T.C. Summary Opinion 2008-107
UNITED STATES TAX COURT
MARK A. AND JULIE R. DOYLE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 17259-07S. Filed August 21, 2008.
Mark A. and Julie R. Doyle, pro sese.
John C. Schmittdiel, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code
(Code) in effect when 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 Code in effect for the
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years in issue, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
Respondent determined deficiencies of $2,046 and $608 in
petitioners’ 2003 and 2004 Federal income taxes, respectively.
Respondent also determined accuracy-related penalties under
section 6662(a) of $409.20 and $121.60 for 2003 and 2004,
respectively.
After concessions by petitioners,1 the issues remaining for
decision are whether petitioners are: (1) Entitled to claim
deductions for interest, depreciation, and certain expenditures
with respect to their “leasing activity and/or trucking
business”; and (2) liable for the accuracy-related penalty for
each year.
Background
Petitioners did not appear in person or by counsel at trial.
The case was submitted on a stipulation of facts and a
supplemental stipulation of facts. Petitioners executed both
stipulations. The stipulated facts, together with the exhibits
attached thereto, are incorporated herein by reference. When the
petition was filed, petitioners resided in North Dakota.
1
Petitioners claimed investment interest expense deductions
of $6,926 and $4,077 for 2003 and 2004, respectively. They
concede that the deductions were not proper. Mrs. Doyle received
$10,025 in premature distributions from a qualified retirement
plan during 2003; petitioners concede that they are liable for a
10-percent additional tax of $1,003 on the distributions.
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On September 25, 2002, Mr. Doyle purchased a “1993 Kenworth
T600 Truck” for $11,000 from “The Load Line”. On October 1,
2002, Citizens State Bank lent Mr. Doyle the funds to acquire the
truck. The terms of the promissory note provided that Mr. Doyle
was to pay the bank the principal amount of $12,025 plus interest
at the rate of 8 percent per annum on the unpaid principal
balance from October 1, 2002, until paid in full. He was to make
seven payments of $1,643.58 and an estimated final payment of
$1,643.58. He was to make the loan payments on the first day of
each quarter starting January 1, 2003. Petitioners paid
$3,921.22 on the note during 2003.2
Contemporaneously, Mr. Doyle entered into a purported lease
agreement with WSB Trucking, Inc. (WSB), that is in effect a
promissory note. The president of WSB, William S. Brown,3 signed
the lease agreement on behalf of WSB. The lease provided that
WSB was to pay Mr. Doyle the principal amount of $12,000 plus
interest at the rate of 8 percent per annum on the unpaid
principal balance from October 1, 2002, until paid in full. WSB
was to make eight payments of $1,643.58 and an estimated final
payment of $1,643.58. WSB was to make loan payments on the first
2
It is not clear from the record whether petitioners paid
anything on the note in 2004.
3
Respondent represents that Mr. Brown is Mrs. Doyle’s
father.
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day of each quarter starting January 1, 2003. Mr. Doyle received
a $1,643.58 payment in 2003 via a check drawn on an account of
WSB. On November 12, 2003, a $1,650 deposit was made to
petitioners’ personal bank account; a notation made upon the
deposit ticket indicates that WSB was the source of the deposit.
On January 13, 2003, petitioners registered the truck in
their name as an interstate carrier with the North Dakota
Department of Transportation.
Petitioners filed joint Forms 1040, U.S. Individual Income
Tax Return, for 2003 and 2004. Petitioners claimed refunds of
$946.27 and $587.47 for 2003 and 2004, respectively. Neither
Form 1040 included a Schedule C, Profit or Loss From Business,
for petitioners’ “leasing activity and/or trucking business”.
During the examination of petitioners’ returns, petitioners
submitted Forms 1040X, Amended U.S. Individual Income Tax Return,
on April 20, 2006, which included Schedules C for their “leasing
activity and/or trucking business” for 2003 and 2004. The 2003
Schedule C listed gross receipts of $1,643.58 and car and truck
expenses of $21,600, for a net loss of $19,956.42. The 2004
Schedule C listed gross receipts of $1,632.66 and car and truck
expenses of $16,125, for a net loss of $14,492.34. Petitioners
claimed refunds of $2,992.40 and $2,175.34 for 2003 and 2004,
respectively. One year later, on April 25, 2007, respondent
issued the notice of deficiency denying petitioners’ Schedule C
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deductions (and resulting loss) because petitioners did not
establish that: (1) The activity constituted “a bona fide
business venture entered into for profit”; (2) they paid or
incurred the expenses; (3) the expenses were paid for ordinary or
necessary business purposes; or (4) the expenses qualify as
allowable deductions under the Code.
On July 18, 2007, petitioners submitted Forms 1040X that
included amended Schedules C for their “leasing activity and/or
trucking business” for 2003 and 2004. For 2003 petitioners
removed the $21,600 in car and truck expenses and claimed a
$2,300 depreciation deduction, a $2,370 deduction for paid
mortgage interest, a $7,893 deduction for repairs and
maintenance,4 and a $525 deduction for taxes and licenses.
Petitioners’ total expenses of $13,088 offset the $1,644 of
reported gross receipts for an $11,144 loss for 2003. For 2004
petitioners removed the $16,125 in car and truck expenses and
claimed a $3,680 depreciation deduction and a $1,892 deduction
for paid mortgage interest. Petitioners’ total expenses of
$5,572 offset the $1,632 of reported gross receipts for a $3,940
4
Although petitioners raised the repairs and maintenance
issue in their petition, they did not continue to assert their
entitlement to the deduction in their pretrial memorandum or at
trial. The issue is deemed abandoned, and they have in effect
conceded that the claimed deduction was not proper. See Leahy v.
Commissioner, 87 T.C. 56, 73-74 (1986).
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loss for 2004. Petitioners reported $328 as the “amount you owe”
for 2003 and claimed a $158 refund for 2004.
Discussion
I. Burden of Proof
In general the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
to prove that the determinations are in error. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). But the burden of
proof on factual issues that affect a taxpayer’s tax liability
may be shifted to the Commissioner where the “taxpayer introduces
credible evidence with respect to * * * such issue.” Sec.
7491(a)(1). Petitioners have not met the requirements of section
7491(a)(2) to shift the burden of proof to respondent. See sec.
7491(a)(1) and (2); Rule 142(a).
II. Petitioners’ Leasing Activity and/or Trucking Business
Respondent asserts that the lease agreement is in fact a
loan, and petitioners bought the truck merely to accommodate Mr.
Brown, “who apparently didn’t have sufficient credit to obtain
it”. Thus, “we don’t think a loss is well-founded.”
Petitioners contend that they entered into “a for profit
venture” involving “over the road hauling”. It “did not produce
as expected [because the truck needed major repairs] which
provided insufficient income to WSB * * * and partial lease
payments to us, who operate in a non-corporate format as sole
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proprietors.” Petitioners claim that they had an active role as
“owners/operators assisting in scheduling loads, [setting up
maintenance and repair services, and obtaining funding for]
certain operational expenditures.”
Petitioners’ evidence consisted of the sales order for the
truck, the promissory note, the lease agreement with WSB, a copy
of the check received from WSB, a letter from North Star
Community Credit Union, referencing certain interest and late fee
payments, and a letter from Workforce Safety & Insurance (WSI).
The WSI letter states that WSI had received a wire transfer from
Mrs. Doyle, which “satisfied your personal liability for workers
compensation premiums for WSB Trucking, Inc.” Additionally,
petitioners provided documentation substantiating the following
expenditures:
Year Expense Amount
2003 Certificate of title/registration $599.59
2003 License plate fee 5.00
2003 Interest 2,278.35
2003 Late fees 60.00
2004 Interest 1,054.61
2004 Late fees 60.00
2004 Workers compensation premium 3,959.40
Petitioners have not carried their burden to show that they,
as opposed to WSB, were engaged in any “trucking activity” for
2003 and 2004.
The terms of the lease agreement between Mr. Doyle and WSB
were nearly identical to the terms of the promissory note that
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Mr. Doyle executed in favor of Citizens State Bank. In addition,
WSB (and Mr. and Mrs. Brown) had filed a chapter 12 bankruptcy
petition in February 1999, which was dismissed in July 2000 at
the debtors’ request. See Farmpro Servs., Inc. v. Brown, 273
Bankr. 194, 195 (Bankr. 8th Cir. 2002).5 The Court surmises that
WSB (and/or Mr. Brown) would not have been able to acquire credit
on such terms from an unrelated party in view of the bankruptcy
filing. See Hall Paving Co. v. United States, 33 AFTR 2d
74-1192, at 74-1199, 74-1 USTC par. 9397, at 83,976 (N.D. Ga.
1974) (“the economic reality of a purported debt can be judged by
whether an unrelated party would have extended credit in the
circumstances.”). The Court finds, on the basis of all of the
facts and circumstances, that the lease agreement was in fact a
financing arrangement and that petitioners served only as
conduits to pass funds between the bank and WSB. See Frank Lyon
Co. v. United States, 435 U.S. 561, 573 (1978); Helvering v. F. &
R. Lazarus & Co., 308 U.S. 252, 255 (1939) (“the courts * * * are
concerned with substance and realities, and formal written
documents are not rigidly binding”); Coulter Elecs., Inc. v.
Commissioner, T.C. Memo. 1990-186 (the documents’ terms and the
parties’ conduct were indicative of a loan relationship rather
than a sale), affd. without published opinion 943 F.2d 1318 (11th
5
The Court takes judicial notice of the bankruptcy court’s
opinion. See Fed. R. Evid. 201.
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Cir. 1991). Accordingly, petitioners have not received any
income, nor are they entitled to claim any deductions on account
of the financing arrangement. See Ill. Power Co. v.
Commissioner, 87 T.C. 1417 (1986); Guaderrama v. Commissioner,
T.C. Memo. 2000-104, affd. 21 Fed. Appx. 858 (10th Cir. 2001).
Respondent’s determination is sustained.
III. Accuracy-Related Penalty
Initially, the Commissioner has the burden of production
with respect to any penalty, addition to tax, or additional
amount. Sec. 7491(c). He satisfies this burden of production by
coming “forward with sufficient evidence indicating that it is
appropriate to impose the relevant penalty.” Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner
satisfies this burden of production, the taxpayer must persuade
the Court that the Commissioner’s determination is in error by
supplying sufficient evidence of reasonable cause, substantial
authority, or a similar provision. Id.
In pertinent part, section 6662(a) and (b)(1) and (2)
imposes an accuracy-related penalty equal to 20 percent of the
underpayment that is attributable to negligence or disregard of
rules or regulations or a substantial understatement of income
tax.6 “Negligence” is defined to include “any failure to make a
6
Because the Court finds for respondent on the negligence
ground, the Court need not discuss the substantial understatement
(continued...)
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reasonable attempt to comply with the provisions of this title”,
and “disregard” is defined to include “any careless, reckless, or
intentional disregard.” See sec. 6662(c). Negligence also
includes any failure by the taxpayer to keep adequate books and
records or to substantiate items properly. See sec. 1.6662-
3(b)(1), Income Tax Regs.
In interpreting section 6662, the Court has defined the term
“negligence” as a “‘lack of due care or the failure to do what a
reasonable and ordinarily prudent person would do under the
circumstances.’” Freytag v. Commissioner, 89 T.C. 849, 887
(1987) (and cases cited thereat), affd. 904 F.2d 1011 (5th Cir.
1990), affd. 501 U.S. 868 (1991).
Section 6664(c)(1) provides an exception to the section
6662(a) penalty: no penalty is imposed with respect to any
portion of an underpayment if it is shown that there was
reasonable cause therefor and the taxpayer acted in good faith.
Section 1.6664-4(b)(1), Income Tax Regs., incorporates a facts
and circumstances test to determine whether the taxpayer acted
with reasonable cause and in good faith. The most important
factor is the extent of the taxpayer’s effort to assess his
proper tax liability. Id. Circumstances that may indicate
reasonable cause and good faith include an honest
6
(...continued)
of income tax ground.
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misunderstanding of fact or law that is reasonable in view of the
taxpayer’s experience, knowledge, and education. Id.
Petitioners have conceded that they improperly accounted for
the distributions with respect to Mrs. Doyle’s qualified
retirement plan and that they claimed improper deductions. In
addition, petitioners were not entitled to deduct the
expenditures paid or incurred in their so-called leasing activity
and/or trucking business. They did not establish reasonable
cause or any defense for their noncompliance with the Code’s
requirements. The Court finds that respondent has met his burden
of production and that petitioners were negligent. See Fairey v.
Commissioner, T.C. Memo. 2005-129. Accordingly, respondent’s
determination is sustained.
Other arguments made by the parties and not discussed herein
were considered and rejected as irrelevant, without merit, and/or
moot.
To reflect the foregoing,
Decision will be entered for
respondent.