T.C. Summary Opinion 2001-51
UNITED STATES TAX COURT
JOHN WILLIAM BARCK & JANIE R. BARCK, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3170-99S. Filed April 5, 2001.
John William Barck and Janie R. Barck, pro sese.
Charles M. Berlau, for respondent.
DINAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
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effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined deficiencies in petitioners’ Federal
income taxes of $12,278, $6,142, and $7,074 and accuracy-related
penalties of $2,456, $1,228, and $1,415 for the taxable years
1993, 1994, and 1995.
After concessions, the issues for decision are: (1) Whether
petitioners are entitled to charitable contribution deductions in
excess of the amounts allowed and conceded by respondent for 1993
and 1994; (2) whether petitioners recognized unreported gain on
the sale of certain property in 1993; (3) whether petitioners
made deductible interest payments in 1994 and 1995 that were not
claimed as deductions on their returns; and (4) whether
petitioners are liable for the accuracy-related penalties under
section 6662(a).1
Some of the facts have been stipulated and are so found.
The stipulations of fact and the attached exhibits are
incorporated herein by this reference. Petitioners resided in
Ashland, Missouri, on the date the petition was filed in this
case.
1
With respect to issues one and two, respondent concedes
petitioners are entitled to an additional deduction for
charitable contributions in 1993 and a reduction in the amount of
the gain recognized, as discussed below. We treat determinations
made in the notice of deficiency but not addressed here as having
been conceded by petitioners because they were not disputed
either in the petition or at trial.
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The first issue for decision is whether petitioners are
entitled to charitable contribution deductions in excess of the
amounts allowed by respondent for 1993 and 1994.
A taxpayer is required to maintain records sufficient to
establish the amount of his deductions. See sec. 6001; sec.
1.6001-1(a) and (e), Income Tax Regs. In the event that a
taxpayer establishes that a deductible expense has been paid but
is unable to substantiate the precise amount, we generally may
estimate the amount of the deductible expense bearing heavily
against the taxpayer whose inexactitude in substantiating the
amount of the expense is of his own making. See Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). We may
estimate a deductible expense only where the taxpayer presents
evidence sufficient to provide some basis upon which an estimate
may be made. See Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985). Certain expenses related to travel, entertainment,
gifts, and listed property (as defined in section 280F(d)(4)) are
additionally subject to the strict substantiation requirements of
section 274(d). See sec. 274(d); sec. 1.274-5T(b), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Section 170(a) allows a deduction for charitable
contributions made during the taxable year to certain listed
types of organizations, if the deductions are verified under
regulations prescribed by the Secretary. See sec. 170(a)(1);
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sec. 1.170A-13, Income Tax Regs. To be deductible, contributions
must be made “to or for the use of” organizations listed in
section 170(c)(1)-(5). Sec. 170(c). The phrase “for the use of”
was added by Congress to allow a deduction for gifts made in
trust for a charitable organization or under a similar legal
arrangement creating rights which may be legally enforced by the
organization; gifts made to an individual for the use of a
charity do not meet the requirements for deductibility in the
absence of such an arrangement. See Davis v. United States, 495
U.S. 472 (1990).
In 1993, petitioners claimed a deduction of $9,329 for
charitable contributions. Respondent allowed $4,557 of this
amount in the notice of deficiency and has since conceded an
additional $1,840. In 1994, petitioners claimed a deduction of
$7,000 for charitable contributions. Respondent allowed $1,665
of this amount.
Petitioner husband (petitioner) testified that the amounts
disallowed and not conceded by respondent for 1993 were
contributions made by him in cash, primarily when attending
church. Petitioner has no written records evidencing such
contributions. Without written records, a deduction for
charitable contributions generally is not allowed. See sec.
1.170A-13, Income Tax Regs. In certain circumstances, however,
we have applied Cohan v. Commissioner, supra, to allow a
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deduction even without written records where a taxpayer provides
a sufficient basis to estimate the amount of the contributions,
such as showing regular church attendance and regular cash
contributions thereto. See, e.g., Fontanilla v. Commissioner,
T.C. Memo. 1999-156; Meeks v. Commissioner, T.C. Memo. 1998-109,
affd. 208 F.3d 221 (9th Cir. 2000); Drake v. Commissioner, T.C.
Memo. 1997-487. Petitioner attended church every Sunday and
often donated cash, even when he traveled. However, he failed to
establish any regularity in occurrence or extent of the donations
from which we could estimate an amount. Thus, petitioners are
not entitled to a charitable contribution deduction for 1993 in
excess of $6,397.
The amounts disallowed in 1994 all relate to contributions
made to Eugene Brown. Mr. Brown served as president of the Full
Gospel Business Men’s Fellowship International (FGBMFI). The
disallowed contributions consist of an automobile which they
valued at $5,000 and cash of $335 in the form of checks made
payable to the order of Gene Brown. Petitioners testified that
the car was given to FGBMFI. However, the car was titled solely
in Mr. Brown’s name. In addition, Mr. Brown provided a
handwritten statement that the car was given to him as a gift by
petitioner. Despite petitioners’ testimony, it is clear that the
car was transferred from petitioners to Mr. Brown individually
and not to the charitable organization. Thus, the disallowed
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contributions in 1994 were not made “to” a qualified
organization, and they were not made “for the use of” such an
organization within the meaning of the statute because there was
no trust-like arrangement creating legally enforceable rights for
the organization. See Davis v. United States, supra. Although
petitioners’ actions may have been entirely altruistic and
intended to benefit FGBMFI, the contributions are not deductible
for Federal income tax purposes. Petitioners are not entitled to
a charitable contribution deduction for 1994 in excess of $1,665.
The second issue for decision is whether petitioners must
include in income gain on the sale of certain property in 1993.
Under sections 61(a) and 1001(c), taxpayers generally must
recognize in the year of sale all gain or loss realized upon the
sale or exchange of property.
Respondent determined that petitioner recognized gain of
$28,462 on the sale of a 1989 Kenworth tractor and 1991
Transcraft flatbed trailer. According to respondent’s trial
memorandum, the gain was determined as follows (petitioner
disputes this calculation):
Tractor Trailer
Sales price $28,843 $9,157
Cost $60,000 $19,050
Depreciation (57,777) (11,735)
Adjusted basis (2,223) (7,315)
Recognized gain 26,620 1,842
Thus, respondent determined the total sales price for tractor and
trailer to be $38,000. Respondent has conceded that the total
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gain be reduced by $5,084 to reflect the cost of an engine
overhaul for the tractor.
Respondent offers the following three checks as the basis of
his determination of the purchase price. Each check is a
cashier’s check, drawn on London Bank & Trust of London,
Kentucky, with Gary and Fairy Smith (the purchasers of the
tractor and trailer) as remitters.
Number Check Date Amount Payment Date Payee Indorser
091724 9/14/93 $500 9/15/93 Gary or Fairy Smith Gary Smith1
091725 9/14/93 24,000 9/17/93 Petitioner Petitioner2
091726 9/14/93 13,500 9/20/93 Petitioner Petitioner3
1
Blank indorsement
2
Blank indorsement
3
Indorsed for petitioner by petitioner wife, for deposit only
At trial, petitioners disputed receiving two of these checks--
numbers 091724 and 091726. Evidence received into the record,
however, shows that check number 091726 was received by
petitioners because it was indorsed “for deposit only,” “Will
Barck by Janie Barck.” The purpose of the other disputed check,
number 091724, is unclear; why the purchasers would obtain a
cashier’s check payable to themselves is unknown. Respondent
argues that this check was used by the purchaser as a retainer in
a “good-faith effort in the sale.” Although there is no evidence
that petitioners received the cashier’s check itself, the
proximity of the check number, check date, and payment date of
the disputed check to those of the other checks indicates that
this amount was most likely given to petitioners in cash for a
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down payment or for a similar purpose, as respondent argues. We
therefore uphold respondent’s determination of the amount of gain
recognized on this transaction, as modified by the concession.
The third issue for decision is whether petitioners made
deductible interest payments in 1994 and 1995 that were not
claimed as deductions on their returns.
Interest is allowed as a deduction to non-corporate
taxpayers under section 163(a) only if it is not “personal
interest” as defined under section 163(h)(2). See sec.
163(h)(1). Interest which is not personal interest and therefore
may be deducted unless otherwise not allowed includes: (1)
interest paid or accrued on indebtedness properly allocable to a
trade or business other than that of performing services as an
employee; (2) any investment interest; and (3) any interest which
is taken into account under section 469 in computing income or
loss from a passive activity of the taxpayer. See sec.
163(h)(2)(A), (B), and (C).
Petitioners argue that petitioner borrowed $60,000 from his
sister for use in starting a “rental real estate” business.2
2
Petitioners made this argument for the first time at trial,
but respondent did not object either to petitioners’ argument or
to their presentation of supporting evidence. We therefore treat
this issue as having been properly pled. See Rule 41(b)(1)
(“When issues not raised by the pleadings are tried by express or
implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings.”); Parekh
v. Commissioner, T.C. Memo. 1998-151 (Rule 41(b) was satisfied
(continued...)
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Petitioner testified that he paid $6,000 in interest per year in
1994 and 1995, in monthly payments of $500 each. However, he
only established that he made the monthly payments in February,
March, May, and July through December 1994, and January through
October 1995. Petitioner repaid the principal in two payments of
$30,000 each, one in December 1996 and the other in October
1997.3 Petitioners filed Schedules C, Profit or Loss From
Business, for an unnamed business in 1994 and 1995. In the
notice of deficiency, respondent determined that petitioners
improperly reported income and claimed expenses on these
Schedules C, and instead should have used Schedules E,
Supplemental Income and Loss, because the income and expenses
were related to rental activities.4 Although significant
deductions were allowed by respondent in connection with this
2
(...continued)
when the parties “introduced the issue at trial and acquiesced in
the introduction of evidence on that issue without objection.”).
3
Nearly all the payments were in the form of checks drawn on
accounts in the name of Will or Janie Barck. However, the
payment made in May 1994 was drawn on an account in the name of
Barck, Inc. Whether such a corporation actually existed is
unclear from the record. If it did not, this account was most
likely used by petitioner informally for individual business
purposes. In any event, we accept petitioner’s testimony that he
intermingled funds between his accounts and that he used
individual funds deposited into the Barck, Inc. account to make
the interest payment.
4
Petitioners also filed a Schedule C in 1993 for a business
involved in “mobile home rent.” It is unclear if this is the
same rental activity as that in which petitioners were engaged in
1994 and 1995.
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activity for mortgage interest in each year, no deductions were
allowed for “other interest.” The Schedule E rental income and
expense deductions set forth in the notice of deficiency were as
follows:
1994 1995
Income $32,019 $81,603
Expenses
Advertising $300 $117
Car & truck 2,085 5,204
Cleaning & maintenance 26 -0-
Legal & professional 159 -0-
Mortgage interest 8,087 13,885
Repairs & maintenance 10,729 10,066
Supplies 592 -0-
Taxes & licenses 582 1,885
Utilities 1,404 4,139
Lot rent 5,770 15,715
Wages -0- 2,583
Insurance 1,179 3,721
Depreciation 1,323 6,701
Other 214 -0-
Total 32,450 64,016
Sch. E rental income (loss) (431) 17,587
We accept petitioner’s testimony concerning the existence
and nature of the $60,000 loan, corroborated by the above
detailed payments and respondent’s determination that petitioners
were conducting a rental activity in 1994 and 1995. We hold that
petitioners are entitled to rental expense deductions for
interest payments of $4,500 in 1994 and $5,000 in 1995.
We briefly note that respondent has not argued that
petitioner’s rental activity was either passive or related to
property held for investment. See sec. 163(d); sec. 469.
Nothing in the record indicates that the additional deductions
allowed by our holding in this case are limited under either
section 163(d) or section 469, and we so hold.
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The final issue for decision is whether petitioners are
liable for the accuracy-related penalties under section 6662(a).
Section 6662(a) imposes a 20-percent penalty on the portion
of an underpayment attributable to any one of various factors,
including (1) negligence or disregard of rules or regulations;
and (2) any substantial understatement of income tax. See sec.
6662(b)(1) and (2). Respondent determined that petitioners are
liable, with respect to each year in issue, for an accuracy-
related penalty due to one or both of these factors for an
underpayment equal to the total amount of the deficiency.
“Negligence” includes any failure to make a reasonable
attempt to comply with the provisions of the Internal Revenue
Code, see sec. 6662(c), including any failure to keep adequate
books and records or to substantiate items properly, see sec.
l.6662-3(b)(1), Income Tax Regs. “Disregard” includes any
careless, reckless, or intentional disregard. See sec. 6662(c).
A “substantial understatement” exists where the amount of
the understatement exceeds the greater of 10 percent of the tax
required to be shown on the return or $5,000. See sec.
6662(d)(1)(A). For purposes of this computation, the amount of
the understatement is reduced to the extent attributable to an
item: (1) If there exists or existed substantial authority for
the taxpayer’s treatment of the item; or (2) if the relevant
facts affecting the treatment of the item are adequately
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disclosed on the taxpayer’s return or an attached statement, and
there is a reasonable basis for the taxpayer’s treatment of the
item. See sec. 6662(d)(2)(B).
Section 6664(c)(1) 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 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. See 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. See id.
Petitioners dispute the assertion of the accuracy-related
penalties, but have not presented any evidence or arguments
specifically addressing this issue. We find that the record in
its entirety supports respondent’s assertion of the penalties in
this case, and we therefore uphold respondent’s determination in
this regard, as modified by respondent’s concessions and our
holding on the other issues in this case.
Reviewed and adopted as the report of the Small Tax Case
Division.
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To reflect the foregoing,
Decision will be entered
under Rule 155.