Fritz v. Commissioner

T.C. Memo. 1996-73

UNITED STATES TAX COURT

ROBERT W. AND JENNIFER J. FRITZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26389-93. Filed February 21, 1996.

Robert W. and Jennifer J. Fritz, pro sese.

Russell F. Kurdys, for respondent.

MEMORANDUM OPINION

RUWE, Judge: Respondent determined deficiencies in

petitioners' Federal income taxes and additions to tax as

follows:

Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661

1985 $15,265 $3,816 $1,160 50 percent of $3,816
the interest
due on $15,265
 - 2 -
Additions to Tax
Year Deficiency Sec. 6653(a)(1)(A) Sec. 6653(a)(1)(B) Sec. 6661

1987 $5,503 $275 50 percent of the $1,376
interest due on
$5,503

The issues for decision are: (1) Whether petitioners are

entitled to a deduction of $9,643 in 1987 for car and truck

expenses; (2) whether petitioners have proven that they are

entitled to a basis in their shares of La-Z-Boy stock sold during

1985 that is in excess of the basis determined by respondent; (3)

whether petitioners are liable for an addition to tax under

section 6651(a)(1)1 for delinquent filing of their 1985 Federal

income tax return; (4) whether petitioners are liable for an

addition to tax under section 6653(a) for negligence or

intentional disregard of rules or regulations for the taxable

years 1985 and 1987; and (5) whether petitioners are liable for

an addition to tax for a substantial understatement of income tax

under section 6661(a) for the taxable years 1985 and 1987.

Background

Petitioners resided in Washington, Pennsylvania, at the time

the petition was filed.

Fritz Tree Service

1
Unless otherwise indicated, all 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.
 - 3 -

During the years in issue, petitioner Robert W. Fritz was

the proprietor of Fritz Tree Service, a tree trimming business in

Washington, Pennsylvania. Mr. Fritz reported his income and

deductions from this business on a Schedule C (Profit or (Loss)

From Business or Profession), which he attached to petitioners'

Federal income tax returns. Fritz Tree Service operated on the

cash method of accounting.2

La-Z-Boy Stock

Selma M. Fritz, the mother of petitioner Robert W. Fritz,

died on January 15, 1981. Mr. Fritz was the executor of his

mother's estate, and he filed a Petition for Probate and Grant of

Letters with the Register of Wills in Washington County,

Pennsylvania. On January 20, 1981, Selma Fritz' will was

admitted to probate, and Letters Testamentary were granted to Mr.

Fritz.

At the time of her death, Selma Fritz owned 17,148 shares of

La-Z-Boy Chair Co. (La-Z-Boy) stock. These shares were included

in Selma Fritz' gross estate as reported on Form 706 (United

States Estate Tax Return) and were valued at $10.125 per share,

their fair market value on the date of Selma Fritz' death. On

July 22, 1982, the IRS issued an Estate Tax Closing Letter in

2
The record contains no other evidence regarding the nature
of Mr. Fritz' business. The parties did not offer a stipulation
of facts, and Mr. Fritz did not testify at trial.
 - 4 -

which the IRS accepted the Form 706 and the valuation of the La-

Z-Boy stock contained therein.

Under the terms of Selma Fritz' will, she bequeathed to Mr.

Fritz 75 percent of the rest, residue, and remainder of her

estate. The remaining 25 percent was bequeathed to petitioners'

son, Timothy R. Fritz. Included within the residue of Selma

Fritz' estate were her shares of La-Z-Boy stock. Upon receipt of

this stock, Mr. Fritz and Timothy Fritz placed the shares in a

stock account at the investment firm of A.G. Edwards & Sons, Inc.

(A.G. Edwards), in the names of Robert W. Fritz, Jennifer Joan

Fritz, and Timothy R. Fritz. In 1985, petitioners and Timothy

Fritz sold 5,406 shares of La-Z-Boy stock for $225,373.

Discussion

Car and Truck Expenses

On Schedule C of their 1987 Federal income tax return,

petitioners claimed a deduction in the amount of $21,364 for car

and truck expenses, which they argue represent expenses incurred

by Mr. Fritz in carrying on his tree trimming business. In the

notice of deficiency, respondent allowed only $11,721 of the

deduction, because petitioners failed to establish that all the

expenses claimed were paid and that they constituted ordinary and

necessary business expenses. Respondent's determination is

presumed correct, and petitioners bear the burden of proving
 - 5 -

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

(1933).

Taxpayers must substantiate the amount of any deductions

claimed. Hradesky v. Commissioner, 65 T.C. 87, 89 (1975), affd.

per curiam 540 F.2d 821 (5th Cir. 1976). In addition, they must

prove that these expenses are ordinary and necessary business

expenses. Sec. 162(a). Expenditures must be "directly connected

with or pertaining to the taxpayer's trade or business". Sec.

1.162-1(a), Income Tax Regs. Our review of the record indicates

that petitioners have failed to substantiate a deduction in an

amount in excess of that already allowed by respondent.

At trial, petitioners introduced the following evidence of

their car and truck expenses for 1987. First, petitioners

offered numerous charge slips, many of which are from Carter's

Amoco, a gasoline station in Washington, Pennsylvania. These

charge slips total $11,605.15. Petitioners have failed to prove,

however, that many of these charges were ever paid. Some of the

charge slips bear the notation "paid" or "cash". We find that

these charges, which total $4,000.62, have been paid by

petitioners. Petitioners have not established that they are

entitled to claim a deduction for the remaining $7,604.53. See

sec. 1.446-1(c)(1)(i), Income Tax Regs.

In addition, petitioners presented carbon copies of two

checks totaling $2,453.43. These checks were drawn on Dollar

Bank in Pittsburgh, Pennsylvania, and made payable to Carter's
 - 6 -

Amoco. It is unclear what charges these checks were intended to

cover.

Finally, petitioners introduced adding machine "tape totals"

that were attached to the charge slips they introduced. These

"tape totals" contain two line items for which no charge slips

can be found. One line item is for $2,113.57. The only evidence

of its payment is a piece of the "tape total" stapled to a series

of charges from Carter's Amoco for purchases in April 1987. On

the tape piece is the notation "Paid in full". The other line

item is for $1,192.09. The only evidence that this amount was

paid is a handwritten notation appearing on a January 2, 1987,

charge slip from Carter's Amoco stating "Pd in full 1192.09 1-2-

87". The handwriting appears to be different from the

handwriting of the person that prepared the charge.

Even including these two line items from the "tape totals"

and the carbon copies of the checks from Dollar Bank, petitioners

have presented evidence that they paid only $9,759.71 of car and

truck expenses for 1987. This figure falls short of the amount

already allowed by respondent. Petitioners have also failed to

prove that these expenses were ordinary and necessary business

expenses within the meaning of section 162(a). Neither the

charge slips nor the copies of the checks from Dollar Bank

indicate the requisite business purposes for petitioners'

expenditures. See sec. 1.162-1(a), Income Tax Regs. We

therefore sustain respondent's determination.
 - 7 -

La-Z-Boy Stock

Petitioners and their son, Timothy Fritz, sold 5,406 shares

of La-Z-Boy stock from their A.G. Edwards account in 1985.

Respondent determined that the shares sold had been inherited by

Mr. Fritz from his mother, Selma Fritz, upon her death.3

Respondent also determined that the basis of the stock sold was

its date of death value of $10.125 per share. Section 1014

generally provides that the basis of property acquired from a

decedent is the fair market value of the property at the date of

the decedent's death or on the alternate valuation date. Sec.

1014(a). Respondent's determination is presumed correct, and the

burden of proof rests with petitioners to show the correct basis

in their La-Z-Boy stock. Rule 142(a); Burnet v. Houston, 283 U.S

223, 228 (1931).

Petitioners essentially argue that the basis of the stock

sold is not $10.125 per share, because the stock sold is not the

same stock that was inherited by Mr. Fritz. However, they have

failed to present any credible evidence to convince us that

respondent's determination is erroneous. Moreover, we conclude

that respondent has correctly determined that the shares sold

were those inherited by Mr. Fritz under the terms of his mother's

3
Respondent allocated the gain from the sale of the La-Z-Boy
stock one-third each to Robert, Jennifer, and Timothy Fritz.
 - 8 -

will. Under section 1014, the correct basis in these shares is

$10.125 per share. See sec. 1014(a). Therefore, we sustain

respondent's determination.4

Addition to Tax for Failure to File a Timely Return

Petitioners filed a delinquent return for the 1985 taxable

year, and respondent determined that they are liable for an

addition to tax under section 6651(a)(1). Petitioners bear the

burden of proof on this issue. Abramo v. Commissioner, 78 T.C.

154, 163 (1982). Petitioners did not address this issue on

brief, nor is there any evidence in the record that would lead us

to conclude that petitioners had a reasonable excuse for not

filing their 1985 return until April 20, 1987. See sec.

6651(a)(1). Thus, we sustain respondent's determination.

4
We note that these stock sales were not reported on
petitioners' 1985 return and that Louis R. DePretis, who prepared
petitioners' 1985 return, testified that petitioners initially
concealed their stock transactions for 1985. Mr. DePretis
testified that "Mr. Fritz had [originally] indicated that there
were no stock transactions during these years that were being
audited. I had asked [respondent's revenue agent] Mr. Torri
after the meeting if he had evidence to the contrary and he said
he did in fact." Mr. DePretis continued: "I therefore then got
back ahold[sic] of the Fritzes * * *. Mrs. Fritz or Mr. Fritz
handed me a transaction that showed they sold 200 shares of
Columbia Gas as being the only transaction for 1985." Mr.
DePretis testified that this sale of 200 shares of Columbia Gas
produced a capital gain of $1,200. Mr. DePretis thought that the
Columbia Gas transaction was petitioners' sole transaction for
1985 because petitioners presented to Mr. DePretis a statement
dated Dec. 31, 1985; however, it only contained transactions from
the month of December.
 - 9 -

Additions to Tax for Negligence

Respondent also determined that petitioners are liable for

additions to tax under section 6653(a)(1) and (2) for the 1985

taxable year, and under section 6653(a)(1)(A) and (B) for the

1987 taxable year.5

This Court has defined negligence as a lack of due care or

the failure to do what a reasonable and ordinarily prudent person

would do under the circumstances. McGee v. Commissioner, 979

F.2d 66, 71 (5th Cir. 1992), affg. T.C. Memo. 1991-510; Neely v.

Commissioner, 85 T.C. 934, 947 (1985). Respondent made numerous

adjustments, in addition to those sustained here, to petitioner's

income and deductions for 1985 and 1987. Petitioners have not

presented any evidence either at trial or on brief to convince us

that their omissions from gross income and excess deductions were

not the result of negligence. Therefore, we sustain respondent's

determination.

Additions to Tax for Substantial Understatement of Income Tax

5
Sec. 6653 was amended by sec. 1503(a) of the Tax Reform Act
of 1986, Pub. L. 99-514, 100 Stat. 2085, 2742, effective for
returns the due date of which is after Dec. 31, 1986. As
amended, the 5-percent addition to tax for negligence or
disregard of rules or regulations and the 50-percent interest
provision formerly contained in sec. 6653(a)(1) and (2) are
contained in sec. 6653(a)(1)(A) and (B), respectively.
 - 10 -

The final issue for decision is whether petitioners are

liable for additions to tax for 1985 and 1987 under section 6661.

Section 6661(a) provides for an addition to tax equal to 25

percent of the amount of any underpayment attributable to a

substantial understatement of income tax. Pallottini v.

Commissioner, 90 T.C. 498, 503 (1988). An understatement is

substantial if it exceeds the greater of $5,000 or 10 percent of

the tax required to be shown on the return. Sec. 6661(b)(1)(A).

However, the amount of the understatement may be reduced under

section 6661(b)(2)(B) for amounts adequately disclosed or

supported by substantial authority. Petitioners have not

addressed this issue on brief, nor have they presented any

evidence that would bring them within the safe harbor provisions

of section 6661(b)(2)(B). Accordingly, we sustain respondent's

determination.

Decision will be entered

for respondent.