Brown v. Commissioner

T.C. Memo. 1996-43

UNITED STATES TAX COURT

CRAIG E. AND DEBBIE A. BROWN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 6830-94. Filed February 6, 1996.

Craig E. and Debbie A. Brown, pro se.

Andrew Lee, for respondent.

MEMORANDUM OPINION

NAMEROFF, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1 Respondent determined a deficiency in petitioners' 1989

Federal income tax return in the amount of $5,073, plus an

accuracy-related penalty under section 6662(a) in the amount of

$1,014.

1
All section references are to the Internal Revenue Code
in effect for the year at issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
 - 2 -

The issues for decision in this case are: (1) Whether

petitioners, are entitled to a charitable contribution deduction

in excess of the amount allowed by respondent, (2) whether

petitioners are entitled to a child care credit, (3) whether

petitioners are entitled to additional deductions in connection

with their Schedule C computer consulting activity, (4) whether

petitioners are entitled to deductions in connection with a

Schedule C business activity not claimed on the original return,

and (5) whether petitioners are liable for the accuracy-related

penalty.

Some of the facts have been stipulated and are so found.

The stipulation of facts and the supplemental stipulation of

facts are incorporated herein by this reference. Petitioners

resided in Lomita, California, at the time of the filing of their

petition.

During the year at issue, petitioner Debbie A. Brown was

employed by Maxicare, a health provider. Petitioner Craig E.

Brown (petitioner) was self-employed as a computer consultant.

Petitioners have three children. In 1989, Gabriel was 11, Yulanda

was 8, and Miranda was 4. Gabriel and Yulanda attended school

from 8 a.m. until 2:30 p.m. Miranda attended either Van Ness

Nursery School or Pacific Coast Preschool from 8 a.m. until 6

p.m. In 1989, petitioner paid Ruth Mayen, a housekeeper who

resided in the home Monday through Friday, to take care of the
 - 3 -

children before and after school, drive the children to school,

and clean the house.

Petitioner is a member of Christ Holy Sanctified Church

(CHSC). Petitioner's father, Eugene Brown, is the pastor of CHSC.

In 1989, petitioner was assigned the position of minister of

music by the CHSC board of elders. In this position, petitioner

organized choirs, played music, and performed other music-related

functions. Petitioner was not an employee of CHSC and did not

receive a salary from CHSC. In addition to his CHSC music

ministry, petitioner played music and organized choirs for other

churches and organizations, conferences, weddings, and funerals.

A tenet of CASC is tithing; i.e., contributing 10 percent of

one's income to the church. To set an example for the

congregation, CASC leaders often contribute a greater amount to

the church. In addition to tithes, CASC also collects donations

for the building fund, visiting minister's fund, the Federated

Church, and Greater Good News United Fellowship. In 1989,

petitioner made contributions to CASC by cash and check.

Petitioner has been a member of the Pentecostal Heritage

(PH) since 1982. PH is a nonprofit organization founded to

restore a house originally built by PH in 1906. PH asks its

members to contribute $120 per year, plus extra amounts at

special events. In addition, PH members volunteer their time to

assist in the restoration of the house. Petitioner organized
 - 4 -

choirs, conducted rehearsals, selected music, and located

instruments for musical performances for PH. In addition,

petitioner assisted with the cleaning, painting, and plumbing for

PH. Petitioner did not receive a salary or other compensation

from PH.

In 1989, petitioner formed a joint venture with Art Glass,

who was also the chairman of PH, to develop software and a

computer system for churches. In theory, this computer system

would allow the pastor to select and play music at the touch of a

button from the pulpit. In addition, they intended to develop

financial and record-keeping software for churches. Petitioner

and Mr. Glass planned to sell the software, music, and computer

to interested churches.

Mr. Glass offered testimony about various activities of the

joint venture, but was uncertain as to whether they occurred in

1989 or 1990. According to his testimony, he and petitioner made

several trips to a recording studio in Ontario, California, to

record various instruments such as the piano, organ, and drum to

use in developing the computer software. Mr. Glass also testified

that he and petitioner attended a music conference in

Philadelphia, Pennsylvania, to observe trends and changes in

black church music. In addition, Mr. Glass testified that he and

petitioner attended several computer shows to see the latest

computer technology and to locate a specific organ sound for

their computer system.
 - 5 -

Petitioner and Mr. Glass made one demonstration of the

record-keeping software to a woman who was the owner of a small

business; however, the date of this demonstration is unknown. No

records of the joint venture were produced, no testimony was

elicited as to an amount of any specific expenditure, and Mr.

Glass indicated that petitioner did not contribute any funds to

the joint venture. Petitioners filed their 1989 Federal income

tax return (the original return) on or before April 15, 1990. The

original return was prepared by the accounting firm of Williams &

Tucker. On the Schedule C attached to the return, petitioner

reported gross income from his computer consulting activity in

the amount of $81,817 and claimed the following expenses:

Expense Amount claimed

Car and truck $3,390
Rent/lease of
business equipment 50
Supplies 138
Travel 1,562
Meals and entertainment 140
Utilities 432
Education 1,824
Bank charges 153
Laundry 520
Temporary help 2,525
Home office 1,253
11,987

On that return, petitioners claimed a charitable contribution

deduction in the amount of $18,151 on Schedule A and a child care

credit in the amount of $960.
 - 6 -

Thereafter, petitioner met Sam Morris (Morris), a Las Vegas

accountant, at a conference in Los Angeles, California. In

response to questions by Morris, petitioner explained his

business and the types of expenses he incurred. Morris offered to

review petitioners' returns to see whether petitioner could take

advantage of certain deductions. Petitioner checked Morris'

references and found nothing unusual. Sometime in 1991,

petitioner sent a 30-pound box by Federal Express to Morris'

office in Las Vegas, Nevada. Petitioner kept no receipt or list

of the documents contained in the box, but he believes the box

contained all of his tax records for 1988 through 1991, including

credit card statements, bank statements, receipts, copies of

prior tax returns, and his daily log for those years. Morris

prepared, and petitioners signed and filed, a Form 1040X (the

amended return) for taxable year 1989. When Morris presented

petitioner with the amended return, petitioner did not review it

in depth prior to signing and filing it. Respondent received the

amended return on April 3, 1992. On the Schedule C for the

computer consulting activity attached to the amended return,

petitioner reported gross receipts in the amount of $75,312 and

claimed the following expenses:

Expense Amount claimed

Car and truck $3,390
Depreciation 3,591
Insurance 1,412
Other interest 3,277
Legal/professional 1,301
Rent/lease machinery and
equipment 50
 - 7 -

Rent/lease other business
property 5,560
Repairs 4,213
Supplies 138
Travel 1,562
Meals and entertainment 940
Utilities 2,104
Wages 15,100
Software 5,755
48,393

A second Schedule C was attached to the amended return for

an activity described as Minister of Music. On this Schedule C

petitioner reported gross receipts of $6,505,2 and claimed the

following expenses:

Expense Amount claimed

Car and truck $1,513
Commissions 16,638
Depreciation 792
Office expense 711
Rent or lease other business
equipment 1,174
Supplies 2,808
Taxes 537
Travel 4,994
Meals and entertainment 1,208
Postage, telephone, special robes
seminars, promotions, dues
and publications, licenses
and fees 14,560
44,935

The amended return did not include a Schedule A, and no

charitable contribution deduction was claimed thereon.

On February 11, 1994, a notice of deficiency was issued to

petitioners based upon the original return. Respondent therein

2
The $6,505 represents income from petitioner-'s computer
consulting activity, and the total income reported on the two
Schedules C equals the gross income reported on the Schedule C
attached to the original return.
 - 8 -

disallowed the claimed charitable contribution deduction3 and

child care credit. Respondent did not process the amended return,

and it was not considered at the time respondent prepared the

notice of deficiency.

Sometime in 1991 or 1992, the Criminal Investigation

Division of the Internal Revenue Service (IRS) began an

investigation of Morris. On March 27, 1992, a search warrant was

issued authorizing a search of Morris' office for various items.

Pursuant to the search warrant, investigators were authorized to

seize, among other things, Federal income tax returns or amended

returns for the years 1989, 1990, and 1991 which included

Schedule A itemized deductions or Schedule C business losses;

amended Federal income tax returns for 1990, 1991, and 1992; and

client lists or other records identifying clients. The search

warrant was executed on March 30, 1992. The return on the search

warrant reflects that 84 boxes of documents were seized,

including 3 boxes which contained information related to

petitioners. These boxes were identified as "Brown, Craig--Tax

records and return", "Craig & Debbie Brown financial records",

and "Amended return, Brown". Subsequently, Special Agent Steven

Boyd returned to petitioners all of their identified documents

which were seized pursuant to the execution of the search

warrant.

3
The remaining itemized deductions were less than the
standard deduction, so respondent disallowed them and allowed
petitioners the standard deduction.
 - 9 -

None of those returned documents allegedly pertained to

1989.

Discussion

We begin by noting that, as a general rule, the

Commissioner's determinations are presumed correct and that the

taxpayer bears the burden of proving that those determinations

are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933). Moreover, deductions are a matter of legislative grace,

and the taxpayer bears the burden of proving that he or she is

entitled to any deduction or credit claimed. Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This

includes the burden of substantiation. Hradeskv v. Commissioner,

65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.

1976). A taxpayer's failure to produce his records does not

relieve him of this burden of proof. Estate of Mason v.

Commissioner, 64 T.C. 651 (1975), affd. 566 F.2d 2 (6th Cir.

1977).

Petitioners contend that they are unable to substantiate

the claimed deductions and child care credit because all of their

1989 tax records were seized, and subsequently lost, by the IRS.

In effect, petitioners argue that they should be relieved of

their burden of substantiating the deductions and credit.

There is no authority for placing the burden of proof on

respondent in the present situation. As we stated in American

Police & Fire Found., Inc. v. Commissioner, 81 T.C. 699, 706

(1983): "Petitioner's burden of going forward with the evidence
 - 10 -

does not shift merely because his records are unintentionally

lost, whether by petitioner, [or] the Government * * *. Instead,

the type of evidence that may be offered to establish a fact is

altered."

The loss of tax records does not leave a taxpayer helpless

in meeting his substantiation burden. In general, when a

taxpayer's records have been lost or destroyed through

circumstances beyond his control, he is entitled to substantiate

the deductions by reconstructing his expenditures through other

credible evidence. American Police & Fire Found., Inc. v.

Commissioner, supra; Malinowski v. Commissioner, 71 T.C. 1120,

1125 (1979); Cook v. Commissioner, T.C. Memo. 1991-590.

Pursuant to a search warrant, special agents of the IRS were

authorized to search Morris' offices and to seize certain

records. Consequently, some of petitioners' records were seized

by the IRS, although it is unclear whether, and to what extent

the seized documents included petitioners' 1989 tax records.

Apparently, Morris' office was extremely disorganized, and

several boxes and file cabinets containing records were not

seized. However, there is no information as to whether

petitioners' 1989 tax records were left in Morris' office. Based

on the record, we find that petitioner mailed his tax records

from 1988 through 1991 to Morris, some of those records were

seized pursuant to the execution of a search warrant, all seized

records identified as belonging to petitioners were returned to
 - 11 -

them, and petitioners no longer have any 1989 records. Thus, all

we can conclude is that petitioners' 1989 original tax records

are not now available.

However, petitioners still bear the burden of-

substantiating the claimed deductions and credit. To do so,

petitioners may present secondary evidence. Petitioner contends

that he cannot reconstruct his records because the cost to

duplicate his records is prohibitive. However, the cost to

duplicate petitioner's records, which may substantiate the

deductions and credit, does not relieve petitioner of his burden

of proof.

We will now first consider the issues raised by

respondent's determination in the notice of deficiency.

Charitable Contribution Deduction

Petitioners claimed a charitable contribution deduction in

the amount of $18,151 on the original return. In the notice of

deficiency respondent disallowed the entire amount, but

respondent conceded on brief that petitioners made charitable

contributions to CHSC in the amount of $2,657, which were

substantiated by copies of their check carbons.4

Section 170 allows a deduction for charitable contributions

made within the taxable year. Sec. 170(a). For charitable

4
It has not been satisfactorily explained how
petitioners have copies of their 1989 check carbons, nor why such
evidence is not available for the substantiation of the other
items in dispute herein.
 - 12 -

contributions of cash, a taxpayer shall maintain for each

contribution a canceled check or receipt from the donee

indicating the name of the donee, the date of the contribution,

and the amount of the contribution, or in the absence of a check

or receipt from the donee, reliable written records showing the

name of the donee, the date of the contribution, and the amount

of the contribution. Sec. 1.170A-13(a)(1), Income Tax Regs.

Petitioner testified that he made cash and check

contributions to CASC and that he believed in tithing. Eugene

Brown testified that petitioner made contributions to CASC, but

could not testify as to specific dates or amounts. However, he

did testify that the church maintained records pertaining to

contributions, that he did not bring those records to the trial,

and that petitioner did not request him to do so. Petitioner

attempted to remedy this lack of evidence by attaching to his

reply brief several documents purporting to verify his charitable

contributions to CASC. Evidence must be submitted at trial.

Documents attached to briefs and statements made therein do not

constitute evidence and will not be considered by the Court. Rule

143(b); Evans v. Commissioner, 48 T.C. 704, 709 (1967), affd. per

curiam 413 F.2d 1047 (9th Cir. 1969); Lombard v. Commissioner,

T.C. Memo. 1994-154, affd. without published opinion 57 F.3d 1066

(4th Cir. 1995); Pauli v. Commissioner, T.C. Memo. 1984-591.

According to the testimony of Art Glass, PH members are

requested to donate $120 per year. Petitioner presented no
 - 13 -

receipts or canceled checks from PH for any contributions made by

him. Mr. Glass testified that PH maintained records of

contributions and that petitioner did not request Mr. Glass to

bring those records to trial.

Petitioner's testimony, as well as the testimony of Eugene

Brown and Art Glass, as to petitioner's general giving patterns

is not sufficient to substantiate petitioner's charitable

contributions. In addition, petitioner's argument on brief that

the 1990 check carbons, which were submitted as evidence, are

representative of his giving patterns is not sufficient to

substantiate petitioner's charitable contributions for 1989.

Petitioner presented no receipts, canceled checks, or written

records to substantiate the claimed deduction. We note that

written records of contributions were maintained by CASC and PH;

however, petitioner failed to present those documents.

Accordingly, petitioner is not entitled to a charitable

contribution deduction in excess of the amount previously allowed

by respondent.

Child Care Credit

According to Form 2441, Child Care and Dependent Expenses,

petitioner paid $9,620 to Ruth Mayen and $840 to Pacific Coast

for child care services. Petitioner testified that he also paid

Van Ness Nursery School for child care services.

Section 21(a) generally provides an allowance for a credit

against tax of any individual who maintains a household which
 - 14 -

includes one or more qualifying individuals. The amount of the

credit is equal to the applicable percentage of the employment-

related expenses paid by the individual. Sec. 21(a). The term

"qualifying individual" under section 21(b) includes a dependent

of the taxpayer under age 13 with respect to whom the taxpayer is

entitled to a dependency deduction under section 151(c). The

allowable credit, under section 21(b)(2), generally is based upon

employment-related expenses that are incurred to enable the

taxpayer to be gainfully employed. The term "employment-related

expense" includes expenses for household services and expenses

for the care of a qualifying individual. Sec. 21(b)(2)(A).

Employment-related expenses are explained in section 1.44A-

1(c)(2), Income Tax Regs.

Sec. 1.44A-1(c). Employment-related expenses--

(2) Household services. Expenses are considered to be
paid for household services if they are paid for the
performance in and about the taxpayer's home of ordinary
and usual services necessary to the maintenance of the
household. However, expenses are not considered as paid for
household services unless the expenses are attributable in
part to the care of the qualifying individual. Thus,
amounts paid for the services of a domestic maid or cook
are considered to be expenses paid for household services
if a part of those services is provided to the qualifying
individual.* * *

The term "household services" includes both cleaning and cooking,

probably the two services most commonly thought of as household

services. Small v. Commissioner, 60 TC 719, 727 (1973), affd.

without published opinion (75-2 USMC par. 9512, 10th Cir. October

9, 1974, 35,AFTR 2d 75-1383); sec. 1.44A-1(c)(7), Example (3),
 - 15 -

Income Tax Regs.

Respondent contends that petitioners are not entitled to

the credit because Ruth Mayen provided housekeeping services.

According to petitioner's testimony, Ruth Mayen was primarily

hired to care for Gabriel and Yulanda, although she did provide

housekeeping services. We find that a part of Ruth Mayen's

housekeeping services included the care of Gabriel and Yulanda.

Unfortunately, petitioner presented very little

documentation and testimony as to the amounts paid Pacific Coast

Preschool, Van Ness Nursery, and Ruth Mayen.5 However, the Court

is satisfied that some amount was expended by petitioners for the

care of Gabriel, Yulanda, and Miranda. Based on the record and

using our best judgment under Cohan v. Commissioner, 39 F.2d 540

(2d Cir. 1930), the Court estimates that child care expenses paid

by petitioners to Pacific Coast Preschool and Van Ness Nursery

were $840 for 1989. Further, the Court estimates that the child

care expense paid by petitioners to Ruth Mayen was $2,000 for

1989. Thus, petitioners are allowed a child care credit based

upon these amounts.

Schedule C Activities

5
Petitioner did present cancelled checks payable to
Pacific Coast in the amount of $198 and Van Ness in the amount of
$196.50. In addition, petitioners made statements in their reply
brief as to the amount paid to Ruth Mayen for child care
services. However, statements in briefs do not constitute
evidence and will not be considered by the Court.
 - 16 -

We now consider the claims of petitioners as set forth in

the amended return; viz, additional expenses for the computer

consulting activity and expenses pertaining to the minister of

music activity. In short, we must reject these claims because

petitioner has utterly failed to (1) substantiate that he had any

expenses related to his computer consulting activity in excess of

those claimed on the original return ($11,987);6 (2) that the

music activity was one engaged in for profit7 or that he incurred

any deductible expenses in carrying on such activity; or (3) that

the joint venture with Mr. Glass went beyond the preopening

stage8 or that he made any monetary contribution thereto.

6
In fact, when questioned about many of the deductions,
petitioner did not know the nature of the expenses claimed nor
how Morris arrived at the figures on the amended return.
7
To be engaged in a trade or business within the meaning
of sec. 162, "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 (1987).
Petitioner did not receive, nor did he expect to receive, any
compensation from CHSC, PH, or any other church organization for
his music activity, except perhaps for an occasional
reimbursement of expense.
8
In order to be currently deductible, the expenses must have
been incurred after the taxpayer's trade or business actually
commenced; expenses incurred prior to such time are nondeductible
preopening expenses. Jackson v. Commissioner, 864 F.2d 1521,
1525-1526 (10th Cir. 1989), affg. 86 T.C. 492 (1986); Goodwin v.
Commissioner, 75 T.C. 424, 433 (1980); affd. without published
opinion 691 F.2d 490 (3d Cir. 1982); McManus v. Commissioner,
T.C. Memo. 1987-457, affd. without published opinion 865 F.2d 255
(4th Cir. 1988). Thus, "carrying on any trade or business."
requires a showing of more than initial research into business
potential and solicitation of potential customers or clients.
(continued...)
 - 17 -

Therefore, we are unable to allow petitioners any deductions in

this regard.

Accuracy-related Penalty

Respondent determined that petitioners were liable for an

accuracy-related penalty under section 6662(a) for negligence or

intentional disregard of rules or regulations.

Petitioners' original return was prepared by Williams &

Tucker. Petitioner did not offer any testimony with regard to the

information he provided Williams & Tucker prior to the

preparation of the original return. Inasmuch as the deficiency

herein derives from the original return, we will not consider the

amended return in this regard.9

Pursuant to section 6662(a), if any portion of an

underpayment of tax is due to negligence or intentional disregard

of rules or regulations, the taxpayer is liable for an amount

equal to 20 percent of the portion of the underpayment

attributable to such negligence or intentional disregard of the

8
(...continued)
Dean v. Commissioner, 56 T.C. 895, 902 (1971); Ping v.
Commissioner, T.C. Memo. 1987-28; Goldman v. Commissioner, T.C.
Memo. 1975-138. The activities must be currently engaged in for
profit. Industrial Research Prods., Inc. v. Commissioner, 40 T.C.
578, 590 (1963).
9
We note, however, that according to petitioner's
testimony, he provided Morris with all of his tax 1989 records,
but he did not review the amended return in depth before he
signed and filed it. Had he done so, he would have observed a
Schedule C for the minister of music activity reflecting gross
income which was clearly inaccurate.
 - 18 -

rules or regulations. Negligence is defined as the failure to do

what a reasonable and ordinarily prudent person would do under

the circumstances. Needy v. Commissioner, 85 T.C. 934, 947

(1985). Petitioner has the burden of proof on this issue. Bilby

v. Commissioner, 58 T.C. 757, 791 (1972).

If a taxpayer relies in good faith upon the advice of a

competent and experienced accountant in the preparation of the

taxpayer's return, the addition to tax for negligence or the

intentional disregard of rules or regulations is not applicable.

Sec. 6664(c); WAIS v. Commissioner, 94 T.C. 473, 487 (1990). To

show good faith reliance, the taxpayer must show that the return

preparer was supplied with all the necessary information and the

incorrect return was a result of the preparer's mistakes. Pepsin

v. Commissioner, 59 T.C. 473, 489 (1972).

We cannot conclude, based solely on petitioner's testimony,

that petitioner provided Williams & Tucker with all the necessary

information and substantiating records to prepare an accurate

return. Accordingly, we hold that petitioners are liable for the

penalty under section 6662(a).

To reflect the resolutions of the issues set forth above.

Decision will be

entered under Rule 155.