Monroe v. Comm'r of Internal Revenue

NOT PRECEDENTIAL

Dion E. Monroe and Kim M. Monroe, pro sese.

Douglas S. Polsky and Joseph P. Benoist, for respondent.

SUMMARY OPINION

COPELAND, JUDGE

This case was heard pursuant to the provisions of section 7463^[1] of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.

Mr. and Mrs. Monroe seek redetermination of the following determinations by the Internal Revenue Service (IRS) set forth in a notice of deficiency dated April 26, 2017:

Year	Deficiency	Accuracy-related penalty sec. 6662(a)
2014	$12, 727	$2, 545
2015	11, 561	2, 312

The issues for decision are:

1. whether the Monroes' gross receipts of $37, 360 and $23, 860 for tax years 2014 and 2015, respectively, reported on Schedules C, Profit or Loss From Business, should be recharacterized as "other income," and whether the amount for 2014 should be increased to the amount reported to the IRS by third parties, $38, 862;

2. whether the Monroes' expense deductions of $54, 333 and $50, 339 for tax years 2014 and 2015, respectively, reported on Schedules C should be recharacterized as miscellaneous itemized deductions reportable on Schedule A, Itemized Deductions; ^[2] and whether those deductions have been substantiated;

3. whether the Monroes failed to report dividend income and capital gain income for tax years 2014 and 2015; and

4. whether the Monroes are liable for substantial understatement of income tax penalties under section 6662(a) and (b)(2) for tax years 2014 and 2015.

Background

Some of the facts have been stipulated and are so found. The stipulation of facts and the attached exhibits are incorporated by this reference. The Monroes resided in Kansas when they timely filed their petition.

During 2014 and 2015 Mrs. Monroe received wages for which her employer issued Forms W-2, Wage and Tax Statement. During the same timeframe Mr. Monroe was employed as a car salesman at Shawnee Mission Hyundai (Shawnee), an automobile dealership. He received compensation from Shawnee for which the parent company for Shawnee issued him Forms W-2. His compensation from Shawnee was based entirely on commissions for the cars he sold. Shawnee paid Mr. Monroe commissions of $72, 305 and $82, 565 for tax years 2014 and 2015, respectively. Mr. Monroe was also eligible for certain performance incentive payments from Hyundai Motor America (Hyundai) based on the number of new cars that he sold. Hyundai paid Mr. Monroe incentive payments totaling $38, 862 and $23, 860 during 2014 and 2015, respectively.

In order to facilitate his overall car sales, Mr. Monroe engaged in certain marketing activities. Those activities involved offering incentives to: (1) potential customers who test drove a Shawnee vehicle for which Mr. Monroe was the designated salesman, (2) customers who purchased a Shawnee vehicle for which Mr. Monroe was the salesman, and (3) persons who referred customers to Mr. Monroe. The various incentives included a free round of golf for two people, lunch, dinner, a $100 gift card, or tickets to a Kansas City Chiefs football game.

Mr. Monroe would market these incentives by taking a day every other week to drive a circuit along which he would deliver to and post flyers at certain targeted insurance agencies, golf courses, golf stores, and junk yards. On days when he drove the circuit, Mr. Monroe used a phone application (app) to track his mileage. The app allowed him to manually enter the starting odometer reading; then it would use the phone's Global Positioning System receiver to track mileage driven and, at the end, add the mileage driven to the initial odometer reading to calculate a final odometer reading. The app also allowed Mr. Monroe to generate a mileage log. His mileage logs included: (1) the date; (2) the time travel was initiated (but no other times); (3) a description, which is either "[d]eliver flyers" or "[d]eliver flyers/[s]etup tourn"; (4) a purpose, which is always "[b]usiness"; (5) a "From", which is always "Home"; (6) a "To", which is always "Golf Stores", "Golf Courses", "Junk Yards", or "Insurance Agents"; (7) a beginning odometer reading; (8) an ending odometer reading; and (9) a mileage calculation. Mr. Monroe's 2014 mileage log reflects 19, 907 business miles driven, and his 2015 mileage log reflects 15, 610 business miles driven.

Mr. Monroe was successful enough at selling new cars that he received substantial incentive payments from Hyundai. Hyundai issued the incentive payments to Mr. Monroe by depositing funds directly onto a prepaid card issued in his name. Mr. Monroe treated his prepaid card account as his business account and used it to pay costs associated with the above-described marketing activities. Among other expenditures he incurred, Mr. Monroe purchased advertising supplies and provided his customers with prizes such as golf rounds and meals using his Hyundai prepaid card. As an example of how Mr. Monroe used the prepaid card to track expenses, a customer might purchase a new Shawnee vehicle through Mr. Monroe at the beginning of the week and Mr. Monroe would take that customer to lunch later in the week. Mr. Monroe would pay for lunch with his prepaid card. Once a week he used the prepaid card account's online features to generate a spreadsheet, and he would type notes in the spreadsheet regarding that week's expenses. This allowed Mr. Monroe to categorize his expenses. In preparation for trial Mr. Monroe also added handwritten notations, such as customers' names, to the prepaid card transaction spreadsheets.

Occasionally, Mr. Monroe would charge a marketing expense to a personal account that he held with Bank of America. In that circumstance he would annotate the expense directly through an online feature of that account. For both years at issue, Mr. Monroe provided the IRS with his records from Bank of America, the prepaid card transaction spreadsheets, his customer list, and the mileage log from his app. In preparation for trial Mr. Monroe added customer names and other handwritten notations on his customer list and Bank of America bank statements.

With regard to incentive payments, Hyundai issued Mr. Monroe Forms 1099-MISC, Miscellaneous Income, reporting that it paid him $38, 862 and $23, 860 in 2014 and 2015, respectively. Petitioners timely filed their 2014 and 2015 joint tax returns on Forms 1040, U.S. Individual Income Tax Return. Mr. Monroe reported the following income and expense items on Forms 1040, Schedules C:

2014	2015
Gross income	$37, 360	$23, 860
Expense Advertising	1, 347	685
Car and truck	20, 171	13, 694
Commissions and fees	2, 152	-0-
Contract labor	2, 535	-0-
Depreciation and sec.	179 1, 696	1, 206
Legal and professional	2, 786	6, 000
Office	2, 351	9, 810
Rent or lease of vehicles, machinery, and equipment	-0-	980
Repairs and maintenance	1, 275	-0-
Supplies	2, 594	2, 526
Taxes and licenses	2, 151	-0-
Travel	6, 437	9, 633
Deductible meals and entertainment	3, 155	2, 380
Utilities	1, 589	-0-
Other	4, 094	3, 425
Total expenses	54, 333	50, 339
Net income or loss	!16, 973	!26, 479

In calculating the car and truck expenses listed in the table above for 2014, the Monroes reported three vehicles and their associated mileages on Form 4562, Depreciation and Amortization, as follows:

Make of car	Business	Commuting	Personal	Total
Audi A	2, 815	412	90	3, 317
Audi A6	14, 367	3, 211	986	18, 564
Volkswagen	16, 855	6, 211	2, 279	25, 345
2014 Totals	34, 037	9, 834	3...