                                  T.C. Memo. 2015-45



                           UNITED STATES TAX COURT



                      URVE V. MOYER, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 13991-12.                            Filed March 16, 2015.



      Calvin Moyer (specially recognized), for petitioner.

      Harry J. Negro, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION


      LAUBER, Judge: With respect to petitioner’s Federal income tax for 2007,

the Internal Revenue Service (IRS or respondent) determined a deficiency and

additions to tax under sections 66511 and 6654 in the following amounts:


      1
          All statutory references are to the Internal Revenue Code in effect for the
                                                                         (continued...)
                                         -2-

 [*2]                                               Additions to tax

   Year         Deficiency      Sec. 6651(a)(1)     Sec. 6651(a)(2)       Sec. 6654
   2007          $16,644            $3,602         To be determined         $725

        Petitioner had not timely filed a Federal income tax return for 2007. Using

information from third-party reports, the IRS prepared a substitute for return

(SFR) that met the requirements of section 6020(b). The IRS computed petition-

er’s tax liability using married filing separately status and allowed her the standard

deduction and one personal exemption. The IRS sent her a notice of deficiency

based on the SFR, determining the deficiency and additions to tax set forth above.

        Subsequently, petitioner filed a delinquent return for 2007 with her hus-

band, Calvin Moyer, claiming married filing jointly status, certain itemized de-

ductions, and a deduction for a loss reported on Schedule E, Supplemental Income

and Loss. Petitioner paid no tax with her delinquent return. Respondent agrees

that petitioner and Calvin Moyer are entitled to married filing jointly status for

2007, and the parties have resolved all issues apart from the amount of the Sche-

dule E loss and the additions to tax. Resolution of the former issue requires that

we decide whether expenses allegedly incurred by an S corporation wholly owned

        1
       (...continued)
tax year at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all monetary amounts to the nearest dollar.
                                        -3-

[*3] by Calvin Moyer were “ordinary and necessary” business expenses under

section 162(a) and whether they were adequately substantiated. With minor

exceptions, we resolve these issues in favor of respondent.

                               FINDINGS OF FACT

      Some of the facts were stipulated and are so found. The stipulation of facts

and the accompanying exhibits are incorporated by this reference. Petitioner

resided in Delaware when she petitioned this Court.

The S Corporation Business

      Petitioner’s husband, Calvin Moyer, was trained as a chemist. In 1968 he

joined DuPont, where he worked chiefly in recruiting and human relations. He

took early retirement in 1992 and started a company called Strategic Learning

Systems, Inc. (SLS), which elected S corporation status for Federal tax purposes.

Through SLS Calvin Moyer offered, as an outside contractor, many of the same

human-relations services that he had previously performed in-house for DuPont.

These included training company managers, helping workers develop “soft-side

skills,” and assisting laid-off employees in transitioning to new jobs.

      Calvin Moyer initially offered these services chiefly by conducting training

seminars, usually at the client’s place of business. A one-day seminar would typi-

cally cost between $8,000 and $10,000. DuPont was SLS’ principal client through
                                        -4-

[*4] 2003, but DuPont stopped signing up for seminars in 2004. SLS had one or

two other clients, but their work began to dry up. By 2006 the SLS business had

diminished to the point where it involved little more than ad hoc consulting that

Calvin Moyer personally performed. SLS had no other employees.

      For 2007 SLS reported gross receipts of $1,289. This income was derived

from Calvin Moyer’s work “as a contract person with some other friends * * * in

similar business * * * to go and help them in a seminar where they need help.”

SLS reported $28,583 of expenses for 2007, as follows:

                                Item                      Amount

                    Automobile                            $7,834

                    Phone & Internet                       5,686

                    Education & training                   3,749

                    Equipment                              3,299

                    Office supplies                        2,235

                    Computer equipment/supplies            2,066

                    Insurance                              1,560

                    Books & journals                         874

                    Business travel                          744

                    Postage & UPS                            557

                    Bank & legal                             279

                    Error in addition                       (300)

                                                          28,583
                                       -5-

[*5] Calvin Moyer operated this business out of the home he shared with peti-

tioner. He and petitioner owned two or more cars, one of which was allegedly

dedicated exclusively to the business. The $7,834 of automobile expense listed

above represented car loan payments, gasoline, and AAA membership fees al-

legedly attributable to the SLS-dedicated car. The $1,560 allegedly spent on

“insurance” included business insurance and collision insurance on the SLS-

dedicated car. The $874 spent on “books & journals” included the cost of books,

such as Jim Cramer’s “Mad Money,” allegedly purchased for use in SLS seminars

(which did not occur).

      After submitting their delinquent 2007 joint return, petitioner and Calvin

Moyer provided the IRS with documentation for $5,263 of SLS expenses. The

IRS allowed deductions for $2,185 of the expenses thus substantiated, chiefly for

office supplies and computer-related items. The remaining $3,078 of substantiated

expenses was paid for (among other things) a camcorder, a treadmill, a wireless

router, music CDs, luggage, museum membership fees, a cell phone charger kit,

candles, and a Microsoft Office 2007 software package. The IRS disallowed a

deduction for these expenses on the ground that they were not “ordinary and ne-

cessary” expenses of SLS’ trade or business and/or because petitioner and Calvin

Moyer failed to satisfy the substantiation requirements of section 274. The IRS
                                        -6-

[*6] accordingly reduced the allowable Schedule E loss claimed by petitioner and

Calvin Moyer from $27,294 to $896.

Tax Court Proceedings

      Calvin Moyer did not timely file a Federal income tax return for 2007. The

IRS prepared an SFR and sent him a notice of deficiency based on the SFR. He

timely sought review in this Court, and his case was litigated under docket No.

7503-11. This Court ultimately dismissed that case for failure properly to prose-

cute. On June 19, 2014, the Court entered an order of dismissal and decision de-

ciding that for the taxable year 2007 Calvin Moyer had a deficiency of $13,229

and was liable for additions to tax under sections 6651(a)(1) and (2) and 6654(a)

of $2,628, $2,920, and $225, respectively. The instant case nevertheless presents

a live controversy because the deficiencies and additions to tax determined against

petitioner differ from those determined against Calvin Moyer, who petitioned in

docket No. 7503-11, and because respondent cannot collect any tax from

petitioner separately absent a judgment against her.

      Petitioner was unable to attend the trial because of illness. The Court spe-

cially recognized Calvin Moyer and allowed him to speak on her behalf and pro-

vide testimony. The Court admitted into evidence documentation (previously sub-

mitted to the IRS) substantiating $5,263 of alleged SLS expenses for 2007. In ad-
                                        -7-

[*7] dition, the Court admitted into evidence documentation substantiating

payments during 2007 to Citizens Automobile Finance of $2,395 for the car

allegedly dedicated to SLS and to State Farm Insurance Co. of $210, of which

$102 was for insurance covering that car and $108 for business insurance. No

substantiation of any other SLS expenses was supplied.

                                     OPINION

I.    Burden of Proof

      The Commissioner’s determinations in a notice of deficiency are generally

presumed correct, and the taxpayer bears the burden of proving those determina-

tions erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pe-

titioner does not contend, and the evidence does not establish, that the burden of

proof shifts to respondent under section 7491(a) as to any issue of fact. Respon-

dent bears the burden of production, but petitioner bears the burden of proof, with

respect to the additions to tax under sections 6651(a)(1) and (2) and 6654. See

sec. 7491(c).

II.   Deductible Business Expenses

      Section 162(a) allows the deduction of “all the ordinary and necessary ex-

penses paid or incurred during the taxable year in carrying on any trade or busi-

ness.” A necessary expense is one that is “appropriate and helpful” to the tax-
                                        -8-

[*8] payer’s business; ordinary expenses are those that are common or frequent in

the type of business in which the taxpayer is engaged. Deputy v. du Pont, 308

U.S. 488, 495 (1940); Welch v. Helvering, 290 U.S. at 113. Personal, living, and

family expenses are generally not deductible. Sec. 262.

      Deductions are a matter of legislative grace, and the taxpayer bears the bur-

den of proving that claimed expenses are ordinary and necessary. Rule 142(a).

The taxpayer also bears the burden of substantiating her claimed deductions by

keeping and producing records sufficient to enable the Commissioner to determine

the correct tax liability. Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S.

79, 84 (1992); sec. 1.6001-1(a), (e), Income Tax Regs. The failure to keep and

present such records counts heavily against a taxpayer’s attempted proof. Rogers

v. Commissioner, T.C. Memo. 2014-141, at *17.

      Section 274(d) imposes more rigorous substantiation requirements for ex-

penses pertaining to travel and listed property, including passenger automobiles.

Deductions for these expenses are disallowed unless the taxpayer substantiates by

adequate records or by sufficient evidence corroborating her own statement: (1)

the amount of the expense; (2) the time and place of the travel or use of the pro-

perty; and (3) the business purpose of the expense. Ibid.
                                        -9-

[*9] Respondent does not dispute that SLS was engaged in a “trade or business”

during 2007. But the scale of its business had declined considerably since 2004

and was extremely limited during 2007 and the immediately preceding years. Its

gross receipts during 2007 were $1,289, derived from ad hoc consulting that

Calvin Moyer personally performed. An assessment of what expenses were

“ordinary” and “necessary” for this business must take into account its relatively

moribund state.

       Before trial petitioner supplied documentation for $5,263 of expenses. The

IRS allowed a deduction for $2,185 of these expenses, including those for various

computer-related items. We find that one other documented expense--$129 for a

Microsoft Office 2007 software package--qualifies as an “ordinary and necessary”

expense of the SLS business. The other disallowed expense deductions were for

books, a camcorder, a treadmill, a wireless router, music CDs, luggage, museum

membership fees, a cell phone charger kit, candles, and other personal items.

Petitioner did not carry her burden of proving that these represented “ordinary and

necessary” expenses of the SLS business as opposed to “personal, living, or family

expenses” that are nondeductible under section 262(a).

      During trial petitioner supplied documentation for $2,605 of additional ex-

penses for car loan payments and insurance. We conclude that the $108 paid to
                                        - 10 -

[*10] State Farm for business insurance constitutes an ordinary and necessary

expense of the SLS business. We conclude that none of the automobile-related

expenses so qualify because petitioner has not satisfied the strict substantiation

requirements of section 274. Given the limited scope of the SLS business, the

automobile in question was clearly used for business purposes infrequently, and

petitioner has not established the actual extent of its business use.

       In sum, we conclude that petitioner is entitled for 2007 to additional SLS-

related deductions of $237 under section 162(a). Respondent properly disallowed

all other claimed deductions for lack of substantiation under sections 162(a) and

274 or as “personal, living, or family expenses” under section 262(a).

III.   Additions to Tax

       A.    Failure To File

       Section 6651 provides for an addition to tax of 5% of the tax required to be

shown on a return for each month or fraction thereof for which there is a failure to

file the return, not to exceed 25% in toto. A taxpayer who files her return late is

liable for this addition to tax unless she shows that her failure was due to reason-

able cause and not due to willful neglect. Sec. 6651(a)(1); United States v. Boyle,

469 U.S. 241, 245 (1985).
                                        - 11 -

[*11] Respondent produced a copy of petitioner’s SFR for 2007 as well as her

delinquent joint return. Petitioner stipulated that she did not file her delinquent

return until January 12, 2014, and at trial she offered no reasonable cause therefor.

We accordingly sustain respondent’s imposition of the addition to tax under

section 6651(a)(1).

      B.     Failure To Pay

      Section 6651(a)(2) provides for an addition to tax when a taxpayer fails to

pay timely the tax shown on a return, unless the taxpayer proves that the failure

was due to reasonable cause and not due to willful neglect. An SFR prepared by

the IRS pursuant to section 6020(b) is treated as the “return” filed by the taxpayer

for purposes of section 6651(a)(2). See sec. 6651(g). For each month or fraction

thereof for which a failure to pay continues, section 6651(a)(2) adds 0.5% of the

tax required to be shown on such return, up to a maximum addition of 25%.

      Petitioner stipulated that the SFR that the IRS prepared for 2007 met the

requirements of section 6020(b). The return indicates a deficiency and balance

due of $27,185. Petitioner presented no evidence suggesting that her failure to

pay was due to reasonable cause. See Higbee v. Commissioner, 116 T.C. 438,

446-447 (2001). We accordingly sustain the section 6651(a)(2) addition to tax.
                                         - 12 -

[*12] C.     Failure To Pay Estimated Tax

      Section 6654 imposes an addition to tax on an individual who underpays her

estimated tax. The addition to tax is calculated with reference to four required

installment payments of the taxpayer’s estimated tax liability. Sec. 6654(c) and

(d). Each required installment is equal to 25% of the “required annual payment.”

Sec. 6654(d). The “required annual payment” is equal to the lesser of: (1) 90% of

the tax shown on the individual’s return for that year (or, if no return is filed, 90%

of her tax for such year) or (2) if the individual filed a valid return for the

immediately preceding taxable year, 100% of the tax shown on that return. See

sec. 6654(d)(1)(A), (B), and (C).

      Petitioner, in her petition, did not assign error to respondent’s determination

of an addition to tax under section 6654(a) for taxable year 2007. Petitioner like-

wise raised no question concerning this issue at trial. Petitioner has therefore con-

ceded that she is liable for the addition to tax under section 6654(a). See Rule

34(b)(4); Swain v. Commissioner, 118 T.C. 358 (2002).

      To reflect the foregoing,


                                                  Decision will be entered under Rule

                                         155.
