T.C. Memo. 1998-91
UNITED STATES TAX COURT
KERN S. AND SOLEDAD D. SMITH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27712-96. Filed March 3, 1998.
Kern S. Smith and Soledad D. Smith, pro sese.
Thomas G. Schleier, for Respondent.
MEMORANDUM OPINION
PARR, Judge: Respondent determined a deficiency in
petitioners' Federal income tax for the taxable year 1993 in the
amount of $60,448, an addition to tax of $15,113 under section
6651(a)(1), and a penalty of $12,090 under section 6662(a). All
section references are to the Internal Revenue Code in effect for
the taxable year in issue, and all Rule references are to the Tax
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Court Rules of Practice and Procedure, unless otherwise
indicated.
After a concession,1 the issues for decision are as follows:
(1) Whether petitioners are entitled to previously unclaimed
Schedule C deductions in excess of the amount conceded by
respondent. We find they are not.
(2) Whether petitioners are liable for an addition to tax
pursuant to section 6651 for late filing. We hold they are.
(3) Whether petitioners are liable for a penalty pursuant to
section 6662 for negligence. We hold they are.
Certain automatic adjustments will be required in the
calculation of self-employment tax and related items of a
computational nature flowing from our findings.
Some of the facts have been stipulated and are so found.
The stipulated facts and accompanying exhibits are incorporated
into our findings by this reference. When they filed their
petition herein, petitioners resided in Oakland, California.
Petitioners filed their individual Federal income tax return
for 1993 on October 13, 1995. The return was due on April 15,
1994. Petitioners had neither sought nor been granted an
extension of time in which to file.
1
Petitioners conceded that Mr. Kern Smith (petitioner)
received $183,585 as self-employment income which petitioners
failed to report. Respondent conceded petitioners are entitled
to deduct $114,394 in previously unclaimed deductions.
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Petitioners reported wages of $4,558 consisting of $950 paid
to Mrs. Soledad Smith (Mrs. Smith) by Heritage Flamingo
Apartments and $3,608.26 paid to Mr. Smith (petitioner) by
Alameda Newspapers, Inc. On line 12 (business income) of Form
1040, petitioners reported $16,147. They did not attach a
Schedule C as required, nor did they claim any deductions or cost
of goods sold.
Petitioner also received nonemployee compensation from the
Alameda Newspaper Group in the amount of $183,585 during 1993,
which petitioners failed to report. Neither did they deduct any
expenses connected with this sum.
A statutory notice of deficiency was sent to petitioners on
October 1, 1996. On June 26, 1997, they attempted to file an
amended income tax return, Form 1040X, on which they reported the
$183,585 and claimed deductions totaling $178,636.
Although requested to do so, petitioners did not meet with
respondent or present any substantiation for the claimed
deductions until January 26, 1998, 6 days before the beginning of
the trial session on which this case was scheduled. The Court’s
standing pre-trial order (which was served on petitioners by the
Court on August 26, 1997, and a copy of which respondent had sent
them when requesting an earlier meeting) stated: “Any documents
or materials which a party expects to utilize in the event of
trial * * *, but which are not stipulated, shall be identified in
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writing and exchanged by the parties at least 15 days before the
first day of the trial session.” No such documents were shown to
respondent within the allotted time, and the Court ruled that
they were inadmissible at trial. Nevertheless, in the interest
of fairness respondent’s agent did consider petitioners'
documents and conceded deductions totaling $114,394, as follows:
Schedule C On 1040X Allowed
Advertising $4,271 $5,579
Car and truck 12,972 9,040
Depreciation 1,088 0
Insurance 283 283
Legal & prof. 3,441 3,441
Office exp. 1,244 1,244
Other business prop. 5,750 0
Supplies 5,736 3,625
Taxes and license 835 835
Meals & ent. 91 91
Utilities 811 811
Answering service 1,890 0
Bank charges 224 224
Consulting 1,500 1,500
Demos/training 81 81
Dues/pubs. 75 75
Equinox 16,009 0
Management fees 5,970 0
Misc. 310 310
Newspaper 10,813 0
Postage 471 471
Printing 781 781
Sales promotion 1,011 1,011
Telephone 6,292 6,477
Carriers 96,687 78,515
Totals $178,636 $114,394
Respondent's determinations in the statutory notice of
deficiency are presumed correct, and petitioners bear the burden
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of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Section 61(a) includes in gross income all
income from whatever source derived, including gross income
derived from business. Sec. 61(a)(2).
Petitioners have shown, and respondent has conceded, that
they are entitled to deduct $114,394 in business expenses, and we
so find.
Section 6651(a)(1) imposes an addition to tax for failure to
file a timely return, unless the taxpayer establishes: (1) The
failure did not result from willful neglect, and (2) the failure
was due to reasonable cause. Petitioners did not offer any
reason for the late filing of their return. Therefore,
respondent’s determination is sustained.
Next we consider whether petitioners are liable for a
negligence penalty under section 6662(a). The penalty amounts to
20 percent of the portion of the underpayment attributable to
negligence. Respondent determined that the entire underpayment
is due to negligence. We agree.
"Negligence" includes any failure to make a reasonable
attempt to comply with the Internal Revenue Code. Sec. 6662(c).
Petitioner failed to report $183,585 in income. In response
to a question from the Court, he testified that he was trying to
operate his business out of a trust in order to avoid taxes, but
that he "did not do it correctly". He apparently believed that
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merely by designating his business income as "trust" income he
would not have to report it. Petitioner did not file a trust
return, nor did either petitioner consult an accountant or an
attorney to determine whether the $183,585 should be reported.
In short, petitioners did not do what a reasonable and ordinarily
prudent person would do under the circumstances. Neely v.
Commissioner, 85 T.C. 934, 947 (1985). Moreover, though
instructed on line 12 of Form 1040 to do so, petitioners did not
file a Schedule C, even as to the business income of $16,147
which they did report. We find that petitioners are liable for
the negligence penalty.
To reflect the foregoing,
Decision will be entered
under Rule 155.