T.C. Memo. 2007-87
UNITED STATES TAX COURT
DUANE D. & INA R. GAY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14273-05. Filed April 12, 2007.
Duane D. & Ina R. Gay, pro sese.
Albert B. Kerkhove, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
CHIECHI, Judge: Respondent determined the following defi-
ciencies in, and accuracy-related penalties under section
6662(a)1 on, petitioners’ Federal income tax (tax):
1
All section references are to the Internal Revenue Code
(Code) in effect for the years at issue. All Rule references are
to the Tax Court Rules of Practice and Procedure.
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Accuracy-Related Penalty
Year Deficiency Under Sec. 6662(a)
2000 $8,223 $1,644.60
2001 3,657 731.40
The issues remaining for decision are:
(1) Should we sustain respondent’s determination for each of
the years at issue that the expenditures that petitioners made
during each such year on certain properties must be capitalized
and amortized? We hold that we should.
(2) Should we sustain respondent’s determination that
petitioners are liable for each of the years at issue for the
accuracy-related penalty under section 6662(a)? We hold that we
should.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time petitioners filed the petition in this case,
they resided in Columbus, Nebraska (Columbus).
At times not disclosed by the record during 2000 and 2001,
petitioners made expenditures for certain work that they had done
on two rental properties that they owned on 40th Street and 8th
Street, respectively, in Columbus (40th Street property and 8th
Street property).
Petitioners timely filed Form 1040, U.S. Individual Income
Tax Return, for each of their taxable years 2000 (2000 return)
and 2001 (2001 return).
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In Schedule E, Supplemental Income and Loss (Schedule E),
included as part of petitioners’ 2000 return (2000 Schedule E),
petitioners showed total rents received of $16,490 and claimed
total expenses of $61,654 and total losses of $45,164. An
attachment to that schedule showed, inter alia, the following
items which, when totaled and rounded to the nearest dollar,
equal the total expenses of $61,654 claimed in the 2000 Schedule
E:
$39,545.86 expenses
$ 4,427.94 Taxes
$17,680.50 Credit card Visa
$61,654.30
Schedule E included as part of petitioners’ 2001 return
(2001 Schedule E) contained no entries. However, an attachment
to that schedule (attachment to the 2001 Schedule E) showed,
inter alia, total rental income of $14,000 and total expenses of
$89,542.
Another attachment to the 2001 Schedule E (second attachment
to 2001 Schedule E) showed the following items which, when
totaled and rounded to the nearest dollar, equal the total
expenses of $89,542 shown in the attachment to the 2001 Schedule
E:
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Mark Wagner - lease $634.00
Brodey Pharmacy $8,088.57
Labor $20,180.00
Rental Utilities $485.00
Tooley Drug $1,940.42
Oakwood Nursing Home $18,598.89
Episcopal Church $1,200.00
Building Supplies $28,624.00
Aunt Lorraine’s Health Ins. $1,092.00
Taxes $8,699.29
$89,542.17
Respondent issued to petitioners a notice of deficiency
(notice) for their taxable years 2000 and 2001. In that notice,
respondent determined, inter alia, that $26,971.69 of the total
expenses of $61,654 that petitioners claimed in the 2000 Schedule
E and $39,083 of the total expenses of $89,542 that petitioners
claimed in the attachment to the 2001 Schedule E and the second
attachment to the 2001 Schedule E must be capitalized and amor-
tized. In the notice, respondent also determined that petition-
ers are liable for each of their taxable years 2000 and 2001 for
the accuracy-related penalty under section 6662(a).
OPINION
Petitioners bear the burden of proving that the determina-
tions in the notice are erroneous.2 Rule 142(a); Welch v.
2
Petitioners do not claim that the burden of proof shifts to
(continued...)
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Helvering, 290 U.S. 111, 115 (1933). Moreover, deductions are a
matter of legislative grace, and petitioners bear the burden of
proving entitlement to any deduction claimed. INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992). Petitioners were required
to maintain records sufficient to establish the amount of any
deduction claimed. Sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
Claimed Property Expenditures
It is petitioners’ position3 that they are entitled to
deduct for each of the years at issue the entire amount of the
expenditures that they made during each such year for certain
work done on the 40th Street property and the 8th Street prop-
erty. In support of that position, Ms. Gay testified:
we have two properties that were totally destroyed by
renters. My husband went ahead, had to hire someone to
do the repair work because he can’t do it anymore.
He came up with the totals of what it costs, the
labor and the material, et cetera, and this was the
numbers that he came up with and put it on his income
tax.
Later, we are audited and they say, No, we have to
-- I think the term is disallowed. There’s a certain
amount that the government wants, I guess, you have to
amortize over a period of so many years.
2
(...continued)
respondent under sec. 7491(a). In any event, petitioners have
failed to establish that they satisfy the requirements of sec.
7491(a)(2). On the record before us, we find that the burden of
proof does not shift to respondent under sec. 7491(a).
3
Although the Court ordered petitioners to file a posttrial
brief, they failed to do so.
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If he did that, he would be over 100-and-some
years, which we know he’s 75 now. He would never
recoup that money back. He can’t recoup the money back
at all unless he can, you know -- you couldn’t charge
enough rent to recoup what the damage was in our life-
time is what I’m saying.
According to petitioners, they would not have made the expendi-
tures at issue on the 40th Street property and the 8th Street
property during each of the years 2000 and 2001 if they had not
believed that the entire amount of such expenditures is deduct-
ible for each of those years. Instead, they would have abandoned
those properties.
Section 263(a) provides that “No deduction shall be allowed
for--(1) Any amount paid out for new buildings or for permanent
improvements or betterments made to increase the value of any
property or estate.” Section 263(a) denies a deduction for an
expenditure for the year the expenditure is incurred when the
amount paid or incurred: (1) Creates or enhances a separate and
distinct asset, see Commissioner v. Lincoln Sav. & Loan Associa-
tion, 403 U.S. 345, 354 (1971); Wells Fargo & Co. & Subs. v.
Commissioner, 224 F.3d 874, 882 (8th Cir. 2000), affg. in part
and revg. in part 112 T.C. 89 (1999); (2) produces a significant
benefit beyond the current taxable year, see INDOPCO, Inc. v.
Commissioner, supra at 87-89; Wells Fargo & Co. & Subs. v. Com-
missioner, supra at 887; or (3) is in connection with the acqui-
sition of a capital asset, Commissioner v. Idaho Power Co., 418
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U.S. 1, 13 (1974).4
On the record before us, we find that petitioners have
failed to carry their burden of establishing (1) that they are
entitled for each of their taxable years 2000 and 2001 to deduct
the entire amount of the expenditures that they made during each
such year on the 40th Street property and the 8th Street property
and (2) that no portion of such expenditures must be capitalized
and amortized. On that record, we sustain respondent’s determi-
nations with respect to those expenditures.
Accuracy-Related Penalty
It is respondent’s position that petitioners are liable for
each of their taxable years 2000 and 2001 for the accuracy-
related penalty under section 6662(a) because of negligence or
disregard of rules or regulations under section 6662(b)(1).
The term “negligence” in section 6662(b)(1) includes any
failure to make a reasonable attempt to comply with the Code.
Sec. 6662(c). Negligence has also been defined as a failure to
do what a reasonable person would do under the circumstances.
See Leuhsler v. Commissioner, 963 F.2d 907, 910 (6th Cir. 1992),
affg. T.C. Memo. 1991-179; Antonides v. Commissioner, 91 T.C.
686, 699 (1988), affd. 893 F.2d 656 (4th Cir. 1990). The term
“disregard” includes any careless, reckless, or intentional
4
See also Basin Elec. Power Coop. v. Commissioner, T.C.
Memo. 2004-109.
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disregard. Sec. 6662(c).
The accuracy-related penalty under section 6662(a) does not
apply to any portion of an underpayment if it is shown that there
was reasonable cause for, and that the taxpayer acted in good
faith with respect to, such portion. Sec. 6664(c)(1). The
determination of whether the taxpayer acted with reasonable cause
and in good faith depends on the pertinent facts and circum-
stances, including the taxpayer’s efforts to assess such tax-
payer’s proper tax liability, the knowledge and experience of the
taxpayer, and the reliance on the advice of a professional, such
as an accountant. Sec. 1.6664-4(b)(1), Income Tax Regs.
Respondent has the burden of production under section
7491(c) with respect to the accuracy-related penalty under sec-
tion 6662. To meet that burden, respondent must come forward
with sufficient evidence indicating that it is appropriate to
impose that penalty. Higbee v. Commissioner, 116 T.C. 438, 446
(2001). Although respondent bears the burden of production with
respect to the accuracy-related penalty that respondent deter-
mined for petitioners’ taxable years 2000 and 2001, respondent
“need not introduce evidence regarding reasonable cause * * * or
similar provisions. * * * the taxpayer bears the burden of proof
with regard to those issues.” Id.
Petitioners conceded certain determinations that respondent
made in the notice for each of the years at issue and, as a
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result, have acknowledged that an underpayment exists for each
such year. Petitioners offered no evidence, and advance no
argument, under section 6662 with respect to their return treat-
ment for the years at issue of (1) the various items as to which
respondent made determinations that petitioners conceded and
(2) the expenditures in question as to which respondent made
determinations that we sustained.5 On the instant record, we find
that the burden of production that respondent has under section
7491(c) is satisfied.
On the instant record, we find that petitioners have failed
to carry their burden of showing that they were not negligent and
did not disregard rules or regulations, or otherwise did what a
reasonable person would do, with respect to the underpayment for
each of the years at issue.
On the instant record, we further find that petitioners have
failed to carry their burden of showing that there was reasonable
cause for, and that they acted in good faith with respect to, the
underpayment for each of the years at issue. See sec.
6664(c)(1).
On the record before us, we find that petitioners have
failed to carry their burden of establishing that they are not
liable for each of the years at issue for the accuracy-related
5
The record does not show that any records that petitioners
maintained were sufficient under sec. 6001 and sec. 1.6001-1(a),
Income Tax Regs. See sec. 1.6662-3(b)(1), Income Tax Regs.
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penalty under section 6662(a). On that record, we sustain re-
spondent’s determinations under that section.
We have considered all of the parties’ contentions and
arguments that are not discussed herein, and we find them to be
without merit, irrelevant, and/or moot.
To reflect the foregoing and the concessions of petitioners,
Decision will be entered for
respondent.