T.C. Summary Opinion 2004-159
UNITED STATES TAX COURT
THOMAS N. COCCIA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9357-03S. Filed November 18, 2004.
Thomas N. Coccia, pro se.
Jason M. Kuratnick, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time that the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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Respondent determined a deficiency in and additions to
petitioner's Federal income tax for taxable year 2000 as follows:
Additions to Tax1
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654(a)
2000 $16,583 $1,416 $629 $277
1
Figures are rounded to the nearest dollar.
After concessions,1 the issues for decision are whether
petitioner is: (1) Required to report wages he received; (2)
required to report gambling winnings he received; (3) required to
report interest he received; (4) required to report self-
employment income he received; (5) entitled to deduct certain
trade or business expenses on Schedule C, Profit or Loss From
Business; and (6) liable for self-employment tax pursuant to
section 1401.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by reference. At the time the petition
in this case was filed, petitioner resided in Philadelphia,
Pennsylvania.
1
Respondent concedes that petitioner is not liable for the
addition to tax for failure to pay tax under sec. 6651(a)(2).
Petitioner concedes that any deficiency redetermined by the Court
is subject to the addition to tax under sec. 6651(a)(1) for
failure to file a tax return timely and the addition to tax
under sec. 6654(a) for failure to pay estimated taxes.
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Petitioner, a Philadelphia police officer, failed to file
timely a Federal income tax return for taxable year 2000.
Respondent determined petitioner's income on the basis of
information returns submitted to respondent by third party
payors. Respondent also determined that petitioner is liable for
the above-listed additions to tax.
On March 19, 2004, after respondent issued petitioner a
statutory notice of deficiency, petitioner submitted a tax return
for 2000 (March return). Respondent has not processed the March
return, and no tax has been assessed as a result of petitioner's
submission of the March return.
After the petition was filed, respondent filed an answer
conceding that petitioner is not liable for an addition to tax
under section 6651(a)(2) and asserting an increase in the
addition to tax under section 6651(a)(1) of $157.35.
At trial, petitioner submitted an additional tax return he
referred to as an "amended return" for taxable year 2000.
A. Petitioner's Income for the 2000 Taxable Year
1. Wages
In 2000, petitioner received wages of $6,275 from Society
Hill Towers. He also received wages of $66,935 from the City of
Philadelphia. Federal income tax of $10,289 was withheld from
petitioner's wages.
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2. Gambling Winnings
During 2000, respondent received from Showboat Casino three
Forms W2-G, Statement for Recipients of Certain Gambling
Winnings. Two of the Forms W2-G were dated May 22, 2000, and
reported that petitioner had won a total of $3,100. The third
Form W2-G dated August 9, 2000, reported that petitioner had an
additional $1,500 of gambling winnings.
On his March return, petitioner reported $18,100 of gambling
winnings and an equivalent amount of gambling losses.
Petitioner's "amended return" reflected the winnings as $1,500.
Petitioner did not maintain a diary or any other contemporaneous
record reflecting either his gambling winnings or losses during
the 2000 taxable year.
3. Interest Income
Petitioner received taxable interest income of $298 during
the 2000 taxable year.
B. Petitioner's Deductions for the 2000 Taxable Year
1. Itemized Deductions
The parties agree that petitioner is entitled to the
following itemized deductions:
Expense Amount
State and local income taxes $5,871
Real estate taxes 1,743
Home mortgage interest 4,903
Gifts to charity 1,140
Total 13,657
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2. Schedules C
Petitioner attached Schedules C to the March return and to
the "amended return" he submitted to respondent. The activities
reported therein included security brokerage services and the
operation of a newsstand.
a. Security Brokerage Services
Respondent received a Form 1099, Miscellaneous Income, from
RBA Associates, Inc., reporting that petitioner received
nonemployee compensation of $1,024 in 2000. On the March return,
petitioner attached a Schedule C for the principal business of
"Retail Stand" reporting income of $1,024, costs of goods sold of
$1,024, and expenses of $2,900. Attached to his "amended return"
is a Schedule C-EZ, Net Profit From Business, for the principal
business of "Security" reflecting gross receipts of $1,024 and
total expenses of $1,024.
Petitioner does not have any records pertaining to this
transaction other than the Form 1099. He did not report any
self-employment tax liability on the March return he submitted to
respondent or on the "amended return" he submitted at trial.
b. Newsstand
In 2000, petitioner attempted to open a newsstand in South
Philadelphia. Petitioner does not have any records pertaining to
his expenses for the newsstand.
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Petitioner never commenced operation of the newsstand. On
his "amended return", petitioner reported a net loss of $11,900
for the business.
Discussion
A. Burden of Proof
The Commissioner's determinations are presumed correct, and
generally, taxpayers bear the burden of proving otherwise. Welch
v. Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are
a matter of legislative grace, and taxpayers bear the burden of
proving that they are entitled to any deduction claimed. New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); Welch v.
Helvering, supra at 115. 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).
The burden of proof may shift to the Commissioner under
section 7491(a). Because petitioner failed to comply with the
requirements of section 7491(a)(2), however, section 7491 is
inapplicable.
B. Petitioner's Income
Pursuant to section 61(a), gross income includes "all income
from whatever source derived" unless excludable by a specific
provision of the Internal Revenue Code. Petitioner does not
dispute that during 2000, he received wages of $73,210, gambling
winnings of $4,600, interest income of $298, and nonemployee
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compensation of $1,024.2 Petitioner did not present any argument
that these amounts are not includable in income. The Court
therefore concludes that petitioner is required to include these
amounts in income.
While petitioner does not dispute that his gambling winnings
should be included in his income, he does assert that his
gambling winnings should be offset by his gambling losses.
Section 165(d) allows taxpayers to deduct losses from wagering
transactions to the extent of the gains from such transactions.
In order to establish entitlement to a deduction for
wagering losses in this Court, the taxpayer must prove the losses
sustained during the taxable year. Mack v. Commissioner, 429
F.2d 182 (6th Cir. 1970), affg. T.C. Memo. 1969-26; Stein v.
Commissioner, 322 F.2d 78 (5th Cir. 1963), affg. T.C. Memo.
1962-19. The taxpayer must also prove that the amount of
wagering losses claimed as a deduction does not exceed the amount
of the taxpayer's gains from wagering transactions. Sec. 165(d).
Implicitly, this requires the taxpayer to prove both the amount
of losses and the amount of winnings. Schooler v. Commissioner,
68 T.C. 867, 869 (1977); Donovan v. Commissioner, T.C. Memo.
2
Pursuant to sec. 6211(b)(1), petitioner's withheld tax on
wages of $10,289 is not taken into consideration in determining
the deficiency. It is, however, applied in calculating the
amount required to be paid. Sec. 31(a)(1). The addition to tax
under sec. 6651(a) is calculated on the net amount of tax due.
Sec. 6651(b)(1).
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1965-247, affd. per curiam 359 F.2d 64 (1st Cir. 1966).
Otherwise, there would be no way of knowing whether the sum of
the losses deducted on the return is greater or less than the
taxpayer's winnings. Schooler v. Commissioner, supra at 869.
Petitioner did not maintain a diary or any other
contemporaneous record reflecting either his winnings or his
losses from gambling during the 2000 taxable year. The only
evidence presented at trial was petitioner's testimony, on which
we decline to rely.
Although the Court acknowledges that petitioner most likely
had some gambling losses during the year, we are unable to
determine (either with specificity or by estimation) the amount
of those losses on the basis of the record at hand. Petitioner
has not met his burden of proof on this issue. See Mayer v.
Commissioner, T.C. Memo. 2000-295, affd. 29 Fed. Appx. 706 (2d
Cir. 2002); Zielonka v. Commissioner, T.C. Memo. 1997-81; see
also Finesod v. Commissioner, T.C. Memo. 1994-66.
C. Petitioner's Business Losses
The Schedule C attached to petitioner's "amended return"
reported trade or business expenses that resulted in a loss of
$11,900 for his newsstand business. Petitioner claimed
entitlement to this business loss for the first time shortly
before trial and argued the issue at trial. Respondent
questioned petitioner regarding substantiation of the expenses.
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The Court deems the issue raised and tried by consent of the
parties under Rule 41(b)(1) and properly before the Court. See
Christensen v. Commissioner, T.C. Memo. 1996-254, affd. without
published opinion 142 F.3d 442 (9th Cir. 1998).
Section 162(a) allows a taxpayer deductions for ordinary and
necessary business expenses paid during the taxable year in
carrying on a trade or business. Generally, a taxpayer must
establish that deductions claimed pursuant to section 162 are for
ordinary and necessary business expenses and must maintain
records sufficient to substantiate the amounts of the deductions
claimed. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Under
section 6001, a taxpayer bears the sole responsibility for
maintaining his business records.
Petitioner says he purchased an existing newsstand but does
not have any records to show how much he paid for it. He
testified that the newsstand was burglarized twice before he was
able to commence operations. Petitioner filed burglary reports
with the police and gave them estimates as to the value of the
items taken, including the strongbox containing all of his
receipts.
If a claimed business expense is deductible, but the
taxpayer is unable to substantiate it, the Court is permitted to
make as close an approximation as it can, bearing heavily against
the taxpayer whose inexactitude is of his or her own making.
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Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). The
estimate, however, must have a reasonable evidentiary basis.
Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Without such a
basis, such an allowance would amount to unguided largesse.
Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957).
In light of the complete absence of any documents or
reasonable evidence substantiating petitioner's claimed expenses,
the Court concludes that petitioner is not entitled to deduct any
Schedule C expenses for 2000.
D. Self-Employment Tax
Generally, a sole proprietor who derives income from a trade
or business is considered to have received self-employment
income. Secs. 1.1401-1(c), 1.1402(c)-1, Income Tax Regs.
Self-employed individuals are also liable for self-employment tax
pursuant to section 1401 as part of their Federal income tax
liability. Secs. 1.1401-1(a), 1.6017-1(a)(1), Income Tax Regs.
Subject to statutory exclusions, the amount of
self-employment tax an individual owes is based on his "net
earnings from self-employment". Sec. 1402(a). "Net earnings
from self-employment" include "the gross income derived by an
individual from any trade or business carried on by such
individual, less the deductions allowed" which are attributable
to the trade or business. Id.; sec. 1.1402(a)-1(a)(1), Income
Tax Regs.
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Petitioner was paid for brokering security services. He
says he served as a middleman and did not realize any profit from
this one-time assignment because all the revenue he received was
paid out to the workers. Petitioner had hoped that this
assignment would result in subsequent security jobs, but such was
not the case. Petitioner, however, does not have any records
documenting any deductible expenses he may have paid. Therefore,
the Court holds that petitioner is liable for self-employment tax
on the income he earned providing the security services.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
under Rule 155.