T.C. Summary Opinion 2010-82
UNITED STATES TAX COURT
NATARAJAN PALANIAPPAN AND S. DANDAMUDI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24802-08S. Filed June 23, 2010.
Natarajan Palaniappan and S. Dandamudi, pro sese.
Alicia E. Elliott, 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 issue,
- 2 -
and Rule references are to the Tax Court Rules of Practice and
Procedure.
Respondent determined for 2005 a deficiency in petitioners’
Federal income tax of $3,440, an addition to tax of $847 under
section 6651(a)(1) for failure to file timely, and an accuracy-
related penalty of $688 under section 6662(a).
Petitioner S. Dandamudi did not sign the stipulation of
facts, nor did she appear for trial. Respondent orally moved to
dismiss her for failure to properly prosecute her case. An
appropriate order granting respondent’s motion will be issued.1
Respondent concedes that petitioners are entitled to a moving
expense deduction of $6,144 and a home mortgage interest
deduction of $2,839. Petitioner Natarajan Palaniappan
(petitioner) concedes that his joint Federal income tax return
was not timely filed within the filing period as extended by
respondent. Respondent concedes that petitioners are not liable
for the accuracy-related penalty under section 6662(a). The
items remaining for decision are whether petitioners: (1) Are
entitled to itemized deductions in an amount in excess of the
standard deduction, and (2) failed to file timely due to
reasonable cause and not due to willful neglect.
1
The Court will dismiss S. Dandamudi for failure to properly
prosecute and will enter a decision against her consistent with
the decision entered against Natarajan Palaniappan.
- 3 -
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
Alaska2 when the petition was filed.
Petitioner was employed as a finance director during the
year at issue, and Ms. Dandamudi was not employed outside of the
home. Among the items claimed on petitioners’ Schedule A,
Itemized Deductions, were medical and dental expenses of $14,859
in excess of the 7.5-percent floor and home mortgage interest of
$11,5013 that included $8,651 paid to a Mr. Chandrasekhar in
India. Respondent disallowed both itemized deductions in their
entirety.
Discussion
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
2
Petitioner filed an amended return while residing in
Arizona.
3
The Schedule A lists home mortgage interest reported on
Form 1098, Mortgage Interest Statement, of $3,030 and $8,651 paid
to Mr. Chandrasekhar, a total of $11,681. There is no
explanation for the discrepancy.
- 4 -
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.
Medical Expenses
Under section 213, individuals are allowed to deduct the
expenses paid for the “medical care” of the taxpayer, the
taxpayer’s spouse, or a dependent, to the extent the expenses
exceed 7.5 percent of adjusted gross income and are not
compensated for by insurance or otherwise.
The term “medical care” includes amounts paid for the
diagnosis, cure, mitigation, treatment, or prevention of disease,
or for insurance covering the diagnosis, cure, mitigation,
treatment, or prevention of disease. Sec. 213(d)(1).
A taxpayer must substantiate claims for deductible medical
expenses by furnishing “the name and address of each person to
whom payment for medical expenses was made and the amount and
date of the payment”. Sec. 1.213-1(h), Income Tax Regs. When
the Commissioner so requests, claims must be substantiated by a
statement or invoice from the service provider showing the
service provided, to or for whom rendered, and the amount and
date of payment. Id. Where a taxpayer fails to provide adequate
substantiation, the Court may uphold the Commissioner’s
determination denying a deduction for medical and dental
expenses. See Davis v. Commissioner, T.C. Memo. 2006-272; Hunter
- 5 -
v. Commissioner, T.C. Memo. 2000-249; Nwachukwu v. Commissioner,
T.C. Memo. 2000-27.
Petitioner offered as evidence of medical expenses a
handwritten list prepared by Ms. Dandamudi for each month of 2005
showing items of the most general description. Some of the
entries included: Medical test, hospital room, hospital tips,
home health, medicine, injection, dental, lab test, and similar
items. Beside each item is an amount in Indian rupees.
Petitioner also presented a faxed copy of a January 2010 computer
printed letter purporting to be from Ms. Dandamudi’s attending
physician in India. In the letter the doctor gives a general
description of Ms. Dandamudi’s medical condition in 2005 and an
overall estimate of what she must have paid in 2005 for treatment
from himself, a private duty nurse and home healthcare service,
acute care, rehabilitation, diagnostic imaging, lab work,
medicines, and the services of several other attending
physicians. The letter represents that everything was paid for
in cash for which no records were retained. The overall cost
estimate is alleged to be based on his “decades of experience” in
diagnosing her illness.
Petitioner was unable to produce a single receipt,
statement, invoice, canceled check, or other item of documentary
evidence for the payment of any medical expense. Aside from the
hospital and physician’s name on the letter offered by
- 6 -
petitioner, the name of no service provider, pharmacy,
laboratory, or hospital was provided.
Because petitioners have failed to provide any proper
substantiation to support their claimed deduction for medical and
dental expenses, the Court finds that no estimate of any amounts
of petitioners’ deduction can be made under Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). In order for
the Court to estimate the amount of an expense there must be some
basis upon which an estimate may be made. Vanicek v.
Commissioner, 85 T.C. 731, 742-743 (1985). Without such a basis,
an allowance would amount to unguided largesse. Williams v.
United States, 245 F.2d 559, 560 (5th Cir. 1957).
The Court sustains respondent’s disallowance of petitioners’
claimed deduction for medical and dental expenses. See sec.
6001; sec. 1.6001-1(a), (e), Income Tax Regs.
Home Mortgage Interest
Section 163(a) allows a deduction for interest paid or
accrued within the taxable year on indebtedness. Individuals are
allowed a deduction for “qualified residence interest”. Sec.
163(h)(3). Qualified residence interest includes interest paid
on indebtedness incurred to acquire a qualified residence of the
taxpayer that is secured by the qualified residence, or on “home
equity indebtedness”, certain indebtedness secured by a qualified
residence. Id. Debt is secured by a qualified residence if
- 7 -
there is an instrument that in the event of default subjects the
residence to satisfaction of the debt in the same way as would a
mortgage or deed of trust. Sec. 1.163-10T(o)(1), Temporary
Income Tax Regs., 52 Fed. Reg. 48417 (Dec. 22, 1987).
Home equity indebtedness is limited in amount to the fair
market value of the qualified residence reduced by any
“acquisition indebtedness” and may not exceed $100,000. Sec.
163(h)(3)(C). Respondent argues that petitioners have failed to
provide adequate substantiation for their claimed home mortgage
interest deduction.
Petitioner attempted to prove his claim with a copy of a
document purporting to be a promissory note in favor of I.K.
Chandrasekhar for 45 lakhs4 of Indian rupees with an attached
payment schedule. By the terms of the note, principal and
interest are guaranteed by petitioner’s father. Petitioner also
produced a copy of a letter ostensibly from Mr. Chandrasekhar’s
India-based attorney stating that “Mr. Palaniappian Natarajan has
met his [sic] all his obligations Principal and Interest per
Mortgage Amortization Schedule attached to the Loan Document for
all these years.”
Petitioner produced no evidence of the fair market value of
his house or the amount, if any, of acquisition indebtedness to
4
A lakh is equal to 100,000. Webster’s 10th New Collegiate
Dictionary (1996).
- 8 -
which it may be subject. Petitioner produced no evidence of the
actual payment of any interest on the note. No notice of a
security interest was filed in the United States with respect to
the loan to petitioner by Mr. Chandrasekhar. Because the loan
from Mr. Chandrasekhar was not a debt secured by an instrument
that in the event of default subjected the property to
satisfaction of the debt in the same way as would a mortgage or
deed of trust, it was not a debt secured by a qualified
residence. Therefore, the debt was not acquisition or home
equity indebtedness for which petitioner may deduct interest.
Respondent’s determination that petitioners are not entitled to
deduct home mortgage interest with respect to the loan from Mr.
Chandrasekhar is sustained.
Addition to Tax Under Section 6651(a)(1)
Respondent bears the burden of production with respect to
the addition to tax. See sec. 7491(c). To meet this burden,
respondent must produce evidence sufficient to establish that it
is appropriate to impose the addition to tax. See Higbee v.
Commissioner, 116 T.C. 438, 446-447 (2001). Petitioner agrees
that petitioners requested and were granted an extension of time
to file their 2005 Federal income tax return until October 15,
2006. Petitioner agrees that petitioners failed to file their
Federal income tax return until February 20, 2007. Respondent
has met his burden of production under section 7491(c) with
- 9 -
respect to imposing the addition to tax under section 6651(a)(1).
It is petitioners’ burden to prove that they had reasonable
cause and lacked willful neglect in not filing the return timely.
See United States v. Boyle, 469 U.S. 241, 245 (1985); Higbee v.
Commissioner, supra at 446; sec. 301.6651-1(a)(2), Proced. &
Admin. Regs. Because petitioners failed to offer any evidence of
reasonable cause and lack of willful neglect for their failure to
file timely, respondent’s determination that they are liable for
the addition to tax under section 6651(a)(1) is sustained.
To reflect the foregoing,
An appropriate order
will be issued, and decision
will be entered under
Rule 155.