Burkley v. Comm'r

T.C. Summary Opinion 2008-20

UNITED STATES TAX COURT

DIANE AND FRANK BURKLEY, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13748-04S. Filed February 27, 2008.

Diane Burkley,1 pro se.

Jason W. Anderson and Kathleen C. Schlenzig, for respondent.

GOLDBERG, Special Trial Judge: This case was heard pursuant

to the provisions of section 7463 of the Internal Revenue Code

(Code) in effect at the time the petition was filed. Pursuant to

section 7463(b), the decision to be entered is not reviewable by

any other court, and this opinion shall not be treated as

1
Both petitioners signed the petition. When the case was
called for trial, petitioner Diane Burkley informed the Court
that petitioner Frank Burkley was disabled and therefore unable
to physically be present at the trial.
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precedent for any other case. Unless otherwise indicated,

subsequent 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.

Respondent determined a $10,048 deficiency in petitioners’

Federal income tax for 2002 and a $2,009.60 accuracy-related

penalty under section 6662(a).

The deficiency resulted from respondent’s disallowance of:

(1) $12,000 deducted as an other miscellaneous deduction for

“home winterization” on Schedule A, Itemized Deductions, and (2)

the following expenses claimed on Schedule E, Supplemental Income

and Loss, for rental Property B (identified as an “apartment

building” located at 8314 South Green Street):

Advertising $350
Auto and travel 4,500
Cleaning and maintenance 3,000
Repairs 12,000
Supplies 900
Utilities 3,000

Petitioners attached a Schedule E to their Federal income

tax return for 2002 showing three properties as follows: (1)

Property A, a “2-flat building” located at 8314 South Green

Street; (2) Property B, an “apartment building” located at 8314

South Green Street; and (3) Property C, an “apartment building”

located at 8314 South Green Street.

In the deficiency computation, respondent increased the

amount of the alternative minimum tax shown on the return and
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recomputed the amount of itemized deductions allowable, taking

into account the limitations due to adjusted gross income under

section 67.

This case was originally set for trial on May 23, 2005. In

anticipation of trial, respondent’s counsel suggested that the

parties meet at respondent’s office. The parties met on May 12,

2005. During this meeting, respondent informed petitioner Diane

Burkley (Mrs. Burkley) and petitioners’ return preparer, Horace

Ingram (Mr. Ingram), about Rule 91 (requiring parties to

stipulate all facts, documents, and evidence not in dispute). In

response to this exchange, Mr. Ingram replied: “rules are made

to be broken”.

During the above meeting, Mr. Ingram redefined the

properties listed on petitioners’ Schedule E with the following

information: (1) Property A, and all expenses listed for it,

pertained to a single-family residence located at 8314 South

Green Street; (2) Property B, and all expenses listed for it,

pertained to a multiunit building located on South Vernon Avenue,

and (3) Property C, which was originally described on

petitioners’ Schedule E as an “apartment building” located at

8314 South Green Street, was included by error on Mr. Ingram’s

part, and all income and expenses listed for this property should

be disregarded.
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The meeting adjourned with no agreed-upon stipulation.

On May 17, 2005, respondent received (via facsimile) from

petitioners a set of documents that included petitioners’ 2002

Forms W-2, Wage and Tax Statement, petitioners’ joint 2002 Form

1040, U.S. Individual Income Tax Return, a joint Form 1040X,

Amended U.S. Individual Income Tax Return for 2002, and pictures

of the South Green Street property and another rental property

located at 11036 South Vernon Avenue.

On the basis of these documents, and pursuant to an order of

this Court dated May 23, 2005, respondent filed an answer on July

29, 2005, in which respondent raised numerous new issues that

resulted in an increased deficiency and a section 6662(a)

accuracy-related penalty. The answer raised the following new

issues: (1) Unreported rental income; (2) disallowance of five

dependency exemption deductions; (3) unreported income from a

State income tax refund; (4) disallowance, in total, of itemized

Schedule A deductions for (a) medical and dental expenses, (b)

real estate taxes, (c) personal property taxes, (d) home mortgage

interest, (e) gifts to charity, and (f) unreimbursed employee

business expenses; (5) disallowance in total of all Schedule E

deductions; and (6) disallowance of rental and real estate loss

because of passive activity loss limitations.
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After concessions,2 the issues for decision are: (1)

Whether petitioners are entitled to deduct claimed Schedule E

expenses as follows:

Property A Property B
Advertising $350 $350
Auto and travel 850 4,500
Cleaning
and maintenance 2,000 3,000
Insurance 1,200 1,800
Mortgage interest 7,484 13,462
Repairs 6,500 12,000
Supplies 2,000 900
Taxes 1,404 1,404
Utilities 3,000 3,000
Total 24,788 40,416

(2) whether petitioners are entitled to claim Schedule A itemized

deductions as follows:

Medical and dental expenses $25,000
Home mortgage interest 13,642
Charitable contributions by cash
or check 18,000
Charitable contributions other
than by cash or check 500
Unreimbursed employee expenses 13,500
Total 70,642

(3) whether petitioners failed to report rental income; (4)

whether petitioners are entitled to claim five dependency

exemption deductions; and (5) whether petitioners are liable for

the accuracy-related penalty under section 6662(a).

2
Petitioners concede that they are not entitled to claim:
(1) A $1,404 Schedule A deduction for real estate taxes; (2) a
$150 Schedule A deduction for personal property taxes; (3) any
expenses with respect to “Property C”, as listed on Schedule E of
their 2002 return; (4) passive activity losses of $81,120.
Petitioners are also not contesting the increase in their
alternative minimum tax.
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Background

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.

Petitioners resided in Chicago, Illinois, on the date the

petition was filed.

During the year in issue, Mrs. Burkley was employed as a

nurse at the University of Illinois, Gentivia Certified

Healthcare, and Nursepower Services. Petitioner Frank Burkley

(Mr. Burkley) was employed at Genetivia Certified Healthcare.

At the start of 2002, petitioners owned a single-family

residence located on South Green Street in Chicago, Illinois (the

South Green Street property). In April 2002, petitioners

purchased a multiunit apartment building located on South Vernon

Avenue in Chicago, Illinois (the South Vernon Avenue property).

The South Vernon Avenue property consists of three floors.

Each of the floors contains an apartment with a living room, two

bedrooms, a kitchen, and a sun porch. Petitioners moved into the

first floor apartment of the South Vernon Avenue property in

August 2002. At the time of their occupancy, a tenant resided in

the second floor apartment. Petitioners evicted this tenant in

August 2002 for failure to pay rent.

Petitioners rented out the second floor apartment starting

in September 2002 for $500 a month. Petitioners rented out the
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third floor apartment starting in October 2002 for $500 a month.

In addition to paying rent, tenants occupying both of the South

Vernon Avenue apartments were required to pay all utilities

attributable to their respective units.

Petitioners continued to own the South Green Street property

after they purchased the South Vernon Avenue property.

Petitioners’ daughter, Vernice, occupied the South Green Street

property immediately after petitioners moved. Vernice paid

petitioners $500 a month rent beginning in September 2002 and was

also responsible for paying all utilities with respect to the

South Green Street property. Two of Vernice’s minor children--

L.B. and J.B.--lived with her at the South Green Street

property.3 These same children were listed as dependents on

petitioners’ 2002 Federal income tax return.

The South Green Street and the South Vernon Avenue

properties are 5.1 miles apart.

Petitioners used the services of Mr. Ingram to prepare and

file their 2002 return. Petitioners’ 2002 return reflected the

following: (1) $196,153 in wages, salaries and tips; (2) $29,916

Schedule E loss; (3) $166,282 adjusted gross income; (4) $73,353

in Schedule A deductions; (5) $16,886 total tax due; (6) $3,670

alternative minimum tax; (7) $40,538 Federal income tax withheld;

and (8) $23,652 refund.

3
The Court uses initials when referring to minor children.
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Discussion

In general, the Commissioner’s determination as set forth in

a notice of deficiency is presumed correct. Welch v. Helvering,

290 U.S. 111, 115 (1933). In pertinent part, Rule 142(a)(1)

provides the general rule that the burden of proof shall be on

the taxpayer. In certain circumstances, however, if the taxpayer

introduces credible evidence with respect to any factual issue

relevant to ascertaining the proper tax liability, section 7491

shifts the burden of proof to the Commissioner. Sec. 7491(a)(1);

Rule 142(a)(2). Petitioners did not argue that section 7491 is

applicable, and they did not establish that the burden of proof

should shift to respondent. Petitioners, therefore, bear the

burden of proving that respondent’s determinations as set forth

in the notice of deficiency are erroneous. See Rule 142(a);

Welch v. Helvering, supra at 115.

With respect, however, to the issues raised in respondent’s

answer, which increased the amount of the deficiency, Rule

142(a)(1) places the burden of proof on respondent.

Finally, with respect to any penalty or addition to tax,

section 7491(c) places the burden of production on the

Commissioner.

Schedule E Expenses

Petitioners maintain that they are entitled to deduct

$24,788 in Schedule E expenses for the South Green Street
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property (Property A) and $40,416 in Schedule E expenses for the

South Vernon Avenue property (Property B). Respondent disallowed

in the notice of deficiency all of the claimed expenses

pertaining to Property B and pleaded in the answer that

petitioners were not entitled to any of the claimed expenses with

respect to Property A. We sustain respondent’s determination

with respect to Property B and hold that respondent has met the

burden of proof with respect to Property A, on the basis of the

facts hereinafter discussed.

Section 6001 provides, in pertinent part, as follows:

SEC. 6001. NOTICE OR REGULATIONS REQUIRING RECORDS,
STATEMENTS, AND SPECIAL RETURNS.

Every person liable for any tax imposed by this
title [title 26, Internal Revenue Code of 1986], or
for the collection thereof, shall keep such records,
render such statements, make such returns, and comply
with such rules and regulations as the Secretary may
from time to time prescribe. * * *

Petitioners provided no receipts to substantiate any of the

expenses claimed for either Property A or B. For example, Mrs.

Burkley admits that they did not spend $350 to advertise either

Property A or B for rent and that, in the case of Property A, no

advertising of any kind was necessary since their daughter took

possession of that property immediately after they moved to

Property B. Mrs. Burkley acknowledged that $700 claimed for auto

and travel expenses was arbitrarily arrived at. Mrs. Burkley

testified that the $2,000 claimed for cleaning expenses for
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Property A was paid to clean out the basement of that property in

anticipation of their move.

Our examination of the record convinces us that petitioners

failed to maintain any records whatsoever with respect to the

items claimed on the Schedule E attached to their 2002 return.

Moreover, Mrs. Burkley and their tax preparer, Mr. Ingram, admit

that some of the figures claimed for deductions taken on their

2002 return, including all of their Schedule E deductions, were

false and/or arbitrarily contrived. Accordingly, without any

evidence to the contrary, we sustain respondent’s determination

and hold that respondent has met the burden of proof with respect

to the issues relevant to petitioners’ 2002 Schedule E as raised

in the answer.

Schedule A Deductions

Petitioners maintain that they are entitled to deduct

$73,353 in Schedule A expenses for taxable year 2002. Respondent

disallowed $24,788 of petitioners’ claimed Schedule A expenses in

the notice of deficiency and further challenged $48,565 of

claimed expenses in the answer. We sustain respondent’s

determination with respect to the disallowance in the notice of

deficiency and hold that respondent has met the burden of proof

with respect to the remaining amount, after concessions, as

asserted in the answer, and based on the facts hereinafter

discussed.
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The aforementioned section 6001 frames our analysis with

respect to this issue. Mrs. Burkley admitted that they

maintained no receipts for any of the $25,000 claimed in medical

and dental expenses. Mrs. Burkley admitted that they had no

records or receipts for many of the expenses claimed on Schedule

A, including all of the taxes listed, unreimbursed business

expenses, job expenses, or miscellaneous deductions claimed.

With respect to the $18,000 claimed for cash or check gifts

made to a charity, petitioners did provide respondent with an

unsigned receipt for contributions they purportedly made to

Screaming Eagle M.B. Church at 1820 West 59th Street, Chicago,

Illinois. The receipt included a breakdown of the $18,000

claimed by petitioners by specific categories such as “tithing”

and “Sunday School”, etc. Ms. Dominque Hall is named as the

secretary/treasurer of the church on this receipt.

On the basis of our examination of the unsigned receipt and

after careful reading of the transcript of the proceeding, we

have grave doubts as to the trustworthiness of the receipt and

are not convinced that petitioners gave a total of $18,000 to

Screaming Eagle M.B. Church in 2002 or that the church did, in

fact, exist at the address listed on the receipt provided, if it

did exist at all.

As to the $500 noncash gift, Mr. Ingram testified that this

was the value of clothing and goods donated to the Salvation Army
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at its drop boxes, where there are no receipts. Petitioners did

not offer any evidence as to what, where, or when the non-cash

items were donated to the Salvation Army.

We are not convinced on the basis of our review of the

entire record that petitioners are entitled to claim an $18,500

deduction for gifts to charity.

Finally, with respect to the other miscellaneous $12,000

deduction claimed for “home winterization”, Mr. Ingram admitted

that he mistakenly duplicated this amount from the amount claimed

for repairs on Schedule E for Property B.

Accordingly, and based on the foregoing, respondent’s

determination is sustained with respect to the $24,788 of

Schedule A deductions disallowed in the notice of deficiency. We

also hold that respondent has satisfied the burden of proof with

respect to the $48,565 of Schedule A deductions disallowed in the

answer.

Rental Income

Mrs. Burkley admitted receiving rent from Property A and B

in 2002 as follows: (1) Property A--$2,000, (2) Property B,

second floor--$2,000, and (3) Property B, third floor--$1,500.

Respondent pleaded in the answer that petitioners did not report

the rents collected on Property A and B as income on their

return.
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Petitioners reported $7,000 in rent received from Property A

and $7,000 in rent received from Property B on Schedule E of

their return. While the Court is perplexed as to why petitioners

would have inflated the rent received, we do find that they did,

indeed, report rent received on their 2002 return. Petitioners

did not, however, report the correct amount of rent received,

which was $5,500. We hold, therefore, on the basis of Mrs.

Burkley’s admission, that petitioners must include only $5,500 of

rental income for taxable year 2002.

Dependency Exemption Deductions

Petitioners claimed five dependency exemption deductions on

their 2002 return. Petitioners listed three minor children--

M.Y., L.B., and J.B--and two adults--Fred Henigan and Harold

Burkley--as dependents. In the answer, respondent asserted that

petitioners are not entitled to the five claimed dependency

exemption deductions on the grounds that: (1) Petitioners had

failed to prove their entitlement to claim a dependency exemption

deduction for any of the individuals listed on their return, and

(2) they failed to maintain adequate records to substantiate

amounts paid in support of the claimed dependents.

Section 151 allows deductions for personal exemptions,

including exemptions for dependents of a taxpayer. See sec.

151(c). Section 152(a) defines the term “dependent” in pertinent

part to include a son or daughter of the taxpayer, or a
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descendant of either, a brother or brother-in-law of the

taxpayer, and an individual who has as his or her principal place

of abode for the taxable year the home of the taxpayer, if over

half of his or her support for the calendar year was received

from the taxpayer. The term “support” includes “food, shelter,

clothing, medical and dental care, education, and the like.”

Sec. 1.152-1(a)(2)(i), Income Tax Regs.

In determining whether an individual received more than half

of his or her support from a taxpayer, there shall be taken into

account the amount of total support received from the taxpayer as

compared to the entire amount of support which the individual

received from all sources. Id.

Mrs. Burkley testified that the three minor children were

her grandchildren. Mrs. Burkley also testified that two of the

children listed on petitioners’ 2002 return--L.B. and J.B.--lived

with their mother, her daughter Vernice, at the South Green

Street property. Mrs. Burkley failed to explain adequately why

the third grandchild, M.Y., resided with them. Petitioners

provided no evidence as to the total amount of support that they

provided to these children or as to the total amount of support

provided to these children from all sources. Petitioners’ only

evidence with respect to the grandchildren was testimony that

when all of the grandchildren slept at the South Vernon Avenue
 - 15 -

property, two of the children slept on the sun porch, and one

child slept in Mrs. Burkley’s bedroom.

With respect to the two adults claimed as dependents,

petitioners provided no evidence either that they had provided

more than half of these individuals’ support during the year in

issue or of the total amount of support received by each of these

individuals. Further, petitioners did not offer any evidence to

substantiate that Fred Henigan made either petitioners’ residence

at South Green Street or South Vernon Avenue his primary place of

abode during the year in issue. The only evidence offered with

respect to these individuals was Mrs. Burkley’s testimony that

Fred Henigan shared a bedroom with Mr. Burkley when he slept at

the South Vernon Avenue property and that Harold Burkley slept on

the couch in the living room of the South Vernon Avenue property.

Accordingly, because petitioners have provided no credible

evidence proving that they are entitled to claim five dependency

exemption deductions with respect to the aforementioned

individuals, we conclude that respondent has satisfied the burden

of proof with respect to this issue and hold that pursuant to

section 152, petitioners are not entitled to five dependency

exemption deductions in taxable year 2002.
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Accuracy-Related Penalty

In the notice of deficiency, respondent determined that

petitioners were liable for the accuracy-related penalty under

section 6662(a) for underpayment of tax.

Section 6662(a) imposes a 20-percent penalty with respect

“to any portion of an underpayment of tax required to be shown on

a return”. This penalty applies to underpayments attributable to

any substantial understatement of income tax. Sec. 6662(a),

(b)(2).

An “understatement” of income tax is defined as the excess

of the tax required to be shown on the return over the tax

actually shown on the return. Sec. 6662(d)(2)(A). An

understatement is “substantial” if it exceeds the greater of 10

percent of the tax required to be shown on the return, or $5,000.

Sec. 6662(d)(1)(A).

Section 6664 provides a defense to the accuracy-related

penalty if a taxpayer establishes that there was reasonable cause

for any portion of the underpayment and that he or she acted in

good faith with respect to that portion. Sec. 6664(c)(1); sec.

1.6664-4(a)(1), Income Tax Regs. Although not defined in the

Code, “reasonable cause” is viewed in the regulations as the

exercise of ordinary business care and prudence. See sec.

301.6651-1(c)(1), Proced. & Admin. Regs. Whether a taxpayer

acted with reasonable cause and in good faith is made on a case-
 - 17 -

by-case basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The

taxpayer’s education, experience, and knowledge are considered in

determining reasonable cause and good faith. And, generally, the

most important factor is the extent of the taxpayer’s effort to

assess his or her proper tax liability. Sec. 1.6664-4(b)(1),

Income Tax Regs.

Respondent determined an accuracy-related penalty under

section 6662(a) to be applicable in this case because petitioners

understated their income tax by $10,048 on their 2002 return.

Because petitioners’ understatement of tax was greater than 10

percent of the tax required to be shown on the return, or $5,000,

the understatement was a substantial understatement of income tax

pursuant to section 6662(d)(1)(A)(i) and (ii).

Petitioners argue that they should not be held liable for

the penalty because of their reliance on the income tax

preparation provided to them by Mr. Ingram.

Respondent carries the burden of production under section

7491(c) with respect to the accuracy-related penalty under

section 6662. To meet that burden, respondent must come forward

with sufficient evidence indicating that it is appropriate to

impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446

(2001). Although respondent bears the burden of production with

respect to the penalty, respondent “need not introduce evidence
 - 18 -

regarding reasonable cause * * * or similar provisions. * * *

the taxpayer bears the burden of proof with regard to those

issues.” Id.

Petitioners concede certain determinations that respondent

made in the notice of deficiency and, as a result, have

acknowledged that an underpayment of tax exists for the year in

issue. Petitioners offered no evidence under section 6662 with

respect to those items raised in either the petition or the

answer. On the basis of the foregoing, we hold that respondent

has satisfied the burden of production under section 7491(c).

We further conclude that petitioners have failed to show

that their reliance on Mr. Ingram’s tax return preparation was

reasonable. Mr. Ingram admitted that he was not an accountant,

that he was unfamiliar with the computer software that he used to

prepare petitioners’ return, that he had made many errors with

respect to petitioners’ 2002 return, and that his rush to

complete the return also resulted in errors. Petitioners’

reliance on Mr. Ingram as their tax return preparer was clearly

unreasonable. Petitioners have, therefore, failed to carry their

burden of showing any reasonable cause for the underpayment of

tax for 2002. See sec. 6664(c)(1).

On the entire record before us, we hold that petitioners

have failed to carry their burden of proving that they are not

liable for an accuracy-related penalty for 2002 under section
 - 19 -

6662(a). We accordingly sustain respondent’s determination with

respect to that issue.

Decision will be entered

under Rule 155.