T.C. Memo. 1997-347
UNITED STATES TAX COURT
RILWAN ADISA SALAMI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12740-96. Filed July 29, 1997.
Rilwan Adisa Salami, pro se.
Linda Grobe, 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.
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Respondent determined deficiencies in petitioner's Federal
income taxes for 1992 and 1993 in the amounts of $3,857 and
$1,877, respectively, and accuracy-related penalties pursuant to
section 6662(a) in the amounts of $771 and $329, respectively.
The issues for decision are: (1) Whether petitioner had
unreported Schedule C gross receipts in the amounts determined by
respondent; (2) whether petitioner is entitled to Schedule C
business expense deductions in excess of the amounts allowed by
respondent; (3) whether petitioner's net earnings from self-
employment are excludable from self-employment income because he
is a nonresident alien; and (4) whether petitioner is liable for
the section 6662(a) accuracy-related penalty.
Some of the facts have been stipulated and are so found.
The stipulations of fact and attached exhibits are incorporated
herein by this reference. Petitioner resided in Chicago,
Illinois, on the date the petition was filed in this case.
Petitioner came to the United States in 1986. He formerly
worked as a security guard in California. Petitioner moved to
Chicago in January 1992 and began working as a taxicab driver.
Petitioner shared a friend's taxicab from January 1992 to
April 1992. The friend allowed petitioner to drive his 1990
Chevrolet Caprice at night. From April 1992 to June 1992,
petitioner drove a car that he leased from Yellow Cab Company.
In July 1992, petitioner purchased his friend's 1990 Chevrolet
Caprice, which he drove until December 28, 1992. From December
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28, 1992, to October 12, 1993, petitioner drove a 1992 Chevrolet
Caprice that he leased from Yellow Cab Company.
Petitioner was granted permanent resident alien status on
September 25, 1996, by the U. S. Department of Justice
Immigration and Naturalization Service.
The first issue for decision is whether petitioner had
unreported Schedule C gross receipts in the amounts determined by
respondent. Respondent's determinations in the statutory notice
of deficiency are presumed to be correct, and petitioner bears
the burden of proving otherwise. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
All taxpayers are required to maintain records sufficient to
determine their correct tax liability. Sec. 6001. Such records
must be retained by the taxpayer "so long as the contents thereof
may become material in the administration of any internal revenue
law." Sec. 1.6001-1(e), Income Tax Regs.
If a taxpayer keeps no records or it appears that records
that are kept do not clearly reflect income, respondent may
reconstruct income under a method which does clearly reflect
income. Sec. 446(b). Once it is established that a
reconstruction is necessary, respondent has great freedom in the
method of reconstruction used. Catalano v. Commissioner, 81 T.C.
8, 13 (1983), affd. without published opinion sub nom. Knoll v.
Commissioner, 735 F.2d 1370 (9th Cir. 1984).
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Petitioner introduced a printout from a friend's taximeter
that he contends shows his method of calculating his gross
receipts. Petitioner, however, failed to present any like
printouts from the taximeters of his own taxicabs. We find that
petitioner failed to maintain adequate records of his gross
receipts for 1992 and 1993.
Since petitioner failed to maintain records that clearly
reflected his income, respondent's revenue agent, Tony Savage,
reconstructed petitioner's gross receipts for 1992 and 1993
through a method called the "cab formula". Mr. Savage works in
respondent's market specialization program that deals with the
transportation industry (including taxicab drivers) and has used
the cab formula on numerous occasions with other taxicab drivers.
As explained by Mr. Savage, the cab formula reconstructs
income by taking into account the claimed gas expenses, price per
gallon of gas, miles per gallon of the vehicle(s) used, occupancy
rate of the vehicle, number of customers and trips per day,
number of days worked per year, and amounts charged for both
entry and per mile fares. Mr. Savage testified that he relied in
part on petitioner's statements during the audit, but necessarily
estimated some factors through the use of similar information
from other taxicab drivers who, unlike petitioner, had provided
him with records.
Mr. Savage testified that he used conservative numbers in
reconstructing petitioner's gross receipts. In particular, he
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did not take into account any tips, which would have increased
the total gross receipts up to 15 percent. We have considered
petitioner's miscellaneous objections to Mr. Savage's
calculations and, after carefully reviewing the record, are
convinced that the cab formula used by Mr. Savage clearly
reflects petitioner's gross receipts for 1992 and 1993. We
therefore sustain respondent's determinations of petitioner's
unreported income.
The second issue for decision is whether petitioner is
entitled to Schedule C business expense deductions in excess of
the amounts allowed by respondent.
Petitioner claimed a deduction for car and truck expenses
for 1992 in the amount of $16,200. In the statutory notice of
deficiency, respondent disallowed $7,473 of the claimed expenses.
Petitioner also claimed a deduction for repairs to his taxicab
for 1993 in the amount of $3,055. Respondent disallowed $1,644
of the claimed repairs.
Respondent's explanations in the statutory notice of
deficiency state that the amounts were disallowed because
petitioner did not establish that any amounts over the allowed
amounts were ordinary and necessary business expenses, and that
the section 274 substantiation requirements had not been met.
Section 162(a) provides for the deduction of all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business. Deductions are strictly a
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matter of legislative grace, and petitioner bears the burden of
proving his entitlement to any deduction 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).
Petitioner's burden includes the requirement that he substantiate
any deductions claimed. Hradesky v. Commissioner, 65 T.C. 87
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
Section 274(d)(4) provides that no deduction shall be
allowed with respect to any listed property, defined in section
280F(d)(4)(A) to include passenger automobiles, unless the
taxpayer meets strict substantiation rules. However, section
280F(d)(5)(B) provides that the term "passenger automobile" does
not include any vehicle used by the taxpayer directly in the
trade or business of transporting persons or property for
compensation or hire. Since petitioner's claimed deductions are
for his use of passenger automobiles as taxicabs, section
274(d)(4) is not applicable in this case.
Notwithstanding the nonapplicability of section 274(d)(4),
petitioner failed to present any records that show that he is
entitled to business expense deductions with respect to his
taxicabs in excess of the amounts allowed by respondent. The
only receipts provided by petitioner are for repairs made to his
taxicab during 1993. Such receipts are partially illegible and
do not exceed the amount allowed by respondent. Petitioner has
failed to meet his burden of proof on this issue. Rule 142(a).
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We hold that petitioner is not entitled to business expense
deductions in excess of the amounts allowed by respondent.
The third issue for decision is whether petitioner's net
earnings from self-employment are excludable from self-employment
income because he was a nonresident alien.
Section 1401(a) imposes a tax on self-employment income for
old-age, survivors, and disability insurance. An additional tax
for hospital insurance is imposed on self-employment income
pursuant to section 1401(b). Self-employment income is defined
as the net earnings from self-employment derived by an
individual, other than a nonresident alien individual, during any
taxable year. Sec. 1402(b). The phrase "net earnings from self-
employment" is in turn defined as gross income derived by an
individual from any trade or business carried on by such
individual, less any attributable deductions. Sec. 1402(a).
Petitioner argues that he is not liable for the section
1401(a) and (b) taxes on self-employment income because he was a
nonresident alien during 1992 and 1993.
A nonresident alien never has self-employment income. Sec.
1.1402(b)-1(d), Income Tax Regs. While a nonresident alien who
derives income from a trade or business carried on within the
United States may be subject to the applicable income tax
provisions on such income, such nonresident alien will not be
subject to the taxes on self-employment income, since any
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earnings which he may have from self-employment do not constitute
self-employment income. Id.
Section 7701(b) and the regulations thereunder provide rules
for determining whether an alien individual is a resident of the
United States. Preece v. Commissioner, 95 T.C. 594, 601-602
(1990). An individual is a nonresident alien if such individual
is neither a citizen of the United States nor a resident of the
United States. Sec. 7701(b)(1)(B). An alien individual is
treated as a resident of the United States with respect to any
calendar year if such individual: (1) Is a lawful permanent
resident of the United States at any time during such calendar
year (green card test); (2) meets a substantial presence test; or
(3) makes an election to be treated as a resident of the United
States. Sec. 7701(b)(1)(A). There is no evidence that
petitioner was a lawful permanent resident of the United States
at any time prior to September 25, 1996, or that he made an
election to be treated as a resident in accordance with the
procedures set forth in section 301.7701(b)-4(c)(3)(v), Proced. &
Admin. Regs. Therefore, petitioner will be treated as a resident
alien only if he meets the substantial presence test provided in
section 7701(b)(3).
An individual generally satisfies the substantial presence
test with respect to any calendar year if such individual was
present in the United States for at least 31 days during that
calendar year and for at least l83 days during a 3-year period
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that includes the calendar year. Sec. 7701(b)(3)(A); sec.
301.7701(b)-1(c)(1), Proced. & Admin. Regs. An individual is
treated as present in the United States on any day that such
individual is physically present in the United States at any time
during such day. Sec. 7701(b)(7)(A).
The record shows that petitioner was physically present in
the United States, working as a taxicab driver in Chicago, for
more than 183 days during 1992 and 1993. In fact, petitioner
offered no evidence that he was physically absent from the United
States at anytime after his arrival in 1986. Moreover,
petitioner never revealed what foreign country he claims as his
place of residency. We find that petitioner satisfies the
section 7701(b)(3) substantial presence test and therefore must
be treated as a United States resident for 1992 and 1993. We
hold that petitioner's net earnings from self-employment
constitute self-employment income. Accordingly, petitioner is
liable for the self-employment taxes as determined by respondent.
The fourth issue for decision is whether petitioner is
liable for the section 6662(a) accuracy-related penalty for
negligence. Respondent's determination of negligence is presumed
to be correct, and petitioner bears the burden of proving that
the penalty does not apply. Rule 142(a); Welch v. Helvering, 290
U.S. 111, 115 (1933); Bixby v. Commissioner, 58 T.C. 757, 791-792
(1972).
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Section 6662(a) imposes a 20-percent penalty on the portion
of the underpayment attributable to any one of various factors,
one of which is negligence or disregard of rules or regulations.
Sec. 6662(b)(1). Respondent determined that petitioner is liable
for the accuracy-related penalty imposed by section 6662(a) for
his underpayment of taxes, and that such underpayment was due to
negligence or disregard of rules or regulations. "Negligence"
includes a failure to make a reasonable attempt to comply with
the provisions of the Internal Revenue laws or to exercise
ordinary and reasonable care in the preparation of a tax return.
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.
Section 6664(c)(1), however, provides that the penalty under
section 6662(a) shall not apply to any portion of an
underpayment, if it is shown that there was reasonable cause for
the taxpayer's position with respect to that portion and that the
taxpayer acted in good faith with respect to that portion. The
determination of whether a taxpayer acted with reasonable cause
and in good faith is made on a case-by-case basis, taking into
account all the pertinent facts and circumstances. Sec.
1.6664-4(b)(1), Income Tax Regs. The most important factor is
the extent of the taxpayer's effort to assess his proper tax
liability for the year. Id.
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Petitioner testified that he prepared his own returns for
1992 and 1993. He failed, however, to maintain adequate records
to substantiate the amounts claimed on his return. Based on the
record, we hold that petitioner has not proved that his
underpayment was due to reasonable cause or that he acted in good
faith.
To reflect the foregoing,
Decision will be entered
for respondent.