T.C. Memo. 2002-283
UNITED STATES TAX COURT
VALENTINA PERRAH, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13127-00. Filed November 18, 2002.
Warren Nemiroff, for petitioner.
Kevin W. Coy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax and penalties for the taxable
years 1994 and 1995 as follows:
Penalty
Year Deficiency Sec. 6662(a)
1994 $5,734 $2,929.60
1995 2,319 1,751.20
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The issues for our consideration are: (1) Whether
petitioner has shown entitlement to various Schedule C, Profit or
Loss From Business, deductions; and (2) whether the resulting
underpayment was due to a substantial understatement of income
tax and/or negligence so as to make petitioner liable for the
accuracy-related penalties under section 6662(a).1
FINDINGS OF FACT
Petitioner Valentina Perrah resided in Mira Loma,
California, at the time the petition was filed in this case.
Petitioner was a real estate broker who owned and operated a
Century 21 office in Mira Loma during taxable years 1994 and
1995. This office operated under the name “Amera-Star Realty”,
and petitioner reported its income and deductions on a Schedule C
attached to her Federal income tax returns.
For taxable years 1994 and 1995, petitioner’s original
individual income tax returns were prepared by petitioner’s
accountant of approximately 7 years, Ron Kington. Her Schedule C
reflected $239,481 of deductions for taxable year 1994 which
included, inter alia, $15,303 for advertising costs, $4,390 in
car and truck expenses, and $27,960 for other expenses such as
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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$9,317 in telephone services and $4,072 in seminar costs. Her
Schedule C reflected $313,217 of deductions for taxable year 1995
which included, inter alia, $13,737 for advertising and $7,579
for car and truck expenses. Petitioner noticed that the amounts
of tax due reflected on her 1994 and 1995 returns were
significantly different from other years, but she did not
question the calculations. Petitioner timely filed her 1994 and
1995 returns and paid the amount of tax shown due on the returns.
Sometime before July 1998, respondent began the examination
of petitioner’s 1994 and 1995 tax years. As a result petitioner
consulted Mary Crenshaw, an acquaintance through whom she
acquired insurance coverage and who petitioner believed was a
C.P.A. Petitioner provided her bank statements to the
acquaintance who turned them over to respondent’s examiner.
Respondent’s examiner raised substantiation issues regarding
petitioner’s claimed Schedule C deductions and discovered a
reporting error. In that regard, it was discovered that
petitioner did not report her Form 1099 income from her business.
Further, petitioner duplicated the omission error by deducting
the Form 1099 income on her Schedule C.
After discovering these problems, petitioner hired attorney
Warren Nemiroff in July 1998. Upon his advice, she submitted
amended returns on November 16, 1998, which reflected the
following revised calculations: (1) Schedule C deductions for
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1994, as amended, totaled $252,056, which included $14,506 for
advertising costs, $9,825 for car and truck expenses and $45,217
for other expenses such as $44,434 in rent, $770 in management
fees, and $13 in bank fees; and (2) Schedule C deductions for
1995, as amended, totaled $284,380, which included $16,161 for
advertising expenses, $7,171 for car and truck expenses and
$29,743 for other expenses, such as $4 in bank charges and
$28,671 in rent.
Subsequent to the filing of these amended returns, Internal
Revenue Agent Francisco Rangel met with petitioner at her office
to discuss her claimed Schedule C deductions. At this meeting,
no documents passed from petitioner to Mr. Rangel. However,
based on the conversation with petitioner and observations he
made at her office, Mr. Rangel allowed some of her claimed
deductions.
On November 6, 2000, respondent issued a statutory notice of
deficiency to petitioner for her 1994 and 1995 tax years.
OPINION
We consider here whether petitioner is entitled to Schedule
C deductions in excess of those allowed by respondent and whether
petitioner is liable for the accuracy-related penalties under
section 6662(a).
I. Substantiation of Schedule C Deductions
Section 162 permits a deduction for ordinary and necessary
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expenses incurred in carrying on a trade or business during the
taxable year. The question of whether an expenditure satisfies
the requirements of section 162 is one of fact. Commissioner v.
Heininger, 320 U.S. 467 (1943). Section 274(d) provides guidance
with respect to certain deductions. Specifically, it sets forth
technical rules for substantiation of expenses relating to travel
and meals.
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving that he or she is entitled to any
deductions claimed.2 Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992). Accordingly, petitioner must show that
she incurred and/or paid the expense as an ordinary and necessary
expense of her business. For expenses covered under section
274(d), petitioner must produce (1) adequate records or (2)
sufficient evidence to corroborate her own statements. Sec.
1.274-5T(c)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985). Adequate records include such things as an
account book, diary, log, statement of expense, or other similar
record in which entries of expenses are recorded at or near the
time of the expense. Id. In addition, petitioner must produce
documentary evidence such as receipts or paid bills. Sec. 1.274-
2
Because the examination commenced prior to July 22, 1998,
sec. 7491 burden of proof and production standards are not
applicable. See sec. 7491.
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5T(c)(2)(i) through (iii), Temporary Income Tax Regs., 50 Fed.
Reg. 46017 (Nov. 6, 1985).
Petitioner argues that her claimed deductions have been
substantiated. Yet, the only evidence that petitioner has
submitted to this Court is her own self-serving testimony
regarding the deductions. We do not have to accept such
testimony without corroborating evidence. Niedringhaus v.
Commissioner, 99 T.C. 202 (1992). Further, aside from
petitioner’s argument that Mr. Rangel’s allowance of some
deductions is proof that her deductions were substantiated in
full, petitioner has not presented any corroborating evidence.
As such, petitioner does not meet the substantiation
requirements of section 162 or section 274(d). Accordingly, we
hold that petitioner did not substantiate her disallowed Schedule
C deductions and has, therefore, not shown respondent’s
determination to be in error.
II. Accuracy-Related Penalty of Section 6662(a)
Section 6662 provides for an accuracy-related penalty equal
to 20 percent of the underpayment if such underpayment was due to
taxpayer’s negligence or substantial understatement of income
tax. Sec. 6662(a) and (b)(1). For the purposes of this section,
a taxpayer is negligent when he or she fails “to do what a
reasonable and ordinarily prudent person would do under the
circumstances.” Korshin v. Commissioner, 91 F.3d 670, 672 (4th
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Cir. 1996), affg. T.C. Memo. 1995-46. An understatement of
income tax is substantial if it exceeds 10 percent of the tax
required to be shown on the return for the taxable year or
$5,000, whichever is greater. Sec. 6662(d)(1)(A).3
As pertinent here, “negligence” includes the failure to make
a reasonable attempt to comply with the provisions of the
Internal Revenue Code and also includes any failure to keep
adequate books and records or to substantiate items properly.
Sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs. It is the
taxpayer’s responsibility to establish that he is not liable for
the accuracy-related negligence penalty imposed by section
6662(a). See Rule 142(a); Tweeddale v. Commissioner, 92 T.C.
501, 505 (1989).4 As we have held that petitioner failed to
comply with the basic requirements of substantiation and record-
keeping contained in the Internal Revenue Code, we find that
petitioner’s underpayment was due to negligence and is subject to
the accuracy-related penalty under section 6662(a).
A taxpayer may avoid the application of the accuracy-related
penalty by proving that he or she acted with reasonable cause and
in good faith. Sec. 6664(c). Whether a taxpayer acted with
reasonable cause and good faith is measured by examining the
3
We need not address whether petitioner’s understatement of
income was substantial because we hold that she is liable for the
accuracy-related penalty due to negligence.
4
See supra note 2.
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relevant facts and circumstances, and most importantly, the
extent to which he attempted to assess his proper tax liability.
See Neely v. Commissioner, 85 T.C. 934 (1985); Stubblefield v.
Commissioner, T.C. Memo. 1996-537; sec. 1.6664-4(b)(1), Income
Tax Regs. As petitioner has not shown this Court the method by
which she kept track of her business profits and losses, we are
unable to find that petitioner attempted, in good faith, to
properly assess her tax liability.
Despite this, petitioner maintains that there are other
factors which show she acted in good faith. Petitioner points
out that (1) she relied upon an accountant who prepared her
original Federal income tax returns; (2) she submitted bank
statements to respondent’s examiner upon notice of audit; (3) she
corrected the discrepancies on her returns; (4) she paid the tax
due; and (5) she hired and relied on tax professionals.
Reliance on the advice of a competent adviser can be a
defense to the accuracy-related penalty. United States v. Boyle,
469 U.S. 241, 252 (1985); Zfass v. Commissioner, 118 F.3d 184
(4th Cir. 1997), affg. T.C. Memo. 1996-167; sec. 1.6664-4(b)(1),
Income Tax Regs. However, it must be established that the
reliance was reasonable, in good faith, and based upon full
disclosure. Ewing v. Commissioner, 91 T.C. 396, 423-424 (1988),
affd. without published opinion 940 F.2d 1534 (9th Cir. 1991);
Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987);
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Pritchett v. Commissioner, 63 T.C. 149, 175-176 (1974).
The record reflects that Mr. Kington, the preparer of her
original Federal income tax returns, was petitioner’s accountant
for 7 years. However, petitioner has not shown Mr. Kington’s
qualifications or what records she provided to him in order to
prepare her returns.5 Therefore, we are unable to find that
petitioner’s reliance on Mr. Kington was in fact reasonable.
The record also reflects that petitioner relied on Mr.
Nemiroff, her attorney, in submitting amended returns for 1994
and 1995.6 However, in the context of this case, petitioner’s
reliance on her attorney and her willingness to correct her
mistakes are irrelevant. As respondent has applied the section
6662(a) penalty to the underpayment reflected on petitioner’s
original returns, we measure petitioner’s good faith and
reasonable reliance as of the date of filing her original
returns.
In that regard, petitioner argues that the penalty should
apply to the underpayment reflected on petitioner’s amended, as
5
The credentials of Ron Kington are unclear from the
record.
6
Petitioner also contends that, on the advice of her
attorney, she hired a new accountant to prepare her amended
returns. Other than petitioner’s testimony, there is no evidence
that she did so. In that regard, petitioner’s amended returns are
not even signed by a tax preparer.
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opposed to original, returns.7 However, an amended return can
only be used to determine a taxpayer’s underpayment for purposes
of section 6662(a) if it is a “qualified amended return”. Sec.
1.6664-2(c)(2), Income Tax Regs. A qualified amended return is
one that is filed before “The time the taxpayer is first
contacted by the Internal Revenue Service concerning an
examination of the return”. Sec. 1.6664-2(c)(3)(i), Income Tax
Regs. As petitioner filed her amended returns after she was
notified of examination, petitioner’s amended returns are not
qualified.
We hold that respondent’s application of the section 6662(a)
penalty to the underpayment reflected in petitioner’s original
returns is correct, and petitioner’s good faith and reasonable
reliance, if any, after she filed her original returns and was
notified of an audit is of no consequence.
To reflect the foregoing,
Decision will be entered
for respondent.
7
While the statutory notice of deficiency reflects the
income tax deficiency reflected on petitioner’s amended returns,
the penalty has been applied to petitioner’s underpayment
reflected on the original returns.