T.C. Memo. 2003-247
UNITED STATES TAX COURT
JIMMY A. PRINCE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9120-02. Filed August 18, 2003.
Jimmy A. Prince, pro se.
Jean Song, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
LARO, Judge: Petitioner petitioned the Court to redetermine
respondent’s determinations as to petitioner’s 1997, 1998, and
1999 Federal income taxes. Respondent determined for those
respective years that petitioner had deficiencies of $36,861,
$89,210, and $71,454 and was liable for section 6662(a)
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accuracy-related penalties of $7,372, $17,842, and $14,291.1
Respondent also determined as to 1997 that petitioner was liable
for a $9,215 addition to tax under section 6651(a)(1).
Following concessions,2 we are left to decide:
1. Whether the 3-year period of limitations under section
6501(a) has run on 1997. We hold it has not.
2. Whether petitioner may deduct self-employment expenses
in amounts greater than those allowed by respondent. We hold he
may not.
3. Whether petitioner may deduct for 1998 a $37,181 net
operating loss (NOL) carryover. We hold he may not.
4. Whether petitioner may deduct dependency exemptions for
his daughter Keauna (Keauna) and his son Zik (Zik). We hold he
may not.
1
Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the subject years, Rule
references are to the Tax Court Rules of Practice and Procedure,
and dollar amounts are rounded.
2
In addition to the concessions made explicitly, we
consider petitioner to have conceded respondent’s determination
of unreported income by virtue of the fact that petitioner did
not address this issue on brief. We hold without further comment
that petitioner underreported the 1997 and 1998 gross income of
his sole proprietorship by $5,261 and $26,631, respectively, as
determined by respondent. See Levin v. Commissioner, 87 T.C.
698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);
Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976); see also
Remuzzi v. Commissioner, T.C. Memo. 1988-8, affd. without
published opinion 867 F.2d 609 (4th Cir. 1989).
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5. Whether petitioner may use the head of household filing
status. We hold he may not.
6. Whether petitioner is liable for the addition to tax
determined by respondent under section 6651(a)(1). We hold he
is.
7. Whether petitioner is liable for the accuracy-related
penalties determined by respondent under section 6662(a). We
hold he is.
FINDINGS OF FACT
Some facts were stipulated. The stipulated facts and the
accompanying exhibits are incorporated herein by this reference.
We find the stipulated facts accordingly. Petitioner resided in
Los Angeles, California, when his petition was filed.
Petitioner’s daughter is Keauna, and his son is Zik. Petitioner
did not reside with Keauna during the subject years, and we do
not find in the record that he resided with Zik either.
Petitioner filed with the Commissioner 1997, 1998, and 1999
Forms 1040, U.S. Individual Income Tax Return, using the filing
status of “Head of Household”. He reported on those returns that
his dependents were Keauna and Zik. On his 1997 and 1999
returns, petitioner reported a loss of $9,614 and income of $954,
respectively, from his sole proprietorship named Jasmak Auto
Parts (Jasmak). On his 1998 return, petitioner reported income
of $17,609 from Jasmak and an NOL carryover of $37,181 for
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purported losses from Jasmak for 1994 through 1997. The items of
income from Jasmak were the only items of income reported on
petitioner’s 1997 through 1999 returns. Petitioner filed his
1997 tax return with the Commissioner on March 26, 1999.
The respective returns reported that petitioner calculated
Jasmak’s profit (loss) for 1997 through 1999 as follows:
1997 1998 1999
Gross receipts $233,394 $407,173 $356,977
Returns and allowances -0- (7,846) -0-
Cost of goods sold:
Beginning inventory 72,411 56,270 81,431
Purchases 114,367 279,762 220,877
Ending inventory 56,270 81,431 83,236
130,508 254,101 219,072
Gross profit 102,886 144,226 137,905
Expenses:
Advertising 7,212 2,206 4,394
Commissions and fees 19,460 23,562 24,348
Insurance 3,428 4,785 6,097
Interest -0- 529 -0-
Legal and prof. services 2,678 9,167 7,971
Office expense -0- -0- 1,782
Rent 36,000 36,000 36,000
Repairs and maintenance 5,152 2,446 1,686
Supplies 1,648 1,049 -0-
Taxes and licenses 197 2,985 2,338
Travel 795 150 1,143
Utilities 2,750 1,200 1,200
Bank charges 425 991 929
Depreciation 4,565 8,058 8,058
Dues and subscriptions 82 182 215
Freight 1,274 94 106
Janitorial 320 355 1,070
Medical/health -0- 1,760 -0-
Miscellaneous expenses 110 839 272
Postage 301 517 674
Salary expense 11,000 20,200 22,000
Security 422 433 428
Telephone 6,342 7,581 8,245
Transportation 3,435 2,028 3,061
Sales tax 3,118 -0- 3,226
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Finance charges 727 -0- 982
Other 530 -0- -0-
Interest expense 529 -0- 726
112,500 127,117 136,951
Profit (loss) (9,614) 17,109 954
The “Salary expense” represented payments which Jasmak made to
petitioner for his services. Petitioner now acknowledges that
the deduction of these payments was improper.
In 2000, the Commissioner began auditing petitioner’s 1997
through 1999 taxable years. As a result of this audit, the
Commissioner increased (decreased) petitioner’s reported taxable
income as follows and reflected these adjustments in the subject
notice of deficiency mailed to petitioner on February 21, 2002:
1997 1998 1999
Self-employment income:
Unreported gross receipts $16,338 $26,631 $24,988
Self-employment expenses:
Advertising 5,952 -0- 2,610
Commissions 19,261 23,397 24,105
Depreciation 1,315 4,801 4,848
Insurance 3,428 4,785 6,097
Legal 2,410 8,240 7,174
Purchases 52,174 127,641 100,764
Returns and allowances -0- 6,760 -0-
Salary 11,000 20,200 22,000
Sales tax 3,118 2,985 3,226
Telephone 4,439 5,307 5,770
Transportation 1,767 1,040 1,530
Other items of income:
NOL carryover -0- 37,181 -0-
AGI adjustments:
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Insurance -0- (594) -0-
Self-employment (5,549) (6,337) (7,166)
Deductions and exemptions:
Standard deduction 1,900 2,000 2,050
Exemptions 5,300 7,938 7,040
122,853 271,975 205,036
At trial, respondent conceded as to 1997 that he incorrectly
disallowed $49,529 of the purchases, $2,308 of the sales tax
expense, and $4,449 of the advertising expense. Respondent also
conceded that petitioner’s 1997 gross income did not include
$11,077 of the determined unreported gross receipts and that
petitioner’s 1999 gross income did not include any of the
determined unreported gross receipts.
OPINION
1. Burden of Proof
Taxpayers generally must prove respondent’s determinations
wrong in order to prevail. Rule 142(a)(1); Welch v. Helvering,
290 U.S. 111, 115 (1933). As one exception to this rule, section
7491(a) places upon respondent the burden of proof with respect
to any factual issue if the taxpayer maintained adequate records,
satisfied applicable substantiation requirements, cooperated with
respondent, and introduced during the court proceeding credible
evidence on the factual issue.3 The legislative history of
3
The relevant language of sec. 7491 provides:
(continued...)
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section 7491(a) clarifies that taxpayers must prove that they
have satisfied the adequate records, substantiation, and
cooperation requirements before that section places the burden of
proof upon the Commissioner.4 H. Conf. Rept. 105-599, at 239
(1998), 1998-3 C.B. 747, 993 (“The taxpayer has the burden of
proving that it meets each of these conditions, because they are
necessary prerequisites to establishing that the burden of proof
3
(...continued)
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 records required
under this title and has cooperated
with reasonable requests by the
Secretary for witnesses,
information, documents, meetings,
and interviews; * * *
4
The text of the statute requires that the taxpayer satisfy
the remaining (credible evidence) requirement as a condition of
placing the burden of proof upon respondent.
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is on the Secretary.”). The legislative history provides further
as to the term “credible evidence”, which is not defined in the
statute, that
Credible evidence is the quality of evidence which,
after critical analysis, the court would find
sufficient upon which to base a decision on the issue
if no contrary evidence were submitted (without regard
to the judicial presumption of IRS correctness). A
taxpayer has not produced credible evidence for these
purposes if the taxpayer merely makes implausible
factual assertions, frivolous claims, or tax
protestor-type arguments. The introduction of evidence
will not meet this standard if the court is not
convinced that it is worthy of belief. If after
evidence from both sides, the court believes that the
evidence is equally balanced, the court shall find that
the Secretary has not sustained his burden of proof.
[Id. at 240-241, 1998-3 C.B. at 994-995.]
We have in previous cases involving section 7491 applied the
definition of the term “credible evidence” as discerned from the
legislative history. E.g., Higbee v. Commissioner, 116 T.C. 438,
442-443 (2001); Forste v. Commissioner, T.C. Memo. 2003-103;
Managan v. Commissioner, T.C. Memo. 2001-192. We do likewise
here. We conclude that section 7491(a) does not apply here to
place the burden of proof upon respondent in that petitioner has
failed to introduce during this proceeding credible evidence on
any factual issue. We note that section 7491(a) also is
inapplicable here in that we do not find that petitioner
maintained adequate records, satisfied applicable substantiation
requirements, or cooperated with the Commissioner.
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2. Period of Limitations
Section 6501(a) generally gives the Commissioner 3 years
from the date on which a return is filed to assess a tax as to
that return. Petitioner filed his 1997 tax return with the
Commissioner on March 26, 1999, and the Commissioner mailed the
subject notice of deficiency to petitioner on February 21, 2002.
We conclude that respondent’s issuance to petitioner of the
notice of deficiency for 1997 was within the 3-year period of
section 6501(a).5
3. Self-Employment Expenses
In addition to the general burden of proof discussed above,
petitioner must prove his entitlement to any deduction, e.g., by
maintaining sufficient records to substantiate his claimed
deductions. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934); Lychuk v. Commissioner, 116 T.C. 374, 384 (2001); see
also sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Petitioner’s
burden requires that he introduce sufficient evidence to:
(1) Make a prima facie case establishing that respondent
committed the errors alleged in the petition and (2) overcome the
evidence favorable to respondent. See Lobe v. Commissioner, T.C.
Memo. 2001-204; Lawler v. Commissioner, T.C. Memo. 1995-26.
5
Petitioner asserts on brief that he mailed his 1997 return
to the Commissioner on Apr. 20, 1998, and that the return filed
on Mar. 26, 1999, was simply a copy of that return. We find
these assertions unsupported by the credible evidence in the
record and decline to rely upon them.
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Petitioner has failed to carry his burden of proof as to
this issue. The record does not disprove respondent’s
determination as to the self-employment expenses, as adjusted by
respondent’s concessions at trial. We sustain that
determination, as adjusted. Lobe v. Commissioner, T.C. Memo.
2001-204 (and cases cited therein).
4. NOL Deduction
Section 172 allows a taxpayer to deduct an NOL for a taxable
year. The amount of the NOL deduction equals the sum of the NOL
carryovers plus NOL carrybacks to that year. Sec. 172(a).
Absent an election to the contrary, an NOL for any taxable year
must first be carried back 3 years and then carried over 15
years. Sec. 172(b)(1)(A), (2), and (3).6 Petitioner, as a
taxpayer attempting to deduct an NOL, bears the burden of
establishing both the existence of the NOL and the amount of any
NOL that may be carried over to 1998. Rule 142(a)(1); United
States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235
(1955); Keith v. Commissioner, 115 T.C. 605, 621 (2000). Such a
deduction is a matter of legislative grace; it is not a matter of
right. United States v. Olympic Radio & Television, Inc., supra
at 235; Deputy v. du Pont, 308 U.S. 488, 493 (1940).
6
In 1997, sec. 172(b)(1)(A) was amended to generally
require a 2-year carryback and a 20-year carryover for NOLs
incurred in taxable years beginning after Aug. 5, 1997. Neither
party asserts that this amendment is applicable here, and we
conclude it is not.
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Petitioner claimed on his return that the NOL applied in
1998 arose in 1994 through 1997. The record does not establish
that petitioner incurred an NOL in any of those years. We
sustain respondent’s determination as to this issue.
5. Dependency Exemptions/Filing Status
Section 152(a) allows a taxpayer such as petitioner to treat
a son and a daughter as dependents if the taxpayer provided
during the taxable year more than half of the support of each.
See also sec. 151(a), (c) (individual taxpayer may deduct an
exemption amount for each of his or her dependents). Support
generally includes amounts used for a dependent’s food, shelter,
clothing, medical and dental care, education, and the like. Sec.
1.152-1(a)(2)(i), Income Tax Regs. To meet the support test
required as to a dependent, a taxpayer must show: (1) The total
amounts received by the dependent from all sources, (2) the
amounts actually applied for the support of the dependent, (3)
the sources which contributed to the total support costs expended
on behalf of the dependent, and (4) that the taxpayer provided
over half of the total expenditures for the dependent’s support.
Barnes v. Commissioner, T.C. Memo. 1986-585.
Petitioner has not persuaded us that he provided more than
one-half of the support of either Keauna or Zik. We conclude
that he is not entitled to treat either of them as his dependent.
We also conclude that petitioner may not file as head of
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household. Under section 2(b)(1)(A)(i), an individual such as
petitioner will qualify for head of household status if he
maintains as his home a household that is the principal place of
abode of a son or daughter for more than one-half of the taxable
year. The record establishes that petitioner did not reside with
Keauna during the subject years and does not establish that Zik
resided with him either.
6. Addition to Tax/Accuracy-Related Penalties
Section 6651(a)(1) imposes an addition to tax for failing to
file a return on or before the specified filing date unless it is
shown that this failure is due to reasonable cause and not due to
willful neglect. Reasonable cause may exist if a taxpayer
exercised ordinary business care and prudence and was nonetheless
unable to file the return within the date prescribed by law.
Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect
means a “conscious, intentional failure or reckless
indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).
Section 6662(a) imposes a penalty of 20 percent on the
portion of an underpayment of tax attributable to, among other
things, a substantial understatement of tax. Sec. 6662(b)(1) and
(2). A substantial understatement of tax is one that exceeds the
greater of 10 percent of the tax required to be shown on the
return or $5,000. Sec. 6662(d)(1)(A). An accuracy-related
penalty does not apply to any portion of an understatement as to
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which the facts and circumstances show that the taxpayer acted
with reasonable cause and in good faith. Sec. 6664(c)(1); sec.
1.6664-4(b)(1), Income Tax Regs.
Respondent bears the burden of production with respect to
this addition to tax and these accuracy-related penalties. Sec.
7491(c). In order to meet this burden, respondent must produce
sufficient evidence establishing that it is appropriate to impose
these items. Once respondent has done so, the burden of proof is
upon petitioner. Higbee v. Commissioner, 116 T.C. at 449.
Respondent has satisfied his burden of production with
respect to the addition to tax in that the record establishes
that petitioner filed his 1997 tax return after its due date.
Respondent has also satisfied his burden of production with
respect to the section 6662(a) accuracy-related penalties to the
extent that the record establishes that petitioner understated
his tax for each of the subject years by the greater of 10
percent of the tax required to be shown on the return or $5,000.
With regard to both the addition to tax and the accuracy-related
penalties, petitioner must establish reasonable cause in order to
prevail. Id. Petitioner filed his 1997 tax return more than 11
months after the due date, and he has presented no evidence
establishing that his failure to file that return timely was due
to reasonable cause and not due to willful neglect. Petitioner
has also failed to introduce any evidence establishing that he
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acted with reasonable cause or in good faith with respect to the
items underlying the accuracy-related penalties. We sustain
respondent’s determination as to the addition to tax and the
accuracy-related penalties (to the extent that the parties
computation(s) under Rule 155 establishes that petitioner
understated his tax for each of the subject years by the greater
of 10 percent of the tax required to be shown on the return or
$5,000).
All arguments made by the parties and not discussed herein
have been rejected as meritless. To reflect concessions,
Decision will be
entered under Rule 155.