T.C. Summary Opinion 2012-41
UNITED STATES TAX COURT
MAYER WEINBERGER AND SARAH WEINBERGER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23544-10S. Filed May 2, 2012.
Ronald Jay Cohen, for petitioners.
Rose E. Gole and Michael J. De Matos, for respondent.
SUMMARY OPINION
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
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was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable
by any other court, and this opinion shall not be treated as precedent for any other
case.
Respondent determined deficiencies in, additions to tax on, and accuracy-
related penalties with respect to petitioners’ Federal income taxes as follows:
Addition to tax Accuracy-related penalty
Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)
2004 $9,652 $1,026.00 $1,930.40
2005 9,564 1,003.50 1,912.80
2006 9,419 978.50 1,883.80
2007 9,234 569.40 1,846.80
2008 8,716 -- 1,743.20
After concessions by respondent,2 the issues now before the Court are as
follows:
(1) Whether petitioners received earned income in the amounts reported for
each year in issue for purposes of the additional child tax credit;
(2) whether petitioners are entitled to the dependent care credit for each year
in issue;
1
Unless otherwise indicated, all subsequent 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.
2
Respondent concedes that petitioners are entitled to six child dependency
exemption deductions and the child tax credit for each year in issue.
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(3) whether petitioners are liable for the addition to tax under section
6651(a)(1) for failure to timely file their Federal income tax returns for 2004, 2005,
2006, and 2007; and
(4) whether petitioners are liable for the accuracy-related penalty under
section 6662(a) for negligence or disregard of rules or regulations with respect to
each year in issue.
Background
Some of the facts have been stipulated, and they are so found. We
incorporate by reference the parties’ stipulation of facts and accompanying exhibits.
Petitioners resided in Antwerp, Belgium, when the petition was filed.
Mayer Weinberger and Sarah Weinberger were married in 1988 and have
lived together in Antwerp, Belgium, at all times relevant thereafter.
Sometime after their marriage, Mr. Weinberger began attending a Jewish
school in Antwerp called The Friends of Satmar Kollel Antwerp Ltd. (Satmar).
Satmar is an institution where married Jewish men engage in the full-time advanced
study of the Torah, the Talmud, and the laws of Jewish life. Although some remain
for longer periods, students at Satmar typically study for two or three years. Satmar
students generally receive a stipend from the school to defray living expenses.
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Mr. Weinberger received such a stipend while he was a full-time student
at Satmar.
After four years of study at Satmar, Mr. Weinberger was hired by the
principal of the school to conduct lectures for the students regarding a variety of
religious subjects involving the Jewish tradition.
During the years in issue Mr. Weinberger continued to teach, and he received
payments from Satmar for each lecture he gave at the school. In addition, Mr.
Weinberger spent his free time engaged in rabbinical studies and became a rabbi
shortly before trial. Meanwhile, Mrs. Weinberger worked in Antwerp as a teacher
at an all-female school called Bais Rachel.
Also during the years in issue petitioners had six dependent children who
were United States citizens and who lived with petitioners in Belgium. Petitioners
paid a child care center at Bais Rachel to care for their young children while
petitioners were teaching and lecturing at their respective schools.
Petitioners filed joint U.S. Federal income tax returns (tax returns) for 2004,
2005, 2006, 2007, and 2008 on June 13, August 16, August 16, and September 8,
2008, and June 1, 2009, respectively.3 On each of those tax returns, petitioners
3
Petitioners also filed Belgian income tax returns for the years in issue.
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reported $48,000 of wages and claimed, inter alia, the additional child tax credit and
the dependent care credit.
Respondent subsequently issued notices of deficiency in which he determined
that the amounts reported as wage income on petitioners’ tax returns for the years in
issue should be reclassified as “other income” because petitioners allegedly failed to
substantiate that the income constituted “earned income” within the meaning of
section 32. See Discussion infra. Furthermore, respondent disallowed, inter alia,
the additional child tax credits and dependent care credits claimed by petitioners.
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Discussion4
A. Burden of Proof
In general, the Commissioner’s determinations set forth in a notice of
deficiency are presumed to be correct, and the taxpayer bears the burden of proving
that those determinations are erroneous. Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Moreover, credits are a matter of legislative grace, and the
taxpayer bears the burden of proving that he or she is entitled to any credit claimed.
Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934); Segel v. Commissioner, 89 T.C. 816, 842
(1987).
4
The United States and the Kingdom of Belgium signed a tax treaty in 1970,
Convention for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income, U.S.-Belg., July 9, 1970, 23 U.S.T.
2687, which was in force from Oct. 13, 1972, through Dec. 28, 2007, at which time
the current treaty, Convention for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion With Respect to Taxes on Income, U.S.-Belg., Nov.
27, 2006, Tax Treaties (CCH) para. 31,011, came into force. Because the United
States taxes its citizens on their worldwide income, a “saving clause” is included in
both tax treaties which reserves the right of the United States to tax its citizens on
the basis of the Internal Revenue Code notwithstanding the treaty provisions. See
Filler v. Commissioner, 74 T.C. 406, 410 (1980). While both treaties provide
certain exceptions to the saving clause, none are relevant here. Furthermore, the
two treaties have no bearing on any of the issues for decision as presented by the
parties in this case, and the existence of the treaties is noted here simply for
purposes of completeness.
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Under section 7491(a)(1), the burden of proof with respect to any factual
issue may shift from the taxpayer to the Commissioner if the taxpayer produces
credible evidence bearing on that issue that is relevant to ascertaining the taxpayer’s
liability. However, section 7491(a)(1) applies only if, inter alia, the taxpayer has
complied with the substantiation and recordkeeping requirements of the Internal
Revenue Code. See sec. 7491(a)(2)(A) and (B). As discussed below, petitioners
failed to fully substantiate their income and expenses and did not maintain
appropriate records. Accordingly, the burden of proof remains on petitioners. See
Rule 142(a); Welch v. Helvering, 290 U.S. at 115.
B. Additional Child Tax Credit
Section 24(a) allows eligible taxpayers a credit for each “qualifying child”.5
Section 24(d) provides that a portion of the credit may be refundable, which portion
is commonly referred to as the additional child tax credit.
To be eligible for the additional child tax credit in any given year a taxpayer
must have received “earned income” within the meaning of section 32. See sec.
24(d)(1)(B)(i); see also Heilman v. Commissioner, T.C. Memo. 2011-210.
Petitioners contend that the amounts Mr. Weinberger received from Satmar
5
Respondent concedes that all six of petitioners’ children claimed on their
returns are qualifying children for purposes of the child tax credit and the additional
child tax credit.
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represent wages paid for his services as a lecturer and thus constitute earned
income. Respondent argues, however, that the amounts received by Mr.
Weinberger represent educational grants and do not constitute earned income under
section 32.6 Respondent also argues that petitioners failed to substantiate the
amounts reported as wages on their tax returns. We hold that the amounts received
by petitioners, as substantiated by the record and discussed infra, constitute earned
income within the meaning of section 32.
1. Earned Income
The term “earned income” includes “wages, salaries, tips, and other
employee compensation” but only if the amounts of those items are includible in
gross income. Sec. 32(c)(2)(A)(i).
At some point shortly after petitioners were married in 1988, Mr. Weinberger
became a full-time student at Satmar and received funds from the school to help
defray living expenses. Upon completing four years of study, however, he was
hired by Satmar as a lecturer, and he continued to be employed by Satmar as a
lecturer during the years in issue.
6
Although the notices of deficiency reclassified all of petitioners’ income,
the record demonstrates that Mrs. Weinberger received earned income from Bais
Rachel in exchange for her services as a teacher. It appears that respondent no
longer contends otherwise. Accordingly, we focus on the amounts received by Mr.
Weinberger during the years in issue.
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On the whole, the record demonstrates that Mr. Weinberger was hired to
lecture and that he was compensated for each lecture given. Admittedly, Mr.
Weinberger spent time studying to become a rabbi during the years in issue, but his
rabbinical studies were conducted during his personal time. Although Mr.
Weinberger occasionally studied to prepare for his lectures, the payments he
received for each lecture were not educational grants but payments for his services.
At trial Mr. Weinberger introduced monthly payment reports provided by
Satmar (payment reports) and a spreadsheet maintained by Satmar (spreadsheet)
that detail each lecture he performed for the school during the years in issue. Each
payment report describes, inter alia, the nature of the lesson he taught and the
number of days he lectured on a particular subject during the month. The payment
reports also clearly list the corresponding amount paid to Mr. Weinberger for each
lecture.
In sum, and on the basis of the entire record, we are satisfied that Mr.
Weinberger was paid to provide services to Satmar as a lecturer during the years in
issue and that the payments he received from Satmar in those years represented
earned income within the meaning of section 32. Therefore, petitioners are entitled
to claim the additional child tax credit to the extent they have substantiated the
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amounts of earned income they received during each year in issue. See, e.g., sec.
6001; sec. 1.6001-1(a), Income Tax Regs.
2. Substantiated Earned Income
Respondent argues, in the alternative, that petitioners failed to fully
substantiate the amounts reported as earned income on their tax returns. In that
regard, and to the extent specified below, we agree with respondent.
The payment reports from Satmar list the amount Mr. Weinberger received
for each lecture beginning with late March 2004 and ending in the first quarter of
2007. The spreadsheet from Satmar reconciles with those payment reports during
the aforementioned period. In addition, the spreadsheet includes payments Mr.
Weinberger received during the final three quarters of 2007 and the first quarter of
2008.
The payment reports and spreadsheet, however, do not show any payments
for the period January 1 through March 22, 2004, or any payments during the final
three quarters of 2008 (missing periods). Although Mr. Weinberger contends that
he received payments from Satmar for his lectures during the missing periods, there
is no documentary evidence in the record to support such a claim. In this regard, the
Court is “not required to accept the self-serving testimony of petitioner * * * as
gospel.” Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Without further
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documentary evidence, we are unwilling to conclude that Mr. Weinberger received
any amount of income beyond what is shown on the payment reports and
spreadsheet.
With respect to the earned income received by Mrs. Weinberger as a teacher
at Bais Rachel, petitioners likewise failed to substantiate the full amounts reported
on their tax returns for the years in issue. Petitioners have proven, however, that
Mrs. Weinberger received earned income during those years in amounts that
coincide with the amounts reported on her pay stub for 2008 and petitioners’
Belgian income tax returns.
Therefore, we conclude that petitioners received the following aggregate
amounts of earned income:7
Tax Year Mayer Weinberger Sarah Weinberger Total
2004 $18,428 $8,335 $26,763
2005 26,145 8,763 34,908
2006 26,727 10,723 37,450
2007 28,605 10,172 38,777
2008 10,975 11,593 22,568
Overall, petitioners failed to maintain complete records of their income and
provided insufficient evidence to substantiate the full amounts claimed on their tax
7
All income and expense amounts have been converted from euro to U.S.
dollars using the conversion rates in the parties’ stipulation of facts and have been
rounded to the nearest dollar.
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returns. Accordingly, we are unwilling to conclude that petitioners received any
earned income beyond the amounts enumerated above.
C. Dependent Care Credit
1. General Requirements
Section 21 allows a credit for a percentage of “employment-related
expenses” paid.8 Employment-related expenses include expenses paid for the care
of a qualifying individual that enable the taxpayer to be gainfully employed. Sec.
21(b)(2)(ii). The term “qualifying individual” includes a dependent, as defined in
section 152(a), of the taxpayer who has yet to reach 13 years of age. Sec.
21(b)(1)(A).
In the notices of deficiency respondent disallowed the dependent care credit
claimed by petitioners each year because they allegedly failed to establish that their
children were qualifying individuals pursuant to section 21. Respondent has since
conceded that petitioners are entitled to dependency exemption deductions with
respect to each child claimed as a qualifying individual for purposes of the
8
The amount of employment-related expenses that may be claimed for
purposes of the dependent care credit in any given tax year is limited to the earned
income of the lower earning spouse for that year. Sec. 21(d)(1). Because we hold
that both petitioners received earned income during each year in issue, further
substantive discussion of earned income in the dependent care credit context is
unnecessary.
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dependent care credit. Furthermore, the record indicates that those dependent
children were under the age of 13 during the years in issue, and it appears
respondent does not contend otherwise. Therefore, we conclude that petitioners’
dependent children are qualifying individuals within the meaning of section
21(b)(1)(A).
Furthermore, petitioners have demonstrated that they were both employed
during the years in issue and their employment made it necessary for them to pay
child care expenses for their qualifying children. Thus, on the basis of the entire
record, we hold that petitioners are entitled to the dependent care credit with respect
to the substantiated amounts of expenses they paid for the care of their qualifying
children. See, e.g., sec. 6001; sec. 1.6001-1(a), Income Tax Regs.
2. Substantiated Employment-Related Expenses
Petitioners provided sufficient documentary evidence to substantiate a portion
of the employment-related expenses they paid during each year. On the basis of that
documentation, we are satisfied that petitioners paid the following amounts of
employment-related expenses in regard to their qualifying children for each
respective year in issue:
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Year Amount of Expenses
2004 $3,899
2005 3,410
2006 3,801
2007 4,206
2008 4,009
As a general rule, if, in the absence of required records, a taxpayer provides
sufficient evidence that the taxpayer has paid an expense, but the taxpayer is unable
to adequately substantiate the amount, the Court may estimate the amount of such
expense. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). In order
for the Court to estimate the amount of an expense, however, 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). Although
Mr. Weinberger claimed he and his wife paid employment-related expenses beyond
the amounts they were able to adequately substantiate, they provided no
documentary evidence of further payments and no basis upon which a greater
allowance may be justified. Accordingly, we are unwilling to conclude that
petitioners paid employment-related expenses beyond the substantiated amounts
listed above.
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D. Additions to Tax
Section 6651(a)(1) imposes an addition to tax for failure to file a return by its
due date. The addition equals 5% of the amount required to be shown as tax on the
return for each month or fraction thereof that the return is late, not to exceed 25% in
the aggregate.
Section 7491(c) generally provides that the Commissioner bears the burden of
production with respect to the liability of an individual for any penalty or addition to
tax. The Commissioner may meet his burden of production by coming forward with
sufficient evidence indicating that it is appropriate to impose the relevant penalty or
addition to tax. Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Respondent
has proven, and has therefore discharged his burden of production under section
7491(c), that petitioners’ 2004, 2005, 2006, and 2007 tax returns were not received
and filed by their respective due dates.9
“A failure to file a tax return on the date prescribed leads to a mandatory
penalty unless the taxpayer shows that such failure was due to reasonable cause and
not due to willful neglect.” McMahan v. Commissioner, 114 F.3d 366, 368 (2d Cir.
1997), aff’g T.C. Memo. 1995-547. A showing of reasonable cause requires a
taxpayer to show that he or she exercised “ordinary business care and prudence”
9
Petitioners timely filed their 2008 tax return.
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but was nevertheless unable to file the return within the prescribed time. United
States v. Boyle, 469 U.S. 241, 246 (1985); sec. 301.6651-1(c)(1), Proced. &
Admin. Regs.
Petitioners have failed to offer persuasive evidence to establish that the late
filing of their 2004, 2005, 2006, and 2007 returns was due to reasonable cause as,
for example, the fact that they worked long hours and cared for many children is
insufficient to relieve them from liability under section 6651(a)(1). See Howe v.
Commissioner, T.C. Memo. 2000-291. Accordingly, we hold that petitioners are
liable for the addition to tax under section 6651(a)(1) for 2004, 2005, 2006, and
2007 to the extent applicable as a result of the parties’ computations under Rule
155.
E. Accuracy-Related Penalties
Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of
any underpayment attributable to negligence or disregard of rules or regulations.
The term “negligence” includes any failure to make a reasonable attempt to comply
with tax laws, and “disregard” includes any careless, reckless, or intentional
disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure
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. Sec. 1.6664-
4(a), Income Tax Regs. The decision as to whether a 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.
As a general rule, the duty of filing accurate tax returns cannot be avoided by
placing responsibility on an agent. See Metra Chem Corp. v. Commissioner, 88
T.C. 654, 662 (1987); Pritchett v. Commissioner, 63 T.C. 149, 174 (1974).
However, a taxpayer may avoid the accuracy-related penalty by showing that his or
her reliance on the advice of a professional, such as a commercial tax return
preparer, was reasonable and in good faith. Sec. 1.6664-4(b)(1), Income Tax Regs.
Specifically, the taxpayer must establish that (1) the preparer was a competent
professional, (2) the taxpayer provided accurate and necessary information to the
preparer, and (3) the taxpayer actually relied in good faith on the preparer’s
judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99
(2000), aff’d, 299 F.3d 221 (3d Cir. 2002); Ma-Tran Corp. v. Commissioner, 70
T.C. 158, 173 (1978). Blind reliance on a tax return preparer, however, is not a
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defense; rather, the taxpayer is generally required to review the tax return before
signing and filing it. Bronson v. Commissioner, T.C. Memo. 2002-260; Osborne v.
Commissioner, T.C. Memo. 2002-11; Bilzerian v. Commissioner, T.C. Memo.
2001-187.
The record establishes that petitioners failed to maintain adequate records and
properly substantiate their income and expenses. See sec. 7491(c); sec. 1.6662-
3(b)(1), Income Tax Regs. Thus, we turn to whether petitioners acted with
reasonable cause and in good faith.
Mr. Weinberger had little to say at trial with respect to petitioners’ failure to
maintain records and substantiate their income and child care expenses, and Mrs.
Weinberger did not testify. Mr. Weinberger simply explained that his wife was
responsible for the couple’s United States and Belgian tax reporting. In that respect
he testified, albeit vaguely, that his wife consulted a commercial tax return preparer
based in Israel called U.S. Benefits Group (U.S. Benefits), which allegedly prepared
the couple’s tax returns for the years in issue. Each of petitioners’ tax returns for
those years, however, includes the typewritten statement “self-prepared” and was
not signed by a tax return preparer. Moreover, there is no documentary evidence in
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the record to suggest that petitioners relied on a tax return preparer named U.S.
Benefits, or any tax return preparer for that matter.
Even if we assume, arguendo, that petitioners hired a commercial tax return
preparer, there is no evidence that the preparer was a competent professional, that
complete and correct information was given to the preparer, or that petitioners
reviewed their returns for accuracy. Mr. Weinberger demonstrated at trial that he
had little knowledge regarding whether complete and accurate documents were
provided to U.S. Benefits and was unfamiliar with the tax returns themselves.
Furthermore, petitioners never called their alleged tax return preparer as a witness.
See Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),
aff’d, 162 F.2d 513 (10th Cir. 1947).
Mr. Weinberger testified that he and his wife no longer seek the services of
U.S. Benefits and have become skeptical of the company’s business practices.10 If
they did, in fact, hire U.S. Benefits to prepare their tax returns, we question whether
petitioners did so in good faith. Moreover, regardless of whether they hired U.S.
Benefits or not, we are skeptical whether petitioners performed even a cursory
10
Although not entirely clear from the record, it appears that U.S. Benefits
promised its clients refundable tax credits from the U.S. Government and charged a
10% commission on any refund its clients received.
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review of their tax returns to confirm the accuracy of the information reported
therein.
In sum, petitioners have not met their burden of persuasion with respect to
reasonable cause and good faith. See Higbee v. Commissioner, 116 T.C. at 446-
447. Accordingly, petitioners are liable for the accuracy-related penalty under
section 6662(a) for each year in issue to the extent the penalties are applicable as a
result of the parties’ computations under Rule 155.
Conclusion
We have considered all of the arguments advanced by the parties, and, to the
extent not addressed herein, we conclude that those arguments are irrelevant, moot,
or meritless.
To give effect to the foregoing,
Decision will be entered
under Rule 155.