Unpublished Disposition, 923 F.2d 863 (9th Cir. 1991)

No. 89-70314.

United States Court of Appeals, Ninth Circuit.

Before BEEZER and TROTT, Circuit Judges, and CROCKER, District Judge.^* 

MEMORANDUM^** 

Appellants, Richard R. and Irene L. Sylvester (the Sylvesters), appeal pro se from the judgment of the United States Tax Court that their joint federal income tax return for 1983 was deficient in the amount of $5,412.93. They also appeal the determination that they owe additional amounts under Sec. 6653¹  (for negligent underpayment) and Sec. 6661 (for substantial understatement of tax liability). The Tax Court had jurisdiction under Secs. 6213, 6214 & 7442. We have jurisdiction over this timely appeal under Sec. 7482. We affirm in part and remand for recalculation of the Sylvesters' tax liability.

* FACTUAL BACKGROUND

The Sylvesters were employed full-time throughout 1983. During the same period, they ran a home publishing business called Ph.D. Publishing. Sometime during 1983, Mr. Sylvester completed development of two computer software programs, both of which were manufactured by Ph.D. Publishing.² 

The Sylvesters filed a joint return for 1983. On that return, they claimed $17,838 worth of deductible employee business expenses. As part of those expenses, Mr. Sylvester claimed deductions for maintaining an office at home for the benefit of his employer.

The Sylvesters also claimed that Ph.D. Publishing generated $3,044.77 in income, but $21,664.56 in deductible expenses, resulting in a net loss of over $18,000. Part of those deductions included trips to Iowa and Italy, depreciation on their residence and depreciation on a car. The Sylvesters claimed that all three of their cars were used 85% of the time for business. At a later point, they attempted to claim dependent care tax credit for Mrs. Sylvester's medical expenses.

The Commissioner disallowed a majority of the above deductions as well as others not contested on this appeal.³  After an aborted attempt to settle and a stipulation, which eliminated a few disagreements, the case proceeded to trial in the Tax Court. The Tax Court rejected Mr. Sylvester's testimony regarding his business purposes as "inherently improbable and cynical," and adopted the Commissioner's determinations in toto. Later, the Tax Court rejected Sylvester's calculation of resulting tax liability and adopted the Commissioner's calculation, which fixed the liability of the Sylvesters at $5,412.93 plus penalties. The Tax Court delivered its opinion from the bench. The court did not make specific findings with respect to many of the claims in dispute.

The Sylvesters argue that the Tax Court erred in upholding the following determinations by the Commissioner:

(1) that Mr. Sylvester is not entitled to the deductions he claimed for employee business expenses;

(2) that the deductions claimed for Mr. Sylvester's own business, but disallowed, are not "ordinary and necessary";

(3) that the Sylvesters used only two of their cars for business 25% of the time, not three of them 85% of the time;

(4) that the Sylvesters are not entitled to claim dependent care credit for Mrs. Sylvester's medical care;

(5) that the Sylvesters are liable for additions to tax for negligent underpayment and for substantial understatement of tax liability.

The Sylvesters also request that this court determine:

(6) whether the Tax Court's computation of liability under Tax Ct.R. 155 was clearly erroneous; and

(7) whether the Tax Court's exclusion of documents offered into evidence was clearly erroneous.⁴ 

II

BURDEN OF PROOF AND STANDARD OF REVIEW

The taxpayer bears the burden of proving the Commissioner's determinations are wrong. See Tax Ct.R. 142. The Commissioner bears the burden of proving new matters and increases in deficiency. Id.

Decisions of the Tax Court are reviewed on the same basis as decisions in civil bench trials in United States District Courts. Mayors v. CIR, 785 F.2d 757, 759 (9th Cir. 1986). Factual findings are reviewed under the "clearly erroneous" standard. Id. Conclusions of law are reviewed de novo. Kelley v. CIR, 877 F.2d 756, 757 (9th Cir. 1989). Mixed questions of law and fact are generally reviewed de novo. Mayors, 785 F.2d at 759; United States v. McConney, 728 F.2d 1195, 1199-1204 (9th Cir.), cert. denied, 469 U.S. 824 (1984).

The Tax Court's affirmance of the penalties for negligent or intentional disregard of rules and regulations is a factual finding reviewed for clear error. Baxter v. CIR, 816 F.2d 493, 496 (9th Cir. 1987).

Evidentiary rulings are reviewed for abuse of discretion and will not be reversed absent some prejudice. Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir. 1988).

III

THE DEDUCTIONS

Sylvester claimed over twenty-one thousand dollars worth of deductions related to his employment. Deductions under Sec. 162, for business expenses such as meals, travel, telephone use and publications, totaled $3,710. Sylvester also deducted a portion of expenses related to his residence, under Sec. 280A, because he claimed to use a portion of his residence as workspace for the convenience of his employer. These expenses consisted of a portion of residence depreciation ($5,530), a portion of residence interest expense totaling $11,127 and a portion of maintenance and other residence expenses totaling $1,066.

An expense is not deductible under Sec. 162 if the taxpayer could have sought reimbursement from his employer but failed to do so. Orvis v. CIR, 788 F.2d 1406, 1408 (9th Cir. 1986). Expenses related to business use of the home by an employee are not deductible unless the use is for the convenience of the employer and exclusively for business. See Sec. 280A. Managers from General Dynamics and Northrop, Mr. Sylvester's employers, testified at trial that employee business expenses were reimbursed by the employer. Those managers also testified that the companies provided all necessary work materials and that employees were expected to work at the office, not at their homes. The Tax Court rejected Mr. Sylvester's assertion that the nature of his particular responsibilities and insufficient office space required that he store materials at home. The court also concluded that the space was not used exclusively for business (see discussion below). On these alternative bases, the court upheld the disallowance of all the deductions claimed for employee business expenses. The resulting increase to income totaled $12,308.⁵ 

The Tax Court's conclusion depends on the weight it gave to the conflicting testimony. Because the court's factual findings--especially those involving credibility--should not be disturbed unless they are clearly erroneous, we affirm the Tax Court's conclusion.

B. Deductions Related to the Home Publishing Business

Sylvester also deducted expenses related to his home publishing business. Sylvester calculated these expenses based on his claim that he used 40% of his home on a regular basis, exclusively for this business. See Sec. 280A. The expenses consisted of: $749 in residence interest expenses and $72 in utilities and maintenance. An additional deduction for residence depreciation ($9,323) will be ignored for the moment because depreciation was treated separately. Automotive expenses ($6,760) and operating expenses ($2,803) also were discussed separately.⁶ 

The Commissioner argued that only one room in the house (7% of the square footage) was used for business. The Commissioner further argued that expenses allocable to this portion of the residence, even if allowable under Sec. 280A(c) (1), should be disallowed under Sec. 280A(c) (5) to the extent they generate a loss. See Scott v. CIR, 84 T.C. 683, 688-92 (1985) (interpreting proposed regulation 1.280A-(2) (i) (2) (ii)).

The Tax Court never reached these issues, because, as noted above, it concluded that the home office was not devoted exclusively to business use, as required by Sec. 280A. This conclusion was based on (1) an examination of the contents of Sylvester's home office library, which persuaded the court that the collection was merely Sylvester's personal library, and (2) the Sylvesters' attempt to depreciate vacuum cleaner bags, a lawn mower and landscaping costs, which the court called "patently personal items." The Tax Court was particularly impressed by the following titles in Sylvester's library: "Persian Poems," "Family Law Symposium," "Collector Cars," and "Photography." Sylvester testified that all his books and periodicals were useful in his publishing business because of their varied styles of binding, advertising and writing.

Although Mr. Sylvester's explanation for the apparently personal library items is plausible, it was not clearly erroneous for the Tax Court to give it no weight. The court considered his testimony and conduct as a whole in concluding that he was not a credible witness. In rejecting Sylvester's testimony, the court described it as "inherently improbable and cynical."

The determination, under Sec. 280A of "exclusive use" should be reviewed for clear error. That determination is similar to the determination of "principal place of business," which is reviewed for clear error. See Pomerantz v. CIR, 867 F.2d 495, 497 (9th Cir. 1988) (" [W]e find that the Tax Court's determination of principal place of business [under Sec. 280A(c) (1) (a) ] is essentially factual and subject to the clearly erroneous standard."). Even under the de novo standard, however, the Tax Court's application of the law to these facts was correct. Mr. Sylvester did not carry his burden of proving he was entitled to home office deductions under Sec. 280A.

The Commissioner allowed interest expense attributable to the residence to be deducted on Schedule A. See n. 4, supra.

Sylvester deducted 40% of the depreciation on his residence, including amounts spent for capital repairs and landscaping. ($3,255 on the residence, $2,316 on fixtures, $332 on landscaping.) Because his claim that a portion of the residence is a business asset was properly rejected, the disallowance of these deductions is affirmed.

The Sylvesters claimed they used three cars for business 85% of the time. The only evidence offered by the Sylvesters was their reconstruction of "typical" business trips. The Commissioner allowed the Sylvesters to claim depreciation on two of the cars based on 25% business use. The Commissioner used the same figure of 25% to adjust automobile expenses and gain on the sale of the Sylvesters' Volvo. The Sylvesters argue that they cannot be required to keep daily logs of their automotive use in order to prove business purpose. See 1985-2 CB 359, 361 (excerpt of H.R.Conf.Rep. No. 67, 99th Cong., 1st Sess. 6-11 (1985)). That does not mean, however, that their testimony and "reconstruction" of business mileage must be accepted as conclusive proof of business purpose. Mr. Sylvester's testimony was discredited at trial. The "reconstruction" was of limited probative value. The Tax Court's conclusion that the Sylvesters failed to carry the burden of proof on the issue of the proportion of business use attributable to the automobiles is affirmed.

The Sylvesters claimed to market computer software. They claimed expenses totaling over eleven thousand dollars related to the development of computer software. These amounts break down as follows:

 Books, Periodicals $ 31 Travel, air fare, hotels $ 3,143 Equipment $ 329 Conferences $ 3,387 Supplies, research $ 2,258 Supplies, development $ 2,567 TOTAL $11,715

Based on these expenses, the Sylvesters claimed a $1,147 investment tax credit and a $1,089 depreciation deduction.

The Tax Court never decided whether the Sylvesters were engaged in the software business. The court also never decided whether expenses incurred in producing a piece of software are deductible as capital expenditures or qualify for investment tax credit. Cf. EMI North Am. Holdings, v. United States, 675 F.2d 1068, 1069 (9th Cir. 1982) (per curiam) (capital expenditures incurred in producing master sound tapes qualify for investment tax credit). Instead, the court determined that most of the expenses were personal in nature. The court agreed with the Commissioner, who disallowed all of these deductions, because "it is not clear how the documents presented relate to a computer tape. Most of the expenses appear to be personal."

The Sylvesters claimed their trip with their daughter to Italy was motivated by the desire to assess "potential customer needs and market demand for desktop computer software," and to "obtain photographs for use in future publications...." At the trial, over five years after the journey, Mr. Sylvester admitted that he had yet to use any of the photographs in his publishing.

The Tax Court upheld the Commissioner's determination that the travel expenses were not deductible. The court also agreed with the Commissioner that the Sylvesters' alleged "business conferences," consisting of 174 meals during the year (including evidence of two or three meals in a single day) were nothing more than personal meals. The court also heard evidence relating to periodicals that the Commissioner argued were personal, for example, National Geographic.

The court set forth no specific findings of fact or conclusions of law with respect to the categories of "Supplies, research" or "Supplies, development." The Commissioner, however, conceded that $261 and $157 worth of expenses were substantiated under these categories. In adopting the Commissioner's determinations, the Tax Court implicitly rejected the contention that these were ordinary and necessary business expense under Sec. 162. The Sylvesters offered no evidence aside from a general description of their business activities to prove the relationship between their expenditures and their publishing business. We affirm the disallowance of expenses related to the computer tape.

The Sylvesters claimed $4,332 in deductible expenses related to their home business. The Commissioner disallowed $1,515 worth of deductions because the substantiation took the form of a "reconstruction" of payments, with no receipts. The Commissioner divided the remaining items (totaling $2,816) into deductible and nondeductible groups, depending on the nature of the item. For example, the Commissioner allowed $327 related to furniture and electronic equipment, but disallowed $159 related to kitchenware and coffee supplies. The Tax Court had available to it evidence regarding the general nature of the expenses, the overall circumstances and the alleged business purposes. The Sylvesters suggest that they carried their burden in front of the Tax Court. Because the determination depends so much on the weight given to Mr. Sylvester's testimony, however, we affirm the Tax Court.

The reduction in proportionate business use of the Sylvesters' Mercedes from 85% to 25% is discussed above. Based on the reduction, the Commissioner reduced the investment tax credit earned on the Mercedes from $681 to $200. The disallowance of a $1,147 credit related to computer software also is discussed above.

The Sylvesters claimed a $944 research credit under Sec. 30 for supplies related to research. $573 was unused credit carried over from prior years. $371 was claimed for 1983 expenditures. The Sylvesters did not state which supply expenditures were related to the credit. The supply expenses accepted as established by the Commissioner totaled $418. ($261 for "research" and $157 for "development".) Research credit is determined by multiplying the increase in research expenses over the "base period" year by 25%. See Sec. 30(a). The amount of research expense substantiated by the Sylvesters ($418) resulted in no research credit for 1983.

The Commissioner also disallowed similar carryover credits earned in previous years. The Sylvesters argument that the Commissioner cannot disallow credits earned in a closed year is without merit. See Mennuto v. CIR, 56 T.C. 910, 923 (1971) (Commissioner can recompute unused credit carryover from closed year to determine tax due in open year).

Expenses incurred for dependent care, when that care allows the taxpayer to be gainfully employed, generate a tax credit under Sec. 44A (Since renumbered as Sec. 21). The Commissioner allowed a tax credit under this section equal to 20% of the substantiated costs related to care of the Sylvesters' children.

The Sylvesters claim that Mrs. Sylvester's medical expenses increase the credit under this section. A spouse qualifies as a dependent under this section if that spouse is "physically or mentally incapable" of caring for him or herself. Sec. 44A(c) (1) (C). There is no evidence in the record that Mrs. Sylvester was physically or mentally incapable of caring for herself. The Sylvesters argue that Mrs. Sylvester was unable to provide her own medical care. That fact is irrelevant. The deductibility of medical expenses is governed (and limited) by Sec. 213. See id. (medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income). The Tax Court and Commissioner correctly disallowed this attempt to evade the limitations in Sec. 213.

IV

THE CALCULATIONS

The Commissioner reduced deductible automobile expenses by reducing the percentage of business use, as noted above. The Commissioner stipulated that the Mercedes and Volvo were used for business 25% of the time and reduced deductible auto expenses by $6,306, accordingly. The Sylvesters have not pointed to any clear error in this regard.

The Commissioner admits that the gain on the sale of the Volvo was erroneously calculated as $1,250 rather than $210, the amount determined in the Notice of Deficiency and the stipulation. Accordingly, we remand for a recalculation of the Sylvesters' resulting tax liability, using the correct figure of $210.

V

THE ADDITIONS TO TAX

The Commissioner imposed additional tax under Sec. 6653 (for negligent or intentional underpayment) and Sec. 6661 (for substantial understatement of tax liability). In light of Mr. Sylvesters advanced training (including a law degree) and experience (including publishing a book called "Strategic Planning: Tax Minimization and Investment Strategy," and in light of the large number of deductions that were clearly not allowable under the Tax Code, we affirm the additions under Sec. 6653. Unless recalculation reveals a tax liability of under $5,000, we also affirm the addition under Sec. 6661.

VI

THE EVIDENTIARY RULINGS

The Sylvesters argue the Tax Court committed reversible error by excluding exhibits offered into evidence. At trial, Mr. Sylvester offered into evidence a computer listing of the library holdings of his employer, Northrop. The Tax Court sustained the objection of the I.R.S. attorney, Michael Noble, that the document was not authenticated by the testimony of the librarian who produced it.

Mr. Sylvester also tried to introduce what he called "impeachment evidence," consisting of correspondence between himself and Noble to show that Noble planned to settle most of the case and then changed his mind. The Tax Court sustained an objection that the material was irrelevant.

The Sylvesters have not demonstrated that the Tax Court abused its discretion in excluding this evidence, nor have they demonstrated any prejudice. See Roberts v. College of the Desert, 870 F.2d 1411, 1418 (9th Cir. 1988).

CONCLUSION

The case is REMANDED for recalculation of the Sylvesters' tax liability consistent with this opinion. In all other respects, however, the judgment of the Tax Court is AFFIRMED.