T.C. Memo. 2011-197
UNITED STATES TAX COURT
ADAN SUCILLA, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10888-10. Filed August 15, 2011.
Adan Sucilla, pro se.
John M. Wall, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined deficiencies in
petitioner’s Federal income tax for 2007 and 2008 of $60,227 and
$9,869, respectively, and accuracy-related penalties under
section 6662(a)1 of $12,045 and $1,974, respectively. The
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended and in effect for the
(continued...)
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deficiencies were the result of the disallowance of expense
deductions claimed on petitioner’s Schedules C, Profit or Loss
From Business, attached to his 2007 and 2008 Federal income tax
returns. The issues for decision after concessions2 are whether
petitioner is entitled to various Schedule C deductions. We must
further decide whether petitioner is liable for the accuracy-
related penalties under section 6662(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, together with the attached exhibits, is
incorporated herein by this reference. At the time petitioner
filed his petition, he resided in Fresno, Californa.
Throughout 2007 and 2008 petitioner operated Sucilla Farm
Labor Contractor, a sole proprietorship providing farm labor
services in the Fresno, California, area. Petitioner timely
filed Forms 1040, U.S. Individual Income Tax Return, for taxable
years 2007 and 2008. Attached to the respective returns were
Schedules C pertaining to petitioner’s farm labor business.
Petitioner reported gross income of $2,351,207 and total expenses
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(...continued)
taxable years at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. Amounts are rounded to
the nearest dollar.
2
In a stipulation of settled issues petitioner concedes that
he received and failed to report $686 of cancellation of
indebtedness income for taxable year 2007.
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of $2,262,421 on his 2007 Schedule C. On his 2008 Schedule C
petitioner reported gross income of $1,342,334 and total expenses
of $1,287,945.
Petitioner did not keep separate books for his business. He
relied on bank statements, subcontractor checks, and receipts for
his expenses. He did, however, hire a certified public
accountant to prepare his 2007 and 2008 Federal income tax
returns. The Internal Revenue Service agent who examined the
returns found that all business income was reported accurately,
but not all expenses deducted could be substantiated because
petitioner had either lost or misplaced a number of his receipts.
For 2007, out of a total of $2,262,421 in expenses, $165,386 was
not substantiated. For 2008, out of a total of $1,287,945 in
expenses, $35,920 was not substantiated. But the auditing agent
allowed deductions totaling $38,635 and $18,585 for 2007 and
2008, respectively, for previously unclaimed but allowable
expenses.
On March 30, 2010 respondent sent a notice of deficiency for
petitioner’s 2007 and 2008 income tax returns. In his notice of
deficiency, respondent disallowed 2007 Schedule C expense
deductions totaling $165,387.3 Respondent also disallowed 2008
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These disallowed deductions related to: (1) Insurance
expenses; (2) office expenses; (3) rent or lease for vehicles,
machinery, and equipment expenses; (4) repairs and maintenance
expenses; (5) supplies expenses; (6) taxes and licenses expenses;
(continued...)
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Schedule C expense deductions totaling $35,921.4 Petitioner filed
a timely petition with this Court.
OPINION
I. Business Deductions
Deductions are a matter of legislative grace, and the
taxpayer must prove he or she is entitled to the deductions
claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934). Section 162(a) provides that “There shall
be allowed as a deduction all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade
or business”. The regulations specify that ordinary and
necessary business expenses include “the ordinary and necessary
expenditures directly connected with or pertaining to the
taxpayer’s trade or business”. Sec. 1.162-1(a), Income Tax Regs.
Taxpayers are required to maintain records sufficient to
establish the amounts of allowable deductions and to enable the
Commissioner to determine the correct tax liability. Sec. 6001;
Shea v. Commissioner, 112 T.C. 183, 186 (1999).
In addition to satisfying the criteria for deductibility
under section 162, certain categories of expenses must also
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(...continued)
(7) meals and entertainment expenses; (8) utility expenses; and
(9) other expenses.
4
These disallowed deductions related to: (1) Car and truck
expenses; (2) legal and professional expenses; (3) rent or lease
for vehicles, machinery, and equipment expenses; (4) repairs and
maintenance expenses; and (5) other expenses.
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satisfy the strict substantiation requirements of section 274(d)
in order for a deduction to be allowed. The expenses to which
section 274(d) applies include, among other things, meals and
entertainment expenses and expenses for passenger automobiles.
See secs. 274(d)(1), (2), (4), 280F(d)(4).
If the trial record provides sufficient evidence that the
taxpayer has incurred a deductible expense but the taxpayer is
unable to substantiate adequately the precise amount of the
deduction to which he or she is otherwise entitled, the Court may
estimate the amount of the deductible expense and allow the
deduction to that extent (Cohan rule). Cohan v. Commissioner, 39
F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85
T.C. 731, 742-743 (1985); Sanford v. Commissioner, 50 T.C. 823,
827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); see
also sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg.
46014 (Nov. 6, 1985). In these instances, the Court is permitted
to make as close an approximation of the allowable expense as it
can, bearing heavily against the taxpayer whose inexactitude is
of his or her own making. Cohan v. Commissioner, supra at 544.
However, in order for the Court to estimate the amount of an
expense, the Court must have some basis upon which an estimate
may be made. Vanicek v. Commissioner, supra at 742-743. Without
such a basis, any allowance would amount to unguided largesse.
Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).
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Section 274(d) overrides the Cohan rule and thus
specifically precludes the Court from allowing a deduction for
travel expenses, entertainment expenses, gifts, and expenses with
respect to section 280F(d)(4) “listed property” (including
passenger automobiles) “unless the taxpayer substantiates by
adequate records or by sufficient evidence corroborating the
taxpayer’s own statement”: (1) The amount of the expense or
other item; (2) the time and place of the travel, entertainment
or use, or date and description of the gift; (3) the business
purpose of the expense or other item; and (4) in the case of
entertainment or gifts, the business relationship to the taxpayer
of the recipients or persons entertained.
Other than those deductions respondent conceded, petitioner
failed to provide receipts, logs, books, or any other kind of
documentation to substantiate the deductions claimed on his 2007
and 2008 Federal income tax returns. Without more information
regarding the claimed deductions, we sustain respondent’s
determinations with regard to petitioner’s 2007 and 2008 Federal
income tax returns.
II. Section 6662(a) Penalty
Section 6662(a) and (b)(2) imposes a 20-percent accuracy-
related penalty upon any underpayment of tax resulting from a
substantial understatement of income tax. An understatement is
substantial if it exceeds the greater of 10 percent of the tax
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required to be shown on the return or $5,000. Sec.
6662(d)(1)(A). The Commissioner bears the burden of production
with respect to penalties. Sec. 7491(c); Higbee v. Commissioner,
116 T.C. 438, 446-447 (2001). Petitioner accurately reported his
income on his 2007 and 2008 Federal income tax returns. However,
petitioner was unable to substantiate various deductions claimed.
Thus, respondent calculated that petitioner understated his tax
liability by $60,227 in 2007 and $9,869 in 2008. Petitioner had
reported taxes of $14,176 and $7,585 on his 2007 and 2008
returns, respectively. The amount of each understatement was
substantial because each exceeded the greater of: (1) 10 percent
of the tax required to be shown on the return for the taxable
year, or (2) $5,000. Consequently, respondent has satisfied his
burden of production.
The accuracy-related penalty is not imposed, however,
with respect to any portion of the underpayment for which the
taxpayer can establish that he acted with reasonable cause and in
good faith. Sec. 6664(c)(1). The decision as to whether the
taxpayer acted with reasonable cause and in good faith depends
upon all the pertinent facts and circumstances. Sec. 1.6664-
4(b)(1), Income Tax Regs. Circumstances indicating that a
taxpayer acted with reasonable cause and in good faith include
“an honest misunderstanding of fact or law that is reasonable in
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light of all of the facts and circumstances, including the
experience, knowledge, and education of the taxpayer.” Id.
Petitioner asserts that he acted with reasonable cause
and in good faith, pointing out that: (1) He accurately reported
his gross business income; (2) he provided bank statements,
subcontractor checks, and receipts to substantiate the deductions
claimed to the best of his ability; (3) expense deductions
previously unclaimed were allowed; and (4) he hired a certified
public accountant to prepare his Federal income tax returns for
2007 and 2008. Given the circumstances, we find petitioner acted
with reasonable cause and in good faith, although we would
encourage him to keep better business records in the future.
Accordingly, we hold that petitioner is not liable for the
accuracy-related penalties under section 6662(a).
In reaching our holdings, we have considered all arguments
made, and, to the extent not mentioned, we conclude that they are
moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.