ELLIS v. COMMISSIONER

T.C. Summary Opinion 2004-170

UNITED STATES TAX COURT

JAMES P. ELLIS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 11098-03S. Filed December 20, 2004.

James P. Ellis, pro se.

Cynthia J. Olson, 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 years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
 - 2 -

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.

Respondent determined the following deficiencies in

petitioner's Federal income taxes and additions to tax for

failure to file timely:

Addition to Tax1
Year Deficiency Sec. 6651(a)(1)

1998 $5,354 $1,272
1999 4,577 793
2000 7,064 1,357
1
Figures are rounded to the nearest dollar.

After a concession,1 the issues for decision are whether:

(l) Respondent is estopped from asserting a deficiency against

petitioner for 1999; (2) petitioner is required to include in

income a reward received from the Internal Revenue Service (IRS)

during 1998; (3) petitioner is entitled to deductions on Schedule

C, Profit or Loss From Business, for 1998, 1999, and 2000 in

excess of those allowed by respondent; and (4) petitioner is

liable for additions to tax for failure to file timely his 1998,

1999, and 2000 Federal income tax returns.

Background

The stipulation of facts and the exhibits received into

evidence are incorporated herein by reference. Petitioner

1
Respondent concedes that petitioner is entitled to a
deduction for depreciation expenses of $2,834 for 2000.
 - 3 -

resided in Security, Colorado, at the time the petition was

filed.

Petitioner, a disc jockey, failed to file timely Federal

income tax returns for taxable years 1998, 1999, and 2000.

A. Petitioner's Individual Income Tax Return for 1998

Attached to petitioner's Form 1040, U.S. Individual Income

Tax Return, for 1998 was a Schedule C on which petitioner

reported gross receipts of $21,600 and contract labor costs of

$19,400. Petitioner also deducted car and truck expenses of

$2,129; depreciation of $1,316; office expenses of $396; supplies

expense of $238; and utilities of $780.

During 1998, in response to his claim, petitioner received a

reward from the IRS in the amount of $7,138.20. Respondent

increased petitioner's gross income by this unreported amount.

Respondent disallowed $1,008 of the deduction for car and truck

expenses and all the deductions for contract labor expenses of

$19,400 due to lack of substantiation. Respondent also

determined that petitioner is liable for an addition to tax under

section 6651(a)(1) for failure to timely file his 1998 return.
 - 4 -

B. Petitioner's Individual Income Tax Return for 1999

A Schedule C was also attached to petitioner's Form 1040 for

1999. Petitioner reported gross receipts of $21,600 and contract

labor costs of $19,400. Petitioner deducted depreciation of

$7,056; tuxedo dry cleaning expenses of $1,124; car and truck

expenses of $1,919; office expenses of $576; supplies expense of

$496; and utilities of $948.

Respondent disallowed deductions for all of the car and

truck expenses and all of the contract labor expenses due to lack

of substantiation. Respondent also determined that petitioner is

liable for an addition to tax under section 6651(a)(1) for

failure to timely file his 1999 return.

C. Petitioner's Individual Income Tax Return for 2000

Petitioner's Schedule C for 2000 again reflected gross

receipts of $21,600 and contract labor costs of $19,400.

Petitioner also deducted $7,980 for depreciation; car and truck

expenses of $5,327; office expenses of $444; supplies expense of

$503; utilities of $960; and tuxedo dry cleaning expenses of

$1,124.

Respondent disallowed deductions for all of the dry cleaning

and car and truck expenses as well as all of the contract labor

and depreciation expenses due to lack of substantiation.

Respondent also determined that petitioner is liable for an
 - 5 -

addition to tax under section 6651(a)(1) for failure to timely

file his 2000 return.

In October 2003, over 6 months after respondent issued the

statutory notice of deficiency in this case, respondent mailed to

petitioner a letter advising of changes to petitioner's statement

of account for 1999 indicating that for 1999 "the amount you now

owe" is "none".

Discussion

A. Estoppel

As a preliminary matter, petitioner contends that he does

not owe any tax for 1999 because he received a letter from the

IRS dated October 13, 2003, which stated that corrections had

been made to his 1999 tax account and "the amount you now owe" is

"none".

It appears that respondent erroneously assessed the amount

shown on the notice of deficiency for petitioner's 1999 taxable

year. The letter respondent sent petitioner on October 13, 2003,

reversed that assessment because it had been made while

petitioner's case was pending before this Court. See sec.

6213(a).

Petitioner alleges that he is no longer liable for the

deficiency in tax and the section 6651(a)(1) addition to tax for

1999, claiming that respondent's October letter led him to

believe that his case had been resolved:
 - 6 -

"I'm going by what they told me. If they were wrong and
they made a mistake, I believed them. I trusted in them."

Although not explicitly stated, petitioner's argument essentially

amounts to a claim of estoppel.

Equitable estoppel is a judicial doctrine that precludes a

party from denying that party's own acts or representations that

induced another to act to his or her detriment. E.g., Graff v.

Commissioner, 74 T.C. 743, 761 (1980), affd. 673 F.2d 784 (5th

Cir. 1982). It is to be applied against the Commissioner only

with utmost caution and restraint. E.g., Hofstetter v.

Commissioner, 98 T.C. 695, 700 (1992).

The doctrine of estoppel is not applicable unless the party

relying on it establishes all of the following elements at a

minimum:

(1) There must be a false representation or wrongful
misleading silence; (2) the error must be in a statement of
fact and not in an opinion or a statement of law; (3) the
person claiming the benefits of estoppel must be ignorant of
the true facts; and (4) he must be adversely affected by the
acts or statements of the person against whom an estoppel is
claimed. * * *

Estate of Emerson v. Commissioner, 67 T.C. 612, 617-618 (1977);

see also Lignos v. United States, 439 F.2d 1365, 1368 (2d Cir.

1971).

Even if we assume that petitioner relied on respondent's

letter, petitioner has not presented any evidence that he was

adversely affected by his reliance on the letter. Petitioner

suffered no detriment that is legally recognizable. He is only
 - 7 -

required to pay the tax that is lawfully owing. He did not

change a position to his detriment. See Reuben v. Commissioner,

T.C. Memo. 2001-193. Accordingly, the doctrine of estoppel does

not apply in this case.

Petitioner's position is further contrary to

well-established law. Congress has provided that closing

agreements under section 7121 and compromise agreements under

section 7122 are the exclusive administrative means for the IRS

to settle civil tax disputes with finality. See Botany Worsted

Mills v. United States, 278 U.S. 282, 288 (1929); Estate of Meyer

v. Commissioner, 58 T.C. 69, 70 (1972); see also Sampson v.

Commissioner, 444 F.2d 530, 531 (6th Cir. 1971), affg. T.C. Memo.

1970-212. The record is devoid of any evidence that petitioner

and respondent entered into a valid closing agreement or

compromise agreement.

B. Deficiencies

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. This includes the burden of substantiation.
 - 8 -

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. Under section 7491(c), respondent retains the

burden of production only with respect to petitioner's liability

for any additions to tax.

1. 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 Code. Petitioner does not dispute that during

1998, he received a reward from the IRS of $7,138.20. He

testified that this amount was shared with several of his

coworkers. The letter the IRS issued to petitioner identifying

the reward was addressed solely to petitioner and did not

indicate that he had an obligation to share the reward with

anyone else.

Petitioner did not present any argument that this amount is

not includable in income. The Court therefore concludes that

petitioner is required to include this amount in gross income.

2. Petitioner's Deductions

Section 162(a) allows a taxpayer deductions for ordinary and

necessary business expenses incurred during the taxable year in
 - 9 -

carrying on a trade or business. Generally, a taxpayer must

establish that deductions taken pursuant to section 162 are

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.

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.

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).

The record does not contain any documents or reasonable

evidence substantiating petitioner's claimed expenses.

Therefore, the Court concludes that petitioner is not entitled to

deduct any Schedule C expenses for 1998, 1999, or 2000 in excess

of amounts allowed by respondent.

C. Addition to Tax for Failure To Timely File a Tax Return

Under section 7491(c), the Commissioner has the burden of

production in any court proceeding with respect to the liability
 - 10 -

of any individual for any penalty or addition to tax. Higbee v.

Commissioner, 116 T.C. 438, 446-447 (2001). In order to meet his

burden of production, the Commissioner must come forward with

sufficient evidence indicating that it is appropriate to impose

the addition to tax for failure to file in the particular case.

Id. at 446. Once the Commissioner meets his burden of

production, the taxpayer must come forward with evidence

sufficient to persuade a court that the Commissioner's

determination is incorrect. Id. at 447.

Respondent contends that petitioner is liable for additions

to tax pursuant to section 6651(a)(1) for 1998, 1999, and 2000.

Section 6651(a)(1) imposes an addition to tax for failure to file

a Federal income tax return by its due date, determined with

regard to any extension of time for filing previously granted.

For each month that the return is late the addition equals 5

percent of the tax required to be shown on the return, not to

exceed 25 percent. Sec. 6651(a)(1). Additions to tax under

section 6651(a)(1) are imposed unless the taxpayer establishes

that the failure was due to reasonable cause and not willful

neglect. Id.; Crocker v. Commissioner, 92 T.C. 899, 912 (1989).

"Reasonable cause" requires the taxpayer to demonstrate that he

exercised ordinary business care and prudence. United States v.
 - 11 -

Boyle, 469 U.S. 241, 246 (1985). "Willful neglect" is defined as

a "conscious, intentional failure or reckless indifference." Id.

at 245.

Petitioner agrees that he did not timely submit his Federal

income tax returns for 1998, 1999, or 2000. Respondent has met

his burden of production regarding petitioner's liability for the

additions to tax. Petitioner did not provide any evidence that

would demonstrate that he had reasonable cause or lacked willful

neglect in failing to timely file his returns. Respondent's

determination as to the section 6651(a)(1) additions to tax is

sustained.

Reviewed and adopted as the report of the Small Tax Case

Division.

To reflect the foregoing,

Decision will be

entered under Rule 155.