T.C. Summary Opinion 2010-50
UNITED STATES TAX COURT
JAMES L. WRIGHT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7440-09S. Filed April 20, 2010.
James L. Wright, pro se.
John Spencer Hitt, for respondent.
DEAN, Special Trial 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, subsequent section references
are to the Internal Revenue Code in effect for the year at
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issue, and Rule references are to the Tax Court Rules of Practice
and Procedure.
Respondent determined for 2005 a deficiency in petitioner’s
Federal income tax of $19,318 and an accuracy-related penalty
under section 6662(a) of $3,863.60.
The parties agree that petitioner is not entitled to
itemized deductions in excess of the standard deduction for a
single taxpayer. The parties also agree that petitioner is
entitled to deduct on Schedule C, Profit or Loss From Business,
only the following expenses: (a) “Other” of $2,376,
(b) $949 for utilities, (c) $1,660 for supplies, (d) $2,997 for
rent, (e) $7,000 for legal fees, and (f) $1,188 for office
expenses. The parties agree that petitioner failed to report on
Schedule C of his Federal income tax return an additional $22,641
of gross receipts and sales. The issues remaining for decision
are whether petitioner: (1) Failed to report $7,003.07 in excess
of the gross receipts and sales that he now admits he failed to
report, and (2) is liable for the accuracy-related penalty under
section 6662(a).
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received in evidence
are incorporated herein by reference. Petitioner resided in
Illinois when the petition was filed.
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Petitioner during the year 2005 was a sole proprietor doing
business as James Wright Tax and Accounting. The parties
stipulated that petitioner maintained a business checking account
with Harris Bank in the name of the proprietorship. Aside from
the deposits on which the parties agree, respondent’s examination
revealed two additional bank “teller deposits”, $3,500 on
December 5 and $3,503.07 on December 21, 2005. Respondent
determined them to be income.
Petitioner did not maintain adequate books and records that
recorded his income for 2005, and he did not produce any evidence
from the bank or otherwise that would indicate the nature of the
disputed deposits.
Discussion
Disputed Deposits
Generally, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer has the burden
of proving that those determinations are erroneous. See Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). In some
cases the burden of proof with respect to relevant factual issues
may shift to the Commissioner under section 7491(a). Petitioner
did not argue or present evidence that he satisfied the
requirements of section 7491(a). Therefore, the burden of proof
does not shift to respondent.
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Petitioner and respondent agree that petitioner did not
report all of his gross receipts for 2005. Petitioner argues
that the disputed deposits are loan proceeds from his life
insurance policy or amounts “from cash savings”, or that he may
have “borrowed * * * [them] from someone”. Petitioner also
testified that “every now and then” he sold life insurance during
the year for which he would receive commissions.
Petitioner failed to offer any documentary evidence about
the nature of the disputed deposits. Even his testimony was
vague and indefinite. This Court is not bound to accept a
taxpayer’s self-serving, unverified, and undocumented testimony.
Shea v. Commissioner, 112 T.C. 183, 189 (1999); Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986).
The Court sustains respondent’s determination that the two
deposits totaling $7,003.07 represent unreported income for 2005.
Accuracy-Related Penalty
Section 7491(c) imposes on the Commissioner the burden of
production in any court proceeding with respect to the liability
of any individual for penalties and additions to tax. Higbee v.
Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.
Commissioner, T.C. Memo. 2003-164. In order to meet the burden
of production under section 7491(c), the Commissioner need only
make a prima facie case that imposition of the penalty or
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addition to tax is appropriate. Higbee v. Commissioner, supra at
446.
Respondent determined that petitioner is liable for an
accuracy-related penalty under section 6662(a). Section 6662(a)
imposes a 20-percent penalty on the portion of an underpayment
attributable to any one of various factors, including negligence
or disregard of rules or regulations and a substantial
understatement of income tax. See sec. 6662(b)(1) and (2).
“Negligence” includes any failure to make a reasonable attempt to
comply with the provisions of the Internal Revenue Code,
including any failure to keep adequate books and records or to
substantiate items properly. See sec. 6662(c); sec.
1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”
is an understatement of tax that exceeds the greater of 10
percent of the tax required to be shown on the return or $5,000.
See sec. 6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section
6662(a) shall not apply to any portion of an underpayment if it
is shown that there was reasonable cause for the taxpayer’s
position and that the taxpayer acted in good faith with respect
to that portion. The determination of 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. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
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important factor is the extent of the taxpayer’s effort to assess
his proper tax liability for the year. Id.
Petitioner had a substantial understatement of tax for 2005
since the understatement amount exceeded the greater of 10
percent of the tax required to be shown on the return or $5,000.
Petitioner claimed itemized deductions and business expenses to
which he was not entitled and underreported his business income.
The Court concludes that respondent has produced sufficient
evidence to show that the imposition of the accuracy-related
penalty under section 6662 is appropriate.
Petitioner, a tax return preparer, did not show that his
underreporting of income and overreporting of deductions were
actions taken with reasonable cause and in good faith.
Respondent’s determination of the accuracy-related penalty under
section 6662(a) for 2005 is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.