Judges: "Dean, John F."
Attorneys: Carlos Franco, Pro se. Kevin W. Coy , for respondent.
Filed: Oct. 28, 2008
Latest Update: Dec. 05, 2020
Summary: T.C. Summary Opinion 2008-136 UNITED STATES TAX COURT CARLOS FRANCO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 26462-06S. Filed October 28, 2008. Carlos Franco, pro se. Kevin W. Coy, for respondent. DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shal
Summary: T.C. Summary Opinion 2008-136 UNITED STATES TAX COURT CARLOS FRANCO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 26462-06S. Filed October 28, 2008. Carlos Franco, pro se. Kevin W. Coy, for respondent. DEAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall..
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T.C. Summary Opinion 2008-136
UNITED STATES TAX COURT
CARLOS FRANCO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26462-06S. Filed October 28, 2008.
Carlos Franco, pro se.
Kevin W. Coy, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed. Pursuant to section 7463(b),
the decision to be entered is not reviewable by any other court,
and this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the years in
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issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Respondent determined deficiencies of $2,307 and $3,855 in
petitioner’s 2001 and 2002 Federal income taxes, respectively.
Respondent concedes that petitioner has substantiated
additional nontaxable deposits of $605 for 2001 consisting of:
(1) $213 for a Federal tax refund; (2) $8 for a vehicle license
fee rebate; (3) $165 for gifts; and (4) $219 for a Federal tax
rebate.
The issues remaining for decision are whether petitioner:
(1) Understated his 2001 and 2002 gross receipts on Schedule C,
Profit or Loss From Business; (2) is entitled to claim Schedule C
business expense deductions of $1,833 and $10,011 for 2001 and
2002, respectively, and (3) is entitled to greater allowances for
itemized deductions than respondent determined for each year.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. When petitioner filed his
petition, he resided in California.
Petitioner was self-employed during 2001 and 2002, operating
a lawn care service. Petitioner filed Forms 1040, U.S.
Individual Income Tax Return, and Schedules C for each year that
respondent examined. On his Schedules C petitioner reported
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Schedule C gross receipts of $19,100 and $39,933 for 2001 and
2002, respectively. Respondent’s revenue agent (RA) and his
Appeals officer (AO) reconstructed petitioner’s Schedule C gross
receipts for each year using the bank deposits method.1 Their
reconstructions
include:
Item 2001 2002
1 1
Total deposits $16,292 $39,418
2 2
Taxable deposits 15,053 33,578
Cash expenditures that did not
come from deposited funds or
3
nontaxable sources 16,725 11,520
4 4
Adjusted Sch. C gross receipts 31,778 45,098
Understatement in Sch. C gross
5 5
receipts 12,678 5,165
1
For 2001 the RA determined that petitioner had total
deposits of $16,172 and $120 into his Bank of America and
Washington Mutual accounts, respectively. For 2002 the RA
determined that petitioner had total deposits of $38,978 and
$440 into his Bank of America and Washington Mutual
accounts, respectively.
2
For 2001 the RA allowed petitioner reductions for
nontaxable deposits of $239 for returned checks and $1,000
for a loan payment received, determining taxable deposits of
$14,933 and $120 into his Bank of America and Washington
Mutual accounts, respectively. For 2002 the RA determined
total deposits of $38,978 and $440 into his Bank of America
and Washington Mutual accounts, respectively. The RA
allowed petitioner reductions for nontaxable deposits of:
(1) $50 for a returned check; (2) $981 for a Federal tax
refund; (3) $1,700 for loan payments received; and (4) $5
from his total deposits. The RA determined taxable deposits
of $36,247 and $435 into his Bank of America and Washington
Mutual accounts, respectively. At petitioner’s Appeals
hearing, he provided a “register tape” to the AO in which he
identified additional nontaxable deposits of $3,104 for
2002. The AO allowed petitioner an additional $3,104
1
Figures have been rounded to the nearest dollar.
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reduction from the $36,247 in taxable deposits with respect
to the Bank of America account. The AO determined that
petitioner had total taxable deposits of $33,578 for 2002.
3
The RA determined cash expenditures of $16,520. The AO
reduced the $16,520 figure by the $5,000 cash hoard that
petitioner at that time claimed he had on hand for use in
2002. The AO determined cash expenditures of $11,520.
4
$15,053 (2001 taxable deposits) + $16,725 (2001 cash
expenditures) = $31,788. $33,578 (2002 taxable deposits) +
$11,520 (2002 cash expenditures) = 45,098.
5
$31,778 (2001 adjusted Schedule C gross receipts) -
$19,100 (2002 Schedule C gross receipts petitioner reported)
= $12,678. $45,098 (2002 adjusted Schedule C gross
receipts) - $39,933 (2002 Schedule C gross receipts
petitioner reported) = $5,165.
Petitioner’s reported Schedule C expense deductions and
respondent’s allowances therefor include:
Item Per return Respondent
2001 2002 allowed
2001 2002
Depreciation $8,268 $3,722
Special depreciation 10,631 7,976
Sec. 179 expenses 3,310 6,769 3,310 6,304
Legal & profl. servs. 169 225 169 225
Taxes & licenses 89
Other expenses:
Safety boots 220 340 220 340
Fuel 1,380 1,409 1,186 1,409
“MISC”1 1,800 3,500 -0- -0-
“Telephone” 366 291 366 291
2 2
“SCE” 493 516 -0- -0-
Vehicle tags 55 55
AAA club 71 71
Deduction for bus.
2 2
use of home 416 434
3 3
Vehicle ins. 654 1,671
1
According to the RA, “[Petitioner said “MISC”] was an
estimate of expenses he forgot to deduct elsewhere.”
2
Respondent represents that “SCE” is a “utility” and that the
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RA allowed 6 percent of the “SCE” expenses in the calculation
of petitioner’s deductions for the business use of his home
for 2001 and 2002, even though petitioner did not claim a
deduction for the business use of his home for either year on
his Schedules C.
3
The AO determined a 90-percent business use of petitioner’s
vehicle(s).
The $31,778 in adjusted 2001 Schedule C gross receipts less
$6,321 in allowed Schedule C expense deductions generated a
$25,457 net profit for 2001 rather than the $11,362 net profit
that petitioner reported. The $45,098 in adjusted 2002 Schedule
C gross receipts less $22,587 in allowed Schedule C expense
deductions generated a $22,511 net profit for 2002 rather than
the $7,769 net profit that petitioner reported.
Other pertinent items reported by petitioner and
respondent’s adjustments thereto include:
Item Per Return Respondent’s
2001 2002 Adjustments
2001 2002
Self-emp. tax1 $1,605 $3,597 $1,098 $3,181
Deduction for self-emp.
tax1 803 549 1,799 1,591
Form 1040 taxable income 6,624 393 8,704 14,093
Form 1040 “total tax” 2,518 1,137 4,825 4,992
2
Form 1040 interest income 5,089 2,346
1
The adjustments to petitioner’s self-employment taxes and his
deductions therefor are computational and are resolved
consistent with the Court’s decision.
2
Petitioner received $2,743 from “Santoro Limited” and
reported the amount as interest income on his Schedule B,
Interest and Ordinary Dividends, for 2001. Respondent removed
the amount and included it in petitioner’s 2001 Schedule C
gross receipts. For 2002 respondent did not adjust the $1,501
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that petitioner received from “Santoro Limited” and reported
as interest income. Petitioner originally argued that the
bank deposits analysis was incorrect because $2,743 was
included twice; i.e., in interest income and in his 2001
Schedule C gross receipts, but he abandoned this claim.
Although petitioner did not elect to itemize his deductions
for either year, respondent allowed petitioner $12,826 in
“Schedule A itemized deductions” for 2001 instead of the lesser
$4,550 standard deduction. The 2001 “Schedule A itemized
deductions” consist of $1,867 for real estate taxes and $10,959
for charitable contributions. No adjustments were made to
petitioner’s $4,700 standard deduction for 2002 or to his “Self-
employed health insurance” deductions, which he reported as
$1,574 and $1,991 for 2001 and 2002, respectively.
Discussion
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency
are presumed correct, and the taxpayer has the burden to prove
that the determinations are in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). But the burden of proof on
factual issues that affect a taxpayer’s tax liability may be
shifted to the Commissioner if the taxpayer introduces credible
evidence with respect to the issue. See sec. 7491(a)(1).
Petitioner has not alleged or proven that section 7491(a)
applies; therefore, the burden remains on him.
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II. Petitioner’s Schedule C Gross Receipts
A taxpayer is required to maintain sufficient records to
allow for the determination of his or her correct tax liability.
Sec. 6001; Petzoldt v. Commissioner, 92 T.C. 661, 686 (1989). If
a taxpayer fails to maintain or does not produce adequate books
and records, the Commissioner is authorized to reconstruct the
taxpayer’s income, and the reconstruction need only be reasonable
in view of all the surrounding facts and circumstances. See sec.
446; Petzoldt v. Commissioner, supra at 686-687; Giddio v.
Commissioner,
54 T.C. 1530, 1533 (1970). Indirect methods, such
as the bank deposits method, may be used for such purposes.
Holland v. United States,
348 U.S. 121 (1954).
The bank deposits method of determining income assumes that
all money deposited into a taxpayer’s bank accounts during a
specific period constitutes gross income. Price v. United
States, 335 F.2d 671, 677 (5th Cir. 1964); see also Tokarski v.
Commissioner,
87 T.C. 74, 77 (1986) (bank deposits constitute
prima facie evidence of income). But the Commissioner must take
into account any nontaxable source or deductible expense of which
he has knowledge. Price v. United States, supra at 677. Under
the bank deposits method: (1) Bank deposits are totaled;
(2) nonincome deposits, redeposits, or transfers are eliminated;
(3) an excess of deposits, as adjusted, over reported income is
considered unreported income; (4) cash expenditures that did not
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come from deposited funds or nontaxable sources are added to
unreported income; and (5) deductible expenses not accounted for
in the taxpayer’s return are allowed. Bacon v. Commissioner,
T.C. Memo. 2000-257, affd. without published opinion 275 F.3d 33
(3d Cir. 2001).
Petitioner told the RA that he never deposited cash received
in his lawn services business, only checks. Petitioner also told
the RA that he calculated his Schedule C gross receipts by adding
his bank deposits to his “1099-misc [income]”. As noted by the
RA, however, the $40,914 sum2 does not match petitioner’s
reported $39,933 in Schedule C gross receipts for 2002.
According to the RA, “he states that he forgot to report the cash
received due to his medical condition [i.e., hearing and vision
problems, and it was] not fraud because he did not intend to
underreport his income.”
The evidence shows that petitioner failed to provide
adequate books and records to account for his Schedule C gross
receipts. In addition, petitioner admitted to the RA that he did
not report all of his income. Therefore, the Court finds that
respondent’s use of an indirect method to reconstruct
petitioner’s Schedule C gross receipts was reasonable.
2
$39,413 (total deposits) + $1,501 (“1099-misc [income]”) =
$40,914.
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At trial petitioner conceded Schedule C gross receipts of
$31,173 and cash expenditures of $16,725 for 2001. After the
parties’ concessions, the parties limited their arguments to the
disputed issues with respect to the 2002 bank deposits analysis.
The Court addresses these arguments in turn.
Although petitioner also conceded that he paid expenses of
$16,520 in cash during 2002, he argues that the 2002 bank
deposits analysis is incorrect because his bank deposits totaled
$34,739 while he reported $39,933 in Schedule C gross receipts.
Thus, the “$5,193 [sic]” difference represents cash he received
and reported. Therefore, the $16,520 of undeposited-cash
expenditures that the IRS determined “never existed but rather
$11,327 [sic] only.” And after reducing the $11,327 figure by
petitioner’s $5,000 cash hoard, then only “$6,137 [sic]” remains
in dispute as undeposited-cash expenditures for 2002.
Respondent contends that petitioner had additional amounts
of undeposited-cash expenditures above the “$5,193 [sic]” figure.
“All undeposited cash includes that amount. We’re not saying he
didn’t report it.”
Although petitioner told the RA that he never deposited cash
received in his lawn services business, at trial he
inconsistently asserted that he made deposits into his bank
accounts “Through checks and cash money”. In addition, neither
petitioner’s testimony nor his 2002 bank statements establish the
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source of the $5,1943 in cash that he received and allegedly
reported as gross income; i.e., whether it consists of deposited
amounts, nontaxable sources, or undeposited cash. Therefore,
petitioner has not proven that he is entitled to a $5,194
reduction from the $11,250 in undeposited-cash expenditures.4
Petitioner next argues that the $11,250 in undeposited-cash
expenditures for 2002 should be reduced to account for the
$12,793 in checks that he cashed between 1984 and 1992 and
allegedly placed into a shoe box hidden on a shelf above the
washing machine in his garage. The funds were his “personal
money that [he earned and paid taxes on] at one time”.
Respondent contends that the funds “are current earnings
from his lawn care business.”
Petitioner testified that he was a “survivalist” who had
saved $10 to $20 a week since he started working, and since he
“hadn’t used it in 25 years, [he decided to use it in 2002, and
he told his customers that he would not accept cash during
2002]”. Petitioner also testified that he did not know how much
cash he had on hand for 2002 because it was not relevant to him.
3
This figure represents the correct amounted ($39,933
(reported Schedule C gross receipts) - $34,739 (total bank
deposits)).
4
The $5,194 for which petitioner asserts that he should get
a reduction from his undeposited-cash expenditures has been taken
into account in the computation of the understatement. See supra
p. 4 table note 5.
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During the initial interview on December 10, 2003,
petitioner told the RA that he had between $35 and $40 in cash on
hand for 2002. According to the RA, petitioner changed his story
later that day, claiming that he had between $3,000 and $5,000 in
cash on hand and that he had $1,500 in cash on hand by the end of
2002. At their next meeting, on February 19, 2004, petitioner
claimed that he definitely had $5,000 on hand at the beginning of
2002. Petitioner knew he had $5,000 because he always had that
amount and “he didn’t take any money out of his cash hoard”
during 2001, but “this time he stated [that he did not have any
money on hand at the end of 2002]”, according to the RA.
Petitioner also told the RA that nobody knows about his cash
hoard because “he [lived] alone and had no personal life.” At
trial, respondent asked petitioner whether he showed his cash
hoard to anybody and whether anybody else knew about it.
Petitioner replied: “No, no, no. Of course not.”
Petitioner, however, called a witness, Mr. Walton, to
corroborate his cash hoard. Mr. Walton testified that he knew
that petitioner had a shoe box, that petitioner “might make a
withdrawal from his account and he never take it and turn it back
in the bank. He’ll put it in his shoe box.” Mr. Walton
testified that he knew this because he had seen petitioner put
money in the shoe box, and it contained “Quite a bit of money.
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Just like * * * over $20,000. Because he bought a truck out of
the shoe box.”
But when questioned by the Court, Mr. Walton testified that:
(1) He did not go with petitioner to purchase the truck; (2) he
knew the purchase money came from the shoe box because petitioner
did not go to the bank for it, but he did not see petitioner take
the purchase money out of the shoe box; (3) he knew that
petitioner got the purchase money out of the shoe box “Because
[petitioner] told me he did”; (4) he knew that the shoe box was
in the garage “because [petitioner] had told [him about it]”;
and (5) he had never seen the contents of the shoe box.
The Court accords little probative weight to, and views with
suspicion, the testimony of Mr. Walton, petitioner’s only
corroborating witness. Mr. Walton’s testimony was based on
hearsay from petitioner. Even if the Court had determined that
Mr. Walton’s testimony was credible, his testimony would not
support petitioner’s inconsistent statements as to the amounts of
his cash hoard, nor could his testimony show that the $11,250 in
undeposited-cash expenditures should be reduced by the $12,793 in
checks that petitioner cashed between 1984 and 1992 and allegedly
did not spend until 2002.
Petitioner’s testimony that he kept a cash hoard well over
the $11,250 in undeposited-cash expenditures in a shoe box over
his washing machine for 20 some years until he decided to spend
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it in 2002 is at best self-serving. See Parks v. Commissioner,
94 T.C. 654, 659 (1990). The Court also finds improbable
petitioner’s claim that while he cashed $12,793 in checks between
1984 and 1992, he did not spend the money, and he kept it in a
shoe box for use in 2002, despite maintaining various
certificates of deposit and bank accounts.5 In addition,
petitioner has inconsistently claimed that he had cash on hand
for 2002 consisting of: (1) $12,793 (checks cashed between 1984
and 1992); (2) $35 to $40; (3) $1,500; and (4) $3,000 to $5,000.
Simply put, petitioner’s cash hoard assertion is riddled with
inconsistencies and implausibilities and has not been supported
by objective evidence in the record. See Parks v. Commissioner,
supra at 659; Boone v. Commissioner, T.C. Memo. 1997-471, affd.
without published opinion
208 F.3d 212 (6th Cir. 2000);Phillips
v. Commissioner, T.C. Memo. 1984-133; In re Kelesyan, 153 Bankr.
927, 929-930 (Bankr. M.D. Fla. 1993).
On the basis of the foregoing, respondent’s determinations
of $16,725 and $11,250 in undeposited-cash expenditures for 2001
and 2002, respectively, are sustained. Respondent’s
determinations of $31,173 and $45,098 of Schedule C gross
receipts for 2001 and 2002, respectively, are sustained. Insofar
5
Aside from the Bank of America and Washington Mutual
accounts, petitioner also held four certificates of deposit worth
$47,320.79 as of Dec. 31, 2001. Petitioner owned six
certificates of deposit worth $63,148.56 as of Jan. 3, 2003.
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as understatements to petitioner’s Schedule C gross receipts for
2001 and 2002 are proposed, respondent’s determinations are
sustained.6
III. Petitioner’s Schedule C Expense Deductions
The 2001 Schedule C expense deduction in dispute is the
$1,833 of the claimed $4,259 in other expenses that respondent
disallowed. Although the AO allowed petitioner a $654 expense
deduction for vehicle insurance for 2001, respondent argues that
the $1,833 figure consists of $194 for fuel, $493 for “SCE”, and
$1,800 for “MISC”. It is unclear from the record whether
respondent allowed the $654 expense deduction as a separate item
within the other expenses category or whether it offsets the
$1,800 “MISC” expense for 2001 (i.e., only $1,146 of the “MISC”
expense remains in dispute).
The 2002 Schedule C expense deductions in dispute are the
$2,345 of the claimed $6,182 in other expenses and $7,666 of the
claimed $25,668 in section 179 expenses and depreciation
deductions that respondent disallowed. Although the AO allowed
petitioner a $1,671 expense deduction for vehicle insurance for
2002, respondent alleges that the $2,345 figure consists of $516
6
Respondent determined understatements of $12,678 and $5,165
for 2001 and 2002, respectively. After taking into account the
parties’ concessions and the Court’s allowances for Schedule C
expense deductions, infra, the understatements in petitioner’s
Schedule C gross receipts are $11,906.40 and $4,980.50 for 2001
and 2002, respectively.
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for “SCE” and $3,500 for “MISC”. It is unclear from the record
whether respondent allowed the $1,671 expense deduction as a
separate item within the other expenses category or whether it
offsets the $3,500 “MISC” expense for 2002 (i.e., only $1,829 of
the “MISC” expense remains in dispute). The $7,666 figure
consists of: (1) $465 of the section 179 expense deduction; (2)
$2,655 of the special depreciation allowance; and (3) $4,546 of
the depreciation deduction.
Petitioner asserted that he had “proved them, and they’re in
[my exhibits, which I showed to the IRS]”.
Petitioner told the RA that he had paid for the fuel in
cash. There is no evidence in the record substantiating payments
of $194 for fuel in 2001. Respondent’s disallowance of the $194
fuel expense deduction for 2001 is sustained. See INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992).
With respect to the $1,800 and $3,500 deductions for “MISC”
expenses for 2001 and 2002, respectively, petitioner has provided
receipts substantiating payments of $46 to the franchise tax
board for 2001, $99 for a permit for 2002, which bears an
undecipherable notation, $175.50 for a building permit and
landscaping business license for 2002, and vehicle expenses of:
(1) $71 for “AAA Renewal” for 2001; (2) $63 for “DMV Renewal” for
2001; (3) $10 to the “City of Moreno Valley” for vehicle tags for
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2002; and (4) $727.20 and $1,856.60 to Nationwide for automobile
insurance for 2001 and 2002, respectively.
The Court finds that petitioner is entitled to deduct the
$46 that he paid to the franchise tax board in 2001 and the
$175.50 for the building permit and landscaping business license
in 2002. See secs. 162, 164; see also Cunningham v.
Commissioner, T.C. Memo. 1989-260 (and cases cited therein).
Petitioner has not proven that the $99 permit for 2002, which
bears the undecipherable notation, qualifies as an ordinary and
necessary business expense and that is it not a nondeductible
personal expense. See secs. 162, 262. Thus, he is not entitled
to a deduction for that permit. The AO allowed petitioner
deductions of $654 and $1,671 for vehicle insurance based upon a
90-percent business use.7 Petitioner has not established that he
is entitled to a greater business use percentage or that he is
entitled to allowances for insurance greater than $654 and $1,671
for 2001 and 2002, respectively. Because the AO allowed
petitioner a business use percentage of 90 percent, the Court
will also allow petitioner 90 percent of his vehicle expenses
for: (1) $63.90 for “AAA Renewal” for 2001; (2) $56.70 for “DMV
Renewal” for 2001; and (3) $9 for the “City of Moreno Valley”
vehicle tags for 2002. Compare Cohan v. Commissioner, 39 F.2d
7
The RA determined business use percentages of 72 and 90
percent for petitioner’s Ford and Toyota trucks, respectively.
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540, 543-544 (2d Cir. 1930), with Sanford v. Commissioner, 50
T.C. 823, 827 (1968) (pursuant to section 274(d), the Court
cannot estimate expenses with respect to certain items), affd.
per curiam
412 F.2d 201 (2d Cir. 1969).
There is no evidence in the record substantiating payments
of $465 for tools in 2002. Therefore, the Court finds that
petitioner is not entitled to an allowance greater than the
$6,304 that the RA allowed as section 179 expenses for 2002.
Petitioner also has not proven any infirmity with respect to
respondent’s determinations disallowing $2,655 of petitioner’s
special depreciation deduction and $4,546 of his depreciation
deduction. Accordingly, respondent’s determinations are
sustained.
Petitioner submitted canceled checks substantiating
telephone payments of $361.90 and $71.65 for 2001 and 2002,
respectively. It is unclear from the record whether respondent
has already given petitioner allowances for these items or that
the items qualify as deductible business expenses. See sec.
262(b) (charges for basic telephone service for the “1st
telephone line” at the taxpayer’s residence are treated as a
nondeductible personal expense); see also secs. 274(d),
280F(d)(4)(A)(v) (requiring strict substantiation of cell phone
expenses). Accordingly, petitioner is not entitled to allowances
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greater than the $366 and $291 for “Telephone” that respondent
allowed for 2001 and 2002, respectively.
Petitioner submitted canceled checks substantiating:
(1) $328 and $341 for “Earthquake” insurance for 2001 and 2002,
respectively; (2) $651 and $808 for “Home” insurance policies for
2001 and 2002, respectively; and (3) $696 for his homeowners’
association fees for each year. Respondent allowed $29.58 and
$30.96 of the “SCE” expense for 2001 and 2002, respectively.
Respondent also allowed a $216 depreciation deduction for
petitioner’s home in the computation of the deduction for the
business use of his home for each year. Petitioner has failed to
establish that respondent erred in disallowing the claimed “SCE”
expense with respect to petitioner’s Schedule C and treating it
as an expense for the business use of his home or that he is
entitled to an allowance greater than 6 percent of the item.8
Petitioner also has not established that he is entitled to
deductions for the business use of his home greater than the $416
and $434 allowances that respondent determined for 2001 and 2002,
respectively. Respondent’s determinations are sustained.
IV. Petitioner’s Itemized Deductions
Respondent allowed petitioner itemized deductions of $12,826
for 2001 consisting of $1,867 for real estate taxes and $10,959
8
Petitioner told the RA that he paid “SCE” in cash; thus, he
has not substantiated any payments to “SCE” for either year.
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for charitable contributions. Respondent allowed petitioner the
$4,700 standard deduction for 2002.
Petitioner has submitted canceled checks or receipts
substantiating: (1) $1,869.96 and $1,969.54 for real estate
taxes for 2001 and 2002, respectively; (2) $291 and $264 for
charitable contributions for 2001 and 2002, respectively;
(3) $2,448 and $3,110 for health insurance premiums for 2001 and
2002, respectively; and (4) medical/dental expenses of $56.69 for
2001.
Self-employed individuals may deduct 60 percent and 70
percent of their health insurance premiums for 2001 and 2002,
respectively, and may deduct the excess thereof pursuant to
section 213. Sec. 162(l)(1), (3). Petitioner claimed self-
employed health insurance deductions of $1,574 and $1,991 for
2001 and 2002, respectively. Respondent has made no adjustment
to petitioner’s claimed $1,574 self-employed health insurance
deduction for 2001, although it should have been limited to
$1,468.80 (60 percent of $2,448). Petitioner has not proven that
he is entitled to an amount greater than the $1,574 that
respondent allowed as a self-employed health insurance deduction
for 2001, but he may deduct the $8749 excess in the amount
allowed by section 213. Petitioner’s self-employed health
9
2001 substantiated health insurance premium payments of
$2,448 less the $1,574 self-employed health insurance deduction
that respondent allowed.
- 20 -
insurance deduction for 2002 is limited to $2,177 (70 percent of
$3,110). Because petitioner only deducted $1,991, he is entitled
to deduct an additional $186 as a self-employed health insurance
deduction for 2002. In addition, petitioner may deduct the
$99310 excess in the amount allowed by section 213. See secs.
63(e)(1), 162(l)(3). In the end, however, petitioner is not
entitled to deduct his section 213 medical expenses for either
year because the amounts do not exceed the 7.5-percent floor of
section 213(a) and he did not elect to itemize his deductions.
See sec. 63(e)(1).11
The RA allowed $10,718 as noncash contributions for 2001
based upon “cash receipts from grocery stores and so forth”. The
AO, however, allowed charitable contributions of $10,959.
Petitioner’s exhibit indicates that of the $291 in canceled
checks that he submitted into evidence respondent has already
10
2002 substantiated health insurance premium payments of
$3,110 less the allowable $2,177 self-employed health insurance
deduction.
11
The sum of petitioner’s sec. 213 medical expenses for 2001
is $930.69 ($874 (excess health insurance premiums) + $56.69
(substantiated medical/dental expenses)). Taking into account
respondent’s adjustments and the Court’s findings, petitioner’s
adjusted gross income (AGI) for 2001 is $23,713.43. To exceed
the 7.5-percent floor of sec. 213, petitioner’s medical/dental
expenses must exceed $1,778.51 for 2001.
The sum of petitioner’s sec. 213 medical expenses for 2002
is $993 (excess health insurance premiums). Taking into account
respondent’s adjustments and the Court’s findings, petitioner’s
AGI for 2002 is $21,496.18. To exceed the 7.5-percent floor of
sec. 213, petitioner’s medical/dental expenses must exceed
$1,612.21 for 2002.
- 21 -
given petitioner an allowance of $241. The Court will allow
petitioner an additional $50 deduction as a charitable
contribution for 2001. See Cohan v. Commissioner, 39 F.2d at
543-544. The Court will also allow petitioner a $1,869.96
deduction for real estate taxes for 2001 rather than the $1,867
figure that respondent allowed.
Petitioner did not elect to itemize his deductions for 2002,
and the $2,233.54 sum12 does not exceed the $4,700 standard
deduction for 2002. See sec. 63. Respondent’s determination is
sustained.
To reflect the foregoing,
Decision will be entered under
Rule 155.
12
$1,969.54 (real estate taxes) + $264 (charitable
contributions) = $2,233.54.
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APPENDIX
The figures in this appendix are for illustrative purposes
only. Computations in accordance with Rule 155 will be
necessary. The figures take into account respondent’s
determinations, the parties’ concessions, and the Court’s
allowances.
Sch. C deductions 2001 2002
Safety boots $220.00 $340.00
Fuel 1,186.00 1,409.00
Telephone 366.00 291.00
Franchise tax bd. 46.00
Licenses or permits 175.50
Vehicle ins. 654.00 1,671.00
AAA 63.90 71.00
Vehicle tags/DMV 56.70 64.00
Deduction for bus.
use of home 416.00 434.00
Legal & profl. servs. 169.00 225.00
Tax & licenses 89.00
Depreciation & sec.
179 expenses 3,310.00 18,002.00
Total 6,487.60 22,771.50
Sch. C profit/loss 2001 2002
Gross receipts $31,173.00 $45,098.00
Deductions -6,487.60 -22,771.50
Net profit 24,685.40 22,326.50
Self-emp. tax comp. 2001 2002
Net profit sch. C $24,685.40 $22,326.50
1 1
x 92.35% x 92.35%
Net earnings 22,796.97 20,618.52
2 2
x 15.30% x 15.30%
Self-emp. tax 3,487.94 3,154.64
3 3
x 50.00% x 50.00%
Self-emp. tax
deduction 1,743.97 1,577.32
- 23 -
Form 1040 items 2001 2002
Taxable interest $2,346.00 $2,864.00
Bus. income 24,685.40 22,326.50
Self-emp. tax deduction -1,743.97 -1,577.32
Self-emp. ins. deduction -1,574.00 -2,117.00
AGI 23,713.43 21,496.18
1
See secs. 1401(a) and (b), 1402(a)(12) (which allows as a
deduction one-half of the self-employment tax rate; thus,
92.35 percent of the Schedule C net profit is subject to
self-employment tax).
2
See sec. 1401(a) and (b) (the rate of tax imposed upon
self-employment income is the sum of 12.4 and 2.9 percent).
3
See sec. 164(f) (which allows as a deduction one-half of
the self-employment taxes).
