T.C. Summary Opinion 2011-28
UNITED STATES TAX COURT
HAROLYN TARR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1787-10S. Filed March 9, 2011.
Harolyn Tarr, pro se.
Katy S. Lin, for respondent.
ARMEN, 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.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined the following deficiencies in, and
accuracy-related penalties under section 6662(a) on, petitioner’s
Federal income taxes:
Penalty
Year Deficiency Sec. 6662(a)
2007 $2,681 $536.20
2008 2,654 530.80
After various concessions described hereinafter, and without
regard to purely mechanical matters related to certain credits,
the issues for decision are as follows:
(1) Whether for 2007 petitioner is entitled to a Schedule C
deduction for “other expenses” aggregating $10,339;
(2) whether for 2008 petitioner is entitled to Schedule C
deductions for travel of $3,254, meals and entertainment of $790,
and certain “other expenses” aggregating $4,925; and
(3) whether petitioner is liable for the accuracy-related
penalty under section 6662(a).
Background2
Petitioner resided in the State of Michigan when the
petition was filed.
At all relevant times petitioner was married, and she and
her husband filed joint Federal income tax returns for 2007 and
2
None of the facts have been stipulated.
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2008, the 2 taxable years at issue in this case.3 On those
returns, petitioner and her husband each reported their wage
income.
Form 1040 for 2007
On the 2007 return, petitioner did not report any taxable
refund of State or local income tax.
Petitioner itemized deductions for 2007, and she attached to
the return a Schedule A, Itemized Deductions. On the Schedule A,
petitioner claimed total itemized deductions of $39,456, which
included miscellaneous itemized deductions (principally employee
business expenses) of $22,591 (net of the 2-percent floor on such
deductions prescribed by section 67(a)).
Petitioner also attached to the return (1) a Schedule C,
Profit or Loss From Business, for her “statistician” activity and
(2) a Schedule C for her husband’s “financial services” activity.
On petitioner’s Schedule C, which reflected a net loss, no gross
receipts or sales were reported. On petitioner’s husband’s
Schedule C, which also reflected a net loss, various deductions
3
The deficiencies and penalties at issue in this case were
determined by respondent in a joint notice of deficiency issued
to petitioner and her husband. The caption of the petition filed
with the Court bore the name of petitioner’s husband; however,
the petition bore the original signature of only petitioner. At
the trial session, petitioner’s husband was repeatedly invited to
ratify the petition by executing an amendment to petition and the
necessary form was furnished to him. After he steadfastly
declined to do so, the Court issued an order dismissing this case
as to him for lack of jurisdiction.
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were claimed, among them “other expenses” of $10,339, consisting
of the following:
communication expense $2,250
transportation expense 3,199
moving expense 1,875
vehicle expense 3,015
$10,339
Form 1040 for 2008
Petitioner itemized deductions for 2008, and she attached to
her return a Schedule A. On the Schedule A, petitioner claimed
total itemized deductions of $19,325, consisting of taxes paid of
$3,510, gifts to charity of $2,971, and miscellaneous itemized
deductions (principally employee business expenses) of $12,844
(net of the 2-percent floor on such deductions prescribed by
section 67(a)).
Petitioner also attached to her return a Schedule C, which
reflected a net loss, for her husband’s “financial services”
activity. Various deductions were claimed on this Schedule C,
including the following:
travel $3,254
meals & entertainment 790
“other expenses”: 5,675
communication expense $1,425
transportation expense 3,500
moving expense 750
Notice of Deficiency
For 2007, respondent determined that petitioner failed to
report (1) gross receipts of $3,558 on her “statistician”
Schedule C and (2) a taxable refund of State income tax of $52.
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Also for that year, respondent disallowed in full Schedule A
miscellaneous itemized deductions and the deduction for “other
expenses” claimed on the “financial services” Schedule C.
For 2008, respondent disallowed all of the Schedule A
itemized deductions and allowed instead the standard deduction
applicable to petitioner’s filing status (married filing
jointly). Also for that year, respondent disallowed in full
Schedule C deductions claimed for travel expenses, meals and
entertainment expenses, and “other expenses”.
For each year, respondent determined that petitioner was
liable for the accuracy-related penalty under section 6662(a).
Stipulation of Settled Issues and Other Concessions
Prior to trial, petitioner executed a Stipulation Of Settled
Issues.
For 2007, petitioner conceded that she failed to report
gross receipts of $3,558 and a taxable refund of $52 and that she
was not entitled to any miscellaneous itemized deductions on
Schedule A.
For 2008, petitioner conceded $14,871 of the $19,325 of
total itemized deductions claimed on the Schedule A.4 Petitioner
4
The difference between the amount claimed by petitioner
on her return ($19,325) and the amount conceded by petitioner in
the Stipulation Of Settled Issues ($14,871) is $4,454. At trial,
respondent conceded that difference; however, respondent’s
concession was obviously motivated by the fact that it had no tax
effect because $4,454 is less than the standard deduction
(continued...)
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also conceded the “moving expense” deduction of $750 claimed as a
component of “other expenses” on her husband’s “financial
services” Schedule C.
Discussion
A. Burden of Proof
In general, the Commissioner’s determinations in a notice of
deficiency are presumed correct, and the taxpayer bears the
burden of showing that those determinations are erroneous. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Pursuant to section 7491(a)(1), the burden of proof as to
factual matters may shift from the taxpayer to the Commissioner
under certain circumstances. Petitioner did not allege that
section 7491 applies, nor did she either introduce the requisite
evidence, see sec. 7491(a)(1), or satisfy the substantiation,
recordkeeping, and other requirements of that section, see sec.
7491(a)(2)(A) and (B). Therefore, petitioner bears the burden of
proof. See Rule 142(a).
B. Substantiation of Deductions
Deductions are allowed solely as a matter of legislative
grace, and the taxpayer bears the burden of proving his or her
entitlement to them. Rule 142(a); INDOPCO, Inc. v. Commissioner,
503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292
4
(...continued)
($10,900) that respondent allowed in the notice of deficiency.
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U.S. 435, 440 (1934). This includes the burden of
substantiation. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87,
89 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976); sec.
1.6001-1(a), (e), Income Tax Regs.
The fact that a taxpayer lists a deduction on the taxpayer’s
return is not sufficient to substantiate the deduction.
Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v.
Commissioner, 62 T.C. 834, 837 (1974). This is because a tax
return is merely a statement of the taxpayer’s claim, and the
return is not presumed to be correct. Wilkinson v. Commissioner,
supra at 639; Roberts v. Commissioner, supra at 837; see Lawinger
v. Commissioner, 103 T.C. 428, 438 (1994) (“Tax returns do not
establish the truth of the facts stated therein.”); Seaboard
Commercial Corp. v. Commissioner, 28 T.C. 1034, 1051 (1957) (a
taxpayer’s income tax return is a self-serving declaration that
may not be accepted as proof for the deduction or exclusion
claimed by the taxpayer); Halle v. Commissioner, 7 T.C. 245
(1946) (a taxpayer’s return is not self-proving as to the truth
of its contents), affd. 175 F.2d 500 (2d Cir. 1949); Taylor v.
Commissioner, T.C. Memo. 2009-235 (“A tax return is not evidence
of the truth of the facts stated in it.”).
As a general rule, if, in the absence of required records, a
taxpayer provides sufficient evidence that the taxpayer has
incurred a deductible expense, but the taxpayer is unable to
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adequately substantiate the amount of the deduction to which he or
she is otherwise entitled, the Court may estimate the amount of
such expense and allow the deduction to that extent. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However, the
Court may bear heavily against the taxpayer, whose inexactitude is
of his or her own making. Id. Further, in order for the Court to
estimate the amount of an expense, we must have some basis upon
which an estimate may be made. Vanicek v. Commissioner, 85 T.C.
731, 743 (1985). Without such a basis, any allowance would amount
to unguided largesse. Williams v. United States, 245 F.2d 559,
560 (5th Cir. 1957).
In the case of certain expenses, section 274(d) expressly
overrides the so-called Cohan doctrine. Sanford v. Commissioner,
50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir.
1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985). Specifically, and as pertinent herein,
section 274(d) provides that no deduction is allowable for
traveling expenses (including meals and lodging while away from
home) or with respect to listed property as defined in section
280F(d)(4), unless the deduction is substantiated in accordance
with the strict substantiation requirements of section 274(d) and
the regulations promulgated thereunder. Included within the
definition of listed property in section 280F(d)(4) is any
passenger automobile or other property used as a means of
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transportation and any cellular telephone. Sec. 280F(d)(4)(A)(i),
(ii), (v), (5); sec. 1.280F-6(b) and (c), Income Tax Regs.; see,
e.g., Murata v. Commissioner, T.C. Memo. 1996-321; Golden v.
Commissioner, T.C. Memo. 1993-602. In other words, in the absence
of adequate records or sufficient evidence corroborating the
taxpayer’s own statement, any deduction that is subject to the
stringent substantiation requirements of section 274(d) is
proscribed.
Applying the foregoing principles to the instant case, we are
unable to conclude, given the absence of relevant testimony and
meaningful records, that petitioner has proven entitlement to any
of the Schedule C deductions remaining in issue. We therefore
sustain respondent’s determination in this regard.
C. Accuracy-Related Penalty
Section 6662(a) imposes a penalty equal to 20 percent of the
amount of any underpayment attributable to negligence or disregard
of rules or regulations. Sec. 6662(b)(1). The term “negligence”
includes any failure to make a reasonable attempt to comply with
tax laws, and the term “disregard” includes any careless,
reckless, or intentional disregard of rules or regulations. Sec.
6662(c). Negligence also includes any failure by the taxpayer to
keep adequate books and records or to substantiate items properly.
Sec. 1.6662-3(b)(1), Income Tax Regs.
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Section 6664(c)(1) provides an exception to the imposition of
the accuracy-related penalty if the taxpayer establishes that
there was reasonable cause for, and the taxpayer acted in good
faith with respect to, the underpayment. See sec. 1.6664-4(a),
Income Tax Regs. The determination of whether the taxpayer acted
with reasonable cause and in good faith is made on a case-by-case
basis, taking into account the pertinent facts and circumstances.
Sec. 1.6664-4(b)(1), Income Tax Regs. The taxpayer bears the
burden of proving that he or she did not act negligently or
disregard rules or regulations. Rule 142(a); Welch v. Helvering,
290 U.S. at 115; Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
But see sec. 7491(c) (regarding the Commissioner’s burden of
production).
For 2007, petitioner failed to report any of the gross
receipts of her “statistician” Schedule C activity; she also
failed to report a refund of State income tax, albeit modest in
amount. Also for that year, petitioner grossly overstated her
itemized deductions, conceding that she was not entitled to nearly
60 percent of the deductions claimed on Schedule A ($22,591 ÷
$39,456).
For 2008, petitioner also grossly overstated her itemized
deductions, conceding that she was not entitled to over 75 percent
of the deductions claimed on Schedule A ($14,871 ÷ $19,325).
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In view of the foregoing, we conclude that respondent
satisfied his burden of production. However, we are unable to
conclude that petitioner proved that there was reasonable cause
for, and that she acted in good faith with respect to, the
underpayment of tax for either 2007 or 2008. Thus, in addition to
the unexplained failure to report gross income and the gross
overstatement of itemized deductions, no persuasive explanation
was provided regarding the disallowed Schedule C deductions. We
therefore hold for respondent on this issue.
Conclusion
We have considered all of the arguments made by petitioner,
and, to the extent that we have not specifically addressed any of
them, we conclude that they are irrelevant or without merit.
To reflect our disposition of the disputed issues, as well as
petitioner’s concessions,
Decision will be entered
for respondent.