T.C. Memo. 2005-253
UNITED STATES TAX COURT
ROBERT C. KOLBECK, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7043-04. Filed October 31, 2005.
Robert C. Kolbeck, pro se.
Michael R. Skutley and Edwin Herrera, for respondent.
MEMORANDUM OPINION
MARVEL, Judge: Respondent determined a deficiency in
petitioner’s Federal income tax of $32,009 and an accuracy-
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related penalty, pursuant to section 6662(a),1 of $6,402 for
2000.
The issues for decision2 are:
(1) Whether petitioner is entitled to the deductions he
claimed on Schedule C, Profit or Loss From Business, of his 2000
return; and
(2) whether petitioner is liable for the accuracy-related
penalty under section 6662(a).
Background
Petitioner resided in Anaheim, California, when his petition
in this case was filed.
During 2000, petitioner was a trucker who worked both as a
union employee and as an independent contractor for Consolidated
Freightways, a trucking company. Consolidated Freightways
permitted its employees to maintain records in an office at the
end of its loading dock, and petitioner kept his business records
there throughout 2000. Petitioner testified that he used these
records in the preparation of his 2000 Federal income tax return.
1
All section references are to the Internal Revenue Code in
effect for the taxable year in issue, and all Rule references are
to the Tax Court Rules of Practice and Procedure. All monetary
amounts are rounded to the nearest dollar.
2
Respondent also determined an increase in petitioner’s
self-employment tax. The adjustment is computational and turns
on our resolution of the Schedule C deduction issue.
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Petitioner reported the income and expenses from his trucking
activity on Schedule C, Profit or Loss From Business.
In 2002, Consolidated Freightways stopped using union labor
and barred union members, including petitioner, from access to
its premises. Petitioner was unable to retrieve the records that
he left on the premises.
Sometime before January 27, 2003, respondent began an
examination of petitioner’s 2000 return. On January 27, 2003,
petitioner and his representative, J.A. Mattatall,3 met with
3
Petitioner’s 2000 return was prepared by J.A. Mattatall, an
unenrolled agent, who, at the time of trial, had been enjoined by
the United States directly or indirectly from “acting as a return
preparer or assisting in or directing the preparation of federal
tax returns for any person or entity other than himself, or
further appearing as a representative on behalf of any person or
organization whose tax liabilities [are] under examination by the
IRS.” United States v. Mattatall, No. CV 03-07016 DDP (PJWx), at
6 (C.D. Cal., Aug. 17, 2004) (order granting plaintiff’s motion
for contempt and second amended injunction of which we take
judicial notice pursuant to Fed. R. Evid. 201). In a footnote to
the order, the U.S. District Court for the Central District of
California provided the following pertinent explanation:
In support of its position, the Government
attaches the transcript of an interview between the IRS
and a taxpayer who brought Mattatall along as his tax
preparer and representative. At the interview, * * * *
[Mattatall] insisted that the taxpayer could choose to
submit an affidavit that his tax return was correct,
and that regardless of the IRS’s request for documents
or other information, the affidavit is all that the
taxpayer need provide. The Government argues that
Mattatall’s position is frivolous, and the Court
agrees. Section 7602 of the Internal Revenue Code
authorizes the IRS to examine “any books, papers,
records, or other data” which “may be relevant” to an
(continued...)
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respondent’s revenue agent to discuss the examination. At the
meeting, petitioner produced an “Affidavit of Facts of Robert
Kolbeck” summarily declaring, among other things, that his
entries on his 2000 Schedule C were accurate and correct.
Because petitioner did not adequately substantiate his Schedule C
expenses, respondent issued a report proposing to disallow all of
the expenses.
Petitioner appealed respondent’s proposed disallowance of
his Schedule C expenses to respondent’s Appeals Office. An
Appeals conference was scheduled, but petitioner did not attend
the conference or make any effort to reschedule it. On February
5, 2004, respondent issued a notice of deficiency in which he
disallowed all of petitioner’s Schedule C deductions for lack of
substantiation as follows:
Expense Amount disallowed
Cost of sales $33,798
Advertising 3,909
Commissions and fees 15,012
Insurance 4,698
Rent/Lease - veh./mach./equip. 14,819
Rent/Lease - other 3,900
Taxes and licenses 2,914
Cell phone 1,904
Fuel 14,983
Other expenses 429
Repairs/Maintenance 12,012
Total 108,378
3
(...continued)
inquiry into “the correctness of any [tax] return.” 26
U.S.C. §7602(a)(1). * * * [Mattatall’s] assertion that
an affidavit is sufficient is unfounded.
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Petitioner timely petitioned this Court to redetermine
respondent’s adjustments and the section 6662(a) penalty. On a
date not specified in the record, petitioner requested a meeting
with respondent’s counsel to discuss the present case. Although
a meeting was scheduled, petitioner failed to attend.
Discussion
Schedule C Deductions
Burden of Proof
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving that those
determinations are erroneous. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933). However, the burden of
proof may shift to the Commissioner under section 7491(a) if the
taxpayer has produced credible evidence relating to the tax
liability at issue and has met his substantiation requirements,
maintained required records, and cooperated with the Secretary’s
reasonable requests for documents, witnesses, and meetings.
Petitioner argues that the summary affidavit of facts he
produced at the January 27, 2003, meeting is sufficient proof of
his Schedule C deductions. We construe his argument, at least in
part, to be that the affidavit is also sufficient under section
7491(a) to shift the burden of proof to respondent.
The affidavit that petitioner submitted to respondent and to
this Court is not sufficient to satisfy the requirements in
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section 7491(a) that petitioner introduce credible evidence,
substantiate his deductions, and cooperate with respondent. See
Higbee v. Commissioner, 116 T.C. 438, 445 (2001) (document
summarizing amounts allegedly owed and paid as business expenses
insufficient to shift burden); see also Davis v. Commissioner,
T.C. Memo. 2005-160 (taxpayer’s vague, conclusory, and general
testimony insufficient to shift burden under section 7491(a)).
The affidavit simply repeats the listing of deductions on the
Schedule C and affirms that they are correct. The affidavit does
not describe petitioner’s trucking activity or explain the types
of expenses generated by the activity. The affidavit does not
contain any credible evidence that the deductions in question
were actually paid or that the expenses were ordinary and
necessary expenses and were reasonable in amount as required by
section 162. The affidavit also contains no information to
establish that requirements of other applicable Code sections,
such as section 274, were satisfied.
We conclude that the requirements of section 7491(a) are not
satisfied by the affidavit on which petitioner relies.
Consequently, petitioner bears the burden of proving that he paid
deductible expenses during 2000 in connection with his trucking
activity.
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Substantiation of Schedule C Deductions
Under section 162(a), a taxpayer may deduct ordinary and
necessary business expenses incurred or paid during the taxable
year. However, deductions are a matter of legislative grace, and
the taxpayer must clearly demonstrate entitlement to the claimed
deductions. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992). A taxpayer must keep records sufficient to establish the
amount of his deductions. Sec. 6001; sec. 1.6001-1(a), Income
Tax Regs.
If the taxpayer claims a business expense deduction but
cannot fully substantiate it, we may estimate the allowable
amount. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930). However, there must be sufficient evidence in the record
to provide a basis for the estimate. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985).
For certain types of expenses, such as those for cellular
telephones, automobiles, and trucks, section 274(d) overrides the
rule of Cohan. See Sanford v. Commissioner, 50 T.C. 823, 827
(1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969). Under
section 274(d), a taxpayer must meet strict substantiation
requirements before any of the listed expenses will be allowable.
See also sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs. We
may not apply the Cohan rule to those expenses covered by section
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274(d). See Sanford v. Commissioner, supra at 827; sec. 1.274-
5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6,
1985).
Petitioner’s position throughout this case has been that he
has adequately substantiated his Schedule C expenses because his
business records were destroyed and because he has stated under
oath that the expenses he claimed on his Schedule C were correct.
That position is wrong, and we reject it. While we accept as
true the fact that petitioner kept some records and that the
records were lost or destroyed as a result of the actions of
petitioner’s former employer, petitioner still had an obligation
to substantiate his deductions. Petitioner made no effort to
reconstruct his records or to submit any documentation to assist
us in evaluating the credibility of his sworn statements.
Even if we assume for purposes of argument that petitioner
incurred ordinary and necessary business expenses in connection
with his trucking activity, petitioner has not provided us with a
reasonable evidentiary basis upon which to estimate those
expenses. Petitioner testified at trial in very general terms
regarding his advertising, fuel, broker’s commission, cell phone,
insurance, licenses and taxes, repairs, and rental expenses, but
the testimony did not provide sufficient detail to permit us to
estimate his expenses in these categories. Petitioner offered no
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testimony regarding his cost of sales other than his testimony
that he paid his drivers in cash.
Because we do not disturb respondent’s determination based
solely on petitioner’s self-serving testimony that the Schedule C
deductions claimed are correct and accurate, we sustain
respondent’s determination disallowing petitioner’s Schedule C
deductions. See Geiger v. Commissioner, T.C. Memo. 1969-159,
(citing Halle v. Commissioner, 7 T.C. 245, 247 (1946), affd. 175
F.2d 500 (2d Cir. 1949)), affd. 440 F.2d 688 (9th Cir. 1971); see
also Tokarski v. Commissioner, 87 T.C. 74, 77 (1986) (“we are not
required to accept the self-serving testimony of petitioner * * *
as gospel”).
Section 6662 Accuracy-Related Penalty
Section 6662 imposes an accuracy-related penalty upon any
underpayment of tax resulting from negligence or disregard of the
tax rules or regulations or from any substantial understatement
of income tax. Negligence includes the failure of a taxpayer to
keep proper records or to substantiate his reported expenses.
Sec. 1.6662-3(b)(1), Income Tax Regs. The penalty does not
apply, however, to any portion of the underpayment for which
there was reasonable cause and with respect to which the taxpayer
acted in good faith. Sec. 6664(c)(1); sec. 1.6664-4(b), Income
Tax Regs.
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Respondent contends that petitioner was negligent in
underpaying his income taxes and that he acted without reasonable
cause and good faith. Petitioner counters that, because his
records were missing, he had reasonable cause for and acted in
good faith regarding the alleged underpayment.
Under section 7491(c), the Commissioner has the burden of
production where a penalty is imposed. To satisfy this burden,
the Commissioner must produce sufficient evidence to show that
the relevant penalty is appropriate but does not need to produce
evidence relating to defenses such as reasonable cause or
substantial authority. Higbee v. Commissioner, 116 T.C. at 446.
Once the Commissioner satisfies his burden of production, the
taxpayer has the burden of producing evidence sufficient to show
the Commissioner’s determination is incorrect. Id. at 447.
In this case, respondent has satisfied his burden of
production due to petitioner’s failure to substantiate his
Schedule C deductions. Failure to substantiate deductions as
required by sections 274 and 6001 may be negligent conduct within
the meaning of section 6662. See, e.g., Schladweiler v.
Commissioner, T.C. Memo. 2000-351, affd. 28 Fed. Appx. 602 (8th
Cir. 2002). Petitioner is required, therefore, to prove that he
had reasonable cause for the underpayment and that he acted in
good faith with respect to the underpayment. Sec. 6664(c).
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The unexpected loss of records beyond the taxpayer’s control
does not preclude a taxpayer from substantiating deductions by
alternate means. See Brown v. Commissioner, T.C. Memo. 1996-43
(“when a taxpayer’s records have been lost or destroyed through
circumstances beyond his control, he is entitled to substantiate
the deductions by reconstructing his expenditures through other
credible evidence”); 6 Administration, Internal Revenue Manual
(CCH), sec. 20.1.1.3.1.2.5, at 45,014 (Aug. 20, 1998).4 The most
4
The Internal Revenue Manual contains the following
instructions for evaluating a taxpayer’s inability to obtain
records as it bears on the taxpayer’s claim that he had
reasonable cause for an underpayment:
(1) Explanations relating to the inability to
obtain the necessary records may constitute
reasonable cause in some instances, but may
not in others.
(2) Consider the facts and circumstances relevant
to each case and evaluate the request for
penalty relief.
(3) If the taxpayer was unable to obtain records
necessary to comply with a tax obligation,
the taxpayer may or may not be able to
establish reasonable cause. Reasonable cause
may be established if the taxpayer exercised
ordinary business care and prudence, but due
to circumstances beyond the taxpayer’s
control they were unable to comply.
(4) Information to consider when evaluating such
a request includes, but is not limited to an
explanation as to:
• Why the records were needed to
comply.
(continued...)
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important factor in determining reasonable cause and good faith
is the extent of the taxpayer’s effort to assess his proper tax
liability. Sec. 1.6664-4(b)(1), Income Tax Regs. We may give
weight to a taxpayer’s oral testimony regarding the fact and
amount of his claimed deductions. Patterson v. Commissioner,
T.C. Memo. 1972-82. However, we have declined to do so when the
taxpayer did not make a good faith effort to reconstruct his
expenses or provide any documentation or corroborative evidence
4
(...continued)
• Why the records were unavailable
and what steps were taken to secure
the records.
• When and how the taxpayer became aware
that they did not have the necessary
records.
• If other means were explored to
secure needed information.
• Why the taxpayer did not estimate
the information.
• If the taxpayer contacted the
Service for instructions on what to
do about missing information.
• If the taxpayer promptly complied
once the missing information was
received; and
• Supporting documentation such as
copies of letters written and
responses received in an effort to
get the needed information.
6 Administration, Internal Revenue Manual (CCH), sec.
20.1.1.3.1.2.5, at 45,014 (Aug. 20, 1998).
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to establish the credibility of his testimony. See Smith v.
Commissioner, T.C. Memo. 1998-33.
In this case, petitioner failed to take any steps to
recreate his records, and he intentionally avoided communications
with respondent. Although petitioner could have reconstructed at
least some of his expenses if he had made a good faith effort to
do so, petitioner did not make a meaningful attempt to contact
third parties who might have been able to verify the nature and
amount of his Schedule C expenses and/or provide copies of
invoices and receipts for such expenses. At trial, petitioner
did not produce any receipts, invoices, or other credible
evidence, including third-party testimony, to support his
Schedule C expense deductions. Additionally, although petitioner
attempted to estimate his expenses at trial at the prompting of
this Court,5 his recollection was too vague and imprecise for the
Court to make a reasonable estimate. See, e.g., Schaefer v.
5
For example, petitioner testified that he owned and
operated five trucks yet he took no steps to produce the records
necessary to verify that he owned five trucks during 2000 or his
basis in the vehicles. He did not obtain duplicate records from
his insurance company to substantiate his insurance payments. He
made no effort to reconstruct his fuel receipts by contacting the
companies from which he purchased fuel, and he did not call any
witnesses who might have verified that he purchased fuel during
2000. Although petitioner testified that he paid commissions to
brokers for referrals during 2000, he could not identify how much
he paid the brokers, and he did not call any of the brokers as
witnesses. He did not attempt to get duplicate copies of the
checks he used to pay the commissions from his bank. He did not
even produce a duplicate receipt for the union dues he testified
he paid.
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Commissioner, T.C. Memo. 1998-163, affd. without published
opinion 188 F.3d 514 (9th Cir. 1999).
Because the underpayment is attributable to negligence of
petitioner and he has not proven that he had reasonable cause for
the underpayment and acted in good faith regarding the
underpayment, we sustain respondent’s determination that
petitioner is liable for the accuracy-related penalty.
To reflect the foregoing,
Decision will be entered
for respondent.