T.C. Summary Opinion 2001-150
UNITED STATES TAX COURT
JAN AND CORINNE MEJNARTOWICZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 318-00S. Filed September 24, 2001.
Jan and Corinne Mejnartowicz, pro se.
John Aletta, for respondent.
POWELL, 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.1 The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority.
1
Unless otherwise indicated, subsequent section references
are to the Internal Revenue Code in effect for the year in issue,
and Rule references are to the Tax Court Rules of Practice and
Procedure.
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Respondent determined a deficiency and a penalty for
negligence under section 6662(a) in petitioners’ 1995 Federal
income tax of $5,746 and $1,149, respectively.
The issues are whether petitioners are entitled to
deductions on Schedule C, Profit or Loss From Business, for (1)
casual labor ($1,200), (2) cost of goods sold ($8,000),2 and (3)
insurance ($2,298), and whether petitioners are liable for the
negligence penalty under section 6662(a). At the time the
petition was filed, petitioners resided in Stratford,
Connecticut.
The relevant facts may be summarized as follows. During
1995 petitioner Jan Mejnartowicz (petitioner) operated a plumbing
and heating business as a sole proprietorship. On the Schedule C
pertaining to the plumbing and heating business petitioner
reported the following:
2
The cost of goods sold is subtracted from gross receipts to
arrive at gross income. Such costs are technically not
deductions and are not subject to limitations under secs. 162 and
274. Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987).
Nonetheless, any amount claimed as a cost of goods sold must be
substantiated, and a taxpayer must maintain records sufficient
for this purpose. Xuncax v. Commissioner, T.C. Memo. 2001-226.
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Gross receipts $26,864
Less cost of goods sold 13,569
Gross income 13,295
Less expenses:
Car & truck $531
Insurance 2,298
Legal 2,000
Utilities 1,764
Casual labor 1,200
Permits 185 7,978
Net profit $5,317
Upon examination respondent disallowed the deductions for legal,
utilities, and casual labor expenses and reduced the insurance
expense by $1,687. Respondent also reduced the amount of cost of
goods sold by $8,000. In addition, respondent made certain
mathematical adjustments that flow from the changes in
petitioners’ adjusted gross income and are not in dispute.
Petitioners concede the adjustments for legal and utilities
expenses.
Petitioner kept no journal or other books and records. He
did maintain a checking account, but the canceled checks were
kept by his accountant who had moved to Florida and were
unavailable. Petitioner did not issue any Forms 1099 or Forms W-
2, Wage and Tax Statement, with regard to the deductions claimed
for casual labor. While petitioner could have obtained records
of his payments for insurance, he did not.
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Discussion
1. Deductions and Cost of Goods Sold
Deductions are a matter of legislative grace. INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). A taxpayer “shall keep
such permanent books of account or records, including
inventories, as are sufficient to establish the amount of gross
income, deductions, credits, or other matters required to be
shown” on a tax return. Sec. 1.6001-1(a), Income Tax Regs.; see
also Meneguzzo v. Commissioner, 43 T.C. 824, 831 (1965). Except
as otherwise provided in section 274,3 when the evidence shows
that a taxpayer incurred a deductible expense, but the exact
amount cannot be determined, the Court may “make as close an
approximation as it can, bearing heavily if it chooses upon the
taxpayer whose inexactitude is of his own making.” Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). There must,
however, be some basis upon which such an approximation can be
made. Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
Petitioner has the burden of substantiating his deductions.
Rule 142. Petitioner has no records whatsoever. His argument,
as he expresses it, is:
Normally * * * my expenses would be two-thirds of my gross
[receipts]. Here, my expenses were only half of what my
gross was, and that would be the same with any plumbing and
heating business.
3
None of the disallowed deductions are subject to sec. 274.
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With regard to the deductions for casual labor and
insurance, we are not satisfied that the unavailability of the
records maintained by his accountant explains his failure to
substantiate these deductions. There are other reasonable means
that petitioner could have used to substantiate these deductions.
He could have called as witnesses the persons he employed, and he
could have obtained information from the insurance company. We,
therefore, sustain respondent’s disallowance of these deductions.
The remaining issue deals with the $8,000 reduction to
petitioner’s cost of goods sold. On his Schedule C, petitioner
reported gross receipts of $26,864 and cost of goods sold of
$13,569. The ratio between the gross receipts and cost of goods
sold is roughly 2:1. We note that in the Internal Revenue
Service “Statistics of Income Bulletin”, Summer 1998, Vol. 18,
No. 1, at 25, total gross receipts and cost of goods sold for
plumbing sole proprietorships for 1996 were $10.2 billion and
$5.2 billion, respectively, almost the identical 2:1 ratio as
shown by petitioner. We do not believe that there would be a
significant difference between 1995 and 1996. Respondent’s
reduction of $8,000, therefore, would appear to be out of line,
and, using our best judgment, we believe that the cost of goods
sold would be $11,569. See Cohan v. Commissioner, supra.
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2. Negligence
Section 6662(a) imposes a penalty with respect “to any
portion of an underpayment of tax required to be shown on a
return” in an amount “equal to 20 percent of the portion of the
underpayment to which this section applies.” Section 6662
applies, inter alia, to underpayments attributable to negligence
or disregard of rules or regulations. Sec. 6662(b)(1).
“Negligence” includes any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code, and
“disregard” includes any careless, reckless, or intentional
disregard. Sec. 6662(c). Also, “‘Negligence is a lack of due
care or the failure to do what a reasonable and ordinarily
prudent person would do under the circumstances.’” Freytag v.
Commissioner, 89 T.C. 849, 887 (1987) (quoting Marcello v.
Commissioner, 380 F.2d 499, 506 (5th Cir. 1967), affg. on this
issue 43 T.C. 168 (1964) and T.C. Memo. 1964-299), affd. 904 F.2d
1011 (5th Cir. 1990), affd. on other grounds 501 U.S. 868 (1991).
The question then is whether petitioners’ conduct meets the
reasonably prudent person standard. See id.
Petitioner made no attempt to keep records of his plumbing
and heating business as required. Moreover, he claimed
deductions for legal expenses and utilities that were, by his own
admission, clearly improper. We sustain respondent’s imposition
of the section 6662(a) penalty.
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Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.