Tax Court in Brief | Kinney v. Commissioner | Schedule C Deductions Legal fees, insurance, car and travel expenses | law of the free man
Tax litigation: The week of July 25, 2022 to July 29, 2022
Kinney v. Comm’r, TC Memo. 2022-81 | July 28, 2022 | Weiler, J | Dekt. No. 17664-19
Short summary: From 1975 to 2014, Charles Kinney worked as a licensed attorney in California. In 2008, he was declared a vexatious litigant for bringing unfounded lawsuits, mainly against his neighbor. On June 24, 2016, he was officially disbarred. This Tax Court notice concerns the IRS’s disallowance of deductions claimed by Kinney for business expenses reported on Schedule C, Business Profit or Loss for the 2016 Tax Year. Upon his return, Kinney indicated that he was a consultant, but during the IRS audit process, Kinney changed his “business” to “Data Entry, Consulting, Tech. Serv., [and] Whistleblower.’ Kinney claimed deductions for car and truck expenses, insurance costs (other than health), utility costs and other expenses. Schedule business activities C did not generate a profit, and the business activities and associated expenses were primarily the result of litigation related to Kinney’s disbarment challenge and lawsuits that would otherwise personally benefit him. provides plenty of detail about Kinney’s litigation proclivities and litigation losses, as Kinney’s expenses in various cases have been reported in its Appendix C. Although colored, the details of these litigations are not relevant to For “other expenses,” Kinney claimed a deduction for life insurance, personal liability insurance policy, and water sports accident and injury insurance.
- Was Kinney entitled to deduct Schedule C (1) other expenses and (2) car and truck expenses reported on his 2016 tax return?
- Although documentation provided by Kinney showed that certain expenses were paid, no credible evidence was presented as to the business purpose of the expenses or that the expenses were ordinary and necessary for the stated purposes. The court costs were personal and non-deductible since they were associated with Kinney’s disbarment, vexatious litigant statement, and prior property disputes with his neighbors. The insurance costs were also personal and therefore not deductible.
Main points of law:
- Burden of proof and review rules. In general, the IRS determinations set forth in a deficiency notice are presumed to be correct, and the taxpayer bears the burden of proving the contrary. Rule 142(a); Welch versus Helvering, 290 U.S. 111, 115 (1933). Deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. INDOPCO, Inc. c. Commissioner503 US 79, 84 (1992); New Colonial Ice Co. vs. Helvering, 292 U.S. 435, 440 (1934). The taxpayer is required to keep sufficient records to enable the Commissioner to properly determine his tax liability. IRC § 6001. The taxpayer bears the burden of justifying the amount and purpose of the deduction claimed. Higbee v. Commissioner116 TC 438, 440 (2001).
- cohan Where a taxpayer establishes that he paid or incurred a deductible expense, but does not establish the amount of the deduction, the Tax Court may sometimes estimate the amount eligible as a deduction. Cohan v. Commissioner39 F.2d 540, 543–44 (2d Cir. 1930); Vanicek v. Commissioner, 85 TC 731, 742–43 (1985). However, there must be sufficient evidence in the file to allow the Court to conclude that a deductible expense was paid or incurred at least in the authorized amount. Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957). The burden of proof may shift to the IRS if the taxpayer presents credible evidence regarding any factual issues relevant to determining the appropriate tax liability and establishes that they have complied with the requirements of Section 7491(a) (2)(A) and (B) to substantiate material, maintain required records, and cooperate with reasonable requests from the IRS. IRC § 7491(a)(1) and (2).
- Different business components. Having a business with various different components does not, in itself, preclude a taxpayer from claiming that they constitute a single business for the purposes of section 183. See Reg. § 1.183-1(d)(1). However, if the expense deductions claimed by a taxpayer are personal or otherwise excluded under the Code, the Tax Court need not determine whether the activities, individually or collectively, were undertaken for the required profit. See Treasures. Reg. § 1.183-2(a).
- Section 162 Deduction for business expenses. Section 162(a) allows the deduction of “all ordinary and necessary expenses paid or incurred during the taxable year in the exercise of a trade or business”. The taxpayer must demonstrate that he engaged in the activity with a “real and honest purpose to make a profit”. Hulter v. Commissioner91TC 371, 392 (1988); see West v. Commissioner, Memo TC. 2016-187, at *10, aff’d, 690 F. App’x 210 (5th Cir. 2017). No deductions are allowed for “personal, living or family expenses”. IRC § 262(a). Whether an expense meets the deductibility requirements under section 162 is a question of fact. See Commissioner v. Heininger320 US 467, 475 (1943).
- Ordinary and necessary expenses. An ordinary expense is an expense that commonly or frequently occurs in the taxpayer’s business, and a necessary expense is an expense that is appropriate and useful to the operation of the taxpayer’s business. See MP v. of the Bridge308 US 488, 495 (1940) (ordinary); Commissioner v. Heininger, 320 US to 471 (required); Treasures. Reg. § 1.162-1(a).
- Legal fees and attorney fees. The deductibility of legal expenses depends on the origin and nature of the claim for which the expenses were incurred and whether the claim has a sufficient connection with the business or income-generating activities of the taxpayer. See United States v. Gilmore, 372 US 39, 48–49 (1963). “[T]The origin and nature of the debt in respect of which an expense has been incurred, rather than its potential consequences on the taxpayer’s fortune, constitutes the determining basic criterion. at 49. For a taxpayer’s legal fees to be deductible on Schedule C, they must arise from the taxpayer’s work as a licensed attorney and not from personal business. Section 162(a) does not permit the deduction of fees paid and fees incurred for admission to a state bar. See Ryman v. Commissioner, 51 TC 799, 801–03 (1969). Expenses incurred to protect its reputation are also irrelevant and non-deductible. See Vannier v. Commissioner, Memo TC. 1997-370, 1997 WL 459741, at *4.
- Rules in Section 262. Section 262 takes precedence over section 162. Commissioner v. Idaho Power Co., 418 U.S. 1, 17 (1974). If the origin of the deductions claimed is personal within the meaning of Section 262, the Tax Court need not determine whether they are ordinary and necessary to Schedule C business activities. Section 274 (d ) prescribes more stringent substantiation requirements that must be met before a taxpayer can deduct certain categories of expenses, including travel expenses, meals and lodging away from home, and expenses relating to listed property such as defined in Section 280F(d)(4). See Sanford v. Commissioner50 TC 823, 827 (1968), aff’d by Curiam, 412 F.2d 201 (2d Cir. 1969).
- Section 274 Rules. Even if such an expense would otherwise be deductible, section 274 may still prevent a deduction if the taxpayer does not present sufficient justification. Temp. Treasures. Reg. § 1.274-5T(a). “Adequate records” generally consist of a book of accounts, journal, ledger, statement of expenses, travel journals, or similar document drawn up at or near the time of the expense or use. , along with supporting documents. in § 1.274-5T(c)(2). The Court cannot use the cohan Rule for estimating expenses covered by Section 274(d). See id. in § 1.274-5T(a). If a taxpayer fails to meet the requirement for adequate records with respect to one or more items, they may substantiate those items with their own detailed statement and with other corroborating evidence. See IRC § 274(d); Temp. Treasures. Reg. § 1.274-5T(a), (b) and (c). The Tax Court is not bound to accept a taxpayer’s unsubstantiated, conclusive and self-serving statements without additional evidence. See Johnson v. Commissioner, Memo TC. 1999-127, Affirmed, 246 F.3d 674 (9th Cir. 2000).
- “Listed property.“Listed Property” as defined in Section 280F(d)(4) includes passenger cars, which are defined as four-wheeled vehicles weighing less than 6,000 pounds and manufactured primarily for use on public roads and the highways. IRC § 280F(d)(5)(A). A passenger automobile does not include an ambulance, a hearse or a vehicle used by the taxpayer directly in a trade or a business of transporting persons or goods for remuneration or rental. SeeRC § 280F(d)(5)(B); Hatte v. Commissioner, Memo TC. 2019-109, at *7 n.3.
- Life insurance premiums. Deductions are not allowed for premiums paid on a life insurance policy if the taxpayer is directly or indirectly a beneficiary under the policy or contract. IRC § 264(a)(1); see Ong v. Commissioner, Memo TC. 2012-114; Minick c. commissioner, Memo TC. 2010-12. Insurance intended to insure personal activities is also not deductible.
- Whistle blowing expenses. Whistleblowing expenses are not deductible where the whistleblowing activities are merely the continuation of personal lawsuits. See RC § 1001, 262(a).
Knowledge: Kinney represents another case of a taxpayer who failed to meet the substantiation requirements for business expense deductions under Sections 162 and 274. Kinney failed to adequately establish that the expenses claimed for deduction were related to a legitimate trade or business. The expenses were personal in nature, although some were incurred in Kinney’s efforts to save his attorney’s license or to protect his property. Insufficient corroborating evidence was given and insufficient generalized or self-serving evidence to otherwise establish any of the elements required for the deduction of the expenses claimed.