T.C. Memo. 1997-204
UNITED STATES TAX COURT
MELREL L. STEPHENS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14361-95. Filed May 5, 1997.
Marc A. Zimmerman, for petitioner.
Roger P. Law, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Melrel L. Stephens petitioned the Court to
redetermine respondent's determination of a $44,221 deficiency in
her 1993 Federal income tax and an $8,844 penalty under
section 6662(a). Respondent reflected her determination in a
notice of deficiency issued to petitioner on June 13, 1995.
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We must decide the following issues with respect to 1993:
1. Whether petitioner may deduct charitable contributions
in an amount greater than allowed by respondent in the notice of
deficiency.
2. Whether petitioner may deduct mortgage interest in an
amount greater than allowed by respondent in the notice of
deficiency.
3. Whether petitioner is liable for the accuracy-related
penalty for negligence determined by respondent under section
6662(a).
Section references are to the Internal Revenue Code in
effect for the year in issue. Rule references are to the Tax
Court Rules of Practice and Procedure.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulated facts and the exhibits submitted therewith are
incorporated herein by this reference. Petitioner resided at
331 West 46th Street, in Los Angeles, California, when she
petitioned the Court.
Petitioner filed timely a 1993 Form 1040, U.S. Individual
Income Tax Return, using the filing status of "Single".
Petitioner's return was prepared by a tax return preparer
(the Preparer) employed by Security Income Tax Service. In order
to have the return prepared, petitioner gave the Preparer a bag
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of documents that included her receipts for gambling, mortgage
interest, and other expenses. Petitioner did not discuss with
the Preparer each document in the bag, and she did not review her
return with the Preparer after he prepared it.
On January 28, 1989, petitioner won $7.2 million in the
California State Lottery, payable in yearly installments.
Petitioner received a $361,000 installment of those winnings in
1993. These winnings were reported on petitioner's 1993 tax
return. No other income was reported thereon.
During 1993, petitioner had an ownership interest in four
real properties located in California at the following addresses:
331 West 46th Street, Los Angeles; 22150 Salter Road, Perris;
8431 Hooper Avenue, Los Angeles; and 2232 Mortimer, Huntington
Park. Petitioner also had an ownership interest in land in
Chicot County, Arkansas. None of these properties generated any
income in 1993.
In 1993, petitioner paid the following mortgage interest and
real property taxes on the above-mentioned properties:
Property Mortgage Real
Situs Interest Property Taxes
331 W. 46th St. $10,913 $245
Salter Rd. 23,994 2,333
8431 Hooper 11,085 1,320
2232 Mortimer 3,426 2,367
Chicot County --- 236
Total 49,418 6,501
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In 1993, petitioner contributed $290 to the United Christian
Church, and she gave $3,000 to the "Most Worshipful United Grand
Lodge A.F. & A.M. Inc." of Los Angeles, California. Petitioner
testified that she also gave "approximately $3,000" in cash to
the B-Ball Association (B-Ball), a youth organization in Carson,
California.
Petitioner's 1993 Form 1040 reported $111,737 of itemized
deductions on Schedule A, Itemized Deductions. The reported
deductions are broken down as follows:1
Real estate taxes . . . . . . . . . . . . . $8,798
Department of motor vehicle tax . . . . . . 916
Home mortgage interest . . . . . . . . . . 56,600
Contributions by cash or check . . . . . . . 3,000
Gambling losses . . . . . . . . . . . . . . 50,000
Respondent determined that petitioner was not entitled to any of
these deductions because she had not substantiated her
entitlement to them.
OPINION
Petitioner must prove that respondent's determinations set
forth in the notice of deficiency are incorrect. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner also
must prove her entitlement to any deduction. Deductions are
strictly a matter of legislative grace, and petitioner must show
that her claimed deductions are allowed by the Code. Petitioner
1
The difference between the sum of these deductions and the
reported $111,737 amount is attributable to the "phased-out"
deductions. See sec. 67.
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must also keep sufficient records to substantiate any deduction
that would otherwise be allowed by the Code. Sec. 6001;
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
With respect to the $3,000 charitable contribution reported
on her 1993 Form 1040, petitioner argues that she is entitled to
deduct this amount on account of a $3,000 donation to B-Ball in
1993. Petitioner relies solely on her testimony to support her
claim to this deduction.
We find petitioner's testimony inconsistent and
unpersuasive. Petitioner testified that she paid "approximately
$3,000" to B-Ball; however, she was unable to state unequivocally
when she purportedly paid this amount. Petitioner testified that
she was unsure whether she paid the $3,000 amount in one or
several installments. Petitioner later testified that she had
$3,000 in cash when she attended a B-Ball meeting, and that she
gave it to one of B-Ball's representatives at that time.
Petitioner's lack of detailed books, records, and receipts
precludes the Court from reaching a determination of what (if
anything) was given to B-Ball. Even if we could arrive at such a
determination, petitioner would still not be entitled to the
disputed deduction. Petitioner has not proven that B-Ball was a
qualified recipient under section 170(c)(2).2 See McGahen v.
2
Although petitioner does not argue that she can deduct the
$3,000 amount given to the Most Worshipful United Grand Lodge
(continued...)
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Commissioner, 76 T.C. 468, 481 (1981), affd. without published
opinion 720 F.2d 664 (3d Cir. 1983). Accordingly, except for the
$290 contribution to the United Christian Church, which
respondent concedes, we hold for respondent on this issue.
Turning to the mortgage interest, the parties do not dispute
that petitioner may deduct the interest that she paid on her
primary residence and one other California property.3 See
sec. 163(h)(2)(D). The parties lock horns on the interest paid
on the remaining two Californian properties. Petitioner asserts
that this interest is deductible as interest on properties held
out for rental; i.e., investment interest. Petitioner argues
that her lottery winnings are investment income that can be
offset by this investment interest expense.
We disagree with petitioner that the interest on the other
properties is deductible as investment interest. We are unable
to find in the record that petitioner ever held any of these
properties out for rental or otherwise held them as an
investment. Petitioner's brief, on this issue, is directed
entirely towards her assertion that lottery winnings are a form
of investment income. We need not decide that issue, however,
2
(...continued)
A.F. & A.M. Inc., we note that the record does not indicate that
this lodge was a qualified recipient under sec. 170(c)(2).
3
We understand the parties' agreement to mean that
petitioner may deduct the mortgage interest paid with respect to
331 West 46th Street ($10,913) and Salter Road ($23,994).
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because petitioner neglects to address why the mortgage interest
is not nondeductible personal interest, see sec. 163(h), and the
record does not otherwise allow us to conclude that it is not
nondeductible personal interest. Although petitioner is correct
that an individual may deduct investment interest to the extent
that it does not exceed net investment income, sec. 163(d)(1), we
are unpersuaded that the mortgage interest was paid "on
indebtedness properly allocable to property held for investment."
Sec. 163(d)(3). We hold for respondent on this issue.
Respondent also determined that petitioner's underpayment of
income tax was due to negligence, and, accordingly, that
petitioner was liable for the penalty under section 6662(a).
Section 6662(a) imposes an accuracy-related penalty equal to
20 percent of the portion of an underpayment that is attributable
to negligence. In order to avoid this penalty, petitioner must
prove that she was not negligent, i.e., she made a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, and that she was not careless, reckless, or in intentional
disregard of rules or regulations. Sec. 6662(c); Drum v.
Commissioner, T.C. Memo. 1994-433, affd. without published
opinion 61 F.3d 910 (9th Cir. 1995); see also Allen v.
Commissioner, 925 F.2d 348, 353 (9th Cir. 1991) (negligence also
defined as a lack of due care or a failure to do what a
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reasonable and prudent person would do under similar
circumstances), affg. 92 T.C. 1 (1989).
Petitioner claims she was unsophisticated about tax laws,
and that she relied on the Preparer to prepare a proper return.
Although he failed to do so, petitioner concludes, her reliance
on him to do a proper job was consistent with ordinary business
care and prudence under the circumstances. We do not agree.
Reasonable reliance on a tax adviser is consistent with ordinary
business care and prudence only in certain cases. In those
cases, the taxpayer must establish that: (1) The adviser had
sufficient expertise to justify reliance, (2) the taxpayer
provided necessary and accurate information to the adviser, and
(3) the taxpayer actually relied in good faith on the adviser's
judgment. See, e.g., Ellwest Stereo Theatres, Inc. v.
Commissioner, T.C. Memo. 1995-610. We are unable to find in the
record that petitioner met any of these requirements; i.e.,
(1) We know nothing about the preparer or his firm, (2) we are
unable to find that petitioner provided necessary and accurate
information to the Preparer, and (3) the record indicates that
petitioner did not actually rely in good faith on the Preparer's
judgment. We conclude that petitioner did not exercise due care,
and that she failed to do what a reasonable and ordinarily
prudent person would have done under the circumstances. We hold
for respondent on this issue.
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In reaching all of our holdings herein, we have considered
all arguments made by petitioner and, to the extent not discussed
above, find them to be without relevance or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.