T.C. Memo. 1997-103
UNITED STATES TAX COURT
LINDLEY ANTHONY SWANSTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8261-95. Filed February 27, 1997.
Lindley Anthony Swanston, pro se.
Charles M. Ruchelman, for respondent.
MEMORANDUM OPINION
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7443A(b)(3)1 and Rules 180, 181, and 182.
Respondent determined a deficiency in Federal income tax of
$2,929.75 and the addition to tax under section 6651(a)(1) in the
amount of $732.43 for petitioner's 1988 tax year.
1
Unless otherwise indicated, 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.
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The issues for decision are: (1) Whether petitioner is
entitled, under section 162(a), to cost of goods sold and
deductions for trade or business expenses incurred in connection
with a book-selling activity, and (2) whether petitioner is
liable for the addition to tax under section 6651(a)(1).
Some of the facts were stipulated. Those facts, with the
exhibits offered in connection therewith, are so found and are
incorporated herein by reference. Petitioner was a resident of
Silver Spring, Maryland, at the time the petition was filed.
During 1988, petitioner sold books, an activity he began
sometime during 1987 following a career as a life insurance
agent. Petitioner sold his books at conventions and seminars in
various parts of the United States. Most of the places where
petitioner sold his books were religious gatherings or
conventions, and most of his books were of a religious nature;
however, sometime during 1988, he began selling secular books
together with the religious books. Petitioner generally rented
one or more booths or exhibit spaces at each convention, where he
displayed and sold his books. Petitioner did not have a fixed
retail place of business. When he was not attending a
convention, he stored his book inventory at home. He did not
conduct any sales activity at home. Petitioner did not employ
anyone, but, frequently, his wife and daughter accompanied him
and assisted in his sales.
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Petitioner and his wife filed a joint Federal income tax
return for 1988. The return was received by the Internal Revenue
Service on May 22, 1992, although the signature lines on the
return bear signature dates of April 3, 1989.2
Petitioner filed a Schedule C, Profit or Loss From Business,
with his 1988 Federal income tax return in connection with his
book-selling activity. That schedule reflected the following
items of income and expenses:
Income:
Gross receipts or sales $16,250
Less cost of goods sold 9,750
Gross income $ 6,500
Expenses:
Advertising $1,220
Bank service charges 145
Car and truck expenses 3,651
Office expense 755
Rent on business property 1,200
Travel 1,760
Meals and entertainment (net) 852
Utilities and telephone 4,230
Wages 550
Exhibit spaces 4,460
Total 18,223
Net loss $12,323*
* The expenses shown total $18,823 rather than $18,223
shown on petitioner's return. The $12,323 net loss is the
correct figure.
2
The notice of deficiency is addressed jointly to petitioner
and his wife Maureen. His wife did not petition the Court, nor
did she appear at trial. Petitioner referred to her at trial as
his "ex-wife" and testified she was living in Florida. Their
current marital status is not indicated in the record.
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In the notice of deficiency, respondent disallowed the
$9,750 cost of goods sold and all of the $18,823 claimed expenses
for lack of substantiation.
The determinations of the Commissioner in a notice of
deficiency are presumed correct, and the taxpayer bears the
burden of proving that the determinations are incorrect. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner produced no documentary evidence to substantiate
any of the items that were disallowed by respondent.
Petitioner's explanation for the failure to produce such evidence
is that, in late April and early May 1989, he attended a
religious convention in Richmond, Virginia. He took all his
books and records with him to work on his Federal income tax
return for 1988. After the Richmond convention concluded, he
drove to New York, and, while he was having lunch with his sister
at a Brooklyn restaurant, someone broke into his truck and took
his briefcase, which contained all of his tax records. No other
property in the truck was taken, although petitioner acknowledged
he had books in the truck having a value of over $9,000. Upon
discovery of the break-in, petitioner drove the truck a few
blocks and located his briefcase, which was damaged. All of the
contents were missing. For this reason, petitioner had no
records to produce at trial to support his claimed expenses.
When questioned by the Court, petitioner admitted he had made no
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attempt to reconstruct his records, such as obtaining
verifications and/or copies of receipts or certifications of
transactions he engaged in with his book suppliers. Petitioner
produced no bank records or statements, copies of which could
have easily been obtained. The Court was not impressed with
petitioner's credibility as a witness. To begin with, he
produced no documentary information, such as a police report, to
establish that a break-in occurred. Moreover, if petitioner is
to be believed, the break-in occurred on either May 3 or 4, 1989;
however, the income tax return filed by petitioner and his then
wife bears signature dates of April 3, 1989, at least 1 month
prior to the purported break-in. Petitioner's explanation for
this was not plausible. He testified that, prior to leaving his
home to attend the Richmond convention, he and his wife presigned
the return on April 3, 1989, and he left the signed, blank return
at home. When he returned home sometime in May 1989, after the
break-in, sans records, he completed his previously signed blank
return based on his "terrific memory". Left unexplained are
reasons for the gap between May 1989 and the receipt of the
return by the Internal Revenue Service approximately 3 years
later.
Even if the Court should accept petitioner's version of what
happened, there are other matters regarding the return that are
questionable. For example, the Schedule C, which is handwritten,
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shows several instances of numbers that are written over, which
suggests to the Court that petitioner altered the numbers to
attain a desired result. In juggling the numbers, he apparently
forgot to correct the line totaling his expenses. That line
showed total deductions of $18,223, when the correct amount was
$18,823. That is not the only problem the Court has with the
return. The return was a joint return, and one of the expenses
claimed on the Schedule C is wages of $550. Petitioner testified
that this represented a payment to his wife for services she
rendered. Yet, the return fails to reflect the $550 as gross
income that should have been reported because petitioner's wife
was reporting jointly with petitioner. Some of the other
expenses claimed on the Schedule C appear to be duplicative,
particularly expenses relating to a home office. With respect to
the home office, the Schedule C claimed $755 for "office
expenses", $1,200 for rent on business property (on petitioner's
home), and telephone and utilities of $4,230. Aside from the
fact that all or some of these expenses appear to be duplicative,
petitioner presented no evidence that these expenses, if paid or
incurred, would be allowable under section 280A, which, in
general, denies deductions with respect to the use of a dwelling
unit used by the taxpayer as a residence, unless such expenses
are, under section 280A(c)(1), allocable to that portion of the
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dwelling used exclusively on a regular basis as "the principal
place of business" of the taxpayer's trade or business.
Petitioner admitted under cross-examination that, in
addition to the $12,323 Schedule C loss claimed on his 1988
return, he has never realized a net profit from his book-selling
activity. He reported net losses of $17,992, $61,283, and
$7,280, respectively, for 1989, 1993, and 1994. Except for small
amounts of other income petitioner earned from commissions on
insurance renewals, his only explanation to the Court as to how
his negative cash-flow was financed was that he was on the
accrual basis of accounting, and he carried his accounts on a
"continuing basis". The Court is skeptical that petitioner's
creditors would "carry" his unpaid accounts over the several
years that he sustained losses.
Petitioner did not corroborate his testimony to support the
positions he asserted. Under these circumstances, the Court is
not required to, and the Court does not, accept such testimony to
support petitioner's positions. See Geiger v. Commissioner, 440
F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam T.C. Memo.
1969-159; Mills v. Commissioner, 399 F.2d 744, 749 (4th Cir.
1968), affg. T.C. Memo. 1967-67; Tokarski v. Commissioner, 87
T.C. 74, 77 (1986). Accordingly, the Court sustains respondent
with respect to petitioner's Schedule C activity.
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Petitioner's 1988 return was filed on May 22, 1992. Under
section 6072(a), income tax returns must be filed on or before
the 15th day of April following the close of the taxable year,
subject to exceptions not pertinent here. Petitioner's 1988
return, therefore, should have been filed on or before April 15,
1989.
The addition to tax under section 6651(a)(1) applies where
there is failure to timely file a tax return, unless it is shown
that the failure to timely file is due to reasonable cause and
not due to willful neglect. Petitioner presented no evidence to
establish reasonable cause for the delinquent filing of his
return. Respondent, therefore, is sustained on this issue.
Decision will be entered
for respondent.