Opinion
6615-22
04-18-2023
LUCELL TRAMMER, III & SHARONDA M. TRAMMER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch Judge
Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is
ORDERED that the Clerk of the Court shall transmit with this order to petitioner and respondent a copy of the pages of the transcript of the trial in this case before Judge Ronald L. Buch at Detroit, Michigan, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard.
In accordance with the oral findings of fact and opinion, a decision will be entered for respondent as to the deficiencies and for petitioner as to the additions to tax under I.R.C. section 6662(a).
Bench Opinion by Judge Ronald L. Buch
March 14, 2023
Lucell Trammer, III &Sharonda Trammer v. Commissioner of Internal Revenue
Docket No. 6615-22
THE COURT: The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion may not be relied upon as precedent in any other case. These oral findings of fact and opinion are made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Tax Court Rule 152. Rule references in this opinion are to the Tax Court Rules of Practice and Procedure, and section references are to the Internal Revenue Code, in effect at all relevant times. The Trammers filed tax returns for 2019 and 2020, reporting their income and myriad personal and business expenses. To prepare those returns, they took their receipts to a return preparer who decided how and where to report items on the Trammers' returns. Some of the personal expenses, such as home mortgage interest were reported in multiple places and double or triple counted. Many personal expenses, such as home maintenance and improvement, were reported as business expenses. Indirect business expenses were reported as direct business expenses. The Commissioner disallowed the expenses for lack of substantiation. At trial, the Trammers offered testimony and documents to support many of their expenses, but their evidence generally failed to establish either the amount of a particular expense or its deductibility. But they clearly established that the errors were those of their return preparer on whom they relied. As a result, we hold that they are liable for the tax determined by the Commissioner but not for the penalties.FINDINGS OF FACT
Lucell Trammer III is an IT consultant and his wife Sharonda M. Trammer is a social worker for the State of Michigan. They each received income in 2019 and 2020, the years in issue. The amounts of income they received are not in issue.
Ms. Trammer's work required that she drive to visit child care and foster care locations. At times, she would purchase items for children, whom she refers to her clients. Ms. Trammer kept a record of her travels visit her clients, but that record is not in evidence this case. She had an office provided by the State of Michigan in 2019, but with the pandemic in 2020, she transitioned to working solely from a home office when not on the road visiting her clients. The record does not include an accurate measurement of the square footage of the Trammers' home or the space used by Ms. Trammer as a home office. It also does not identify whether that space was used exclusively as a home office.
Mr. Trammer worked as an IT consultant, principally from home. At times he was treated as a wage earner, having been provided a Form W-2, Wage and Tax Statement. At other times, he received payment through a single-member limited liability company that third parties would pay for Mr. Trammer's services. And at yet other times, he would be compensated directly, receiving a Form 1099. Naturally, Mr. Trammer incurred expenses in connection with his business, but he did not maintain clear records of those expenses that were directly tied to his business.
Mr. Trammer is also closely involved with Dove Church, a church in Detroit at which his mother and father serve as pastors. He provided IT services to Dove Church, incurred expenses on behalf of Dove Church, and donated money to Dove Church.
2019 Form 1040
Mr. and Mrs. Trammer filed Form 1040, U.S. Individual Income Tax Return, for 2019 with the status of married filing jointly. They reported income of over $160,000 before being offset by various losses and income offsets. Those losses relate to Mr. Trammer's IT consulting and the income offsets relate to Ms. Trammer's work for the State of Michigan.
The Trammers claimed nearly $50,000 of itemized deductions in 2019. The itemized deductions include deductions for state taxes, home mortgage interest, charitable contributions, and an "other itemized deduction." Elsewhere on the return, this itemized deduction is identified as an "ordinary loss debt instrument." The Trammers also reported vehicle and meal expenses in connection with Ms. Trammer's employment.
2020 Form 1040
Mr. and Mrs. Trammer filed Form 1040 for 2020 with the status of married filing jointly. They reported roughly $98,000 of income before losses and offsets. As with 2019, the losses relate to Mr. Trammer's IT consulting and the income offsets relate to Ms. Trammer's work for the State of Michigan.
The Trammers claimed over $35,000 of itemized deductions in 2020. The itemized deductions include deductions for state taxes, home mortgage interest, charitable contributions, and an "other itemized deduction." Elsewhere on the return, this itemized deduction is identified as an "ordinary loss debt instrument." The Trammers also reported vehicle and meal expenses in connection with both of their employment.
Return Preparation
The Trammers relied on a paid return preparer to prepare their returns for the years in issue. Although the individual return preparers identified on the 2019 and 2020 returns differed, the Trammers used the same return preparation firm for both years. Each year, they brought their records to a return preparer who decided what items to report on the Trammers' return and where.
The returns contain obvious errors such as reporting the same expense in multiple places. For example, within the 2020 Form 1040, home mortgage interest is claimed on Schedule A, Itemized Deductions, Schedule C, Profit or Loss From Business, and Form 8829, Expenses for Business Use of Your Home. The latter contains another obvious error. All home-related expenses were reported as "Direct expenses" and thus they were not apportioned purposes to the percentage of the home that was for business purposes.
Notice of Deficiency
The Commissioner mailed the Trammers a notice of deficiency for 2019 and 2020 on January 6, 2022. In that notice, the Commissioner determined a deficiency of $11,750 and a section 6662(a) accuracy-related penalty of $2,350 for 2019, and a deficiency of $15,072 and a section 6662(a) accuracy-related penalty of $3,014 for 2020.
The deficiencies stem from disallowed deductions and expenses. For 2019, the Commissioner disallowed various Schedule C expenses totaling nearly $20,000, another $8,620 of expenses from Form 2106, Employee Business Expense (for Ms. Trammer), a $1,513 student loan interest deduction, and $48,405 of itemized deductions. Having disallowed all of the Trammers' itemized deductions for 2019, the Commissioner allowed a $24,400 standard deduction. For 2020, the Commissioner disallowed various Schedule C expenses totaling over $45,000, another $5,690 of expenses from Form 2106, and over $35,000 for itemized deductions. Having disallowed all of the Trammers' itemized deductions for 2020, the Commissioner allowed a $24,800 standard deduction.
Except for the 2019 student loan interest deduction, which was computational, the Commissioner denied the Trammers' reported deductions and expenses for lack of substantiation.
The Commissioner also determined a section 6662(a) accuracy-related penalty for each year. The Commissioner's primary position for determining the penalties was a substantial understatement of income tax. He determined negligence in the alternative. The IRS examiner who made the decision to assert penalties obtained approval on a Civil Penalty Approval Form signed by his group manager on August 5, 2021, before the notice of deficiency was mailed.
While residing in Michigan, the Trammers filed a timely petition for redetermination of the deficiencies. The Court tried this case in Detroit, Michigan. Mr. Trammer appeared in person, and Ms. Trammer appeared by telephone during her testimony. Mr. Trammer provided to the Court various documents, principally receipts, to support the Trammers' claimed expenses. The documents include receipts for a monthly car wash membership and for goods and services related to home improvement, such as lawn mowing and snow removal, fencing, mulch, and gravel. The documents included substantiation for the Trammers' contributions to Dove Church, but the amounts they substantiated are less than the standard deductions the Commissioner allowed in the notice of deficiency for 2019 and 2020. The substantiation did not include documents to substantiate the amounts of home mortgage interest or state taxes.
OPINION
I. Burden of Proof
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and taxpayers bear the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of proof may shift to the Commissioner in certain circumstances. I.R.C. § 7491(a)(1). To shift the burden, taxpayers must have complied with applicable substantiation and record-keeping requirements and have cooperated with the Commissioner's reasonable requests for "witnesses, information, documents, meetings, and interviews." I.R.C. § 7491(a)(2). The Trammers do not contend that the burden shifts nor does the record establish that they satisfy the prerequisites for shifting the burden under section 7491.
II. Deductions
Taxpayers bear the burden of proving that they are entitled to claimed deductions. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). That burden requires substantiation. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Taxpayers must maintain records sufficient to establish the amount of each deduction. Rogers v. Commissioner, T.C. Memo. 2014-141, at *17; Treas. Reg. § 1.6001-1(a), (e). For some deductions such as vehicle and meal expenses, heightened proof is required. I.R.C. § 274(d).
Section 162(a) allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. The taxpayer bears the burden of proving that business expenses were actually incurred and were "ordinary and necessary." I.R.C. § 162(a). If the taxpayer establishes that an expense is deductible but cannot substantiate the precise amount, the Court may estimate the amount. See Cohan v. Commissioner, 39 F.2d 540, 543-44 (2d Cir. 1930). But the taxpayer must provide some basis for an estimate. See Vanicek v. Commissioner, 85 T.C. 731, 742-43 (1985).
A. Schedule C Expenses
The Trammers may not deduct additional expenses beyond what the Commissioner allowed in the notice of deficiency for 2019 and 2020. They failed to demonstrate the amount of expenses that they incurred or the business purpose for those expenses, and they did not provide sufficient evidence from which the Court could formulate an estimate. They failed to meet their burden.
B. Form 2106
The Trammers may not deduct the employee business expenses reported on Form 2106. Although the performance of services as an employee is considered a trade or business, Primuth v. Commissioner, 54 T.C. 374, 377-378 (1970), the Trammers failed to substantiate the expenses Ms. Trammer incurred in the conduct of her social work. This is particularly true given that the expenses are of the type that require heightened substantiation, such as travel and meal expenses. I.R.C. § 274(d).
C. Itemized Deductions
The Trammers failed to substantiate itemized deductions in excess of the standard deduction amounts that the Commissioner allowed in the notice of deficiency for 2019 and 2020. They established their charitable contributions to Dove Church, but they did not offer any evidence of state taxes paid or their home mortgage interest paid. The Commissioner allowed standard deductions of $24,400 in 2019 and $24,800 in 2020. Because the Trammers did not establish itemized deductions in excess of those amounts, we sustain the Commissioner's disallowance of the Trammers' itemized deductions.
III. Penalties
Section 6662(a) provides that a taxpayer may be liable for a penalty of 20% of the portion of an underpayment of tax required to be reported on a return that is attributable to, among other things, negligence or disregard of the rules or regulations or a substantial understatement of income tax. See I.R.C. § 6662(b)(1) and (2). Only one 6662 accuracy-related penalty may be imposed with respect to a given portion of an underpayment. Treas. Reg. § 1.6662-2(c); see Mileham v. Commissioner, T.C. Memo. 2017-168, at *46.
Under section 7491(c), the Commissioner bears the burden of production with respect to penalties and must produce evidence that any penalty is appropriate. See Higbee, 116 T.C. at 446. For section 6662 penalties, which require managerial approval pursuant to section 6751(b), the Commissioner must establish compliance with section 6751(b). Walquist v. Commissioner, 152 T.C. 61, 68 (2019). Once the Commissioner meets his burden, the Trammers must come forward with persuasive evidence that the Commissioner's determination is incorrect or that an exception applies. Higbee, 116 T.C. at 446-47; see I.R.C. § 6664(c)(1) (reasonable cause and good faith exception).
The Commissioner met his burden of production with respect to section 6751(b). The Civil Penalty Approval form shows that the IRS examiner obtained approval for the penalties in August 2021, before the Commissioner issued the notice of deficiency in January 2022 or otherwise formally communicated the decision to determine penalties.
Section 6662(d)(1)(A) defines a substantial understatement of income tax that exceeds the greater of 10% of the tax required to be shown on the tax return or $5,000. The Trammers' understatements are substantial for 2019 and 2020 because they exceed $5,000 and are greater than 10% of the amount required to be shown on their returns.
"Negligence' . . . includes any failure by the taxpayer to keep adequate books and records or to substantiate items properly." Treas. Reg. § 1.6662- 3(b)(1). The record shows that the Trammers were negligent because they failed to keep adequate books and records to substantiate reported expenses. See Mileham, at *46.
Although the Commissioner met his burden of production as to penalties, the Trammers may nonetheless demonstrate that the reasonable cause and good faith exception of section 6664(c)(1) applies.
Section 6664(c)(1) provides that "no penalty may be imposed under section 6662 with respect to any portion of an underpayment upon a showing by the taxpayer that there was reasonable cause for, and the taxpayer acted in good faith with respect to, such portion." Treas. Reg. § 1.6664-4. Reasonable cause requires the taxpayer to have exercised ordinary business care and prudence as to the disputed item. See United States v. Boyle, 469 U.S. 241, 246 (1985). Good faith reliance on the advice of a professional may satisfy this requirement. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 98 (2000) aff'd, 299 F.3d 221 (3d Cir. 2002).
Reliance on a return preparer excuses a taxpayer from an accuracy-related penalty only if such reliance was reasonable. Id.; Treas. Reg § 1.6664-4(b). Reliance on a return preparer is reasonable if: (1) the adviser was a competent professional who had sufficient expertise to justify reliance, (2) the taxpayer provided necessary and accurate information to the adviser, and (3) the tax preparer actually relied in good faith on the adviser's judgment. Neonatology Associates, 115 T.C. at 99.
The Trammers relied on a return preparer to whom they had been referred. They supplied the return preparer with necessary and accurate information each year, and the return preparer decided what to do with that information. The Trammers reasonably relied in good faith on their return preparer's judgment. Accordingly, the section 6662 accuracy-related penalty does not apply for the years in issue.
IV. Conclusion
The Trammers failed to establish that they are entitled to deductions or losses beyond those already allowed by the Commissioner in the notice of deficiency. Because they relied on their return preparers to accurately prepare their returns, however, they had reasonable cause for, and acted in good faith with respect to, the underpayments. Accordingly, they are not liable for section 6662 penalties.
This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:17 a.m., the above-entitled matter was concluded.)