T.C. Memo. 2011-272
UNITED STATES TAX COURT
VERNELL DAVID WEST, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14036-07. Filed November 16, 2011.
Vernell David West, pro se.
Michael T. Sargent, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
PARIS, Judge: Petitioner brought this action under section
6213(a)1 seeking redetermination of the following deficiencies in
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
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income tax and additions to tax for the tax years 1999, 2000,
2001, 2002, 2003, 2004, and 2005:
Additions to Tax
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654(a)
1999 $24,323 $5,472.68 ¹ N/A
2000 46,355 10,429.88 ¹ $2,203.78
2001 24,494 5,511.15 ¹ 978.87
2002 16,994 3,823.65 ¹ 567.92
2003 20,651 4,646.48 ¹ 540.44
2004 32,956 7,415.10 ¹ 956.62
2005 39,956 8,990.10 ¹ 1,602.69
¹The amount of any additions to tax under sec. 6651(a)(2)
shall be determined pursuant to sec. 6651(a)(2), (b), and (c).
The Court must decide the following issues: (1) Whether
petitioner must recognize unreported income for the tax years
1999 through 2005; (2) whether petitioner is entitled to ordinary
and necessary business expense deductions for the tax years 1999,
2000, 2001, 2002, 2003, 2004 and 2005; and (3) whether petitioner
is liable for the additions to tax under sections 6651(a)(1) and
(2) and 6654(a) for the tax years 2000 through 2005.
FINDINGS OF FACT
Some facts have been stipulated, and the stipulated facts
are incorporated in our findings by this reference. Petitioner
resided in North Carolina at the time the petition was filed.
Petitioner operated both a farming business and a bricklaying
business in a location other than his home for the tax years 1999
through 2005. The record does not indicate his method of
accounting.
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Petitioner did not file Federal income tax returns for the
tax years 1999 through 2005. Petitioner believed that once he
turned 72 years old, he did not have to pay taxes anymore.
Pursuant to section 6020(b), using information third parties
reported, respondent prepared a substitute return for petitioner
for each of the tax years at issue.
The substitute returns respondent prepared indicated the
following payments and their categories were made to petitioner:
Social Bricklaying
Year Total Security Business Interest
1999 $72,451 --- $63,753 ---
2000 136,271 $9,747 52,811 $108
2001 86,182 13,488 50,848 19
2002 66,003 13,814 45,337 ---
2003 75,854 14,012 56,835 ---
2004 109,137 14,302 89,541 ---
2005 142,935 14,685 98,445 ---
The balance of all the payments each year was related to
petitioner’s farming business.
Petitioner timely filed a petition for redetermination, and
a trial was set. Before the trial date, petitioner’s
granddaughter Velicia L. Everett faxed to respondent six pages of
tables. The first page summarized petitioner’s claims to farming
and bricklaying expenses for the tax years 1999 through 2005 and
categorized them according to “Expenses” and “Payroll”. Copies
of Forms W-3, Transmittal of Wage and Tax Statements, for the tax
years 2002, 2003, 2004, and 2005 were attached. The tables
identified each of the claimed farming and bricklaying business
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expenses for services or goods for those tax years according to
the vendor who provided those services or sold the items and the
cost of each service or item. The tables were prepared using
receipts included in petitioner’s records. The expenses reported
for tax years 1999, 2000, 2001, 2002, and 2003 were not
documented by receipts or other substantiation, except for
petitioner’s purchase of a $14,580 tractor on May 4, 2001.
Petitioner could not provide any such records for those tax years
because his children had cleaned up his home and thrown away the
documents when he was seriously ill and was hospitalized for an
extended period. Petitioner reported expenses for tax years 2004
and 2005, including the purchase of a Ford Expedition for
$35,055.79 on December 12, 2005. He stated that he had used the
Ford Expedition only to drive from his personal residence to his
doctor’s office and the farming field.
Respondent conceded the issue of the payroll expenses listed
on the tables for all the tax years. Petitioner is entitled to
deduct the payroll expenses of $9,349, $8,758, $18,087, and
$19,375 for the respective tax years 2002, 2003, 2004, and 2005
for the bricklaying business.
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OPINION
Burden of Proof
The Commissioner’s determinations in the notice of deficiency
are presumed correct, and the taxpayer bears the burden of
disproving those determinations. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). The burden of proof may
shift to the Commissioner with respect to a factual issue
relevant to ascertaining the liability of a taxpayer for tax when
the taxpayer has introduced credible evidence regarding that
issue and has met certain statutory requirements. See sec.
7491(a).
Gross Income
Section 61 provides that “gross income means all income from
whatever source derived”. Sec. 61(a). The U.S. Supreme Court
has construed this section to mean that gross income includes all
“accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion.” See Commissioner v. Glenshaw
Glass Co., 348 U.S. 426, 431 (1955). There is no dispute that
petitioner received for the tax years 1999 through 2005 the
amounts shown on the table supra, from the substitute returns.2
2
However, the stipulation of facts contains a typographical
error. In 2005 petitioner received a Form 1099-S, Proceeds from
Real Estate Transactions, reporting the receipt of $19,508 from
the Farm Bureau. It was incorrectly listed as a Form 1099-MISC,
Miscellaneous Income, on the stipulation.
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However, a taxpayer does not have to include a Social
Security benefit in gross income unless the taxpayer’s adjusted
gross income, with certain modifications, plus one-half of the
Social Security benefit exceeds a specified base amount. Sec.
86(b). An allowance of petitioner’s business expense deductions
will affect his adjusted gross income. Therefore, in the Rule
155 computations the parties are to take into account that
petitioner has to include in gross income only the portion of
Social Security benefits prescribed by section 86.
Deductions
Deductions are a matter of legislative grace. See INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice
Co. v. Helvering, 292 U.S. 435 (1934). A taxpayer must prove he
is entitled to any deduction. See INDOPCO, Inc. v. Commissioner,
supra at 84; New Colonial Ice Co. v. Commissioner, supra at 440;
see also Rule 142(a). Furthermore, the taxpayer must
substantiate his deductions. See Welch v. Helvering, supra at
115; see also Rule 142(a).
Tractor and Car
Under section 167 a depreciation deduction is allowed for
the exhaustion and wear and tear of property used in a trade or
business. Section 179 provides that a taxpayer can elect a
deduction for certain depreciable property in the year that
property is placed in service. Petitioner is not entitled to the
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depreciation deduction for his Ford Expedition because he used
that car only for personal reasons, traveling between his
residence and his regular place of business. See Commissioner v.
Flowers, 326 U.S. 465 (1946); O’Hare v. Commissioner, 54 T.C. 874
(1970). As to his tractor, petitioner did use the tractor for a
business purpose and can depreciate its cost over the recovery
period, using the applicable convention. See sec. 168.
Petitioner cannot, however, reap an immediate deduction for his
tractor under section 179 because he failed to elect that
treatment.
Other Farming and Bricklaying Expenses
Section 162(a) provides for the deduction of all the
ordinary and necessary expenses a taxpayer paid or incurred
during the taxable year in carrying on his business. Respondent
concedes that petitioner had a farming business and a bricklaying
business that produced ordinary and necessary business expenses
under section 162. Petitioner also provided specific
documentation of his farming receipts for tax years 2004 and
2005. The issue remains as to whether petitioner has sufficient
documentation to substantiate the expenses related to his farming
business for tax years 1999 through 2003 and for his bricklaying
business for all tax years.
This Court may estimate the amount of a deductible expense
in certain circumstances where a taxpayer establishes he paid the
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expense but cannot substantiate the precise amount. See Cohan v.
Commissioner, 39 F.2d 540, 544 (2d Cir. 1930). In its estimate,
this Court may bear heavily against a taxpayer whose inexactitude
is of his own making. See id. A taxpayer must provide a basis
upon which this Court can make its estimate of the expense. See
Williams v. United States, 245 F.2d 559, 560 (5th Cir. 1957);
Cohan v. Commissioner, supra at 544; Vanicek v. Commissioner, 85
T.C. 731, 743 (1985). In estimating a taxpayer’s expenses for
the year at issue this Court has relied upon a taxpayer’s
expenses incurred in previous or subsequent years. See Young v.
Commissioner, T.C. Memo. 1989-241 (limiting the relevant year’s
repair expenses because they have exceeded the cost of the
previous year’s expenses); Hicks v. Commissioner, T.C. Memo.
1957-24 (estimating the present year’s income by comparison with
the income received in other relevant years). The Court holds
that pursuant to section 162 petitioner can deduct his business
expenses for the tax years 2004 and 2005 as stipulated and can
deduct an estimated amount of the other expenses for the tax
years 1999, 2000, 2001, 2002 and 2003.
Petitioner is entitled to deduct the listed expenses related
to his farming business for tax years 2004 and 2005 as the record
indicates that his tables were based on actual receipts for those
years, and respondent has conceded this. In regard to the
business expenses related to farming for the tax years 1999,
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2000, 2001, 2002, and 2003, the record as a whole warrants an
estimate of the expenses petitioner incurred for those tax years.
The estimate will be based on the average of the expenses he
incurred for 2004 and 2005.3
Petitioner has provided documentation related to business
expenses for his bricklaying business only for 2004 and 2005.
The record as a whole warrants an estimate of the expenses
petitioner incurred for tax years 1999, 2000, 2001, 2002, and
2003. The estimate will be based on the average of the expenses
he incurred in 2004 and 2005.
Additions to Tax
Section 6651(a)(1) imposes an addition to tax if a taxpayer
failed to file an income tax return timely. Under section
6651(a)(2), an addition to tax is imposed for a taxpayer’s
failure to pay taxes shown on any return. Section 6654(a)
imposes an addition to tax for a taxpayer’s failure to pay
estimated income tax.4 Pursuant to section 7491(c), respondent
has the burden of production with respect to any penalty,
3
For the purpose of calculating the estimated expenses for
tax years 1999, 2000, 2001, 2002, and 2003, the cost of the Ford
Expedition will not be included because petitioner cannot deduct
the cost of the Ford Expedition for the tax year 2005. For the
tax year 2001, petitioner is entitled to the estimated other
business expenses in addition to the depreciation deduction
claimed for the tractor.
4
The only Federal tax deposit during the years in question
was for the 2000 taxable year made on Jan. 15, 2001, for $12,500.
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addition to tax, or additional amount imposed by the Internal
Revenue Code. See sec. 7491(c); Higbee v. Commissioner, 116 T.C.
438, 446 (2001). Respondent has not carried the burden for
taxable year 2000 in regard to section 6654(a) in that there was
a significant Federal tax deposit relected in the stipulation of
facts; however the evidence is sufficient to satisfy respondent’s
burden of production under section 7491(c) for the balance of the
taxable years at issue.
These additions to tax will not be imposed if a taxpayer’s
failure is due to reasonable cause and not willful neglect. See
secs. 6651(a), 6654(e)(3). Petitioner seeks relief from these
additions to tax, arguing that he is ignorant of and has
misinterpreted the law. Petitioner’s mistake as to or ignorance
of the law does not amount to reasonable cause, and thus his
argument will not relieve him from the imposition of these
additions to tax. See Joyce v. Commissioner, 25 T.C. 13, 15
(1955); Mostafa v. Commissioner, T.C. Memo. 2006-106; Guthrie v.
Commissioner, T.C. Memo. 1989-168. Respondent introduced
evidence that petitioner did not file returns for tax years 1999
through 2005 or request additional time to file.
Conclusion
Petitioner must recognize unreported income, as we have
found. Petitioner is not entitled to a depreciation deduction
for his car for the tax year 2005. He is entitled to the
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depreciation deduction for his tractor and must depreciate the
cost of the tractor over the recovery period using the
applicable convention. Also, petitioner is entitled under
section 162 to deduct for his farm business and for his
bricklaying business expenses for the tax years 2004 and 2005.
For each of the tax years 1999, 2000, 2001, 2002, and 2003, he
is entitled to the average of the other farm business expenses
incurred for the tax years 2004 and 2005. Petitioner is
entitled to additional deductions related to his bricklaying
business for tax years 1999 through 2003 using the average
expenses incurred for 2004 and 2005. Respondent has shown
adequate grounds for the additions to tax under section
6651(a)(1) and (2) for all years at issue and under section
6654(a) but for taxable year 2000, and this Court will therefore
sustain them.
To reflect concessions and this Court’s conclusions stated
above,
Decision will be entered
under Rule 155.