Opinion
Docket No. 2218-20S.
04-14-2021
DASHEAVIA Q. JOLLY & ADEOLA ADENIYI, Petitioners v. Commissioner of Internal Revenue, Respondent
ORDER
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 the parties a copy of the pages of the transcript of the trial in this case before Chief Special Trial Judge Lewis R. Carluzzo at Los Angeles, California, containing his oral finds 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, decision will be entered pursuant to Rule 155.
(Signed) Lewis R. Carluzzo
Chief Special Trial Judge Bench Opinion by Judge Lewis R. Carluzzo March 12, 2021
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 (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152.
This proceeding for the redetermination of a deficiency is a small tax case subject to the provisions of section 7463 and Rules 170 through 174. Except as provided in Rule 152(c), this bench opinion shall not be cited as authority, and pursuant to section 7463(b) the decision entered in this case shall not be treated as precedent for any other case.
Dasheavia Q. Jolly and Adeola Adeniyi appeared unrepresented. Yervant P. Hagopian appeared on behalf of respondent.
In a notice of deficiency dated December 2, 2019 (notice), respondent determined a $9,193 deficiency in petitioners' 2017 Federal income tax, a $1,332 section 6651(a)(1) addition to tax, and imposed a $1,776 section 6662 (a) accuracy-related penalty.
Petitioners concede that they received but failed to report wages of $1,200 that Mrs. Jolly (petitioner) received from Healthsource Global Staffing, Inc. in 2017 and understated gross receipts by $2,516 on the Schedule C, Profit or Loss From Business, attached to their 2017 Federal income tax return (return). Respondent concedes the section 6662(a) accuracy-related penalty.
After concessions, the issues for decision are whether: (1) petitioner received but failed to report wages of $1,255 shown of a Form W-2, Wage and Tax Statement, issued by Moppin; (2) petitioners are entitled to a deduction for other expenses claimed on the Schedule C attached to their return; and (3) petitioners had reasonable cause for failing timely to file their return.
Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioners lived in California.
During 2017 petitioner was employed as a travel nurse. She provided nursing services to patients who were assigned to her by a number of health care agencies. Sometime during that year, she formed Elite Infusion Care (Elite). Elite was formed to provide in-home care to patients in need of IV antibody infusions in the Los Angeles area. On or around September 25, 2017, she used the website legalzoom.com to generate the forms necessary to file for limited-liability-company status for Elite.
On or around August of 2017, petitioner hired a third-party consultant, 21st Century Health Care Consultants (21st Century), to help Elite obtain a Medicare certification and develop its policies and procedures. 21st Century provided other services as well, including nurse tracking, billing, and human resources. All told she was charged and paid $24,000 for the services.
During the year in issue, petitioners maintained a personal checking account with JP Morgan Chase Bank (Chase). According to petitioners' Chase account statement for August of 2017, $23,743.54 was transferred from that account to 21st Century. The difference between this amount and the amount petitioner actually paid is due to a down payment made before the electronic transfer shown on her banking statement was made.
In or around September 2017, shortly after its formation, petitioner was informed that it would take up to two years for Elite to receive a license from the State of California. Without a state license, services that Elite intended to provide to its patients might not be covered by private health insurance plans, or public plans such as Medicaid and Medicare. Unwilling to wait the two years for the license, petitioner decided in or around October of 2017 to abandon her efforts to continue with the business she planned to conduct through Elite. Instead, by the end of 2017, she turned her attention to a different business involving nurse staffing. That business did not begin until some point in 2018. As best as we can tell from the record, about 60% of the amount petitioner paid to 21st Century relate to services that can be and were attributable to petitioner's nurse staffing business.
Petitioners' 2017 self-prepared, joint Federal income tax return was filed on July 10, 2018. That return includes a Schedule C for Elite showing no gross receipts and expenses of $29,604, resulting in a loss of $29,604, which is taken into account in the computation of the adjusted gross income reported on that return. The Schedule C deduction for other expenses, includes "ACHC accreditation standards" of $199, "legal zoom LLC formation" of $283, "virtual office/conference room rental" of $6,250, "home care consultant" of $18,000, "medical Law attorney Cali" of $3,317, and "Startup Costs" of $1,280. The home care consultant item is an understatement of the fee petitioner paid to 21st Century.
In the notice, respondent: (1) increased petitioners' Schedule C gross receipts by $2,516; (2) increased petitioners' wage income by $2,455; (3) disallowed the Schedule C deduction for other expenses; (4) determined that petitioners are liable for an addition to tax under section 6651(a)(1); and (5) imposed a section 6662(a) accuracy-related penalty. Other adjustments made in the notice are computational and will not be addressed in this bench opinion.
As a general rule, the Commissioner's determination of a taxpayer's Federal income tax liability in a notice of deficiency is presumed correct, and the taxpayer bears the burden of proving that the determination is erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
I. Unreported Income
Section 61(a) provides that "gross income means all income from whatever source derived". As relevant, respondent determined that petitioners failed to report wages of $1,255, as evidenced and reported to respondent on a Form W-2 issued by Moppin. The amount shown on the information return clearly constitutes income, and nothing else need be said on the point.
Section 6201(d) provides that the Commissioner in certain circumstances cannot rely on information returns alone to establish unreported income but "shall have the burden of producing reasonable and probative information" in addition thereto. This provision applies only where the taxpayer "asserts a reasonable dispute with respect to any item of income reported on an information return" and only if "the taxpayer has fully cooperated with the Secretary". Sec. 6201(d).
As best as we can tell, petitioners cooperated with respondent during this proceeding. Petitioner credibly testified that she received but failed to report wage income of $1,200 and Schedule C gross receipts of $2,516. On the other hand, she credibly testified that she did not receive the $1,255 of wage income reported on a Form W-2 issued by Moppin, and we accept her testimony on the point. Accordingly, respondent's adjustment increasing petitioners' income by the $1,255 is not sustained.
II. Schedule C Deductions
As we have observed in countless opinions, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). Petitioners do not claim, and the record does not otherwise demonstrate that the provisions of section 7491(a) are applicable here, and we proceed as though they are not.
A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate that the expense to which the deduction relates has been paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965); sec. 1.6001-1(a), Income Tax Regs.
Taxpayers may deduct ordinary and necessary expenses paid in connection with operating a trade or business. Sec. 162(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004).
Petitioners have failed to produce any canceled checks, receipts, or other reliable documents either originally maintained or reconstructed that substantiate the Schedule C expenses for "virtual office/conference room rental" of $6,250, "medical Law attorney Cali" of $3,317, and "Startup Costs" of $1,280. Accordingly, petitioners are not entitled to deductions for those expenses.
With respect to the remaining Schedule C expenses, we find that petitioner paid what would be considered ordinary and necessary trade or business expenses for "ACHC accreditation standards" of $199, "legal zoom LLC formation" of $283, and "home care consultant" of $24,000. That is not to say, however, that petitioners are entitled to current deductions for these items.
Before a section 162(a) deduction is allowable, the business must have actually commenced. See sec. 195(a);see also Richmond Television Corp. v. United States, 345 F.2d 901, 907 (4th Cir.1965), vacated and remanded on other grounds, 382 U.S. 68 (1965). It is clear that Elite did not function as a "going concern" as of the close of 2017. See Richmond Television Corp. v. United States, 345 F.2d at 907. Accordingly, petitioners' Schedule C expenses would have to be capitalized and could be deducted only as allowable startup expenditures pursuant to section 195.
Section 195(b)(2) provides that when a trade or business is completely disposed of or abandoned, any deferred expenses may be deducted under section 165 as a loss during the year of abandonment. This includes startup expenses incurred in an unsuccessful attempt to create a business. See sec. 195(b)(2); See, e.g., Seed v. Commissioner, 52 T.C. 880 (1969) (finding deductible loss under section 165(c)(2) for legal and other expenses on abandonment of business venture following denial of application for a charter).
The record shows that Elite ceased as a proposed business in or around October of 2017, shortly after its formation. Accordingly, we find that petitioners are entitled to Schedule C deductions for expenses for "ACHC accreditation standards" of $199 and "legal zoom LLC formation" of $283 as startup expenses properly deductible under section 165. However, as petitioner noted in her testimony, a substantial percentage of the services provided by 21st Century were used in her nurse staffing business later in 2018. Relying upon detail shown in the estimated costs for such service, we find that 40% of the fees paid by petitioner are allocable to Elite and 60% of the fees are allocable to her nurse staffing business that began operation in 2018. That being so, only 40% of the fees may be included in the amount of loss that petitioner would be entitled to deduct in 2017. The Federal tax consequences, if any, of the remaining portion would have to be taken into account in later years.
III. Section 6651(a)(1) Addition to Tax
Petitioners 2017 return was due to be filed on or before April 15, 2018, but it was not filed until July 10, 2018. See secs. 6072(a), 7503. Consequently, respondent imposed a section 6651(a)(1) addition to tax for 2017.
Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return unless the taxpayer proves that such failure is due to reasonable cause and is not due to willful neglect. See United States v. Boyle, 469 U.S. 241, 245 (1985); Section 6651(a)(1) imposes an addition to tax of 5% of the tax required to be shown on the return for each month or fraction thereof for which there is a failure to file, not to exceed 25% in the aggregate.
Respondent's records demonstrate that petitioners' 2017 return was not timely filed, and petitioners do not dispute the point. Respondent's section 7491(c) burden of production has been met with respect to the imposition of the addition to tax.
To avoid liability for the additions to tax, petitioners would have to show that the failure to timely file (1) did not result from willful neglect and (2) was due to reasonable cause. See sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect has been defined as a "conscious, intentional failure or reckless indifference." Boyle, 469 U.S. at 245. Reasonable cause exists where the taxpayer exercised ordinary business care and prudence but was nevertheless unable to file the return by the date prescribed by law. Id. at 246. The existence of reasonable cause or willful neglect is a question of fact. Id. at 249 n.8.
Petitioners explain that they filed their return late because they were waiting to received Mr. Adeniyi's Social Security number. Apparently, petitioners did not know they could request an automatic extension of time to file their return. Be that as it may, petitioners did not cite, nor are we aware of, any authority that would allow a taxpayer to avoid section 6651(a)(1) liability on such a basis. Accordingly, petitioners are liable for the section 6651(a)(1) addition to tax.
To reflect the foregoing, decision will be entered under Rule 155. This concludes the Court's bench opinion in this case.
(Whereupon, at 8:24 a.m., the above-entitled matter was concluded.)