T.C. Memo. 2011-39
UNITED STATES TAX COURT
JOHN ARTHUR RAEBER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13089-09. Filed February 10, 2011.
John Arthur Raeber, pro se.
Audra M. Dineen and Matthew A. Mendizabal, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax and accuracy-related penalties as
follows:
Penalty
Year Deficiency Sec. 6662(a)
2006 $90,029 $18,005.80
2007 90,536 18,107.20
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The issues for decision are: (1) Whether petitioner is
entitled to deductions for business expenses of $252,013 and
$253,490 claimed on Schedules C, Profit or Loss From Business,
for 2006 and 2007, respectively; and (2) whether petitioner is
liable for accuracy-related penalties under section 6662(a)1 for
2006 and 2007.2
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulations of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
California at the time he filed his petition.
In 2006 and 2007 petitioner worked as a self-employed
consultant to various architects throughout the world. He
operated his consulting business as a sole proprietorship and
reported his income and expenses from the business on a Schedule
C. Petitioner timely filed Forms 1040, U.S. Individual Income
Tax Return, for 2006 and 2007, and attached Schedules C on which
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code (Code) in effect for the years in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
2
Respondent’s determinations with respect to the reduction
of petitioner’s personal exemption deductions and with respect to
the increase in petitioner’s self-employment taxes are automatic
adjustments that will be resolved by our decision of the primary
issue.
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he reported gross income of $336,475 and $334,860, respectively,
and business expenses of $252,0133 and $253,490,4 respectively.
Respondent audited petitioner’s 2006 and 2007 returns and
requested that petitioner substantiate all of his Schedule C
business expenses. Petitioner refused to substantiate any of his
claimed business expenses, arguing that the substantiation
requirement violates his Fifth Amendment rights under the U.S.
Constitution. Respondent then issued petitioner a notice of
deficiency disallowing petitioner’s deductions for business
expenses claimed on his Schedules C.
At trial petitioner told the Court that he had no knowledge
of any pending criminal investigation. Respondent’s counsel
informed the Court that she too was unaware of any pending
criminal investigation of petitioner.
OPINION
I. Deficiency Determinations
A. Burden of Proof
As a general rule, taxpayers bear the burden of proving the
Commissioner’s deficiency determinations incorrect. Rule 142(a);
3
Petitioner reported the following business expenses on
his Schedule C for 2006: (1) Meals and entertainment of $17,612;
(2) business use of home of $16,940; (3) contract labor of
$102,400; and (4) various other expenses of $115,061.
4
Petitioner reported the following business expenses on
his Schedule C for 2007: (1) Meals and entertainment of $17,790;
(2) business use of home of $17,012; (3) contract labor of
$73,700; and (4) various other expenses of $144,988.
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Welch v. Helvering, 290 U.S. 111, 115 (1933). To shift the
burden of proof to the Commissioner with respect to a factual
issue relevant to the liability for tax, taxpayers must, inter
alia, maintain all records required by the Code and regulations
and cooperate with reasonable requests by the Secretary for
witnesses, information, documents, meetings, and interviews.
Sec. 7491(a)(2). Petitioner neither claims nor shows that he
satisfies the requirements of section 7491(a) to shift the burden
of proof to respondent. Accordingly, petitioner bears the burden
of proof.
B. Schedule C Deductions
Deductions are a matter of legislative grace, and taxpayers
have the burden of showing that they are entitled to any
deduction claimed. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). Taxpayers are required to
maintain records that are sufficient to enable the Commissioner
to determine their correct tax liability. Sec. 6001; sec.
1.6001-1(a), Income Tax Regs. Additionally, taxpayers bear the
burden of substantiating the amount and purpose of the item
claimed as a deduction. Hradesky v. Commissioner, 65 T.C. 87, 89
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
Petitioner argues that reporting his expenses on his 2006
and 2007 Schedules C and signing his returns under penalty of
perjury constitute sufficient substantiation. We have long held
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that signing a return under penalty of perjury is not sufficient
to substantiate its accuracy. Wilkinson v. Commissioner, 71 T.C.
633, 639 (1979); Roberts v. Commissioner, 62 T.C. 834, 837-839
(1974) (holding that a taxpayer does not satisfy his burden to
substantiate claimed business expenses by merely signing his
return under penalty of perjury and testifying to its accuracy,
without producing additional evidence); Whitaker v. Commissioner,
T.C. Memo. 2010-209.
Petitioner failed to introduce any other evidence to
substantiate his claimed business expenses, asserting instead his
Fifth Amendment privilege against self-incrimination. The Court
is not aware of any pending or likely criminal investigation of
petitioner. The privilege against self-incrimination does not
apply where the possibility of criminal prosecution is remote or
unlikely. Wilkinson v. Commissioner, supra at 638. Petitioner’s
baseless Fifth Amendment claim cannot stand in the way of a
determination of his civil tax liability.
At trial the Court warned petitioner that his Fifth
Amendment claim would not excuse him from his burden to
substantiate his claimed business expenses and offered petitioner
an additional opportunity to introduce evidence to satisfy his
burden. However, petitioner continued to assert his Fifth
Amendment privilege and offered no further evidence to
substantiate his claimed business expenses. Accordingly, we
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sustain respondent’s disallowance of petitioner’s deductions for
business expenses claimed on his Schedules C for 2006 and 2007.
II. Section 6662(a) Accuracy-Related Penalties
Pursuant to section 6662(a), taxpayers may be liable for a
penalty of 20 percent of the portion of an underpayment of tax
attributable to: (1) A substantial understatement of income tax
or (2) negligence or disregard of rules or regulations. See sec.
6662(b). The term “understatement” means the excess of the
amount of tax required to be shown on a return over the amount of
tax imposed which is shown on the return, reduced by any rebate
(within the meaning of section 6211(b)(2)). Sec. 6662(d)(2)(A).
Generally, an understatement is a “substantial understatement”
when it exceeds the greater of $5,000 or 10 percent of the amount
of tax required to be shown on the return. Sec. 6662(d)(1)(A).
In addition, section 6662(c) defines “negligence” as any failure
to make a reasonable attempt to comply with the provisions of the
Code, and “disregard” means any careless, reckless, or
intentional disregard.
The Commissioner has the burden of production with respect
to the section 6662(a) accuracy-related penalty. Sec. 7491(c).
To meet this burden, the Commissioner must produce sufficient
evidence indicating that it is appropriate to impose the penalty.
See Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Once the
Commissioner meets this burden of production, the taxpayer must
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come forward with persuasive evidence that the Commissioner’s
determination is incorrect. Rule 142(a); see Higbee v.
Commissioner, supra at 447. Whether applied because of a
substantial understatement of income tax or negligence or
disregard of rules or regulations, the accuracy-related penalty
is not imposed with respect to any portion of the understatement
as to which the taxpayer acted with reasonable cause and in good
faith. The taxpayer is responsible for putting forth evidence to
show that he acted with reasonable cause and in good faith.
Petitioner’s understatement exceeded the greater of $5,000
or 10 percent of the amounts of tax required to be shown on his
2006 and 2007 returns. Therefore, we find that respondent
satisfied his burden of production. Petitioner offered no
evidence that he acted with reasonable cause and in good faith.
Accordingly, we hold that petitioner is liable for the section
6662(a) accuracy-related penalty for 2006 and 2007.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we conclude they are irrelevant or without
merit.
To reflect the foregoing,
Decision will be entered
for respondent.