T.C. Summary Opinion 2004-173
UNITED STATES TAX COURT
JAMES EDWARD AND BRENDA DIANNE STARKOVICH, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3979-04S. Filed December 21, 2004.
James Edward and Brenda Dianne Starkovich, pro sese.
Abbey B. Garber, 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, all 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
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to be entered is not reviewable by any other court, and this
opinion should not be cited as authority.
Respondent determined for 2001 a deficiency in petitioners'
Federal income tax of $15,408 and an accuracy-related penalty of
$3,082 under section 6662(a).
The issues for decision are whether petitioners: (1)
Received unreported income during 2001; and (2) are liable for
the accuracy-related penalty under section 6662(a).
Background
The stipulation of facts and the exhibits received into
evidence are incorporated herein by reference. Petitioners
resided in McKinney, Texas, at the time the petition was filed.
During 2001, James Edward Starkovich (petitioner) was a
residential and commercial painting contractor, and Brenda Dianne
Starkovich was a homemaker. Petitioners timely filed their 2001
Federal income tax return.
Attached to petitioners' return was a Schedule C, Profit or
Loss From Business, on which petitioner reported gross receipts
of $32,400 and expenses of $23,658 from his painting activities.
Petitioner worked at an apartment complex owned by Golden
Leaf, Inc. (Golden Leaf), performing repairs and maintenance,
painting apartments, and staining fences in 2001. Golden Leaf
paid petitioner by check for his work at the apartments. During
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2001, petitioner received and cashed 13 checks from Golden Leaf.
The checks totaled $85,097.
During 2001, respondent received a Form W-2, Wage and Tax
Statement, from Labor Ready Central III LP reporting that $52 in
wages was paid to petitioner. Respondent also received a Form
1099-MISC, Miscellaneous Income, from Metroplex Design Builders
reporting that $1,450 in nonemployee compensation had been paid
to petitioner during 2001.
Respondent issued a notice of deficiency for 2001
determining that petitioners had unreported income of $52,697
from services rendered, and determining an accuracy-related
penalty under section 6662(a) of $3,082.
Discussion
Generally, the Commissioner's determinations of unreported
income in a notice of deficiency are presumed correct, and the
taxpayer has the burden of proving that those determinations are
erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). In some cases the burden of proof with respect to
relevant factual issues may shift to the Commissioner under
section 7491(a). Petitioners did not present evidence or
argument that they satisfied the requirements of section 7491(a),
and, therefore, the burden of proof does not shift to respondent.
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A. Unreported Income
Petitioner contends that he was involved in a fraudulent
kickback scheme involving Ione Morgan (Ms. Morgan), who works as
a live-in manager for Golden Leaf; her husband, Bob Morgan; and
his brother, Chester Morgan. Petitioner alleges that he would
receive a check from Golden Leaf in an amount greater than what
he was owed for services he performed. In exchange for receiving
the contracting job, petitioner would cash that check and remit
the overage to Bob Morgan. Petitioner says he kept track of
these transactions but a fire at his home on August 22, 2001,
destroyed the records.
Petitioner claims that at the end of 2001 he tried to
terminate his involvement in the scheme, but Ms. Morgan and her
husband told him that his family would be endangered by the other
individuals involved in the scheme.
In her testimony, Ms. Morgan denied that she was involved in
a kickback scheme with petitioner. She stated that petitioner
was paid for services rendered on various projects for Golden
Leaf. When petitioner completed a job, he would submit an
invoice to Ms. Morgan. Ms. Morgan would submit the invoice to
Mr. Yeh, president of Golden Leaf, and Mr. Yeh would write a
check to petitioner.
Petitioners have not provided evidence sufficient to refute
respondent's determination. The Court finds that petitioners
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have failed to meet their burden and sustains respondent's
determination with respect to the 2001 unreported income.
B. Accuracy-Related Penalty
Under section 7491(c), the Commissioner has the burden of
production in any court proceeding with respect to the liability
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 accuracy-related penalty. 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 determined that petitioners are liable for the
accuracy-related penalty under section 6662(a). Section 6662(a)
imposes a 20-percent penalty on the portion of an understatement
attributable to any one of various factors, including negligence
or disregard of rules or regulations and a substantial
understatement of income tax. See sec. 6662(b)(1) and (2).
"Negligence" includes any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code,
including any failure to keep adequate books and records or to
substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A "substantial understatement"
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includes an understatement of tax of $5,000 or more. See sec.
6662(d); sec. 1.6662-4(b), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer's
position and that the taxpayer acted in good faith with respect
to that portion. 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
his proper tax liability for the year. Id.
Petitioner failed to keep adequate books and records
reflecting his income. See sec. 6662(c); sec. 1.6662-3(b)(1),
Income Tax Regs. There is also an understatement of tax greater
than $5,000. The Court concludes that respondent has produced
sufficient evidence to show that the accuracy-related penalty
under section 6662 is appropriate. Nothing in the record
indicates petitioners acted with reasonable cause and in good
faith. The Court holds that the record supports respondent's
determination that petitioners are liable for the
accuracy-related penalty.
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Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be
entered for respondent.