                            T.C. Summary Opinion 2017-90



                           UNITED STATES TAX COURT



                        PAUL CHEN, Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 14798-16S.                           Filed December 13, 2017.



      Paul Chen, pro se.

      Jason T. Scott, for respondent.



                                SUMMARY OPINION


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


      1
          Unless otherwise indicated, subsequent section references are to the
                                                                        (continued...)
                                         -2-

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

for any other case.

      In a notice of deficiency dated March 28, 2016, respondent determined a

deficiency of $4,389 in petitioner’s 2014 Federal income tax.

      After a concession,2 the issue for decision is whether petitioner is entitled to

deduct $8,430 as a commission rebate on his 2014 Schedule C, Profit or Loss

From Business.

                                    Background

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

facts and the accompanying exhibits are incorporated herein by this reference.

Petitioner resided in California when his petition was timely filed.

      During the year in issue petitioner was a real estate broker and earned client

commissions from purchases and sales of real estate. Petitioner had agreements

with clients whereby he would rebate a portion of the commission earned if the



      1
       (...continued)
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
      2
       Petitioner concedes that he received and failed to report $12,750 in non-
employee income for 2014, as determined in the notice of deficiency. Other
adjustments in the notice of deficiency are computational and will be resolved by
the Court’s conclusion on the deduction issue.
                                        -3-

client performed most of the work with respect to finding a property to purchase or

showing a property for sale. The rebate amount was computed as percentage of

the total commission earned by petitioner.

      In 2014 petitioner entered into a commission rebate agreement with his

client, Jackson Yuen.3 In May 2014 Mr. Yuen purchased a house for $510,000

and petitioner received a commission of $12,750 from this transaction. On May

15, 2014, petitioner wrote a check payable to Mr. Yuen for $8,430 pursuant to the

commission rebate agreement.

      For taxable year 2014 four Forms 1099-MISC, Miscellaneous Income, were

issued to petitioner as follows: (1) Intero Lincoln Castle View Realty d.b.a.

Intero, reporting nonemployee compensation of $20,375; (2) Meritage Homes of

California, Inc., reporting nonemployee compensation of $31,265; (3) NRT West,

reporting nonemployee compensation of $29,375; and (4) Taylor Morrison




      3
        The agreement, dated April 2, 2014, reflects the following commission
rebate structure: (1) for a purchase price of up to $299,999, the client receives a
rebate equal to 65% of petitioner’s commission; (2) for a purchase price of
$300,000 to $999,999, the client receives a rebate equal to 70% of petitioner’s
commission; (3) for a purchase price of $1 million to $1,999,999, the client
receives a rebate equal to 75% of petitioner’s commission; (4) for a purchase price
of $2 million to $2,999,999, the client receives a rebate equal to 80% of
petitioner’s commission; and (5) for a purchase price greater than $3 million the
client receives a rebate equal to 90% of petitioner’s commission.
                                         -4-

California LLC, Northern California Division, reporting nonemployee

compensation of $40,000.

      Petitioner timely filed a 2014 Form 1040, U.S. Individual Income Tax

Return, attaching a Schedule C. Under the business name Angel Investment

Realty, petitioner reported $108,265 in gross receipts and total expenses of

$90,206, including $78,604 for commissions and fees paid.

      In the notice of deficiency respondent determined that petitioner had failed

to report $12,750 in taxable income, the difference between the $121,0154 total

amount reported on the Forms 1099-MISC issued to petitioner for 2014 and the

$108,265 reported as Schedule C gross receipts on petitioner’s 2014 Form 1040.

Respondent did not disallow any of the deductions claimed on petitioner’s

Schedule C. Petitioner timely filed a petition in which he conceded that he had

failed to report $12,750 in taxable income, asserting that he is entitled to an

additional deduction for a commission rebate paid.

      At trial petitioner asserted that he had an additional corresponding

deduction of $8,430, representing the commission rebate he paid to Mr. Yuen.5


      4
          $20,375 % $31,265 % $29,375 % $40,000' $121,015.
      5
     Petitioner asserted in his petition that for “2014, I omitted one income
commission from a client, totaling to $12,750. However, I did credit some of my
                                                                       (continued...)
                                        -5-

Petitioner asserted that he kept records of the commissions received and

corresponding commission rebates paid to clients for taxable year 2014 and that he

did not bring these records to court but could provide them to respondent. At the

conclusion of the trial, the Court ordered that the record would remain open and

provided petitioner additional time to provide respondent with copies of canceled

checks or any other documentation to substantiate the $8,430.

      Subsequently, respondent filed a status report in which he asserts that

petitioner provided copies of documents (six canceled checks and one document

titled “Instructions for Disbursement of Commission”) purportedly reflecting

seven instances in which petitioner paid commission rebates to buyers. The

amounts reflected on these documents total $70,184. Respondent asserts that

“[g]iven that the new information provided by Petitioner purportedly substantiates

an amount less than the already allowed deduction, it remains Respondent’s




      5
       (...continued)
commission to the buyer. For this particular client, I gave the client credit and
check in the total amount of $10,176.50.” At trial petitioner asserted that the
deduction was for a commission rebate of $8,430 paid to Mr. Yuen and provided a
copy of the check payable to Mr. Yuen reflecting this amount.
                                         -6-

position” that petitioner has not provided substantiation for the additional amount

claimed.6

                                     Discussion

      Deductions are a matter of legislative grace, and a taxpayer is required to

maintain records sufficient to substantiate expenses underlying deductions claimed

on his or her return. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.; see New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

      Section 162(a) generally allows deductions for all ordinary and necessary

expenses paid or incurred during the taxable year in carrying on any trade or

business. In general, no deduction is permitted for personal, living, or family

expenses. Sec. 262(a). The taxpayer bears the burden of proving that expenses

were of a business nature rather than personal and that they were ordinary and

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

      If the taxpayer is able to establish that he paid or incurred a deductible

expense but is unable to substantiate the precise amount, the Court generally may

approximate the deductible amount, but only if the taxpayer presents sufficient

evidence to establish a rational basis for making the estimate. See Cohan v.

      6
       Petitioner did not file a status report or otherwise express disagreement
with respondent’s status report. Subsequently, the Court closed the record and
deemed the matter submitted.
                                         -7-

Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); see also Vanicek v.

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

      Petitioner seeks to deduct $8,430 as a commission expense, in addition to

the deduction of $78,604 for commissions and fees already claimed on his

Schedule C. Petitioner has not provided any evidence to prove that the $8,430

was not included as part of the claimed deduction of $78,604. Therefore, we

conclude that petitioner has not satisfied his burden of proof and he is not entitled

to this additional deduction.

      To reflect the foregoing,


                                               Decision will be entered for

                                       respondent.
