2004 Tax Ct. Summary LEXIS 159">*159 PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b), THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.
DEAN, Special Trial Judge: This case was heard pursuant to the provisions of
Respondent determined for 1999 a deficiency in petitioners' Federal income tax of $ 16,420 and an accuracy-related penalty under
In the petition, petitioners did not challenge respondent's adjustments to their Schedule A, Itemized Deductions, totaling $ 43,204. Pursuant to Rule 34(b)(4), Schedule A deductions in excess of those stipulated by the parties are deemed conceded by petitioners.
The issues remaining2004 Tax Ct. Summary LEXIS 159">*160 for decision are whether petitioners are: (1) Entitled to deductions on Schedule C, Profit or Loss From Business; (2) entitled to offset a rental real estate loss against wage income; and (3) liable for an accuracy-related penalty under
The stipulated facts and the exhibits received into evidence are incorporated herein by reference. At the time the petition in this case was filed, petitioners resided in Chadds Ford, Pennsylvania.
Background
A. Petitioner's Employment During 1999
1. Eli Lilly & Co.
Dr. Isaac William Hammond (petitioner) worked full time throughout 1999 for Eli Lilly & Co. (Eli Lilly) conducting pharmaceutical research. He received $ 149,615.82 as employee wages from Eli Lilly in 1999.
2. Indiana University
In addition to his full-time employment, petitioner taught a graduate-level class at Indiana University (the university) two afternoons per week from January through May 1999.
The university paid petitioner employee wages of $ 5,000 for teaching for that period. Petitioner was given an office in which to meet students and to perform administrative duties as well as office equipment and supplies to prepare course materials. Petitioner2004 Tax Ct. Summary LEXIS 159">*161 spent an additional 3 to 4 hours at home each of the other week nights preparing for class and grading student assignments.
Petitioner estimates that he traveled 60 miles from Eli Lilly to the university to teach each class. Following class, petitioner traveled about 90 miles from the university to his home. On Form 2106, Employee Business Expenses, petitioner did not claim a deduction for vehicle expenses.
On nights when he taught, petitioner bought dinner. On Form 2106, petitioner claimed a deduction of $ 1,500 for meals.
3. Illinois/Indiana Emergency Medical
On weekends throughout 1999, petitioner treated patients and reviewed patient charts for Illinois/Indiana Emergency Medical (IIEM) at various locations. Most often, however, he performed these services at Howard Community Hospital in Greensburg, Indiana.
Petitioner received employee wages of $ 6,272.50 from IIEM for his services. Petitioner traveled 120 miles round trip from his residence when he treated patients at Howard Community Hospital. He bought his meals when he worked there.
4. American Research Associates, Inc.
As a result of his work at IIEM, petitioner became interested in conducting medical research2004 Tax Ct. Summary LEXIS 159">*162 into the treatment of hypertension. He incorporated American Research Associates, Inc. (ARA), as a nonprofit medical research corporation in Indiana on June 15, 1999.
To obtain funding for this medical research, petitioner prepared and submitted several grant proposals to the National Institutes of Health (NIH) in 1999. He did not, however, receive any grants from NIH during 1999.
On April 17, 2000, petitioners filed a joint Form 1040, U.S. Individual Income Tax Return, for 1999. Among the forms attached to the return were Schedule A; two Schedules C; Schedule E, Supplemental Income and Loss; Form 2106; and Form 8829, Expenses for Business Use of Your Home.
1. Petitioners' Schedules C
a. ARA
The first Schedule C petitioners attached to their 1999 Form 1040 was for ARA, which petitioners characterized as a medical research business. Petitioners included the IIEM wages of $ 6,272.50 in the $ 6,610 reported as gross income on the ARA Schedule C.
Petitioners deducted various business expenses totaling $ 38,557. They claimed car expenses of $ 26,075 based on the number of miles petitioner traveled in 1999 using2004 Tax Ct. Summary LEXIS 159">*163 the same car for commuting from his residence to Eli Lilly and traveling to IIEM and to the university. According to the service book for petitioner's car, petitioner traveled a total of 25,657 miles. On Form 4562, Depreciation and Amortization, petitioners claimed that he used the car 100 percent for business and that he traveled 60,000 miles in 1999.
Petitioners deducted $ 2,100 for insurance premiums petitioner says he paid for the car he used for travel in 1999. Petitioner did not provide any records to substantiate these expenditures.
Petitioners deducted $ 450 for fees petitioner says he paid to an attorney to review his employment contract with IIEM. He does not have a bill from the attorney nor any record of the payment.
Petitioners deducted $ 2,800 for office expenses on the 1999 Schedule C for ARA. Petitioner cannot recall how he calculated the amount of $ 2,800 and did not present any records to substantiate that amount.
Petitioners deducted $ 500 for printer and copier supplies, repairs, and maintenance. Petitioner does not have any receipts to substantiate that amount.
Petitioners deducted $ 1,500 for taxes and licenses, which respondent disallowed. Respondent allowed2004 Tax Ct. Summary LEXIS 159">*164 petitioner's payments for licenses as a miscellaneous itemized deduction on Schedule A.
Petitioners deducted $ 3,567 on Schedule C for travel in 1999 as part of job-hunting expenses. Respondent allowed as a miscellaneous itemized deduction on Schedule A the $ 3,355 that petitioner substantiated.
Petitioners also deducted $ 1,500 in meal expenses and $ 5,395 for the business use of their home which respondent disallowed.
Petitioners' claimed deductions exceeded the wages from IIEM that were reported as gross income on the ARA Schedule C, resulting in a reported loss of $ 37,342. Petitioners applied the reported loss against the $ 149,615.82 of wage income petitioner received from Eli Lilly for 1999. Respondent disallowed all the deductions petitioners claimed on the ARA Schedule C.
b. ATE Consulting Services
The second Schedule C was for ATE Consulting Services (ATE), which petitioner characterized as a consulting business.
Petitioners reported the $ 5,000 of teaching wages petitioner received from the university as gross income on the ATE Schedule C.
2. Petitioners' Schedule E
During 1999, petitioners owned a house in Lithonia, Georgia. Petitioner received approval2004 Tax Ct. Summary LEXIS 159">*165 from DeKalb County, Georgia, to participate in its public assistance program. Petitioner received rents of $ 11,405 for his tenants from DeKalb County under that program. On their Schedule E for 1999, petitioners reported a rental real estate loss of $ 2,635 from the rental of the house.
Petitioners offset the rental real estate loss against the wage income earned from Eli Lilly. Respondent disallowed petitioners' rental real estate loss.
Respondent also determined that petitioners are liable for an accuracy-related penalty under
Discussion
Under
Respondent's determinations are presumed correct, and petitioners bear the burden of proving otherwise.
A. Petitioners' Schedule C Expenses
It is well settled that a corporation is an entity distinct from its shareholders.
To the extent that the claimed deductions related to petitioner's employment at the university and IIEM, they were not substantiated, as petitioners failed to substantiate any of the expenses claimed on the ARA Schedule C. See sec. 6001;
Petitioners reported a rental real estate loss of $ 2,635 from the rental of their property in Georgia. They applied the loss against petitioner's wages from Eli Lilly. Respondent disallowed the loss.
Although petitioners are not entitled to offset the rental real estate loss against petitioner's wages,
On their 1999 tax return, petitioners reported $ 149,616 in wages, $ 53 in taxable interest, $ 3,521 in taxable refunds or credits, $ 6,272.50 in wages from IIEM, and $ 5,000 in wages from the university2004 Tax Ct. Summary LEXIS 159">*169 for an adjusted gross income (without the passive activity loss) of $ 164,462.50. Petitioners' adjusted gross income exceeds $ 100,000 by $ 64,462.50. Fifty percent of $ 64,462.50 is $ 32,231.25. When petitioners' maximum offset amount of $ 25,000 is reduced by $ 32,231.25, it is completely eliminated. Thus, the Court sustains respondent's determination disallowing petitioners' rental real estate loss.
Respondent determined that petitioners are liable for the accuracy-related penalty under
Petitioner failed to keep adequate books and records reflecting expenses of his ARA activities and to properly substantiate other items reported on the return. See
Reviewed and adopted as the report of the Small Tax Case Division.
To reflect the foregoing,
Decision will be entered for respondent.