PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2014-50
UNITED STATES TAX COURT
JOEL G. NGANGA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7884-13S. Filed June 4, 2014.
Joel G. Nganga, pro se.
K. Elizabeth Kelly, for respondent.
SUMMARY OPINION
ARMEN, Special Trial Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in effect when the
-2-
petition was filed.1 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.
Respondent determined the following deficiencies in, and accuracy-related
penalties on, petitioner’s Federal income taxes:
Penalty
Year Deficiency sec. 6662(a)
2010 $17,790 $3,558.00
2011 17,384 3,476.80
After deemed concessions by petitioner and express concessions by
respondent,2 the issues for decision are as follows:
1
Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the taxable years in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
2
Petitioner did not assign any error or allege any facts in the petition
regarding respondent’s determination: (1) disallowing returns and allowances
claimed on Part I (Income) of his Schedule C, Profit or Loss From Business, for
2010 or (2) that he received a taxable State income tax refund of $5,428 in 2011.
Accordingly, petitioner is deemed to have conceded those issues. See Rule
34(b)(4) (“Any issue not raised in the assignments of error shall be deemed to be
conceded.”); see also McNeil v. Commissioner, T.C. Memo. 2011-150, 2011 WL
2559802, at *1 n.3 (issues not raised on brief or at trial are deemed conceded),
aff’d per curiam, 451 Fed. Appx. 622 (8th Cir. 2012). Respondent concedes that
petitioner is entitled to deductions claimed on his Schedule A, Itemized
Deductions, for mortgage interest of $7,091 and real estate taxes of $1,680 for
2011.
-3-
(1) Whether petitioner is entitled to deduct various expenses claimed by him
on Part II (Expenses) of his Schedules C, Profit or Loss From Business, for 2010
and 2011;
(2) whether petitioner is entitled to deduct the miscellaneous deductions
claimed by him on Schedule A, Itemized Deductions, for 2010;
(3) whether petitioner is liable for tax and the 10% additional tax under
section 72(t) on a distribution from an individual retirement account (IRA) for
2010; and
(4) whether petitioner is liable for accuracy-related penalties under section
6662(a) for 2010 and 2011.
Other adjustments made in the notice of deficiency are purely computational
and will be resolved on the basis of the Court’s disposition of the disputed issues.
Background
Some of the facts have been stipulated, and they are so found. Petitioner’s
legal residence was in the State of Georgia at the time that the petition was filed
with the Court.
2010 Form 1040
Petitioner timely filed a 2010 Form 1040, U.S. Individual Income Tax
Return, reporting wages of $116,338 and a State tax refund of $3,240. Petitioner
-4-
did not report an IRA distribution of $1,758 that he received from Fidelity
Insurance, nor did he otherwise disclose this distribution on his return.
Petitioner itemized his deductions for 2010, and he attached to his return a
Schedule A. On his Schedule A, petitioner claimed total itemized deductions of
$44,195. This amount included State and local taxes of $8,345 (specifically
including State and local income taxes of $5,631) and gross miscellaneous
deductions of $11,850.
Petitioner also attached to his 2010 return a Schedule C for Dependable
Komputer, which he described as engaged in “computer troubleshooting”. In Part
I (Income) of his Schedule C, petitioner reported gross income of $1,000, which
he calculated as follows:
Gross receipts $4,200
Less: Returns and allowances - 3,200
Gross income 1,000
In Part II (Expenses) of his Schedule C, petitioner claimed deductions
(including one for the use of 70% of his home) of $68,131, with a resulting net
loss of $67,131.
Among the expenses claimed by petitioner on his Schedule C were the
following:
-5-
Car and truck expenses $10,816
Depreciation and sec. 179 expense 22,464
Office expense 630
Travel 9,000
Utilities 4,300
Other expenses 3,230
Expenses for business use of home 8,694
In sum, petitioner reported taxable income on his 2010 return as follows:
Wages $116,338
State and local tax refund 3,240
Less: Business loss - 67,131
Adjusted gross income 52,447
Less: Itemized deductions - 44,195
Less: Personal exemption - 3,650
Taxable income 4,602
On the basis of the foregoing, petitioner reported tax of $463. He then
claimed a residential energy credit in the same amount and so reported no tax
liability for 2010.
2011 Form 1040
Petitioner timely filed a 2011 Federal income tax return. On his return,
petitioner reported wages of $95,443. Petitioner did not report any refund of State
tax.
-6-
Unlike 2010, petitioner did not itemize deductions for 2011 but rather
claimed the standard deduction. Like 2010, petitioner attached to his 2011 return
a Schedule C for Dependable Komputer.
On his Schedule C petitioner reported net income of $1,880 and claimed
deductions (including one for the use of 70% of his home) of $75,478, with a
resulting net loss of $73,598.
Among the expenses claimed by petitioner on his Schedule C were the
following:
Car and truck expenses $20,869
Depreciation and sec. 179 expense 6,490
Mortgage interest 7,091
Office expense 3,200
Repairs and maintenance 4,300
Travel 8,420
Utilities 2,800
Other expenses 5,124
Expenses for business use of home 12,384
In sum, petitioner reported taxable income on his 2011 return as follows:
Wages $95,443
Less: Business loss - 73,598
Adjusted gross income 21,845
Less: Standard deduction - 5,800
Less: Personal exemption - 3,700
Taxable income 12,345
On the basis of the foregoing, petitioner reported tax of $1,424.
-7-
Notice of Deficiency
In due course respondent issued a notice of deficiency to petitioner for 2010
and 2011. In the notice respondent disallowed miscellaneous deductions claimed
by petitioner on Schedule A for 2010. Respondent also disallowed both the
Schedule C offset for returns and allowances for 2010 and the various deductions
petitioner claimed on his Schedules C for 2010 and 2011 as listed above.3 Further,
respondent determined for 2010 that (1) petitioner failed to report the Fidelity IRA
distribution of $1,758 and (2) he was liable for the 10% additional tax thereon
under section 72(t). Moreover, for 2011 respondent determined that petitioner
failed to report a taxable refund of State income tax of $5,428.4 Finally,
respondent determined that petitioner was liable for accuracy-related penalties
under section 6662(a) for 2010 and 2011 on the basis of, inter alia, substantial
understatements of income tax.
3
As mentioned supra note 2, respondent subsequently agreed to
recategorize the deduction claimed by petitioner on his 2011 Schedule C for
mortgage interest of $7,091 as an itemized deduction on his Schedule A and as
such conceded it. Although respondent also conceded (as mentioned in note 2) a
deduction for real estate taxes for 2011 on petitioner’s Schedule A, the record does
not disclose whether such taxes had been subsumed in some deduction on the
Schedule C.
4
This determination is consistent with respondent’s allowance of the
deduction claimed by petitioner on his 2010 Schedule A for State and local taxes.
-8-
Petitioner timely filed a petition for redetermination.
Petitioner did not appear at trial. However, the day before trial he appeared
at calendar call, and later that day he executed a stipulation of facts that includes
as an exhibit “the documents provided to respondent by petitioner in an effort to
substantiate the deductions he claimed on his Schedules C for taxable years 2010
and 2011.”5 Those documents, which are tantamount to a shoebox full of
uncategorized records, do include a Cobb County (State of Georgia) Occupational
Tax Certificate for Dependable Komputer demonstrating the payment of $102 in
2011 for a business license. The stipulation of facts does not include any
documents or facts regarding miscellaneous deductions claimed on petititioner’s
Schedule A, nor any documents or facts regarding the Fidelity IRA distribution.
Discussion
I. Burden of Proof
In general, the Commissioner’s determinations in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of showing that those
determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933).
5
At no time since calendar call has the Court heard from petitioner.
-9-
Pursuant to section 7491(a)(1), the burden of proof as to factual matters may
shift from the taxpayer to the Commissioner under certain circumstances.
Petitioner did not allege that section 7491 applies, nor did he either introduce the
requisite evidence or satisfy the substantiation, recordkeeping, and other
requirements of that section. See sec. 7491(a)(1) and (2)(A) and (B). Therefore,
petitioner bears the burden of proof. See Rule 142(a).
II. Substantiation of Deductions
Deductions are allowed solely as a matter of legislative grace, and the
taxpayer bears the burden of proving his or her entitlement to them. Rule 142(a);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co.
v. Helvering, 292 U.S. 435, 440 (1934). Section 6001 requires taxpayers to
maintain records sufficient to establish the amount of each deduction. Hradesky v.
Commissioner, 65 T.C. 87, 89 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir.
1976); sec. 1.6001-1(a), (e), Income Tax Regs.
A. Deductions Claimed on Petitioner’s Schedule C
Section 162(a) allows a deduction for ordinary and necessary business
expenses that a taxpayer pays in connection with the operation of a trade or
business. Boyd v. Commissioner, 122 T.C. 305, 313 (2004). To be “ordinary” the
expense must be of a common or frequent occurrence in the type of business
- 10 -
involved. Deputy v. du Pont, 308 U.S. 488, 495 (1940). To be “necessary” an
expense must be “appropriate and helpful” to the taxpayer’s business. Welch v.
Helvering, 290 U.S. at 113. Additionally, the expenditure must be “directly
connected with or pertaining to the taxpayer’s trade or business”. Sec. 1.162-1(a),
Income Tax Regs. In contrast, section 262(a) disallows deductions for personal,
living, or family expenses.
In support of the deductions claimed for Dependable Komputer, petitioner
presumably relies on the uncategorized jumble of documents that was incorporated
into the stipulation of facts as an exhibit. Because petitioner inexplicably failed to
appear at trial, the record is silent regarding how these documents might
demonstrate deductible expenses for a computer repair business.6 See Chrush v.
Commissioner, T.C. Memo. 2012-299, at *5-*6 (citing Patterson v. Commissioner,
T.C. Memo. 1979-362 (disapproving “shoebox method”)); see also Hale v.
Commissioner, T.C. Memo. 2010-229, 2010 WL 4120880, at *2 (“We need not
* * * undertake the task of sorting through * * *[these documents] in an attempt to
see what is, and what is not, adequate substantiation of the items on petitioner’s
returns.”). Without the benefit of petitioner’s testimony to interpret and give
6
For example, petitioner’s documents include receipts for children’s meals
at fast food restaurants.
- 11 -
meaning to these documents, there is but one that demonstrates on its face a
business purpose, namely, a copy of a Cobb County Occupational Tax Certificate
issued to Dependable Komputer evidencing the payment of $102 in 2011 for a
business license. Apart from this item, petitioner failed to substantiate any
deductible expense or allowance for either 2010 or 2011. Petitioner has
substantiated $102 of business expenses allowable as a deduction on his Schedule
C for 2011.
B. Deductions Claimed on Petitioner’s Schedule A for 2010
Petitioner claimed $44,195 of deductions on Schedule A of his 2010 Federal
income tax return, including gross miscellaneous itemized deductions of $11,850.
Respondent disallowed all of petitioner’s miscellaneous deductions for lack
of substantiation. Petitioner did not offer any documentation in support of such
deductions, nor, as previously stated, did he appear at trial to provide testimony.
Accordingly, we sustain respondent’s determination as to these deductions.
III. IRA Distribution and 10% Additional Tax
A. IRA Distribution
Section 408(d)(1) provides that, with certain enumerated exceptions, any
amount paid or distributed out of an IRA is included in the gross income of the
payee or distributee as provided by section 72. Rollover contributions are an
- 12 -
exception to the inclusion of IRA distributions in the income of payees or
distributees. An amount is a rollover contribution if it meets the requirements of
section 408(d)(3). If an amount is distributed from an IRA to the individual for
whom the account is maintained, and the entire amount is paid into an IRA,
annuity, or eligible retirement plan for the benefit of the individual not later than
the 60th day after the day on which he or she receives the distribution, it is a
rollover excepted from inclusion in income. Sec. 408(d)(3)(A).
In 2010 petitioner received a $1,758 distribution from his Fidelity IRA.
Petitioner alleges in his petition that the IRA distribution was a rollover and thus
not subject to taxation in 2010; however, petitioner has not provided any
documentation or testimony to support this allegation. See Rule 143(c)
(“[U]nadmitted allegations in pleadings do not constitute evidence.”). Because
petitioner has not established that the IRA distribution was rolled over into
another IRA, he does not satisfy the requirements of section 408(d)(3)(A) to
except the distribution from inclusion in income for 2010. We therefore sustain
respondent’s determination on this issue.
B. Additional Tax Under Section 72(t)
Section 72(t)(1) imposes a 10% additional tax on the taxable amount of an
early distribution from a qualified retirement plan (as defined in section 4974(c)).
- 13 -
The term “qualified retirement plan” includes an IRA described in section 408(a).
Sec. 4974(c)(4). A distribution is “early” if it is made before the recipient attains
the age of 59½. Sec. 72(t)(2)(A)(i). However, the 10% additional tax does not
apply under certain circumstances. Thus, for example, section 72(t)(2) excepts a
qualified retirement plan distribution from the 10% additional tax if the
distribution is attributable to the taxpayer’s disability, made for the payment of
certain medical expenses or health insurance premiums, or used for a first-time
home purchase. Sec. 72(t)(2)(A)(iii), (B), (D), (F).
Generally, the taxpayer has the burden of proving his or her entitlement to
any of these exceptions. See Rule 142(a). In 2010 petitioner received a $1,758
distribution from his Fidelity IRA. Petitioner had not reached age 59½ at the time
of the distribution. Furthermore, the record does not reflect why petitioner chose
to withdraw the $1,758 from his retirement plan in 2010, such as whether the
distribution was used to pay medical expenses, health insurance premiums, or
expenses attributable to a disability or to make a first-time home purchase.
Consequently, the distribution from his retirement plan is considered an early
distribution for purposes of section 72(t). And, as the distribution has not been
shown to fit within any of the statutory exceptions, petitioner is liable for the
additional 10% tax on the distribution under section 72(t)(1).
- 14 -
IV. Accuracy-Related Penalty
Section 6662(a) and (b)(2) imposes an accuracy-related penalty equal to
20% of the amount of any underpayment of tax that is attributable to a substantial
understatement of income tax. By definition an understatement is the excess of
the tax required to be shown on the tax return over the tax actually shown on the
return. Sec. 6662(d)(2)(A). An understatement of income tax is “substantial” if it
exceeds the greater of $5,000 or 10% of the tax required to be shown on the
return. Sec. 6662(d)(1)(A).
With respect to a taxpayer’s liability for any penalty, section 7491(c) places
on the Commissioner the burden of production, thereby requiring the
Commissioner to come forward with sufficient evidence indicating that it is
appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-
447 (2001). Once the Commissioner meets his burden of production, the taxpayer
must come forward with persuasive evidence that the Commissioner’s
determination is incorrect. See Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
In the instant case petitioner reported tax due of zero for 2010 and $1,424
for 2011. The notice of deficiency determined petitioner’s correct tax was
$17,790 for 2010 and $18,808 for 2011. Respondent will have met his burden of
production if Rule 155 computations show that petitioner had a substantial
- 15 -
understatement of income tax. See, e.g., Jarman v. Commissioner, T.C. Memo.
2010-285. We assume, arguendo, that respondent has carried his burden of
production. As a result, petitioner now bears the burden to show that an exception
to the penalty applies. See Higbee v. Commissioner, 116 T.C. at 446-447.
Section 6664(c)(1) provides an exception to the imposition of the accuracy-
related penalty with respect to any portion of an underpayment if the taxpayer
establishes that there was reasonable cause for such portion and the taxpayer acted
in good faith with respect to such portion. The decision as to whether the taxpayer
acted with reasonable cause and in good faith is made on a case-by-case basis,
taking into account the pertinent facts and circumstances, including the taxpayer’s
knowledge, education, and experience, as well as the taxpayer’s reliance on
professional advice. Thomas v. Commissioner, T.C. Memo. 2013-60; see also
Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000) (providing a
three-prong test to establish reasonable reliance on professional advice), aff’d, 299
F.3d 221 (3d Cir. 2002); sec. 1.6664-4(b)(1), Income Tax Regs. Generally, the
most important factor is the extent of the taxpayer’s effort to assess his or her
proper tax liability. Humphrey, Farrington & McClain, P.C. v. Commissioner,
T.C. Memo. 2013-23; sec. 1.6664-4(b)(1), Income Tax Regs.
- 16 -
By failing to appear at trial, petitioner did not adduce any evidence that
might have served to satisfy his burden of proof. Accordingly, petitioner is liable
for the accuracy-related penalties under section 6662(a) as determined by
respondent.
Conclusion
To reflect both the parties’ concessions and our disposition of the disputed
issues,
Decision will be entered
under Rule 155.