T.C. Memo. 2012-153
UNITED STATES TAX COURT
JOHN H. SCHOPPE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9867-10. Filed May 30, 2012.
John H. Schoppe, pro se.
Inga C. Plucinski, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined against petitioner deficiencies for the
six years in issue and additions to tax for failure to file, failure to pay, and failure to
make estimated tax payments as follows:
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Additions to tax1
Year Deficiency Sec. 6651(a)(1) Sec. 6651(a)(2) Sec. 6654
2002 $9,945 $1,943.33 $2,159.25 $238.78
2003 10,629 2,391.53 2,657.25 274.24
2004 16,590 3,732.75 4,147.50 475.41
2005 12,314 2,770.65 (1) 493.90
2006 9,048 2,035.80 (1) 428.18
2007 7,095 1,596.38 (1) 322.90
1
To be computed in the Rule 155 calculation.
The primary issue for decision is whether petitioner has adequately
substantiated deductions claimed for business expenses.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Petitioner is 68
years old and resides in Utah.
In spite of years of poor health and illness (namely, liver disease and
degenerative arthritis), for many years petitioner has been actively and primarily
engaged as a sole proprietor in a number of real estate related activities, and
petitioner has held various business licenses. Petitioner was a real estate agent,
1
All section references are to the Internal Revenue Code applicable to the
years in issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
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broker, consultant, appraiser, and an instructor of real estate licensing classes, as
well as a financial planner and an insurance agent.
Petitioner was engaged full time in his various real estate related and other
activities, generally six days a week. At least for some of the years before us,
petitioner owned some rental property.
Petitioner kept track of expenses incurred each day on a calendar for each
year on which he would make only vague notations of the amounts and payees
relating to the expenses (e.g., “$15.95 Ho Jo”). Also on the calendar, petitioner
would make brief notations of his automobile or truck mileage driven each day.
Generally, neither on his calendar nor anywhere else would petitioner note or
describe the business purpose for his expenses and mileage. Although available at
the trial and referenced on direct and cross-examination of petitioner, none of
petitioner’s calendars applicable to 2002 through 2007 was offered into evidence.
Although it is not completely clear from the record regarding petitioner’s
banking practices, it appears that petitioner maintained one checking account into
which he deposited income from his real estate related activities and out of which
petitioner paid the bulk of his business and personal expenses.
Petitioner did not timely file Federal income tax returns for the years in issue.
Also, except for small amounts of Federal income tax withheld from wages he
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received in two of the years in issue, petitioner did not pay (and has not paid) any
Federal income tax for the years in issue.
On audit respondent summoned petitioner’s bank records. On the basis of
deposits into petitioner’s bank accounts to calculate his unreported real estate
related income and third-party information to calculate petitioner’s unreported
wages, and under authority of section 6020(b), respondent prepared for petitioner
substitutes for returns and notices of deficiency and charged petitioner with the
following income:
Income from 2002 2003 2004 20051 2006 2007
Real estate $29,606 $42,202 $58,449 $24,664 $35,471 $25,728
Wages 11,300 --- --- 17,881 1,194 3,945
Unemployment
compensation 3,752 --- --- --- --- ---
Social Security --- --- --- --- 3,701 6,558
Total 44,658 42,202 58,449 42,545 40,366 36,231
1
Per respondent’s stipulation, the above amounts for 2005 represent some
adjustments to the audit determination.
In preparing the substitutes for returns, because of lack of substantiation by
petitioner, respondent allowed petitioner no business expense deductions against the
real estate related income charged to petitioner. For each year respondent did allow
petitioner a standard deduction and a personal exemption.
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On November 6, 2009, petitioner finally submitted to respondent documents
that petitioner claims represent his Federal income tax returns for 2002 through
2007. For each of the years in issue except 2005, petitioner’s untimely tax returns
show total real estate related income close to the amount of income respondent
charged to petitioner in the substitutes for returns and in the notices of deficiency.2
However, petitioner’s untimely 2002, 2005, 2006, and 2007 Federal income
tax returns also show substantial business expenses that offset the reported real
estate related income and reflect net business losses. Petitioner’s untimely 2003 and
2004 Federal income tax returns show net income from his real estate related
activities of $9,260 and $10,378, respectively, but itemized deductions and a
personal exemption offset the reported income for each year.
Respondent has not processed petitioner’s untimely Federal income tax
returns, and respondent has not allowed petitioner any of the claimed business
expense or itemized deductions reflected on petitioner’s untimely Federal income
tax returns.
2
For 2005 respondent charged petitioner with $38,421 in real estate related
income. Petitioner’s untimely 2005 Federal income tax return reflected total real
estate related income of $18,755.
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OPINION
Gross income includes all income from whatever source. Sec. 61(a); see also
United States v. Burke, 504 U.S. 229, 233 (1992) (“The definition of gross income
under the Internal Revenue Code sweeps broadly.”). Bank deposits are considered
prima facie evidence of income; the taxpayer bears the burden of establishing that
such deposits were derived from nontaxable sources. Welch v. Commissioner, 204
F.3d 1228, 1230 (9th Cir. 2000), aff’g T.C. Memo. 1998-121; see also Clayton v.
Commissioner, 102 T.C. 632, 645-646 (1994); Harmer v. Commissioner, 4 Fed.
Appx. 673, 676 (10th Cir. 2001).
At trial petitioner did not seriously challenge respondent’s determinations of
income, and no credible evidence suggests errors in respondent’s income
determinations for each year in issue.3
Petitioner now claims, however, that the amounts of the business expense and
itemized deductions shown on his untimely Federal income tax returns for 2002
through 2007 should be allowed.
3
Respondent does acknowledge minor adjustments that need to be made to
respondent’s income determinations. Those adjustments are to be made in the Rule
155 calculation.
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Generally, determinations made by respondent in a notice of deficiency are
presumed correct, and the taxpayer bears the burden of proving otherwise.4 See
Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Specifically with regard to claimed business expense and itemized
deductions, the taxpayer bears the burden of proof by a preponderance of the
evidence. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The
taxpayer’s burden includes the burden of substantiation, Hradesky v. Commissioner,
65 T.C. 87, 90 (1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976), and a tax
return is not itself evidence of a taxpayer’s correct income or allowable expenses,
Taylor v. Commissioner, T.C. Memo. 2009-235 (citing Lawinger v. Commissioner,
103 T.C. 428, 438 (1994)).
Petitioner states that his business activities were atypical, that his business
expenses and itemized deductions fully offset his income, and that he does not owe
any Federal income tax. Petitioner testified about and described some of his
business expenses. Petitioner states that because he was confident he owed no
Federal income tax and was “willing to forfeit” to the Government tax refunds he
4
For obvious reasons, no shift in the burden of proof in this case is
appropriate. See sec. 7491(a)(2).
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claims he was owed for at least some of the years in issue, petitioner did not worry
about and did not timely file Federal income tax returns for 2002 through 2007.
Petitioner complains that respondent’s audit and trial representatives
steamrolled him and refused to accept the obvious business nature of all of his
activities and that respondent summarily rejected expenses shown on his calendars
and reflected by checks and credit card charges. Petitioner claims that essentially
all of his expenses represent business expenses.
In response to the Court’s suggestion at trial, an effort was made to reach a
settlement as to an estimated percentage of petitioner’s real estate income that
would be treated as business expenses. Petitioner, however, would have none of it.
Petitioner emphatically refers to the financial status of his various activities as
“minus, minus, in the hole”.
Petitioner notes that most real estate people pay their “agents” a commission
of around 60%, but insists that his business activities are not reflected by the norm,
that his business model is “odd”, that he is an “enigma”, and that 90-95% of his real
estate related income was passed on as commission expenses to six or seven
independent real estate agents that assisted him.
At trial petitioner also suggested that some of the amounts deposited into his
bank accounts and treated by respondent as real estate income constituted
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nontaxable funds he received as loans from his commission agents in order to
provide him cashflow when his business was slow.
At trial, however, petitioner did not call any of his commission agents as a
witness. He did not identify any of the checks he allegedly wrote as commission
checks, and he did not identify any of the specific amounts deposited into his bank
accounts over the years as nontaxable loans received.
On cross-examination about the business or personal nature of expenses
shown on his calendars and in his check register, petitioner stated bluntly: “So if
it’s business or personal, it’s still a cost, and it’s mostly business because this is
business.”
Testifying about the business or personal nature of a number of $15 overdraft
charges, petitioner stated: “In my mind, if I’m overdrawn, it’s because I don’t have
income from my business. So if it’s not income, it’s a business expense.”
Asked at trial to explain some of the items making up the business travel
expense deductions shown on his untimely Federal income tax returns, petitioner
described, among other items, a January 16, 2007, Visa credit card charge as
payment for a business luncheon; but petitioner then acknowledged that the $38
expense was in payment for lift tickets at Snow Basin, a popular Utah ski resort.
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Authority exists for a court to estimate a taxpayer’s business expenses where
a reasonable basis therefor exists. See Cohan v. Commissioner, 39 F.2d 540, 543-
544 (2d Cir. 1930). Business expenses subject to section 274(d) (e.g.,
entertainment and away-from-home meal and lodging expenses), however, may not
be estimated. See sec. 280F(d)(4)(A); Sanford v. Commissioner, 50 T.C. 823, 827
(1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969).
But for the reasonable-basis and section 274(d) limitations on the authority
under Cohan to estimate a taxpayer’s deductible business expenses, we would be
inclined to attempt an estimate of petitioner’s allowable business expenses.
However, because of the difficulty on the record before us of knowing with any
confidence the correct nature of petitioner’s expenses and because of the significant
portion of petitioner’s claimed expenses that appears to be subject to section 274(d),
we decline to make any estimate under Cohan of petitioner’s deductible business
expenses.
Other than one 2006 charitable contribution deduction of $807, petitioner has
not substantiated any of the claimed itemized deductions.
Conclusion
For 2002 through 2007 we sustain respondent’s determinations of the
amounts of petitioner’s income and wages, and petitioner is not entitled to any of
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the business expense deductions claimed on his untimely Federal income tax
returns.
With one exception, petitioner has not substantiated any of the alleged
itemized deductions claimed on his untimely Federal income tax returns. The
claimed itemized deductions are not allowed, and petitioner is entitled to a standard
deduction for each year.
Accordingly, we sustain respondent’s deficiency determination against
petitioner for each of the years involved herein, subject to adjustments respondent
has agreed to.
Because we have sustained respondent’s deficiency determinations against
petitioner, respondent has met his burden of production with regard to each of the
additions to tax respondent determined against petitioner. See sec. 7491(c).
Petitioner has established neither reasonable cause nor lack of willful
neglect with regard to the Federal income tax deficiencies that we today sustain.
For each year in issue we sustain respondent’s imposition of the section
6651(a)(1) and (2) and 6654 additions to tax for late filing of his tax returns, for
late payment of his Federal income tax liabilities, and for underpayment of his
annual estimated tax liability. See Wheeler v. Commissioner, 127 T.C. 200, 207-
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212 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008); Grosshandler v. Commissioner,
75 T.C. 1, 21 (1980).
Decision will be entered
under Rule 155.