T.C. Memo. 2014-119
UNITED STATES TAX COURT
HERMANN CHERIZOL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 811-12. Filed June 16, 2014.
Hermann Cherizol, pro se.
Jane J. Kim, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined the following deficiencies in
petitioner’s Federal income tax, additions to tax pursuant to section 6651(a)(1),1
1
Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended (Code) and in effect for the years in issue, and Rule
(continued...)
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[*2] and accuracy-related penalties pursuant to section 6662(a) for his 2007, 2008,
and 2009 tax years:
Addition to tax Penalty
Year Deficiency sec. 6651(a)(1) sec. 6662(a)
2007 $8,095 $1,699 $1,619
2008 10,531 --- 2,106
2009 12,666 --- 2,533
The issues for decision are (1) whether we have jurisdiction pursuant to section
6213(a) to consider the instant case; (2) whether petitioner is entitled to deduct
expenses reported on Schedules C, Profit or Loss From Business, of $42,335,
$52,150, and $67,039 for his 2007, 2008, and 2009 tax years (years in issue),
respectively; (3) whether petitioner is entitled to deduct a capital loss carryforward
of $3,000 on Schedule D, Capital Gains and Losses, for each of the years in issue;
(4) whether petitioner is liable for an addition to tax pursuant to section 6651(a)(1)
for his 2007 tax year; and (5) whether petitioner is liable for accuracy-related
penalties pursuant to section 6662(a) for the years in issue.2
1
(...continued)
references are to the Tax Court Rules of Practice and Procedure. We round all
monetary amounts to the nearest dollar.
2
The remaining adjustments set forth in the notice of deficiency are
computational and will be resolved by our holdings on the aforementioned issues.
Consequently, we do not specifically address the remaining adjustments in this
(continued...)
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[*3] FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated. The parties’
stipulated facts are incorporated in this opinion by reference and are found
accordingly. At the time of filing the petition, petitioner resided in New York.
During the years in issue petitioner was a train operator with the
Metropolitan Transportation Authority of New York City, where he typically
worked 8 hours per day and 40 hours per week. Petitioner’s commute to work was
approximately 1 hour and 20 minutes.
During the years in issue petitioner also engaged in various activities under
an unincorporated venture that he named “Right Connections”. Petitioner’s
activities, each of which he contends should qualify as a trade or business for
Federal income tax purposes, included: (1) planning, and accompanying models
on, overnight trips to a clothing-optional beach for suntanning; (2) selling comic
books, baseball cards, and other paraphernalia; (3) creating and publishing a book
of restaurant reviews; (4) trading stocks on the Internet; and (5) consulting.
2
(...continued)
opinion.
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[*4] On January 20, 2009, respondent received petitioner’s Form 1040, U.S.
Individual Income Tax Return (tax return), for petitioner’s 2007 tax year.
Petitioner timely filed tax returns for his 2008 and 2009 tax years. On each of his
2007, 2008, and 2009 tax returns petitioner reported on Schedule C the following
expenses that petitioner claims are related to the various activities he pursued
under Right Connections:
Schedule C expense 2007 2008 2009
Wages $7,235 $7,600 $9,316
Meals & entertainment 2,700 3,100 ---
Travel 4,300 5,600 6,285
Repairs & maintenance 1,650 2,900 4,258
Office 1,850 2,800 6,325
Legal & professional 12,000 14,000 19,755
Advertising 10,500 13,100 17,800
Cost of goods sold 2,100 3,050 3,300
Total 42,335 52,150 67,039
Petitioner also claimed a $3,000 capital loss carryforward on Schedule D of
each of his 2007, 2008, and 2009 tax returns. On those tax returns petitioner listed
a post office box in New York (New York P.O. box) as his address.
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[*5] On November 3, 2011, respondent issued petitioner a notice of deficiency
for his 2007, 2008, and 2009 tax years, determining the aforementioned income
tax deficiencies, accuracy-related penalties, and addition to tax. On January 9,
2012, petitioner filed a petition with this Court challenging respondent’s
determinations. On the petition, petitioner listed the New York P.O. Box as his
address.
OPINION
I. Burden of Proof
Generally, the Commissioner’s determination of a deficiency is presumed
correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Section 7491(a)(1) provides an
exception that shifts the burden of proof to the Commissioner as to any factual
issue relevant to a taxpayer’s liability for tax if: (1) the taxpayer introduces
credible evidence with respect to that issue and (2) the taxpayer satisfies certain
other conditions, including substantiation of any item and cooperation with the
Government’s requests for witnesses, documents, other information, and meetings.
Sec. 7491(a)(2); see also Rule 142(a)(2). The taxpayer bears the burden of
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[*6] proving that the taxpayer has met the requirements of section 7491(a). Rolfs
v. Commissioner, 135 T.C. 471, 483 (2010), aff’d, 668 F.3d 888 (7th Cir. 2012).
Petitioner did not argue that the burden should shift, and he failed to comply
with the substantiation and cooperation requirements. Accordingly, the burden of
proof remains on petitioner.3
II. Jurisdiction
In his petition, petitioner claims that he did not receive a notice of
deficiency and contends that the case should be dismissed, presumably for lack of
jurisdiction pursuant to section 6213(a). Petitioner’s contention is without merit.
A valid notice of deficiency and a timely petition are essential to this
Court’s jurisdiction in a deficiency case, and any case in which one or the other is
not present must be dismissed. Rule 13(a), (c); Monge v. Commissioner, 93 T.C.
3
We note that petitioner failed to comply with the Court’s orders to file a
posttrial brief. When a party fails to file a brief altogether, the failure has been
held by this Court to justify the dismissal of all issues as to which the nonfiling
party has the burden of proof. See Rule 123; Stringer v. Commissioner, 84 T.C.
693 (1985), aff’d without published opinion, 789 F.2d 917 (4th Cir. 1986). While
we decline to enter a default judgment against petitioner for failure to file a brief,
we view his failure as an indication of his tenuous position with regard to the
issues in question. See McGee v. Commissioner, T.C. Memo. 2000-308, 2000 WL
1434240, at *6.
-7-
[*7] 22, 27 (1989); Pyo v. Commissioner, 83 T.C. 626, 632 (1984). A notice of
deficiency is valid for purposes of section 6212(a) and section 6213(a), regardless
of actual receipt by the taxpayer, if it is mailed to the taxpayer’s last known
address. Sec. 6212(b)(1); see Yusko v. Commissioner, 89 T.C. 806, 810 (1987);
King v. Commissioner, 88 T.C. 1042, 1047(1987), aff’d, 857 F.2d 676 (9th Cir.
1988); Frieling v. Commissioner, 81 T.C. 42, 52 (1983). The term “last known
address” is well defined in the tax law. A taxpayer’s last known address is the
address that appears on the taxpayer’s most recently filed and properly processed
Federal tax return unless the IRS is given clear and concise notification of a
different address. Sec. 301.6212-2(a), Proced. & Admin. Regs.
Respondent mailed the notice of deficiency to petitioner’s New York P.O.
box, which was the same address that petitioner gave on each of his 2007, 2008,
and 2009 tax returns, as well as on his petition. Petitioner does not contend that he
gave respondent clear and concise notification of a different address. See id.
Accordingly, we conclude that petitioner’s New York P.O. box was his last known
address pursuant to section 6212 and that respondent mailed the notice of
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[*8] deficiency to petitioner’s last known address.4 See id. Consequently, we
decline to dismiss the instant case for lack of jurisdiction.
III. Schedule C Expenses
On Schedules C of his 2007, 2008, and 2009 tax returns petitioner claimed
deductions pursuant to section 162 for various expenses relating to his activities
pursued through Right Connections. Section 162(a) permits a taxpayer to deduct
the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. See Commissioner v. Lincoln Sav. & Loan Ass’n,
403 U.S. 345, 352 (1971). In order for a taxpayer “to be engaged in a trade or
business, the taxpayer must be involved in the activity with continuity and
regularity and * * * the taxpayer’s primary purpose for engaging in the activity
must be for income or profit.” Commissioner v. Groetzinger, 480 U.S. 23, 35
4
We note that respondent has the burden of proving that the notice of
deficiency was properly mailed. See August v. Commissioner, 54 T.C. 1535, 1536
(1970). Sec. 6212(a) expressly authorizes the Commissioner, after determining a
deficiency, to send a notice of deficiency to the taxpayer by certified or registered
mail. Respondent presented the mailed notice of deficiency and its certified mail
number. Petitioner does not contend that there was any mailing impropriety.
Moreover, petitioner did not stipulate facts, present admissible evidence, or
otherwise contend at trial or on brief that he did not receive a notice of deficiency,
much less that there was any mailing impropriety. Accordingly, we conclude that
petitioner has conceded that the notice of deficiency was properly mailed. See
Rule 149(b); Cadwell v. Commissioner, 136 T.C. 38, 48-49 (2011), aff’d, 483 Fed.
Appx. 847 (4th Cir. 2012).
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[*9] (1987). An expense is ordinary if it is normal, usual, or customary within a
particular trade, business, or industry or arises from a transaction “of common or
frequent occurrence in the type of business involved.” Deputy v. du Pont, 308
U.S. 488, 495 (1940). An expense is necessary if it is appropriate and helpful for
the development of the business. See Commissioner v. Lincoln Sav. & Loan
Ass’n, 403 U.S. at 353; Commissioner v. Heininger, 320 U.S. 467, 471 (1943).
Section 262(a) disallows deductions for personal, living, or family expenses. See
also sec. 1.162-17(a), Income Tax Regs.5
Deductions are a matter of legislative grace, and the taxpayer bears the
burden of proving that he is entitled to any claimed deductions. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). This includes the burden of
substantiation. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89 (1975),
aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Martell v. Commissioner, T.C.
Memo. 2013-115, at *24; sec. 1.6001-1(a), (e), Income Tax Regs. Taxpayers must
maintain records relating to their income and expenses and must prove their
entitlement to all claimed deductions, credits, and expenses in controversy. See
5
For purposes of the instant opinion, we assume, without deciding, that
petitioner’s reported Schedule C expenses on his 2007, 2008, and 2009 tax
returns, insofar as they are properly substantiated, are trade or business expenses
pursuant to sec. 162.
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[*10] sec. 6001; Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. at 84;
Welch v. Helvering, 290 U.S. at 115. Adequate substantiation must establish the
nature, amount, and purpose of a claimed deduction. Higbee v. Commissioner,
116 T.C. 438, 440 (2001); see also Hradesky v. Commissioner, 65 T.C. at 89-90.
The taxpayer must produce such records upon the Secretary’s request. Sec.
7602(a); see also sec. 1.6001-1(e), Income Tax Regs.
An expense may be deductible even where the taxpayer is unable to fully
substantiate it. Christine v. Commissioner, T.C. Memo. 2010-144, 2010 WL
2640125, at *2, aff’d, 475 Fed. Appx. 259 (9th Cir. 2012). The regulations
provide that “[w]here records are incomplete or documentary proof is unavailable,
it may be possible to establish the amount of the expenditures by approximations
based upon reliable secondary sources of information and collateral evidence.”
Sec. 1.162-17(d)(3), Income Tax Regs. However, there must be sufficient
evidence in the record to provide a basis upon which an estimate may be made and
to permit us to conclude that a deductible expense, rather than a nondeductible
personal expense, was incurred in at least the amount allowed. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner,
85 T.C. 731, 742-743 (1985); Christine v. Commissioner, 2010 WL 2640125, at
*2. In these instances, the Court is permitted to make as close an approximation
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[*11] of the allowable expense as it can, bearing heavily against the taxpayer
whose inexactitude is of his or her own making. Cohan v. Commissioner, 39 F.2d
at 543-544. In making such an approximation,
due consideration will be given to the reasonableness of the stated
expenditures for the claimed purposes in relation to the taxpayer’s
circumstances (such as his income and the nature of his occupation),
to the reliability and accuracy of records in connection with other
items more readily lending themselves to detailed record-keeping, and
to all of the facts and circumstances in the particular case.
Sec. 1.162-17(d)(3), Income Tax Regs. In deciding whether a taxpayer has
satisfied his or her burden of substantiating a deduction, we are not required to
accept the taxpayer’s self-serving, undocumented testimony. Niedringhaus v.
Commissioner, 99 T.C. 202, 219-220 (1992); Tokarski v. Commissioner, 87 T.C.
74, 77 (1986).
However, certain expenses may not be estimated because of the strict
substantiation requirements of section 274(d). Sanford v. Commissioner, 50 T.C.
823, 827-828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969). Travel
expenses, meals and entertainment, and expenses relating to certain listed property
are subject to the specific and more stringent substantiation requirements of
section 274. See sec. 274(d). To deduct such expenses, the taxpayer must
substantiate by adequate records or sufficient evidence to corroborate the
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[*12] taxpayer’s own testimony: (1) the amount of the expense; (2) the time and
place of the travel or meal expenditure; (3) the business purpose of the expense;
and (4) in the case of meals and entertainment, the business relationship between
the taxpayer and the persons being entertained. Id. Generally, deductions for
expenses subject to the strict substantiation requirements of section 274(d) must
be disallowed in full unless the taxpayer satisfies every element of those
requirements. Sanford v. Commissioner, 50 T.C. at 827-828; sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
To substantiate by adequate records, the taxpayer must provide (1) an
account book, log, or similar record and (2) documentary evidence, which together
are sufficient to establish each element of an expenditure. Sec. 1.274-5T(c)(2)(i),
Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985). Documentary
evidence includes receipts, paid bills, or similar evidence. Sec. 1.274-5(c)(2)(iii),
Income Tax Regs. As we have stated, a contemporaneous log is not required, but
corroborative evidence used to support a taxpayer’s reconstruction of the
expenditure “‘must have a high degree of probative value to elevate such
statement’” to the level of credibility of a contemporaneous record. Larson v.
Commissioner, T.C. Memo. 2008-187, 2008 WL 2986387, at *4 (quoting section
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[*13] 1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6,
1985)).
To substantiate by sufficient evidence corroborating the taxpayer’s own
statement, the taxpayer must establish each element by his or her own statement
and by documentary evidence or other direct evidence. Sec. 1.274-5T(c)(3)(i),
Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6, 1985). To establish
the business purpose of an expenditure, however, a taxpayer may corroborate his
or her own statement with circumstantial evidence. Id.
Petitioner claims various expense deductions on Schedules C attached to his
2007, 2008, and 2009 tax returns. We review the deductibility of each of
petitioner’s expenses in turn.
A. Wages
Petitioner claimed $7,235, $7,600, and $9,316 of wage expense deductions
on Schedules C attached to his 2007, 2008, and 2009 tax returns, respectively.
Petitioner has not offered any written substantiation, testimony, or other evidence
in support of these expenses. Consequently, we conclude that petitioner has failed
to carry his burden of proving that he is entitled to the claimed deductions for
wage expenses.
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[*14] B. Meals
Petitioner claimed deductions for $2,700 and $3,100 of expenses related to
meals on Schedules C attached to his 2007 and 2008 tax returns, respectively.
Petitioner contends that he incurred these expenses while attempting to compile a
book of New York restaurant reviews; petitioner alleges that he paid for meals for
reviewers who would then review the dining experience. To substantiate these
expenses, petitioner submitted an unsigned sample confidentiality agreement that
he contends he used for contracts with the reviewers. The sample agreement does
not substantiate the amount, time, or place of any meals expenses. Petitioner also
submitted self-prepared spreadsheets listing total amounts spent at each restaurant
for 2007 and 2008 and sample reviews submitted by the restaurant reviewers.
None of the submitted documents indicates, on its own or when viewed with the
others, when it was created or provides enough information for us to determine
precisely what was purchased or when it was purchased. Moreover, we question
the credibility of the submitted documents because petitioner himself created the
spreadsheets and the reviewers failed to sign or otherwise authenticate the
submitted reviews. Accordingly, we do not accept any of the documents as
credible evidence of the underlying expenses and, therefore, petitioner has not
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[*15] carried his burden of proving that he is entitled to the claimed deductions for
these expenses.
C. Travel
Petitioner claimed $4,300, $5,600, and $6,285 of travel expense deductions
on Schedules C attached to his 2007, 2008, and 2009 tax returns, respectively.
Travel expenses may not be estimated and are subject to the specific and more
stringent substantiation requirements of section 274. See sec. 274(d); Sanford v.
Commissioner, 50 T.C. at 827-828. Petitioner did not submit any substantiation in
support of the $6,285 of travel expense deductions claimed on his 2009 tax return.
Regarding his claimed 2007 and 2008 travel expenses, petitioner submitted (1)
self-prepared spreadsheets indicating the cost of ferry tickets and overnight tent
lodging for his travels related to the suntanning activities of Right Connections
and (2) handwritten, generic receipts documenting the cost of tent lodging, but not
ferry tickets, for his suntanning activities. As to the submitted documents, we
question their credibility because petitioner himself created the spreadsheets and
the submitted receipts were drafted on generic, rather than customized, receipt
paper and were not authenticated.6 Accordingly, we do not accept any of the
6
Attached to some, but not all, of the documents petitioner submitted as
substantiation are notarized statements affirming that the “aforementioned
(continued...)
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[*16] documents as credible evidence of the underlying travel expenses.
Consequently, petitioner has failed to carry his burden of proving that he is
entitled to the claimed deductions for travel expenses.
D. Repairs and Maintenance
Petitioner claimed $1,650, $2,900, and $4,258 of repair and maintenance
expense deductions on Schedules C attached to his 2007, 2008, and 2009 tax
returns, respectively. Petitioner has not offered any written substantiation,
testimony, or other evidence in support of his 2009 repair and maintenance
expenses. Regarding his 2007 and 2008 repair and maintenance expenses,
petitioner submitted two self-created job invoices for computer repair and
reconstruction. Petitioner admits that he lost the original receipts and submitted
recreated job invoices. The recreated job invoices were not contemporaneous with
any of the work and were signed by a former employee of the company that
provided the computer services, but that former employee no longer has any
6
(...continued)
Statements, Ledgers, Receipts, and/or Diaries are true and genuine.” However,
petitioner’s notarized statements only confirm that petitioner himself signed the
notarized statements. They do not authenticate any of the underlying documents
he created and submitted as substantiation for his expenses. Instead, we question
the contemporaneity and accuracy of petitioner’s self-created documents because
the attached notarized statements were not notarized until July 6, 2010, more than
a year after the expenses were claimed to have been incurred.
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[*17] authority to bind the company. Additionally, the former employee did not
appear at trial to authenticate the recreated job invoices. Accordingly, we do not
accept the recreated job invoices as credible substantiation of the underlying
expenses. Moreover, petitioner did not testify as to how the repair expenses were
related to his alleged business. Consequently, we conclude that petitioner has
failed to carry his burden of proving that he is entitled to the claimed deductions
for repair and maintenance expenses.
E. Office
Petitioner claimed $1,850, $2,800, and $6,325 of office expense deductions
on Schedules C attached to his 2007, 2008, and 2009 tax returns, respectively.
Petitioner did not offer any written substantiation, testimony, or other evidence in
support of those expenses and, therefore, has failed to carry his burden of proving
that he is entitled to the claimed deductions.
F. Legal and Professional
Petitioner claimed $12,000, $14,000, and $19,755 of legal and professional
expense deductions on Schedules C attached to his 2007, 2008, and 2009 tax
returns, respectively. Petitioner did not offer any written substantiation,
testimony, or other evidence in support of his 2009 legal and professional
expenses. Regarding his claimed 2007 and 2008 legal expenses, petitioner
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[*18] submitted a (1) self-created notice of legal expenses listing costs for court
fees and administration, costs to prepare legal documents, and costs of labor for
petitioner’s pro se representation, and (2) two self-created promissory notes in
which petitioner signed as both the payor, acting on behalf of Right Connections,
and the payee. The notice of legal expenses does not separately document each
specific court fee or document produced. Petitioner admits that his substantiation
and recollection of the legal expenses “is a little murky” and that he “probably
didn’t break down the expense properly.” Accordingly, we do not accept the
notice of legal expenses and the promissory notes as credible substantiation of the
underlying legal expenses. Consequently, we conclude that petitioner has failed to
carry his burden of proving that he is entitled to the claimed deductions for legal
and professional expenses.
G. Advertising
Petitioner claimed $10,500, $13,100, and $17,800 of advertising expense
deductions on Schedules C attached to his 2007, 2008, and 2009 tax returns,
respectively. Petitioner did not offer any written substantiation, testimony, or
other evidence in support of his 2009 advertising expenses. Regarding his
claimed 2007 and 2008 advertising expenses, petitioner submitted two job
invoices, dated March 15, 2007, and April 17, 2008, for various advertising
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[*19] materials and distribution services. However, both documents lack invoice
numbers and appear to have been created by petitioner. Moreover, the alleged
invoices were signed only by petitioner and were not authenticated by a
representative of the advertising company that provided the alleged services.
Accordingly, we do not accept either invoice as credible evidence of the
underlying advertising expenses. Consequently, we conclude that petitioner has
failed to carry his burden of proving that he is entitled to the claimed deductions
for advertising expenses.
H. Cost of Goods Sold
Petitioner reported $2,100, $3,050, and $3,300 of costs of goods sold on
Schedules C attached to his 2007, 2008, and 2009 tax returns, respectively.
Petitioner did not offer any written substantiation, testimony, or other evidence in
support of his 2009 cost of goods sold. Regarding his claimed 2007 and 2008
costs of goods sold, petitioner submitted self-created spreadsheets of purchases
that he made through PayPal.7 Petitioner’s submissions are not official PayPal
records, and they do not indicate account numbers, items ordered or sold, or even
seller or buyer information beyond a PayPal identification name. In fact, some of
7
PayPal is an Internet business wholly owned by eBay, Inc, through which
funds may be transferred between a buyer and seller.
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[*20] the sellers or buyers, such as the ones named “the finest fragrances”,
“SHOES FOR AUCTION”, and “Teahouse Treasures”, cause us to question
whether the transactions were even related to his alleged business activities
performed under the trade name Right Connections. Moreover, in the
spreadsheets petitioner seems to have haphazardly compiled both sales and
purchases, and we are unable to distinguish the ones from the others. We do not
accept petitioner’s spreadsheets as credible evidence of costs of goods sold.
Accordingly, we conclude that petitioner has failed to carry his burden of proving
that he is entitled to the claimed costs of goods sold.
Upon the basis of the foregoing, we sustain respondent’s determinations in
the notice of deficiency that petitioner is not entitled to deduct any expenses
pursuant to section 162 on his 2007, 2008, or 2009 tax return.
IV. Schedule D Expenses
Section 165(a) generally permits deductions for losses sustained during the
taxable year and not compensated for by insurance or otherwise. However, capital
losses on the sale or exchange of capital assets are limited to the extent allowed
under sections 1211 and 1212. Sec. 165(f). Subject to the limitations of section
1211, taxpayers can carry forward their capital losses to succeeding taxable years.
Sec. 1212(b). Pursuant to section 1211, noncorporate taxpayers are permitted to
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[*21] deduct losses on the sale or exchange of capital assets to the extent of the
gain from such sales or exchanges, plus the lower of: (1) $3,000 ($1,500 in the
case of a married individual filing separately) or (2) the excess of such losses over
such gains. Sec. 1211(b). Section 1212(b)(1)(B) provides that the excess of the
net long-term capital loss over the net short-term capital gain is to be treated as a
long-term capital loss for the succeeding taxable year.
To be entitled to a deduction under section 165(a), a taxpayer is required to
keep records to establish the loss. Sec. 6001. If a deduction is carried forward
from one year to another, the taxpayer must keep records to substantiate the
amount. Sec. 1.6001-1(e), Income Tax Regs. To substantiate a capital loss
carryforward, the taxpayer must show: that a loss was incurred; when the loss was
incurred; that the taxpayer is entitled to deduct the loss; whether the loss is capital
or noncapital, or business or personal; and the amount of capital gain during the
intervening years. Widemon v. Commissioner, T.C. Memo. 2004-162, 2004 WL
1559185, at *5; Meissner v. Commissioner, T.C. Memo. 1995-191, 1995 WL
243505, at *3; Aazami v. Commissioner, T.C. Memo. 1993-436, 1993 WL
369137, at *3-*4.
Petitioner claimed a $3,000 capital loss carryforward on Schedule D of each
of his 2007, 2008, and 2009 tax returns. However, petitioner (1) offered no
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[*22] credible evidence to substantiate the capital loss carryforwards, (2) did not
address the capital loss carryforwards in his petition, in his pretrial memorandum,
or during trial, and, (3) as we previously noted, failed to submit a posttrial brief.
We treat the issue as conceded by petitioner. See Rule 149(b). In any event, we
conclude that petitioner has failed to carry his burden of substantiating the claimed
capital loss carryforwards. On the basis of the foregoing, we sustain respondent’s
determinations in the notice of deficiency that petitioner is not entitled to deduct
any capital loss carryforward on his 2007, 2008, or 2009 tax return.
V. Additions to Tax
For petitioner’s 2007 tax year, respondent determined that petitioner is
liable for the addition to tax pursuant to section 6651(a)(1) for his failure to timely
file a Federal income tax return.
Section 6651(a)(1) provides that, in the case of a failure to file a tax return
on the date prescribed for filing (including any extension of time for filing), there
shall be added to the tax required to be shown on the return an amount equal to 5%
of that tax for each month or fraction thereof that the failure to file continues, not
exceeding 25% in the aggregate. The addition to tax is mandatory unless it is
shown that the failure to file is due to reasonable cause and not willful neglect.
Sec. 6651(a)(1); Estate of Cavenaugh v. Commissioner, 100 T.C. 407, 426 (1993),
- 23 -
[*23] aff’d in part, rev’d in part on other grounds, 51 F.3d 597 (5th Cir. 1995).
Reasonable cause for delay is established where a taxpayer is unable to file despite
the exercise of ordinary business care and prudence. Bassett v. Commissioner, 67
F.3d 29, 31 (2d Cir. 1995), aff’g 100 T.C. 650 (1993); sec. 301.6651-1(c)(1),
Proced. & Admin. Regs. “Willful neglect” has been defined as a “conscious,
intentional failure or reckless indifference.” United States v. Boyle, 469 U.S. 241,
245 (1985). Whether a failure to file timely is due to reasonable cause and not
willful neglect is a question of fact. Id. at 249 n.8; Crocker v. Commissioner, 92
T.C. 899, 913 (1989).
In the notice of deficiency, respondent determined that petitioner’s 2007 tax
return was received by the Internal Revenue Service on January 20, 2009, more
than 11 months after the filing deadline of April 15, 2008, and determined that
petitioner was liable for an addition to tax of $1,699 for petitioner’s 2007 tax year.
Petitioner does not contend or offer evidence to prove that the return was timely
filed, that respondent incorrectly computed the addition to tax, or that his failure to
file timely was due to reasonable cause. Indeed, petitioner does not address
respondent’s proposed addition to tax in his petition, in his pretrial memorandum,
or during trial, and, as we previously noted, petitioner failed to submit a posttrial
brief. We treat the issue as conceded by petitioner. See Rule 149(b).
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[*24] Accordingly, we sustain respondent’s determination that petitioner is liable
for an addition to tax pursuant to section 6651(a)(1) for his 2007 tax year.
VI. Accuracy-Related Penalty
For each of the years in issue, respondent determined that petitioner is liable
for an accuracy-related penalty pursuant to section 6662(a).
Section 6662(a) imposes an accuracy-related penalty of 20% of any
underpayment that is attributable to causes specified in subsection (b). Subsection
(b) applies the penalty to any underpayment attributable to, inter alia, a
“substantial understatement” of income tax. An “understatement” is the excess of
the amount of tax required to be shown on the return over the amount of tax that is
actually shown on the return, reduced by any rebate. Sec. 6662(d)(2)(A). A
“substantial understatement” of income tax exists if the amount of the
understatement for the taxable year exceeds the greater of (1) 10% of the tax
required to be shown on the return or (2) $5,000. Sec. 6662(d)(1)(A).
Generally, the Commissioner bears the burden of production with respect to
any penalty, including the accuracy-related penalty. Sec. 7491(c); Higbee v.
Commissioner, 116 T.C. at 446. However, petitioner did not address respondent’s
proposed accuracy-related penalties in his petition, in his pretrial memorandum, or
during trial, and, as we previously noted, petitioner failed to submit a posttrial
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[*25] brief. See Rule 149(b). Accordingly, we treat the issue as conceded by
petitioner and we sustain respondent’s determination that petitioner is liable for
the accuracy-related penalties pursuant to section 6662(a) for the years in issue.
VII. Conclusion
In sum, we conclude that (1) we have jurisdiction pursuant to section
6213(a) to consider the instant case; (2) petitioner is not entitled to deduct
Schedule C expenses of $42,335, $52,150, and $67,039 for his 2007, 2008, and
2009 tax years, respectively; (3) petitioner is not entitled to deduct a Schedule D
capital loss carryforward of $3,000 for any of the years in issue; (4) petitioner is
liable for an addition to tax pursuant to section 6651(a)(1) for his 2007 tax year;
and (5) petitioner is liable for an accuracy-related penalty pursuant to section
6662(a) for each of the years in issue. Consequently, we sustain respondent’s
determinations that petitioner is liable for income tax deficiencies, an addition to
tax, and accuracy-related penalties.
In reaching these holdings, we have considered all the parties’ arguments,
and, to the extent not addressed herein, we conclude that they are moot, irrelevant,
or without merit.
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[*26] To reflect the foregoing,
Decision will be entered for
respondent.