T.C. Summary Opinion 2012-48
UNITED STATES TAX COURT
ANDREA MARIE HALL, a.k.a. ANDREA MARIE DARABASZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7699-10S. Filed May 22, 2012.
Andrea Marie Hall, a.k.a. Andrea Marie Darabasz, pro se.
Bradley C. Plovan and Arlene A. Blume, for respondent.
SUMMARY OPINION
DEAN, Special Trial Judge: This case was heard pursuant to the provisions
of section 7463 of the Internal Revenue Code in effect when the petition was filed.
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.
Unless otherwise indicated, subsequent section references are to the Internal
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Revenue Code in effect for the year at issue, and Rule references are to the Tax
Court Rules of Practice and Procedure.
Respondent determined for 2008 a deficiency in petitioner’s Federal income
tax of $12,943 and an accuracy-related penalty under section 6662(a) of $2,588.60.
Petitioner concedes that she failed to report as income $5,280 received from
Phoenix Realty & Associates and $18 received from “Police and Fire FCU” in
2008. Petitioner concedes that she had unreported “other income” determined by
respondent’s bank deposits analysis as reduced by respondent’s concession of
nontaxable deposits from Richmond American Homes and Traveler’s Joy and
wedding gifts of $2,530 received and deposited in 2008. Petitioner also concedes
that she is not entitled to a deduction on Schedule E, Supplemental Income and Loss
(From rental real estate, royalties, partnerships, S corporations, estates, trusts,
REMICs, etc.), of $1,000 as an advertising expense.
Although petitioner filed her return as a single, unmarried individual, she and
respondent agree that she was married during and at the close of 2008. Respondent
concedes that petitioner is entitled to deduct on Schedule E an expense for mortgage
interest of $14,147.16. Respondent concedes that petitioner is
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entitled to deduct $4,239 in real estate taxes paid to Anne Arundel County,
Maryland.
The issues remaining for decision are: (a) whether petitioner is entitled to
deduct home mortgage interest in excess of that allowed or agreed to by respondent;
(b) whether petitioner is entitled to deduct Schedule E expenses in excess of those
allowed or agreed to by respondent; and (c) whether petitioner is liable for the
accuracy-related penalty under section 6662(a).
Some of the facts have been stipulated and are so found. The stipulation of
facts and the exhibits received in evidence are incorporated herein by reference.
Petitioner resided in Maryland when the petition was filed.
Background
Petitioner worked as a medical assistant during 2008. Petitioner married her
husband, Daniel Hall, in May 2008, and they remained married at the time of trial.
Petitioner purchased her principal residence in February 2008. Petitioner
deducted on Schedule A, Itemized Deductions, attached to her Federal income tax
return for 2008, home mortgage interest of $36,432. Respondent received from
seven financial institutions Forms 1098, Mortgage Interest Statement, reporting
interest of $39,966 paid “in petitioner’s name”. One of the Forms 1098 was from
Chase Home Finance/Amtrust Bank. Petitioner substantiated that she personally
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made eight payments during the year on the mortgage. Another Form 1098 was
received from Taylor, Bean & Whitiker Mortgage Corp. Respondent allowed with
respect to the latter Form 1098 a mortgage interest deduction for “each verified
monthly payment equal to one-twelfth of the total interest paid during the year”.
Petitioner’s husband claimed no itemized deductions and did not report any
Schedule E activity on his Federal income tax return for 2008.
Petitioner owned an interest in real estate other than her home in 2008
(property). The property was the subject of a failed installment land sale or “rent-
to-own” agreement and a subsequent lease agreement in 2008. In addition to the
real estate taxes respondent already conceded, petitioner paid $264.46 for water and
waste water service at the property.
Discussion
Generally, the Commissioner’s determinations are presumed correct, and the
taxpayer bears the burden of proving that those determinations are erroneous. Rule
142(a); see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v.
Helvering, 290 U.S. 111, 115 (1933). In some cases the burden of proof with
respect to relevant factual issues may shift to the Commissioner under section
7491(a). Petitioner did not argue or present evidence that she satisfied the
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requirements of section 7491(a). Therefore, petitioner bears the burden of proof
with respect to the issues in the notice of deficiency.
Mortgage Payments
Respondent argues not that the home mortgage amounts were not paid on
petitioner’s mortgages, but rather that she has not shown evidence that she
personally made each and every payment. Respondent asserts in his pretrial
memorandum that he “separately verified” that petitioner made certain payments
and as a result determined in the notice of deficiency that she was entitled to a home
mortgage interest deduction of $9,423. The parties agree that petitioner has verified
that she made home mortgage payments in addition to those respondent separately
verified.
Respondent’s counsel’s position at trial was that the payments shown by
petitioner “do not fully account for the mortgage interest reported on the 1098.”
Petitioner insisted that she made all the payments on her home mortgage but could
not find all the evidence that would prove it. Where a taxpayer is unable to prove
the exact amount of the otherwise deductible item, the Court may estimate the
amount of such an expense and allow the deduction to that extent. Millikin v.
Commissioner, 298 F.2d 830, 834-835 (4th Cir. 1962), aff’g T.C. Memo. 1959-210;
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Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Estate of Dickerson
v. Commissioner, T.C. Memo. 1997-165.
The Court finds that petitioner’s testimony along with the reasonable
inferences to be drawn from the facts and circumstances support her
deduction of home mortgage interest as reported on her Forms 1098.
Schedule E Deductions
The parties stipulated several documents, Exhibits 17-P through 24-P, related
to Schedule E deductions petitioner sought, to which respondent reserved various
objections.
Payments to Anne Arundel County
Exhibit 17-P is a stamped paid bill for $264.46 from Anne Arundel County
for water and waste water service. Respondent reserved an objection to the
document because it was evidence of a deduction not shown on the return or raised
in the pleadings. Respondent’s counsel in announcing certain concessions stated
that as to the exhibit, “there is no issue as to the evidence”. The Court treats
respondent’s statement as a waiver of his objection and finds that petitioner is
entitled to the deduction.
Exhibit 18-P is a real estate tax bill of $4,239.53 paid to Anne Arundel
County. Respondent objected to the document because it was evidence of a
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deduction not shown on the return or raised in the pleadings. As respondent has
conceded this item as a deduction related to the property, the Court will treat
respondent as having waived his objection to the document. To the extent that
respondent did not intend to waive his objection, it is overruled. See Rule 174(b).
“Bad Debt” Deduction
Petitioner testified at trial that she suffered a bad debt loss on the property
and that she should be allowed to deduct the bad debt on her Schedule E for 2008.
She testified that she started renting the property in February of 2008, the renters
“suddenly left the property without notice,” yet she had to continue to make
mortgage payments of $24,846. Petitioner presented Exhibits 19, 20, and 21-P to
support her argument. Petitioner admits that the $24,846 “bad debt” includes the
$14,200 of interest on the mortgage that she deducted and that respondent has
agreed to. Certainly that portion of the proposed deduction is not allowable.
Double deductions are not allowed absent the clear intent of Congress. United
States v. Skelly Oil Co., 394 U.S. 678, 684 (1969); Charles Ilfeld Co. v. Hernandez,
292 U.S. 62, 68 (1934); Lang v. Commissioner, T.C. Memo. 2010-286. The
balance of the mortgage payment, absent evidence to the contrary, would be for the
acquisition of the property itself, a capital asset. Sec. 1221. Generally, no
deduction is allowed for capital expenditures. Sec. 263(a). In any event, debts
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arising from unpaid rents are not allowable as a bad debt deduction unless the rental
income has been included on the return for the year or a prior taxable year. Sec.
1.166-1(e), Income Tax Regs. Petitioner has not shown that she included any
uncollected rent for the property in income for any year.
Whether or not the Court admits petitioner’s documents, her legal position is
untenable. She is not entitled to a bad debt deduction of $24,846 on Schedule E for
2008.
Mortgage Expenses
Respondent conceded that petitioner is entitled to deduct the Schedule E
mortgage expenses evidenced by Exhibits 22, 23, and 24-P, and the Court treats his
reserved objections to the exhibits as waived.
Accuracy-Related Penalty
Section 7491(c) imposes on the Commissioner the burden of production in
any court proceeding with respect to the liability of any individual for penalties and
additions to tax. Higbee v. Commissioner, 116 T.C. 438, 446 (2001); Trowbridge
v. Commissioner, T.C. Memo. 2003-164, aff’d, 378 F.3d 432 (5th Cir. 2004). In
order to meet the burden of production under section 7491(c), the Commissioner
need only make a prima facie case that imposition of the penalty or the addition to
tax is appropriate. Higbee v. Commissioner, 116 T.C. at 446. Petitioner, although
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married, filed as a single person and failed to report specific items of income as well
as income determined using an indirect method.
The Court concludes that respondent has produced sufficient evidence to
show that the accuracy-related penalty under section 6662(b)(1)1 is appropriate for
2008.
Section 6662(a) and (b)(1) and (2) imposes a 20% penalty on the portion of
an underpayment of tax attributable to negligence or disregard of rules or regulations
and a substantial understatement of income tax. “Negligence” includes any failure
to make a reasonable attempt to comply with the provisions of the Internal Revenue
Code, including any failure to keep adequate books and records or to substantiate
items properly. See sec. 6662(c); sec. 1.6662-3(b)(1), Income Tax Regs.
Section 6664(c)(1) provides that the penalty under section 6662(a) shall not
apply to any portion of an underpayment if it is shown that there was reasonable
cause for the taxpayer’s position and that the taxpayer acted in good faith with
respect to that portion. The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case basis, taking into
1
Because the Court finds that petitioner was negligent, the other bases for the
application of the penalty will not be discussed. See sec. 1.6662-2(c), Income Tax
Regs.
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account all the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax
Regs.
Section 1.6664-4(b)(1), Income Tax Regs., specifically provides:
“Circumstances that may indicate reasonable cause and good faith include an honest
misunderstanding of fact or law that is reasonable in light of all the facts and
circumstances, including the experience, knowledge, and education of the taxpayer.”
The most important factor is the extent of the taxpayer’s effort to assess his proper
tax liability for the year. Id.
Petitioner offered no argument or evidence to show that there was reasonable
cause for and that she acted in good faith with respect to the underpayment.
Respondent’s determination of the accuracy-related penalty under section
6662(a) for 2008 is sustained.
To reflect the foregoing,
Decision will be entered
under Rule 155.