T.C. Memo. 2011-296
UNITED STATES TAX COURT
ILLYA BELL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 26557-09. Filed December 22, 2011.
P filed his 1996 tax return over 10 years late. R
disallowed certain deductions claimed on Schedule C and
determined a sec. 6651(a)(1), I.R.C., addition to tax and a
sec. 6662(a) accuracy-related penalty.
Held: R’s determinations are sustained to the extent
decided herein.
Illya Bell, pro se.
Laura J. Mullin and Katherine Holmes Ankeny, for respondent.
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MEMORANDUM FINDINGS OF FACT AND OPINION
WHERRY, Judge: This case is before the Court on a petition
for redetermination of an income tax deficiency of $12,333, a
section 6651(a)(1) addition to tax of $3,083.25, and a section
6662(a) accuracy-related penalty of $2,466.60 that respondent
determined for petitioner’s 1996 tax year.1 The issues for
decision are (1) whether petitioner is entitled to deductions
claimed on Schedule C, Profit or Loss From Business; (2) whether
the wage income reported on petitioner’s 1996 tax return was
overstated; (3) whether petitioner is liable for a section
6651(a)(1) failure to file addition to tax; and (4) whether
petitioner is liable for a section 6662(a) accuracy-related
penalty.2
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the taxable year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
2
The notice of deficiency also disallowed certain itemized
deductions. Petitioner did not contest respondent’s adjustment
of $13,800 for his 1996 tax year. Therefore, except as they are
the result of any correlative computational adjustments which are
required as the result of this opinion, we deem those statutory
notice of deficiency adjustments conceded. See Levin v.
Commissioner, 87 T.C. 698, 722-723 (1986) (citing Rule 142(a) for
the proposition that because “petitioners have made no argument
with respect to * * * deductions claimed * * * [, they] are
deemed to have conceded their nondeductibility”), affd. 832 F.2d
403 (7th Cir. 1987).
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FINDINGS OF FACT
Some of the facts have been stipulated, and the
stipulations, with the accompanying exhibits, are incorporated
herein by this reference. At the time he filed his petition,
petitioner resided in California.
Petitioner started a landscaping business in 1995. During
1996 he had two landscaping jobs, one for the residential
community in which he lived and one for Wal-Mart. Petitioner was
able to work at the residential community for only 30 days during
the 1996 tax year because of a restraining order requiring him to
stay 100 yards away from his ex-wife and children.3 Petitioner
worked for Wal-Mart the entire year and was paid $1,000 per
month. Wal-Mart issued petitioner a Form 1099-MISC,
Miscellaneous Income, showing the wages paid to him.
Petitioner claimed he kept paperwork and records of his
income and expenses from the landscaping business but lost them.
He claimed he gave up on the landscaping business and was
unemployed from 1996 until 2006 when he began working full time
as a healthcare provider.4
3
From the record, it appears that petitioner, at some point,
lived with his ex-wife and children at the residential community
where he worked. But it is unclear to the Court when
petitioner’s divorce occurred and what his living arrangements
were after the divorce.
4
Forms W-2, Wage and Tax Statement, provided to this Court
after trial show that contrary to his testimony, petitioner did
earn at least $880.68 during the 1998 tax year.
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In 2007 the State of California Franchise Tax Board issued a
notice to petitioner and his employer that they were going to
start garnishing his wages to collect delinquent taxes owed to
the State of California in the total amount of $13,975.25 for the
1996 and 1997 tax years. Petitioner erroneously believed the
garnishment order was from the Internal Revenue Service (IRS).
When the garnishment started, petitioner went to Beverly A.
Arrington for help in sorting out his tax liabilities.
Petitioner claimed that the only information he provided to Ms.
Arrington was the Form 1099 he had received from Wal-Mart.
Ms. Arrington prepared petitioner’s tax return and sent it
to him. Petitioner signed the tax return and mailed it in
without taking “the opportunity to even take a look at it”.
Petitioner’s Form 1040, U.S. Individual Income Tax Return, for
his 1996 tax year was filed October 31, 2007. The Form 1040
showed wages, salaries, and tips of $41,696 and a business loss
from the landscaping business of $18,839. A Schedule C attached
to the Form 1040 reported gross receipts of $17,296 and expenses
of $36,135 leading to the loss of $18,839.
The reported expenses were taxes and licenses--$750;
supplies--$6,678; rent or lease of vehicles, machinery, and
equipment--$7,880; advertising--$6,525; repairs and maintenance--
$5,252; legal and professional services--$225; and car and
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truck--$8,825. Petitioner signed the return beneath the
statement “Under penalties of perjury, I declare that I have
examined this return and accompanying schedules and statements,
and to the best of my knowledge and belief, they are true,
correct, and complete.”
Respondent issued a notice of deficiency on August 6, 2009,
disallowing all of petitioner’s claimed Schedule C deductions
except the deduction for legal and professional services expenses
of $225 and determining a deficiency in income tax of $12,333, a
section 6651(a)(1) addition to tax of $3,083.25, and a section
6662(a) accuracy-related penalty of $2,466.60. Petitioner timely
petitioned this Court, arguing that he needed additional time to
find documentation for his reported expenses. Trial was held on
December 13, 2010, in Los Angeles, California.
Petitioner elaborated at trial, claiming he had entrusted
Ms. Arrington to help him with his taxes but later found out “the
tax for 1996 were [sic] basically done wrong”. Petitioner
claimed he does not know where Ms. Arrington got the expenses
reported on Schedule C but “would say a couple of them are pretty
accurate”. Petitioner also acknowledged that he did not pay
$6,000 for advertising expenses.
As for the other reported expenses, petitioner stated he
purchased a Chevy truck for $8,500 in 1995 and mostly used
equipment such as lawnmowers, edgers, trimmers, shovels, and
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rakes, etc., costing around $6,000 in 1995 and 1996. He claimed
he rented equipment such as trenchers and trucks for sod.
Petitioner stated he had no documentation of his expenses because
“It has been all destroyed due to the [criminal] case that I was
dealing with in ‘96. I had a choice of walking away or doing
jail time, and I chose to walk away”.5
Immediately before trial, for the first time petitioner
alleged that he realized after talking with respondent’s counsel
that his tax return showed $41,696 of wage income. He asserted
at trial that he was self-employed throughout 1996 and had no
income other than from his landscaping business, stating he “did
not earn $41,000” in 1996.
OPINION
I. Burden of Proof
As a general rule, the Commissioner’s determination of a
taxpayer’s liability in the notice of deficiency is presumed
correct, and the taxpayer bears the burden of proving that the
determination is improper. See Rule 142(a); Welch v. Helvering,
290 U.S. 111, 115 (1933). However, pursuant to section 7491(a),
the burden of proof on factual issues that affect the taxpayer’s
5
The circumstances leading to petitioner’s divorce, which
occurred in the general timeframe of 1995-97, are unclear.
However, it appears that his ex-wife filed charges against him at
the time the divorce proceedings were taking place.
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tax liability may shift to the Commissioner in certain
situations.6 Petitioner has neither claimed nor shown that he
satisfied the requirements of section 7491(a), and therefore he
bears the burden of proof.
II. Schedule C Deductions
Deductions are a matter of legislative grace, and taxpayers
bear the burden of proving entitlement to any claimed deduction.
Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992). Taxpayers are required to identify each deduction
available and show that they have met all requirements as well as
to keep books or records to substantiate all claimed deductions.
Sec. 6001; Roberts v. Commissioner, 62 T.C. 834, 836-837 (1974).
Section 162(a) authorizes a deduction for “all the ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business”. A trade or business
expense is ordinary for purposes of section 162 if it is normal
or customary within a particular trade, business, or industry,
and is necessary if it is appropriate and helpful for the
development of the business. Commissioner v. Heininger, 320 U.S.
467, 471 (1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940).
6
Sec. 7491 is effective for court proceedings that arise in
connection with examinations commencing after July 22, 1998.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
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Even if the expenses reported on Schedule C are ordinary and
necessary, petitioner has failed to adequately substantiate the
claimed deductions. The record relating to the claimed
deductions is limited to petitioner’s trial testimony and is
unsupported by written substantiation. Petitioner conceded some
of the reported expenses were not accurate and admitted that some
were paid in 1995, not 1996.
Petitioner claims that he kept records but they were
destroyed. When a taxpayer’s records are lost or destroyed
through circumstances beyond his control, the taxpayer is
entitled to substantiate deductions by reconstructing
expenditures through credible evidence. Villarreal v.
Commissioner, T.C. Memo. 1998-420 (citing Malinowski v.
Commissioner, 71 T.C. 1120, 1125 (1979)). However, this Court is
not bound to accept unverified, undocumented testimony of a
taxpayer. Id. (citing Hradesky v. Commissioner, 65 T.C. 87, 90
(1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976)). As
petitioner introduced no evidence to substantiate the claimed
Schedule C deductions other than his unsupported testimony at
trial, he failed to fully and adequately reconstruct the claimed
expenditures.
However, except for expenses subject to heightened scrutiny
pursuant to section 274, if a taxpayer establishes that he paid a
deductible expense but is unable to substantiate the precise
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amount, we may, after “bearing heavily * * * upon the taxpayer
whose inexactitude is of his own making”, estimate the amount.
We may do this only if we are convinced that the taxpayer paid
such an expense and we have a basis upon which to make an
estimate. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). We
do not doubt that petitioner operated a landscaping business
during 1996. Some of the expenses reported on his tax return are
not deductible (but should have been capitalized and depreciated
over time).
We shall not allow petitioner to deduct all reported
expenses solely on the basis of his testimony. Nevertheless, it
is inconceivable that he did not pay some expenses operating the
landscaping business. We believe petitioner had to have paid
expenses such as for the rental of machinery, for repairs and
maintenance of his equipment, and incidental expenses such as gas
for lawnmowers and related equipment. On the evidence before us,
we believe that petitioner’s allowable expense deductions for his
1996 tax year should be $3,283.7
7
On Schedule C, petitioner reported, among others, expenses
for repairs and maintenance of $5,252 and rent or lease of
vehicles, machinery, and equipment of $7,880. We believe
petitioner to have paid some amount for these two reported
expenses and arrive at $3,283 by giving petitioner 25 percent of
these reported expenses. We give only 25 percent because
petitioner testified that he spent “under $6,000 [buying or
renting equipment]. Maybe $6,000 total”. Of the items
purchased, some may have been items which had to be capitalized
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For these reasons, and except as noted above, we sustain
respondent’s determination and disallowance of the claimed
Schedule C deductions per the notice of deficiency.
III. Overstatement of Income
At trial petitioner alleged that the amount reported as wage
income for his 1996 tax year was fabricated by Ms. Arrington and
that the only income he earned during 1996 was from his
landscaping business and was reported on Schedule C.
We are not required to consider issues that have not been
pleaded. Foil v. Commissioner, 92 T.C. 376, 418 (1989), affd.
920 F.2d 1196 (5th Cir. 1990). Whether an issue has been
properly raised depends upon whether the opposing party has been
given fair notice of the matter in controversy. Rule 31(a).
Rule 34 requires that the petition contain clear and concise
assignments of each and every error alleged and statements of
facts on which the petitioner relies to sustain each assignment
of error. Petitioner did not raise the issue of an overstatement
of income until trial, and respondent had no notice of this issue
until then.
We recognize that petitioner is proceeding pro se and is not
well versed in the law. But even if the issue were properly
pleaded, he bore the burden of proving an overstatement of income
rather than expensed. Additionally, his testimony indicated he
bought equipment in both 1995 and 1996.
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and has failed to meet that burden. The record contains only
petitioner’s unsupported testimony. He did not attempt to
explain why Ms. Arrington might have included wage income that he
did not in fact earn or where those numbers might have come from.
Nor did he call Ms. Arrington as a witness or as a pretrial
matter alert respondent to the issue so that he could call Ms.
Arrington or others to clarify the matter or find documents in
his possible possession to do so. We also find unlikely
petitioner’s claim that he never glanced at his tax return before
signing it. Notably, as with all individual Federal income tax
returns, it was signed under penalties of perjury and constitutes
an admission against interest here. See Doll v. Commissioner,
T.C. Memo. 2005-269 (quoting Times Tribune Co. v. Commissioner,
20 T.C. 449, 452 (1953)). Consequently, we shall not reduce
petitioner’s taxable gross income from wages, salary, tips, etc.,
as reported on line 7 of his Form 1040 as to any portion of the
$41,696 stated thereon.
IV. Section 6651 Addition to Tax
Section 6651(a)(1) imposes an addition to tax for failure to
file a return on time unless it is shown that such failure is due
to reasonable cause and not due to willful neglect. This
addition to tax is in the amount of 5 percent of the tax required
to be shown on the return for each month or fraction thereof
until the return is filed, not to exceed 25 percent.
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Respondent bears the burden of production with regard to
the section 6651(a)(1) addition to tax. See sec. 7491(c);8
Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). To meet
his burden, respondent must produce sufficient evidence
establishing that it is appropriate to impose the addition to
tax. See Higbee v. Commissioner, supra at 446. Petitioner bears
the burden of proving that the failure to file was due to
reasonable cause and not willful neglect. Id. at 447.
Petitioner filed his 1996 tax return in 2007, over 10 years
late. Further, petitioner has not presented any evidence that
his failure to file was due to reasonable cause and not willful
neglect. Respondent has thus met his burden of production, and
petitioner has not shown his failure to timely file was due to
reasonable cause and not willful neglect. Accordingly, we
sustain the addition to tax under section 6651(a)(1).
V. Section 6662(a) Accuracy-Related Penalty
Respondent bears the burden of production with respect to
petitioner’s liability for the section 6662(a) penalty. See sec.
7491(c). This means that respondent “must come forward with
sufficient evidence indicating that it is appropriate to impose
the relevant penalty” but “need not introduce evidence regarding
reasonable cause, substantial authority, or similar provisions
8
See supra note 6.
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* * * it is * * * [petitioner’s] responsibility to raise those
issues.” Higbee v. Commissioner, supra at 446.
Section 6662(a) imposes an accuracy-related penalty of 20
percent on any underpayment that is attributable to causes
specified in subsection (b). Respondent determined petitioner is
liable for a substantial understatement of income tax. See sec.
6662(b)(2). An understatement is the excess of the amount of tax
required to be shown on the return over the amount of tax
actually shown on the return less any rebates. Sec.
6662(d)(2)(A). A substantial understatement of income tax occurs
in any year where the amount of the understatement exceeds the
greater of 10 percent of the amount required to be shown on the
return or, in the case of individual taxpayers, $5,000. Sec.
6662(d)(1)(A). Respondent has met his burden of production.
Section 6664(c) provides for an exception to the accuracy-
related penalty where a taxpayer can demonstrate (1) reasonable
cause for the underpayment and (2) that the taxpayer acted in
good faith with respect to the underpayment. Sec. 6664(c)(1).
The determination of reasonable cause and good faith “is made on
a case-by-case basis, taking into account all pertinent facts and
circumstances.” Sec. 1.6664-4(b)(1), Income Tax Regs. To
establish good faith reliance on the advice of a return preparer,
a taxpayer must establish that (1) he gave the preparer complete
and accurate information, (2) an incorrect return was a result of
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the preparer’s mistakes, and (3) he believed in good faith that
he was relying on a competent return preparer’s advice. Estate
of Goldman v. Commissioner, 112 T.C. 317, 324 (1999), affd.
without published opinion sub nom. Schutter v. Commissioner, 242
F.3d 390 (10th Cir. 2000); see also Neonatology Associates, P.A.
v. Commissioner, 115 T.C. 43, 99 (2000), affd. 299 F.3d 221 (3d
Cir. 2002).
Petitioner filed his 1996 tax return over 10 years late. He
has produced no records to substantiate his reported Schedule C
expenses or to show where the numbers on the Form 1040 might have
come from. He admits that the only information he gave Ms.
Arrington was a Form 1099. He blindly signed the Form 1040 under
penalties of perjury without even making a cursory review of it.
Petitioner has failed to show that the reasonable cause and good
faith exception applies. Accordingly, we sustain the section
6662(a) accuracy-related penalty.
Decision will be entered
under Rule 155.