T.C. Memo. 2005-213
UNITED STATES TAX COURT
RAMIRO AND MARIA MARTINEZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5130-04. Filed September 12, 2005.
Ramiro and Maria Martinez, pro sese.
Irene Carroll, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MARVEL, Judge: Respondent determined a deficiency of $2,305
in petitioners’ Federal income tax for 2001.1 The issue for
1
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.
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decision is whether petitioners received unreported income for
2001.2
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts is incorporated herein by this
reference. Petitioners resided in Los Angeles, California, when
their petition in this case was filed. Petitioners have limited
facility in English, and their testimony was given through an
interpreter.
A. Petitioners’ 2001 Tax Return
Petitioners timely filed a joint Federal income tax return
for 2001. Petitioners reported $14,840 of business income on the
return and listed their respective occupations as self–employed.
Each petitioner also filed a separate Schedule C-EZ, Net Profit
From Business (Sole Proprietorship), with the return. Petitioner
Ramiro Martinez (Mr. Martinez) reported on his Schedule C-EZ that
his principal business or profession was construction and that he
received gross receipts and a net profit of $11,050. Petitioner
Maria Martinez (Mrs. Martinez) reported on her Schedule C-EZ that
2
Respondent increased petitioners’ income by the amount of
unreported income he alleges they received, and as a result he
also adjusted petitioners’ self-employment tax, self-employment
tax deduction, and earned income credit. The parties agree that
the resulting adjustments are computational, and they do not
dispute that the adjustments turn on our resolution of the
unreported income issue.
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her principal business or profession was housekeeping and that
she received gross receipts and a net profit of $3,790.
B. The Notice of Deficiency
On January 26, 2004, respondent issued a Notice of
Deficiency in which he adjusted petitioners’ business income from
$14,840 to $20,710. Respondent adjusted petitioners’ business
income based on Forms 1099 submitted to the Internal Revenue
Service by third-party payers. The Forms 1099 provided as
follows:
Payer of income Payee of income Amount paid
Life Bank Ramiro Martinez $2,000
Dr. Yury Geylikman Ramiro Martinez 3,000
Alpa Construction, Inc. Ramiro Martinez 5,020
Svetella Design, Inc. Ramiro Martinez 3,750
Fresh Paint Art
Advisor, Inc. Maria Martinez 3,790
County of Los Angeles
Auditor Controller Maria Martinez 3,150
Total Amount
Reported 20,710
As a result of his adjustment to petitioners’ business income,
respondent also adjusted petitioners’ self-employment tax, self-
employment tax deduction, and earned income credit. Petitioners
acknowledge that they received the amounts reported on the Forms
1099.
C. Mr. Martinez’s Self-Employment Income
Mr. Martinez was paid for his construction work in
installments by check. Mr. Martinez testified that he would cash
the checks he received and divide the proceeds with other workers
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who were unable to cash checks.3 Mr. Martinez testified that his
payment to each person depended on the type of work the
individual did and the length of time that the individual worked.
Mr. Martinez kept no records, however, of how much time the other
workers worked or of his transferring income to any third
parties. Mr. Martinez also kept no records of how much income he
earned or retained for himself.
1. Life Bank
Mr. Martinez testified he split the $2,000 he received from
Life Bank with two other workers, Gustav Ortiz (Mr. Ortiz) and a
man Mr. Martinez could only identify as “another guy who is not
here. He went to Mexico.” Mr. Martinez did not know how much of
the $2,000 was for his own work or how much he kept. Mr. Ortiz,
who has a Social Security number, testified that he worked only
for Mr. Martinez and that Mr. Martinez gave him approximately
$1,000 cash for the job, but Mr. Ortiz did not report the money
on a tax return or deposit the money in a bank.
2. Dr. Yury Geylikman
Mr. Martinez testified he split the $3,000 he received from
Dr. Yury Geylikman (Geylikman) with at least two or three other
3
The record does not make clear the relationship between Mr.
Martinez and the other workers. Mr. Martinez gave conflicting
testimony as to whether the other workers worked for him or
merely with him.
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workers, but he could identify only one worker, Mr. Luis Garcia.
Mr. Martinez estimated that he kept $1,400 of the $3,000.
3. Alpa Construction and Svetella Design, Inc.
Mr. Martinez testified he split both the $5,020 he received
from Alpa Construction (Alpa) and the $3,750 he received from
Svetella Design, Inc. (Svetella), with three or four workers whom
he could not identify. Petitioner did not know how much of the
Alpa income he kept, but he estimated that he kept $1,600 of the
Svetella income.
4. Tax Return Preparation
Petitioners’ 2001 joint return was prepared by Gonzales
Services. Mr. Martinez informed Gonzales Services that he
divided the income he received with other workers. The amount of
income Mr. Martinez reported on his Schedule C-EZ was based on
his own estimates of how much he had earned from his business and
how much he had paid to others. Mr. Martinez’s estimates were
not based on any records.
D. Mrs. Martinez’s Self-Employment Income
In 2001, Fresh Paint Art Advisor, Inc., paid Mrs. Martinez
$3,790, and that was the only income reported on her Schedule C-
EZ. Also during 2001, Los Angeles County (County) paid Mrs.
Martinez $3,150 for providing care to her grandchildren. Mrs.
Martinez used the money from the County for her grandchildren,
but she kept no records of her expenditures.
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E. The Present Litigation
On March 22, 2004, petitioners timely filed a petition with
this Court seeking review of the notice of deficiency and
alleging that they had expense documentation that would reduce
the amount of the deficiency. On April 27, 2004, respondent’s
answer was filed. The trial in this case was set for the Court’s
January 24, 2005, Los Angeles, California, trial session, and
both parties appeared and were heard.
OPINION
Section 61(a) defines gross income for purposes of
calculating taxable income as “all income from whatever source
derived”. Respondent has determined that petitioners received
unreported income from Life Bank, Alpa, Geylikman, Svetella, and
the Los Angeles County Auditor Controller.
The Commissioner’s deficiency determination is normally
entitled to a presumption of correctness, Rapp v. Commissioner,
774 F.2d 932, 935 (9th Cir. 1985), and the burden of proving the
determination incorrect generally rests with the taxpayer, Rule
142(a). However, when a case involves unreported income and that
case is appealable to the Court of Appeals for the Ninth Circuit,
barring a stipulation to the contrary, the Commissioner’s
determination of unreported income is entitled to the presumption
of correctness only if the determination is supported by some
evidence linking the taxpayer to an income-producing activity.
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Palmer v. United States, 116 F.3d 1309, 1313 (9th Cir. 1997).
Once the Commissioner produces evidence linking the taxpayer to
an income-producing activity, the burden shifts to the taxpayer
to rebut the presumption by establishing that the Commissioner’s
determination is arbitrary or erroneous. Rapp v. Commissioner,
supra at 935; Adamson v. Commissioner, 745 F.2d 541, 547 (9th
Cir. 1984), affg. T.C. Memo. 1982-371; see also United States v.
Janis, 428 U.S. 433, 441-442 (1976).
This case is appealable, barring a stipulation to the
contrary, to the Court of Appeals for the Ninth Circuit.
Consequently, we are bound to apply the law of the circuit as
summarized above. Golsen v. Commissioner, 54 T.C. 742 (1970),
affd. 445 F.2d 985 (10th Cir. 1971).
The evidence on which respondent relies to satisfy his
initial burden of production regarding his determination that
petitioners received unreported income is drawn from Forms 1099
that respondent received from third-party payers. Because
petitioners have stipulated that they received the income
reported on the Forms 1099, respondent has met his burden of
production. See Parker v. Commissioner, 117 F.3d 785, 787 (5th
Cir. 1997) (when the taxpayer does not dispute the receipt of
unreported income, the Commissioner “has no duty to investigate a
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third-party payment report”). Petitioners, therefore, have the
burden of showing that respondent’s determination is erroneous.4
Petitioners contend that although they received the funds
reported on the Forms 1099, “some or all of these funds were
given to them to pay to third parties and * * * therefore * * *
[they do] not believe the amounts * * * [are] their income.” We
reject petitioners’ contention.
It is well established that a taxpayer need not treat as
income payments that he did not receive under a claim of right,
that were not his to keep, and that he was required to transmit
to someone else as a mere conduit. Diamond v. Commissioner, 56
T.C. 530, 541 (1971), affd. 492 F.2d 286 (7th Cir. 1974); see
also Ancira v. Commissioner, 119 T.C. 135, 138 (2002); Vetrano v.
Commissioner, T.C. Memo. 2000-128. However, if a taxpayer does
receive a payment under a claim of right and without restriction
or limitation as to the disposition of the payment, then the
taxpayer has received taxable income even if it still may be
claimed that he is not entitled to retain the payment and even
though he may be liable to restore its equivalent. See N. Am.
Oil Consol. v. Burnet, 286 U.S. 417, 424 (1932); Vetrano v.
Commissioner, supra. The record does not reflect that
4
In this case, petitioners do not contend that sec. 7491(a),
which shifts the burden of proof to the Commissioner if its
requirements are met, applies, and petitioners have not produced
evidence to show they meet the requirements of sec. 7491(a). The
burden of proof, therefore, remains on petitioners.
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petitioners received the unreported income as mere conduits
without a claim of right.
A. Mr. Martinez
Mr. Martinez testified that he split the money he received
from the third-party payers with other workers because the
workers “had no formal ID or any papers to cash their money, and
so * * * [I] took the check * * * [myself] and * * * [I] cashed
it for them.” Mr. Martinez provided inconsistent testimony,
however, as to whether the workers worked for him or with him,
the number of workers he paid and the amounts he paid them, and
the amounts he kept for himself. Mr. Martinez also presented no
documentation supporting his alleged division of the money he
received or the amount he reported on his Schedule C-EZ, and he
provided no documentary evidence that he was obligated to divide
the money with other workers.
One of the men who worked with Mr. Martinez during 2001,
Gustav Ortiz (Mr. Ortiz), testified that Mr. Martinez gave him
“about a thousand for the Life job”. Although Mr. Ortiz did not
report the income on a Federal income tax return and did not have
any documentation to support his testimony, we shall accept his
testimony made under oath, and we shall allow Mr. Martinez a
deduction of $1,000 for wages paid to Mr. Ortiz.
Because of Mr. Martinez’s vague and inconsistent testimony
and the lack of credible evidence in the record, we conclude that
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petitioners failed to carry their burden of proof, that Mr.
Martinez received the amounts reported on the Forms 1099 by Life
Bank, Geylikman, Alpa, and Svetella under a claim of right, and
that Mr. Martinez must include those amounts in his income. See
Liddy v. Commissioner, T.C. Memo. 1985-107 (taxpayer did not meet
his burden of proof where he inadequately explained what he did
with the funds he received), affd. 808 F.2d 312 (4th Cir. 1986).
However, we shall allow Mr. Martinez a deduction of $1,000 for
the amount that Mr. Ortiz testified under oath he received from
Mr. Martinez.
B. Mrs. Martinez
Mrs. Martinez testified that she spent the $3,150 she
received from the County on her grandchildren because she
believed the money belonged to them and that the County only paid
it to her “because she was taking care of the kids.” Mrs.
Martinez failed to provide any credible evidence, however, to
support her claim that the money belonged to her grandchildren.
For example, Mrs. Martinez presented no evidence that her use of
the County funds was restricted, that she spent the money on her
grandchildren other than by choice, or that the funds were
excludable from her income by operation of law.5 Consequently,
5
For example, sec. 131(a) provides that gross income shall
not include amounts received by a foster care provider as
qualified foster care payments. See Cato v. Commissioner, 99
T.C. 633 (1992). Petitioners do not contend that Mrs. Martinez
(continued...)
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we conclude that petitioners have failed to carry their burden of
proving that the County payments of $3,150 were not income to
Mrs. Martinez.
C. Conclusion
We have carefully considered all remaining arguments made by
the parties for results contrary to those expressed herein and,
to the extent not discussed above, conclude that those arguments
are without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.
5
(...continued)
was a foster care provider or that the payments in question were
qualified foster care payments. The record establishes only that
Mrs. Martinez received the payments for taking care of her
grandchildren.