                         T.C. Summary Opinion 2014-37



                         UNITED STATES TAX COURT



                    PHYLLIS SHAW, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 10969-12S L.                     Filed April 16, 2014.



      Phyllis Shaw, pro se.

      Beth A. Nunnink, for respondent.


                              SUMMARY OPINION


      THORNTON, Chief Judge: This case was heard pursuant to the provisions

of section 7463 of the Internal Revenue Code in effect when the petition was

filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable by


      1
       All section references are to the Internal Revenue Code in effect for the
relevant times, and all Rule references are to the Tax Court Rules of Practice and
                                                                       (continued...)
                                        -2-

any other court, and this opinion shall not be treated as precedent for any other

case.

        Petitioner seeks review pursuant to sections 6320(c) and 6330(d) of

respondent’s determination sustaining the filing of a notice of Federal tax lien with

respect to her 2004, 2006, 2008, and 2009 Federal income tax.

                                    Background

        The parties have stipulated some facts, which are so found. When she filed

her petition, petitioner resided in Tennessee.

        In 2004 petitioner owned and operated a pet grooming business called Dog

Gone Good Grooming. Throughout 2004 her principal place of business for Dog

Gone Good Grooming was at a shopping center.

        In July 2004 petitioner purchased a house as her personal residence. In

February 2005 she moved her principal place of business for Dog Gone Good

Grooming from the shopping center to her personal residence.

        On July 20, 2005, respondent received petitioner’s 2004 Form 1040, U.S.

Individual Income Tax Return, reporting tax due of $10,061. On this return,

petitioner claimed a $4,850 standard deduction in lieu of claiming itemized


        1
      (...continued)
Procedure. All monetary amounts are rounded to the nearest dollar.
                                          -3-

deductions. Attached to this return was a Schedule C, Profit or Loss From

Business (Sole Proprietorship), for petitioner’s pet grooming business; it showed

$53,163 of gross receipts and $20,527 of total expenses. On August 22, 2005,

respondent assessed the tax shown on petitioner’s return as well as a $1,811

section 6651(a)(1) addition to tax for late filing and a $252 section 6651(a)(2)

addition to tax for failure to pay timely.2

      On September 12, 2009, petitioner filed a Form 1040X, Amended U.S.

Individual Income Tax Return (amended return), for her 2004 taxable year,

reporting tax due of $3,446. On this amended return, petitioner claimed $6,554 of

itemized deductions, which according to an attached Schedule A, Itemized

Deductions, consisted of $1,240 of taxes paid, $4,914 of interest paid, and $400 of

charitable donations. She also attached to her amended return a Schedule C for

her pet grooming business which reported $54,228 of gross receipts and $31,525

of total expenses exclusive of expenses for business use of her home. In addition,

she reported on line 30 of her Schedule C a $3,985 expense for business use of her

home. Respondent did not process petitioner’s amended return.




      2
        During these proceedings respondent conceded that petitioner is not liable
for the sec. 6651(a)(2) addition to tax. We do not address this issue further.
                                          -4-

      The following table shows (i) the amounts shown on petitioner’s Schedule

C attached to her 2004 original return, (ii) the amounts shown on petitioner’s

Schedule C attached to her 2004 amended return, and (iii) the amounts respondent

has conceded.

                                                                   Respondent’s
             Item                        Original     Amended      concessions

      Gross receipts                     $53,163       $54,228         ---
      Insurance (other
       than health)                          504           913           $561
      Interest (Other)                     ---           1,600         ---
      Legal and professional
       services                            ---              897              673
      Office expense                             94         572              336
      Repairs and
       maintenance                         3,311          3,364           863
      Supplies                             ---            7,423         3,622
      Other--Donations and
       charitable
       contributions                         400            400        ---
      Other--janitor and
       waste pickup                        ---            1,343              585
      Other--bank
       charges                             1,191          1,249         1,082
      Expenses for business
       use of home                         ---            3,985        ---

      The following table shows the amounts petitioner claimed on her Schedule

A attached to her 2004 amended return and the amounts respondent has conceded

petitioner is entitled to deduct subject to certain limitations.
                                        -5-

                                       Claimed on           Respondent’s
                   Item                Schedule A           concessions

             Medical expenses              ---                   $352
             State and local                 $294         Determined by tax
              general taxes                                tables1
             Real estate taxes                717                  793
             Personal property
              taxes                           229                  273
             Home mortgage
              interest                      3,414                5,186
             Points not reported
              on Form 1098                  1,500                ---
             Charitable
                                                                  2
              contributions                   400                     400

      1
       Respondent concedes that petitioner is entitled to a deduction for Schedule
A general sales tax based on the “Optional Sales Tax Tables”. See sec.
164(b)(5)(H); see also Figures v. Commissioner, T.C. Memo. 2012-296, at *11.
Because petitioner’s sales tax deduction will be based, in part, on her 2004
adjusted gross income (taking into account respondent’s concessions and our
findings and holdings herein), the actual amount of petitioner’s deduction will be
determined pursuant to the parties’ Rule 155 computations.
      2
        On brief petitioner contends that the $400 she reported on her Schedule A
as charitable contributions is the same $400 she reported on her Schedule C as
“Other--Donations and Charity Contributions”. As discussed more fully below,
petitioner argues that this $400 should be reported on her Schedule C rather than
her Schedule A.

      Petitioner timely filed returns for her 2006, 2008, and 2009 tax years,

reporting tax of $2,506, $3,589, and $2,388, for each tax year, respectively.

Respondent assessed these amounts. At various times, petitioner entered into

installment agreements with respondent to pay her 2004, 2006, 2008, and 2009
                                          -6-

tax, but respondent eventually terminated the installment agreements because of

petitioner’s nonpayment.

         On June 28, 2011, respondent sent petitioner a Notice of Federal Tax Lien

Filing and Your Right to a Hearing Under Section 6320 (lien notice) for her 2004,

2006, 2008, and 2009 taxable years. Petitioner timely filed a written response to

the lien notice requesting an “appeal”.

         On October 21, 2011, the Internal Revenue Service Office of Appeals sent

petitioner a letter acknowledging it had received her case for consideration.

         By letter dated November 7, 2011, petitioner sent correspondence to the

Office of Appeals, including a copy of her 2004 return, a copy of her amended

2004 return, and notes explaining why she believed the figures on her amended

return were correct. Petitioner raised no issues about her 2006, 2008, or 2009 tax

years.

         On January 19, 2012, Settlement Officer Thomas Erwin (SO Erwin) sent

petitioner a letter indicating that he had received her request for a collection due

process hearing and scheduling a telephone conference for March 1, 2012, at 9

a.m. The letter also indicated that SO Erwin would be unable to consider any

collection alternatives unless petitioner provided certain documentation on or

before February 20, 2012.
                                          -7-

      Petitioner did not send any of the requested documentation, nor did she call

at the designated time of her scheduled telephone conference. On March 1, 2012,

SO Erwin sent petitioner a “last chance letter” indicating that he would make a

determination by reviewing the administrative file and any information she had

previously submitted; he advised her that if she wanted to provide additional

information she should do so no later than March 15, 2012. On March 21, 2012,

SO Erwin recorded in his Appeals log that he had received no reply or

documentation from petitioner and that he had determined to sustain the collection

action with respect to the lien.

      On April 2, 2012, the Office of Appeals issued a Notice of Determination

Concerning Collection Action(s) Under Section 6320, determining that the filing

of the tax lien notice was appropriate.

                                      Discussion

I. Statutory Framework

      Section 6321 imposes a lien in favor of the United States on all property and

property rights of a person who is liable for and fails to pay tax after demand for

payment has been made. The lien arises when assessment is made and continues

until the assessed liability is paid. Sec. 6322. For the lien to be valid against

certain third parties, the Secretary must file a notice of Federal tax lien; within five
                                        -8-

business days thereafter, the Secretary must provide written notice to the taxpayer.

Secs. 6320(a), 6323(a). Within 30 days commencing after the end of the 5

business days, the taxpayer may request an administrative hearing before an

Appeals officer. Sec. 6320(b)(1); sec. 301.6320-1(c)(1), Proced. & Admin. Regs.

      At the hearing, the taxpayer may raise any relevant issue, including

appropriate spousal defenses, challenges to the appropriateness of the collection

action, and collection alternatives. Secs. 6320(c), 6330(c)(2)(A). A taxpayer may

challenge the existence or amount of the underlying tax liability unless the

taxpayer received a notice of deficiency or otherwise had an earlier opportunity to

dispute the tax liability. Sec. 6330(c)(2)(B); see also Sego v. Commissioner, 114

T.C. 604, 609 (2000). The “underlying tax liability” includes the tax deficiency,

additions to tax, and statutory interest. See Gray v. Commissioner, 138 T.C. 295,

300 (2012), aff’d, 723 F.3d 790 (7th Cir. 2013); Katz v. Commissioner, 115 T.C.

329, 339 (2000).

      Following the hearing, the Appeals officer must determine whether to

sustain the filing of the notice of Federal tax lien. In making that determination,

the Appeals officer is required to: (1) verify that the requirements of any

applicable law and administrative procedure have been followed; (2) consider the

relevant issues raised by the taxpayer; and (3) consider whether the filing of the
                                         -9-

notice of lien appropriately balances the need for efficient collection of taxes with

the taxpayer’s concerns regarding the intrusiveness of the proposed collection

action. Sec. 6330(c)(1), (2), and (3).

      Once the Appeals officer issues a notice of determination, the taxpayer may

seek review in this Court. Secs. 6320(c), 6330(d)(1). If the validity of the

underlying tax liability is properly at issue, we review that issue de novo. See

Wadleigh v. Commissioner, 134 T.C. 280, 288 (2010); Sego v. Commissioner, 114

T.C. at 610. Other issues a taxpayer properly raises are reviewed for abuse of

discretion. Wadleigh v. Commissioner, 134 T.C. at 288 (2010); Sego v.

Commissioner, 114 T.C. at 610.

II. Petitioner’s 2004 Tax Liability

      A. Schedule C Expenses

      During her Appeals hearing, petitioner challenged only her 2004 tax

liability.3 Respondent concedes that petitioner is entitled to dispute her 2004

underlying tax liability in this proceeding. The burden of proof is on petitioner to


      3
       Because she failed to properly raise the issue at her Appeals hearing, we
decline to address petitioner’s argument, raised for the first time in her posttrial
memorandum, that she is entitled to $3,000 of capital losses for each year 2004
through 2009 and $200 for 2010, with respect to a mobile home she purportedly
used. See Giamelli v. Commissioner, 129 T.C. 107, 112-115 (2007); see also sec.
301.6320-1(f)(2), A-F3, Proced. & Admin. Regs.
                                       - 10 -

show error in respondent’s determination as to her underlying liability.4 See Rule

142(a).

      A taxpayer may deduct ordinary and necessary expenses paid or incurred

during the taxable year in carrying on a trade or business if the taxpayer maintains

sufficient records to substantiate the expense. Secs. 162(a), 6001; sec. 1.6001-

1(a), Income Tax Regs. The taxpayer bears the burden of substantiation.

Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d, 540 F.2d 821 (5th Cir.

1976). Generally, no deductions are allowed for personal, living, or family

expenses. Sec. 262(a).

      If a taxpayer establishes that deductible expenses were incurred but fails to

establish the amount, we generally may estimate the amount allowable. Cohan v.

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). There must be evidence in

the record, however, that provides a rational basis for our estimate. Vanicek v.

Commissioner, 85 T.C. 731, 742-743 (1985).




      4
      Petitioner does not contend and the record does not establish that the
burden of proof as to any factual issue should shift to respondent pursuant to sec.
7491(a).
                                       - 11 -

             1. Insurance Expenses (Other Than Health Insurance)

      Petitioner contends that she is entitled to a $913 deduction claimed on her

Schedule C for insurance expenses that she paid in 2004. Respondent concedes

that petitioner is entitled to deduct $561 claimed on her Schedule C for insurance

but argues that the remaining $352 should be reported on her Schedule A as a

personal medical expense subject to the limitations found in section 213. At trial

petitioner conceded that this $352 was a personal medical expense.

             2. Interest

      The parties disagree as to whether petitioner is entitled to a $1,600

deduction for interest expenses she claims to have paid with respect to three credit

cards she purportedly uses for business purposes. Petitioner’s credit card

statements show purchases from various merchants in 2004, but she was unable to

produce invoices or receipts showing a detailed description of the items she

purchased. She testified that certain of the purchases were for blade sharpeners,

grooming scissors, supplies, and other items necessary to a dog grooming

business. Petitioner’s credit card statements also show several purchases,

however, that we find were for personal rather than business purposes.5 Bearing

      5
      For example, the credit card statements show purchases for
peopledata.com, reunion.com, and a notation from petitioner that indicates she
                                                                     (continued...)
                                        - 12 -

heavily against petitioner, whose inexactitude is of her own making, we conclude

that she is entitled to deduct 40% of her claimed interest expense, or $640. See

Cohan v. Commissioner, 39 F.2d at 540.

             3. Legal and Professional Services

      Petitioner contends that she is entitled to a $897 deduction for legal and

professional services expenses that she paid for legal proceedings with respect to

her personal chapter 7 bankruptcy filing in 2004. She contends that she made four

separate payments of $299 each to her legal representative and that 75% of these

expenses should be allowed as business expenses on her Schedule C. Respondent

concedes that petitioner is entitled to deduct 75% of her legal expenses, but argues

that her profit and loss statement and bank statements show only three $299

payments to her legal representative in 2004. Petitioner has not introduced any

evidence other than her self-serving testimony to substantiate the alleged fourth

$299 payment. Pursuant to respondent’s concession, we hold that petitioner is

entitled to deduct $673 of fees for legal and professional services.




      5
       (...continued)
used a credit card to pay her 2003 personal income tax.
                                        - 13 -

             4. Office Expenses

      Petitioner contends that she is entitled to a $572 deduction for office

expenses that she claims she paid in 2004. In support of this contention, she

introduced copies of receipts and invoices as well as her profit and loss statement

for 2004. Many of these copies are illegible. Petitioner testified that she had the

original copies of these documents at her home, but she failed to introduce them

into evidence or to explain why she was unable to produce them at trial.

      Respondent concedes that petitioner is entitled to deduct $336 in office

expenses, as reflected on receipts from Staples showing payments of $314, $10,

and $12. The record also contains an additional Staples receipt, dated April 12,

2004, for $43. Petitioner credibly testified that this $43 purchase was for business

purposes. We hold that petitioner is entitled to deduct $379 for office expenses.

             5. Repairs and Maintenance

      Petitioner contends that she is entitled to a $3,364 deduction for repairs and

maintenance expenses that she paid in 2004. Respondent concedes that petitioner

is entitled to deduct $863 of these expenses. At trial petitioner testified that her

claimed repairs and maintenance expenses included payments for new flooring,

light fixtures, bathtubs, a dividing wall, shrubbery, and the like. Petitioner also

testified that many of these expenses included payments for purported repairs and
                                        - 14 -

maintenance she made to her personal residence in 2004, even though she moved

her pet grooming business from the shopping center to her personal residence in

2005.

        Section 263(a) prohibits any deduction for amounts paid for permanent

improvements that increase the value of property. See also sec. 1.263(a)-2(a),

Income Tax Regs. Additionally, a taxpayer is generally not permitted to deduct

expenses for business usage of a home unless an exception under section 280A

applies.6 Petitioner has failed to show that her claimed deductions are not capital

expenses and that she is entitled to deduct these expenses for 2004. Petitioner has

also failed to show that her claimed deductions with respect to expenses she paid

for her home fall under an exception in section 280A.

        We sustain respondent’s determination on this issue and hold that petitioner

is entitled to no greater deduction for repairs and maintenance expenses than

respondent has allowed.




        6
       Generally, a taxpayer may deduct expenses with respect to the portion of a
home that the taxpayer uses exclusively and on a regular basis: (1) as the principal
place of business for a trade or business; (2) as a place of business which is used
by patients, clients, or customers in meeting or dealing with the taxpayer in the
normal course of a trade or business; or (3) in the case of a separate structure
which is not attached to the taxpayer’s home, in connection with a trade or
business. See sec. 280A(a), (c)(1)(A), (B), and (C).
                                       - 15 -

             6. Supplies

      On her amended return and Schedule C petitioner claimed a $7,423

deduction for supplies expenses that she allegedly paid in 2004. Her profit and

loss statement, however, shows only $5,144 of expenses for supplies in 2004.

Petitioner has failed to explain the discrepancy. Respondent concedes that

petitioner is entitled to deduct $3,622 of these expenses. Petitioner introduced

voluminous copies of receipts from Wal-Mart, Dollar General, Lowe’s, Joanne

Stores, and Home Depot. Many of these copies are illegible, and certain ones that

are legible bear dates in 2003. Additionally, many of petitioner’s Lowe’s and

Home Depot receipts are dated July 2004 or later, after petitioner purchased her

personal residence. On the basis of our careful review of the record, we conclude

that petitioner is entitled to an additional supplies deduction of $120 beyond that

which respondent has allowed, or a total supplies deduction of $3,742.7




      7
       The additional $120 represents purchases that we are persuaded were for
business purposes as reflected in Ex. 38-P.
                                       - 16 -

             7. Charitable Contributions

      Petitioner contends that she is entitled to a $400 charitable contribution

deduction claimed on her Schedule C.8 Respondent contends that petitioner is not

entitled to this deduction claimed on her Schedule C but concedes that the $400

deduction should be allowed on her Schedule A. Petitioner has failed to show that

these expenses were ordinary and necessary expenses of her pet grooming

business. See Bentley v. Commissioner, T.C. Memo. 2012-294; Gage v.

Commissioner, T.C. Memo. 2002-72; sec. 1.162-15(a), Income Tax Regs. We

sustain respondent’s determination disallowing the deduction for these expenses

claimed on petitioner’s Schedule C.

             8. Janitor and Waste Expenses

      Petitioner contends that she is entitled to deduct $1,343 for janitor and

waste expenses for 2004. Respondent concedes that petitioner is entitled to deduct

$585 of these expenses. Most of petitioner’s receipts for these expenses are

illegible. Many of the receipts that are legible show purchases of personal items,

including paper plates and cutlery, arthritis cream, toothpaste, Fritos, and Mary

      8
       In her brief petitioner concedes that the $400 charitable contribution
deduction she claimed on her Schedule A of her amended return is the same $400
that she claimed on her Schedule C as an expense for “Other--Donations and
Charity Contributions”. She argues this $400 should properly be claimed on her
Schedule C, however, and not her Schedule A.
                                         - 17 -

Jane candy. We hold that petitioner is not entitled to deduct more janitor and

waste expenses than respondent has allowed.

             9. Banking Charges

      Petitioner contends that she is entitled to deduct $1,249 of banking charges

for 2004. Her profit and loss statement for her pet grooming business shows bank

charges totaling only $1,174, and she failed to explain the discrepancy.

Respondent concedes that petitioner is entitled to deduct $1,082 of these expenses

but argues that she is not entitled to deduct the remaining banking fees because

she used the bank accounts for both business and personal reasons.9 We hold that

petitioner has failed to establish that she is entitled to a greater deduction for

banking charges than respondent has conceded.

             10. Expenses for Business Usage of Personal Residence

      Petitioner contends that she is entitled to deduct $3,985 of expenses with

respect to the business usage of her personal residence during her 2004 taxable

year. Respondent contends that petitioner failed to prove that in 2004 her personal

residence was her “principal place of business” as required under section

280A(c)(1). We agree with respondent. We have found that petitioner’s principal


      9
      At trial petitioner conceded that she used both bank accounts for personal
and business purposes.
                                        - 18 -

place of business in 2004 was at a shopping center and that she moved her

business to her personal residence in 2005. Petitioner has failed to show these

expenses fall under any other exception in section 280A. Accordingly, we sustain

respondent’s determination.

      B. Schedule A Deductions--Home Mortgage Interest and Points Not
         Reported on Form 1098

      At trial petitioner contended that she had deductible mortgage interest and

points of $5,975. Respondent concedes that petitioner is entitled to deduct $5,186.

In her posttrial memorandum petitioner contends that her deductible mortgage

interest and points total $7,415. Petitioner has failed to direct this Court’s

attention to any evidence to substantiate her claim. Petitioner is entitled to deduct

on her Schedule A only $5,186 for home mortgage interest and points.

      C. Section 6651 Addition to Tax

      Respondent determined that petitioner is liable for an addition to tax under

section 6651(a)(1) for failure to timely file her 2004 Federal income tax return.

Section 6651(a)(1) provides for an addition to tax for failure to file a return by the

date prescribed unless the taxpayer establishes that the failure is due to reasonable

cause and not willful neglect. The Commissioner bears the burden of production

with respect to whether it is appropriate to impose the section 6651(a)(1) addition
                                          - 19 -

to tax, see sec. 7491(c), and the burden of proof is on the taxpayer to establish

reasonable cause, United States v. Boyle, 469 U.S. 241 (1985).

      Petitioner’s 2004 tax return was due on April 15, 2005, and at trial she

conceded that she filed her tax return late on July 20, 2005. Respondent has met

his burden of production. Petitioner failed to show reasonable cause for not filing

her 2004 tax return on time. We sustain respondent’s determination to impose a

section 6651(a)(1) addition to tax.

III. Abuse of Discretion in Sustaining Collection Action

      Petitioner challenges the appropriateness of the filing of the notice of tax

lien and requests that it be withdrawn.

      During her Appeals hearing petitioner offered no collection alternative,

failed to submit the requested financial information to SO Erwin, and failed to

contact SO Erwin at the scheduled time for their telephone conference or respond

to his “last chance letter”. Petitioner has failed to show that respondent abused his

discretion in sustaining the filing of the notice of tax lien. See Stanwyck v.

Commissioner, T.C. Memo. 2012-180, and cases cited therein. Having carefully

reviewed the record, we conclude that respondent has satisfied the requirements of

section 6320. Consequently, we sustain respondent’s filing of the notice of
                                        - 20 -

Federal tax lien, subject to the recalculation, pursuant to Rule 155, of petitioner’s

underlying liability for 2004.

      To reflect the foregoing and the parties’ concessions,


                                                      Decision will be entered

                                                 under Rule 155.
