For most of us the saying “If you don’t succeed at first, try, try again,” is good advice. However, it’s not good to try to deduct personal expenses as business expenses on your tax return. It’s an especially bad idea to then try justifying that at Tax Court repeatedly. Of course, that happened today.
Petitioners are no strangers to this Court. This case constitutes, at the minimum, their 14th case, involving at least one of petitioners, spanning almost 30 taxable years from 1981 to 2010. Most recently they litigated the consolidated cases at docket Nos. 16195-12S, 26201-12S, and 1070-13S, which were decided by this Court’s T.C. Summary Opinion 2014-105. Those cases, like this one, addressed similar continuing issues arising primarily from petitioners’ efforts to substantiate and deduct expenses which they attribute to Mr. Boring’s Schedule C sole proprietorship d.b.a. Rambor Technology (Rambor) or his partnership Board Automation. The substantive tax disputes emanate from petitioners’ misunderstanding of the terms “ordinary” and “necessary” as used in defining deductible business expenses pursuant to section 162 and the interrelationship of that section with section 262, defining nondeductible personal expenses. [footnotes omitted]
The issues in this case were deducting expenses without backup, including what appear to be numerous personal expenses. In order to deduct business expenses, they must be both ordinary and necessary for the business.
An expense is ordinary for purposes of this section if it is normal or customary within a particular trade, business, or industry…An expense is necessary if it is appropriate and helpful for the development of the business…Section 262, in contrast, generally precludes deduction of “personal, living, or family expenses.”
The breadth of section 162(a) is tempered by the requirement that any amount reported as a business expense must be substantiated, and taxpayers are required to maintain records sufficient therefor.[citations omitted]
Put simply, almost all of the expenses that were deducted on the return were either nondeductible personal expenses or had no substantiation.
The Court goes through great detail in this case. The reason is that the Court doesn’t want to hear the 15th case dealing with the same issues.
We warn petitioners, however, that their conduct is in material noncompliance with Federal tax law. Our opinions here and in T.C. Summary Opinion 2014-105 are tailored to explain what the law requires. Petitioners have been fairly warned; consequently, any further conduct in the same vein as that considered here and in our previous cases addressing their tax liabilities and tax payments may well, under present law, result in the application of a section 6673 penalty in an amount of up to $25,000.
Section 6673 is the penalty for filing a frivolous Tax Court case. The Court ruled that the case wasn’t entirely frivolous because of one issue. On the tax return, the petitioners took the home office deduction (including mortgage interest). That deduction was denied, but the mortgage interest taken on the home office deduction should have been moved to be an itemized deduction on Schedule A. If not for that, the petitioners might not only owe the tax, penalties (they were hit with the accuracy-related penalty), and interest, but the frivolous penalty too. They somehow avoided the late filing penalty (this was noted in a footnote on the return), so they should consider themselves lucky.