T.C. Memo. 2008-228
UNITED STATES TAX COURT
PATRICK S. ARNOLD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 708-06, 12304-06, Filed October 8, 2008.
12312-06, 12475-06.
Steven D. Morford, for petitioner.
Kelly M. Davidson, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
THORNTON, Judge: In these consolidated cases, respondent
determined the following deficiencies and additions to tax with
respect to petitioner’s Federal income taxes:
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Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6651(a)(2) 6654
19991 $79,706 $17,933 $19,926 $3,857
2000 57,404 14,351 -- --
2001 67,571 15,203 13,514 2,700
2002 53,953 12,139 5,934 1,802
The sole issue is whether petitioner is entitled to
deductions claimed on Schedules A, Itemized Deductions, and
Schedules C, Profit or Loss From Business, attached to his
untimely returns for the years at issue.2 Unless otherwise
indicated, all section references are to the Internal Revenue
Code in effect for the years at issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
1
After issuing the notice of deficiency for 1999,
respondent issued petitioner a new examination report,
redetermining a 1999 deficiency of $73,625 and additions to tax
pursuant to secs. 6651(a)(1) and (2), and 6654 in the amounts of
$16,565, $18,406, and $3,563, respectively. Respondent has
conceded the amounts of deficiency and additions to tax in excess
of those determined in the new examination report.
2
Neither in his petition nor otherwise in this proceeding
has petitioner assigned error to respondent’s determination that
he is liable for additions to tax pursuant to secs. 6651(a)(1)
and (2), and 6654. We deem petitioner to have conceded that the
additions to tax are appropriate. See Swain v. Commissioner, 118
T.C. 358, 365 (2002) (if an individual does not challenge a
penalty by assigning error to it, the Commissioner has no
obligation under sec. 7491(c) to produce evidence that the
penalty is appropriate). The exact amount of the additions to
tax shall be determined in the parties’ Rule 155 calculations.
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FINDINGS OF FACT3
The parties have stipulated some facts, which we incorporate
herein. When he petitioned the Court, petitioner resided in
Arizona.
During the years at issue, petitioner was in the masonry,
tile, and stone installation business. He failed to file timely
Forms 1040, U.S. Individual Income Tax Return, for 1999, 2000,
2001, and 2002 and made no estimated tax payments. Respondent
issued separate notices of deficiency for each of these years,
determining that petitioner had unreported income.
Each petition in these consolidated cases alleges as the
sole assignment of error that respondent has failed to take into
account petitioner’s “ordinary and necessary expenses”. The
petitions state identically: “Tax returns are in the process of
being prepared to reflect those expenses.” After petitioning
this Court, petitioner submitted to respondent Federal income tax
returns for the years at issue. Attached to these returns, which
are in evidence, are Schedules A and Schedules C in which
petitioner claimed numerous and sizable deductions.
3
Petitioner failed to file any posttrial brief and
consequently failed to set forth any objections to respondent’s
proposed findings of fact. We consider petitioner to have waived
any objections to respondent’s proposed findings of fact. See
Rule 151(e)(3) (“In an answering or reply brief, the party shall
set forth any objections, together with the reasons therefor, to
any proposed findings of any other party”).
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OPINION
Petitioner does not dispute respondent’s determinations as
to the amounts of his unreported income for the years at issue.4
Although his contentions are vague, petitioner appears to claim
entitlement to at least some of the various deductions claimed on
his untimely returns. The record is sparse. Petitioner’s
counsel was unprepared at trial, called no witnesses, and filed
neither a pretrial memorandum nor a posttrial brief as ordered.
The evidence consists almost entirely of the parties’ limited
stipulations and the testimony of respondent’s revenue agent.
Generally, 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).5 Deductions are a
matter of legislative grace, and a taxpayer must prove
entitlement to claimed deductions. Rule 142(a)(1); INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992). The taxpayer must keep
sufficient records to substantiate any deductions claimed. Sec.
6001. If a taxpayer establishes a deductible expense but is
4
On his Schedules C, Profit or Loss From Business,
petitioner reported as gross receipts or sales the same amounts
that respondent had determined in the notices of deficiency as
unreported income.
5
Petitioner does not claim and has not established that the
conditions of sec. 7491(a) have been met to shift the burden of
proof to respondent with regard to any factual issue as to
petitioner’s liability for tax.
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unable to substantiate the precise amount, the Court generally
may approximate the deductible amount, but only if the taxpayer
presents sufficient evidence to establish a rational basis for
making the estimate. Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743
(1985); cf. Kendrix v. Commissioner, T.C. Memo. 2006-9
(questioning whether the Cohan rule applies with respect to
claimed charitable contributions that have not been adequately
substantiated).
On the Schedules A attached to his untimely returns
petitioner claimed, among other things, cash and noncash
charitable contributions (including carryover amounts) in the
following amounts:
Year Charitable Contributions
1999 $35,028
2000 13,078
2001 13,905
2002 9,408
Respondent concedes that petitioner has substantiated charitable
contributions in 1999 and 2000 in the amounts of $15,525 and
$4,215, respectively. Petitioner has failed to establish that he
is entitled to any greater amount of charitable deduction.6
6
Petitioner’s claimed 1999 charitable deduction included a
$12,618 carryover of excess charitable contributions from his
1997 taxable year. On brief respondent concedes that petitioner
had available a $9,859 charitable contribution carryover from
(continued...)
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Moreover, in this proceeding petitioner has offered no evidence
to show that he is entitled to any other itemized deductions.
On the Schedules C attached to his untimely returns,
petitioner claimed, among other things, expenses for materials
and supplies in the following amounts:
Year Amount
1999 $28,086
2000 64,821
2001 43,257
2002 63,830
The parties have stipulated certain of petitioner’s receipts for
materials and supplies, totaling $7,642 for 1999; $17,028 for
2000; $15,778 for 2001; and $16,043 for 2002. We hold that
petitioner is entitled to deductions for materials and supplies
in these amounts. Petitioner has introduced no evidence to
substantiate any greater amount of Schedule C expenses or to
provide any basis for us to estimate them.7
6
(...continued)
1997 but contends, on the basis of stipulated evidence, that the
entire carryover must be treated as a charitable contribution
paid in 1998. See sec. 170(d)(1); sec. 1.170A-10(b)(1) and (2),
Income Tax Regs. (individuals’ charitable contributions in excess
of the applicable percentage limitation must be treated as
charitable contributions paid in each of the 5 taxable years
immediately succeeding the contribution year in order of time).
Petitioner has offered neither evidence nor argument against
these contentions.
7
At trial petitioner’s counsel stated that it was “pretty
obvious” that petitioner must have had labor expenses to generate
his income. Shortly before trial petitioner provided respondent
with copies of Forms 1096, Annual Summary and Transmittal of U.S.
(continued...)
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To reflect the foregoing and concessions by respondent,
Decision will be entered
under Rule 155.
7
(...continued)
Information Returns, for his 1999 through 2002 taxable years with
attached Forms 1099-MISC, Miscellaneous Income, reporting
payments allegedly made to specified individuals for those years.
The parties have stipulated, however, that the Social Security
numbers reported in the Forms 1099-MISC do not belong to the
individuals whose names are reported therein. Moreover,
respondent alleges that he has no record that petitioner ever
filed the Forms 1096 and 1099-MISC. In any event, at trial
petitioner offered neither these forms nor any other evidence to
substantiate claimed labor expenses.