T.C. Memo. 1997-63
UNITED STATES TAX COURT
CRAIG V. ADAMS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10587-95. Filed February 4, 1997.
Clinton A. Jackson, for petitioner.
Charles M. Ruchelman, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COHEN, Chief Judge: Respondent determined a deficiency of
$30,394 in petitioner's Federal income tax for 1991 and an
accuracy-related penalty of $6,078 pursuant to section 6662(a).
Unless otherwise indicated, all section references are to the
Internal Revenue Code in effect for the year in issue, and all
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Rule references are to the Tax Court Rules of Practice and
Procedure.
After a concession by petitioner, the issues remaining for
decision are: (1) Whether petitioner failed to report income;
(2) whether petitioner is entitled to depreciation deductions;
(3) whether petitioner is entitled to rental expense deductions;
(4) whether petitioner is entitled to claim his mother and his
father as his dependents; (5) whether petitioner is entitled to
head of household filing status; and (6) whether petitioner is
liable for the accuracy-related penalty under section 6662.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated
facts are incorporated in our findings by this reference. At the
time the petition was filed, petitioner resided in Washington,
D.C. During the first 6 months of 1991, petitioner was chief
resident at Washington Hospital Center. For the last 6 months of
1991, petitioner was in a private medical practice.
World Medical/Dental--Equipment Leasing and Depreciation
Petitioner purchased various medical and dental equipment,
office furniture, and a used neon sign during 1987, 1988, and
1989. During 1989, 1990, and at least a portion of 1991,
petitioner's mother operated World Medical/Dental, a walk-in
dental clinic on 16th Street, N.W., in Washington, D.C. Pursuant
to a lease agreement dated July 1, 1987, petitioner's mother was
to pay $2,500 per month for the use of the medical and dental
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equipment and the office furniture in the World Medical/Dental
business. On December 6, 1988, petitioner and his mother entered
into an agreement whereby petitioner's mother would pay
petitioner $500 per month for the use of a used neon sign that
read "World Med/Dent".
On his 1989 and 1990 Schedules C, petitioner reported that
his principal business was a medical/dental office known as
"World Med/Dent" located on 16th Street, N.W., in Washington,
D.C. Petitioner reported income of only $10,000 and $12,500 on
his Schedules C for 1989 and 1990, respectively. In addition to
depreciation on the leased items, petitioner claimed advertising,
postage, laundry, travel, and supplies as Schedule C expenses in
1989 and 1990.
On his 1991 Schedule C, petitioner reported that his
principal business was a "Medical Office/Physician" located on
Irving Street, N.W., Washington, D.C. Petitioner received no
lease payments from his mother during 1991, and he retrieved his
equipment from his mother during April 1991.
During 1991, petitioner did not use the neon sign or any of
the dental equipment in his private medical practice.
Unreported Income
Dr. Marie Kay (Dr. Kay) was employed by World Medical/Dental
beginning in January 1988. According to Dr. Kay's employment
agreement, all equipment, furniture, and supplies of World
Medical/Dental were and were to remain the property of
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petitioner. Dr. Kay was initially to be paid a certain amount
per working day and then, after 270 days, Dr. Kay's pay was to be
a 20-percent share of the net profits. On or about February 1,
1991, Dr. Kay presented a cashier's check in the amount of
$23,000 to petitioner's mother. On February 8, 1991, Dr. Kay
presented a check in the amount of $15,000 to petitioner's
mother. The February 8, 1991, check bore the notation "Deposit
for purchase of practice World Dental". On or about February 22,
1991, Dr. Kay presented a cashier's check in the amount of
$25,000 to petitioner's mother.
In late February 1991, petitioner received a check in the
amount of $33,000 from the account of World Medical/Dental. On
March 6, 1991, petitioner received an additional $25,000 from his
parents. These amounts were in addition to gifts that petitioner
received from his parents during 1991.
Pennsylvania Property
In February 1990, petitioner inherited property in
Pittsburgh, Pennsylvania (the Pennsylvania property). During
1990 and 1991, petitioner received no rental income from the
property. On his 1991 Schedule E, petitioner claimed rental
expenses totaling $3,955.42 relating to the Pennsylvania
property.
Dependency and Head of Household Status
Petitioner's mother and father did not file 1991 Federal
income tax returns. During 1991, petitioner's parents resided,
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at least for some period of time, in a Washington, D.C., home
that was owned by petitioner and at least one of his brothers.
Petitioner's parents were in Florida on numerous occasions during
1991 and made several trips to other locations during the year.
In 1991, petitioner's father received all of his Social Security
checks at a Florida address where petitioner's grandmother
resided. During 1991, petitioner received gifts from his parents
totaling at least $20,000. Petitioner deposited into his
personal bank account checks made payable to his father totaling
$10,240.42. Petitioner's mother received an undetermined amount
of interest payments from investments during 1991.
OPINION
Unreported Income
Respondent determined that petitioner failed to report
$63,000 that was received from the sale of his medical/dental
equipment. This amount corresponds to the amounts received by
petitioner's mother from Dr. Kay. During 1991, petitioner
received payments of $33,000 and $25,000 and deposited into his
personal account checks payable to his father totaling
$10,240.72, in addition to his receipt of over $20,000 in gifts
from his parents.
Petitioner argues that the money that was received from
World Medical/Dental and from petitioner's father was in
repayment of loans.
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Neither petitioner nor his parents could provide any
specifics about the claimed loans. No documentation or other
objective indicia of a bona fide debt were introduced. On the
minimal evidence presented, and in view of the family
relationship, we cannot conclude that there was any bona fide
obligation between petitioner's parents and petitioner. See
Perry v. Commissioner, 92 T.C. 470, 481 (1989), affd. without
published opinion 912 F.2d 1466 (5th Cir. 1990).
Petitioner also argues that no sale of the World
Medical/Dental practice to Dr. Kay was ever consummated.
Petitioner does not deny, however, that he was the owner of the
equipment, furniture, and supplies of World Medical/Dental at the
time the alleged sale occurred. That the sale to Dr. Kay was not
completed does not exclude from gross income any money received
by petitioner in contemplation of the sale of his equipment that
was part of World Medical/Dental.
Dr. Kay testified that the money that she paid to
petitioner's mother was a downpayment on the purchase of World
Medical/Dental. Dr. Kay also testified that she never received
any of the assets of World Medical/Dental and that she was never
refunded any portion of her downpayment. According to Dr. Kay's
testimony, World Medical/Dental was suddenly closed in April 1991
without any explanation.
Petitioner's only explanation at trial for Dr. Kay's
payments is that the $63,000 received by World Medical/Dental
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from Dr. Kay was for expenses due under a term of Dr. Kay's
employment contract. On brief, petitioner did not make this
argument and apparently abandoned this position. Even if this
position were not abandoned, petitioner has not produced any
reliable evidence in support of his claim. Furthermore, Dr. Kay
testified credibly that she never shared in the net profits and
that her salary remained at a certain dollar amount per day.
Petitioner has not offered any credible evidence to disprove
respondent's determination that he received income from funds
paid by Dr. Kay. Petitioner's changing factual contentions
suggest that he has little regard for the truth. Thus,
respondent's determination will be sustained.
Equipment Depreciation
Respondent determined that petitioner is not entitled to
depreciation deductions claimed on medical/dental equipment and a
used neon sign. Petitioner bears the burden of establishing that
he is entitled to the claimed deductions. Rule 142(a); INDOPCO
v. Commissioner, 503 U.S. 79, 84 (1992); Rockwell v.
Commissioner, 512 F.2d 882, 886 (9th Cir. 1975), affg. T.C. Memo.
1972-133. This includes substantiating the amount of the item
claimed. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd.
per curiam 540 F.2d 821 (5th Cir. 1976).
"Section 167(a) provides that a reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in
the trade or business or of property held by the taxpayer for the
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production of income shall be allowed as a depreciation
deduction." Sec. 1.167(a)-1(a), Income Tax Regs. The allowance
is "that amount which should be set aside for the taxable year
* * * so that the aggregate of the amounts set aside, plus the
salvage value, will, at the end of the estimated useful life of
the depreciable property, equal the cost or other basis of the
property". Sec. 1.167(a)-1(a), Income Tax Regs. The basis to be
used is "the adjusted basis provided in section 1011 for the
purpose of determining the gain on the sale or other disposition
of such property." Sec. 167(g).1 In the instant case,
petitioner's basis is the cost of the medical/dental equipment
and the used neon sign.
As evidence of the cost of the items, petitioner introduced
handwritten documents to show various alleged sales of equipment
from petitioner's father to petitioner. At trial, petitioner
testified that petitioner's father used petitioner's money to
purchase the equipment and that the documents were executed to
memorialize the transaction. Petitioner's father's testimony
indicated that the documents, although dated in 1987, 1988, and
1989, were not necessarily prepared contemporaneously with the
purchase of the equipment. No receipts or other independent
1
This is the section in effect for property placed into
service during 1987, 1988, and 1989. The section was later
renumbered sec. 167(c) by sec. 11812(a)(1) and (2) of the Omnibus
Budget Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat.
1388, 1388-534, for property placed into service after
November 5, 1990.
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evidence of the purchase or of the cost of these items was
received into evidence from which we can estimate an allowable
deduction, cf. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930);
we must have some basis on which an estimate may be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Respondent's determination that petitioner is not entitled
to depreciation deductions for medical/dental equipment and a
used neon sign will be sustained.
Pennsylvania Property
Respondent determined that petitioner is not entitled to
deduct any claimed expenses associated with the Pennsylvania
property other than $732 in real estate taxes paid by petitioner.
The parties stipulated that certain amounts claimed as supplies
and advertising expense were paid, but respondent does not agree
that the amounts spent related to rental of the Pennsylvania
property. Respondent contends that the advertisement and the
supplies, along with the claimed repairs and depreciation
expenses, are not deductible because petitioner did not hold the
property in the course of a trade or business or for the
production or collection of income during 1991.
The record is totally lacking in credible evidence of
petitioner's attempting to rent the Pennsylvania property. At
trial, petitioner admitted that, at some point during "the
spring" of 1991, he decided to "unload" the property.
Photographs that were admitted as evidence of the repairs that
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petitioner made to the property show a "For Sale" sign in the
window of the property. A classified advertisement that was
introduced at trial likewise indicates that the property was for
sale, not for rent.
Petitioner also introduced numerous receipts in an attempt
to substantiate purchases of items for supplies and repairs. The
majority of these receipts show purchases in the Washington,
D.C., area, not in the Pittsburgh area. That petitioner would
purchase all of these items in the Washington, D.C., area and
transport them to Pittsburgh to make the repairs is not credible,
especially in light of petitioner's testimony that a family
friend in Pittsburgh made most of the repairs.
On the record before us, we cannot conclude that petitioner
attempted to rent the Pennsylvania property. We conclude that
petitioner did not hold out the Pennsylvania property in the
course of a trade or business or for the production of income
during 1991. Thus, respondent's determination that petitioner is
not entitled to deductions relating to the property, in excess of
the real property taxes allowed, will be sustained.
Personal Exemptions for Petitioner's Parents and
Head of Household Filing Status
Respondent determined that petitioner is not entitled to
personal exemptions for petitioner's mother, father, and brother
for 1991. At trial, petitioner conceded that he was not entitled
to a personal exemption for his brother.
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Section 151 provides for deductions for personal exemptions.
In this case, petitioner would be entitled to exemptions for his
mother and father if his mother and father were dependents under
section 152 and if his mother's and father's gross income were
less than the exemption amount ($2,150 for 1991). Secs. 151(c),
152; Rev. Proc. 90-64, 1990-2 C.B. 674, 675.
Petitioner's mother and father would be "dependents" if
"over half of * * * [their] support, for the calendar year in
which the taxable year of the taxpayer begins, was received from
the taxpayer". Sec. 152(a). Petitioner has not proven that he
provided over one-half of his parents' support during 1991.
Petitioner's parents lived in a home that was owned by petitioner
and at least one of his brothers. Petitioner introduced numerous
receipts in an attempt to substantiate his payment of expenses
for his parents. From the record in this case, we cannot be
certain that these expenditures were made for petitioner, his
parents, or otherwise. We are not persuaded by petitioner's or
his parents' conclusory assertions in the absence of any
corroboration.
Petitioner received at least $20,000 in gifts from his
parents during 1991. The source of these funds was not explained
at trial. Also, petitioner's mother testified that she received
an undetermined amount of interest income during 1991. During
1991, petitioner's mother also operated World Medical/Dental. No
evidence was provided as to whether or not petitioner's mother
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received any income from World Medical/Dental during 1991.
Petitioner allegedly purchased various items of equipment from
his father.
Petitioner has failed to prove that he provided in excess of
one-half of the support of his parents during 1991 or that his
parents' income was less than the exemption amount, and, thus,
petitioner cannot claim his parents as dependents.
Respondent determined that petitioner is not entitled to
claim head of household status for the year in issue. Section
2(b) provides:
(1) In general.--For purposes of this subtitle, an
individual shall be considered a head of a household
if, and only if, such individual is not married at the
close of his taxable year, is not a surviving spouse
(as defined in subsection (a)), and either--
(A) * * *
* * * * * * *
(B) maintains a household which constitutes
for such taxable year the principal place of abode
of the father or mother of the taxpayer, if the
taxpayer is entitled to a deduction for the
taxable year for such father or mother under
section 151. [Emphasis added.]
Because petitioner is not entitled to personal exemptions for his
parents under section 151, respondent's determination that
petitioner is not entitled to head of household status will be
sustained.
Accuracy-Related Penalty
Section 6662(a) imposes a penalty in an amount equal to
20 percent of the underpayment of tax attributable to one or more
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of the items set forth in section 6662(b). Respondent asserts
that the entire underpayment of petitioner’s tax was due to
negligence or intentional disregard of rules or regulations.
Petitioner bears the burden of proving that respondent's
determinations are erroneous. Rule 142(a); Bixby v.
Commissioner, 58 T.C. 757, 791 (1972).
“Negligence” includes a failure to make a reasonable attempt
to comply with the provisions of the internal revenue laws. Sec.
6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. “Disregard”
includes any careless, reckless, or intentional disregard of
rules or regulations. Sec. 6662(c); sec. 1.6662-3(b)(2), Income
Tax Regs. Large understatements of income have been held to be
indicative of negligence or intentional disregard of the rules or
regulations. See Anders v. Commissioner, 68 T.C. 474, 493
(1977).
The section 6662 accuracy-related penalty does not apply
with respect to any portion of an underpayment if it is shown
that there was reasonable cause for such portion and that
petitioner acted in good faith with respect to such portion.
Sec. 6664(c)(1). The determination of whether petitioner acted
with reasonable cause and in good faith depends upon the
pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income
Tax Regs.
Petitioner claims that he relied on the Internal Revenue
Service (IRS) information hotline and the Form 1040 instructions
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in preparing his 1991 return. Such reliance, petitioner claims,
is evidence that he acted with reasonable cause and in good
faith.
Reliance on "professional" advice will constitute reasonable
cause only if the taxpayer acted in good faith and made full
disclosure of all relevant facts to the adviser. See Paula
Constr. Co. v. Commissioner, 58 T.C. 1055, 1061 (1972), affd.
without published opinion 474 F.2d 1345 (5th Cir. 1973).
Petitioner admitted at trial that, when he called the hotline, he
did not explain that the equipment was being leased or that no
income was being reported from the activity in 1991. Petitioner
did not make full disclosure so that his alleged reliance on the
hotline is reasonable cause. Petitioner failed to keep adequate
records to substantiate his entitlement to deductions that he
claimed. Sec. 6001; Crocker v. Commissioner, 92 T.C. 899, 912
(1989); sec. 1.6001-1, Income Tax Regs.
Petitioner's whole case is based on inconsistencies and
improbabilities and lacks credibility. Petitioner has not
established reasonable cause or good faith reliance to excuse him
from the penalty for negligence or intentional disregard of rules
or regulations.
To reflect the foregoing and a concession of petitioner,
Decision will be entered
for respondent.