T.C. Summary Opinion 2006-88
UNITED STATES TAX COURT
LAMPANH AND SYKHANE PCHAN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7640-05S. Filed May 25, 2006.
Lampanh and Sykhane Pchan, pro sese.
Thomas L. Fenner, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463. Unless otherwise indicated, all
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. 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 the following deficiencies in
petitioners’ Federal income taxes and penalties for 2002 and
2003:
Penalty
Year Deficiency Sec. 6662
2002 $6,423 $1,284.60
2003 6,702 1,340.40
The issues for decision are whether petitioners: (1) Are
entitled to deductions they claimed on Schedules C, Profit or
Loss From Business, for 2002 and 2003, in excess of those allowed
by respondent, and (2) are liable for accuracy-related penalties
under section 6662(a).
Background
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, petitioners resided in Houston,
Texas.
Lampanh Pchan (petitioner) was employed as a machinist at
all relevant times. For 2002 and 2003, petitioners jointly filed
Forms 1040, U.S. Individual Income Tax Return, which were
prepared by a tax return preparer. In addition to his regular
employment, petitioner operated his own business. On the 2002
Schedule C for that business, petitioner reported both gross
receipts and gross income of $14,175, car and truck expenses of
$17,739, and other expenses of $10,101. On the 2003 Schedule C,
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petitioner reported both gross receipts and gross income of
$26,656, car and truck expenses of $17,181, and other expenses of
$7,085.
During the examination of the tax returns, petitioner did
not present any documentation for the car and truck expenses.
Respondent’s examining agent, however, accepted petitioner’s
representation that petitioner drove from his place of employment
to his Schedule C activity at the rate of 4 miles per day, 6 days
a week. Petitioner was accordingly allowed deductions for car
and truck expenses of $455 for 2002, and $449 for 2003, based on
the applicable standard mileage rates for those years.
With respect to other expenses deducted on the Schedules C,
the only evidence presented during examination was an earnings
statement for the period ending December 15, 2002. The earnings
statement indicated that “receivables” of $1,754.10 and the cost
of tools of $118.21 were withheld from petitioner’s paycheck.
The examining agent accepted petitioner’s explanation that the
withheld amounts represented money that petitioner borrowed from
his employer to pay for a computer and tools. Petitioner was
allowed deductions for other expenses of $1,872 for each of 2002
and 2003.
Respondent issued to petitioner statutory notices of
deficiency for 2002 and 2003 determining that petitioner failed
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to substantiate his claimed deductions, in excess of those
allowed by respondent, and that petitioner was liable for section
6662(a) accuracy-related penalties due to substantial
understatements of income tax.
Discussion
The Commissioner’s determinations are presumed correct, and
generally taxpayers bear the burden of proving otherwise.1 Rule
142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Tax deductions are a matter of legislative grace with a
taxpayer bearing the burden of proving entitlement to the
deductions claimed. Rule 142(a)(1); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992).
Section 162 allows a deduction for “all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business”. Taxpayers bear the burden of
substantiating the amount and purpose of any claimed deduction.
See Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), affd. per
curiam 540 F.2d 821 (5th Cir. 1976). A taxpayer is required to
maintain sufficient records to establish that he is entitled to
the claimed deductions. Sec. 6001; Higbee v. Commissioner, 116
1
Petitioner has not raised the issue of sec. 7491(a), which
shifts the burden of proof to the Commissioner in certain
situations. This Court concludes that sec. 7491 does not apply
because petitioner has not produced any evidence that establishes
the preconditions for its application.
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T.C. 438, 440 (2001); sec. 1.6001-1(a), Income Tax Regs; see also
secs. 274(d), 280F(d)(4).
At trial, petitioner failed to offer any evidence to
substantiate the car and truck expense deductions claimed on the
Schedules C.
As for the substantiation of other expenses on the Schedules
C, petitioner relied on an earnings statement for the period
ending December 15, 2002, which respondent had already examined
and accounted for in the statutory notice of deficiency.
Petitioner testified that he did not maintain any records or
receipts for his other expenses. Although tools were a large
component of petitioner’s other expenses, petitioner claimed that
he lacked documentation, because the tools were paid for in cash
and purchased from friends and coworkers.
Petitioner, instead, presented copies of invoices, receipts,
and sales contracts from 2005, which he contends were the same
type of expenses that he paid in 2002 and 2003. These documents,
however, are not relevant, because they fail to substantiate the
amount of other expenses that petitioner may have paid in 2002
and 2003.
The Court sustains respondent’s determination that
petitioner is not entitled to Schedule C deductions for car and
truck expenses, and other expenses in excess of the amounts
allowed by respondent.
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Accuracy-Related Penalty
Section 7491(c) imposes the burden of production in any
court proceeding on the Commissioner with respect to the
liability of any individual for penalties and additions to tax.
Higbee v. Commissioner, supra at 446; Trowbridge v. Commissioner,
T.C. Memo. 2003-164, affd. 378 F.3d 432 (5th Cir. 2004). In
order to meet the burden of production under section 7941(c), the
Commissioner must come forward with sufficient evidence
indicating that it is appropriate to impose the relevant penalty.
Higbee v. Commissioner, supra.
Pursuant to section 6662(a), a taxpayer may be liable for a
penalty of 20 percent of the portion of an underpayment of tax
(1) due to negligence or disregard of rules or regulations, or
(2) attributable to a substantial understatement of income tax.
See sec. 6662(b)(1) and (2); see also DeCleene v. Commissioner,
115 T.C. 457, 476 (2000). A substantial understatement of tax
exists if the amount of the understatement of tax exceeds the
greater of 10 percent of the tax required to be shown on the tax
return, or $5,000. See sec. 6662(d)(1)(A).
Respondent has met his burden of production, because he has
shown that petitioner has mathematically understated his income
tax liability within the meaning of section 6662(d)(1)(A).
Once the Commissioner meets his burden of production, the
taxpayer must come forward with evidence sufficient to persuade
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the Court that the Commissioner’s determination is incorrect.
Higbee v. Commissioner, supra at 446-447.
The accuracy-related penalty is not imposed with respect to
any portion of the understatement as to which the taxpayer acted
with reasonable cause and in good faith. See sec. 6664(c)(1).
The decision as to whether the taxpayer acted with reasonable
cause and in good faith depends upon all the pertinent facts and
circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs.
Generally, the most important factor is the extent of the
taxpayer’s efforts to evaluate his proper tax liability. Id.
The taxpayer, generally, must bear the consequences of any
negligent errors committed by his or her agent. Pritchett v.
Commissioner, 63 T.C. 149, 173-175 (1974); Ellwest Stereo
Theatres v. Commissioner, T.C. Memo. 1995-610. For a taxpayer to
rely reasonably upon advice so as to negate a section 6662(a)
accuracy-related penalty determined by the Commissioner, the
taxpayer must prove by a preponderance of the evidence that the
taxpayer meets all of the following requirements: (1) The
adviser was a competent professional who had sufficient expertise
to justify reliance, (2) the taxpayer provided necessary and
accurate information to the adviser, and (3) the taxpayer
actually relied in good faith on the adviser’s judgment. See
Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43, 99
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(2000), affd. 299 F.3d 221 (3d Cir. 2002); Ellwest Stereo
Theatres v. Commissioner, supra.
Petitioner contends that he relied on the tax return
preparer to prepare his tax return and to ensure tax compliance
since he has no knowledge of tax laws. Petitioner has not
presented any evidence that he had provided necessary and
accurate information to the preparer or that the preparer
possessed sufficient relevant information or expertise to warrant
petitioners’ reliance on the preparer’s judgment.
Respondent’s determination that petitioners are liable for
accuracy-related penalties under section 6662(a) is accordingly
sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.