T.C. Memo. 2002-101
UNITED STATES TAX COURT
HIEN X. PHAM, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8004-00. Filed April 15, 2002.
Hien X. Pham, pro se.
Michael A. Skeen, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
COLVIN, Judge: Respondent determined deficiencies in
petitioner’s Federal income taxes of $58,283 for 1996 and $59,226
for 1997, an addition to tax under section 6651(a)(1) of
$14,794.25 for 1997, and accuracy-related penalties under section
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6662(a) of $11,656.60 for 1996 and $11,845.20 for 1997.1 After
concessions, the issues for decision are:
1. Whether respondent bears the burden of proof under
section 7491(a) as to the items of income and deduction
disallowed in the notice of deficiency. We hold that respondent
does not.
2. Whether petitioner had unreported income of $64,108.94
for 1996 and $21,942.75 for 1997. We hold that he did.
3. Whether petitioner may deduct miscellaneous expenses
related to his Schedule C business of $15,302 for 1996 and
$25,746 for 1997. We hold that he may not.
4. Whether petitioner is liable for the addition to tax for
failure to timely file under section 6651(a)(1) for 1997. We
hold that he is not.
5. Whether petitioner is liable for the accuracy-related
penalty under section 6662(a) for 1996 and 1997. We hold that he
is.
Section references are to the Internal Revenue Code in
effect for the applicable years. Rule references are to the Tax
Court Rules of Practice and Procedure.
1
After concessions, respondent now contends that
petitioner is liable for deficiencies in his Federal income taxes
of $27,555 for 1996 and $15,512 for 1997, an addition to tax of
$3,865.75 under sec. 6651(a)(1) for 1997, and accuracy-related
penalties under sec. 6662(a) of $5,511 for 1996 and $3,102.40 for
1997.
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FINDINGS OF FACT
Some of the facts are stipulated and are so found.
A. Petitioner
Petitioner resided in Orange, California, when he filed the
petition. He is a technician who repairs copy machines. He
operated a copy machine service business known as Copy Care
Technology in 1996 and 1997. He sometimes hired subcontractors
to repair copy machines.
B. Petitioner’s Bank Accounts
Petitioner made the following deposits in his bank accounts
in 1996 and 1997:
1996
Amount
Bank deposited
Wells Fargo $1,410.57
Wells Fargo (2) 135,805.44
Bank of America 56,956.71
Total 194,172.72
1997
Amount
Bank deposited
Wells Fargo $118,031.27
Bank of America 81,772.02
Total 199,803.29
C. Petitioner’s Income Tax Returns
Petitioner filed his 1996 income tax return on April 15,
1997. He obtained a 4-month extension of time to file his 1997
return until August 17, 1998. He filed his 1997 income tax
return on August 17, 1998. He included with each of his 1996 and
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1997 returns a Schedule C, Profit or Loss From Business, for Copy
Care Technology. He deducted business expenses of $56,500 for
1996 and $97,752 for 1997 on the Schedules C.
D. Respondent’s Examination of Petitioner’s 1996 and 1997
Returns
Revenue Agent Colleen Warren (Warren) began her examination
of petitioner’s 1996 and 1997 returns in December 1998, when she
met with petitioner at his home. He refused to talk to Warren at
that time. Warren then invited petitioner to meet with her at
her office. She asked petitioner for copies of his 1996 and 1997
bank statements, invoices, and canceled checks to support his
1996 and 1997 Schedule C expense deductions. Petitioner did not
respond to Warren’s December 1998 document requests, meet with
her, or respond to her telephone calls. She sent petitioner
several letters to attempt to schedule a conference. Petitioner
did not respond to these letters. Warren also gave petitioner
the option of meeting instead with her manager, but petitioner
refused.
Petitioner told Warren that he could not understand English.
Warren then asked a revenue agent who spoke Vietnamese to contact
petitioner. Petitioner asked that agent to contact him at
petitioner’s mother’s home. The agent left a message there for
petitioner to telephone the agent. Petitioner did not return the
agent’s call.
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Warren issued summonses to petitioner’s banks and obtained
petitioner’s 1996 and 1997 bank statements.
E. Respondent’s Determination
Warren performed a bank deposits analysis and characterized
each of petitioner’s 1996 and 1997 deposits as taxable or
nontaxable. She characterized the following as nontaxable:
Checks deposited by petitioner with insufficient funds; returned
deposits; loans from petitioner’s father; a $37.72 check from Air
Touch Cellular deposited on April 12, 1996; a $588.32 check from
Kelley Escrow deposited on August 7, 1996; a $25 check from AT&T
deposited on August 7, 1996; and a $560 redeposit made on August
19, 1997.
Respondent determined that petitioner received unreported
income of $118,413 in 1996 and $78,150 in 1997. Respondent
disallowed business expense deductions of $46,500 in 1996 and
$87,752 in 1997.
Respondent transferred petitioner’s case to Appeals Officer
Heidi Peterson (Peterson) in September 2000, after the petition
in this case was filed. In early October 2000, Peterson wrote to
petitioner to schedule a conference and to request information
and documents that Warren had previously requested. Shortly
before the date Peterson had proposed for the conference,
petitioner told Peterson that he did not have the requested
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documents. Peterson rescheduled the conference for late November
2000.
Petitioner then retained Mr. Covarrubias (Covarrubias) to
represent him in his dealings with respondent. Covarrubias asked
Peterson to reschedule the conference for the end of December
2000. Peterson did so. Covarrubias attended that conference and
gave Peterson some of petitioner’s canceled checks. Covarrubias
later gave Peterson a box containing unorganized personal and
business invoices and petitioner’s credit card statements.
Warren organized petitioner’s records. Warren identified
the expenses which she thought were deductible. Warren then
recomputed petitioner’s income and expenses for 1996 and 1997 as
follows:
1996
Nontaxable items, Wells Fargo (2) $17,284.18
Nontaxable items, Bank of America 41,767.28
Returned deposits, Bank of America 8,613.32
Gross receipts per return 62,399.00
Unreported income 64,108.94
Total deposits for 1996 194,172.72
1997
Nontaxable items, Wells Fargo $560.00
Nontaxable items, Bank of America 65,232.54
Gross receipts per return 112,068.00
Unreported income 21,942.75
Total deposits for 1997 199,803.29
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Warren concluded that petitioner had allowable Schedule C
business expenses of $39,439 for 1996 and $65,494 for 1997.2
OPINION
A. Whether Respondent Bears the Burden of Proof as to Items of
Income and Deduction
Petitioner contends that respondent bears the burden of
proof under section 7491(a) as to the items of income and
deduction disallowed in the notice of deficiency. We disagree.
The Commissioner bears the burden of proof under section
7491(a)3 if the taxpayer has: (1) Complied with substantiation
2
Shortly before trial respondent allowed additional
deductions for Schedule C business expenses of $1,759 for 1996
and $6,512 for 1997.
3
Sec. 7491 provides in pertinent part:
SEC. 7491. BURDEN OF PROOF.
(a) Burden Shifts Where Taxpayer Produces Credible
Evidence.--
(1) General rule.--If, in any court
proceeding, a taxpayer introduces credible
evidence with respect to any factual issue
relevant to ascertaining the liability of the
taxpayer for any tax imposed by subtitle A or
B, the Secretary shall have the burden of
proof with respect to such issue.
(2) Limitations.--Paragraph (1) shall
apply with respect to an issue only if--
(A) the taxpayer has complied with
the requirements under this title to
substantiate any item;
(B) the taxpayer has maintained all
(continued...)
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requirements under the Internal Revenue Code, sec. 7491(a)(2)(A);
(2) maintained all records required by the Internal Revenue Code,
sec. 7491(a)(2)(B); (3) cooperated with reasonable requests by
the Secretary for information, documents, and meetings, id.; and
(4) introduced at trial credible evidence with respect to any
factual issue relevant to ascertaining his or her liability for
any tax imposed under subtitle A or B, sec. 7491(a)(1).4
Petitioner did not substantiate his deductions, keep records
of his income and expenses, or cooperate with respondent’s
agents. Thus, petitioner bears the burden of proving that
respondent’s determination is incorrect as to the items of income
and deduction disallowed in the notice of deficiency. Sec.
7491(a); Rule 142(a)(2).
B. Whether Petitioner Had Unreported Income
Respondent contends respondent’s bank deposits analysis
shows that petitioner had unreported income of $64,108.94 in 1996
and $21,942.75 in 1997. Petitioner does not dispute respondent’s
3
(...continued)
records required under this title and
has cooperated with reasonable requests
by the Secretary for witnesses,
information, documents, meetings, and
interviews; * * *.
4
Sec. 7491 applies to court proceedings arising in
connection with examinations beginning after July 22, 1998. See
Internal Revenue Service Restructuring & Reform Act of 1998, Pub.
L. 105-206, sec. 3001(a), 112 Stat. 726. The examination in this
case began after July 22, 1998. Thus, sec. 7491 applies.
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use of the bank deposits method to reconstruct his income for
1996 and 1997.
Petitioner contends that he had the following nontaxable
sources of income: Loans from his friends, brothers, or sister
of $1,600 on March 5, 1996, $4,500 on April 24, 1997, $3,800 on
June 18, 1997, $3,000 on June 20, 1997, and $3,000 on July 1,
1997.5 We disagree.
Petitioner has no promissory notes or records showing that
these amounts were loans or that he repaid them. He did not
identify specific individuals who lent him these amounts.
Petitioner’s testimony that these deposits were loans was vague
and uncorroborated. We are not convinced that the source of any
of the bank deposits respondent counted as unreported income for
petitioner in 1996 and 1997 was a nontaxable loan. We conclude
that petitioner had unreported income of $64,108.94 in 1996 and
$21,942.75 in 1997.
C. Whether Petitioner May Deduct More Business Expenses Than
Respondent Allowed for 1996 and 1997
Petitioner deducted more miscellaneous expenses related to
his Schedule C business than respondent allowed for 1996 and
5
Petitioner’s contention on brief differs slightly from
his contention at trial. On brief, he contended that deposits in
his bank accounts “that are large and end in ‘000', such as
$1,000.00, $3,000.00, and $5,000.00, are loan funds I received
from my family and friends.” At trial, he contended that bank
deposits of $1,000 or more were funds which were lent to him by
friends and family and then identified the five specific deposits
(shown above) as loans. He did not show that any of the deposits
respondent used to determine unreported income were loans.
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1997. Respondent disallowed deductions of $15,302 for 1996 and
$25,746 for 1997 because petitioner did not substantiate them.
Petitioner contends that he paid $15,302 in 1996 and $25,746
in 1997 to hire a receptionist and a repair technician to fix
copy machines for him. However, petitioner offered no evidence
other than his testimony, which was vague and uncorroborated.
Petitioner did not identify the receptionist or the repair
technician or indicate when they worked for him or when he made
the payments.
We conclude that petitioner may not deduct more
miscellaneous expenses related to his Schedule C business than
respondent allowed for 1996 and 1997.
D. Whether Petitioner Is Liable for the Addition to Tax for
Failure To Timely File His 1997 Income Tax Return
Respondent contends that petitioner is liable for the
addition to tax under section 6651(a) for failure to timely file
his income tax return for 1997. Petitioner received an automatic
4-month extension to file his 1997 income tax return until
August 17, 1998. Petitioner filed his 1997 return on August 17,
1998. Thus, petitioner timely filed his 1997 return. Sec.
6651(a)(1).
Respondent alleges that petitioner’s extension to file is
invalid because petitioner did not properly estimate his tax
liability for 1997 or remit the estimated tax when he applied for
the extension. The Commissioner bears the burden of production
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with respect to penalties and additions to tax. Sec. 7491(c).
To meet the burden of production under section 7491(c), the
Commissioner must come forward with evidence showing that it is
appropriate to impose the particular penalty but need not
introduce evidence of elements such as reasonable cause or
substantial authority. Higbee v. Commissioner, 116 T.C. 438, 446
(2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747,
995. The request for an extension is not in the record, and,
thus, we cannot tell how much tax petitioner estimated was due.
There is no evidence to support respondent’s allegation that
petitioner’s extension is invalid, or that petitioner did not
properly estimate the amount of tax due and remit the estimated
tax with the extension request. We conclude that respondent has
failed to meet the burden of production under section 7491(c),
that petitioner’s extension is valid, and that he is not liable
for the addition to tax for failure to timely file his 1997
income tax return.
E. Whether Petitioner Is Liable for the Accuracy-Related
Penalty
Taxpayers are liable for a penalty equal to 20 percent of
the part of the underpayment attributable to negligence or
disregard of rules or regulations. Sec. 6662(a) and (b)(1).
Negligence includes failure to make a reasonable attempt to
comply with internal revenue laws or to exercise ordinary and
reasonable care in preparing a tax return. Sec. 6662(c).
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Petitioner alleged nontaxable sources of income of $1,600
for 1996 and $14,300 for 1997, but he did not dispute that he had
a substantial amount of unreported income in those years; in
effect, petitioner conceded that he had unreported income of
$62,508 for 1996 and $7,642 for 1997. In addition, petitioner
did not produce to respondent’s agent during the audit adequate
substantiation of the items in dispute. A taxpayer’s failure to
properly substantiate items is evidence of negligence. See sec.
6662(c); Higbee v. Commissioner, supra at 449; sec. 1.6662-
3(b)(1), Income Tax Regs. These facts are sufficient to meet
respondent’s burden of production under section 7491(c) relating
to petitioner’s liability for the accuracy-related penalty.
The accuracy-related penalty under section 6662(a) does not
apply to any part of an underpayment if the taxpayer shows that
there was reasonable cause for that part of the underpayment, and
that the taxpayer acted in good faith in view of the facts and
circumstances. Sec. 6664(c)(1). The taxpayer bears the burden
of proving that the failure is due to reasonable cause and not
willful neglect. Higbee v. Commissioner, supra at 446.
Petitioner contends that he is not liable for the accuracy-
related penalty. However, he offered no evidence to support his
contention. Petitioner suggests that he and Warren had a bad
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working relationship, but he did not explain how this is relevant
to whether he is liable for the accuracy-related penalty for the
years in issue.
We conclude that petitioner is liable for the accuracy-
related penalty under section 6662(a) for 1996 and 1997.
To reflect concessions and the foregoing,
Decision will be
entered under Rule 155.