T.C. Memo. 2008-40
UNITED STATES TAX COURT
DONALD P. AND MARGIE C. OSBORNE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4838-05. Filed February 26, 2008.
Donald P. and Margie C. Osborne, pro sese.
Joan E. Steele, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
FOLEY, Judge: After concessions, the issues for decision
are whether: (1) Petitioners are entitled to depreciation,
insurance, interest, supplies, tax and licenses, travel, and
other expense deductions relating to 2001 and 2002; (2)
petitioners properly calculated cost of goods sold relating to
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2001 and 2002; (3) petitioners failed to report gross income
relating to 2001 and 2002; and (4) petitioners are liable for
section 6662(a)1 accuracy-related penalties.
FINDINGS OF FACT
Petitioner Donald Osborne (Mr. Osborne) was a self-employed
truck driver. In addition, he maintained a business, Don Osborne
Enterprises, which rented trailers and bought and sold over-the-
road trucks and trailers. On his Schedules C, Profit or Loss
from Business, relating to 2001 and 2002, Mr. Osborne combined
income and expenses relating to these activities and claimed
expense deductions for depreciation, insurance, interest,
supplies, tax and licenses, travel, and other expenses.
In 2004, petitioners’ 2001 and 2002 returns were selected
for audit, and respondent’s Revenue Agent Mary Miller began an
examination of the items on the returns. To substantiate their
expense deductions, petitioners submitted canceled checks, credit
card statements, insurance records, and other documentation.
Petitioners were given credit for the expenses that were properly
substantiated. Using canceled checks and vehicle title
information for Mr. Osborne’s business, Ms. Miller made
adjustments to the inventory, cost of goods sold, and depreciable
1
Unless otherwise indicated, all section references are
to the Internal Revenue Code of 1986, as amended, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
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assets relating to 2001 and 2002. In addition, Ms. Miller used a
bank deposits analysis to determine petitioners’ unreported
income.
On December 6, 2004, respondent issued petitioners a notice
of deficiency relating to 2001 and 2002. In the notice of
deficiency, respondent determined that petitioners were not
entitled to portions of the deductions claimed on their returns,
had failed to report gross receipts income, had improperly
calculated cost of goods sold, and were liable for section
6662(a) accuracy-related penalties.
On March 11, 2005, petitioners, while residing in Colorado,
filed their petition with the Court.
OPINION
Petitioners contend that they are entitled to the Schedule C
deductions relating to 2001 and 2002 for Don Osborne Enterprises.
Section 162(a) allows as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Petitioners must maintain
sufficient records to substantiate the deductions. See sec.
6001; sec. 1.6001-1(a), Income Tax Regs.
At trial, petitioners produced canceled checks, credit card
statements, insurance records, and other documentary evidence
that respondent had previously taken into account in the
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determinations.2 There is no credible evidence to substantiate
deductions (i.e., those relating to depreciation, insurance,
interest, supplies, tax and licenses, travel, and other expenses)
beyond those that respondent allowed in the notice of deficiency.
In addition, we sustain respondent’s determinations relating to
cost of goods sold. During the trial, pursuant to a stipulated
agreement, the parties reduced the amount of unreported gross
income in dispute.
To determine petitioners’ unreported income, respondent
conducted a bank deposits analysis. Bank deposits are prima
facie evidence of income, Tokarski v. Commissioner, 87 T.C. 74,
77 (1986), and under the bank deposits method, all money
deposited into a taxpayer’s bank account during a given period is
assumed to be taxable income, DiLeo v. Commissioner, 96 T.C. 858,
868 (1991), affd. 959 F.2d 16 (2d Cir. 1992). Respondent’s
determinations are presumed to be correct, and petitioners bear
the burden of proving that respondent’s bank deposits analysis is
erroneous. See Rule 142(a); Parks v. Commissioner, 94 T.C. 654,
658 (1990). Petitioners did not submit sufficient evidence to
2
Pursuant to sec. 7491(a), petitioners have the burden of
proof unless they introduce credible evidence relating to the
issue that would shift the burden to respondent. See Rule
142(a). Our conclusions, however, are based on a preponderance
of the evidence, and thus the allocation of the burden of proof
is immaterial. See Martin Ice Cream Co. v. Commissioner, 110
T.C. 189, 210 n.16 (1998).
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rebut respondent’s determinations, and the determinations are, as
adjusted by the parties’ stipulation, therefore, sustained.
With respect to 2001 and 2002, respondent determined that
petitioners were liable for accuracy-related penalties pursuant
to section 6662(a). The penalty applies to any portion of
petitioners’ underpayment that is attributable to negligence or
disregard of rules or regulations. See sec. 6662(b)(1).
Respondent bears and has met the burden of production relating to
the section 6662(a) accuracy-related penalties and has
established that petitioners were negligent in the filing of
their 2001 and 2002 returns. See sec. 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Petitioners failed to
report income, maintain adequate business records, or exercise
due care in reporting their income and expenses. Accordingly, we
sustain respondent’s determinations.
Contentions we have not addressed are irrelevant, moot, or
meritless.
To reflect the foregoing,
Decision will be entered
under Rule 155.