Garrin v. Comm'r

T.C. Summary Opinion 2009-50

UNITED STATES TAX COURT

CHRISTOPHER OLAN GARRIN, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 25592-07S. Filed April 9, 2009.

Christopher Olan Garrin, pro se.

John R. Bampfield, for respondent.

RUWE, Judge: This case was heard pursuant to the provisions

of section 74631 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to

1
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.
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be entered is not reviewable by any other court, and this opinion

shall not be treated as precedent for any other case.

Respondent determined deficiencies, additions to tax, and

accuracy-related penalties as follows:

Addition to Tax Accuracy-Related Penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

2004 $15,990 $3,997.50 $897.50
2005 3,590 3,198.00 718.00

After concessions, the issues we must decide are: (1)

Whether petitioner had unreported income of $88,3892 for 2004;

(2) whether petitioner is entitled to cost of goods sold and

deductions claimed on Schedule C, Profit or Loss From Business,

for 2004 and 2005 in amounts greater than those allowed by

respondent; (3) whether petitioner is entitled to deduct net

operating losses (NOL) of $10,814 for 2004 and $5,784 for 2005;

(4) whether petitioner is entitled to deduct home mortgage

interest claimed on Schedule A, Itemized Deductions, in an amount

greater than that allowed by respondent for 2004; (5) whether

petitioner is liable for the additions to tax pursuant to section

6651(a)(1) for 2004 and 2005; and (6) whether petitioner is

2
In the notice of deficiency respondent determined on the
basis of bank deposits analysis that petitioner had unreported
income of $88,389. After further examination of petitioner’s
bank deposits for 2004, respondent has concluded that
petitioner’s unreported income should have been $88,509.
Nevertheless, respondent has agreed to limit his pursuit of
unreported income to $88,389 as originally stated in the notice
of deficiency.
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liable for the accuracy-related penalties pursuant to section

6662(a) for 2004 and 2005.

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. At the time the petition

was filed, petitioner resided in Georgia.

During 2004 and 2005 petitioner was a subcontractor doing

business as Garrin Construction, a commercial construction

company that specialized in interior commercial drywall.

Petitioner transacted much of his business with cash, including

purchasing materials and paying some of his employees. Payors

reported paying to petitioner nonemployee compensation of $50,286

and $35,214 during 2004 and 2005, respectively. Petitioner

operated his business from his residence. Petitioner, however,

has not offered any documentary or testimonial evidence as to the

portion of his residence that was used exclusively for business.

During 2004 petitioner acquired a “big job” that required

him to assign eight of his workers to it. Petitioner testified

that the “big job” caused him cashflow problems and he had to

borrow money from his mother in order to continue paying his

workers and to purchase the necessary materials to complete the

job. Petitioner asserts that his mother lent him $20,000 at

various intervals during 2004 and that these funds were received
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in cash. Petitioner further asserts that he borrowed “roughly

about $12,000” from his girlfriend in 2004 in order to fix his

house and shop. Petitioner submitted two letters, one allegedly

written by his mother and the other allegedly written by his

girlfriend, as evidence of the funds he had borrowed from them.

The two handwritten letters, however, were both dated within 1

week of trial. Petitioner had no other documentation of either

loan.

In May 2004 petitioner’s residence was destroyed by fire.

The report prepared by the local fire department stated there was

heavy fire throughout the house with most of the roof area and

one vehicle destroyed by the fire. The fire destroyed not only

petitioner’s shop but also his 2004 business records. Petitioner

did not claim a casualty loss on either his 2004 or 2005 Federal

income tax return. During 2004 petitioner paid $3,959 in home

mortgage interest.

The IRS received petitioner’s 2004 Federal income tax return

on September 21, 2005. Petitioner did not report any wages,

salaries, tips, or gross receipts from his business for 2004 but

did report a $26 State income tax refund. Petitioner also

reported a business loss of $5,810, an NOL of $10,814, and home

mortgage interest of $11,500.

During 2005 petitioner allowed his niece to move into his

trailer home since he did not stay there. While out of town,
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petitioner received a telephone call from his brother and his

brother’s wife informing him that they were throwing all of his

belongings out, including his business records, transferring the

title out of his name, and moving their daughter (petitioner’s

niece) into the trailer. Petitioner called the police to put a

stop to his family’s actions but asserts that his 2005 business

records were nevertheless lost.

The IRS received petitioner’s 2005 Federal income tax return

on January 26, 2007. On his 2005 Schedule C petitioner reported

gross receipts of $35,214, cost of goods sold of $9,478, car and

truck expenses of $43,418, depreciation of $6,460, an insurance

(other than health) expense of $2,500, and a utilities expense of

$840, resulting in a reported business loss of $27,482. For 2005

petitioner did not report any wages, salaries, or tips. On his

2005 return petitioner also reported a separate NOL of $5,784 and

a State income tax refund of $26.

Discussion

The Commissioner’s determinations in a notice of deficiency

are presumed correct, and the taxpayer bears the burden of

proving error in the Commissioner’s determinations. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden of

proof may shift to the Commissioner in certain circumstances if

the taxpayer introduces credible evidence and establishes that he

or she substantiated items, maintained required records, and
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fully cooperated with the Commissioner’s reasonable requests.

Sec. 7491(a)(1) and (2)(A) and (B). Petitioner has neither

asserted that the burden of proof has shifted to respondent nor

provided sufficient credible evidence to reconstruct his business

records for 2004 or 2005; therefore the burden of proof remains

with petitioner.

I. Unreported Income for 2004

Gross income includes all income from whatever source

derived unless excluded by a specific provision of the Internal

Revenue Code. Sec. 61(a). Where a taxpayer is unable to produce

substantiating business records of his income, the Commissioner

may use the bank deposits method to reconstruct and compute the

taxpayer’s income. See Estate of Mason v. Commissioner, 64 T.C.

651, 656 (1975), affd. 566 F.2d 2 (6th Cir. 1977). A bank

deposit is prima facie evidence of income. Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986). This method of

reconstruction assumes that all money deposited into a taxpayer’s

bank account is includable in gross income unless the taxpayer

establishes that the deposits are not taxable. DiLeo v.

Commissioner, 96 T.C. 858, 868 (1991), affd. 959 F.2d 16 (2d Cir.

1992). The Commissioner, however, must take into account any

nontaxable items and deductible expenses of which he has

knowledge. Id. (citing Price v. United States, 335 F.2d 671, 677

(5th Cir. 1964)).
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Petitioner does not dispute respondent’s use of the bank

deposits method for reconstruction of his 2004 income; rather, he

contends that a portion of these deposits was loan proceeds from

his mother and his girlfriend. For support petitioner proffered

two handwritten letters purportedly from his mother and his

girlfriend. However, the handwritten letters were not

contemporaneous manifestations of the parties’ purported

agreements with petitioner, and we do not find them to be

persuasive or credible. Moreover, petitioner has not identified

any specific deposit into his bank account as representative of

loan proceeds.

Because petitioner failed to identify any of the deposits as

nontaxable, all the deposits in 2004 are includable in

petitioner’s gross income. Accordingly, we find that petitioner

failed to report $88,389 in gross receipts for 2004.

II. Schedule C Cost of Goods Sold and Business Expenses

Section 162(a) allows a taxpayer to deduct all the ordinary

and necessary expenses paid or incurred in carrying on a trade or

business. Taxpayers bear the burden of proving that they have

complied with the specific requirements for any deduction

claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).

Personal expenses, in contrast, generally are not deductible.

Sec. 262(a).
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A taxpayer must substantiate amounts claimed as deductions

by maintaining the records necessary to establish that he or she

is entitled to the deductions. Sec. 6001; sec. 1.6001-1(a),

Income Tax Regs. When a taxpayer presents convincing evidence

that he incurred a deductible expense but lacks the records to

substantiate the claimed amounts, the Court may estimate the

allowable deduction. Cohan v. Commissioner, 39 F.2d 540, 544 (2d

Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

The Court will estimate the expenses only when the record

provides some basis for computation. Cohan v. Commissioner,

supra at 544; Vanicek v. Commissioner, supra at 742-743. In

estimating the taxpayer’s allowable deductions, the Court bears

heavily against the taxpayer because the “inexactitude is of his

own making.” Cohan v. Commissioner, supra at 544.

A. Utilities Expense

For 2005 petitioner claimed a utilities expense of $840. Of

that amount, respondent allowed $216 and disallowed $624.

Petitioner has not established that he paid or incurred a

utilities expense in an amount greater than that respondent

allowed. Accordingly, we find that he is not entitled to a

utilities expense deduction for 2005 in excess of the amount

respondent already allowed.

For 2004 petitioner did not initially deduct a utilities

expense on his late-filed Federal income tax return. At trial,
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however, petitioner submitted a copy of an electric utility bill

with his name on it. This electric utility bill indicates that

petitioner paid $743.90 for electricity during 2004. The

electric utility bill does not, however, indicate the address or

property to which it pertains. Nevertheless, respondent has

conceded on brief that it relates to petitioner’s residence.

Section 280A(a) provides: “Except as otherwise provided in

this section, in the case of a taxpayer who is an individual

* * *, no deduction otherwise allowable under this chapter shall

be allowed with respect to the use of a dwelling unit which is

used by the taxpayer during the taxable year as a residence.”

Section 280A(c)(1)(A) provides an exception to this general rule

and permits a deduction for home office expenses allocable to a

portion of the dwelling unit which is exclusively used on a

regular basis as the principal place of business for any trade or

business of the taxpayer.

Petitioner has neither established what portion of his

residence was used solely for business purposes nor provided some

basis for us to compute it. Thus, we are unable to determine

what portion of his 2004 utilities expense was allocable to the

business. Accordingly, we find that petitioner has failed to

carry his burden of proof and therefore is not entitled to a

utilities expense deduction for 2004.
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B. Car and Truck Expenses

Section 274(d)(4) imposes heightened substantiation

requirements for listed property. Listed property includes

passenger automobiles. Sec. 280F(d)(4)(A)(i). The required

substantiation must be sufficient to establish the amount and use

of the expense, the time of the business use, and the business

purpose of the expense. Sec. 1.274-5T(b)(6), Temporary Income

Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). Taxpayers must

substantiate their expenses by either “adequate records” or

“sufficient evidence corroborating the taxpayer’s own statement”.

Sec. 274(d); sec. 1.274-5T(c)(1), Temporary Income Tax Regs., 50

Fed. Reg. 46016 (Nov. 6, 1985). “To meet the ‘adequate records’

requirements of section 274(d), a taxpayer shall maintain an

account book, diary, log, statement of expense, trip sheets, or

similar record * * *, and documentary evidence”. Sec. 1.274-

5T(c)(2)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov.

6, 1985). When a taxpayer loses the substantiating documentation

due to circumstances beyond his control, he may reasonably

reconstruct such expenses. Sec. 1.274-5T(c)(5), Temporary Income

Tax Regs., 50 Fed. Reg. 46022 (Nov. 6, 1985).

Petitioner did not deduct any car and truck expenses on his

2004 Schedule C. At trial petitioner provided a $37.69 receipt

from Craig’s Xpress Lube dated July 14, 2004. Petitioner,

however, has offered nothing more to reasonably reconstruct his
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car and truck expenses in 2004 and has failed to establish the

business purpose of the $37.69 expense. Accordingly, we sustain

respondent’s determination and find that petitioner has not met

the heightened substantiation requirements to deduct any car and

truck expenses in 2004.

On petitioner’s Schedule C for 2005 he deducted $43,418 of

car and truck expenses. Respondent disallowed $43,171 of the

claimed deduction. At trial petitioner proffered many receipts

purportedly relating to car and truck expenses of his business.

Petitioner has not corroborated these receipts with credible

testimony or other evidence to establish the business purpose of

the expenses. See sec. 1.274-5T(c)(1), Temporary Income Tax

Regs., supra. In fact, when asked about a log for 2005

petitioner testified: “I think there is a log somewhere, but it

probably isn’t up to date because it was pretty much havoc at

that time. I got a little sidetracked. I’m sure it won’t be

accurate.” While petitioner may have incurred some car and truck

expenses while operating his business, the consequence of his

failure to keep an accurate log or at a minimum establish the

business purpose for the expenses reflected on the receipts

provided by him is that respondent’s determination will be

sustained. Accordingly, we find that petitioner is not entitled

to a car and truck expense deduction for 2005 in excess of the

amount respondent already allowed.
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C. Cost of Goods Sold and Other Schedule C Expenses

On his 2004 Schedule C petitioner did not report any amount

as cost of goods sold (COGS) or claim a deduction for any

business expense other than a $5,810 depreciation expense under

section 179. In the notice of deficiency respondent determined

that petitioner incurred $25,177 for COGS, $2,739 for insurance,

and $322 for repairs and maintenance in 2004. Petitioner

submitted evidence showing that he had additional Schedule C

expenses in 2004 that were neither claimed on his return nor

allowed by respondent in the notice of deficiency. On brief

respondent has conceded that petitioner is entitled to an

additional $25.90 in Schedule C expense deductions. With respect

to all other receipts petitioner proffered, he has not

established how these expenditures related to his business.

Accordingly, we sustain respondent’s determination and hold that

petitioner is not entitled to an increase in COGS or to any other

business expense deduction in an amount greater than that

respondent allowed for 2004.

On his 2005 Schedule C petitioner reported COGS of $9,478.

In the notice of deficiency respondent determined that petitioner

had overstated his COGS by $2,304. After reviewing the multitude

of receipts provided by petitioner at trial, on brief respondent

has conceded that petitioner’s COGS should be increased by an

additional $145.37. Most of the receipts petitioner provided are
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insufficient on their own to substantiate their business purpose.

Moreover, petitioner has not credibly testified with respect to

these receipts. We therefore sustain respondent’s determination

and hold that petitioner is only entitled to subtract $7,320 from

his gross receipts as COGS in 2005.

III. Net Operating Loss Deductions

Section 172(a) and (b) allows a deduction for an NOL, which

may be carried back to each of the 2 years preceding the taxable

year of the loss and carried over to each of the 20 taxable years

following the year of the loss. In general, the taxpayer bears

the burden of establishing both the actual existence of NOLs and

the amounts of such losses that may be carried to the years at

issue. Rule 142(a); Keith v. Commissioner, 115 T.C. 605, 621

(2000).

On his 2004 Federal income tax return petitioner reported a

$10,814 NOL, and on his 2005 return he reported a $5,784 NOL. In

the notice of deficiency respondent disallowed these deductions

because petitioner did not “establish that any loss existed or

was adequately substantiated.”

Petitioner has not provided any evidence of the existence of

an NOL that could have been deducted in 2004 or 2005.

Accordingly, we find that petitioner is not entitled to an NOL

deduction for either 2004 or 2005.
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IV. Home Mortgage Interest Deduction

For 2004 petitioner claimed a home mortgage interest

deduction of $11,500. Respondent determined that petitioner was

entitled to a home mortgage interest deduction of $3,959.

Home mortgage interest is generally deductible under section

163(a), subject to the requirements of subsection (h).

Petitioner has not offered any documentary or testimonial

evidence to allow us to determine whether he is entitled to a

home mortgage interest deduction in excess of the amount

respondent already allowed. Accordingly, we sustain respondent’s

determination.

V. Section 6651(a)(1) Addition to Tax

Section 6651(a)(1) imposes an addition to tax for the

failure to file a return. Section 7491(c) generally provides

that the Commissioner bears the burden of production with respect

to the liability of an individual for any penalty or addition to

tax. The Commissioner may meet his 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).

Because the parties stipulated that petitioner filed his

2004 and 2005 Federal income tax returns late, respondent has met

his burden of production.
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Additionally, petitioner has not offered any documentary or

testimonial evidence to establish that his late filing was due to

reasonable cause and not due to willful neglect. See sec.

6651(a)(1). Accordingly, we sustain the section 6651(a)(1)

addition to tax but note that because the parties have made

several concessions, respondent’s original section 6651(a)(1)

addition to tax computations must be adjusted to reflect those

changes.

VI. Section 6662(a) Accuracy-Related Penalty

Pursuant to section 6662(a) and (b)(1) and (2), a taxpayer

may be liable for a penalty of 20 percent on the portion of an

underpayment of tax (1) due to negligence or disregard of the

rules or regulations or (2) attributable to a substantial

understatement of income tax. Section 6662(c) defines

“negligence” as any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code. See

also sec. 1.6662-3(b)(1), Income Tax Regs. A substantial

understatement of tax is defined as an understatement of tax that

exceeds the greater of 10 percent of the tax required to be shown

on the tax return or $5,000. Sec. 6662(d)(1)(A). The

Commissioner bears the burden of production with respect to the

accuracy-related penalty. See sec. 7491(c); Higbee v.

Commissioner, supra at 446.
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On the basis of our findings herein, respondent has met his

burden of production. See sec. 6662(c); sec. 1.6662-3(b)(1),

Income Tax Regs. Although petitioner asserts that his business

records were either destroyed by fire or lost due to the actions

of his family members, we do not find his limited testimony

sufficient to establish that the alleged missing records complied

with the recordkeeping requirements of the law. See sec. 6001;

sec. 1.6001-1(a), Income Tax Regs. Petitioner therefore failed

to make a reasonable attempt to comply with the law or maintain

adequate records.

An exception to the section 6662 penalty applies when the

taxpayer demonstrates there was reasonable cause for the

underpayment and the taxpayer acted in good faith with respect to

the underpayment. Sec. 6664(c); Higbee v. Commissioner, supra at

448. Whether a taxpayer acted with reasonable cause and in good

faith is made on a case-by-case basis, taking into account all

the pertinent facts and circumstances. Higbee v. Commissioner,

supra at 448; sec. 1.6664-4(b)(1), Income Tax Regs.

Petitioner testified that he had receipts for many of his

expenses but the receipts were either destroyed by fire in 2004

or thrown away by his brother and his brother’s wife in 2005.

The loss of his 2004 business records does not explain why

petitioner chose not to report any gross receipts from his

business in 2004. Additionally, petitioner admittedly did not
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keep a contemporaneous log of his expenses in 2005 and testified

further that if he could find the log that he kept he was sure

that it would not be accurate. Moreover, petitioner has made

little if any attempt to reconstruct the missing records. Such

circumstances do not constitute reasonable cause. Accordingly,

we conclude that petitioner has failed to demonstrate reasonable

cause and good faith. Respondent’s determination on this issue

is sustained.

To reflect the foregoing,

Decision will be entered

under Rule 155.