Collins v. Commissioner

T.C. Memo. 1997-129

UNITED STATES TAX COURT

MARY ANN AND WILSON R. COLLINS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7938-95. Filed March 11, 1997.

Mary Ann Collins, pro se.

Leslie H. Finlow, for respondent.

MEMORANDUM OPINION

DAWSON, Judge: This case was assigned to Special Trial

Judge D. Irvin Couvillion pursuant to section 7443A(b)(4) and
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Rules 180, 181, and 183.1 The Court agrees with and adopts the

opinion of the Special Trial Judge which is set forth below.

OPINION OF THE SPECIAL TRIAL JUDGE

COUVILLION, Special Trial Judge: Respondent determined the

following deficiencies in petitioners' Federal income taxes and

additions to tax:

Addition to Tax
Year Deficiency Sec. 6651(a)(1)

1989 $11,135 $2,154.85
1990 12,800 2,383.00
1991 6,984 981.00
1992 6,881 1,984.00

After concessions by the parties, the issues remaining for

decision are: (1) Whether Mary Ann Collins (petitioner)

overstated gross receipts or sales income from her trade or

business activity for the years 1989 and 1990; (2) whether

petitioners are entitled to a child care credit under section 21

1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years at issue. All Rule
references are to the Tax Court Rules of Practice and Procedure.
Petitioners elected that this case be considered as a small tax
case pursuant to sec. 7463. Prior to commencement of the trial,
the Court ordered the discontinuance of the proceedings under
sec. 7463 because the deficiencies in tax for 2 of the years in
question were in excess of $10,000, and the allegations in the
petition placed at issue the entire amounts of the deficiencies
and additions to tax determined in the notices of deficiency.
The Court thereupon assigned the case to the Special Trial Judge
pursuant to sec. 7443A(b)(4). Respondent filed an answer,
generally denying petitioners' allegations.
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for 1989, 1990, and 1991; and (3) whether petitioners are liable

for the addition to tax under section 6651(a)(1) for the 4 years

at issue.2

Some of the facts were stipulated. Those facts, with the

annexed exhibits, are so found and are incorporated herein by

reference. At the time the petition was filed, petitioners,

husband and wife, were residents of Oxon Hill, Maryland.

Petitioner is a schoolteacher. During the years at issue,

petitioner was also engaged in a trade or business activity that

she described as a beauty consultant. Essentially, the activity

she was engaged in was that of a representative for the Mary Kay

2
Respondent issued three notices of deficiency for the 4
years at issue. After the notices of deficiency were issued,
petitioner met with an Appeals officer for respondent, and, as a
result, respondent either conceded or made additional allowances
on several of the adjustments in the notices of deficiency. At
trial, the parties advised the Court that these adjustments were
considered settled, with respondent conceding the allowances of
the Appeals officer and petitioner conceding those adjustments
that had not been totally allowed by the Appeals officer (except
as to the three remaining issues described above). The parties
did not submit to the Court a listing of the various adjustments.
Counsel for respondent referred to some of these adjustments
during the trial, but the settled issues were not formalized in a
written agreement nor made part of the stipulation. In addition
to these concessions, respondent, at trial, conceded petitioners'
entitlement to a rental expense deduction for roof repairs for
the year 1991 in the amount of $3,480. This item had not been
claimed on petitioners' 1991 income tax return, nor was it
brought up by petitioners in the audit process. The item was
brought up by petitioner with the Appeals officer, who
acknowledged the expenditure but treated it as a capital
expenditure and allowed a $100 depreciation deduction for 1991.
The effect of respondent's concession at trial is to allow the
entire amount of $3,480 as a deduction for 1991 and elimination
of the $100 depreciation deduction allowed by the Appeals
officer.
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Cosmetics Co., in which she sold the beauty products of that

company. Petitioner had been engaged in this activity for

approximately 10 years. Wilson R. Collins was employed by a

private security firm during the years at issue. In addition to

petitioner's Mary Kay Cosmetics activity, petitioners owned an

apartment building during the years at issue. On their Federal

income tax returns, petitioners reported their income and

expenses from the Mary Kay Cosmetics activity and the apartment

building rental activity on Schedules C and E, respectively,

Profit or Loss From Business, and Supplemental Income and Loss.

The determinations of the Commissioner in a notice of

deficiency are presumed correct, and the burden is on the

taxpayer to show that the determinations are in error. Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Further,

section 6001 requires, in pertinent part, that "Every person

liable for any tax * * * shall keep such records, render such

statements, make such returns, and comply with such rules and

regulations as the Secretary may from time to time prescribe."

Section 1.6001-1(a), Income Tax Regs., provides, in pertinent

part, that "any person subject to tax under subtitle A of the

Code * * *, shall keep such permanent books of account or

records, including inventories, as are sufficient to establish

the amount of gross income, deductions, credits, or other matters

required to be shown by such person in any return of such tax".
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With respect to the first issue, petitioners contend that

the gross sales receipts reported on Schedule C of their tax

returns for 1989 and 1990 for petitioner's Mary Kay Cosmetics

business were overstated. For 1989, petitioners reported gross

receipts of $29,127. At trial, petitioner contended that the

correct amount of gross receipts for 1989 was $20,356.55. For

1990, petitioners reported gross receipts from the Mary Kay

Cosmetics activity in the amount of $27,827. At trial,

petitioner contended that the correct amount was $18,391.30.

This issue was not alleged in the petition. Petitioner

testified, however, that the matter was brought up in the

conference petitioner had with respondent's Appeals officer after

the notices of deficiency were issued. The Appeals officer did

not agree to any concession or revision of the gross receipts

reported by petitioners for the 2 years in question. At trial,

petitioner offered into evidence a stack of sales tickets that

she contended represented the totality of her sales for the 2

years in question, and which would total to the lesser amounts

recited above. This information had not been presented to

counsel for respondent prior to trial. To afford counsel the

opportunity to review this information, as well as to meet with

petitioner in hopes that this issue might be resolved or a basis

of settlement might be reached, the Court ordered the trial

recessed for a period of 2 days, after which the case would be

recalled and the trial resumed and closed. Petitioner was
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advised that, if respondent did not accept her documentation and

declined to concede or settle the issue, the Court expected her

to be present to finalize the presentation of this issue.

When the case was recalled, counsel for respondent advised

the Court that, upon review of petitioner's sales tickets,

respondent was unwilling to make any concessions on this issue,

that petitioner had been advised of respondent's position, and

that petitioner was advised that she should appear at the recall

session for the conclusion of this case. Petitioner did not

appear at the recall of the case and never advised either the

Court or counsel for respondent as to her reason for failing to

appear.

On recall of the case, counsel for respondent gave the

following reasons why respondent was not willing to accept the

sales tickets as evidence of the reduced amount of gross receipts

for the 2 years in question:

Some of the receipts appear to have been altered as to
amounts paid. The receipts are in no recognizable
chronological sequence, as there are a number of different
tracing numbers on the receipts, suggesting that Petitioner
had numerous receipt books. There are sequential gaps from
receipt to receipt, suggesting that there are other receipts
which Petitioner has not provided for Respondent's
inspection. And the Petitioner has represented that she
provided an adding machine tape to each bundle of receipts
and the total amount on the tape represents the total
receipts contained in the bundle. In fact, the totals on
the tapes did not match the total receipts in each bundle in
almost all cases.

Some of the tapes contain inexplicable additions and
subtractions. Some of the tapes recorded a $20 receipt, for
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example, and the amount of 20 cents, due to misplacement of
the decimal, and some of the tapes had substantial
omissions.

The Respondent spoke to the Petitioner on the telephone
yesterday afternoon * * * and conveyed to her these
conclusions * * * that Respondent would not concede reported
gross receipts amounts for 1989 and 1990.

At the time the parties spoke, Petitioner did not know
whether she would come to Court or not. In any event, the
Respondent has no questions for Petitioner.

The Court, however, would have been interested in hearing

petitioner's testimony regarding these sales tickets and to

explain or address the problems pointed out by counsel for

respondent. Petitioner produced no accounting records that would

corroborate the sales tickets. The tickets alone do not have

that much significance to the Court without testimony explaining

petitioner's accounting methodology and, in particular,

addressing the apparent flaws suggested by respondent's counsel.

The gross receipts reported on the tax returns are admissions by

petitioners, and we generally do not permit the substitution of

lower values in the absence of cogent proof. See Estate of Hall

v. Commissioner, 92 T.C. 312, 337-338 (1989). On this record,

the Court holds that petitioners failed to sustain their burden

of proof on this issue. Respondent, therefore, is sustained.

The second issue is whether petitioners are entitled to a

child care credit for the years 1989, 1990, and 1991.

Petitioners claimed a credit of $960 for each of these years for

two dependent children. Respondent disallowed the credit for
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each of the 3 years. The reason advanced in the notices of

deficiency is that one of petitioners' dependents, a child, was

over 13 years of age, and, in addition, petitioners had not

substantiated the amounts claimed to have been paid for child

care. The statutory notices further stated that, even if the

amount of child care payments claimed for the other qualifying

child, $682, had been substantiated, that amount would not be

"nearly enough to result in [the] maximum credit taken of $4800".

Section 21(a) generally provides allowance for a credit

against the tax to any individual who maintains a household that

includes as a member one or more qualifying individuals and who

incurs employment-related expense. 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, including expenses incurred

for the care of a qualifying individual. Other provisions and

conditions of the credit are not pertinent here.

Petitioner's oldest dependent child, Tanya, was born on

May 3, 1971. Therefore, as of December 31, 1989, Tanya would

have been over 18 years of age. Under section 21(b), petitioners

were not entitled to a child care credit with respect to Tanya,

since she was over 13 years of age for each of the years at
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issue. As to the other child, James, who was less than 13 years

of age during the 3 years in question, petitioners presented no

documentary evidence to establish the amounts they paid each year

for his care while petitioners pursued gainful employment.

Petitioner testified she paid approximately $50 per week, for 50

weeks each year, for his care. These payments were in cash, and

petitioner produced no receipts to substantiate these payments.

The Court recognizes that petitioners were both gainfully

employed during the years at issue; however, the Court is

skeptical that petitioners incurred payments for the care of

James, or, if any payments were incurred, that such payments

would have been for 50 weeks each year. Petitioner was a

schoolteacher, and while petitioner was at school teaching, her

child was also at school, and, more than likely, the two returned

home on or about the same time each day. Moreover,

schoolteachers generally have 3 months each summer when they are

not required to report to work. For these time periods, the

Court cannot conclude that child care expenses were incurred.

And, finally, petitioners had another dependent child, Tanya, who

was over 18 years of age in 1989. Tanya may well have provided

some of the child care responsibilities for James on those

occasions where petitioners were unable to care for James. The

Court, therefore, holds for respondent on this issue and,

moreover, declines to make any allowance for child care expenses
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pursuant to Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.

1930).

The final issue is the addition to tax under section

6651(a)(1) for the 4 years at issue for failure to timely file

Federal income tax returns.

Petitioners' 1989 return was received by respondent's

Philadelphia, Pennsylvania, office on June 11, 1992; their 1990

and 1991 returns bear a preparer's signature date of May 12,

1992, and the 1992 return was received by respondent's

Philadelphia, Pennsylvania, office on April 1, 1994. No

extensions were granted to petitioners for the late filing of

their returns. Sec. 6081(a). Under section 6072(a), calendar

year taxpayers are required to file their income tax returns by

April 15th following the close of the calendar year. When April

15th falls on a Saturday, Sunday, or legal holiday, the return is

timely if filed on the next succeeding day which is not a

Saturday, Sunday, or legal holiday. Sec. 7503. Thus,

petitioners' 1989, 1990, 1991, and 1992 returns should have been

filed, respectively, on April 15, 1990, 1991, 1992, and 1993.

Because April 15, 1990, was a Sunday, petitioners' 1989 return

should have been filed on April 16, 1990. Their returns,

therefore, were filed late.

The addition to tax under section 6651(a)(1) is imposed

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
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and not due to willful neglect. Petitioners presented no

evidence to establish reasonable cause for the delinquent filing

of their returns. Although petitioner claimed that their return

preparer was supposed to have filed applications for extensions

to file, which he failed to do, the Court is skeptical of this

contention. For example, the 1989 return, which should have been

filed on or before April 16, 1990, was filed on June 11, 1992,

over 2 years beyond the due date. Petitioner did not testify as

to the date the return preparer was engaged to prepare

petitioners' returns. Since the 1989, 1990, and 1991 returns

bear almost identical signature dates, it is logical for the

Court to conclude that petitioners, in all probability, did not

engage the services of the return preparer until sometime in

1992, when the returns were signed. This would have been past

the due date for filing the returns. Petitioners have not

established reasonable cause for the late filing of their

returns. Respondent is sustained on this issue.

Decision will be entered

under Rule 155.