel expenses, car and truck expenses, legal and professional services expenses, and all other expenses. I'll take these in order.
Noting generally that Ms. Cristea had no income from a business in either year __ he described the MH business as "real estate" and she intended to buy, rehabilitate, and then sell properties she found that were d under valued, in her opinion. She wasn't actually in MH business in these years. She was just looking for property to invest in and then flip. But again, the Government specifically disclaimed relying on the absence of the business to disallow these expenses and challenged of them only regarding substantiation.
So I'll go through each of these five categories of expenses, beginning with cost of goods sold. Cost of goods sold has no meaning for a business that has no inventory. In 2010, Ms. Cristea claimed a $17,495 adjustment for cost of goods sold; its disallowance, I have to sustain. Again, it doesn't make any sense to have cost of goods sold in a business without any inventory.
I will group the travel and car and truck expenses for both years. In 2010, she reported $4,420 in travel expenses and $6,100 in car and truck expenses. In 2011, she reported $3,080 in travel expenses and $1,978 in car and truck expenses. I'm grouping these together because Internal Revenue Code section 274(d) imposes strict substantiation requirements with respect to deductions for travel, meals and entertainment, and listed property. Listed property includes passenger automobiles.
Expenses that are subject to section 274(d) must be substantiated either by adequate records or by sufficient evidence corroborating the taxpayer's own statement showing the amount of the expense, the time and place the expense was incurred, and the business purpose of the expense. See 26 C.F.R. Section 1.274-5T(a) (3) .
It's not enough for a taxpayer to establish one of them. She has to establish all of them. We have no discretion in this area and so we can't estimate a taxpayer's expenses here. In this case, the Cristeas failed to produce adequate records or sufficient evidence to substantiate business travel and car and truck expenses, plus the business purpose of those expenses in a business that, again, had not invested in any real property and had not flipped any real property. The Court can't estimate any of these expenses in any event. I will sustain the disallowance of those expenses.
The fourth category is legal and professional services expenses of $12,582 in 2010 and $5,535 in 2011. Again, there were no receipts or even testimony from Ms. Cristea about what these expenses were and how they qualified as legal and professional services in relation to a real estate business that was not yet up and off the ground. I'll sustain the disallowance of these expenses as well.
That leaves an unusual category of other Schedule C expenses. The Commissioner did not specify what these are. There is a category on the Schedule C called "Other Expenses" but Ms. Cristea did not claim any deductions for that category of other expenses. And so I construed the other expenses that the IRS disallowed to mean all the other little line items on the Schedule C that were not included in the first four categories without discussion.
These were disallowed to the extent of $7,955 in 2010 and $21,777 in 2011. This was especially odd. If one looks at Exhibit 3-J at Bates Number 51 and looks at part 2 of the form relating to expenses, one can add it up and come up with a number $25,450 in other expenses on Schedule C, and they were disallowed only to the extent of $7,955. So there was no substantiation of any of these expenses in a way that made it more likely than not that they were actually incurred in Ms. Cristea's Schedule C business, such as that business was. So I'll disallow them, but only to the extent in the Notice of Deficiency. That means in disallowing of these $25,450 of other Schedule C expenses, only the $7,955 that were disallowed by the Commissioner in his Notice of Deficiency.
Similarly, for 2011, if one adds up all the other Schedule C expenses outside of the four categories I've already discussed, the number totals $21,977 and only $21,777 was disallowed on the Notice of Deficiency. So I agree that these deductions are not allowable but will sustain the disallowance only to the extent that they were in the Notice of Deficiency, which means that Ms. Cristea will get $200 extra in 2011 and many thousands of dollars extra in 2010. Neither of these are noticed in the Notice of Deficiency and the Government didn't plead an increase in disallowance, so it probably did not make a difference in the end.
That leaves the third category of expense, Schedule E expenses. Again, the Government challenged these expenses only for lack of substantiation. Disavowing the statement of the Pre-Trial Memorandum that challenged Ms. Cristea's acting participation and any possible characterization that she was a real estate professional and again, saying that she had an active real estate business when she was looking for her very first property, which she didn't even buy until 2011. So again, this is a fight about substantiation.
What's left after several concessions and settlements before the trial began are for the 2010 tax year, expenses on Schedule E for advertising, auto and travel, cleaning and maintenance, commission, legal and MH other professional fees, repairs, and supplies that can be found on Exhibit 1-J at page 8.
For 2011, the categories of expense are those listed on Ms. Cristea's Schedule E for 2011, Exhibit 3-J at page 56. And these are, again, advertising, auto and travel, cleaning and maintenance, legal and other professional fees, repairs, supplies, and all-purpose other category on line 19 of her alleged form. Some of these are subject to the same restrictions under section 274 as were her Schedule C expenses, the travel and vehicle expenses, and there was a similar lack of any detailed substantiation required by that section for these expenses in the record.
On the rest, there was just no proof or basis on which I could estimate any expenses. In, again, a business that really wasn't much of a business for the two years at question. With that, I will sustain the Government's disallowance of all of those expenses in the contested categories.
That leaves only the question of penalties. There were two penalties at issue in this case. The first was a penalty under section 6651(a)(1). This is a section of the Internal Revenue Code that provides when a taxpayer fails to file a tax return within the time prescribed by law. Unless it is shown that her failure is due to reasonable cause and not willful neglect, there has to be added an amount that can increase up to 25 percent of the tax owed.
Here, Ms. Cristea admitted during trial that she was extremely late in filing these tax returns. Indeed, years late in filing them, and there really is no reasonable excuse for her action, but she didn't really present any. I'll sustain the Government's 6651(a)(1) penalty.
That leaves the accuracy-related penalty under section 6662 of the Code. Section 6662(a) provides for a penalty for negligence or disregard of rules and regulations or for a substantial understatement of income tax. The Government sustained its burden of coming forward just as a matter of math because the understatement of income tax resulting from the aggressive deductions that Ms. Cristea took puts her over the threshold as a matter of arithmetic.
I recognize that these were self-prepared returns that Ms. Cristea did for herself and her husband and they were very far under the norm in reporting deductions without substantiation for a business without customers or income. Her deductions for employee business expenses, while she was not even an employee, and for deductions relating to a single rental property that were grossly excessive based on the proof that she ultimately came forward with. However, there were some concessions and settlements of other issues in the case, so a Decision will be entered under Rule 155.
This concludes the Court's oral findings of fact and opinion in this case.
(Whereupon, at 11:23 a.m., the above-entitled matter was concluded.)