T.C. Summary Opinion 2008-89
UNITED STATES TAX COURT
MUHAMMAD MCNEILL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8402-06S. Filed July 23, 2008.
Muhammad McNeill, pro se.
Michael T. Sargent, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue 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 precedent
for any other case. Unless otherwise indicated, subsequent
section references are to the Internal Revenue Code in effect for
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the year in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined a $7,115 deficiency in petitioner’s
Federal income tax for 2002. After concessions,1 the issues for
decision are: (1) Whether petitioner is entitled to deduct
business-related expenses for the year in issue, and (2) whether
petitioner is liable for additions to tax under sections
6651(a)(1) and (2) and 6654.
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. Petitioner resided in
Maryland when the petition was filed.
Petitioner did not file a Federal income tax return for
2002. Under section 6020(b), and on the basis of information
provided to respondent by third parties relating to compensation
paid to petitioner, respondent prepared a substitute for return
(SFR). In 2002 petitioner received $11,416 of nonemployee
compensation from Bal Com, Inc., and $19,117 of nonemployee
compensation from Virtek Cable Contractors, Inc. Bal Com, Inc.,
1
The parties agree on the following: (1) Petitioner
received a total of $30,533 in nonemployee compensation during
2003; (2) petitioner had no withholdings for 2002; (3) petitioner
made no estimated tax payments during 2002; (4) petitioner failed
to file his 2002 Federal income tax return; and (5) petitioner
worked as a self-employed cable television installer in 2002.
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and Virtek Cable Contractors, Inc., were subcontractors for
Comcast Cable, Inc., in 2002.
The income tax deficiency respondent determined includes
self-employment tax liability based on the income that petitioner
conceded he had received from third parties.
On February 6, 2006, respondent mailed a notice of
deficiency to petitioner for 2002. On February 26, 2007,
petitioner provided respondent’s counsel with an unfiled Form
1040, U.S. Individual Income Tax Return, for 2002. Petitioner
attached to this unfiled Form 1040 a Schedule C, Profit or Loss
From Business, on which he characterized the $30,533 of total
nonemployee compensation reported by the aforementioned third
parties as “gross receipts or sales”. On that same Schedule C
petitioner claimed deductions for the following business
expenses:
Advertising $289
Car and truck expenses 6,926
Insurance 2,600
Office expense 330
Vehicles, machinery,
and equipment 1,690
Other business property 3,600
Repairs and maintenance 1,289
Supplies 850
Other expenses 9,075
Total 26,649
The $9,075 of other expenses included the following: (1)
$1,386 for communications; (2) $189 for bank charges; and (3)
$7,500 for day workers.
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Discussion
Taxpayers generally bear the burden of proving that the
Commissioner’s determinations are incorrect. Rule 142(a); Welch
v. Helvering, 290 U.S. 111, 115 (1933). However, section 7491(a)
may in specific circumstances place the burden on the
Commissioner with regard to any factual issue relating to the
taxpayer’s liability for tax if the taxpayer produces credible
evidence with respect to that issue and meets the requirements of
section 7491(a)(2). The taxpayer bears the burden of proving
that he has met the requirements of section 7491(a)(2)(A) and (B)
by substantiating items, maintaining required records, and fully
cooperating with the Secretary’s reasonable requests. Miner v.
Commissioner, T.C. Memo. 2003-39; Nichols v. Commissioner, T.C.
Memo. 2003-24, affd. 79 Fed. Appx. 282 (9th Cir. 2003).
Respondent raised section 7491 as an issue. For the reasons
discussed infra we agree with respondent that petitioner did not
satisfy the requirements of section 7491(a)(2)(A) and (B) as he
failed to: (1) Maintain records; (2) make a return; and (3)
comply with the rules and regulations as prescribed by the
Secretary. See sec. 6001. Since petitioner has not met the
requirements of section 7491(a)(2), we find that the burden of
proof remains with petitioner.
Respondent determined that petitioner is liable for
additions to tax under: (1) Section 6651(a)(1) for failure to
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file an income tax return; (2) section 6651(a)(2) for failure to
pay income tax; and (3) section 6654(a) for failure to make
estimated tax payments. Respondent bears the burden of
production with respect to petitioner’s liability for the
additions to tax. See sec. 7491(c); Higbee v. Commissioner, 116
T.C. 438, 446-447 (2001). To meet his burden of production
respondent must come forward with sufficient evidence indicating
that it is appropriate to impose the additions to tax. See
Higbee v. Commissioner, supra at 446-447. The burden of proof
with regard to the reasonable cause exception of section 6651(a)
remains on petitioner.
Schedule C Expenses
Deductions are strictly a matter of legislative grace, and
the taxpayer bears the burden of proving entitlement to any
deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,
84 (1992). The taxpayer is required to maintain records
sufficient to establish any deduction claimed. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs.
As previously stated, petitioner prepared but did not file a
Form 1040 for 2002 which included a Schedule C. Respondent’s
position is that petitioner is not entitled to deduct any of the
expenses listed on this Schedule C for lack of substantiation.
In support of his position that he is entitled to the
Schedule C deductions at issue, petitioner relies primarily on
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his testimony and three paycheck stubs that were received into
evidence. We found petitioner’s testimony to be mainly self-
serving and vague with respect to the deductions claimed on the
Schedule C. We will not rely on that testimony to establish that
petitioner is entitled to any of the Schedule C deductions at
issue. See Lerch v. Commissioner, 877 F.2d 624, 631-632 (7th
Cir. 1989), affg. T.C. Memo. 1987-295.
With respect to the expenses shown on petitioner’s Schedule
C, section 162(a) generally allows a deduction for ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. The only records that
petitioner kept with respect to these expenses were the three
paycheck stubs that were received into evidence. These stubs
were for petitioner’s pay from Virtek Cable Contractors, Inc.,
and show that the company deducted amounts for accident
insurance, liability insurance, and ladder rental from each
paycheck. The amounts deducted for accident insurance and ladder
rental were $25 and $15, respectively, for each of the pay
periods reflected on the paycheck stubs. The amounts shown as
deducted for liability insurance were $14.38, $17.15, and $13.94,
respectively. Petitioner presented no further evidence with
respect to these expenses (liability insurance and ladder
rental). Petitioner also did not keep any work records, logs,
advertisements, employee information, or receipts showing the
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types and amounts of all of the expenses that he claimed on the
Schedule C.
On the record before us, we find that petitioner has failed
to carry his burden of proving he is entitled for taxable year
2002 to deduct under section 162(a) any expenses that he claimed
on Schedule C with the exception of $165.47 (the total amounts
shown for insurance and ladder rental on the three paycheck stubs
received into evidence). Although petitioner did estimate his
total cost for insurance for 2002 as $1,800, he provided no
evidence to substantiate this amount; and because the record is
unclear as to exactly what expenses were incurred with respect to
the two companies for which petitioner worked (Virtek Cable
Contractors, Inc., and Bal Com, Inc.), we lack the requisite
information to estimate any of the claimed Schedule C expenses,
including insurance expenses. See Cohan v. Commissioner, 39 F.2d
540 (2d Cir. 1930). But see sec. 274(d); sec. 1.274-5T(a),
Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
Additions to Tax
Respondent determined that petitioner is liable for
additions to tax under section 6651(a)(1) for failure to file an
income tax return for 2002 and under section 6651(a)(2) for
failure to pay the tax due.
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on the date prescribed (determined with regard to
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any extension of time for filing) unless petitioner can establish
that his failure to file a return was due to reasonable cause and
not due to willful neglect. Petitioner admitted that he did not
file a Federal income tax return for 2002. Respondent has
therefore met his burden of production. Further, we find that
petitioner’s failure to file a Federal income tax return for 2002
was not due to reasonable cause but was due to willful neglect.
Therefore, we conclude that petitioner is liable for the section
6651(a)(1) addition to tax for 2002.
The section 6651(a)(2) addition to tax for failure to pay is
applicable only when an amount of tax is shown on a return.
Cabirac v. Commissioner, 120 T.C. 163, 170 (2003). On the 2002
SFR, which was prepared in accordance with the requirements of
section 6020(b), respondent calculated a tax liability of $7,115.
Pursuant to section 7491(c), respondent bears and has met the
burden of production relating to section 6651(a)(2) for 2002.
With respect to 2002 petitioner is liable for the section
6651(a)(2) addition to tax on the basis of the amount of tax
shown on the 2002 SFR. See sec. 6651(g) (the SFR is disregarded
for purposes of determining the addition to tax under section
6651(a)(1) but is treated as the return for purposes of the
addition to tax under section 6651(a)(2)). Section 6654(a)
provides for an addition to tax “in the case of any underpayment
of estimated tax by an individual”. This addition to tax is
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mandatory unless one of the statutorily provided exceptions
applies. See sec. 6654(e); Grosshandler v. Commissioner, 75 T.C.
1, 20-21 (1980). There is no exception for reasonable cause or
lack of willful neglect. Estate of Ruben v. Commissioner, 33
T.C. 1071, 1072 (1960).
Under section 6654 the addition to tax is calculated with
reference to four required installment payments of the taxpayer’s
estimated tax liability. Sec. 6654(c)(1); Wheeler v.
Commissioner, 127 T.C. 200, 210 (2006), affd. 521 F.3d 1289 (10th
Cir. 2008). Each required installment of estimated tax is equal
to 25 percent of the “required annual payment.” Sec
6654(d)(1)(A). The “required annual payment” is generally equal
to the lesser of: (1) 90 percent of the tax shown on the return
or; (2) if the individual filed a return for the immediately
preceding taxable year, 100 percent of the tax shown on that
return. Sec. 6654(d)(1)(B); Wheeler v. Commissioner, supra at
210-211; Heers v. Commissioner, T.C. Memo. 2007-10. A taxpayer
has an obligation to pay estimated tax for a particular year only
if he had a “required annual payment” for that year. Wheeler v.
Commissioner, supra at 211.
The parties agree that petitioner was required to file a
Federal income tax return for 2002, that petitioner did not file
a 2002 return, that petitioner failed to make any estimated tax
payments, and that petitioner did not have any withholdings for
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2002. In order for the Court to analyze the application of the
section 6654(a) addition to tax (as required by section
6654(d)(1)(B)), we must conclude that respondent has met his
burden of production of evidence that petitioner had a required
annual payment for 2002 payable in installments under section
6654. To this end, respondent must introduce evidence showing
whether petitioner filed a return for the preceding taxable year
and, if so, the amount of tax shown on that return. See Wheeler
v. Commissioner, supra at 211. Respondent did not do so.
Without that evidence, this Court cannot identify the number
equal to 100 percent of the tax shown on petitioner’s 2001
return, complete the comparison required by section
6654(d)(1)(B), and conclude petitioner had a required annual
payment for 2002 that was payable in installments under section
6654. Consequently, respondent’s determination regarding the
section 6654 addition to tax is not sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.