Daniel v. Commissioner

T.C. Memo. 1997-328

UNITED STATES TAX COURT

DAVID DANIEL AND ANNETTE DANIEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7427-96. Filed July 21, 1997.

Keith Howard Johnson, for petitioners.

Francis C. Mucciolo, for respondent.

MEMORANDUM OPINION

DINAN, Special Trial Judge: This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.1

1
Unless otherwise indicated, all section references are
to the Internal Revenue Code in effect for the taxable years in
issue. All Rule references are to the Tax Court Rules of
Practice and Procedure.
 - 2 -

Respondent determined deficiencies in petitioners' Federal

income taxes for 1991 and 1992 in the amounts of $2,667 and

$3,654, respectively, and penalties for fraud pursuant to section

6663(a) in the amounts of $1,475 and $2,111, respectively.

After concessions by petitioners,2 the issues remaining for

decision are: (1) Whether petitioners are entitled to charitable

contribution deductions for 1991 and 1992 in excess of the

amounts allowed by respondent; (2) whether petitioners are

entitled to a casualty loss deduction for 1992; and (3) whether

petitioners are liable for the section 6663(a) penalty for fraud

for 1991 and 1992.

Some of the facts have been stipulated and are so found.

The stipulations of fact and attached exhibits are incorporated

herein by this reference. Petitioners resided in Jacksonville,

Florida, on the date the petition was filed in this case.

Petitioner husband (Mr. Daniel) is a retired Marine Corps

veteran. Petitioner wife (Mrs. Daniel) works for respondent in

the Collections Division. She was initially hired in December

1983 as a clerk and was later promoted to the position of account

representative/tax examiner. Her responsibilities include

contacting delinquent taxpayers, securing payments, and setting

up payment plans. She is not involved in the preparation of

2
Petitioners concede that they received and failed to
report interest income in the amounts of $50.49 and $52.17 for
1991 and 1992, respectively. Petitioners also concede that they
are only entitled to a deduction for real estate taxes for 1992
in the amount of $901, as determined by respondent.
 - 3 -

taxpayers' returns or in determining taxpayers' tax liabilities.

During the years at issue, Mrs. Daniel worked as a customer

service manager in the Collections Division in charge of

overseeing other account representatives.

Petitioners are active members of their local religious

community. They also support a missionary church in Jamaica that

operates a basic (elementary) school for children. Petitioners

are friendly with the missionary church's minister and have

attended church functions with the minister and his wife.

In early October 1992, several days of heavy rain caused a

flood that damaged petitioners' property. The flood caused water

damage to a sunk-in family room and a garage located at the rear

of their house. The flood also destroyed several trees in

petitioners' backyard.

Mrs. Daniel ordinarily fills out petitioners' tax returns.

Since she was uncertain as to how to claim a casualty loss

deduction on their 1992 return for the flood damage, she asked

Albert Rabassa, one of her subordinates in the Collections

Division, to assist her.

Mr. Rabassa began his employment with the Internal Revenue

Service (IRS) in September 1990. In 1988 or 1989 (Mr. Rabassa's

testimony was that he was not sure of the date), Mr. Rabassa was

employed at Florida National Bank as a senior vice president. He

was 58 years old and was employed as Division Director of Data

Processing; his salary was $99,000 per year. He also enjoyed

various "perks" and bonuses. The bank was sold in 1988 or 1989
 - 4 -

to First Union and all of the executives, including Mr. Rabassa

were terminated. He could not find employment in the banking

industry.

He was first employed by the IRS in 1990 as a taxpayer

service representative at $16,000 per year. In May 1993, Mr.

Rabassa was an account representative in the Automated Collection

System Unit (ACS) of the Collection Division; his supervisor was

Mrs. Daniel. One of the responsibilities of ACS was to contact

persons who had not filed tax returns when required. ACS would

often prepare a return for delinquent taxpayers and submit it to

them for signature.

While working under the supervision of Mrs. Daniel, Mr.

Rabassa kept notes on the way the ACS dealt with taxpayers.

Those notes included his observations regarding training issues,

assignments, and what he considered to be inappropriate comments

between ACS employees and taxpayers that he intended to take up

with management. As Mr. Rabassa testified: "Some of the

statements made by taxpayer representatives (IRS) to taxpayers

were totally inappropriate and should be brought to a

discipline--not discipline; that's a wrong choice of words--

should have training on better customer service skill."

Mr. Rabassa had received some training from the IRS in

preparing tax returns for delinquent taxpayers.

Mrs. Daniel entered her and Mr. Daniel's names and an

identifying number on Form 4684, casualties and thefts, which

petitioners attached to their 1992 return. All of the casualty
 - 5 -

loss data recorded on the Form 4684 was calculated by Mr. Rabassa

and was entered on the form by him. One of the items on the Form

4684 calculated by Mr. Rabassa pertained to flood damage to

carpeting in petitioners' home. Mr. Rabassa calculated

petitioners' carpeting loss to have been $5,940. Mr. Rabassa

explained how he arrived at that figure:

Annette (Mrs. Daniel) said that she had her family
room redecorated and that she had carpeting put in, and
I asked the approximate size of the family room. And
my original calculation showed a $14 per square yard
and she asked me to move it to $21 a square yard.
After I completed that calculation, I remembered that
my math was incorrect in the fact that it's length time
width divided by nine from feet to get square yards.
And it came out to be 309 square yards; which was
obviously wrong, because that's 2700 square feet, which
is bigger than most people's houses, so--

The Court: You remembered that length times width
divided by nine gives you square yards?

(Mr. Rabassa): Yes, sir. And I failed to divide by
nine, so instead of having a smaller number, it came up
to 309 square yards. And I believe if you take 309
square yards times $21 it comes back to 54--I don't
have my calculator, but it had to be somewhere in that
neighborhood.

Mrs. Daniel discussed her 1992 Federal income tax liability

with Mr. Rabassa on April 13, 14, and 15, 1993. Approximately 2

weeks later, after having assisted Mrs. Daniel in preparing

petitioners' 1992 return, Mr. Rabassa contacted the Inspection

Division of IRS to report that petitioners had filed a fraudulent

return for 1992.

For a considerable period of time prior to May 26, 1993, Mr.

Rabassa's employee performance was the subject of criticism. In

a memorandum to Al Rabassa, Tax Examiner/Team A, from Annette
 - 6 -

Daniel, Chief, Team A, dated May 26, 1993, and as a result of a

counseling session with Mr. Rabassa on May 25, 1993, Mrs. Daniel

stated:

This letter confirms our discussions of May 25, 1993,
during which time I informed you that your performance
has been unacceptable for certain critical areas of
your position and specific standards. You have been
counseled several times on these same critical elements
and standards.3

Mrs. Daniel concluded her May 26, 1993, memorandum to Mr.

Rabassa as follows:

Beginning on June 1, 1993 you will be given sixty (60)
calendar days in which you will have an opportunity to
demonstrate acceptable performance with respect to the
above-critical elements and performance standards. I
will be monitoring your performance closely during this
period and at the end of the period I will evaluate
your performance, with the assistance of the Section
Chief and make a determination whether your performance
has become acceptable during the period. You will be
informed soon thereafter on whether possible further
action is to be taken if any. I will continue to give
you feedback as I discussed with you.

If you have any questions on this matter, I am
available to answer your questions and to assist you in
improving your performance during this period. I asked
you if you wanted an OJI and your preference is to work
with me and I believe we can do it.

cc: Chief, Section I

Tina Myers, respondent's revenue agent, audited petitioners'

1991 and 1992 returns, and respondent issued the statutory notice

of deficiency based upon Ms. Myers' findings and Mr. Rabassa's

accusations.

3
On May 26, 1993, Mrs. Daniel was not aware that Mr.
Rabassa had reported her to the Inspection Division of IRS.
 - 7 -

Respondent's determinations in the statutory notice of

deficiency are presumed to be correct, and petitioners bear the

burden of proving otherwise. Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933). Moreover, deductions are strictly a

matter of legislative grace, and petitioners bear the burden of

proving their entitlement to any deductions claimed. Rule

142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

The first issue for decision is whether petitioners are

entitled to charitable contribution deductions for 1991 and 1992

in excess of the amounts allowed by respondent. Petitioners

claimed charitable contribution deductions in the amounts of

$11,101 and $12,000 on their 1991 and 1992 returns, respectively.

In the statutory notice of deficiency, respondent disallowed

$9,139 and $9,888 of these claimed amounts, respectively.

Petitioners argue on brief that they are entitled to

deductions for the following charitable contributions that have

not been allowed by respondent:

1991 1992

Penrith Church (Cash) $3,000 $3,000
Penrith Church (Goods) 2,998 4,004
Senior Women's Ministries 808 792
Vietnam Veterans of America 2,270 2,400
Total 9,076 10,196
 - 8 -

Respondent contends that petitioners have not proved that

they made the charitable contributions in issue, and as discussed

infra, they acted fraudulently in claiming a portion of such

amounts.

Section 170 allows as a deduction any charitable

contribution actually paid during the taxable year. Sec.

170(a)(1); sec. 1.170A-1(a), Income Tax Regs. The term

"charitable contribution" is defined under section 170(c) as:

a contribution or gift to or for the use of --

(1) A State, a possession of the United
States, or any political subdivision of any of the
foregoing, or the United States or the District of
Columbia, but only if the contribution or gift is
made for exclusively public purposes.

(2) A corporation, trust, or community chest,
fund, or foundation --

(A) created or organized in the United
States or in any possession thereof, or under
the law of the United States, any State, the
District of Columbia, or any possession of
the United States;

(B) organized and operated exclusively for
religious, charitable, scientific, literary, or
educational purposes, * * *

(C) no part of the net earnings of which
inures to the benefit of any private shareholder
or individual; and

(D) which is not disqualified for tax
exemption under section 501(c)(3) by reason of
attempting to influence legislation, and which
does not participate in, or intervene in * * *,
any political campaign on behalf of * * * any
candidate for public office.

* * * * * * *
 - 9 -

(3) A post or organization of war veterans, or an
auxiliary unit or society of, or trust or foundation
for, any such post or organization --

(A) organized in the United States or
any of its possessions, and

(B) no part of the net earnings of which
inures to the benefit of any private
shareholder or individual.

Penrith Church

The record shows that Penrith Church was incorporated under

the Jamaican Companies Act on June 9, 1987, under the name of

Pentecostal Holiness Church of Jamaica Limited. Penrith Church

is not a qualified donee under section 170(c)(2) because it was

not created or organized in the United States or in any

possession thereof, or under the laws of the United States, any

State, the District of Columbia, or any possession of the United

States. See ErSelcuk v. Commissioner, 30 T.C. 962 (1958);

Alisobhani v. Commissioner, T.C. Memo. 1994-629. Therefore, we

hold that petitioners, as a matter of law, are not entitled to

deductions for their charitable contributions to Penrith Church.4

4
At trial, petitioners' called as their witness Carol
Johnson (Johnson). Johnson resided in Kingston, Jamaica, and is
a missionary evangelist in the Pentecostal Holiness Church in
Jamaica. Johnson thoroughly convinced us that petitioners
(continued...)
 - 10 -

Senior Women's Ministries

Petitioners submitted statements from Senior Women's

Ministries of the First Pentecostal Holiness Church that show

petitioners made cash contributions in the amounts of $808 and

$792 during 1991 and 1992, respectively. These statements were

presented to Ms. Myers during the audit of petitioners' 1991 and

1992 returns. Ms. Myers testified that she did not contact

Senior Women's Ministries to verify the documents but nonetheless

disallowed any deductions for the amounts shown.

Section 1.170A-13(a)(1)(ii), Income Tax Regs., provides that

taxpayers may substantiate a contribution of money with a

receipt, letter, or other communication from the donee charitable

organization showing the name of the donee, the date of the

contribution, and the amount of the contribution. We find that

the documents introduced by petitioners meet this substantiation

requirement. We hold that petitioners are entitled to charitable

contribution deductions for their cash donations in the amounts

shown on the statements from Senior Women's Ministries.

Vietnam Veterans of America

Petitioners donated furniture, appliances, sporting

equipment, clothing, and various household goods to the Vietnam

Veterans of America (Veterans) during 1991 and 1992. Petitioners

4
(...continued)
supported the Jamaican church with gifts of cash and donations
in kind.
 - 11 -

redecorated their home in 1991 and donated their used furniture

and appliances to the Veterans. The clothing donated in 1991

included petitioner husband's old Marine uniforms. Most of the

1992 contributions consisted of the contents of Mr. Daniel's

deceased parents' home. Mr. Daniel would place the items on the

curb on the day specified by the Veterans who would pick them up.

Section 1.170A-13(b), Income Tax Regs., sets forth the

substantiation requirements for charitable contributions of

property other than money for taxable years beginning after

December 31, 1982. In general, taxpayers must obtain a receipt

from the donee that shows the name of the donee, the date and

location of the donation, and a reasonable description of the

donated property. Sec. 1.170A-13(b)(1), Income Tax Regs. Where

it is impractical to obtain a receipt, taxpayers must maintain

reliable written records of their donations. Id.

Petitioners' offered a receipt from the Veterans as evidence

of their 1991 donations but failed to produce a receipt for their

1992 donations. Petitioners also attached to their 1991 and 1992

returns lists of donated items. After reviewing these lists, we

find that they do not contain all of the information required by

section 1.170A-13(b)(2) and (3), Income Tax Regs. We are

convinced, however, by petitioners' credible testimony and the

information disclosed on the lists that they made donations to

the Veterans in the amounts shown on their returns.
 - 12 -

We find that petitioners have substantially complied with

the substantiation requirements and have made a good faith

attempt to provide respondent with sufficient information. We

accept Mrs. Daniel's estimates of the fair market values of the

donated items. Accordingly, we hold that petitioners are

entitled to charitable contribution deductions for their

donations to the Veterans in the amounts claimed on their 1991

and 1992 returns.

The second issue for decision is whether petitioners are

entitled to a casualty loss deduction for 1992. Petitioners

claimed a casualty loss in the amount of $11,300 on their 1992

return for the following items:

Flood Damage to Wall To Wall Carpet & Dry Wall $5,940
Water Damage to Wall Cabinets 1,610
Wind Storm Damage - Loss of Five Trees & Removal 3,750

After accounting for certain limitations, petitioners

claimed a casualty loss deduction in the amount of $3,100.

Respondent disallowed the claimed deduction in the statutory

notice of deficiency.

Section 165(a) allows as a deduction any loss sustained

during the taxable year and not compensated for by insurance or

otherwise. In the case of an individual's nonbusiness property,

the deduction is limited to losses that "arise from fire, storm,

shipwreck, or other casualty, or from theft." Sec. 165(c)(3).

The parties agree that petitioners sustained a casualty loss

within the meaning of section 165(c)(3) during 1992. Respondent,
 - 13 -

however, argues that petitioners have not proved that the amount

of the loss sustained exceeds the deduction limitations set forth

in section 165(h).

Section 165(h)(1) provides that any casualty loss deduction

of an individual is allowed only to the extent that the amount of

the loss arising from each casualty exceeds $100. Section

165(h)(2) further limits the deduction to the amount that the

aggregate of the losses for the taxable year, in excess of the

section 165(h)(1) limitation of $100 per casualty, exceeds 10

percent of the individual's adjusted gross income for the taxable

year. For purposes of section 165(h), a husband and wife making

a joint return are treated as one individual. Sec. 165(h)(4)(B).

Petitioners' adjusted gross income for 1992 is $80,170.5

Therefore, petitioners are entitled to a casualty loss deduction

to the extent they prove that the amount of the loss exceeds

$8,117.6

The proper measure of the amount of the loss sustained is

the difference between the fair market value of the property

immediately before and after the casualty, not to exceed its

adjusted basis. Helvering v. Owens, 305 U.S. 468, 471 (1939);

5
This amount includes: (1) Adjusted gross income in the
amount of $80,118 as reported by petitioners on their 1992
return; and (2) unreported interest income in the amount of $52
as conceded by petitioners.
6
This amount includes: (1) The section 165(h)(1)
limitation of $100, and (2) the section 165(h)(2) limitation of
$8,017 ($80,170 x 10%).
 - 14 -

Lamphere v. Commissioner, 70 T.C. 391, 395 (1978); sec. 1.165-

7(b)(1), Income Tax Regs. The fair market values of the property

must generally be ascertained by competent appraisal. Sec.

1.165-7(a)(2)(i), Income Tax Regs.

If competent appraisal is not available, the actual cost of

repairs to the property damaged is also acceptable as evidence of

the reduction in value if the taxpayer shows that: (a) The

repairs are necessary to restore the property to its condition

immediately before the casualty; (b) the amount spent for such

repairs is not excessive; (c) the repairs do not care for more

than the damage suffered; and (d) the value of the property after

the repairs does not as a result of the repairs exceed the value

of the property immediately before the casualty. Lamphere v.

Commissioner, supra at 395-396 (1978); sec. 1.165-7(a)(2)(ii),

Income Tax Regs.

Petitioners argue that they have substantiated a casualty

loss in the total amount of $9,571.37, based upon the following

items:

Repairs & installation related to carpeting $3,819.00
Repairs & installation of new cabinets 1,352.37
Color television 300.00
Sod & mulch damage 100.00
Loss of trees 3,750.00
Pool pump 250.00

Respondent concedes that petitioners paid Clarence Walker

$3,819 to repair water damage to the carpet and tile in their

family room. Respondent also concedes that petitioners paid

Lawton Carter $1,352.37 to install storage cabinets in
 - 15 -

petitioners' garage. Respondent, however, argues that the

cabinets installed by Mr. Lawton did not replace any cabinets

damaged by the flood.

Mrs. Daniel testified that the flood caused damage to wall

cabinets in their garage. The record reveals that Mr. Lawton was

hired to install new storage cabinets in petitioners' garage.

Mr. Lawton stated in an affidavit that he did not remove any

cabinets from the garage, and did not see any signs of water

damage. There is, however, no evidence in the record that Mr.

Lawton was responsible for removing the damaged cabinets or

cleaning up the water damage. Based on Mrs. Daniel's credible

testimony, we find that the storage cabinets installed in

petitioners' garage replaced cabinets damaged by the flood. We

therefore find that the amount paid by petitioners to Mr. Lawton

to install the storage cabinets in the garage is includable in

the determination of the amount of the casualty loss.

Mr. Daniel testified that the trees claimed on the return as

a loss consisted of one "special type palm tree" and a number of

fruit trees. Petitioners' adjacent neighbor, Gregory Lamar

Kennedy, testified that a tree that was about 30 feet in height

was damaged by the flood and was cut down "roughly a couple of

months after the flood." Based on Mr. Daniel's credible

testimony and Mr. Kennedy's corroborating testimony, we find that

the flood caused petitioners to sustain a loss because of the

destruction of several trees on their property.
 - 16 -

Although the opinion of landowners as to the value of their

property is admissible in evidence because of the owner's special

relationship to that property, Harmon v. Commissioner, 13 T.C.

373, 383 (1949), Mrs. Daniel admitted at trial that Mr. Rabassa,

who had never visited petitioners' home before or after the

flood, helped her estimate the amount of the tree loss that was

claimed on the return. Mr. Rabassa's opinion does not constitute

a competent appraisal under section 1.165-7(a)(2)(i), Income Tax

Regs. Petitioners have not submitted any other competent

appraisal of the decrease in their property's value or,

alternatively, any amounts actually paid for the removal and

replacement of the trees. Based on the record, we find that

petitioners have failed to establish the precise amount of the

casualty loss attributable to their loss of trees.

Under the Cohan rule, since we have found that petitioners

sustained a loss of several trees from the flood, we may

approximate the amount of the loss, bearing heavily against

petitioners whose inexactitude in substantiating the amount of

the loss is of their own making. Cohan v. Commissioner, 39 F.2d

540 (2d Cir. 1930). We estimate that petitioners' loss of trees

reduced the value of petitioners' property by $1,000.

Petitioners argue that they also sustained a loss of a color

television and a pool pump, as well as sod and mulch damage to

their yard. These items were not claimed on the return, raised

in the petition to the Court, or discussed in petitioners' trial
 - 17 -

memorandum. At trial, Mrs. Daniel testified that these items

were not claimed on the return because she was in a hurry to file

the return. Petitioners have not submitted any evidence of the

loss of these items other than Mr. Daniel's own estimates given

to their insurance company the day after the flood. Based on the

record, we find that petitioners have failed to prove that they

should be allowed to include these unclaimed items in the

determination of the amount of their casualty loss.

We find that petitioners have proved that they sustained a

casualty loss in the amount of $6,171.37. After taking into

account the section 165(h) limitations, we hold petitioners are

not entitled to a casualty loss deduction.

The third issue for decision is whether petitioners are

liable for the section 6663(a) penalty for fraud for 1991 and

1992. Respondent determined in the statutory notice of

deficiency that the fraud penalty is applicable to the following

adjustments to petitioners' taxable income:

1991 1992

Real estate taxes $ 321 $ 0
Charitable contributions 6,639 6,888
Casualty loss 0 3,100
Interest income 50 52

Respondent did not assert the fraud penalty in the statutory

notice of deficiency for adjustments to petitioners' charitable

contribution deductions for 1991 and 1992 in the amounts of

$2,500 and $3,000, respectively. There is no explanation in the
 - 18 -

statutory notice of deficiency, respondent's trial memorandum, or

respondent's brief as to the particular charitable contributions

against which respondent asserts the fraud penalty.

Section 6663(b) provides that if respondent establishes that

any part of any underpayment of tax required to be shown on a

return is due to fraud, the entire underpayment shall be treated

as attributable to fraud and subjected to a 75 percent penalty

unless the taxpayer establishes, by the preponderance of the

evidence, that some part of the underpayment is not attributable

to fraud. Respondent bears the burden to prove by clear and

convincing evidence: (1) An underpayment of tax by the taxpayer;

and (2) that some part of the underpayment is due to fraud. Sec.

7454(a); Rule 142(b); Clayton v. Commissioner, 102 T.C. 632, 646

(1994); King's Court Mobile Home Park, Inc. v. Commissioner, 98

T.C. 511, 515-516 (1992). We have already decided that

petitioners underpaid their Federal income taxes for 1991 and

1992 due to: (1) Petitioners' concessions regarding the claimed

real estate tax deduction and unreported interest income, and (2)

our holdings that they are not entitled to the entire amounts of

the claimed charitable contribution or any casualty loss

deductions. Therefore, we address whether such underpayments are

due to fraud.

Fraud is established by proving that a taxpayer intended to

evade tax believed to be owing by conduct intended to conceal,

mislead, or otherwise prevent the collection of such tax.
 - 19 -

Clayton v. Commissioner, supra at 647. Direct evidence of the

requisite fraudulent intent is seldom available, but fraud may be

proved by examining circumstantial evidence indicative of the

taxpayer's motives. Recklitis v. Commissioner, 91 T.C. 874, 910

(1988). Over the years, courts have developed various factors,

or "badges", which tend to establish the existence of fraud. See

Clayton v. Commissioner, supra at 647.

Respondent relies primarily on the allegations of Mr.

Rabassa, who claims that Mrs. Daniel asked him to fabricate

deductions on her 1992 return. At trial, we had the opportunity

to observe Mr. Rabassa's demeanor and find his testimony to be

completely discreditable. Mr. Rabassa's motivation for making

such false accusations apparently stems from his inability to

adjust to his lower entry level position with the IRS after

occupying a high level management position in the banking

industry.

Moreover, we are unpersuaded by respondent's attempt to

bootstrap the disputed accusations of Mrs. Daniel's disgruntled,

subordinate worker into a broad assertion of fraud against an

employee who is acknowledged to have a reputation for honesty and

fairness, as testified to by her co-worker Martha Brookes. We

find that Mrs. Daniel's reliance upon Mr. Rabassa's advice was

certainly an error in her judgment, but does not support a

finding of fraudulent intent to evade tax believed to be due and

owing.
 - 20 -

The circumstantial evidence of fraud alleged by respondent

is dwarfed by petitioners' credible testimony. In addition, Ms.

Myers admitted at trial that several of petitioners' documents

and other attempts of proving their claimed deductions were

rejected without serious consideration of either petitioners'

veracity or the authenticity of proffered documents.

We find that there is not in this record any credible

evidence in support of respondent's burden to establish by clear

and convincing evidence that any part of petitioners'

underpayment for either of the years in issue is due to fraud.

Accordingly, we hold that petitioners are not liable for the

section 6663(a) fraud penalty.

To reflect the foregoing,

Decision will be entered

under Rule 155.