T.C. Memo. 2011-203
UNITED STATES TAX COURT
MARY E. CAHILL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24387-07. Filed August 17, 2011.
Larry C. Fedro, for petitioner.
Nancy L. Karsh, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: Respondent determined a deficiency of
$59,839 in petitioner’s Federal income tax and additions to tax
pursuant to sections 6651(a)(1) and (2) and 6654(a) of $13,458,
$7,776, and $1,736, respectively, for 2004.1
1
Unless otherwise indicated, all section references are to
(continued...)
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The issues for decision after stipulations and concessions2
are: (1) Whether petitioner received taxable interest income of
$88; (2) whether petitioner received taxable dividend income of
$96; (3) whether petitioner is entitled to a theft loss deduction
of $849; (4) whether petitioner is entitled to education credits;
and (5) whether petitioner is liable for additions to tax
pursuant to sections 6651(a)(1) and (2) and 6654(a).
1
(...continued)
the Internal Revenue Code, as amended and in effect for the year
in issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure. Amounts are rounded to the nearest
dollar.
2
Before trial the parties stipulated that (1) petitioner had
a long-term capital loss of $62 rather than a long-term capital
gain of $5,394; (2) petitioner is not liable for the 10-percent
additional tax pursuant to sec. 72(t) for early withdrawals from
a qualified retirement plan because she was disabled in 2004; (3)
petitioner is entitled to deduct expenses on Schedule A, Itemized
Deductions, for mortgage interest, real estate taxes, and sales
tax, of $4,807, $32,312, and $2,096, respectively; (4) petitioner
is not entitled to a long-term capital loss carryforward of
$3,000; (5) the amount of petitioner’s exemption pursuant to sec.
151(d)(3) is a mathematical computation based on all the
appropriate adjustments; and (6) petitioner is entitled to two
dependency exemption deductions for her son and daughter.
On brief petitioner conceded the following issues: (1) The
distributions petitioner received from her qualified retirement
plan were taxable; (2) the alimony payments petitioner received
from her ex-husband were taxable; and (3) petitioner is not
entitled to Schedule A deductions for casualty losses from
hurricane damage, charitable contributions, theft losses from
financial investments, and medical expenses exceeding those
stipulated.
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FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the supplemental stipulation of
facts, together with the attached exhibits, are incorporated
herein by this reference. At the time petitioner filed her
petition, she lived in Florida.
Petitioner and her ex-husband were divorced in 1997. They
had two children, a son born in 1982 and a daughter born in 1985.
Pursuant to their divorce decree, petitioner’s ex-husband paid
her alimony in 2004. During 2004 petitioner’s son was living in
China and working as a teacher. Petitioner’s daughter was
attending college and living with petitioner’s ex-husband.
Petitioner’s ex-husband paid their daughter’s college tuition and
provided additional financial support for both children.
On August 31, 2004, petitioner received a distribution of
$68,000 from her retirement account at UBS Financial Services.
On November 5, 2004, petitioner received a distribution of
$132,000 from the same UBS Financial Services account.
Petitioner did not roll over any amounts withdrawn to another
qualified retirement plan.
In September 2004 two hurricanes struck near petitioner’s
apartment in Florida. On September 20, 2004, the company that
managed petitioner’s apartment building informed her that a
restoration team would be inspecting her apartment for damage.
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Petitioner received two similar notifications on September 27 and
October 8, 2004. Petitioner filed a claim with her apartment
building manager alleging that a computer was stolen from her
apartment during one of the restoration team’s inspections.
Petitioner did not file a Form 1040, U.S. Individual Income
Tax Return, for 2003 or 2004, nor had she made any estimated tax
or other payments on her tax due for 2004. On June 15, 2007,
respondent filed a Federal income tax return for 2004 on behalf
of petitioner pursuant to section 6020(b). On July 19, 2007,
respondent mailed petitioner a notice of deficiency for 2004.
Petitioner timely mailed her petition to the Court on October 17,
2007.
OPINION
I. Burden of Proof
Respondent’s determinations in the notice of deficiency are
presumed correct, and petitioner would ordinarily bear the burden
of proving that respondent’s determinations are incorrect. See
Rule 142(a)(1). Section 7491(a)(1) provides that, subject to
certain limitations, where a taxpayer introduces credible
evidence with respect to a factual issue relevant to ascertaining
the taxpayer’s tax liability, the burden of proof shifts to the
Commissioner with respect to that issue. Credible evidence is
evidence the Court would find sufficient upon which to base a
decision on the issue in favor of the taxpayer if no contrary
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evidence were submitted. Ruckriegel v. Commissioner, T.C. Memo.
2006-78.
Section 7491(a)(1) applies only if the taxpayer complies
with the relevant substantiation requirements in the Internal
Revenue Code, maintains all required records, and cooperates with
the Commissioner with respect to witnesses, information,
documents, meetings, and interviews. Sec. 7491(a)(2)(A) and (B).
The taxpayer bears the burden of proving compliance with the
conditions of section 7491(a)(2)(A) and (B). See, e.g.,
Ruckriegel v. Commissioner, supra. Petitioner neither proposes
facts to support her compliance with the conditions of section
7491(a)(2)(A) and (B) nor persuasively argues that respondent
bears the burden of proof on any issue because of section
7491(a)(1). Accordingly, the burden remains on petitioner to
prove that respondent’s determination of a deficiency in her
income tax is erroneous.
II. Interest and Dividend Income
Section 61 defines gross income to include “all income from
whatever source derived”. Section 61(a)(4) and (7) specifically
includes in income “interest” and “dividends”, respectively.
Petitioner received $88 of interest from two banks and $96 of
dividends from an investor services company in 2004. Petitioner
has failed to present any evidence to dispute these amounts.
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Accordingly, we sustain respondent’s determinations with respect
to the interest and dividend income.
III. Theft Loss Deduction
Section 165(a) permits a deduction against ordinary income
for “any loss sustained during the taxable year and not
compensated for by insurance or otherwise.” For individuals, the
deduction is limited to: (1) Losses incurred in a trade or
business; (2) losses incurred in any transaction entered into for
profit though not connected to a trade or business; or (3) losses
of property not connected with a trade or business or a
transaction entered into for profit, if such losses arise from
“fire, storm, shipwreck, or other casualty, or from theft.” See
sec. 165(c); Lockett v. Commissioner, T.C. Memo. 2008-5, affd.
306 Fed. Appx. 464 (11th Cir. 2009). A taxpayer may deduct a
theft loss in the year the loss is sustained. Sec. 165(a).
Generally, a theft loss is treated as sustained during the
taxable year in which the taxpayer discovers it. Sec. 165(a),
(e). Petitioner has the burden of proving she sustained a theft
loss. See Rule 142(a); Elliot v. Commissioner, 40 T.C. 304, 311
(1963).
Petitioner testified that her computer was stolen from her
apartment during one of the restoration team’s inspections of her
apartment after the hurricanes. The only evidence to support her
testimony is a letter from a claims company representing her
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apartment building that confirms that she filed a claim alleging
that her apartment was burglarized. Petitioner did not present a
police report or any other evidence to substantiate that a theft
actually occurred. Accordingly, we sustain respondent’s
determination with respect to the theft loss.
IV. Education Credits
Section 25A allows education credits3 against tax for
“qualified tuition and related expenses” paid by the taxpayer
during the tax year. Section 25A(f)(1)(A)(iii) defines the term
“qualified tuition and related expenses”, in pertinent part, to
include “tuition and fees” for “any dependent of the taxpayer
with respect to whom the taxpayer is allowed a deduction under
section 151”. Petitioner argues she is entitled to education
credits for 2004 for her son, who worked as a schoolteacher in
China. To prevail on this issue, petitioner must show that (i)
she is entitled to the dependency exemption deduction under
section 151 for her son for 2004; and (ii) she paid “qualified
tuition and related expenses” for her son in 2004. See sec.
25A(b), (c), (f).
The parties have stipulated that petitioner is entitled to a
dependency exemption deduction for her son for 2004. Petitioner
3
These credits are called the Hope Scholarship Credit and
the Lifetime Learning Credit. Both are subject to multiple
conditions and limitations that need not be discussed in this
opinion.
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has failed, however, to substantiate that she paid “qualified
tuition and related expenses” for her son in 2004. Petitioner
testified that her son attended the University of Beijing in 2004
and that she paid tuition and related expenses for him.
Petitioner has not presented any evidence outside of her own
self-serving testimony to support this claim. A taxpayer’s self-
serving declaration is generally not a sufficient substitute for
records. Weiss v. Commissioner, T.C. Memo. 1999-17.
Accordingly, we sustain respondent’s determination with respect
to the education credits.
V. Additions to Tax
The Commissioner has the burden of production
with respect to any penalty, addition to tax, or additional
amount. Sec. 7491(c). The Commissioner satisfies this burden of
production by coming forward with sufficient evidence indicating
that it is appropriate to impose the penalty. See Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). Once the Commissioner
satisfies this burden of production, the taxpayer must persuade
the Court that the Commissioner’s determination is in error by
supplying sufficient evidence of an applicable exception. Id.
A. Section 6651(a)(1) Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on the date prescribed unless the taxpayer can
establish that the failure is due to reasonable cause and not due
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to willful neglect.4 The parties do not dispute that petitioner
failed to file a Federal income tax return for 2004.
Accordingly, respondent has satisfied his burden of production
under section 7491(c).
B. Section 6651(a)(2) Addition to Tax
Section 6651(a)(2) imposes an addition to tax for failure to
pay the amount shown as tax on the taxpayer’s return on or before
the date prescribed unless the taxpayer can establish that the
failure is due to reasonable cause and not due to willful
neglect.5 Respondent submitted Form 4340, Certificate of
Assessments, Payments, and Other Specified Matters, to prove that
petitioner failed to file a Federal income tax return and failed
to make any payments of income tax for 2004. Thus, respondent
has produced sufficient evidence that petitioner is liable for
the section 6651(a)(2) addition to tax for 2004 unless an
exception applies. See Higbee v. Commissioner, supra at 446.
4
If the Secretary prepares a return for the taxpayer under
sec. 6020(b), it is disregarded for purposes of determining the
amount of the addition to tax under sec. 6651(a)(1), but it is
treated as a return filed by the taxpayer for purposes of
determining the amount of the addition to tax under sec.
6651(a)(2). Sec. 6651(g).
5
The amount of the addition to tax under sec. 6651(a)(2)
reduces the amount of the addition to tax under sec. 6651(a)(1)
for any month to which an addition to tax applies under both
paragraphs. Sec. 6651(c)(1).
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C. Exceptions to the Section 6651(a)(1) and (2) Additions
to Tax
Reasonable cause is a defense to the section 6651(a)(1) and
(2) additions to tax. To prove reasonable cause for a failure to
timely file, the taxpayer must show that she exercised ordinary
business care and prudence and was nevertheless unable to file
the return within the prescribed time. Crocker v. Commissioner,
92 T.C. 899, 913 (1989); sec. 301.6651-1(c)(1), Proced. & Admin.
Regs. To prove reasonable cause for a failure to pay the amount
shown as tax on a return, the taxpayer must show that she
exercised ordinary business care and prudence in providing for
payment of her tax liability and nevertheless either was unable
to pay the tax or would suffer undue hardship if she paid the tax
on the due date. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
The determination of whether reasonable cause exists is based on
all the facts and circumstances. Estate of Hartsell v.
Commissioner, T.C. Memo. 2004-211; Merriam v. Commissioner, T.C.
Memo. 1995-432, affd. without published opinion 107 F.3d 877 (9th
Cir. 1997).
Petitioner argues she had reasonable cause for failing to
file a return for 2004 because she received opinions that she did
not have to file a return from an attorney and from her
stockbroker. She argues she relied on these opinions to conclude
that the distributions from her qualified retirement plans and
the alimony payments she received were not taxable and that she
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was entitled to deductions in excess of any reportable income.
Petitioner testified that she was told by an attorney that she
did not have to file a return because given her income and
deductions, such a return would be “frivolous”.
Petitioner relies solely on her self-serving testimony to
establish reasonable cause. She has not provided any written
opinion of her attorney or her stockbroker or established they
were competent tax advisers. Further, neither petitioner’s
attorney nor her stockbroker testified at trial. Petitioner has
not presented any substantive evidence to establish that she
exercised ordinary business care and prudence but nevertheless
failed to file a return for 2004 and failed to pay the amount
due. Accordingly, we sustain respondent’s determinations with
respect to the section 6651(a)(1) and (2) additions to tax.
D. Section 6654(a) Addition to Tax
Section 6654(a) imposes an addition to tax on an
underpayment of estimated income tax unless an exception applies.
See sec. 6654(e). The section 6654(a) addition to tax is
determined by applying the underpayment rate established under
section 6621 to the amount of the underpayment6 for the period of
6
“[A]mount of the underpayment” means the excess of the
required installment over the amount, if any, of the installment
paid on or before the due date for the installment. Sec.
6654(b)(1).
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the underpayment.7 The addition to tax is also calculated with
reference to four required installment payments of the taxpayer’s
estimated income tax. Sec. 6654(c)(1); Wheeler v. Commissioner,
127 T.C. 200, 210 (2006), affd. 521 F.3d 1289 (10th Cir. 2008).
Each required installment of estimated income tax
is equal to 25 percent of the “required annual payment.” Sec.
6654(d)(1)(A). The required annual payment is generally equal to
the lesser of: (1) 90 percent of the tax shown on the taxpayer’s
return for the year (or 90 percent of the taxpayer’s tax for the
year if no return is filed); or (2) 100 percent of the tax shown
on the return for the preceding year. Sec. 6654(d)(1)(B);
Wheeler v. Commissioner, supra at 210-211. If the taxpayer did
not file a return for the preceding year, then clause (2) does
not apply. Sec. 6654(d)(1)(B).
A taxpayer has an obligation to pay estimated income tax for
a particular year only if she had a “required annual payment” for
that year. Wheeler v. Commissioner, supra at 211. As discussed
above, a determination of petitioner’s “required annual payment”
generally would require a comparison of the tax shown on
petitioner’s 2003 and 2004 returns. Petitioner failed to file a
return for either year. Because petitioner failed to file a
7
The period of the underpayment runs from the due date for
the installment to the earlier of the 15th day of the 4th month
following the close of the taxable year or with respect to any
portion of the underpayment, the date on which such portion is
paid. Sec. 6654(b)(2).
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return for 2003, a comparison with her 2004 tax is not required
pursuant to section 6654(d)(1)(B). Accordingly, petitioner’s
“required annual payment” is equal to 90 percent of her tax for
2004. Respondent’s burden of production under section 7491(c)
with respect to the section 6654(a) addition to tax has been
satisfied by proof at trial through Form 4340 that petitioner has
a Federal income tax liability for 2004 and that petitioner made
no estimated payments for the year. Thus, the addition to tax
applies under section 6654(a) unless petitioner established that
an exception applies.
No general reasonable cause exception exists for the
section 6654(a) addition to tax. Sec. 1.6654-1(a)(1), Income Tax
Regs.; see also Bray v. Commissioner, T.C. Memo. 2008-113. But
no addition to tax is imposed under section 6654(a) with respect
to any underpayment if the Secretary determines that the taxpayer
became disabled either in the taxable year for which estimated
income tax payments were required or in the preceding taxable
year and that the underpayment was due to reasonable cause and
not to willful neglect. Sec. 6654(e)(3)(B). Petitioner argues
that she became disabled in 2004.
Respondent concedes that petitioner was disabled in 2004.
However, petitioner has not established that she became disabled
in 2003 or 2004. To the contrary, petitioner’s 2001 Federal
income tax return lists her occupation as “disabled”. Further,
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for the same reasons discussed with respect to the section
6651(a)(1) and (2) additions to tax, petitioner has failed to
establish reasonable cause for failing to pay estimated income
tax. Accordingly, we sustain respondent’s determinations with
respect to the section 6654(a) addition to tax.
In reaching these holdings, the Court has considered all
arguments made and, to the extent not mentioned, concludes that
they are moot, irrelevant, or without merit.
To reflect the foregoing,
Decision will be entered
under Rule 155.