                         T.C. Summary Opinion 2014-108



                         UNITED STATES TAX COURT



                  TORY M. WATSON, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 26032-11S.                       Filed December 8, 2014.



      E. Rhett Buck, Jr., for petitioner.

      Portia Neomi Rose, for respondent.



                              SUMMARY OPINION


      MORRISON, Judge: This case was heard pursuant to section 7463 of the

Internal Revenue Code in effect when the petition was filed. Pursuant to section
                                           -2-

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.1

      The respondent (referred to here as the “IRS”) issued a notice of deficiency

to the petitioner, Tory M. Watson (referred to here as “Watson”), for the 2005 and

2006 tax years determining: (1) income-tax deficiencies of $2,2822 for 2005 and

$26,257 for 2006; (2) additions to tax for 2006 of $5,633 under section 6651(a)(1)

and $6,259 under section 6651(a)(2); and (3) an accuracy-related penalty for 2006

of $5,251 under section 6662(a).

      After trial the parties settled many of the issues. The remaining issues to be

resolved involve the tax treatment of certain business expenses of LLCs Watson

owned. Specifically, the remaining issues are:

(1)   The amount of the rental-expense deduction for Skyline Motion Pictures,

      LLC, for 2005. We hold that the amount is $16,605.

(2)   The amount of the contract-labor-expense deduction for Skyline Motion

      Pictures, LLC, for 2005. We hold that the amount is $75,153.




      1
        All subsequent section references are to the Internal Revenue Code in
effect for the years at issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
      2
          All dollar amounts are rounded to the nearest dollar.
                                        -3-

(3)   The amount of the contract-labor-expense deduction for Skyline Movement,

      LLC, for 2006. We hold that the amount is $14,778.

(4)   The amount of the contract-labor-expense deduction for Liberation

      Financial, LLC, for 2006. We hold that the amount is $8,900.

                                   Background

      The stipulated facts and the supplemental stipulation of facts are

incorporated by this reference. Watson resided in Texas at the time he filed the

petition.

      From 2002 through 2006 Watson was an employee in the mortgage

industry. During 2005 Watson was employed by DSG Mortgage, LLC, and First

Capital Mortgage Corp. as a loan originator. During 2006 Watson was employed

by First Capital Mortgage Corp. as a loan originator.

      Watson prepared his own federal-income-tax returns for 2005 and 2006. He

filed these returns late. Watson’s 2005 return included Schedules C, “Profit or

Loss From Business,” for two LLCs that he owned and operated: Britt and

Skyline Motion Pictures. Through Britt, Watson engaged in the business of

making and selling clothing. Through Skyline Motion Pictures, Watson engaged

in the business of producing films and other entertainment.
                                         -4-

      During 2006 Watson abandoned Skyline Motion Pictures’ business of

producing films and other entertainment. He changed the name of the LLC to

Skyline Movement. Through Skyline Movement, Watson engaged in website

design and other consulting services. On his 2006 return he included a Schedule

C for Skyline Movement. He also included a Schedule C for Liberation Financial,

LLC, another LLC that he owned and operated. Through Liberation Financial,

Watson advised mortgage companies on improving their overall performance and

the performance of their loan officers. All three LLCs (Skyline Motion

Pictures/Skyline Movement, Britt, and Liberation Financial) were disregarded

entities for federal tax purposes. Therefore, Watson is treated for federal tax

purposes as if he operated the LLCs as sole proprietorships. The IRS does not

challenge the existence of the businesses the LLCs conducted or that the

businesses were operated for profit.

      On the Schedule C for Skyline Motion Pictures for 2005 Watson claimed

business-expense deductions of $291,558. On the Schedule C for Britt for 2005

Watson claimed business-expense deductions of $10,839. Watson reported that

neither business had gross income for 2005. On the Schedule C for Skyline

Movement for 2006 Watson claimed business-expense deductions of $152,940.

On the Schedule C for Liberation Financial for 2006 Watson claimed business-
                                        -5-

expense deductions of $208,426. Watson reported gross income for both Skyline

Movement and Liberation Financial for 2006.

      On August 9, 2011, the IRS mailed a notice of deficiency to Watson for

both 2005 and 2006. In the notice of deficiency, the IRS disallowed:

      C     all business-expense deductions that Watson claimed on the Schedule

            C for Skyline Motion Pictures for 2005,

      C     all business-expense deductions that Watson claimed on the Schedule

            C for Britt for 2005,

      C     $70,016 of the business-expense deductions that Watson claimed on

            the Schedule C for Skyline Movement for 2006, and

      C     $97,973 of the business-expense deductions that Watson claimed on

            the Schedule C for Liberation Financial for 2006.

The IRS also determined that for 2005 Watson had earned $67 in interest and

received $1,376 attributable to a refund from the State of Illinois Revenue

Department. The IRS also made computational adjustments for both years to

Watson’s self-employment taxes, adjusted gross income, itemized deductions, and

net operating losses. The IRS determined: (1) income-tax deficiencies of $2,282

for 2005 and $26,257 for 2006; (2) additions to tax for 2006 of $5,633 under
                                         -6-

section 6651(a)(1) and $6,259 under section 6651(a)(2); and (3) an accuracy-

related penalty for 2006 of $5,251 under section 6662(a).

      The case was tried in Houston, Texas. After trial the parties reached a

partial settlement. The parties agreed that: (1) Watson’s income for 2005 is

increased by $67 for interest and $1,376 for the refund from the State of Illinois

Revenue Department; (2) any adjustments to Watson’s self-employment taxes,

adjusted gross income, itemized deductions, and net operating losses for 2005 and

2006 are computational; and (3) for 2006 Watson is liable for additions to tax

under section 6651(a)(1) and (2) and a penalty under section 6662(a) for any

underpayment that is determined. As for the Schedule-C adjustments, it appears to

us that the settlement agreement resolved all Schedule-C adjustments except for

the following four categories:

      C      a rental-expense deduction for Skyline Motion Pictures for 2005,

      C      a contract-labor-expense deduction for Skyline Motion Pictures for

             2005,

      C      a contract-labor-expense deduction for Skyline Movement for 2006,

             and

      C      a contract-labor-expense deduction for Liberation Financial for 2006.
                                                -7-

The following tables summarize: (1) the categories of Schedule-C expenses that

Watson reported; (2) the amounts Watson claimed on his returns for each

category; (3) the amounts allowed in the notice of deficiency for each category;

and (4) the parties’ positions regarding the deductible amounts for each category,

as reflected in the pleadings, the concessions made at trial, the settlement

agreement, and the briefs.

                                Skyline Motion Pictures (2005)
                                        Amount
                             Amount    allowed in
                                per     notice of
             Item             return   deficiency                 Parties’ positions
 Advertising                 $20,734      -0-                    $20,565 (as settled)

 Business use of home         16,877      -0-                         -0- (as settled)
 Car and truck expenses        8,489      -0-                     2,430 (as settled)
                                                                  1
                                                                      78,861 (Watson)
 Contract labor               85,843      -0-                             -0- (IRS)
 Depreciation                  8,621      -0-                     4,625 (as settled)
 Legal & professional
  services                    15,822      -0-                     8,480 (as settled)
 Office expense                2,901      -0-                    11,767 (as settled)
 Rent or lease of “[o]ther                                        23,055 (Watson)
  business property”          22,769      -0-                         -0- (IRS)
                                                                            2
 Supplies                     15,392      -0-                                   -0-
                                                                            2
 Travel                       26,491      -0-                                   -0-
                                                                            2
 Meals and entertainment      12,287      -0-                                   -0-
 Utilities                    10,035      -0-                         794 (as settled)
                                                 -8-

 “Other expenses”             45,297       -0-                   15,431 (as settled)
                                                          64,092 (settled as deductible)
                                                                        plus
  Total                      291,558       -0-           101,916 (still sought by Watson)

       1
       2
         This amount is explained infra Discussion part 2.a.
         Watson did not argue for any deduction at trial or on brief. These are deemed conceded.
See, e.g., Hedrick v. Commissioner, 63 T.C. 395, 396-397 (1974).

                                          Britt (2005)
                                        Amount
                             Amount    allowed in
                                per     notice of
            Item              return   deficiency                   Parties’ positions
 Supplies                      $421        -0-                   $5,420 (as settled)
 “Other expenses”             10,418       -0-                       -0- (as settled)
  Total                       10,839       -0-              5,420 (settled as deductible)



                                  Skyline Movement (2006)
                                        Amount
                             Amount    allowed in
                                per     notice of
            Item              return   deficiency                   Parties’ positions
                                                                         1
 Advertising                  $1,643        $1,643                           $1,643
                                                                         1
 Car and truck expenses       33,225        33,225                           33,225
                                                                2
                                                                    $14,778 (Watson)
 Contract labor               26,870       -0-                          -0- (IRS)
                                                                         1
 Depreciation                 13,056        13,056                           13,056
 Legal & professional
                                                                         1
  services                     4,350         4,350                           4,350
 Rent or lease of “[o]ther
                                                                         1
  business property”           2,100         2,100                           2,100
                                                  -9-
                                                                           1
 Supplies                       9,235         9,235                            9,235
 Travel                         6,912         5,169               1,237 (as settled)
 Meals and entertainment      26,135          1,565                486 (as settled)
                                                                           1
 Utilities                      6,289         6,289                            6,289
 “Other expenses”             23,125          6,292               8,617 (as settled)
                                                                       3
                                                                         80,238
                                                                          plus
  Total                      152,940         82,924        14,778 (still sought by Watson)

        1
          Neither party sought an amount different than the amount allowed in the notice of
deficiency.
       2
       3
        This amount is explained infra Discussion part 2.b.
        This consists of: (1) amounts agreed to in settlement and (2) amounts determined in
notice of deficiency in categories for which neither party sought an amount different than the
amount allowed in the notice of deficiency.


                                   Liberation Financial (2006)
                                         Amount
                             Amount     allowed in
                                per      notice of
             Item             return    deficiency                Parties’ positions
                                                                       1
 Advertising                 $27,125       $27,125                         $27,125
                                                                  260,582 (Watson)
 Contract labor               45,548        -0-                       -0- (IRS)
 Legal & professional
                                                                           1
  services                      3,875         3,875                            3,875
                                                                       1
 Office expenses              36,030         36,030                        36,030
                                                                       1
 Supplies                     13,516         13,516                        13,516
                                                                           1
 Taxes and licenses             1,350         1,350                            1,350
 Travel                         4,291             552             2,480 (as settled)
 Meals and entertainment      38,513          3,779               2,672 (as settled)
                                                                       1
 Utilities                    18,393         18,393                        18,393
                                              -10-

 “Other expenses”             19,785          5,833               7,111 (as settled)
                                                                       3
                                                                        112,552
                                                                          plus
  Total                      208,426       110,453         60,582 (still sought by Watson)

        1
          Neither party sought an amount different than the amount allowed in the notice of
deficiency.
       2
        This amount is explained infra Discussion part 2.c.
       3
        This consists of: (1) amounts agreed to in settlement and (2) amounts determined in
notice of deficiency in categories for which neither party sought an amount different than the
amount allowed in the notice of deficiency.

                                          Discussion

       Generally, the taxpayer bears the burden of proving, by a preponderance of

the evidence, that the determinations in the notice of deficiency are erroneous.

Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a)

imposes the burden of proof on the IRS with respect to fact issues for which the

taxpayer: (1) complied with the substantiation requirements of the Internal

Revenue Code; (2) maintained all records required under the Internal Revenue

Code; (3) cooperated with reasonable requests by the IRS for witnesses,

information, documents, meetings, and interviews; and (4) introduced credible

evidence. Credible evidence is the quality of evidence which the Court would find

sufficient upon which to base a decision on the issue in the taxpayer’s favor,

absent any contrary evidence. See, e.g., Higbee v. Commissioner, 116 T.C. 438,

442 (2001). Watson argues that he has satisfied the conditions required to impose
                                         -11-

the burden of proof on the IRS. We need not decide whether section 7491(a)

imposes the burden of proof on the IRS. This is because our findings are

supported by the preponderance of the evidence. See Knudsen v. Commissioner,

131 T.C. 185, 189 (2008).

      Section 162(a) authorizes a deduction for ordinary and necessary expenses

that were paid or incurred during the taxable year in carrying on the taxpayer’s

trade or business, including rental payments, section 1.162-1(a), Income Tax

Regs., and payments for services, section 1.162-7(a), Income Tax Regs. An

expense is “ordinary” if either it is customary or usual within the particular trade,

business, or industry or it relates to a transaction “of common or frequent

occurrence in the type of business involved.” Deputy v. du Pont, 308 U.S. 488,

495 (1940). An expense is “necessary” if it is both appropriate and helpful to the

taxpayer’s trade or business, see, e.g., Welch v. Helvering, 290 U.S. at 113, and it

is directly connected with or pertains directly to the taxpayer’s trade or business,

sec. 1.162-1(a), Income Tax Regs. Being an employee is considered a trade or

business, and thus the ordinary and necessary expenses of employment are

deductible under section 162(a), provided, however, that the employee cannot seek

reimbursement of the expenses from the employer. See, e.g., Benson v.

Commissioner, T.C. Memo. 2007-113, 93 T.C.M. (CCH) 1199, 1201 (2007)
                                        -12-

(citing Podems v. Commissioner, 24 T.C. 21, 23 (1955)). Personal, family, and

living expenses are generally not deductible. Sec. 262(a).

      If the taxpayer establishes that the taxpayer paid or incurred a deductible

expense but does not establish the amount of the expense, then the court may

estimate the amount of the allowable deduction if there is sufficient evidence in

the record to provide a rational basis for the estimate. Cohan v. Commissioner, 39

F.2d 540, 542-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-

743 (1985). If the evidence in the record does not provide a rational basis for the

estimate, the claimed deduction must be disallowed. Vanicek v. Commissioner,

85 T.C. 731 at 742-743.

1.    Rental-expense deduction for 2005

      Watson claimed a rental-expense deduction of $22,769 on the Schedule C

for Skyline Motion Pictures for 2005. In the notice of deficiency, the IRS

disallowed that deduction. At trial and on brief Watson asserted that he is entitled

to a rental-expense deduction of $23,055 for Skyline Motion Pictures for 2005

consisting of:

      C      $4,500 that Watson allegedly paid to Gerry Licea to rent a unit

             in an unidentified building as an office for Skyline Motion

             Pictures for February, March, and April 2005,
                                         -13-

      C        $15,605 that Watson allegedly paid to Sarah Bajwa to rent Unit 711

               as an office for Skyline Motion Pictures for June through December

               2005, and

      C        $2,950 that Watson allegedly paid to lease a house in Los Angeles for

               one week for business meetings for Skyline Motion Pictures.

The IRS disputes the deductibility of any rental expense for Skyline Motion

Pictures for 2005.

      As discussed more fully below, we hold that Watson is entitled to a total

rental-expense deduction of $16,605 for Skyline Motion Pictures for 2005, which

consists of:

      C        Zero of the $4,500 allegedly paid to Gerry Licea,

      C        $13,655 of the $15,605 allegedly paid as rent for Unit 711, and

      C        $2,950 of the $2,950 paid to lease the house in Los Angeles.

      a.       Rental-expense deductions for rental of an office from Gerry Licea

      Watson testified that he paid $4,500 to Gerry Licea to lease “a unit in a

different building” (i.e., different from 125 East 13th Street, Chicago, Illinois,

which was the office of Skyline Motion Pictures beginning in June 2005) at the

rate of $1,500 per month for February, March, and April 2005. The documentary

evidence confirms that Watson made one $1,500 payment to Gerry Licea.
                                        -14-

However, Watson’s testimony about the alleged office was vague and tentative.

He did not tell us the address of the “different building”. He supplied no other

details about the office or what he used it for. No documents in the record

corroborate Watson’s testimony. His vague, uncorroborated testimony was too

weak to be credible on this point. Consequently, Watson is not entitled to any

deduction for rental payments to Gerry Licea for an office for Skyline Motion

Pictures for 2005.

       b.    Rental-expense deduction for rental of Unit 711

       Unit 711 was a condominium loft with a kitchen and a bedroom in a

residential building at 125 East 13th Street, Chicago, Illinois. During 2005,

Watson owned and lived in Unit 1406, also at 125 East 13th Street, Chicago,

Illinois.

       Watson explained in detail how he used Unit 711: He kept audiovisual

equipment in the unit, he wrote movie scripts in the unit, and he met there with

Skyline Motion Pictures’ contractors. Watson’s testimony was credible. We hold

that the rent payments for Unit 711 were an ordinary and necessary business

expense.

       To prove the amount of rent he paid for Unit 711, Watson provided a copy

of the signed lease agreement for Unit 711. The agreement required Watson to
                                          -15-

pay a monthly rent of $1,950 per month and $50 per month for a parking space.

The term of the lease was from June 4, 2005, to June 4, 2006. Watson also

provided copies of these checks and cleared-check images written on Skyline

Motion Picture’s bank account, written to Sarah Bajwa:

      C      a check dated May 26, 2005, for $1,950 for “deposit” for “Unit

             1406”,

      C      a check dated May 26, 2005, for $1,755 for “June 2005 rent”,

      C      a check dated July 18, 2005, for $1,950 for “July Rent #711”,

      C      a check dated August 1, 2005, for $1,950 for “August Rent #711”,

      C      a check dated September 2, 2005, for $2,000 for “Sept ‘05 Rent and

             Parking”, and

      C      a check dated October 4, 2005, for $2,000 for “Oct Rent - Apt #711”.

      Watson testified that the first check, which was noted as “deposit” for “Unit

1406”, actually related to Unit 711, not Unit 1406. We take this to be true.

However, the check appears to be a payment of a security deposit, not rent.

Security deposits are not deductible, if at all, until the year actually forfeited.

Williams v. Commissioner, T.C. Memo. 1998-93, 75 T.C.M. (CCH) 1933, 1938

(1998).
                                         -16-

      On the basis of Watson’s testimony, copies of checks and cleared-check

images, and the signed lease agreement, we find that Watson paid $1,755 for rent

for June 2005, $1,950 for rent for July 2005, $1,950 for rent for August 2005,

$2,000 for rent for September 2005, and $2,000 for rent for October 2005.

      Watson testified that he paid rent for November and December 2005, but he

could not find checks or other documents to substantiate the payments. We found

his testimony credible. We find that he paid $2,000 for rent for each of these two

months. Consequently, Watson is entitled to deduct $13,655 for renting Unit 711

for Skyline Motion Pictures for 2005.

      c.    Rental-expense deduction for lease of a house in Los Angeles

      Watson claimed a rental-expense deduction for Skyline Motion Pictures for

a $2,950 payment made in 2005. At trial Watson testified that the purpose of the

payment was to lease a furnished, single-family house for Skyline Motion Pictures

to be used for one week of business meetings while he attended the Los Angeles

International Film Festival. We found Watson’s testimony credible.

Consequently, Watson is entitled to deduct the $2,950 payment as a rental expense

for Skyline Motion Pictures for 2005.3

      3
      Watson testified that he stayed at the house during the week. Thus, the
expense could arguably be a “lodging” expense subject to the “strict-
                                                                      (continued...)
                                         -17-

2.    Contract-labor-expense deductions for 2005 and 2006

      As discussed more fully below, we hold that Watson is entitled to contract-

labor-expense deductions of:

      C      $75,153 for Skyline Motion Pictures for 2005,

      C      $14,778 for Skyline Movement for 2006, and

      C      $8,900 for Liberation Financial for 2006.

      a.     Contract-labor-expense deduction for Skyline Motion Pictures for
             2005

      Watson claimed a contract-labor-expense deduction of $85,843 on the

Schedule C for Skyline Motion Pictures for 2005. The IRS disallowed the

deduction in full. At trial and on brief Watson asserted that he is entitled to a

contract-labor expense deduction of $81,767 for Skyline Motion Pictures for 2005.

However, during trial Watson conceded that four expenses included in the $81,767

totaling $2,906 are not deductible. These expenses included: (1) a check dated

January 4, 2005, written to Ben Goldhirsh for $353; (2) a check dated April 10,

2005, written to Commercial Edison for $141; (3) a check dated October 11, 2005,

written to A B Chicagoland for $500; and (4) a check dated June 22, 2005, written

      3
       (...continued)
substantiation” requirements of sec. 274(d)(1) and sec. 1.274-5T(b)(2), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). However, the IRS did not
challenge the deduction on this ground.
                                        -18-

to Duo Consulting for $1,912, which was counted twice in the $81,767 total. We

therefore consider that it is Watson’s position that the deductible amount of this

category of expenses is $81,767 minus $2,906, or $78,861. The IRS disputes the

deductibility of any contract-labor expenses for Skyline Motion Pictures for 2005.

      To document those expenses Watson provided numerous copies of checks,

cleared-check images, partial bank statements, and a few invoices. Watson also

provided copies of the non-disclosure agreements that he entered into with some

of the contract laborers for Skyline Motion Pictures. The copies of checks,

cleared-check images, bank statements, and invoices that Watson provided

substantiate the amounts he paid as contract-labor expenses for Skyline Motion

Pictures for 2005. Furthermore, Watson credibly testified to the business purpose

for nearly all of the contract-labor expenses for Skyline Motion Pictures for 2005

for which he seeks a deduction; only a few of the expenses reported for Skyline

Motion Pictures appear to be nondeductible.

      On the basis of Watson’s credible testimony and the corroborating

documentary evidence, we hold that he is entitled to a contract-labor-expense

deduction of $75,153 for Skyline Motion Pictures for 2005. The following table

summarizes the deductibility of the contract-labor expenses for Skyline Motion

Pictures for 2005:
                                            -19-

                            Skyline Motion Pictures (2005)
                               Contract-labor expenses
                              ($81,767 claimed on brief)
                 Amount
                 claimed     Amount
    Payee        on brief   deductible                           Reasoning
AB                   $500      -0-         Watson conceded at trial
 Chicagoland
Ben Goldhirsh         353      -0-         Watson conceded at trial
Brian Bubser        1,750      $1,750      Expense of designing Skyline’s website
Com Ed                141      -0-         Watson conceded at trial
Design 4 U            585      -0-         Watson testified that the expense was to install 17
                                           curtains in Unit 1406, which was his personal
                                           residence at the time. This is a non-deductible
                                           personal expense.1
Duo                 3,824       1,913      Expense was included twice
 Consulting
Jelena Zanko       27,575      27,575      Consulting, promotional, marketing, creative, and
                                           writing services
Jelena Zanko          104            104   Reimbursement to Jelena Zanko for her payment
                                           of Skyline Motion Pictures’ business expenses
Jonathan                4      -0-         Watson could not remember purpose
 Jacobs
M W Design            600            600   Design services and print coordination
Mike Laha           5,084       5,084      Consulting services; provided advice on the film
                                           industry, including production, budgeting, and
                                           screenwriting
Mike Laha             170            170   Reimbursement to Mike Laha for his payment of
                                           Skyline Motion Pictures’ business expenses

Nicole Cavallo     21,025      21,025      Consulting services
Nicole Cavallo         20             20   Reimbursement to Nicole Cavallo for her
                                           payment of Skyline Motion Pictures’ business
                                           expenses
                                                   -20-

 Patrick                      1,250    1,250      Consulting service for the film industry
  Loughman
 Patrick                      1,500   -0-         The memo line on the check reads “Personal
  Loughman                                        loan” and Watson did not present evidence
                                                  sufficient to overcome the implication that this is
                                                  not deductible.1
 Paul Niemeyer                5,750    5,750      Artwork services, designed a movie poster
  of Niemeyer
  Illustrations
 Proline                       158          158   Service call to balance the bulb in a projector
  Mechanical                                      Watson used for business presentations
  Inc.
 Quist                        7,500    7,500      Web design and development services
  Interactive
 SPOT                         1,000    1,000      Animation services; created a marketing trailer
  Animation
 Tony Gonzalez                1,620   -0-         Watson testified that this expenses was for
                                                  electrical work done in Unit 1406, which was his
                                                  personal residence at the time. This is a non-
                                                  deductible personal expense.1
 Tony Gonzalez                1,255    1,255      Electrical work for communications in Unit 711,
                                                  which was Watson’s office at the time.
  Total                  81,767       75,153

       1
           See sec. 262(a).

       b.        Contract-labor-expense deduction for Skyline Movement for 2006

       Watson claimed a contract-labor-expense deduction of $26,870 on the

Schedule C for Skyline Movement for 2006. The IRS disallowed the deduction in

full. At trial and on brief Watson contended that he is entitled to a contract-labor

expense deduction of only $14,778 for Skyline Movement for 2006. The IRS
                                          -21-

disputes the deductibility of any contract-labor expenses for Skyline Movement

for 2006.

      To document the contract-labor expenses for Skyline Movement for 2006,

Watson submitted numerous copies of checks, cleared-check images, and bank

statements from his personal bank account. These substantiate the amounts

Watson paid as contract-labor expenses for Skyline Movement for 2006.

Furthermore, Watson credibly testified to the business purpose for all of the

contract-labor expenses for Skyline Movement for 2006 for which he seeks a

deduction.

      On the basis of Watson’s credible testimony and the corroborating

documentary evidence, we hold that Watson is entitled to a contract-labor-expense

deduction of $14,778 for Skyline Movement for 2006. The following table

summarizes the deductibility of the contract-labor expenses for Skyline Movement

for 2006:

                              Skyline Movement (2006)
                               Contract-labor expenses
                              ($14,778 claimed on brief)
                 Amount
                 claimed     Amount
     Payee       on brief   deductible                      Reasoning
 Jacob Watson        $630        $630    Business artwork services; creation of artwork for
                                         She Beads, which was a business Watson
                                         consulted for in 2005.
                                          -22-

 Jelena Zanko         13,425     13,425   Business marketing, writing, and consulting
                                          services
 Kurt Kroeck             400       400    Business artwork services
 Nicole Cavallo          323       323    Business marketing and consulting services
  Total               14,778     14,778

      c.        Contract-labor-expense deduction for Liberation Financial for 2006

      Watson claimed a contract-labor-expense deduction of $45,548 on the

Schedule C for Liberation Financial for 2006. The IRS disallowed the deduction

in full. At trial and on brief Watson contended that he is entitled to a contract-

labor-expense deduction of $60,582 for Liberation Financial for 2006. The IRS

disputes the deductibility of any contract-labor expenses for Liberation Financial

for 2006.

      To document the contract-labor expenses for Liberation Financial for 2006,

Watson provided numerous copies of checks, cleared-check images, and bank

statements. These substantiate some of the amounts that Watson claims he paid as

contract-labor expenses for Liberation Financial for 2006. Furthermore, Watson

credibly testified to the business purpose for some of the contract-labor expenses

for Liberation Financial for 2006 for which he seeks a deduction.

      However, for many of the contract-labor expenses that Watson reported for

Liberation Financial for 2006, it appears to us, on the basis of his testimony and
                                       -23-

the memorandum lines on several of the checks that he provided as proof of

payment, that all the payments he made to Melissa DeSitter, Ben Goldhirsh,

Dominic Garner, Jonathan Jones, Reginald Ray, and Tony Gonzalez are related to

his employment. In 2006 Watson was employed as a loan originator by First

Capital Mortgage. Liberation Financial was in the business of management

consulting and advised primarily mortgage companies, including First Capital

Mortgage, in order to help improve the overall performance of each company and

its loan officers. Watson asserted that none of the expenses he claims as

deductions for Liberation Financial were related to his employment as a loan

originator for First Capital Mortgage. The payments that Watson made to Melissa

DeSitter, Ben Goldhirsh, Dominic Garner, Jonathan Jones, Reginald Ray, and

Tony Gonzalez all appear to be for services these individuals performed in

connection with his employment as a loan originator. These expenses are

deductible only if Watson could not seek reimbursement from his employer. See

Podems v. Commissioner, 24 T.C. at 23. The record does not support the

proposition that Watson could not seek reimbursement for these expenses.

Therefore they are not deductible.

      On the basis of Watson’s credible testimony with respect to some of these

expenses and corroborating documentary evidence, we hold that he is entitled to a
                                          -24-

contract-labor-expense deduction of $8,900 for Liberation Financial for 2006.

The following table summarizes the deductibility of the contract-labor expenses

that Watson reported for Liberation Financial for 2006:

                               Liberation Financial (2006)
                                Contract-labor expenses
                               ($60,582 claimed on brief)
                  Amount
                  claimed     Amount
     Payee        on brief   deductible                      Reasoning
 Ben Goldhirsh    $663         -0-        Watson testified that Ben Goldhirsh provided
                                          loan-processing services in the mortgage loan
                                          business and that expenses paid to Goldhirsh
                                          were incurred on behalf of his employer.
                                          These expenses appear to be related to Watson’s
                                          employment as a loan originator and not his
                                          Schedule-C business of management consulting.
 Brian Bubser       2,000      $2,000     Website and graphic design
 Dominic           14,650      -0-        Watson testified that Dominic Garner performed
  Garner                                  “[l]ead generation, communication with
                                          borrowers, going and getting applications signed,
                                          picking up documents”. The memo lines on all
                                          the checks read “Advance”. These expenses
                                          appear to be related to Watson’s employment as a
                                          loan originator and not his Schedule-C business
                                          of management consulting.
 Holly Bartle         250         250     Promotional work
 Jacob Watson       1,200       1,200     Marketing, design, and artwork services
 Jelena Zanko       3,000       3,000     Marketing and writing services
 Jennifer             250         250     Promotional work
  McCullah
 Jonathan Jones     8,065      -0-        Watson testified that Jonathan Jones performed
                                          services that were “very similar to Dominic
                                          Garner”. The memo lines on the checks read
                                   -25-

                                  either “Commissions” or “advance”. These
                                  expenses appear to be related to Watson’s
                                  employment as a loan originator and not his
                                  Schedule-C business of management consulting.
Kurt Kroeck       1,700   1,700   Marketing, design, and artwork services
Leticia Winn       250      250   Promotional work
Melissa          26,554   -0-     Watson testified that Melissa DeSitter was like an
 DeSitter                         executive assistant for his consulting business
                                  and that she “sent out and confirmed that lead
                                  mailing campaigns were going out, dealt with
                                  borrowers, dealt with lead companies” and
                                  “communicat[ed] with borrowers, lenders, title
                                  companies, prospects, closing agents in the
                                  mortgage consulting business”. The few memo
                                  lines available read “[Month] Bonus”. These
                                  expenses appear to be related to Watson’s
                                  employment as a loan originator and not his
                                  Schedule-C business of management consulting.
Nicole Cavallo     500    -0-     The memo line on this check reads “repayment of
                                  loan”. This suggests that the payment was the
                                  repayment of loan principal, which is
                                  nondeductible. Watson did not testify what this
                                  payment was for.
Reginald Ray       350    -0-     Watson testified that Reginald Ray “provided
                                  some sort of closing activities with a borrower”.
                                  These expenses appear to be related to Watson’s
                                  employment as a loan originator and not his
                                  Schedule-C business of management consulting.

Satin Grable       250      250   Promotional work
Tony Gonzalez      900    -0-     Watson testified that this expense was to have
                                  electrical work done, but he could not remember
                                  where it was done; the work may have been done
                                  at Unit 711 or at his employer’s office. These
                                  expenses appear to be expenses Watson paid on
                                  behalf of his employer.
 Total           60,582   8,900
                                         -26-

         In reaching our holdings, we have considered all arguments made, and, to

the extent not mentioned, we conclude that they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                Decision will be entered under Rule

                                         155.
