T.C. Summary Opinion 2007-15
UNITED STATES TAX COURT
MARIA E. MAGALLON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17263-05S. Filed January 29, 2007.
Maria E. Magallon, pro se.
Jonathan A. Neumann, 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 year 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 for 2002 a deficiency in petitioner’s
Federal income tax of $5,291 and a section 6662(a) accuracy-
related penalty of $922.
Petitioner did not contest in the petition or at trial
whether she had unreported taxable interest in 2002. Therefore,
petitioner is deemed to have conceded the issue. Rule 34(b)(4);
see Funk v. Commissioner, 123 T.C. 213, 215 (2004). The issues
for decision are whether petitioner: (1) Had unreported Schedule
C gross receipts for 2002, (2) is entitled to Schedule C
deductions for taxes and licenses expenses, (3) is entitled to
claim a dependency exemption for her daughter, MA,1 and (4) is
liable for a section 6662(a) accuracy-related penalty.
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, petitioner resided in Stockton,
California. Petitioner is a native speaker of Spanish. One of
her daughters, Gisell Pompa, acted as her interpreter at trial.
During 2002, petitioner was self-employed, engaging in
retail sales in a flea market. Petitioner was also employed by
“M&R” in 2002.
In 2002, petitioner made a number of trips to a casino
called Jackson Rancheria where she gambled almost exclusively on
1
The Court will refer to the minor child by her initials.
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slot machines. Jackson Rancheria issued to petitioner for 2002,
eight Forms W-2G, Certain Gambling Winnings, showing that
petitioner had total gross winnings of $35,355.
Petitioner filed for 2002 Form 1040, U.S. Individual Income
Tax Return, reporting wages of $3,003. Petitioner also reported
gambling winnings of $35,355 against which she claimed Schedule A
gambling loss deductions of $35,233. On Schedule C, Profit or
Loss From Business, petitioner reported income of $6,992 derived
from gross receipts of $20,305 from her flea market sales.
Petitioner claimed Schedule C deductions of $1,460 for taxes and
licenses expenses, a dependency exemption deduction for MA, and a
child tax credit of $34.2
Petitioner’s return was examined by Tax Compliance Officer
George Martin (TCO Martin). During the examination, petitioner
provided to TCO Martin: (1) A Form 4822, Statement of Annual
Estimated Personal and Family Expenses, indicating that her
personal expenses totaled $10,826, (2) an annual activity report
from Jackson Rancheria substantiating that petitioner had net
gambling losses of $28,183.15 in 2002, (3) a calendar showing the
daily amount of income from her flea market sales, and (4) other
miscellaneous documentation.
2
The correct computation of the child tax credit will be
determined by the Court’s resolution of the dependency exemption
deduction issue.
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TCO Martin determined, based on his review of the
documentation presented, that petitioner did not maintain
adequate records to account for gross receipts from her flea
market sales. TCO Martin therefore used a “cash T analysis”, an
indirect method to reconstruct income. He compared petitioner’s
known sources of income to her personal expenditures to determine
whether more was spent than was reported. The cash T analysis
reflected that petitioner expended $17,871 more than her known
sources of income for 2002. TCO Martin concluded that the excess
expenditures suggested that petitioner had unreported gross
receipts of at least $17,871 from her flea market sales.3
Discussion
Generally, the Commissioner’s determinations 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). Petitioner
did not present evidence or argument that she satisfied the
requirements of section 7491(a). Therefore, the burden of proof
does not shift to respondent.
3
Because of respondent’s mathematical error, the statutory
notice of deficiency incorrectly indicated that the adjustment to
petitioner’s Schedule C gross receipts was $17,368. The correct
adjustment would have been $17,871.
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I. Unreported Schedule C Gross Receipts
Section 6001 requires a taxpayer to maintain sufficient
records to allow for the determination of the taxpayer’s correct
tax liability. Petzoldt v. Commissioner, 92 T.C. 661, 686
(1989). If a taxpayer fails to maintain or does not produce
adequate books and records, the Commissioner is authorized to
reconstruct the taxpayer’s income. See sec. 446; Petzoldt v.
Commissioner, supra at 686-687. Indirect methods may be used for
this purpose. Holland v. United States, 348 U.S. 121 (1954).
The Commissioner’s reconstruction need only be reasonable in
light of all the surrounding facts and circumstances. Petzoldt
v. Commissioner, supra at 687; Giddio v. Commissioner, 54 T.C.
1530, 1533 (1970).
The evidence shows that petitioner failed to provide
adequate records to account for the gross receipts from her flea
market sales. Therefore, it was reasonable for TCO Martin to use
the cash T analysis, an indirect method, to reconstruct
petitioner’s income for 2002.
The cash T analysis is performed by setting up a table with
income items (debits) on the left side of the “T” account and
expenses (credits) on the right side of the “T” account. See,
e.g., Owens v. Commissioner, T.C. Memo. 2001-143. Its purpose is
“to measure a taxpayer’s reported income against personal
expenditures to determine whether more was spent than was
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reported.” Rifkin v. Commissioner, T.C. Memo. 1998-180, affd.
without published opinion 225 F.3d 663 (9th Cir. 2000). The
implication is that the excess of expenditures over reported
income represents unreported income. Id.
On the income side of the “T” account, TCO Martin determined
that petitioner had total cash sources of $34,473, consisting of:
(1) Reported wages of $3,000, (2) reported Schedule C gross
receipts of $20,305, (3) gifts from her son of $6,000, and (4)
Social Security benefits of $5,168 for MA. On the expenses side
of the “T” account, TCO Martin determined that petitioner had
total cash expenditures of $52,344, consisting of: (1)
State/Federal withholdings of $230, (2) tax payments for prior
years of $700, (3) Schedule A expenses of $427, (4) Schedule C
expenses of $11,978, (5) personal living expenses of $10,826, and
(6) net gambling losses of $28,183 in 2002. Therefore,
petitioner’s expenditures exceeded her known income by $17,871.
Since petitioner failed to show that she had other sources of
income, TCO Martin concluded that the excess expenditure of
$17,871 represented unreported gross receipts from her flea
market sales.
At trial, the focus of the inquiry with regard to the cash T
analysis was on petitioner’s gambling losses. According to the
annual activity report from Jackson Rancheria, which is
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reproduced below, petitioner had net gambling losses of
$28,183.15 in 2002.
Gaming Area Dollars In Dollars Out Win/Loss
Pit $75.00 -0- ($75.00)
Slot 686,611.23 $658,503.08 (28,108.15)
Totals 686,686.23 658,503.08 (28,183.15)
Petitioner agrees that the report is accurate to the extent
that it shows that she had net gambling losses of $28,183.15 in
2002. Petitioner, however, argues that the report was
“definitely incorrect” in showing that she gambled $686,686.23 in
2002. For tax purposes, it is irrelevant whether petitioner
actually gambled $686,686.23 or some other amount in 2002 in
order to arrive at net gambling losses of $28,183.15.
TCO Martin included petitioner’s excess gambling losses on
the expenses side of the “T” account because petitioner failed to
account for the income source that she used to pay for those
losses. Unless petitioner can account for how she had paid for
her excess gambling losses in 2002, such losses were properly
included in the expenses side of the “T” account.
Petitioner claims that she used her excess winnings from
2001 to pay for her excess gambling losses in 2002. In support,
petitioner presented a Form 1040 for 2001 where she reported
winnings of $60,546 and claimed a gambling loss deduction of
$43,916, resulting in net winnings of $16,530.
TCO Martin testified that he had reviewed bank statements
from all of petitioner’s known accounts. The statements,
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however, did not show that there was a large balance forward from
2001 that could be used to pay for expenses in 2002. Petitioner
claims that there was no large balance forward in her bank
account because shortly after she deposited the checks from
Jackson Rancheria, she withdrew the money. As part of the
initial audit questions, TCO Martin had asked whether petitioner
had cash on hand outside of her bank accounts. Petitioner’s
representative at that time gave no indication that petitioner
had a “cash hoard”.
It is well established that the Court is not required to
accept petitioner’s self-serving testimony in the absence of
corroborating evidence. See Niedringhaus v. Commissioner, 99
T.C. 202, 219 (1992); Tokarski v. Commissioner, 87 T.C. 74, 77
(1986). Moreover, petitioner has the burden of proof. See Rule
142(a). Petitioner’s uncorroborated testimony is insufficient to
convince the Court she used her excess 2001 winnings rather than
unreported gross receipts from her flea market sales to pay for
her gambling losses in 2002.
Petitioner did not raise any issues with respect to the
remaining income and expense items that TCO Martin used in his
cash T analysis.
Accordingly, the Court accepts respondent’s conclusion from
his cash T analysis that petitioner had excess expenditures of
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$17,871 that represent unreported gross receipts from her flea
market sales.
II. Taxes and Licenses Expenses Deductions
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).
Under section 162, a taxpayer may deduct all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business, if the taxpayer maintains
sufficient records to substantiate the expenses. Sec. 162(a);
see sec. 6001; Deputy v. du Pont, 308 U.S. 488, 495 (1940).
Taxpayers bear the burden of substantiating the amount and
purpose of any claimed deduction. See Hradesky v. Commissioner,
65 T.C. 87 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
Petitioner claimed Schedule C deductions of $1,460 for taxes
and licenses expenses. Petitioner failed to provide any
documentation to substantiate that she paid $1,460 for taxes and
licenses in 2002. Therefore, respondent’s determination
disallowing the claimed deductions is sustained.
III. Dependency Exemption
Petitioner claimed a dependency exemption deduction for her
daughter, MA, for 2002. Section 151(c)(1) allows a taxpayer to
claim as a deduction an exemption for each qualifying dependent.
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A child of the taxpayer is considered a “dependent” so long as
the child has not attained the age of 19 at the close of the
calendar year in which the taxable year of the taxpayer begins,
and more than half the child’s support for the taxable year was
received from the taxpayer. Secs. 151(c)(1)(B), 152(a)(1). The
age limit is increased to 24 if the child was a student as
defined by section 151(c)(4). Sec. 151(c)(1)(B).
In 2002, MA received Social Security benefits of $5,168 for
her support. In order for petitioner to meet the support
requirement under section 152(a), she must show that she paid
more than $5,168 for MA’s support in 2002. Petitioner failed to
provide any documentation to support her contention that she
provided for more than half of MA’s support in 2002.
Accordingly, respondent’s determination disallowing the
exemption deduction is sustained.
IV. Accuracy-Related Penalty
Respondent determined that petitioner is liable for an
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
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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”
includes an understatement of tax that exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
See sec. 6662(d); sec. 1.6662-4(b), Income Tax Regs. The
Commissioner bears the burden of production. Sec. 7491(c).
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
her proper tax liability for the year. Id.
Petitioner had a substantial understatement of tax for 2002
because the understatement amount exceeded 10 percent of the tax
required to be shown on the return. 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 petitioner acted with reasonable
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cause and in good faith. Respondent’s determination of an
accuracy-related penalty under section 6662(a) is sustained.
Reviewed and adopted as the report of the Small Tax Case
Division.
To reflect the foregoing,
Decision will be entered
for respondent.