The Tax Court in Brief – August 1st – August 5th, 2022
Tax Litigation: The Week of August 1st, 2022, through August 5th, 2022
Eze v. Comm'r, T.C. Memo. 2022-83 | August 4, 2022 | Lauber, J. | Dkt. No. 21425-19
Short Summary: During tax years 2015 and 2016, Petitioner Nnabugwu C. Eze ("Petitioner") reported income and expenses from two sets of activities on Schedules C—consulting in the electronic healthcare field ("Schedule C1") and residential construction ("Schedule C2"). Petitioner reported expenses on Schedules C1 and C2 primarily related to car/truck expenses and other expenses. While Schedule C1 reported net profits in tax years 2015 and 2016, Schedule C2 reported significant net losses nearly offsetting Schedule C1's net profit.
The IRS selected Petitioner's 2015 and 2016 tax returns for examination and issued Petitioner a timely notice of deficiency. The IRS disallowed all car/truck expenses on Schedules C1 and C2, 90 percent of the other expenses on Schedule C1, and all of the other expenses on Schedule C2. Additionally, the IRS assessed certain accuracy-related penalties under Section 6662(a).
Petitioner timely filed his petition for redetermination of the deficiencies and accuracy-related penalties. The IRS conceded the accuracy-related penalties, pursuant to I.R.C. § 6751(b)(1). After Petitioner changed counsel, eventually representing himself pro se, and obtaining continuances, Petitioner's case proceeded to remote trial on March 29, 2022.
- (1) Whether petitioner has substantiated expenses allegedly incurred in conducting two sets of sole proprietorship activities.
- (1) Petitioner has not substantiated expenses allegedly incurred in conducting two sets of sole proprietorship activities save one exception.
Key Points of Law:
- The Commissioner's determinations in a notice of deficiency are generally presumed correct, and the taxpayer bears the burden of proving them erroneous. See Rule 142(a).
- The burden of proof may shift to the Commissioner if the taxpayer "introduces credible evidence with respect to [a relevant] factual issue" and satisfies three additional conditions: (1) the taxpayer must have "complied with the requirements under [Title 26] to substantiate any item," (2) the taxpayer must have "maintained all records required under [Title 26]," and (3) the taxpayer must have "cooperated with reasonable requests by the [IRS] for witnesses, information, documents, meetings, and interviews." See R.C. § 7491(a)(1), (2)(A)-(B).
- Deductions are a matter of legislative grace, and taxpayers bear the burden of proving their entitlement to any deduction claimed. See Rule 142(a); INDOPCO, Inc. v. Comm'r, 503 U.S. 79, 84 (1992).
- A taxpayer must show that he has met all requirements for each deduction and keep books or records that substantiate the expenses underlying it. See R.C. § 6001; Roberts v. Comm'r, 62 T.C. 834, 836 (1974).
- If a taxpayer claims a deduction but cannot fully substantiate the underlying expense, the Court in certain circumstances may approximate the allowable amount, "bearing heavily if it [so] chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Comm'r, 39 F.2d 540, 543–44 (2d Cir. 1930).
- No deduction is allowed for vehicle expenses unless the taxpayer substantiates, by adequate records or sufficient evidence corroborating his own statements, the amount, time and place, and business purpose for each expenditure. See Treas. Reg. § 1.274-5T(c).
Insight: As this case suggests, taxpayers must be able to substantiate all expenses claimed on their tax returns. Failure to provide sufficient, accurate books and records, especially with respect to car and truck expenses, will result in the IRS disallowing such expenses. In fact, as the Court notes, the taxpayer's explanation for the expenses must be plausible and credible. Moreover, taxpayers should be wary of claiming significant expenses on Schedule C that result in large net losses. Those situations may result in a higher likelihood of an IRS audit. Finally, although it was not a focus of the opinion, this case did involve the IRS's concession of certain penalties, pursuant to I.R.C. § 6751(b)(1), as the IRS could not demonstrate adequate supervisory approval of the penalties.
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