WILKERSON v. COMMISSIONER

T.C. Summary Opinion 2004-99

UNITED STATES TAX COURT

ELLIOT VIRGIL WILKERSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 1211-03S. Filed July 27, 2004.

Elliot Virgil Wilkerson, pro se.

John F. Driscoll, for respondent.

ARMEN, 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, all subsequent section
references are to the Internal Revenue Code in effect for 2000,
the taxable year in issue. All Rule references are to the Tax
Court Rules of Practice and Procedure.
 - 2 -

Respondent determined a deficiency in petitioner’s Federal

income tax of $11,493 for the taxable year 2000, as well as an

accuracy-related penalty under section 6662(a) in the amount of

$711.

After petitioner’s concessions,2 the remaining issues for

decision are:

(1) Whether petitioner received unreported business and

rental income. We hold that he did to the extent provided

herein.

(2) Whether petitioner is entitled to claim various

Schedule C and Schedule E deductions. We hold that he is not.

(3) Whether petitioner is entitled to claim various

itemized deductions for state and local taxes. We hold that he

is not.

(4) Whether petitioner is entitled to claim a personal

casualty or theft loss of $7,283. We hold that he is not.

(5) Whether petitioner is liable for the accuracy-related

penalty under section 6662(a). We hold that he is.

2
At trial and in the stipulation of facts, petitioner
conceded the adjustments in the notice of deficiency;
specifically, that he received unreported income in the following
amounts: (1) Wages of $51,824; (2) interest of $54; and (3)
rental income in the amounts of $2,380 and $642, for a total of
$3,022.
 - 3 -

Background

Some of the facts have been stipulated, and they are so

found. We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

At the time that the petition was filed, petitioner resided

in Dothan, Alabama.

On or about April 15, 2001, petitioner filed with respondent

a Form 1040, U.S. Individual Income Tax Return, for 2000 (Form

1040). On the Form 1040, petitioner reported zero wages, zero

total income, and zero taxable income, and he claimed a refund of

Federal income tax withheld in the amount of $7,940. On the last

page of his Form 1040, petitioner listed his occupation as

“Labor”.

On October 28, 2002, respondent issued petitioner a notice

of deficiency for 2000. Based on information returns, respondent

determined that petitioner failed to report wages from Great

Northern Nekoosa Corp. (GNNC) of $51,824, interest from Five Star

Credit Union of $54, and total rental income of $3,022, which

amount consisted of $2,380 from Paden Realty & Appraisals, Inc.,

and $642 from Housing Authority of the City of Dothan, Alabama.

Respondent further determined that petitioner is liable for the

accuracy-related penalty under section 6662(a) for a substantial

understatement of tax.
 - 4 -

On January 23, 2003, petitioner timely filed a petition with

the Court challenging the determined deficiency stating: “Expense

for the Production of Income”.3 Thereafter, petitioner submitted

to respondent’s Appeals Office on June 4, 2003, a revised Form

1040 for 2000 (revised Form 1040). Respondent did not process

the revised Form 1040 as an amended return. The revised Form

1040 reflected in pertinent part as follows:

Line 7. Wages, salaries, tips, etc. * * * $51,824
Line 8a. Taxable interest. * * * 54
Line 12. Business income or (loss). * * * (4,207)
Line 17. Rental real estate * * * (12,500)
Line 22. * * * total income. 35,171

Line 36. * * *itemized deductions * * * 10,314
Line 39. Taxable income. * * * 22,057
Line 40. Tax 3,331
Line 58. Federal income tax withheld * * * 7,940
Line 66. * * * This is the amount you overpaid. 4,609

Petitioner attached to the revised Form 1040, inter alia, the

following schedules and forms that are pertinent to the issues in

this case: Schedule A, Itemized Deductions; Schedule C, Profit

or Loss from Business; Schedule E, Supplemental Income and Loss;

and Form 4684, Casualties and Thefts.

On Schedule A, petitioner claimed total itemized deductions

of $10,314, which amount included the following: State and local

income tax of $2,664; real estate tax of $133; personal property

tax of $234; and a casualty or theft loss of $7,283 as calculated

3
We note, however, that petitioner did not claim any
deductions on his Form 1040, U.S. Individual Income Tax Return.
 - 5 -

on Form 4684. Petitioner attached no documentation to his

revised Form 1040 to support any of the itemized deductions.

On Form 4684, petitioner described the property for which he

claimed a casualty or theft loss as: “Personal, Cedar Springs,

Ga, 04/22/47”. The personal property referred to certain

employment rights that petitioner allegedly forfeited in a

collective bargaining agreement that his labor union entered into

sometime before 1997. “Cedar Springs, Ga” is the location of

GNNC, which is the paper mill where petitioner works. The date

“04/22/47” is petitioner’s birth date. The Form 4684 reflected

in pertinent part as follows:

Line 2. Cost or other basis of each property $10,900
Line 5. Fair market value before casualty or theft 43,600
Line 6. Fair market value after casualty or theft 10,900
Line 7. Subtract line 6 from line 5 32,700
Line 10. Casualty or theft loss. * * * 10,900
Line 11. Enter the amount from line 10 or $100,
whichever is smaller 100
Line 17. Enter 10% of your adjusted gross income * * * 3,517
Line 18. * * * enter result on Schedule A * * * 7,283

On Schedule C, petitioner identified his business name as

V.G.’s Gallery, his principal business or profession as art and

flowers, and his business activity code as 453220, signifying a

gift, novelty, and souvenir store. Schedule C reflected in

relevant part as follows:

Gross receipts or sales $1,891
Returns or allowances 899
Cost of goods sold 903
Gross income 89
Total expenses 4,296
Net loss (4,207)
 - 6 -

The expenses consisted of automobile expenses, legal and

professional services, office expense, rent, repairs and

maintenance, supplies, travel, and other expenses. Petitioner

attached no documentation to his revised Form 1040 to support the

amounts claimed for returns or allowances, cost of goods sold,

and expenses.

On Schedule E, petitioner identified three rental real

estate properties in Alabama: (1) 5515 Yellow Wood Ave.,

Birmingham; (2) 313 Cordova Drive, Dothan; and (3) 3312 Cathy Lou

Road, Dothan. Schedule E reflected in relevant part as follows:

Property Rents Received Expenses Depreciation Total Expenses Losses
Yellow Wood $2,380 $1,836 $4,488 $6,324 ($3,944)
Cordova 3,960 4,222 3,599 7,821 ( 3,861)
Cathy Lou 2,772 8,014 2,712 10,726 ( 7,954)
[1]
Total 9,112 14,072 10,799 (12,500)
[1]
Petitioner claimed “deductible” rental real estate losses of $3,128, $3,063, and
$6,309 for Yellow Wood, Cordova, and Cathy Lou, respectively. See sec. 469; see
also Form 8582, Passive Activity Loss Limitations.

The expenses consisted of cleaning and maintenance, commissions,

insurance, legal and professional fees, management fees, mortgage

interest, supplies, and taxes. Petitioner attached no

documentation to his revised Form 1040 to support the claimed

amounts for expenses and depreciation.

After receipt of petitioner’s revised Form 1040, respondent

requested from petitioner any supporting documentation concerning

petitioner’s claimed deductions. Petitioner did not provide any

supporting documentation to respondent.
 - 7 -

At trial, petitioner offered no documentary evidence to

support any of the deductions or allowances claimed by him on

Schedules A, C, and E. In addition, petitioner at trial declined

to offer any testimonial evidence to support any of those

deductions or allowances other than the casualty or theft loss

claimed on Schedule A and Form 4684.

At the end of the trial, respondent made an oral motion to

conform the pleadings to the evidence and to assert an increased

deficiency. Petitioner did not object.

Discussion

As a preliminary matter, we note that petitioner conceded

the adjustments determined in the notice of deficiency. The

remaining issues in this case were raised at trial by way of the

stipulation of facts and petitioner’s own testimony. As stated

above, respondent at trial made an oral motion to conform the

pleadings to the evidence and to assert an increased deficiency,

and we must decide whether to grant such motion. See Rule

41(b)(1); sec. 6214(a).

Generally, we deem issues raised and tried by the consent of

the parties as having been raised in the pleadings. Rule 41(b).

Whether a motion to conform the pleadings should be allowed,

however, is within the sound discretion of the Court.

Commissioner v. Estate of Long, 304 F.2d 136, 144 (9th Cir.

1962), affg. unreported orders of this Court. If there is unfair
 - 8 -

surprise or prejudice to the opposing party, then the motion

should be denied. Estate of Horvath v. Commissioner, 59 T.C.

551, 555 (1973).

After a review of the entire record, we find that the

factual issues giving rise to respondent’s motion were raised

during trial without petitioner’s objection and with his consent.

The evidence on which respondent bases his motion was admitted at

trial by way of a stipulation of facts, including petitioner’s

revised Form 1040,4 and petitioner’s own testimony. In addition,

we do not find that granting respondent’s motion would result in

unfair surprise or prejudice to petitioner. The evidence in the

record further demonstrates that the deficiency may be greater

than that determined in the notice of deficiency. Accordingly,

we shall grant respondent’s motion to conform the pleadings to

the evidence and to assert an increased deficiency.5

4
The revised Form 1040 was not processed by respondent as
an amended return. There is no statutory authority permitting
the filing of an amended return, and the acceptance or rejection
thereof is solely within the discretion of the Commissioner.
Goldring v. Commissioner, 20 T.C. 79, 81 (1953). We may,
however, admit the revised Form 1040 in evidence as a statement
of petitioner’s present position. See McCabe v. Commissioner,
T.C. Memo. 1983-325.
5
Nevertheless, to the extent that respondent has sought an
increased deficiency, he bears the burden of proof. We note,
however, that petitioner’s revised Form 1040, which was received
in evidence, sufficiently supports respondent’s assertion for an
increased deficiency. See Collins v. Commissioner, T.C. Memo.
1956-156.
 - 9 -

A. Unreported Income

Gross income includes all income from whatever source

derived, specifically including gross income derived from

business, gains derived from dealings in property, and rents.

Sec. 61(a)(2), (3), (5).

Petitioner admittedly concedes by way of the stipulation of

facts and his own testimony that he received unreported income in

excess of the adjustments in the notice of deficiency.

Specifically, petitioner admitted that he received unreported

gross receipts or sales of $1,891 and rental income in the

aggregate amount of $9,112.

With respect to the amount of rental income, we note that

petitioner conceded the adjustments in the notice of deficiency

in the amounts of $2,380 and $642. The first amount is

consistent with the amount of rental income reported on

petitioner’s revised Form 1040 for the Yellow Wood property. The

latter amount of $642 appears to be included in the total rental

income amount of the other 2 properties. Therefore, we limit the

amount of unreported rental income to $6,090 (i.e., $3,960 +

$2,772 - $642).

Accordingly, we conclude that petitioner received unreported

gross receipts or sales of $1,891 and unreported rental income of

$6,090 in excess of that determined by respondent in the notice

of deficiency.
 - 10 -

B. Schedule C and Schedule E Deductions

1. General Principles

Deductions are strictly a matter of legislative grace, and a

taxpayer bears the burden of proving his or her entitlement to

the deductions claimed. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).6 This includes the burden

of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90

(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).

Section 6001 further requires taxpayers to maintain books

and records sufficient to substantiate the amounts of the

deductions claimed. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax

Regs. If a taxpayer is unable to fully substantiate the expenses

incurred, but there is evidence that deductible expenses were

incurred, the Court may nevertheless allow a deduction based upon

an approximation of expenses. Cohan v. Commissioner, 39 F.2d

540, 544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731,

742-743 (1985). The estimate, however, must have a reasonable

evidentiary basis, Vanicek v. Commissioner, supra, and there must

6
The burden of proof does not shift to respondent under
sec. 7491(a) because petitioner failed to establish that he
complied with the requirements of sec. 7491(a)(2)(A) and (B) to
substantiate items, maintain records, and fully cooperate with
respondent’s reasonable requests. We note that petitioner stated
at trial that he “did not come prepared to address those”
deductions. We find that statement remarkable considering that
the amount of the deductions claimed was a substantial part of
his revised Form 1040.
 - 11 -

be sufficient evidence in the record to permit us to conclude

that a deductible expense was paid or incurred in at least the

amount allowed, Williams v. United States, 245 F.2d 559, 560-561

(5th Cir. 1957).

In the case of travel expenses and expenses relating to the

use of listed property, including any passenger automobile or

other property used as a means of transportation, sec.

280F(d)(4)(A)(i) and (ii), section 274(d) imposes stringent

substantiation requirements to document the nature and amount of

such expenses. Sec. 274(d); Sanford v. Commissioner, 50 T.C.

823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969);

sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014

(Nov. 6, 1985). To meet these substantiation requirements, the

taxpayer must maintain adequate records or sufficient

corroborating evidence to establish each element of an

expenditure. Sec. 274(d); sec. 1.274-5T(b)(6), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985); sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.

6, 1985).

2. Schedule C Deductions

Section 162(a) allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.
 - 12 -

Petitioner purportedly operates an art and flowers business.

Petitioner claims subtractions from gross receipts (e.g., returns

or allowances and cost of goods sold) as well as various expense

deductions associated with this business.

Petitioner, however, offered no evidence whatsoever to

substantiate deductions for the claimed amounts. Petitioner

failed to produce any records or documents that any of the

expenses were allegedly paid or incurred with respect to this

business. Moreover, petitioner failed to present any testimony,

however slight, to explain the expenses listed on Schedule C to

give us any basis upon which we could estimate such deductions.

On the basis of his revised Form 1040, petitioner would have this

Court infer facts not in the record to prove that he incurred

legitimate business expenses. The burden, however, is on

petitioner to substantiate his claimed deductions. We hold,

therefore, that petitioner failed to meet his burden of proof.

Consequently, petitioner is not entitled to subtract returns or

allowances and cost of goods sold from gross receipts, nor is he

entitled to any of his claimed expense deductions. See sec.

274(d); Williams v. United States, supra; Vanicek v.

Commissioner, supra; sec. 1.274-5T, Temporary Income Tax Regs.,

50 Fed. Reg. 46014 (Nov. 6, 1985).
 - 13 -

3. Schedule E Deductions

Section 212(2) allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year for

the management, conservation, or maintenance of property,

including real property, held for the production of income. Sec.

1.212-1(h), Income Tax Regs.

The evidence indicates that petitioner maintains several

rental properties. Petitioner thus claims depreciation as well

as various expense deductions associated with his rental

properties.

Petitioner, however, offered no evidence whatsoever to

substantiate deductions for the claimed amounts. Petitioner

failed to produce any records or documents that any of the

expenses were allegedly paid or incurred with respect to his

rental properties. Moreover, petitioner failed to present any

testimony, however slight, to explain the expenses listed on

Schedule E to give us any basis upon which we could estimate such

deductions. On the basis of his revised Form 1040, petitioner

would have this Court infer facts not in the record to prove that

he incurred legitimate rental expenses. The burden, however, is

on petitioner to substantiate his claimed deductions. We hold,

therefore, that petitioner failed to meet his burden of proof.

Consequently, petitioner is not entitled to deduct depreciation,

nor is he entitled to any of his claimed expense deductions. See
 - 14 -

Williams v. United States, supra; Vanicek v. Commissioner, 85

T.C. 731 (1985).

C. Personal Deductions

1. Deductions for State and Local Taxes

As relevant herein, section 164(a) provides for the

deduction of (1) State and local real property taxes; (2) State

and local personal property taxes; and (3) State and local income

taxes paid or accrued within the taxable year.

Petitioner failed to produce any evidence to show that he

paid the taxes claimed on his revised Form 1040, nor did he offer

any testimony concerning those deductions. Therefore, petitioner

has not met his burden of proof. Accordingly, petitioner is not

entitled to claim deductions on Schedule A for taxes paid.

2. Casualty Loss Deduction

As relevant to the present case, section 165(a) and (c)(3),

subject to limitations, allows an individual to claim a deduction

for a loss of property not connected with a trade or business

that arises “from fire, storm, shipwreck, or other casualty, or

from theft”. Personal casualty losses are deductible in the year

the loss is sustained. Sec. 165(a), (h)(3)(B); sec. 1.165-

7(a)(1), Income Tax Regs. A loss is “treated as sustained during

the taxable year in which the loss occurs as evidenced by closed

and completed transactions and as fixed by identifiable events
 - 15 -

occurring in such taxable year.” Sec. 1.165-1(d)(1), Income Tax

Regs; see also sec. 1.165-1(b), Income Tax Regs.

The term “other casualty” is defined as a loss proximately

caused by a sudden, unexpected, or unusual event, excluding the

progressive deterioration of property through a steadily

operating cause or by normal depreciation. Maher v.

Commissioner, 680 F.2d 91, 92 (11th Cir. 1982), affg. 76 T.C. 593

(1981); Coleman v. Commissioner, 76 T.C. 580, 589 (1981). There

must be a causal connection between the alleged casualty and the

loss claimed by the taxpayer. Kemper v. Commissioner, 30 T.C.

546, 549-550 (1958), affd. 269 F.2d 184 (8th Cir. 1959).

Petitioner contends that the alleged $7,283 personal

casualty loss arose during the years 1997 and 1998 while he was a

member of a labor union in which he forfeited certain rights

through provisions in a collective bargaining agreement between

the labor union and his employer, GNNC. In support of his

contention, petitioner relies on our previous opinion in

Wilkerson v. Commissioner, T.C. Summary Opinion 2001-63.7 In

that case, we held that money paid to petitioner for the years

1997 and 1998, by virtue of an agreement between GNCC and the

7
Pursuant to sec. 7463(b), a summary opinion cannot be
relied on as precedent for other cases. Although this statutory
prohibition does not necessarily preclude application of the
doctrines of res judicata and collateral estoppel, neither
doctrine applies in this case because the issue presented in the
instant proceeding is not identical to the issue decided in the
prior proceeding.
 - 16 -

labor union of which petitioner was a member, constituted

compensation for services under section 61(a)(1). Petitioner’s

theory, however, is that this Court concluded that he forfeited

certain rights that constitute property of value for which he is

entitled to a loss deduction. Petitioner’s contention is

misplaced.

Petitioner’s alleged forfeiture of rights is not the type of

loss contemplated by section 165(c)(3). In fact, petitioner’s

own testimony revealed that he characterizes the forfeiture of

rights as a job-related expense. Moreover, petitioner presented

no evidence that his alleged personal loss resulted from either a

theft or a sequence of events normally associated with a

casualty; that is, sudden, unexpected, or unusual events causing

a considerable destructive force to property where the resulting

direct and proximate damage causes a loss similar to that arising

from a fire, storm, or shipwreck. White v. Commissioner, 48 T.C.

430, 434-435 (1967); see Landy v. Commissioner, T.C. Memo. 1979-

354 (taxpayer not entitled to personal casualty loss deduction

for the loss of driving privileges).

Even assuming arguendo that petitioner’s forfeiture of

rights under the collective bargaining agreement constitutes a

personal casualty loss or theft, petitioner would not be entitled

to a deduction for such loss or theft because the alleged loss
 - 17 -

was sustained during the taxable years 1997 and 1998 rather than

the taxable year 2000, which is the year in issue.

Accordingly, we hold that petitioner is not entitled to a

casualty or theft loss deduction of $7,283.

D. Section 6662(a) Substantial Understatement of Tax

The last issue for decision is whether petitioner is liable

for an accuracy-related penalty pursuant to section 6662(a) for

the year in issue. Section 7491(c) places on the Commissioner

the burden of production with respect to a taxpayer’s liability

for any penalty.8 The taxpayer, however, still has the burden of

proving that the Commissioner’s determination of the accuracy-

related penalty is erroneous. Rule 142(a); INDOPCO, Inc. v.

Commissioner, 503 U.S. at 84; Welch v. Helvering, 290 U.S. 111,

115 (1933); Higbee v. Commissioner, 116 T.C. 438, 446-448 (2001).

Section 6662(a) imposes a penalty equal to 20 percent of any

underpayment of tax that is due to a substantial understatement

of income tax. See sec. 6662(a) and (b)(2). An individual

substantially understates his or her income tax when the reported

tax is understated by the greater of 10 percent of the tax

required to be shown on the return or $5,000. Sec.

8
We hold that respondent satisfied the burden of
production under sec. 7491(a)(1) because the record shows that
petitioner failed to include certain items in income and claimed
deductions to which he was not entitled. Higbee v. Commissioner,
116 T.C. 438, 442 (2001).
 - 18 -

6662(d)(1)(A).9 Tax is not understated to the extent that the

treatment of the item related thereto is based on substantial

authority or is adequately disclosed in the return or in a

statement attached to the return, and there is a reasonable basis

for the tax treatment of such item by the taxpayer. Sec.

6662(d)(2)(B).

Moreover, the accuracy-related penalty does not apply with

respect to any portion of an underpayment if it is shown that

there was reasonable cause for the underpayment and the taxpayer

acted in good faith with respect to the underpayment. Sec.

6664(c)(1). 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. Sec. 1.6664-4(b)(1), Income Tax Regs. The most

important factor is the extent of the taxpayer’s effort to assess

the taxpayer’s proper tax liability for such year. Id.

Based on petitioner’s own admitted concessions of unreported

income, a prima facie case exists for imposition of the penalty.

Petitioner appears to contend that he did in fact report his

income tax on the revised Form 1040 after he did not receive a

response from respondent concerning the tax characterization of

9
For purposes of “the amount shown as the tax by the
taxpayer on his return”, the revised Form 1040 is not a
“qualified amended return” in determining whether petitioner
understated his income tax. Sec. 1.6664-2(a), (c), Income Tax
Regs.
 - 19 -

his alleged forfeiture of rights. As noted above, the revised

Form 1040 was not processed as an amended return, and, therefore,

petitioner’s reporting of income tax on his revised Form 1040

does not constitute a reasonable basis for not reporting income

tax on his Form 1040. Based on the entirety of the record, we

conclude that the other requirements for relief from the

substantial understatement penalty have not been met.

Accordingly, we hold that petitioner is liable for the accuracy-

related penalty under section 6662(a).10

E. Conclusion

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Respondent’s motion to conform

the pleadings to the evidence

will be granted, and decision will

be entered under Rule 155.

10
Based on our disposition of the other disputed issues,
we note that the sec. 6662(a) penalty may be greater than that
originally determined in the notice of deficiency.