T.C. Memo. 2014-63
UNITED STATES TAX COURT
BRAD S. HERSHBERGER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 279-12, 280-12, Filed April 8, 2014.
281-12.
Brad S. Hershberger, pro se.
Jamie M. Stipek, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
KERRIGAN, Judge: Respondent determined the following deficiencies and
penalties in these consolidated cases with respect to petitioner’s Federal income
tax for tax years 2006, 2007, and 2008:
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[*2]
Penalty
Year Deficiency sec. 6662(a)
2006 $8,368 $1,674
2007 6,890 1,378
2008 855 171
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect for the tax years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure. We round all monetary amounts to
the nearest dollar.
After concessions, the issues for consideration are whether petitioner (1)
received rental income greater than the rental income he reported on his Schedules
E, Supplemental Income and Loss, for tax years 2006 and 2007; (2) is entitled to
deduct repair expenses he reported on his Schedules E for tax years 2006 and
2007; (3) is entitled to deduct charitable contributions he reported on his
Schedules A, Itemized Deductions, for tax years 2006, 2007, and 2008; and (4) is
liable for accuracy-related penalties under section 6662(a) for tax years 2006,
2007, and 2008.
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[*3] FINDINGS OF FACT
Some of the facts are stipulated and are so found. Petitioner resided in
Kansas when he filed the petitions. Petitioner worked for Cessna Airport, Inc.,
during 2006, 2007, and 2008.
On January 8, 2009, petitioner filed a Form 1040, U.S. Individual Income
Tax Return, for tax year 2006. On his Schedule A petitioner claimed a deduction
for charitable cash contributions of $8,100. On his Schedule E petitioner listed
ownership of three residential rental properties in Wichita, Kansas, located on the
following streets: E. Gilbert (Gilbert property), Allen (Allen property), and Ellis
(Ellis property). Petitioner reported rental income from the Gilbert property, the
Allen property, and the Ellis property of $3,270, $3,100, and $3,120, respectively.
Petitioner reported repair expenses in connection with the Gilbert property, the
Allen property, and the Ellis property of $6,231, $5,972, and $6,103, respectively.
On February 10, 2009, petitioner filed a Form 1040 for tax year 2007. On
his Schedule A petitioner claimed a deduction for charitable cash contributions of
$9,000. On his Schedule E petitioner listed continued ownership of the Gilbert
property, the Allen property, and the Ellis property. Petitioner reported rental
income from the Gilbert property, the Allen property, and the Ellis property of
$3,223, $3,127, and $3,152, respectively. Petitioner reported repair expenses in
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[*4] connection with the Gilbert property, the Allen property, and the Ellis
property of $6,314, $5,817, and $6,099, respectively.
Petitioner filed timely a Form 1040 for tax year 2008. On July 13, 2009,
petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for
tax year 2008. On his Schedule A petitioner claimed a deduction for charitable
cash contributions of $5,720.
On September 21, 2011, respondent issued petitioner a notice of deficiency
for tax years 2006, 2007, and 2008. Respondent disallowed petitioner’s repair
expense and charitable contribution deductions for lack of substantiation and
included additional rental income because of unexplained deposits in petitioner’s
bank account records.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and a taxpayer bears the burden of proving those determinations
are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner has not claimed or shown that he meets the requirements of section
7491(a) to shift the burden of proof to respondent on any relevant factual issues.
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[*5] Taxpayers must maintain records adequate to substantiate their income and
deductions. Sec. 6001. These records should be sufficient to establish the amount
of the gross income or other items shown on the tax return. Sec. 1.6001-1(a),
Income Tax Regs. The taxpayer shall retain these records as long as they may
become material in the administration of the Internal Revenue Code. Sec. 1.6001-
1(e), Income Tax Regs.
II. Unreported Income
Section 61(a) defines gross income as “all income from whatever source
derived” unless otherwise provided. Respondent reconstructed petitioner’s rental
income for tax years 2006 and 2007 using the bank deposits method. Where the
taxpayer fails to keep sufficient records under section 6001, the Commissioner
may compute taxable income through a method that “does clearly reflect income”.
Sec. 446(b); Petzoldt v. Commissioner, 92 T.C. 661 (1989).
The Commissioner’s use of the bank deposits method has long been
approved when the taxpayer fails to keep sufficient records under section 6001.
Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978); see also Good v.
Commissioner, T.C. Memo. 2012-323, at *25. This method “assumes that all
money deposited in a taxpayer’s bank account during a given period constitutes
taxable income, but the Government must take into account any nontaxable source
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[*6] or deductible expense of which it has knowledge.” Clayton v. Commissioner,
102 T.C. 632, 645-646 (1994). The bank deposits method provides prima facie
evidence of income, and the Commissioner is not required to prove the likely
source of the income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The
taxpayer shoulders the burden of establishing that items “should be excluded from
income or allowed as deductions.” Gemma v. Commissioner, 46 T.C. 821, 833
(1966); see also Clayton v. Commissioner, 102 T.C. at 645.
Respondent produced copies of petitioner’s Bank of America records for tax
years 2006 and 2007. The bank records indicate that petitioner made the
following bank deposits on the following dates:
Date Deposit amount
Sept. 5, 2006 $2,500
Sept. 15, 2006 4,000
Dec. 11, 2006 7,000
June 12, 2007 12,000
Respondent contends that these deposits were additional rental income that
petitioner did not report on his Forms 1040. Petitioner testified that the bank
deposits were all derived either from paychecks for wages he received from
Cessna Airport, Inc., and reported on his Forms 1040 or checks he received from
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[*7] the U.S. Treasury as refunds of Federal tax. Petitioner did not provide
documents to corroborate his testimony. Petitioner did not call any witnesses to
corroborate his testimony. The record is devoid of any evidence, other than
petitioner’s testimony, that the deposits were excludible from income or allowable
as deductions. Petitioner’s unsupported testimony is insufficient to meet his
burden. We sustain respondent’s determinations with respect to petitioner’s
unreported rental income.
III. Rental Repair Deductions
Deductions are a matter of legislative grace, and the taxpayer must prove his
or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). Section 212(2) allows for a deduction of all the ordinary and necessary
expenses paid or incurred during the taxable year for the management,
conservation, or maintenance of property held for the production of income. A
taxpayer may deduct properly substantiated repair expenses for properties held out
for rent under section 212.
A taxpayer claiming a deduction on a Federal income tax return must
demonstrate that the deduction is allowable pursuant to a statutory provision and
must further substantiate that the expense to which the deduction relates has been
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[*8] paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).
Petitioner produced receipts for 2006 and 2007 that he contends substantiate
his repair expenses. These receipts are vague and do not include the nature and
date of the repairs, the name of the individual or company that performed the
repairs, the details concerning what work was performed, or the type of materials
used in the repairs. The receipts were printed on blank paper rather than on the
official letterhead of a business. Petitioner testified that a man named Juan
Rodriguez made the repairs and prepared the receipts in 2006 and that a man
named Jose Martinez made the repairs and prepared the receipts in 2007.
Petitioner did not call either Mr. Rodriguez or Mr. Martinez as a witness to verify
the cost of the repairs or to authenticate the receipts, and therefore respondent did
not have an opportunity to cross-examine them. Petitioner’s uncorroborated and
vague receipts are not credible. We sustain respondent’s disallowance of
petitioner’s repair expense deductions.
IV. Charitable Contributions
Section 170(a)(1) allows a deduction for contributions to charitable
organizations defined in section 170(c). Section 170(f)(8) provides substantiation
requirements for certain charitable contributions. Specifically, section
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[*9] 170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a)
for any contribution of $250 or more unless the taxpayer substantiates the
contribution by a contemporaneous written acknowledgment of the contribution
by the donee organization that meets the requirements of subparagraph (B).” For
donations of money the donee’s written acknowledgment must state the amounts
contributed, indicate whether the donee organization provided any goods or
services in consideration for the contribution, and provide a description and a
good-faith estimate of the value of any goods or services provided by the donee
organization. See sec. 179(f)(8)(B); sec. 1.170A-13(f)(2), Income Tax Regs.
Section 170(f)(17) provides: “No deduction shall be allowed under subsection (a)
for any contribution of a cash, check, or other monetary gift unless the donor
maintains as a record of such contribution a bank record or a written
communication from the donee showing the name of the donee organization, the
date of the contribution, and the amount of the contribution.” Section 170(f)(17)
is effective only for charitable contributions made in tax years beginning after
September 17, 2006. Section 170(f)(17) applies to petitioner for tax years 2007
and 2008. For tax year 2006, section 1.170A-13(a) (1)(iii), Income Tax Regs.
requires in the absence of a canceled check the name of the donee, the date of the
contribution, and the amount of the contribution. Respondent argues that
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[*10] petitioner is not entitled to deduct charitable contribution reported on his
Schedules A because none of the contributions were substantiated. Petitioner
testified that the charitable contributions were the result of a tithe that he paid to
his church. Petitioner provided no receipts, bank records, or documentation
showing the donee and date of the contribution for any tax year in issue. We
sustain respondent’s disallowance of petitioner’s charitable contribution
deductions.
V. Accuracy-Related Penalties
Respondent determined that for each year in issue petitioner is liable for an
accuracy-related penalty pursuant to section 6662(a). Section 6662(a) provides a
penalty for an underpayment attributable to negligence or disregard of rules or
regulations within the meaning of section 6662(b)(1).
The Commissioner bears the burden of production regarding the taxpayer’s
liability for any penalty. Sec. 7491(c); see also Higbee v. Commissioner, 116 T.C.
438, 446-447 (2001). Once the Commissioner has met this burden, the taxpayer
must provide persuasive evidence that the Commissioner’s determination was
incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 447.
Negligence includes any failure to make a reasonable attempt to comply
with the provisions of the internal revenue laws, to exercise due care, or to do
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[*11] what a reasonable and prudent person would do under the circumstances.
Sec. 6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-
3(b)(1), Income Tax Regs. Negligence also includes any failure by a taxpayer to
keep adequate books and records or to substantiate items properly. Sec. 1.6662-
3(b)(1), Income Tax Regs. Respondent has demonstrated that petitioner failed to
keep accurate records with respect to his rental income, rental repair expenses, and
charitable contributions. Respondent has shown that petitioner acted negligently
with respect to 2006, 2007, and 2008.
The accuracy-related penalty does not apply with respect to any portion of
an underpayment for which it is shown that the taxpayer had reasonable cause and
acted in good faith. Sec. 6664(c)(1). For purposes of section 6664(c) a taxpayer
may be able to establish reasonable cause and good faith by showing reliance on
professional advice. Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioner testified that his Forms 1040 for 2006, 2007, and 2008 were
prepared by his accountant. Petitioner did not call his accountant to testify, and
petitioner could not recall what documents he provided to his accountant to
prepare his returns. Petitioner has failed to provide evidence that his accountant
was a competent professional with sufficient expertise and that he provided the
accountant with necessary and accurate information. See Neonatology Assocs.,
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[*12] P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir.
2002). Petitioner did not show reasonable cause for failing to keep adequate
books and records in order to substantiate items properly. We hold that for each
year in issue petitioner is liable for a section 6662(a) penalty for negligence.
Any contentions we have not addressed are irrelevant, moot, or meritless.
To reflect the foregoing,
Decision will be entered under
Rule 155 at docket No. 279-12.
Decisions will be entered for
respondent at docket Nos. 280-12
and 281-12.