T.C. Memo. 2009-164
UNITED STATES TAX COURT
EDILBERTO TOMAS GUERRERO AND
SALVIE VILLAFLOR GUERRERO, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 27203-07. Filed July 6, 2009.
Edilberto Tomas Guerrero and Salvie Villaflor Guerrero, pro
sese.
Scott B. Burkholder, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a $4,998 deficiency
in and a $999.60 section 6662(a)1 penalty on petitioners
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
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Edilberto Guerrero (Mr. Guerrero) and Salvie Guerrero’s (Mrs.
Guerrero) 2004 Federal income tax.
The issues for decision are: (1) Whether petitioners are
entitled to deductions for personal property taxes, other taxes,
charitable contributions, and individual retirement account (IRA)
contributions; and (2) whether petitioners are liable for the
section 6662(a) penalty.
FINDINGS OF FACT
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 petitioners
filed the petition, they resided in California.
Petitioners were notified by the IRS by letter in April 2007
that their 2004 return was being audited. The initial contact
letter identified the audit issues and informed petitioners of
the need to bring records supporting their position with regard
to the issues presented in the letter. Mr. Guerrero contacted
the auditing IRS office’s group secretary on April 20, 2007, and
scheduled an interview.2 On June 7, 2007, Mr. Guerrero met with
Ms. Tamara Burrell, the tax auditor assigned to his return.3
2
Group secretaries make it a point when scheduling
appointments to tell taxpayers of the substantiation
requirements.
3
Ms. Burrell testified that Mrs. Guerrero did not
accompany Mr. Guerrero to the meeting. However, Mrs. Guerrero
(continued...)
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At the interview, Mr. Guerrero did not provide any
documentation to support the claimed deductions and contended he
was entitled to those deductions without having to provide any
substantiation. Ms. Burrell informed Mr. Guerrero that the
taxpayer must “maintain some semblance of record keeping” and
“provide records to support the deductions”, as well as “provide
validity to the figures that appear on the return.”
Respondent issued a notice of deficiency to petitioners
disallowing $39,000 of claimed deductions comprising the
following: Personal property taxes of $3,300, other taxes
(automobile registration) of $2,700, charitable contributions of
$26,000, and IRA contributions of $7,000.4 These deductions were
disallowed because petitioners failed to provide any checks,
receipts, bills, invoices, letters confirming donations, or any
other documents proving the payment of those amounts.
Petitioners timely filed a petition challenging respondent’s
denial of their claimed deductions. A January 10, 2008, letter
3
(...continued)
did sign the return and the petition.
4
On petitioners’ Schedule A, Itemized Deductions, they
claimed total deductions of $40,669. Respondent denied $32,000
of these itemized deductions: Personal property taxes of $3,300,
other taxes of $2,700, and charitable contributions of $26,000,
leaving petitioners with $8,669, $1,031 less than the standard
deduction of $9,700. In adjusting the return, respondent allowed
the standard deduction because it provided petitioners with a
larger deduction than the allowable itemized deductions.
Petitioners claimed the IRA contributions as “above the line”
deductions.
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from the IRS notified petitioners they would have another
opportunity to substantiate the contested deductions.
Petitioners failed to provide any substantiation at this second
interview.
At trial Mr. Guerrero claimed he lacked substantiating
documents for the $26,000 of charitable contributions because
petitioners made anonymous cash donations to their church. Mr.
Guerrero also claimed he was unaware that he needed to
substantiate the contributions. However, when asked whether he
followed the instructions on the tax return that relate to
charitable contributions over $250, Mr. Guerrero stated: “I don’t
have to follow [them], I just put whatever is necessary to put
the deduction. This is my deduction, the cash plate that I
donated.” Mr. Guerrero, despite claiming he had some supporting
evidence, provided no substantiation or explanation for the other
claimed deductions.
Even though petitioners’ gross income is not in issue, at
trial Mr. Guerrero argued that gain derived from wages, salaries,
and compensation for personal services is not taxable income.5
5
In his pretrial memorandum, Mr. Guerrero cites various
opinions including Lucas v. Earl, 281 U.S. 111 (1930) (he is
actually quoting the syllabus accompanying the opinion, which is
not considered part of the opinion), and Edwards v. Keith, 231 F.
110 (2d Cir. 1916). He contends that those cases support the
proposition that gain from wages, salaries, and compensation for
personal services is not within the concept of income and thus is
not taxable.
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At trial Mr. Guerrero was advised by the Court that his case
involved deductions and not gross income, and that his position
was inconsistent with and nonresponsive to the issues presented.
Petitioners offered no other arguments or evidence.
OPINION
I. Substantiation of Claimed Deductions
Deductions are a matter of legislative grace, and a taxpayer
bears the burden of proving that he is entitled to the deductions
claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503
U.S. 79 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435
(1934). The taxpayer is required to maintain records that are
sufficient to enable the Commissioner to determine his correct
tax liability. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
In addition, the taxpayer bears the burden of substantiating the
amount and purpose of the claimed deduction. See Hradesky v.
Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d
821 (5th Cir. 1976).
Section 7491(a) shifts the burden of proof to the
Commissioner with respect to a factual issue affecting the tax
liability of a taxpayer who meets certain preliminary conditions.
Petitioners failed to cooperate with respondent and did not
produce any credible evidence with respect to any matter in this
case. See sec. 7491(a). Furthermore, petitioners did not claim
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that section 7491(a) applies. Accordingly, section 7491(a) does
not apply in this case.
Although Mr. Guerrero denies having knowledge of the
substantiation requirement, it is clear respondent made him aware
of this duty. Respondent’s letters, Ms. Burrell, and this Court
all informed Mr. Guerrero of his duty to substantiate the claimed
deductions, yet he repeatedly failed and refused to do so.
Despite petitioners’ adamant denial of any duty to substantiate,
it is clear taxpayers must provide records supporting their
claimed deductions. See sec. 6001; sec. 1.6001-1(a), Income Tax
Regs. Accordingly, because petitioners have not presented any
evidence supporting the claimed deduction amounts, they have not
met their burden of substantiation and are not entitled to the
deductions. See Hradesky v. Commissioner, supra.
II. Section 6662(a) Accuracy-Related Penalty
Section 6662(a) imposes a penalty in an amount equal to 20
percent of the portion of the underpayment of tax attributable to
one or more of the items set forth in section 6662(b), including
negligence or disregard of rules or regulations. “Negligence” is
the failure to exercise due care or the failure to do what a
reasonable and prudent person would do under the circumstances
and includes any failure to make a reasonable attempt to comply
with the provisions of the internal revenue laws. Sec. 6662(c);
Neely v. Commissioner, 85 T.C. 943, 947 (1985); sec. 1.6662-
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3(b)(1), Income Tax Regs. “Disregard” includes any careless,
reckless, or intentional disregard of rules or regulations. Sec.
6662(c); sec. 1.6662-3(b)(2), Income Tax Regs.
The accuracy-related penalty of section 6662 does not apply
with respect to any portion of an underpayment if it is shown
that there was reasonable cause for such portion and that the
taxpayer acted in good faith with respect to such portion. Sec.
6664(c)(1). The determination of whether a taxpayer acted with
reasonable cause and in good faith depends upon the pertinent
facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs.
The most important factor is the extent of the taxpayer’s effort
to assess his or her proper tax liability. Id.
Section 7491(c) provides that the Commissioner bears the
burden of production with respect to the liability of any
individual for additions to tax and penalties. “The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount”. Swain v.
Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). If a taxpayer files a
petition alleging some error in the determination of an addition
to tax or penalty, the taxpayer’s challenge will succeed unless
the Commissioner produces evidence that the addition to tax or
penalty is appropriate. Swain v. Commissioner, supra at 363-365.
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The Commissioner, however, does not have the obligation to
introduce evidence regarding reasonable cause or substantial
authority. Higbee v. Commissioner, supra at 446-447.
Petitioners failed to provide any substantiation for the
deductions respondent disallowed and claimed they were not
required to do so. Alone, a failure to substantiate deductions
may be indicative of negligence. Sec. 1.6662-3(b)(1). Further,
petitioners’ repeated failures and refusals to substantiate the
claimed deductions despite knowing of the substantiation
requirement demonstrates an intentional disregard for section
6001. See secs. 1.6662-3(b)(2), 1.6001-1(a), Income Tax Regs.
Petitioners have offered no evidence to contradict this
inference, and their arguments presented at trial and in their
pretrial memorandum do not address the issue at hand.
Petitioners’ reliance on Lucas v. Earl, 281 U.S. 111 (1930), and
Edwards v. Keith, 231 F. 110 (2d Cir. 1916), is misplaced and
reflects a misunderstanding of the issues presented in those
cases. Both cases involved assignments of income and whether
income was attributable to the person who earned it. Neither
pertains directly to whether deductions must be substantiated.
Thus, it cannot be said petitioners acted reasonably or in good
faith. Given this, respondent’s determination of the section
6662(a) penalty is sustained.
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To reflect the foregoing,
Decision will be entered
for respondent.