Tax Court in Brief | Harrison v. Commissioner | Itemized Deductions, Charitable Contributions, Passive Income

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Tax Litigation: The Week of May ninth, 2022, by means of May thirteenth, 2022

Harrison v. Comm’r, T.C. Memo 2022-6 | May 12, 2022 | Panuthos, J | Dkt. No. 12170-19S

Opinion

Summary: The IRS declared a deficiency, further tax, and accuracy-related penalties on the 2015 earnings tax return of Nicole Harrison, an worker of Samsung Electronics and a guide on the aspect. Harrison made a number of charitable contributions, largely made by means of a PayPal account, and he or she often donated clothes, sneakers, and jewellery to organizations resembling Goodwill and Dress for Success. Harrison traveled in reference to Samsung and usually booked enterprise class flights; nonetheless, when firm coverage modified in order that she may solely be reimbursed for the price of coach, she continued to ebook enterprise class. She started to deduct the distinction on her Schedule A and substantiated the prices with financial institution statements of her company card. In connection together with her sole proprietorship consulting, she paid an organization to arrange a web site, networked, traveled for 2 purchasers, purchased a laptop computer, and renovated her private residence to incorporate a home-office. Lastly, she and a relative, bought a rental property. She contributed to the mortgage by sending Venmo funds. She didn’t obtain any earnings and claimed passive-activity losses for remediating a flooded basement, insurance coverage, and different house-related bills.

Issues:

Whether Harrison is entitled to deduct charitable contributions and unreimbursed worker bills reported on Schedule A, Itemized Deductions?
Whether Harrison is entitled to sure expense deductions referring to her consulting exercise reported on Schedule C, Profit or Loss from Business?
Whether Harrison is entitled to deduct actual property exercise bills reported on Schedule E, Supplemental Income and Loss?
Whether Harrison is answerable for an addition to tax for failure to well timed file pursuant to § 6651(a)(1)?

Primary Holdings

Yes and no. The Court restricted charitable contributions for lack of proof to correctly substantiate the claimed deductions on each money and noncash contributions. The document lacked approximate dates of acquisition, detailed descriptions, and the prices or different bases for the non-cash contributions, and Harrison didn’t present adequate substantiation for her claimed deduction on the money contributions.
Harrison didn’t meet the necessities of § 274(d) for reimbursement of flight bills. She failed to supply information to show occasions, locations, and enterprise goal.
Harrison’s consulting exercise didn’t rise to the extent of carrying on a commerce or enterprise. Harrison was nonetheless in the exploratory levels of forming a enterprise of which deductions underneath § 162(a) will not be permitted.
Harrison didn’t show she qualifies for the energetic participation exception of the rental endeavor. She solely testified to co-signing the lease, she didn’t present a replica of the lease, she didn’t present receipts of the Venmo funds on the mortgage, and he or she didn’t obtain any earnings from the exercise. Therefore, she didn’t qualify for the exception underneath § 469(i). Accordingly, Harrison was not entitled to make use of § 162(a) for bills related to the true property.
Harrison didn’t present her failure to well timed file a return was attributable to affordable trigger. Thus, she was answerable for the § 6651(a)(1) addition to tax.

Key Points of Law

Burden of Proof. In basic, the IRS’s willpower set forth in a discover of deficiency is presumed appropriate, and the taxpayer bears the burden of proving that the willpower is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Under § 7491(a), the burden of proof can shift to the IRS if the taxpayer introduces credible proof with respect to any factual points related to ascertaining the taxpayer’s tax legal responsibility. If the burden stays on the taxpayer, then the taxpayer should show she or he in entitled to a particular deduction in query. See Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). If a taxpayer is ready to set up that she paid or incurred a deductible expense however is unable to substantiate the exact quantity, the Court could approximate the deductible quantity, however provided that the taxpayer presents adequate proof to determine a rational foundation for making the estimate. See Cohan v. Comm’r, 39 F.second 540, 543-44 (second Cir. 1930).
170 Charitable Contributions. There is allowed a deduction for any charitable contribution fee, as outlined by §170(c), and which is allowed underneath the rules. § 170(a)(1); Treas. Reg. § 1.170A-13. The substantiation necessities rely on type of fee and the scale of the contribution.
Charitable Contributions of Property. If property aside from cash is donated, “the quantity of the contribution is the truthful market worth (FMV) of the property on the time of the contribution.” Treas. Reg. § 1.170A-1(c)(1). FMV is outlined as the worth at which a keen purchaser and vendor would transact, neither being underneath any compulsion to purchase or promote, and each having affordable data of related info. Treas. Reg. § 1.170A-1(c)(2)
Substantiation Requirements of Money Donation. A charitable contribution of cash should be substantiated by at the least one of many following: (1) a canceled examine; (2) a receipt from the donee charitable group exhibiting the identify of the donee, the date of the contribution, and the quantity of the contribution; or (3) in the absence of a canceled examine or receipt from the donee charitable group, different dependable written information exhibiting the identify of the donee, the date of the contribution, and the quantity of the contribution. Treas. Reg. § 1.170A-13(a)(1). The reliability of the document is decided on the idea of all related info. Treas. Reg. § 1.170A-13(a)(2)(i). If the donation is a small quantity, any written or different proof from the donee charitable group acknowledging receipt is mostly adequate. Treas. Reg. § 1.170A-13(a)(2)(i)(C). However, donations in extra of $250 require donee written acknowledgement containing specified info. § 170(f)(8).
Substantiation Requirements of Property Donation. A charitable contribution of property should be substantiated by a receipt exhibiting (1) the identify of the donee; (2) the date and placement of the contribution; and (3) an outline of the property in element fairly adequate underneath the circumstances. Treas. Reg. § 1.170A-13(b)(1). A receipt shouldn’t be required if the contribution is made in circumstances the place it’s impractical to acquire a receipt. See id. The reliability of the information is decided on the idea of the entire related info and circumstances. Treas. Reg. 1.170A-13(b)(2). If the deduction on the contribution of property exceeds $500, then the taxpayer should preserve written information establishing (1) the merchandise’s method of acquisition in addition to both the merchandise’s approximate date of acquisition or date the property was considerably accomplished and (2) the fee or different foundation, adjusted as offered by part 1016, of property donated by the taxpayer in the course of the taxable 12 months. See 170(f)(11)(A)(i), (B); Treas. Reg. § 1.170A-13(b)(3)(i).
162 Trade or Business Expense. § 162 typically permits for the deduction for all of the bizarre and vital bills paid or incurred in the course of the taxable 12 months in carrying on any commerce or enterprise. Boyd v. Comm’r, 122 T.C. 305, 313 (2004). The taxpayer bears the burden of proving that bills had been of a enterprise nature somewhat than private and that they had been bizarre and vital. Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Performing companies as an worker constitutes a commerce or enterprise. See O’Malley v. Commissioner, 91 T.C. 352, 363–64 (1988); Primuth v. Commissioner, 54 T.C. 374, 377–78 (1970).
274 Disallowance of Certain Travel Expenses. Travel bills require strict substantiation by means of enough information or by adequate proof corroborating the taxpayer’s personal assertion as to the quantity, time, place, and enterprise goal of those expenditures. § 274(d). Substantiation by enough information requires the taxpayer to keep up an account ebook, a diary, a log, a press release of expense, journey sheets, or an identical document ready contemporaneously with the expenditure and documentary proof (e.g., receipts or payments) of sure expenditures. Treas. Reg. § 1.274-5(c)(2)(iii); Temp. Treas. Reg. § 1.274-5T(c)(2). Substantiation by different adequate proof requires the manufacturing of corroborative proof in help of the taxpayer’s assertion particularly detailing the required component. Temp. Treas. Reg. § 1.274- 5T(c)(3).
162 vs § 195. § 162(a) doesn’t present the operative rule for deducting start-up prices. The Code part that does present the mechanical rule is § 195. A preliminary seek for a possible enterprise alternative doesn’t qualify the taxpayer for deductions underneath §§ 162, 165, or 212. Dean v. Comm’r., 56 T.C. 895, 902 (1971). Carrying on a commerce or enterprise requires greater than preliminary analysis into enterprise potential and the solicitation of potential clients. Christian v Comm’r., T.C. Memo. 1995-12.
469 Passive Activity Loss. § 469(a) typically disallows any “passive exercise loss” for the taxable 12 months. A passive exercise loss is outlined as the surplus of the combination losses from all passive actions for that 12 months over the combination earnings from all passive actions for such 12 months. § 469(d)(1).
Passive Activity Defined. A passive exercise is any commerce or enterprise in which the taxpayer doesn’t materially take part. § 469(c)(1). Rental exercise is mostly handled as per se passive no matter whether or not the taxpayer materially participates. § 469(c)(2). There are two exceptions to the overall rule that rental actual property actions are per se passive actions: (1) passive exercise losses as much as $25,000 underneath part 469(i) and (2) sure taxpayers in actual property trades or companies (actual property professionals) underneath part 469(c)(7). Moss v. Comm’r., 135 T.C. 365, 368 (2010).
469(i) Exception to Passive Activity Definition. a Section 469(i) permits taxpayers who “actively participated” in rental actual property actions throughout any taxable 12 months to deduct as much as $25,000 of the passive exercise losses attributable to these actions in that 12 months. § 469(i)(1) and (2). This Court has decided that the energetic participation customary is met if a taxpayer participates in a major and bona fide sense in making administration choices or arranging for others to supply companies resembling repairs. Madler v. Comm’r., T.C. Memo. 1998-112.
6651(a)(1) Failure to Timely File. A Section 6651(a)(1) imposes an addition to tax for failure to file a return on the date prescribed (together with extensions) except the taxpayer can set up that the failure is because of affordable trigger and never attributable to willful neglect. Respondent bears the burden of manufacturing with respect to petitioner’s legal responsibility for the addition to tax underneath part 6651(a)(1). See § 7491(c); Higbee v. Comm’r., 116 T.C. 438, 446–47 (2001). Once the burden is met, the taxpayer bears the burden of proving that her failure to file a well timed return was attributable to affordable trigger somewhat than willful neglect. Higbee, 116 T.C. at 446.

Insights. This case demonstrates the taxpayer’s burden of manufacturing as soon as the IRS has declared a deficiency attributable to improper deductions. The case highlights the factual circumstances a courtroom will inquire into for sure claimed deductions. As such, taxpayers might want to hold detailed information for money and noncash charitable contributions. Moreover, taxpayers ought to observe that pre-business bills will not be deductible underneath § 162. Instead, the deduction for start-up prices is allowable underneath §§ 195 and 709. Travel expenditures ought to be accompanied with occasions, locations, and documentation of the enterprise goal. Lastly, this case exhibits the sophisticated passive exercise loss disallowance guidelines. Specifically, these associated to actual property owned by people.

For further info on the topic passive versus nonpassive, see Freeman Law’s Tax Court in Brief: Tax Court in Brief | Rogerson v. Commissioner | Passive Income, Rent of Yachts, and Reliance on Competent Tax Counsel – Freeman Law (May 12, 2022).

For further info on the tax remedy of charitable contributions, see Freeman Law’s weblog on Joint Committee on Taxation Report on Tax Treatment of Charitable Contributions – Freeman Law (March 22, 2022).

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