Decision will be entered under
KERRIGAN,
*221 Respondent later determined a revised deficiency of $120,318, a revised addition to tax under
At trial respondent asserted an increase in petitioner's deficiency, claiming that he had received an additional $25,000 of income from American Steamship Owners, Shipowners Claims Bureau (Shipowners Claims Bureau).
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the year in issue, and all Rule 2013 Tax Ct. Memo LEXIS 229">*230 references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
After concessions the issues for consideration are whether petitioner (1) received taxable income from Friemann Christie, L.L.C. (FC), also known as CFC Advisors, L.L.C. (CFC); (2) received additional taxable income from the Shipowners Claims Bureau; (3) received a taxable distribution from his
Some of the facts are stipulated and are so found. Petitioner resided in Connecticut when he filed the petition.
Petitioner is an executive in the insurance and reinsurance business. His work includes consulting and brokering. Petitioner holds a bachelor's degree in accounting and a master's degree in business administration.
During tax year 2008 petitioner worked for BMS Intermediaries, Inc. (BMS), 2013 Tax Ct. Memo LEXIS 229">*231 which used Odyssey One Source, Inc. (Odyssey), as its payroll firm. Petitioner received wages of $356,333 from BMS/Odyssey as well as compensation of $5,000 directly from BMS. His contract for employment was with Odyssey.
During the tax year in issue petitioner also received a hardship distribution of $14,714 from a 401(k) plan provided by BMS/Odyssey and managed by Lincoln National Life Insurance Co. Petitioner requested the distribution because of tuition costs.
*223 In April 2008 BMS terminated petitioner's employment. Later that month petitioner contacted Peter Christie, a principal at FC. At that time FC's only principals were J. Bernard Friemann and Mr. Christie. Soon after, petitioner began developing business with FC jointly.
On or about May 1, 2008, FC entered into a services, confidentiality, and noncompete agreement (Eagle agreement) with Eagle Ocean Agencies, Inc. (Eagle). The Eagle agreement required petitioner to provide insurance consulting services for Eagle one day per week; in exchange Eagle would pay FC a flat fee of $125,000 from May 1 through December 1, 2008. The Eagle agreement provided that Eagle would reimburse FC for travel costs and related expenses monthly. Expenses 2013 Tax Ct. Memo LEXIS 229">*232 over $5,000 needed prior approval.
On May 14, 2008, petitioner received compensation income of $25,000 from the Shipowners Claims Bureau, a company affiliated with Eagle. Petitioner provided consulting services to the Shipowners Claims Bureau.
On July 14, 2008, petitioner executed a memorandum of agreement with Mr. Christie. In the memorandum of agreement FC agreed to provide petitioner with two drawdown facilities which he could use to supplement his income from FC. Because FC agreed that petitioner should receive an average monthly income of $50,000, the memorandum of agreement allowed him to draw up to $50,000 per *224 month from the first facility. The amount that petitioner could draw each month depended on the income FC allocated to him that month. That amount, however, would not take into account the fees that FC received from Eagle pursuant to the Eagle agreement. The total first drawdown facility available to petitioner was $150,000; once he reached that amount, he would be able to draw from the second drawdown facility.
Petitioner was required to repay the first drawdown facility out of future income allocated to him by FC. Any outstanding balances would bear interest. The memorandum 2013 Tax Ct. Memo LEXIS 229">*233 of agreement stated that all draws would be treated as income earned by petitioner for tax purposes and FC would report any draws on a Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., or a Form 1099-MISC, Miscellaneous Income. In August 2008 FC changed its name to CFC.
On November 24, 2008, petitioner executed a revenue sharing and allocation agreement (revenue sharing agreement) with Mr. Friemann, Mr. Christie, and CFC. The revenue sharing agreement formalized the memorandum of agreement. Its goal was to provide "a means for the balancing of distributions between and among the Producers"— i.e., petitioner, Mr. Friemann, and Mr. Christie—by "normaliz[ing] the flow" of petitioner's earned income with the two *225 drawdown facilities. Like the memorandum of agreement, the revenue sharing agreement provided petitioner with access to $50,000 per month from the first drawdown facility less the sum of the amount of his "earned income received from non-CFC production ('Outside Income')", among other things. The maximum amount petitioner could receive from the first drawdown facility was $150,000. Any draws on the facility would bear interest. The revenue sharing agreement also 2013 Tax Ct. Memo LEXIS 229">*234 reiterated that the amounts CFC had received from Eagle with respect to the Eagle agreement would be excluded from the drawdown calculations.
The revenue sharing agreement further provided that CFC would report any money petitioner received from the drawdown facilities on a Form 1099-MISC or a Schedule K-1. The revenue sharing agreement provided that it would terminate on November 30, 2010.
On November 25, 2008, petitioner executed a guaranty connected with the revenue sharing agreement. The guaranty provided that if a balance remained in the second drawdown facility on November 30, 2010, petitioner would authorize CFC "to reallocate income" from him to Mr. Christie until the balance was eliminated. Mr. Christie was to fund the drawdown facilities.
*226 In tax year 2008 petitioner received the following payments from FC/CFC:
7/2/08 | $75,000 |
8/15/08 | 25,000 |
9/18/08 | 25,000 |
11/25/08 | 25,000 |
12/22/08 | |
Total | 175,000 |
Of these payments $125,000 represented the payments FC/CFC received from Eagle for services petitioner had rendered under the Eagle agreement. On December 22, 2008, Eagle paid petitioner $20,000 directly.
On its 2008 Form 1065, U.S. Return of Partnership Income, CFC reported 2013 Tax Ct. Memo LEXIS 229">*235 the $175,000 paid to petitioner as a guaranteed payment to a partner. CFC also issued petitioner a Schedule K-1 reporting a guaranteed payment of $175,000.
In or around August 2009 the relationship between petitioner and CFC began to falter. On September 4, 2009, Mr. Christie sent petitioner a draft operating agreement. This agreement was never executed.
On April 22, 2010, petitioner and his wife filed their joint Federal income tax return for tax year 2008. On their Schedule A petitioner and his wife claimed a deduction for the following miscellaneous itemized expenses:
*227 | |
Unreimbursed employee expenses | $31,667 |
Tax preparation fee | 750 |
Other (see statement) | |
Total | 32,917 |
On his Schedule C petitioner claimed a deduction for the following business expenses for his consulting business: 22013 Tax Ct. Memo LEXIS 229">*236
Advertising | $3,035 |
Car and truck | 10,593 |
Depreciation | 1,600 |
Insurance | 14,400 |
Interest | 6,800 |
Legal and professional services | 4,796 |
Office | 29,243 |
Rent or lease of vehicles, machinery,and equipment | 14,142 |
Repairs and maintenance | 440 |
*228 Supplies | 2,854 |
Taxes and licenses | 1,980 |
Travel | 15,095 |
Meals and entertainment | 10,378 |
Utilities | 13,985 |
Other | |
Total | 144,701 |
During 2008 petitioner's wife received compensation income of $733 from the Caron Croll Group, Inc.
The notice of deficiency disallowed the expense deductions petitioner claimed on his Schedules A and C. The notice of deficiency also adjusted petitioner's income to reflect the payments he received from FC/CFC and the payment he received from his 401(k) plan.
Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and a taxpayer bears the burden of proving those determinations are erroneous.
Respondent contends that petitioner received $175,000 of taxable income from FC/CFC in the form of a guaranteed payment to a partner during tax year 2008. Respondent claims that petitioner erred when he failed to report the payment on his 2008 Federal income tax return.
Petitioner does not dispute that he received payments in the amounts determined by respondent for the tax year in issue. Petitioner, however, claims that he was not a partner of FC/CFC during the tax year in issue because he never *230 signed CFC's amended and revised operating agreement and that the payments were loans from the partnership to him rather than guaranteed payments. 32013 Tax Ct. Memo LEXIS 229">*238
A partnership generally exists when persons "join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession, or business and when there is community of interest in the profits and losses."
To determine whether a 2013 Tax Ct. Memo LEXIS 229">*240 partnership exists, we consider whether, in the light of all the facts, the parties intended to join together in good faith with a valid business purpose in the present conduct of an enterprise.
Even though petitioner did not sign CFC's operating agreement, both he and FC/CFC acted as though he was a partner of FC/CFC. Petitioner stated at trial that he contacted FC because he wanted to pool his resources and to develop business jointly with FC. When FC/CFC received a payment from Eagle pursuant 2013 Tax Ct. Memo LEXIS 229">*241 to the Eagle agreement, FC/CFC would pay over the entire amount to petitioner immediately.
Petitioner entered into the memorandum of agreement and the revenue sharing agreement, both of which provided for the mechanism under which he would share in the profits of FC/CFC. Moreover, the memorandum of agreement and the revenue sharing agreement stated that FC/CFC would issue petitioner a Form 1099-MISC or a Schedule K-1 with respect to any money he received under either agreement. There is no indication in the record that petitioner objected to receiving a Schedule K-1 on the grounds that he was not a partner.
*233 Furthermore, the revenue sharing agreement refers to petitioner, Mr. Friemann, and Mr. Christie as "producers", thus placing him on the same footing with respect to revenue sharing as Messrs. Friemann and Christie. When asked whether the revenue sharing agreement was between CFC and partners, Mr. Friemann testified: "It was intended to be. * * * We certainly intended that * * * [petitioner] would be a partner in the business." Mr. Friemann also testified that "in 2008, when we were operating, it was always our intention that * * * [petitioner] would be a principal of the business."
Finally, 2013 Tax Ct. Memo LEXIS 229">*242 after petitioner entered into the memorandum of agreement, FC changed its name from "Friemann Christie" to "CFC Advisors". Mr. Friemann testified that they chose the name CFC so that Mr. Christie could tell his clients that it stood for "Christie Friemann Cahill" and petitioner could tell his clients that it stood for "Cahill Friemann Christie". There is no indication that petitioner objected to the name change on the grounds that he was not a partner. Accordingly, we find that petitioner was a partner of CFC during the tax year in issue.
Payments a partner receives from a partnership generally fall into one of three categories. First, a partner may receive payments representing distributions *234 of his or her distributive share of partnership income.
Whether a partner is acting in his or her capacity as a partner—rather than in his or her capacity as one who is not a member of the partnership—while providing services to his or her partnership is a factual determination.
*235 We are satisfied that the facts of this case place the $125,000 of payments made to petitioner in accordance with the Eagle agreement within the ambit of the term "guaranteed 2013 Tax Ct. Memo LEXIS 229">*244 payments" pursuant to
Mr. Friemann further testified that FC/CFC paid the $125,000 to petitioner immediately upon receipt. His testimony is consistent with FC/CFC's bank statements, which show that the day after FC/CFC received a payment from Eagle or one of Eagle's affiliates, petitioner withdrew an amount equal to the payment received. Petitioner does not dispute that he received this money.
Moreover, the memorandum of agreement and the revenue sharing agreement expressly stated that the payments pursuant to the Eagle agreement would not be considered draws from either drawdown facility. Mr. Friemann testified that they "wanted to be clear that this $125,000 would in no way reduce how much 2013 Tax Ct. Memo LEXIS 229">*245 * * * [petitioner] could draw each month on the facility". Mr. *236 Friemann also testified that the $125,000 petitioner received was not subject to the drawdown facilities.
Petitioner thus contracted with FC/CFC to provide consulting services for a fixed fee which was not dependent upon the profits of the partnership. Therefore, the payments from Eagle were determined "without regard to the income of the partnership."
Petitioner claims that the remaining $50,000 of payments he received were not income because they were loans from the partnership to him and were subject to repayment. CFC classified these payments as guaranteed payments on its Form 1065. Petitioner claims in his pretrial memorandum that the remaining $50,000 of payments "may have been made under a Revenue Sharing agreement, which is effectively a draw-down facility, subject repayment and interest." Respondent agrees 2013 Tax Ct. Memo LEXIS 229">*246 that the $50,000 of payments was made under the first drawdown facility.
Whether a transaction is a loan for Federal income tax purposes is a question of fact. The following factors are considered in determining whether a *237 loan is bona fide: (1) the existence of a sum certain; (2) the likelihood of repayment; (3) a definite date of repayment; and (4) the manner of repayment.
Petitioner's argument that the payments represent the repayment of loans is not supported by the record. Although payments under the first drawdown facility in theory accrued interest, neither the memorandum of agreement nor the revenue sharing agreement provided any definite date of repayment or a manner of repayment other than from future income allocated to petitioner. The revenue sharing agreement was merely set to terminate on November 30, 2010. Moreover, petitioner was 2013 Tax Ct. Memo LEXIS 229">*247 required to execute a guaranty only with respect to the second drawdown facility. Therefore, the $50,000 of payments petitioner received pursuant to the first drawdown facility was not for repayment of loans.
Like the $125,000 of payments from the Eagle agreement, the payments from the drawdown facility were not dependent upon the profits of the partnership. The amount available to petitioner did not fluctuate with FC/CFC profits.
*238 Moreover, the memorandum of agreement and the revenue sharing agreement expressly stated that any draws would be considered income to petitioner and would be reported on a Form 1099-MISC or a Schedule K-1. Thus, the remaining $50,000 of payments was also guaranteed payments. 52013 Tax Ct. Memo LEXIS 229">*248
Accordingly, respondent correctly determined that petitioner received taxable income of $175,000 in the form of guaranteed payments from CFC in tax year 2008.
At trial respondent asserted an increase in petitioner's deficiency to reflect an additional payment of $25,000 that petitioner had received from the Shipowners Claims Bureau in tax year 2008. Respondent claims that petitioner erred when he failed to report this amount on his 2008 Federal income tax return. The Commissioner bears the burden of proof with respect to any increase of deficiency.
*239 Respondent proffers (1) an invoice from petitioner to the Shipowners Claims Bureau requesting a fee of $25,000 that would be due on May 8, 2008, and (2) a transaction detail report from Deutsche Bank showing that petitioner received $25,000 from the Shipowners Claims Bureau on May 14, 2008. The treasurer of the Shipowners Claims Bureau also testified that the Shipowners Claims Bureau made the $25,000 payment to petitioner. Finally, petitioner admitted at trial that he received the $25,000 payment from 2013 Tax Ct. Memo LEXIS 229">*249 the Shipowners Claims Bureau but failed to report it on his 2008 Federal income tax return. Petitioner has offered no evidence regarding this issue.
Accordingly, respondent correctly determined that petitioner received an additional taxable income of $25,000 from the Shipowners Claims Bureau in tax year 2008.
Petitioner stipulated that he received a hardship distribution of $14,714 from his 401(k) plan in tax year 2008. Respondent claims that petitioner erred when he failed to report this payment on his 2008 Federal income tax return.
Generally, under
Accordingly, respondent correctly determined that petitioner received taxable income of $14,714 from his 401(k) plan in tax year 2008.
*241 Whether an expenditure is ordinary and necessary is generally a question of fact.
*242 Deductions are a matter of legislative grace, and a taxpayer must prove his or her 2013 Tax Ct. Memo LEXIS 229">*252 entitlement to a deduction.
Certain expenses specified in
On his 2008 Federal income tax return petitioner reported the following expenses on his Schedule C, some of which respondent has conceded:
Travel | $15,095 | $13,112 | $1,983 |
Meals and entertainment | 10,378 | 8,202 | 2,176 |
Car and truck | 10,593 | 7,624 | 2,969 |
Utilities | 13,985 | 6,866 | 7,119 |
Office | 29,243 | 17,495 | 11,748 |
Depreciation | 1,600 | 2,350 | (750) |
Taxes and licenses | 1,980 | 2,807 | (827) |
Legal | 4,796 | 5,425 | (629) |
Advertising | 3,035 | 3,035 | -0- |
Other | 15,360 | 1,796 | 13,564 |
Interest | 6,800 | 5,998 | 802 |
Insurance | 14,400 | 3,718 | 10,682 |
*244 Supplies | 2,854 | -0- | 2,854 |
Maintenance and repairs | 440 | -0- | 440 |
Vehicle lease | |||
Total | 144,701 | 92,514 | 52,187 |
Respondent also has conceded that petitioner is entitled to an education credit of $1,600 for educational expenses incurred 2013 Tax Ct. Memo LEXIS 229">*254 by his wife for the tax year in issue.
Petitioner claims he should be able to deduct the remaining expenses relating to: (1) travel, (2) meals and entertainment, (3) car and truck, (4) utilities, (5) office expenses, (6) other expenses, (7) interest, (8) insurance, (9) supplies, (10) maintenance and repairs, and (11) vehicle lease. Travel expenses, meals and entertainment expenses, car and truck expenses, and vehicle lease expenses are all subject to the strict substantiation rules of
To substantiate his expenses, petitioner offers American Express bank statements, which show his travel, restaurant, merchandise, super market, auto, fees and adjustments, and insurance expenses. Petitioner also offers typed or handwritten lists for each type of expense, which provide the month, name of vendor, amount, and a very general explanation for each item listed. These lists *245 appear to have been created by petitioner. There is no indication when petitioner compiled these lists. Petitioner did not testify specifically about any of the expenses.
The American Express bank statements and self-compiled lists petitioner provided for 2013 Tax Ct. Memo LEXIS 229">*255 those expenses do not provide enough information for us to determine what he actually purchased with respect to those expenses and to what extent these purchases had a business purpose.
Petitioner has offered no receipts regarding his car and truck expenses, utility expenses, interest expenses, supply expenses, and maintenance and repair expenses. The sparse number of receipts and invoices that petitioner does offer fail to provide enough information for us to determine to what extent these purchases had a business purpose.
Petitioner has failed to meet the strict substantiation requirements of
On his 2008 Federal income tax return, petitioner 2013 Tax Ct. Memo LEXIS 229">*256 claimed a deduction for miscellaneous Schedule A expenses totaling $32,917, relating to unreimbursed employee expenses, tax preparation fees, and other expenses. In the notice of deficiency respondent disallowed a deduction for $28,823 of petitioner's Schedule A expenses. In particular, respondent disallowed a deduction for the following Schedule A expenses: (1) vehicle expenses; (2) expenses for travel away from home; (3) business expenses; (4) expenses for meals and entertainment; (5) expenses relating to tax preparation; and (6) other expenses marked "see statement".
Petitioner claims he should be allowed to deduct these expenses, or, in the alternative, that he should be able to move these expenses to his Schedule C and deduct them there.
For his Schedule A vehicle expenses, travel expenses, and meals and entertainment expenses petitioner offers no evidence to support these claims beyond what he offers to substantiate the corresponding Schedule C expenses. Petitioner's evidence thus does not sufficiently indicate that the vehicle expenses, *247 travel expenses, and meals and entertainment expenses were ordinary and necessary unreimbursed employee expenses directly related to a trade 2013 Tax Ct. Memo LEXIS 229">*257 or business during the tax year in issue.
For his Schedule A business expenses petitioner offers: (1) a list titled "Business Expenses"; (2) American Express bank statements showing his merchandise expenses; (3) an invoice from T-Mobile; (4) an unidentified statement showing charges for travel expenses and services; and (5) an American Express bank statement showing his travel expenses. Other than the T-Mobile invoice petitioner provided no receipts regarding his reported business expenses. It is impossible for us to determine what petitioner actually purchased from these vendors or to what extent the purchases had a business purpose. Likewise, it is impossible to determine to what extent the items purchased from T-Mobile had a business purpose.
For his Schedule A tax preparation expenses petitioner offers a bill from his accountant, which refers to the preparation of his 2008 Federal and State income tax returns. The bill, however, is dated October 22, 2008, more than two months before the close of petitioner's 2008 taxable year and more than a year before he filed his 2008 Federal tax return.
*248 Petitioner offers no evidence to support his Schedule A other expenses marked "see statement".
Petitioner 2013 Tax Ct. Memo LEXIS 229">*258 has failed to meet the strict substantiation requirements of
Even if petitioner were to establish that he incurred the expenses reported on his Schedule A, petitioner would not be entitled to deduct those expenses on his Schedule C. A taxpayer may deduct unreimbursed employee expenses as an ordinary and necessary business expense under
Petitioner admitted at trial that the expenses he deducted on Schedule A were incurred before May 2008. Petitioner was employed by BMS until his termination in April 2008, and he testified at trial that he had a noncompete agreement with BMS. He did not begin working with FC/CFC until May 1, 2008. Therefore, if petitioner incurred any of these expenses, they were 2013 Tax Ct. Memo LEXIS 229">*260 incurred before he began his consulting business with FC/CFC at a time when he was still employed by BMS, thereby making them employee business expenses which must be reported as a miscellaneous itemized deduction on Schedule A. Moreover, if *250 the expenses were incurred by petitioner for the purpose of finding new employment in the field of insurance consulting, they would be reportable, if at all, as miscellaneous expenses on Schedule A. Thus, even if petitioner had established that he incurred the expenses, they would be reportable as miscellaneous itemized deductions on Schedule A and would be limited to the amount exceeding 2% of his adjusted gross income.
Petitioner is not entitled to deduct any Schedule A amounts as additional Schedule C expenses for tax year 2008.
Under
Respondent determined that petitioner is liable for an addition to tax pursuant to
Petitioner filed his 2008 Federal income tax return on April 22, 2010. Respondent has shown that petitioner failed to timely file his Federal income tax return for 2008. Consequently, we conclude that respondent has satisfied the burden of production under
Petitioner failed to introduce any evidence that he is not liable for the addition to tax or that his failure 2013 Tax Ct. Memo LEXIS 229">*262 to timely file was due to reasonable cause and not willful neglect. Accordingly, petitioner is liable for the addition to tax pursuant to
Respondent determined that petitioner is also liable for the accuracy-related penalty pursuant to
The phrase "substantial understatement of income tax" means an understatement that exceeds the greater of $5,000 or 10% of the income tax required to be shown on the tax return for the taxable year.
Even if petitioner's understatement is not substantial, respondent claims that petitioner is liable for the
Respondent has shown that petitioner failed to report as income payments totaling $175,000 that he received from FC/CFC, for which he received 2013 Tax Ct. Memo LEXIS 229">*264 a Schedule K-1; a payment of $25,000 that he received from the Shipowners Claims Bureau; and a hardship distribution of $14,714 that he received from his 401(k) plan. Respondent has further shown that petitioner failed to produce any documentary evidence showing that the expenses he reported on his Schedules A and C were ordinary and necessary expenses connected to a trade or business or his job. Respondent thus has shown that petitioner acted negligently.
Petitioner therefore is liable for the accuracy-related penalty unless he can show he had reasonable cause for and acted in good faith regarding part of the underpayment.
Petitioner failed to introduce any evidence that he relied on professional advice or otherwise had reasonable cause for and acted in good faith regarding part of the understatement.
Accordingly, petitioner is liable for the accuracy-related penalty under
Any contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
1. After issuing the notice of deficiency respondent reduced the amounts of the deficiency, addition to tax, and penalty on account of an adjustment to self-employment tax owed by petitioner.↩
2. Petitioner erroneously labeled the business on his Schedule C "Caron Croll Group".
3. Generally, we lack jurisdiction to redetermine the partnership items of a partnership if the partnership is subject to the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Neither FC nor CFC was a partnership subject to TEFRA because both qualified for the small partnership exception under
4.
5. For purposes of