T.C. Summary Opinion 2009-168
UNITED STATES TAX COURT
BERNICE E. AKANNO, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13778-07S. Filed November 12, 2009.
Wilfred I. Aka, for petitioner.
Alexander D. Devitis, for respondent.
COHEN, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue 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, all section references are to
the Internal Revenue Code in effect for the years in issue, and
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all Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined deficiencies of $30,580 and $39,148 in
petitioner’s Federal income taxes for 2004 and 2005,
respectively. Respondent also determined section 6662(a)
penalties of $6,116 and $7,829.60 for 2004 and 2005,
respectively. After concessions, the issues for decision are
whether petitioner received unreported interest income, whether
she is entitled to itemized deductions or rental loss deductions
beyond those conceded by respondent, whether she is entitled to
exemptions for dependents not conceded by respondent, and whether
she is liable for the accuracy-related penalties.
Background
Petitioner resided in California at the time her petition
was filed. During 2004 and 2005, petitioner worked full time as
a licensed nurse, primarily working the night shift at various
hospitals.
During the years in issue, petitioner had an ownership
interest in a 12-unit residential property. Ten of the units
were rented or available for rent. Petitioner and some of her
relatives occupied part of the property as their residence.
Petitioner actively participated in management of the property
but was not a real estate professional during 2004 or 2005.
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On her Form 1040, U.S. Individual Income Tax Return, for
2004, petitioner claimed four dependents, including her child,
two uncles, and a niece. On her Form 1040 for 2005, petitioner
claimed six dependents, including her child, two uncles, a niece,
and two unidentified persons. One of the uncles claimed as a
dependent on both returns filed his own Federal income tax return
for 2004 on which he claimed a personal exemption, an earned
income credit, and a refund. Respondent has conceded
petitioner’s claims with respect to her child but disputes the
additional dependent exemptions claimed for the uncles, niece,
and unidentified persons.
On her Forms 1040 for 2004 and 2005, petitioner reported,
respectively, wages of $112,413 and $178,102 and deducted rental
losses of $87,624 and $123,877. During the proceedings in this
case, she reduced her claimed rental expenses from $117,212 to
$108,137 for 2004 and from $123,877 to $104,378 for 2005.
Petitioner failed to report a State income tax refund received in
2004, and the parties have now agreed that she must include in
income the amount of $660 for that year. She failed to report
$136 and $116 in interest income on an account jointly maintained
with her brother during 2004 and 2005, respectively. Petitioner
has conceded that she failed to report $17,936 in rental income
in 2005.
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Respondent has conceded that petitioner is entitled to
deduct mortgage interest of $18,554 for 2004, has allowed
comparable mortgage interest claimed in 2005, and has conceded an
additional $20,000 per year in other rental expenses, including
estimated depreciation. In making the concessions, respondent
considered petitioner’s personal use of a portion of the property
and the probability that her coowner paid some of the expenses.
On her tax returns, petitioner claimed itemized deductions
including unreimbursed employee business expenses of $18,341 in
2004 and $15,767 in 2005. The claimed employee business expenses
consisted of vehicle expenses for which she failed to maintain
contemporaneous records or other means of substantiation required
by section 274(d). Respondent has conceded that petitioner is
entitled to deduct $4,000 in employee business expenses for each
year.
Procedural Matters
Because petitioner failed to produce documents or answer
questions during the examination of her returns for 2004 and
2005, separate notices of deficiency were sent to her determining
unreported income and disallowing claimed exemptions and
deductions. On June 18, 2007, she filed a petition in which she
elected to have this case conducted under the small tax case
procedures established pursuant to section 7463. She requested
Los Angeles, California, as the place of trial.
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By notice served April 4, 2008, this case was set for trial
in Los Angeles on September 8, 2008. Petitioner failed to appear
for trial on September 8, and counsel for respondent appeared and
filed a motion to dismiss the case for lack of prosecution. The
motion recounted petitioner’s failure to respond to
correspondence and phone calls from respondent’s counsel in
attempts to resolve this case or prepare it for trial. The Court
ordered petitioner to show cause why the case should not be
dismissed. On December 10, 2008, petitioner’s response to order
to show cause was filed. In her response, petitioner attributed
her failure to appear for trial to domestic difficulties. She
represented that she had retained the services of Wilfred I. Aka
to help her present the information that would support her
position. The Court’s order to show cause was discharged, and
the case was returned to the general docket for trial or other
disposition.
By notice served January 2, 2009, this case was set for
trial in Los Angeles on June 1, 2009. On April 17, 2009,
respondent filed a motion for an order to show cause pursuant to
Rule 91(f), setting forth petitioner’s continuing failure to
respond to communications from respondent. Attached to
respondent’s motion was a proposed stipulation and a series of
exhibits. Petitioner was ordered to show cause by May 6, 2009,
why the matters set forth in the proposed stipulation attached to
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respondent’s motion should not be deemed stipulated. Petitioner
failed to respond, the order to show cause was made absolute, and
the facts and evidence set forth in respondent’s proposed
stipulation were deemed established for purposes of this case.
The case was called for trial on June 1 and recalled on June
2, 2009. Petitioner orally moved for a continuance, which was
granted over respondent’s objection. The case was then set for
trial during the trial session commencing on July 20, 2009, in
Los Angeles. On July 14, 2009, Wilfred I. Aka entered his
appearance as counsel of record. He had been involved with the
issues in the case, however, by at least December 2008 according
to petitioner’s response to the Court’s first order to show
cause.
When the case was called for trial on July 20, 2009,
petitioner had neither executed a stipulation of facts nor moved
to be relieved of the deemed stipulations. Petitioner testified
at trial, and certain documents were received in evidence. The
trial was conducted consistent with section 7463(a) and Rule
174(b), in that the Federal Rules of Evidence were not applied.
Leading questions were permitted. In part because of the small
case designation, respondent’s counsel consented to withdrawal of
one of the items previously deemed stipulated.
At the conclusion of trial, petitioner sought to revoke her
election of small case procedures made when the petition was
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filed and applied in the two prior trial settings. The Court
ruled that the request to revoke the election was untimely. The
only issues in this case are routine and factual. There is no
reason to discontinue the proceedings conducted pursuant to
petitioner’s election and followed through trial by the parties
and the Court. See sec. 7463(d); Rule 171(c).
Also at the conclusion of trial, the Court commented on the
unsatisfactory state of the record and suggested that the parties
meet in an attempt to exchange additional information and resolve
additional issues. The parties were ordered to report on any
progress within 30 days and were given options concerning
posttrial briefs. Petitioner did not comply with the Court’s
suggestion and instead filed a brief that ignored evidence in the
record and argued facts that were contradicted or not supported
by evidence in the record. She declined respondent’s offer to
interview her claimed dependents. Respondent in a posttrial
brief nonetheless made the concessions mentioned above.
Discussion
Generally, petitioner has the burden of proving that the
determinations in the notices of deficiency are erroneous. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioner has not satisfied the conditions for shifting the
burden of proof to respondent under section 7491(a) because she
did not comply with the requirements to substantiate deductions,
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did not maintain all required records, and did not cooperate with
reasonable requests for information, documents, meetings, and
interviews. See sec. 7491(a)(2).
The only unreported income item remaining in dispute is the
interest on a joint bank account, which petitioner admitted
receiving. She argues, through her counsel, that she was not
required to report that interest income because her brother
reported it on his returns, but she testified that she does not
know whether her brother reported it. Petitioner’s argument with
respect to this item is contrary to her testimony and is
unavailing. She must include in her income $136 for 2004 and
$116 for 2005. See sec. 61(a)(4).
Petitioner failed to provide any documentary evidence or
specific testimony that she provided more than half of the
support for her uncles and her niece or any other claimed
dependent. (For 2005 petitioner failed to provide any evidence
that her niece had not provided over one-half of her own support
for the year. See sec. 152(c)(1)(D), (2)(B)). She testified
only that she provided support for them as follows:
Q About how much of living expenses did you
provide for these people?
A As much as their need was, and I provided
enough for what they needed; for what they need as
their needs I did. But I can’t put together right now
how much it is.
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She did not name in her testimony the unidentified persons
claimed on her return for 2005. Although she said that her
relatives were not employed during the years in issue, she did
not explain or negate other sources of their support, such as
other relatives or public assistance. See section 152(a) in
effect for 2004 and section 152(d)(1) in effect for 2005. Her
testimony in this regard is vague and unreliable. She has not
established her entitlement to the dependency exemptions.
It appears from petitioner’s testimony and from the
documents in evidence that petitioner used part of the rental
property as her residence. The property address was shown as
petitioner’s address on the Forms W-2, Wage and Tax Statement,
received in evidence. Petitioner produced miscellaneous receipts
relating to work done at the property and to expenses, such as
utilities, relating to the property. Petitioner did not allocate
the expenses of the property between rental expenses and expenses
attributable to her residence, and she did not prove that she
paid the amounts claimed. Real property tax records relating to
the building occupied and rented by petitioner suggested that she
was a coowner of the property with her brother and that 2 units
of the 12-unit property were “owner occupied”. Various receipts
petitioner presented at the time of trial did not fully
substantiate even the reduced amounts claimed for rental
expenses. Petitioner’s reported earnings and rents received do
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not appear sufficient to support the multiple dependents and to
pay the deductible expenses that she claimed. No deductions in
excess of those respondent conceded are allowable.
Petitioner’s claimed deductions for business use of her
vehicle have not been substantiated by adequate records as
required by section 274(d). A passenger vehicle is listed
property under section 280F(d)(4). Thus deductions are
disallowed unless the taxpayer adequately substantiates the
amount of the expense; the time and place of business use of the
vehicle; and the business purpose of the vehicle use. These
rules were adopted to preclude estimates based solely on a
finding that some deductible business expenses were incurred, as
allowed in other contexts. See Sanford v. Commissioner, 50 T.C.
823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir.
1969).
Petitioner’s counsel reconstructed the estimated business
mileage petitioner claimed, guessing at odometer readings during
2004 and 2005, and substantially reduced the employee business
expenses claimed for vehicle use. The reconstruction used her
current address rather than the address of her residence in 2004
and 2005 and was patently unreliable. Petitioner’s testimony did
not provide the necessary substantiation of time and place that
the expenses were incurred. Petitioner is not entitled to any
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deductions for business use of her vehicle in excess of the
amounts respondent conceded.
During the examination of her returns and for 2 years after
her petition was filed, petitioner did not produce documents or
otherwise cooperate in the determination of her tax liabilities.
With respect to the disallowed deductions and exemptions,
petitioner declined the opportunity after the trial, which
included respondent’s offer to interview her claimed dependents,
to establish greater entitlements. For over 6 months before
trial, she had a tax professional assisting her. At this point,
we infer that no additional substantiating or corroborating
evidence exists.
Petitioner has offered no explanation for the failure to
report $17,936 in rental income in 2005 and a State income tax
refund in 2004. Her alleged reason for not reporting interest
received in both years is contradicted by her testimony. She
alleges in her posttrial brief that she provided all of the
underlying documents to her tax preparer and that they were
subsequently lost without fault on her part, but the evidence
does not support that assertion. At trial, petitioner merely
responded to leading questions about the preparation of her
returns; she did not testify about any lost records.
Section 6662(a) and (b)(1) and (2) imposes a 20-percent
accuracy-related penalty on any underpayment of Federal income
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tax attributable to a taxpayer’s negligence or disregard of rules
or regulations, or a substantial understatement of income tax.
Section 6662(d)(1)(A) defines “substantial understatement of
income tax” as an amount exceeding the greater of 10 percent of
the tax required to be shown on the return or $5,000. In this
case, a Rule 155 computation will be required because of
respondent’s concessions, and it is not clear at this point
whether the remaining understatements will be substantial.
Respondent asserts petitioner’s negligence as an alternative
ground for imposition of the penalty for each year. Petitioner
failed to comply with substantiation requirements specific to the
deductions and exemptions claimed on her returns, claimed
deductions on the returns in excess of those established or even
claimed at trial, and failed to report income in each year.
These indicia of negligence satisfy respondent’s burden of
production with respect to the penalties. See sec. 7491(c).
The accuracy-related penalty under section 6662(a) will not
be imposed with respect to any portion of the underpayment as to
which the taxpayer acted with reasonable cause and in good faith.
Sec. 6664(c)(1). The decision as to whether a taxpayer acted
with reasonable cause and in good faith is made by taking into
account all of the pertinent facts and circumstances. Sec.
1.6664-4(b)(1), Income Tax Regs. Petitioner’s conclusory denials
of negligence and generalized assertions that she provided all of
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the necessary information to her tax return preparer are
unpersuasive on the record in this case and do not establish
reasonable cause. The section 6662(a) penalties will be
sustained.
In the answer, respondent asserted that petitioner’s rental
losses were limited by section 469, relating to passive
activities. Because we do not allow any deductions beyond those
conceded by respondent, it is not necessary to address that
issue. We have considered the other arguments of the parties;
they are either irrelevant or lack merit. For the reasons set
forth above,
Decision will be entered
under Rule 155.