T.C. Memo. 2016-212
UNITED STATES TAX COURT
CARI BARNES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 28925-11. Filed November 22, 2016.
Cari Barnes, for herself.
Lewis A. Booth II and Paul C. Feinberg, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
MORRISON, Judge: The respondent (referred to here as the “IRS”) issued
a notice of deficiency to the petitioner, Cari V. Barnes, for the 2008 and 2009 tax
years. In this notice, the IRS determined income-tax deficiencies of $23,032 and
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[*2] $31,763 for 2008 and 2009, respectively, and accuracy-related penalties
under section 6662(a) of $4,606.40 and $6,352.60 for 2008 and 2009,
respectively.1
Barnes timely filed a petition under section 6213(a) for a redetermination of
the deficiencies and the penalties. We have jurisdiction under section 6214(a).
The issues in the case have been narrowed by the parties through a
stipulation of settled issues (and also partly through the stipulation of facts). We
resolve the remaining issues as follows:
(1) Barnes has unreported income of $25,754.71 for 2008 and $25,901.96 for
2009.
(2) Barnes is not entitled to a business-expense deduction for Barnes & Barnes
Financial Services for 2008 or 2009 in excess of the amount conceded by
the IRS ($15,937 for 2008 and $17,984 for 2009).
(3) Barnes is not entitled to a charitable-contribution deduction for 2008 or
2009 in excess of the amount allowed by the IRS in the notice of deficiency
($12,576 for 2008 and $16,381 for 2009).
1
Unless otherwise indicated, 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. Some dollar amounts are rounded to
the nearest dollar.
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[*3] (4) Barnes is not entitled to a rental-property-expense deduction (that is,
deductions for the expenses of owning rental property) for 2008 or 2009,
except that Barnes is entitled to a $932.49 deduction for real-property taxes
for 2009.
(5) Barnes is liable for section-6662(a) accuracy-related penalties for 2008 and
2009.
FINDINGS OF FACT
Some facts have been stipulated, and they are so found.
1. Background
During 2008 and 2009, Barnes resided at 10515 Bushy Creek, Houston,
Texas.2
Barnes has bachelor’s degrees in computer science, computer information
systems, and theology. She has a master’s degree in management. She has been
an accountant since at least 1994 and has prepared income-tax returns for
individuals since at least 2004.
During 2008 and 2009, Barnes worked as an accountant for Robert Half, a
staffing and temporary-work agency.
2
Barnes resided in Texas when she filed her petition. Therefore, an appeal
of our decision in this case would go to the U.S. Court of Appeals for the Fifth
Circuit unless the parties designate another circuit. See sec. 7482(b)(1) and (2).
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[*4] During 2008 and 2009, Barnes also ran a tax-return-preparation business
called Barnes & Barnes Financial Services. Barnes attached Schedules C, “Profit
or Loss From Business”, to her 2008 and 2009 tax returns to report the income and
expenses of this business, a sole proprietorship. She prepared approximately 100
income-tax returns annually as part of this business. She leased an office for this
business at 2626 South Loop West, Suite 655, Houston, Texas. When handling
the work of this business, she usually used this office.
During 2008 and 2009, Barnes also ran a business that performed financial-
consulting work for churches. Barnes attached a second Schedule C to each of her
2008 and 2009 tax returns to report the income and expenses of this business, a
business that, like her tax-return-preparation business, was a sole proprietorship.
Barnes did financial-consulting work for Williams Temple Church of God
(referred to here as “the church” or “Williams Temple Church”). In 2009, Barnes
received at least $10,000 from the church for this financial-consulting work. She
reported $10,000 on the second Schedule C attached to her 2009 tax return.
During 2008 and 2009, Barnes also volunteered for Williams Temple
Church as the church’s “Special Events Coordinator”. In this volunteer role she
ordered food for events hosted at the church, reserved party space, and purchased
supplies. The church did not have a reimbursement policy, written or otherwise,
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[*5] regarding the types of expenses incurred by church volunteers that the church
would reimburse. Barnes had the authority to approve reimbursements from the
church. For a number of reimbursement requests submitted to the church, Barnes
made the request and also approved it.
In August 2008, Barnes went on a trip to Africa during which she visited
Dar es Salaam, Tanzania, and Nairobi, Kenya. Barnes visited schools and
orphanages on the trip. Barnes also went on safaris during the trip. The trip was
organized and sponsored by Williams Temple Church. Barnes paid $5,112 to
Genesis Travel, a travel agency, for the trip. In exchange for the $5,112, Barnes
received airplane tickets, meals, and lodging.
During 2008 and 2009, Barnes owned a 50% interest in real property at
2115 North Durham Drive, Houston, Texas (referred to here as the “Durham Drive
property”). Barnes inherited her 50% interest in the Durham Drive property from
her father, Titus Barnes, following his death in 2001. Barnes’s sister, Cassandra
Mallett, inherited the other 50% interest in the Durham Drive property from Titus
Barnes. Titus Barnes’s will gave Barnes an option to buy her sister’s interest in
the Durham Drive property for $16,000. Barnes did not buy her sister’s interest in
the Durham Drive property until 2013, when she bought it from her sister for only
$3,000 (rather than the $16,000 provided for in the option).
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[*6] Barnes rented the Durham Drive property to her cousin, Timothy Dixon,
during 2008 and 2009, for $200 per month. The record does not show, nor does
Barnes take the position, that she shared the rent she received with her sister, with
whom she co-owned the house. At $200 per month, Barnes was supposed to
receive rent of $2,400 per year. Dixon missed several of the $200 rent payments.
As Barnes reported on her 2008 and 2009 tax returns, she received from Dixon
total rent of only $800 in 2008 and $1,000 in 2009. Barnes did not begin eviction
proceedings against Dixon despite his missing several rent payments.
Barnes received various payments from her father’s estate during 2008 and
2009 that were unrelated to the Durham Drive property. These payments are
discussed in greater detail infra part 1.a.
Barnes maintained the following ten bank accounts during the 2008 and
2009 tax years:
• Bank of America checking account ending in 8675
• Bank of America checking account ending in 9517
• Bank of America checking account ending in 4470
• Bank of America IRA ending in 5771
• Bank of America checking account ending in 6621
• Bank of America savings account ending in 2071
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[*7] • Bank of America savings account ending in 5962
• Bank of America savings account ending in 2422
• Wells Fargo checking account ending in 3054
• Wells Fargo savings account ending in 3183
Barnes made numerous deposits into a number of her bank accounts throughout
2008 and 2009.
2. Barnes’s tax returns
a. 2008
Barnes filed a Form 1040, “U.S. Individual Income Tax Return”, for the
2008 tax year. She reported two exemptions, wages of $64,242, interest income of
zero, dividend income of zero, a business loss of $4,014, a net rental-property loss
of $9,474, itemized deductions of $27,769, and taxable income of $15,985.
Barnes attached a Schedule A, “Itemized Deductions”, to her 2008 tax
return. She reported, among other things, real-estate taxes of $2,557 and total
charitable contributions of $16,727. The Schedule A did not report the amount of
any individual charitable contribution or the names of the donee organizations.
On the Schedule C for Barnes & Barnes Financial Services for 2008, Barnes
reported gross receipts of $18,237, total expenses of $17,120, and net business
income of $1,117.
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[*8] On the Schedule C for her financial-consulting work with churches for
2008, Barnes reported gross receipts of $3,520, total expenses of $8,651, and a net
business loss of $5,131.
As mentioned above, Barnes reported a net business loss of $4,014 on her
2008 tax return. This was calculated as follows:
Business Business income/(loss)
Barnes & Barnes Financial Services $1,117
Financial-consulting work with churches (5,131)
Net business income/(loss) (4,014)
Barnes attached to her 2008 tax return a Schedule E, “Supplemental Income
and Loss”, to report the income and expenses for the Durham Drive property
under the heading of “Residential Rental Property”. On this Schedule E, Barnes
reported rent received of $800, expenses of $10,274, and a net rental-property loss
of $9,474 from the Durham Drive property for 2008.
b. 2009
Barnes filed a Form 1040 for the 2009 tax year. She reported two
exemptions, wages of $64,016, interest income of $108, dividend income of zero,
a business loss of $1,771, a net rental-property loss of $9,151, itemized deductions
of $26,252, and taxable income of $19,650.
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[*9] Barnes attached a Schedule A to her 2009 tax return. She reported, among
other things, real-estate taxes of $2,505 and total charitable contributions of
$17,766. The Schedule A did not report the amount of any individual charitable
contribution or the names of the donee organizations.
On the Schedule C for Barnes & Barnes Financial Services for 2009, Barnes
reported gross receipts of $20,773, total expenses of $21,974, and a net business
loss of $1,201.
On the Schedule C for her financial-consulting work with churches for
2009, Barnes reported gross receipts of $10,000, total expenses of $10,570, and a
net business loss of $570.
As mentioned above, Barnes reported a net business loss of $1,771 on her
2009 tax return. This was calculated as follows:
Business Business income/(loss)
Barnes & Barnes Financial Services ($1,201)
Financial-consulting work with churches (570)
Net business income/(loss) (1,771)
Barnes attached to her 2009 tax return a Schedule E to report the income
and expenses for the Durham Drive property under the heading of “Residential
Rental Property”. On this Schedule E, Barnes reported rents received of $1,000,
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[*10] expenses of $10,151 (including $1,094 in property taxes), and a net rental-
property loss of $9,151 from the Durham Drive property for 2009.
3. Reconstruction of Barnes’s income; notice of deficiency
In March 2011, the IRS reconstructed Barnes’s income for the 2008 and
2009 tax years through a bank-deposits analysis for each year. The IRS’s bank-
deposits analyses for 2008 and 2009 consisted of the following steps:
• The IRS totaled the deposits into Barnes’s bank accounts.
• The IRS subtracted what it determined to be nontaxable deposits,
such as transfers between accounts and such as deposits that it
determined were traceable to nontaxable sources.
• The IRS subtracted the amounts of income that Barnes had reported
on her tax returns (including wages, interest, gross receipts reported
on the two Schedules C for each year, and rents reported on the
Schedule E for each year).
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[*11] • The resulting amounts for each year were considered by the IRS to be
Barnes’s unreported income for each year. These amounts of
unreported income thus determined were $30,543 and $53,785 for
2008 and 2009, respectively.3
On October 20, 2011, the IRS issued the notice of deficiency to Barnes for
the 2008 and 2009 tax years determining income-tax deficiencies and accuracy-
related penalties as noted supra. The notice of deficiency incorporated the IRS’s
determinations of Barnes’s unreported income from the bank-deposits analyses
explained supra.
The notice of deficiency allowed $1,883 of the $17,120 in business-expense
deductions claimed by Barnes for Barnes & Barnes Financial Services on her 2008
tax return. In particular, it allowed:
C zero of the $350 claimed for advertising,
3
The notice of deficiency characterized the unreported income as unreported
gross receipts for Barnes & Barnes Financial Services. Barnes does not contend
that if she indeed has unreported income it should be attributed to her business of
financial consulting for churches or her rental of the Durham Drive property rather
than to Barnes & Barnes Financial Services. Therefore, although we consider the
propriety of the IRS’s determinations of unreported income in one respect (i.e.,
whether the income considered by the IRS to be unreported income was indeed
income and unreported), we do not consider whether the unreported income is
attributable to Barnes & Barnes Financial Services, as opposed to her business of
financial consulting for churches or her rental of the Durham Drive property.
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[*12] C zero of the $6,930 claimed for car and truck expenses,
C zero of the $242 claimed for depreciation,
C $1,651 of the $4,056 claimed for office rent,
C $232 of the $2,855 claimed for supplies,
C zero of the $100 claimed for taxes and licenses,
C zero of the $220 claimed for travel,
C zero of the $48 claimed for meal and entertainment expenses, and
C zero of the $2,319 claimed for other expenses.
The notice of deficiency allowed $7,116 of the $21,974 in business-expense
deductions claimed by Barnes for Barnes & Barnes Financial Services on her 2009
tax return. In particular, it allowed:
C zero of the $500 claimed for advertising,
C zero of the $6,544 claimed for car and truck expenses,
C zero of the $300 claimed for contract labor,
C zero of the $1,090 claimed for depreciation,
C $283 of the $830 claimed for insurance,
C $300 for legal and professional services (rather than the $200
claimed),
C $3,740 of the $5,056 claimed for office rent,
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[*13] C $672 of the $2,503 claimed for supplies,
C zero of the $100 claimed for taxes and licenses,
C zero of the $195 claimed for meal and entertainment expenses,
C $1,479 of the $1,523 claimed for utilities, and
C $642 of the $3,133 claimed for other expenses.
The notice of deficiency disallowed the full $8,651 of business-expense
deductions Barnes claimed for her financial-consulting work with churches on her
2008 tax return.
The notice of deficiency disallowed the full $10,570 of business-expense
deductions Barnes claimed for her financial-consulting work with churches on her
2009 tax return.
The notice of deficiency (1) disallowed all rental-property-expense
deductions Barnes claimed ($10,274 for 2008, and $10,151 for 2009), and (2)
recharacterized the amounts Barnes reported as rental income for both 2008
($800) and 2009 ($1,000) as Barnes’s “other income” instead of rental income.4
4
The IRS’s recharacterization of the rents from rental income to “other
income” did not affect its calculation of the amount of the deficiency. Therefore
we do not consider the propriety of this recharacterization.
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[*14] The notice of deficiency allowed charitable-contribution deductions of
$12,576 for 2008 (instead of the $16,727 Barnes claimed) and $16,381 for 2009
(instead of the $17,766 Barnes claimed).
The notice of deficiency determined that Barnes has unreported dividend
income of $41 for 2008 and $38 for 2009.
After issuing of the notice of deficiency, the IRS made revisions to its bank-
deposits analyses. The IRS’s litigating position (i.e., the position the IRS presents
to the Court in this case) regarding the amounts of Barnes’s unreported income for
2008 and 2009 is based on these revised bank-deposits analyses. Exhibit 4-J in
the trial record consists of copies of the IRS’s original and revised bank-deposits
analyses and summaries thereof for the 2008 tax year. Exhibit 5-J in the trial
record includes copies of the IRS’s original and revised bank-deposits analyses
and summaries thereof for the 2009 tax year.
In its revised bank-deposits analysis for the 2008 tax year, the IRS
determined that $1,693.79 of the $30,543 of bank deposits that it had treated as
unreported income in the original bank-deposits analysis should be excluded from
income. As a result, the IRS’s revised bank-deposits analysis determined that
Barnes’s unreported income for 2008 was $28,849.21. As with the original bank-
deposits analysis for 2008, the IRS computed this amount of unreported income by
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[*15] subtracting various nontaxable items and already-reported items of income
from the total amount of deposits into eight of Barnes’s ten bank accounts in
2008.5 The IRS computed the total deposits into Barnes’s bank accounts in 2008
as follows:
5
The two bank accounts which Barnes maintained during 2008 and 2009
that the IRS did not include in its reconstruction of Barnes’s income were a Bank
of America IRA ending in 5771 and a Bank of America savings account ending in
2071. The only deposits to these two bank accounts consisted of interest income.
The total amount of such interest was $39.30 in 2008 and $95.63 in 2009. It
appears that the IRS did not include the $39.30 of interest deposits in its
$146,298.36 total of bank deposits for 2008 and that the IRS did not include the
$95.63 of interest deposits in its $191,623.05 total of bank deposits for 2009. The
IRS does not assert that there should be an increase in Barnes’s income on account
of these two bank accounts. We decline to consider whether these amounts were
unreported income.
Barnes’s bank-account statements reflected that she received and deposited
dividends. No dividends were reported on her returns. To account for these
unreported dividends, the notice of deficiency adjusted Barnes’s income upward.
The revised bank-deposits analysis also recognized that Barnes received the
dividends, but the dividends were subtracted from the amounts of Barnes’s
unreported income determined under the revised bank-deposits analysis. The
subtraction was appropriate, we believe, because the dividends were included in
Barnes’s income by the notice of deficiency separate and apart from the bank-
deposits analysis. The parties have stipulated that Barnes earned the dividend
income. This means they agree that the dividend adjustments in the notice of
deficiency were correct. If the revised bank-deposits analysis had also included
the dividends in Barnes’s income, this would have resulted in double counting the
dividends.
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[*16]
Bank account Amount
Bank of America checking (4470) $11,544.79
Bank of America checking (6621) 1,284.92
Bank of America checking (8675) 88,832.44
Bank of America checking (9517) 40,976.11
Bank of America savings (2422) 0.81
Bank of America savings (5962) 300.46
Wells Fargo checking (3054) 3,358.28
Wells Fargo savings (3183) 0.55
Total 146,298.36
In its revised bank-deposits analysis for the 2009 tax year, the IRS
determined that $25,526.74 of the $53,785 of bank deposits it had treated as
unreported income in the original bank-deposits analysis should be excluded from
income. As a result, the IRS’s revised bank-deposits analysis determined that
Barnes’s unreported income for 2009 was $28,258.26. As with the original bank-
deposits analysis for 2009, the IRS computed this amount of unreported income by
subtracting various nontaxable items and already-reported items of income from
the total amount of deposits into eight of Barnes’s ten bank accounts in 2009. The
IRS computed the total deposits into Barnes’s bank accounts in 2009 as follows:
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[*17]
Bank account Amount
Bank of America checking (4470) $28,750.91
Bank of America checking (6621) 2,145.00
Bank of America checking (8675) 111,169.88
Bank of America checking (9517) 42,582.50
Bank of America savings (2422) 0.21
Bank of America savings (5962) 275.17
Wells Fargo checking (3054) 6,484.08
Wells Fargo savings (3183) 215.30
Total 191,623.05
4. Stipulations and concessions
Before trial the parties agreed to a stipulation of facts and a stipulation of
settled issues. We adopt their stipulations.
As stated above, for 2008 Barnes deducted $8,651 of total expenses on her
second Schedule C, which was the schedule she used for her financial-consulting
work for churches. The deduction for these expenses was disallowed in the notice
of deficiency. In the stipulation of settled issues, the parties stipulated that, “in
settlement of the adjustments in the respondent’s notice of deficiency”, “[a]ll of
Petitioner’s [Barnes’s] expenses related to her Schedule C-2 activity [financial-
consulting work for churches] are classified as startup expenses in taxable year
2008.” The IRS takes the position that this means that the expenses of Barnes’s
financial-consulting work for churches for 2008 are not immediately deductible
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[*18] for the 2008 tax year but must be amortized by Barnes ratably over a period
of 180 months. See sec. 195; see also sec. 1.195-1, Income Tax Regs. Barnes
does not disagree.6
On her second Schedule C for 2009, Barnes reported income for this
business of $10,000 and expenses of $10,570. In the stipulation of settled issues,
the parties stipulated that, “in settlement of the adjustments in the respondent’s
notice of deficiency”, Barnes is allowed to deduct expenses to the extent of her
income for this business. It is undisputed that Barnes’s income for this business
for 2009 was $10,000. Accordingly, the parties agreed that Barnes is allowed to
claim total expenses of $10,000 for her financial-consulting work for churches for
2009. Therefore, Barnes’s net income/loss from her financial-consulting work for
churches for 2009 is zero.
The stipulation of facts contains a table that is “a summary of the expenses
claimed by petitioner and the amounts respondent alleges have been
substantiated”. This table relates exclusively to the expenses that Barnes claimed
as deductions for Barnes & Barnes Financial Services for 2008 and 2009.
6
Neither party explained which month begins the 180-month period.
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[*19]
Item 2008 2009
Advertising $415 $423
Car and truck expenses 3,465 3,277
Contract labor 0 300
Depreciation 0 904
Insurance 283 213
Internet 0 0
Legal services 0 300
Meals & entertainment 0 0
Office rent 4,050 4,079
Office telephone 1,619 0
“Other expenses: Bank fees” 344 259
“Other expenses: Cellular phone” 1,668 1,680
“Other expenses: Donations” 0 0
“Other expenses: Postage” 126 118
“Other expenses: Professional development” 475 710
“Other expenses: Publications” 0 0
Supplies 3,392 3,752
Taxes and licenses 100 100
Travel 0 0
Utilities 0 1,869
Total 15,937 17,984
After this table in the stipulation of facts is the following statement:
Petitioner [Barnes] is not in agreement with the amounts listed for
Car & Truck Expenses, Insurance Expenses, Publications [“Other
expenses: Publications”], and Internet Expenses for taxable years
2008 and 2009, the amount listed for Supplies expenses for taxable
year 2009 and the amount listed for Office Telephone for taxable year
2009.
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[*20] Thus, this post-table statement expresses Barnes’s disagreement with ten of
the amounts listed in the table.
We now explain the significance of the amounts listed in the table. First, all
the amounts listed (and which are greater than zero) are the amounts the IRS
conceded to be deductible for the described categories and years. We conclude
this is so because the stipulation of facts refers to the amounts in the table as
“amounts respondent [the IRS] alleges have been substantiated.” The stipulation
by the IRS that it “alleges” that Barnes has “substantiated” the amount of a
deduction is tantamount to a concession by the IRS that the amount is deductible.7
Second, the amounts in the table are amounts that Barnes agrees are deductible for
the described categories and years, with the exception of the ten amounts specified
in the statement following the table. This statement, which expresses Barnes’s
lack of “agreement” with these ten amounts, implies that Barnes is in “agreement”
with all the other amounts in the table.
To illustrate the effect of the post-table statement, it is helpful to reproduce
the table in the stipulation of facts with each of the ten specified amounts in bold:
7
The stipulation of facts uses the word “alleges” in an admittedly unusual
sense. Normally when one says a party “alleges” a position, that means that the
position would favor the alleging party if the position were adopted by a court.
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[*21]
Item 2008 2009
Advertising $415 $423
Car and truck expenses 3,465 3,277
Contract labor 0 300
Depreciation 0 904
Insurance 283 213
Internet 0 0
Legal services 0 300
Meals & entertainment 0 0
Office rent 4,050 4,079
Office telephone 1,619 0
“Other expenses: Bank fees” 344 259
“Other expenses: Cellular phone” 1,668 1,680
“Other expenses: Donations” 0 0
“Other expenses: Postage” 126 118
“Other expenses: Professional development” 475 710
“Other expenses: Publications” 0 0
Supplies 3,392 3,752
Taxes and licenses 100 100
Travel 0 0
Utilities 0 1,869
Total 15,937 17,984
To summarize, the amounts not in bold are amounts to which both Barnes and the
IRS agreed, and the ten amounts in bold are the amounts that the IRS agreed
Barnes is entitled to deduct and for which (as of the stipulation of facts) Barnes
preserved the right to prove a higher amount.
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[*22] The stipulation of facts, executed by the parties at the beginning of trial,
reflects the parties’ positions at the beginning of trial. The parties’ positions
regarding unresolved items in the table are further established by the parties’
statements at trial and the parties’ statements in their post-trial briefs. We explain
these statements and the effect of these statements below.
At trial, Barnes conceded on the record that she was not entitled to deduct
office-telephone expenses for 2009. Accordingly, Barnes is not entitled to a
deduction for office-telephone expenses for 2009.
During trial and in her post-trial briefs Barnes did not present any argument
that she is entitled to deductions in excess of the amounts in the table for either
insurance expenses or “Other expenses: Publications” for 2008 or 2009.
Therefore, she has conceded that the amounts in the table for these categories for
2008 and 2009 are correct. See, e.g., Hedrick v. Commissioner, 63 T.C. 395,
396-397 (1974). Accordingly, Barnes is entitled to deductions of $283 for
insurance expenses for 2008, $213 for insurance expenses for 2009, and zero for
“Other expenses: Publications” for 2008 and 2009.
In her post-trial briefs, Barnes contends that she is entitled to deductions in
excess of the amounts agreed to as deductible by both her and the IRS for cell-
phone expenses and depreciation for 2008 and 2009. As explained supra, in the
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[*23] stipulation of facts Barnes agreed with the IRS on the deductible amounts
for both of these categories for 2008 and 2009. Barnes has not provided us with
any reason to relieve her of this agreement. Under the circumstances we do not
relieve Barnes of the agreement in question, and accordingly, we will not further
address her claims raised in her post-trial briefs that she is entitled to deductions in
excess of the amounts agreed to in the stipulation of facts as deductible by both
Barnes and the IRS for cell-phone expenses or depreciation for 2008 or 2009. See
Rule 91(e). Barnes is entitled to deductions of $1,668 for cell-phone expenses for
2008, $1,680 for cell-phone expenses for 2009, zero for depreciation for 2008, and
$904 for depreciation for 2009.
To summarize, only the following business-expense deductions need to be
resolved: car and truck expenses for 2008 and 2009, internet expenses for 2008
and 2009, and supplies expenses for 2009. The following two tables reflect for
each respective tax year the (1) categories of unresolved business expenses that
Barnes reported on her Schedule C for Barnes & Barnes Financial Services and (2)
for each of these categories (a) the amounts Barnes claimed on the Schedule C, (b)
the amounts allowed by the IRS in the notice of deficiency, (c) the amounts
conceded by the IRS in the stipulation of facts, and (d) the amounts determined by
the Court (determinations which are explained infra part 2).
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[*24]
2008 Tax year
IRS IRS position Amount
position in reflected in determined
Amount notice of stipulation of by the
Category per return deficiency facts Court
Car and truck expenses $6,930 0 $3,465 $3,465
Internet 0 0 0 0
2009 Tax year
IRS IRS position Amount
position in reflected in determined
Amount notice of stipulation of by the
Category per return deficiency facts Court
Car and truck expenses $6,544 0 $3,277 $3,277
Internet 0 0 0 0
Supplies 2,503 $672 3,752 3,752
OPINION
1. Barnes had unreported income of $25,754.71 for 2008 and $25,901.96 for
2009.
The IRS reconstructed Barnes’s income using the bank-deposits method for
the 2008 and 2009 tax years. The IRS contends that Barnes failed to report
income of $28,849.21 for 2008 and $28,258.26 for 2009. Barnes contends that all
bank deposits that the IRS treated as unreported income were attributable to
various nontaxable sources.
Section 6001 requires all taxpayers to maintain adequate books and records
of taxable income. If a taxpayer fails to keep adequate records, then the IRS may
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[*25] reconstruct the taxpayer’s income by any reasonable method that clearly
reflects income. See, e.g., sec. 446(b); Holland v. United States, 348 U.S. 121,
130-132 (1954). One acceptable method is the bank-deposits method. Clayton v.
Commissioner, 102 T.C. 632, 645 (1994); DiLeo v. Commissioner, 96 T.C. 858,
867 (1991), aff’d, 959 F.2d 16 (2d Cir. 1992). When using the bank-deposits
method, the IRS assumes that if a taxpayer is engaged in an income-producing
activity and makes deposits to bank accounts, then those deposits, less amounts
identified as nonincome items and deductions, constitute taxable income. See
Clayton v. Commissioner, 102 T.C. at 645-646.
Barnes was engaged in three income-producing activities during the years at
issue (setting aside her work as an employee of Robert Half): (1) her tax-return-
preparation business (Barnes & Barnes Financial Services), (2) her financial-
consulting work for churches, and (3) her collection of rent for the Durham Drive
property. With respect to her tax-return-preparation business, which appears to be
the most financially significant of the three activities, Barnes did not keep any
informal or formal books of account to record her income and expenses. Nor did
she retain a bookkeeper or accountant. She also kept inadequate records for the
expenses of the Durham Drive property. Barnes made numerous deposits into
multiple bank accounts that were not attributable to her work as an employee of
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[*26] Robert Half. Under these circumstances, we conclude that it was reasonable
for the IRS to use the bank-deposits method to reconstruct Barnes’s income for
2008 and 2009. See, e.g., sec. 446(b); Holland, 348 U.S. at 130-132.
The notice of deficiency issued by the IRS to Barnes incorporated the IRS’s
determinations of unreported income made in the IRS’s original bank-deposits
analyses. After issuing the notice of deficiency, the IRS revised its bank-deposits
analyses for the 2008 and 2009 tax years. The IRS’s litigating position regarding
Barnes’s unreported income is based on the revised bank-deposits analyses. The
IRS’s revised bank-deposits analysis for 2008 reduced the amount it determined to
be Barnes’s unreported income from $30,543 to $28,849.21. The revised bank-
deposits analysis for 2008 treated several deposits as nontaxable which had
previously been treated as taxable in the original bank-deposits analysis for 2008.
The revised bank-deposits analysis for 2008 also treated four deposits (totaling
$1,045.75) as taxable which had previously been treated as nontaxable in the
original bank-deposits analysis for 2008. The IRS’s revised bank-deposits
analysis for 2009 reduced the amount it determined as Barnes’s unreported income
from $53,785 to $28,258.26 by treating several deposits as nontaxable which had
previously been treated as taxable in the original bank-deposits analysis for 2009.
- 27 -
[*27] Barnes argues that the deposits that the IRS determined to be unreported
income were attributable to various nontaxable sources.8 (Barnes does not
contend that any of the bank deposits determined by the IRS to be unreported
income were already reported by her as income.) In support of her argument,
Barnes provided three types of evidence: (1) her own testimony, (2) copies of
checks that she received, and (3) a spreadsheet she prepared and labeled “Sources
of Non-Taxable Income & Checks”. This spreadsheet was admitted pursuant to an
agreement by the parties that the spreadsheet should be treated by the Court as if it
were Barnes’s testimony.9 Accordingly, we treat the spreadsheet as Barnes’s
testimony. The spreadsheet lists alleged deposits that Barnes claimed originated
from nontaxable sources, but that she claims the IRS included in her income. The
spreadsheet has the following information:
8
Barnes also argues that the IRS misapplied the bank-deposits method
because, as she vaguely asserts, the IRS “did not conduct an analysis of the
cancelled checks, currency expenditures and cash on hand”. Barnes does not
explain exactly what she means by this. Furthermore, she raised this argument in
the last brief she filed, a brief for which the IRS did not have an opportunity to
respond. We decline to consider Barnes’s vague and untimely argument.
9
During trial the attorney for the IRS said that “as long as there’s no
determination that Respondent [the IRS] agrees with her explanations * * * if
you’d like to treat her explanations in this document as her direct testimony and
you as a fact-finder make the ultimate determination as to credibility, then we are
fine with that.”
- 28 -
[*28] • The amount of the alleged deposit.
• The date of the alleged deposit.
• The name of the bank account (for most of the alleged deposits).
• The date on which Barnes alleged she originally received the money
allegedly deposited.
• The alleged nontaxable source of the money.
The following table summarizes the spreadsheet:
- 29 -
[*29]
Alleged source of unreported deposits Amount in 2008 Amount in 2009
Funds from her father’s estate $30,539.13 $12,152.80
Reimbursements from Williams Temple 3,098.39 10,384.42
Church
Reimbursements from insurance 2,159.44 26,017.12
companies for property damage
Federal income-tax refunds 10,032.71 15,401.76
Store and merchant refunds 1,415.53 387.51
“Reimbursements from various sources” 747.03 317.54
Repayments of loan principal from 8,023.00 2,945.00
clients, friends, and family
Redeposit of unused American Express 250.00 -0-
Traveler’s checks
Reimbursement of attorney’s fees paid on 375.00 -0-
behalf of father’s estate
Reimbursement for court fees paid on -0- 100.00
behalf of client
Gift from cousin 25.00 -0-
Deposits “from personal funds or other 8,509.00 5,705.00
loans not previously reported”
Total1 65,174.23 73,411.15
1
The total amounts for both years that Barnes claimed were treated as unreported income
by the IRS ($65,174.23 and $73,411.15) are significantly greater than the amounts actually
treated as unreported income by the IRS ($28,849.21 for 2008 and $28,258.26 for 2009). This is
because (1) some of the amounts in the spreadsheet were not deposited in Barnes’s bank accounts
(and therefore did not show up in the IRS’s revised bank-deposits analyses), (2) some of the
amounts in the spreadsheet were deposited in Barnes’s bank accounts but the IRS did not
consider them to be income, and (3) some of the amounts in the spreadsheet were deposited in
Barnes’s bank accounts but the IRS determined they had already been reported by Barnes.
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[*30] The IRS argues that Barnes failed to prove that any of the deposits into her
bank accounts that the IRS determined to be unreported income are traceable to
the nontaxable sources listed above.
Barnes’s argument, as we explained, is that the IRS erroneously included in
her income deposits that were not actually income. For her argument to prevail,
all four of the following conditions must be true: (1) Barnes received an amount,
(2) the amount was nontaxable, (3) she deposited the amount into her bank
accounts, and (4) the IRS treated this deposit as income in its bank-deposits
analyses. See Clayton v. Commissioner, 102 T.C. at 645-646. Barnes’s argument
requires the resolution of factual matters. To resolve a factual matter in its favor,
the party bearing the burden of proof must prove the fact by a preponderance of
the evidence. Estate of Gilford v. Commissioner, 88 T.C. 38, 51 (1987). We now
consider which party bears the burden of proof regarding the facts underlying
Barnes’s challenge to the IRS’s revised bank-deposits analyses.
The following general rules regarding who bears the burden of proof are
pertinent:
• The taxpayer generally bears the burden of proving that the
determinations in the notice of deficiency are erroneous. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
- 31 -
[*31] • The IRS bears the burden of proof regarding any “new matter”. Rule
142(a)(1). “[N]ew matter” includes a new theory that requires the
presentation of different evidence. See Wayne Bolt & Nut Co. v.
Commissioner, 93 T.C. 500, 507 (1989).
• The IRS bears the burden of proof regarding an increased deficiency.
Rule 142(a)(1).
• The IRS bears the burden of proof for issues for which the taxpayer
shows that the requirements of section 7491(a)(1) and (2) are
satisfied. Higbee v. Commissioner, 116 T.C. 438, 442 (2001); see
Rolfs v. Commissioner, 135 T.C. 471, 483 (2010), aff’d, 668 F.3d
888 (7th Cir. 2012).
N Section 7491(a)(1) requires the taxpayer to present credible
evidence with respect to factual issues relevant to ascertaining
the taxpayer’s tax liability. Credible evidence is evidence that,
after critical analysis, would constitute a sufficient basis for
deciding the issue in favor of the taxpayer if no contrary
evidence were submitted. Higbee v. Commissioner, 116 T.C.
at 442.
- 32 -
[*32] N Section 7491(a)(2) requires the taxpayer to comply with
substantiation and record-keeping requirements and cooperate
with the IRS’s reasonable requests for witnesses, information,
documents, meetings, and interviews.
In addition, the following principles apply when the notice of deficiency is
based on the bank-deposits method of reconstructing income:
• The taxpayer generally bears the burden of proving that the
reconstruction is in error and may do so, in whole or in part, by
proving that a deposit is not taxable. See Clayton v. Commissioner,
102 T.C. at 645-646.
• The IRS is not required to show a likely source of income for each
deposit. Id. (citing Estate of Mason v. Commissioner, 64 T.C. 651,
657 (1975), aff’d, 566 F.2d 2 (6th Cir. 1977)).10
In this case, four of the deposits that the IRS determined were taxable were
determined to be taxable only after it issued the notice of deficiency. These four
deposits (totaling $1,045.75) involve “new matter” because determining whether
10
The cases cited for these principles, Clayton v. Commissioner, 102 T.C.
632, 645-646 (1994), and Estate of Mason v. Commissioner, 64 T.C. 651, 657
(1975), aff’d 566 F.2d 2 (6th Cir. 1977), did not consider the effect of sec.
7491(a), which was added to the Internal Revenue Code in 1998.
- 33 -
[*33] the four deposits were unreported income requires evidence different from
the evidence related to the adjustments in the notice of deficiency. So the IRS has
the burden of proof with respect to the four deposits. See Rule 142(a) (imposing
burden of proof on IRS for “new matter”). We conclude infra part 1.e. that Barnes
has shown by a preponderance of the evidence that all four of these deposits were
attributable to nontaxable sources. Therefore, even if Barnes had the burden of
proof, we would still conclude that these four deposits are not taxable. We hold
that these four deposits in 2008 totaling $1,045.75 (each of which is described in
greater detail infra part 1.e.ii.) are not taxable and the IRS’s determination of
Barnes’s unreported income for 2008 should be reduced by $1,045.75.
For all the remaining deposits determined to be taxable by the IRS (i.e., the
deposits determined to be taxable by the IRS other than the four deposits totaling
$1,045.75), the IRS’s determinations were made as part of the notice of deficiency.
Therefore, Barnes should have the burden of proving that the remaining deposits
are not taxable. See Clayton v. Commissioner, 102 T.C. at 645-646 (taxpayer has
burden of proving that deposits are not taxable in challenging bank-deposits
analysis underlying notice of deficiency). The only potential exception is section
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[*34] 7491(a).11 If Barnes were to satisfy section 7491(a), including the
requirement that she present credible evidence, then the burden of proof would
shift to the IRS with respect to that factual issue.
To consider the effect of section 7491(a), we divide the remaining deposits
into two groups according to the conclusions made later in our opinion. The first
group of the remaining deposits consists of those deposits for which we conclude
later in the opinion Barnes has proven by a preponderance of the evidence were
attributable to nontaxable sources. (As we explain later, Barnes has proven by a
preponderance of the evidence that deposits treated as income by the IRS totaling
$2,048.75 in 2008 (described in specific detail infra parts 1.b.i. and 1.f.i.) and
$2,356.30 in 2009 (described in specific detail infra parts 1.b.ii., 1.e.ii., and 1.g.)
were attributable to nontaxable sources.) For these deposits, even if the burden of
proof were placed on the IRS, we would still conclude that these deposits were not
taxable. Therefore it is unnecessary for us to determine whether Barnes has
satisfied section 7491(a) with respect to the factual issues relevant to these
11
The IRS revised its bank-deposits analyses after the notice of deficiency,
but the revision did not cause an increase in the deficiency. See Rule 142(a)
(imposing burden of proof on IRS for increased deficiencies). Although the IRS
conceded that some deposits determined to be income in the notice of deficiency
are not income, Barnes still has the burden of proof regarding all other deposits
determined to be income in the notice of deficiency. Gobins v. Commissioner, 18
T.C. 1159, 1168-1169 (1952), aff’d per curiam, 217 F.2d 952 (9th Cir. 1954).
- 35 -
[*35] deposits. See Knudsen v. Commissioner, 131 T.C. 185, 189 (2008). We
hold that $2,048.75 of deposits determined by the IRS to be includible in income
for 2008 are not includible in income and $2,356.30 of deposits determined by the
IRS to be includible in income for 2009 are not includible in income. We
therefore hold that the IRS’s determination of Barnes’s unreported income for
2008 should be reduced by $2,048.75 (which excludes the $1,045.75 mentioned in
the paragraph above) and that the IRS’s determination of Barnes’s unreported
income for 2009 should be reduced by $2,356.30.
We conclude later in the opinion that Barnes has not proven by a
preponderance of the evidence that the remaining deposits in the second group
were attributable to nontaxable sources. These conclusions are discussed infra
part 1.a. through 1.l. For each of these deposits we hereby find (although we do
not make a detailed explanation for this finding) that Barnes failed to present
credible evidence that the deposits are nontaxable. Thus, section 7491(a) has not
been satisfied with respect to these remaining deposits, and Barnes bears the
burden of proof with respect to them.
Our conclusions about the burden of proof regarding the bank-deposits
method are summarized in the chart below. This chart covers all deposits
- 36 -
[*36] determined by the IRS to be unreported income in its revised bank-deposits
analyses.
Deposits that Barnes
proved by a Deposits that Barnes failed to
preponderance of the prove by a preponderance of
evidence are nontaxable the evidence are nontaxable
Deposits These are four deposits in No such deposits
determined to be 2008 totaling $1,045.75.
taxable by the IRS For these deposits, the
after the notice of IRS has the burden of
deficiency proof.
Deposits This is the “first group” of This is the “second group” of
determined to be deposits mentioned in the deposits mentioned in the
taxable by the IRS text. For these deposits, text. We find that Barnes did
in the notice of there is no need to not produce credible
deficiency determine who has the evidence that these deposits
burden of proof given our are nontaxable. Therefore,
finding that Barnes has Barnes has the burden of
proven by a proof regarding these
preponderance of the deposits.
evidence that these
deposits are nontaxable.
a. Funds from her father’s estate
Barnes received the following five checks from the estate of her father,
Titus Barnes:
• a check for $8,000 received in 2008,
• a check for $22,359.13 received in 2008,
- 37 -
[*37] • a check for $1,406.15 received in 2009,
• a check for $6,318.49 received in 2009, and
• a check for $4,427.16 received in 2009.
Barnes claims that the five checks she received from her father’s estate were either
(1) inheritance or (2) reimbursement for various expenses that Barnes personally
incurred on behalf of her father’s estate before his will was probated. Gross
income does not include the value of property acquired by inheritance. Sec.
102(a). Nor does gross income include amounts received as reimbursement or
loan repayment. See, e.g., Commissioner v. Tufts, 461 U.S. 300, 307 (1983).
Barnes did not directly deposit the five checks she received from her
father’s estate into her bank accounts. Instead, she testified that she cashed them,
kept the cash at home, and later deposited the cash into her bank accounts in
amounts that did not correspond to the amounts of the checks. However, Barnes
did not prove that she kept track of the cash from the five checks or that she
segregated this cash from her other cash. In our view, it is as likely that she spent
the cash from the five checks as that she deposited this cash into her bank
accounts. Accordingly, we cannot determine that any amounts that Barnes
received from her father’s estate were actually deposited into her bank accounts.
- 38 -
[*38] Barnes failed to prove by a preponderance of the evidence that any deposits
into the bank accounts used by the IRS in its revised bank-deposits analyses were
attributable to nontaxable amounts that she received from her father’s estate.
Accordingly, we hold that no adjustments to the IRS’s determinations of Barnes’s
unreported income for 2008 or 2009 for these amounts are warranted.
b. Reimbursements from Williams Temple Church
i. 2008
For 2008, Barnes claims that she had deposits into her bank accounts
totaling $3,098.39 that were attributable to reimbursements received from
Williams Temple Church but were treated as income by the IRS. She identifies
these deposits as follows:
Amount Bank account Date deposited
$699.99 8675 Feb. 12, 2008
248.05 9517 Mar. 3, 2008
421.64 9517 Mar. 14, 2008
508.00 3054 May 16, 2008
150.00 3054 July 25, 2008
100.00 8675 Nov. 3, 2008
870.71 8675 Dec. 8, 2008
100.00 8675 Dec. 18, 2008
As an initial matter, we conclude that the amounts identified in the table
above of $421.64, $508, $150, and $100 (the $100 identified in the spreadsheet as
- 39 -
[*39] a November 3, 2008 deposit) were deposited into Barnes’s bank accounts,
and were already treated as nontaxable deposits by the IRS in its revised bank-
deposits analysis for 2008. Therefore, no adjustment to the IRS’s determination of
Barnes’s unreported income for 2008 is warranted for these amounts.
The remaining amounts identified in the table above are $699.99, $248.05,
$870.71, and $100 (the $100 identified in the spreadsheet as a December 18, 2008
deposit). We address these four amounts below.
The trial record contains a check written to Barnes from Williams Temple
Church for $699.99 that Barnes deposited into her bank account ending in 8675 on
February 2, 2008. The notation on the memo line of this check reads
“Reimb./Printer for Pastor’s office”. The trial record also contains a “Check
Request Form” (a form apparently used by Williams Temple Church to record
requests that the church make a payment, the name of the person requesting the
payment, the name of the person approving the payment, the requested amount of
the payment, the requested payee, and the purpose of the payment) that
corresponds to this $699.99 check. The form indicates that this $699.99 check
was to be paid to Barnes and was for a “Printer”. Meredith Jenkins signed this
form as the “Requester” and Barnes signed this form as the “Approver”. The IRS
treated this $699.99 deposit as income in its revised bank-deposits analysis for
- 40 -
[*40] 2008. We conclude that this $699.99 deposit was attributable to a
nontaxable reimbursement from the church and must be excluded from Barnes’s
income for the 2008 tax year.
The trial record contains a check written to Barnes from Williams Temple
Church for $248.05 that Barnes deposited into her bank account ending in 9517 on
March 3, 2008. The notation on the memo line of this check reads “Food for
Superbowl Outreach”. The trial record also contains a “Check Request Form”
indicating that this $248.05 check was to be paid to Barnes and was for “Food--
Super Bowl”. Jenkins signed this form as the “Requester” and Barnes signed this
form as the “Approver”. The IRS treated this $248.05 deposit as income in its
revised bank-deposits analysis for 2008. We conclude that this $248.05 deposit
was attributable to a nontaxable reimbursement from the church and must be
excluded from Barnes’s income for the 2008 tax year.
The trial record contains a check written to Barnes from Williams Temple
Church for $870.71 that Barnes deposited into her bank account ending in 8675 on
December 8, 2008. The notation on the memo line of this check reads
“Reimb./Funds spent for Leadership Conference”. The trial record also contains a
“Check Request Form” indicating that this $870.71 check was to be paid to Barnes
and was for a “Leadership Conference”. This form was signed by Barnes as both
- 41 -
[*41] the “Requester” and “Approver”. The IRS treated this $870.71 deposit as
income in its revised bank-deposits analysis for 2008. We conclude that this
$870.71 deposit was attributable to a nontaxable reimbursement from the church
and must be excluded from Barnes’s income for the 2008 tax year.
The trial record contains a check written to Barnes from Williams Temple
Church for $100 that she claims was deposited into her bank account ending in
8675 on December 18, 2008, which is also the date of the check. There is no $100
deposit into this bank account, or any of her bank accounts, on or around this date.
We conclude that Barnes failed to prove by a preponderance of the evidence that
she deposited this $100 check into any of her bank accounts. Accordingly, no
adjustment to the IRS’s determination of Barnes’s unreported income for 2008 is
warranted for this $100 check.
In sum, we hold that the IRS’s determination of Barnes’s unreported income
for 2008 must be adjusted to exclude nontaxable deposits totaling $1,818.75.
ii. 2009
For 2009, Barnes claims that she made deposits into her bank accounts
totaling $10,384.42 that were attributable to reimbursements received from
Williams Temple Church but were treated as income by the IRS. She identifies
these deposits as follows:
- 42 -
[*42]
Amount Bank account Date deposited
$1,004.65 8675 Jan. 12, 2009
350.00 6621 Jan. 12, 2009
1,513.20 8675 Apr. 1, 2009
864.20 8675 May 5, 2009
301.66 8675 May 26, 2009
1,316.16 8675 June 9, 2009
627.70 8675 July 28, 2009
472.40 8675 Aug. 19, 2009
293.87 8675 Sept. 15, 2009
527.70 8675 Oct. 21, 2009
890.75 8675 Oct. 26, 2009
890.75 8675 Oct. 26, 2009
665.69 8675 Dec. 14, 2009
665.69 8675 Dec. 14, 2009
As an initial matter, we conclude that the $301.66 identified in the table
above was deposited into one of Barnes’s bank accounts and was already treated
as a nontaxable deposit by the IRS in its revised bank-deposits analysis for 2009.
Therefore, no adjustment to the IRS’s determination of Barnes’s unreported
income for 2009 is warranted for this amount.
The remaining amounts identified in the table above are $1,004.65, $350,
$1,513.20, $864.20, $1,316.16, $627.70, $472.40, $293.87, $527.70, $890.75,
$890.75, $665.69, and $665.69. We address these 13 amounts below.
- 43 -
[*43] The trial record contains a check written to Barnes from Williams Temple
Church for $1,354.65 that Barnes claims was deposited into two of her bank
accounts on January 12, 2009, through two separate deposits. Barnes claims that
$1,004.65 of this $1,354.65 was deposited into her bank account ending in 8675
on January 12, 2009, and the remaining $350 was deposited into her bank account
ending in 6621, also on January 12, 2009. Her bank statements show two such
deposits on January 12, 2009. The notation on the memo line of the $1,354.65
check reads “Reimb./Christmas Gala & Law Enforcement Events”. The trial
record also contains a “Check Request Form” indicating that this check was to be
paid to Barnes and was for a “Christmas Gala Event” and a “Law Enforcement
Event”. This form was signed by Barnes alone. The IRS treated these two
deposits as income in its revised bank-deposits analysis for 2009. We conclude
that these two deposits into Barnes’s bank accounts totaling $1,354.65 were
attributable to nontaxable reimbursements from the church and must be excluded
from Barnes’s income for the 2009 tax year.
Barnes failed to provide checks or check request forms for any of the other
amounts which she claims (1) were nontaxable reimbursements she received from
the church (2) were deposited into her bank accounts but (3) were treated as
income by the IRS for 2009. There are deposits into her bank accounts on the
- 44 -
[*44] dates identified by Barnes that correspond to a few of these other amounts:
$864.20, $627.70, $472.40, $293.87, $527.70, $890.75, and $665.69. However,
the deposit entries on her bank statements do not indicate the payor (i.e., the
person who wrote the checks that Barnes deposited), and therefore we cannot rely
on the deposit entries to determine the origin of any of these deposits. There are
no deposits into Barnes’s bank accounts matching any of the other amounts listed
in the table above. We conclude that Barnes failed to prove by a preponderance of
the evidence that she received and subsequently deposited into her bank accounts
any nontaxable reimbursements from Williams Temple Church in 2009 other than
the $1,354.65 and $301.66 amounts described above.
In sum, we hold that the IRS’s determination of Barnes’s unreported income
for 2009 must be adjusted to exclude $1,354.65.
c. Reimbursements from insurance companies for property damage
i. 2008
For 2008, Barnes claims that she received, cashed, and subsequently
deposited a $2,159.44 insurance reimbursement check from State Farm but the
deposit was treated as income by the IRS. The trial record contains a copy of a
check for $2,159.44 that Barnes received from State Farm on November 22, 2008,
confirming that Barnes received this amount. Barnes testified that she cashed the
- 45 -
[*45] $2,159.44 check and deposited the cash into her bank accounts only “a little
at a time as needed to make repairs.” However, Barnes did not prove that she kept
track of the cash from the $2,159.44 check or that she segregated this cash from
her other cash. In our view, it is as likely that she spent the cash from this check
as that she deposited this cash into her bank accounts. Barnes failed to prove by a
preponderance of the evidence that she deposited into her bank accounts any
amount of the $2,159.44 check that she received from State Farm in 2008.
Accordingly, we hold that no adjustment to the IRS’s determination of Barnes’s
unreported income for 2008 is warranted.
ii. 2009
For 2009, Barnes claims that she had deposits into her bank accounts
totaling $26,017.12 that were attributable to reimbursements received from
insurance companies but were treated as income by the IRS. She identifies these
deposits as follows:
- 46 -
[*46]
Amount Source Bank account Date deposited
$5,740.61 Farmers Insurance 4470 Jan. 6, 2009
5,740.61 Farmers Insurance 4470 Jan. 6, 2009
12,953.64 Farmers Insurance 4470 Jan. 6, 2009
935.26 State Farm Insurance 3054 Mar. 30, 2009
57.64 Farmers Insurance 9517 May 26, 2009
500.00 Safeco Insurance 8675 May 26, 2009
89.36 State Farm Insurance 8675 Nov. 2, 2009
As an initial matter, we conclude that the amounts identified in the table
above of $12,953.64, $935.26, $57.64, $500, and $89.36 were deposited into
Barnes’s bank accounts and were already treated as nontaxable deposits by the
IRS in its revised bank-deposits analysis for 2009. Therefore, no adjustment to the
IRS’s determination of Barnes’s unreported income for 2009 is warranted for these
amounts.
The remaining amounts identified in the table above are the two $5,740.61
entries. For 2009, the trial record contains a copy of only one check for $5,740.61
that Barnes received from Farmers Insurance on January 5, 2009. Barnes
deposited this check into her bank account ending in 4470 on January 6, 2009.
We conclude that Barnes included the deposit of this $5,740.61 check twice in the
spreadsheet that she contends lists nontaxable deposits treated as income by the
- 47 -
[*47] IRS. The IRS already identified and treated the $5,740.61 deposit
attributable to this check as a nontaxable deposit in its revised bank-deposits
analysis for 2009. Accordingly, we hold that no adjustment to the IRS’s
determination of Barnes’s unreported income for 2009 is warranted for this
$5,740.61 check.
d. Federal income-tax refunds
Barnes identifies $10,032.71 of bank deposits in 2008 and $15,401.76 of
bank deposits in 2009 by date and amount. She contends that these deposits were
attributable to federal income-tax refunds and that the IRS treated these deposits
as income. We disagree that the IRS treated these deposits as income. We
conclude that the IRS already identified and treated deposits of these amounts as
nontaxable deposits in its revised bank-deposits analyses. Accordingly, we hold
that no adjustments to the IRS’s determinations of Barnes’s unreported income for
2008 or 2009 are warranted.
e. Store and merchant refunds
A refund from a merchant of an amount the taxpayer previously paid to the
merchant is generally not included in gross income. See Martell v. Commissioner,
T.C. Memo. 2013-115, at *21. Although there are exceptions to this general
- 48 -
[*48] proposition, such as the tax-benefit rule, see Frederick v. Commissioner, 101
T.C. 35, 41 (1993), the IRS has not invoked these exceptions.
i. 2008
For 2008, Barnes claims that she had deposits into her bank accounts
totaling $1,415.53 that were attributable to nontaxable refunds from stores or
merchants but were treated as income by the IRS. She identifies these deposits as
follows:
Amount Source Bank account Date deposited
$13.52 Quill 9517 Feb. 11, 2008
314.44 American Express 9517 Feb. 20, 2008
175.00 Discover 9517 Feb. 26, 2008
16.23 Office Depot 9517 Mar. 24, 2008
266.06 American Express 9517 Apr. 4, 2008
290.25 American Express 9517 Apr. 18, 2008
40.00 Bank of America 4470 Apr. 28, 2008
20.00 Bank of America 4470 Apr. 28, 2008
191.50 Nordstrom 8675 July 14, 2008
21.53 Target 4470 Aug. 7, 2008
1.22 AT&T 9517 Aug. 16, 2008
31.98 Office Depot 9517 Dec. 15, 2008
9.04 Partyboy 9517 Dec. 22, 2008
10.70 Walmart 8675 Dec. 26, 2008
14.06 Target 8675 Dec. 29, 2008
- 49 -
[*49] As an initial matter, we conclude that the amounts identified in the table
above of $13.52, $16.23, $40, $20, $191.50, $21.53, $31.98, $9.04, $10.70, and
$14.06 were deposited into Barnes’s bank accounts, and were already treated as
nontaxable deposits by the IRS in its revised bank-deposits analysis for 2008.
Therefore, no adjustment to the IRS’s determination of Barnes’s unreported
income for 2008 is warranted for these amounts.
The remaining amounts identified in the table above are $314.44, $175,
$266.06, $290.25, and $1.22. These amounts total $1,046.97. We conclude that
these five amounts were deposited into Barnes’s bank accounts and were treated
by the IRS as income in its revised bank-deposits analysis for 2008. We discuss
below whether these five deposits are includible in income.
We conclude that four of the five deposits listed above (totaling $1,045.75
out of the $1,046.97) are nontaxable store or merchant refunds erroneously treated
as income by the IRS. The four deposits totaling $1,045.75 are: (1) a $314.44
refund from American Express deposited into her bank account ending in 9517 on
February 20, 2008, (2) a $175 refund from Discover Network deposited into her
bank account ending in 9517 on February 26, 2008, (3) a $266.06 refund from
American Express deposited into her bank account ending in 9517 on April 4,
2008, and (4) a $290.25 refund from American Express deposited into her bank
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[*50] account ending in 9517 on April 18, 2008.12 Barnes failed to prove by a
preponderance of the evidence the source of the fifth deposit, which was $1.22.
Accordingly, we hold that the IRS’s determination of Barnes’s unreported income
for 2008 must be adjusted to exclude $1,045.75.
ii. 2009
For 2009, Barnes claims that she had deposits into her bank accounts
totaling $387.51 that were attributable to nontaxable refunds from stores or
merchants but were treated as income by the IRS. She identifies these amounts as
follows:
Amount Source Bank account Date deposited
$107.74 Bank of America 9517 Feb. 10, 2009
107.74 Bank of America 9517 Feb. 17, 2009
6.05 Target 4470 June 16, 2009
65.90 HSBC Private Label 8675 Nov. 12, 2009
41.65 American Express 9517 Nov. 16, 2009
25.97 Quill 9517 Dec. 10, 2009
32.46 Quill 9517 Dec. 11, 2009
As an initial matter, we conclude that the amounts identified in the table
above of $6.05, $65.90, $25.97, and $32.46 were deposited into Barnes’s bank
12
These are the $1,045.75 in deposits for which the IRS has the burden of
proof. See supra pp. 32-33.
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[*51] accounts and were already treated as nontaxable deposits by the IRS in its
revised bank-deposits analysis for 2009. Therefore, no adjustment to the IRS’s
determination of Barnes’s unreported income for 2009 is warranted for these
amounts.
The remaining amounts identified in the table above are $107.74, $107.74,
and $41.65. These amounts total $257.13. However, upon reviewing Barnes’s
bank statements and the IRS’s revised bank-deposit analysis for 2009, we
conclude that Barnes actually had deposits totaling $501.65 (instead of the
$257.13 erroneously asserted by Barnes) in 2009 that were treated as income by
the IRS but are in our view attributable to nontaxable store or merchant refunds.
The first such deposit was a $200 refund (erroneously identified by Barnes in her
briefs as a deposit of only $107.74, rather than $200) from Bank of America
deposited into her bank account ending in 9517 on February 10, 2009. The second
such deposit was a $260 refund (also erroneously identified by Barnes in her briefs
as a deposit of only $107.74, rather than $260) from Bank of America deposited
into her bank account ending in 9517 on February 17, 2009. The third such
deposit was a $41.65 refund from American Express deposited into her bank
account ending in 9517 on November 16, 2009. These three deposits, totaling
$501.65, are nontaxable deposits traceable to store or merchant refunds that were
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[*52] erroneously treated as income for 2009 by the IRS. Accordingly, we hold
that the IRS’s determination of Barnes’s unreported income for 2009 must be
adjusted to exclude $501.65.
f. “Reimbursements from various sources”
i. 2008
For 2008, Barnes claims that she had deposits into her bank accounts
totaling $747.03 that were attributable to “reimbursements from various sources”
but were treated as income by the IRS. She identifies these deposits as follows:
Amount Source Bank account Date deposited
$50.00 Brenda Ozen 9517 Jan. 28, 2008
165.00 Bank of America 9517 Apr. 8, 2008
339.24 Wells Fargo 8675 Apr. 28, 2008
127.79 Verizon 8675 July 9, 2008
65.00 Ora Robinson 8675 July 9, 2008
As an initial matter, we conclude that the amounts identified in the table
above of $339.24 and $127.79 were deposited into Barnes’s bank accounts and
were already treated as nontaxable deposits by the IRS in its revised bank-deposits
analysis for 2008. Therefore, no adjustment to the IRS’s determination of
Barnes’s unreported income for 2008 is warranted for these amounts.
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[*53] The remaining amounts identified in the table above are $50, $165, and $65.
We address these three amounts below.
We conclude that the amounts of $165 and $65 were deposited into
Barnes’s bank accounts and were treated as income by the IRS but are, in our
view, attributable to nontaxable reimbursements from various sources. The $165
deposit was a $165 refund from Bank of America that was deposited into her bank
account ending in 9517 on April 8, 2008. Specific and credible testimony by
Barnes established that the $65 deposit was attributable to a $65 reimbursement
she received from Ora Robinson (Barnes’s aunt) and subsequently deposited into
her bank account ending in 8675 on July 9, 2008. Regarding the third deposit, of
$50, Barnes contends that she made a $50 deposit into her bank account ending in
9517 on January 28, 2008, that this deposit was attributable to a reimbursement
check that she received from Brenda Ozen, and that this deposit was treated as
income by the IRS. Barnes did not provide a copy of this $50 check. There is no
$50 deposit into Barnes’s bank account ending in 9517 on this date. Barnes failed
to prove by a preponderance of the evidence that she received a $50
reimbursement check from Brenda Ozen or that she subsequently deposited such a
$50 check into any of her bank accounts. Accordingly, we hold that the IRS’s
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[*54] determination of Barnes’s unreported income for 2008 must be adjusted to
exclude $230.
ii. 2009
For 2009, Barnes claims that she had deposits into her bank accounts
totaling $317.54 that were attributable to “reimbursements from various sources”
but were treated as income by the IRS. She identifies these deposits as follows:
Amount Source Bank account Date deposited
$92.54 Unidentified source 9517 Jan. 5, 2009
200.00 Wells Fargo 6621 Mar. 16, 2009
25.00 Ora Robinson 8675 Sept. 14, 2009
There is a deposit of $92.54 into her bank account ending in 9517 on January 5,
2009, but the source of this deposit is not determinable from the bank statements
and Barnes did not describe the source of this deposit. There is no check in the
record for that amount. There is also a deposit of $200 into her bank account
ending in 6621 on March 16, 2009, but we are unable for similar reasons to
confirm the source of this deposit. There is no deposit of $25 into Barnes’s bank
account ending in 8675 on September 14, 2009.
Barnes failed to prove by a preponderance of the evidence that any of these
alleged nontaxable amounts were deposited into her bank accounts. Accordingly,
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[*55] we hold that no adjustment to the IRS’s determination of Barnes’s
unreported income for 2009 is warranted for these amounts.
g. Repayments of loan principal from clients, friends, and family
Barnes claims that she received, and subsequently deposited into her bank
accounts, $8,023 in 2008 and $2,945 in 2009, that these deposits were attributable
to repayments of the principal of loans that she had made to clients, friends, and
family, and that the IRS treated these deposits as income. Gross income also does
not include amounts received as repayments of loans. See, e.g., Commissioner v.
Tufts, 461 U.S. at 307.
Barnes testified that she regularly made informal loans to clients, friends,
and family members. If Barnes in fact lent money to her friends, family, or clients
and was repaid, then the amounts representing repayments are not income. See,
e.g., id. Barnes testified that the loans she made were informal, that they were not
memorialized by any formal agreements, that she did not charge interest, and that
she did not charge penalties for late payments. Barnes claims that when she was
repaid for these alleged loans she deposited the repayments into her various bank
accounts.
The trial record contains documentary evidence of the existence of only one
of these alleged loans; specifically, there is a $500 check from Sylvia Law, a
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[*56] friend of hers from church, which Barnes received in 2009, and which
Barnes claims was the repayment of a $500 loan to Law.13 In her testimony
Barnes described only this loan with any specificity. Barnes credibly testified that
she lent Law $500 and that Law subsequently repaid Barnes that same amount.
The $500 check written to Barnes from Law was deposited into Barnes’s bank
account ending in 8675 on June 2, 2009. The IRS treated this deposit as income in
its revised bank-deposits analysis for 2009. Given Barnes’s testimony and the
documentary evidence, we conclude that this $500 deposit was from a nontaxable
loan repayment and that it should be excluded from Barnes’s income for 2009.
We are unable to determine whether Barnes deposited into her bank
accounts any other loan repayments. The sole evidence that she received any
other loan repayments or that she deposited such amounts into her bank accounts
is Barnes’s uncorroborated testimony (via the spreadsheet). We are not required
to, and do not, rely on Barnes’s self-serving and unsubstantiated testimony to
establish that she received any other loan repayments or that she deposited such
amounts into her bank accounts. See Tokarski v. Commissioner, 87 T.C. 74, 77
13
Barnes also attempted to enter into evidence affidavits from six different
individuals, each of whom Barnes alleges repaid her for personal loans she made
to them. However, these affidavits were excluded from evidence as inadmissible
hearsay.
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[*57] (1986). Barnes failed to prove by a preponderance of the evidence that any
deposits into the bank accounts used by the IRS in its revised bank-deposits
analyses were attributable to nontaxable repayment of loan principal, other than
the $500 from Sylvia Law in 2009. In sum, we hold that no adjustment to the
IRS’s determination of Barnes’s unreported income for 2008 is warranted, but that
the IRS’s determination of Barnes’s unreported income for 2009 should be
adjusted to exclude $500.
h. Redeposit of unused American Express Traveler’s checks
Barnes claims that a $250 deposit into her bank account ending in 8675 was
attributable to a nontaxable refund for $250 of unused American Express
Traveler’s checks. The IRS already identified and treated this $250 deposit as
nontaxable in its revised bank-deposits analysis for 2008. Accordingly, we hold
that no adjustment to the IRS’s determination of Barnes’s unreported income for
2008 is warranted.
i. Reimbursement of attorney’s fees paid on behalf of father’s estate
The trial record contains a copy of a check that Barnes wrote to Clement
Aldridge for $375 on May 22, 2008, that has the word “wills” in the memo line.
Barnes identifies Aldridge as the attorney who wrote a will for Titus Barnes.
Barnes claims that on June 3, 2008, she received a $375 payment from Jesse
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[*58] Walker (an unidentified person whom we assume arguendo was associated
with the estate of Titus Barnes) as a reimbursement for this expense and that she
deposited this $375 into her bank account ending in 9517 on that same day. There
is no $375 deposit into any of Barnes’s bank accounts on or around June 3, 2008
(the date that Barnes claimed to have deposited the amount). Barnes failed to
prove by a preponderance of the evidence that any deposits into her bank accounts
were attributable to this alleged nontaxable reimbursement. Accordingly, we hold
that no adjustment to the IRS’s determination of Barnes’s unreported income for
2008 is warranted.
j. Reimbursement for court fees paid on behalf of client
Barnes’s spreadsheet, which we treat as her testimony, states that a $100
deposit into her bank account ending in 3054 on August 25, 2008 was attributable
to a reimbursement from a client of Barnes & Barnes Financial Services, Tim
Hadley, for court fees that Barnes had paid on his behalf. The IRS already
identified and treated this $100 deposit as nontaxable in its revised bank-deposits
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[*59] analysis for 2008.14 Accordingly, we hold that no adjustment to the IRS’s
determination of Barnes’s unreported income for 2008 is warranted.
k. Gift from cousin
Barnes claims that a $25 deposit into her bank account ending in 8675 on
July 21, 2008, was attributable to a nontaxable gift that she received from her
cousin, Darnell Barnes. The sole evidence that this $25 deposit was attributable to
a nontaxable gift is Barnes’s uncorroborated testimony (via the spreadsheet). We
are not required to, and do not, rely on Barnes’s self-serving and unsubstantiated
testimony. See Tokarski v. Commissioner, 87 T.C. at 77. Barnes failed to prove
by a preponderance of the evidence that she received this alleged gift or that the
$25 deposit that she identified was attributable to a nontaxable gift. Accordingly,
we hold that no adjustment to the IRS’s determination of Barnes’s unreported
income for 2008 is warranted.
l. Deposits “from personal funds or other loans not previously reported”
In her briefs, Barnes asserts that she made various deposits into her bank
accounts, totaling $8,509 in 2008 and $5,705 in 2009, all of which, according to
14
In her briefs, Barnes asserts that this $100 was deposited into her bank
account in 2009. The check Barnes received for this payment is dated August 4,
2008, and was deposited into her bank account ending in 3054 on August 25,
2008. Therefore the IRS was correct to subtract this $100 amount from her bank
deposits for the 2008 tax year, not the 2009 tax year.
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[*60] her, were attributable to “personal funds or other loans not previously
reported.” Her spreadsheet, which we treat as her testimony, contains information
about these deposits, including (1) the date of the deposit, (2) the bank account,
(3) the amount of the deposit, and (4) a description of the nontaxable source of the
money. A review of the bank statements shows that these deposits listed in her
spreadsheet were real deposits. However, the bank-statement deposit entries
describe the deposits only as either “Deposit” or “Counter Credit”. These
descriptions do not aid us in determining whether these deposits were from taxable
or nontaxable sources. Furthermore, Barnes’s spreadsheet describes the source of
these deposits only in vague terms. Each deposit is described in the spreadsheet as
both “Cash Personal Funds/Loans” and “Funds from Estate/Loan Repayment”.
Barnes did not provide any other explanation of the source of these deposits. We
are not required to, and do not, rely on Barnes’s self-serving and unsubstantiated
testimony. See id. We are unconvinced that any of these identified deposits were
attributable to nontaxable sources. Accordingly, we hold that no adjustments to
the IRS’s determinations of Barnes’s unreported income for 2008 or 2009 are
warranted.
m. Summary
The table below summarizes our conclusions in part 1.
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[*61]
The Court’s conclusions regarding the IRS’s revised bank-deposit analyses
2008 2009
Unreported income as determined by
IRS in revised bank deposit analysis $28,849.21 $28,258.26
Adjustments by Court for
reimbursements by Church in part 1.b 1,818.75 1,354.65
Adjustments by Court for store and
merchant refunds in part 1.e 1,045.75 501.65
Adjustments by Court for
reimbursements from various sources
in part 1.f 230.00 -0-
Adjustments by Court for repayment of
loan principal from clients, friends,
and family in part 1.g -0- 500.00
Adjustments by Court:
Total 3,094.50 2,356.30
Unreported income as determined by
Court pursuant to bank-deposit
analysis 25,754.71 25,901.96
2. Barnes is not entitled to business-expense deductions for Barnes & Barnes
Financial Services for 2008 or 2009 in excess of the amounts the IRS
conceded ($15,937 for 2008 and $17,984 for 2009).
Barnes seeks deductions in excess of the amounts the IRS conceded for the
following business expenses for Barnes & Barnes Financial Services: car and
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[*62] truck expenses for 2008 and 2009, internet expenses for 2008 and 2009, and
supplies expenses for 2009.
Unless otherwise indicated, all expenses discussed in this section relate to
Barnes & Barnes Financial Services. As described supra, the parties previously
resolved the tax treatment of all expenses reported on the Schedule C for Barnes’s
financial-consulting work with churches for 2008 and 2009 in the stipulation of
settled issues.
Generally, the taxpayer bears the burden of proving that the determinations
in the notice of deficiency are erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. at 115. The IRS bears the burden of proof for issues for which the taxpayer
shows that the requirements of section 7491(a) are satisfied. Higbee v.
Commissioner, 116 T.C. at 442; see Rolfs v. Commissioner, 135 T.C. at 483
(taxpayer bears burden of proving that requirements of section 7491(a) have been
met). With respect to this issue--the availability of various types of business-
expense deductions for Barnes & Barnes Financial Services--Barnes has failed to
prove that the requirements of section 7491(a) have been met. Therefore, Barnes
bears the burden of proof with respect to the disputed business-expense deductions
for Barnes & Barnes Financial Services.
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[*63] a. Car and truck expenses
Section 162(a) allows a taxpayer to deduct all ordinary and necessary
expenses paid or incurred by the taxpayer in carrying on a trade or business.
Section 262(a) disallows deductions for personal, living, or family expenses.
Costs incurred in traveling between two places of business may be deductible as
ordinary and necessary business expenses. See Steinhort v. Commissioner, 335
F.2d 496, 504 (5th Cir. 1964), aff’g T.C. Memo. 1962-233. The costs of traveling
between a taxpayer’s home and work (i.e., commuting expenses) are personal and
are not deductible business expenses. Id. at 504; Heuer v. Commissioner, 32 T.C.
947, 951 (1959), aff’d, 283 F.2d 865 (1960); sec. 1.162-2(e), Income Tax Regs.
Section 6001 requires the taxpayer to maintain records sufficient to
establish the amount of each deduction claimed. See also sec. 1.6001-1(a),
Income Tax Regs. Under the so-called Cohan rule, if the taxpayer establishes that
an expense is deductible but is unable to substantiate the precise amount, the court
may estimate the amount, bearing heavily against the taxpayer whose inexactitude
is of his or her own making. See Cohan v. Commissioner, 39 F.2d 540, 543-544
(2d Cir. 1930). However, section 274(d) overrides the Cohan rule--imposing strict
substantiation requirements--with regard to certain expenses. See Sanford v.
Commissioner, 50 T.C. 823, 828 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir.
- 64 -
[*64] 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985). These expenses include the expenses of operating passenger
automobiles. Sec. 274(d) (any expense with respect to the use of “listed property”
as defined in section 280F(d)(4)); sec. 280F(d)(4)(A)(i) (defining listed property
as including passenger automobiles). Thus, the car and truck expense deductions
Barnes seeks are subject to the strict substantiation requirements of section
274(d).15 To deduct expenses subject to the strict substantiation requirements of
section 274(d), the taxpayer must substantiate “elements” by one of two methods:
“adequate records” or “sufficient evidence corroborating the taxpayer’s own
15
Barnes reported deductions for car and truck expenses on both the
Schedules C for her financial-consulting work and her Schedules C for Barnes &
Barnes Financial Services. Barnes listed vehicle information on her Schedule Cs
for her financial-consulting work for churches (i.e., the date a vehicle was placed
in service, June 1, 2008; the miles she drove the vehicle for business for that year;
and the total miles she drove the vehicle), but she listed no vehicle information on
her Schedules C for Barnes & Barnes Financial Services. We surmise that Barnes
intended to report that she used the same vehicle for both her financial-consulting
work for churches and for Barnes & Barnes Financial Services and that she
reported the information for the vehicle only on the Schedules C for her financial-
consulting work for churches. (The deductibility of the “car and truck” expenses
reported for Barnes’s financial-consulting work with churches has been resolved
in the stipulation of settled issues.) Although neither the returns nor the record
indicates whether the vehicle was a passenger vehicle, Barnes and the IRS agree
that Barnes’s reported “car and truck” expenses for Barnes & Barnes Financial
Services are subject to the strict substantiation requirements of sec. 274(d).
Therefore, we consider Barnes’s “car and truck” expenses for Barnes & Barnes
Financial Services to be subject to the strict substantiation requirements of sec.
274(d).
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[*65] statement”. One “element” is the amount of the expenses. Sec. 1.274-
5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985). For
the expenses of operating vehicles (including passenger automobiles), the taxpayer
has two options for calculating the expenses of operating the vehicle. Sec. 1.274-
5(j)(2), Income Tax Regs.; Rev. Proc. 2008-72, sec. 5.02, 2008-2 C.B. (Vol. 2)
1286, 1288; Rev. Proc. 2007-70, sec. 5.02, 2007-2 C.B. 1162, 1164. Under the
first option, the taxpayer calculates the actual expenses of using the vehicle for
business. Sec. 1.274-5T(b)(6), Temporary Income Tax Regs., supra. Under the
second option, the taxpayer calculates the expenses of using the vehicle for
business by multiplying the business miles driven by a flat mileage rate set by the
IRS. Sec. 1.274-5(j)(2), Income Tax Regs.; Rev. Proc. 2008-72, sec. 5.02 (“A
taxpayer generally may deduct an amount equal to * * * the business standard
mileage rate times the number of business miles traveled.”). Which of these
options is chosen by the taxpayer makes a difference as to the “elements” that
must be substantiated.
If the taxpayer chooses to calculate the expenses of operating a vehicle
using the applicable mileage rate, then the “elements” to be substantiated include:
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[*66] (1) the mileage of each business use and the total business and
nonbusiness mileage during the taxable year, see sec. 1.274-5(j)(2), Income
Tax Regs.; sec. 1.274-5T(b)(6)(i)(B), Temporary Income Tax Regs., supra,
(2) the date of each business use of the vehicle, see sec. 1.274-5(j)(2), Income
Tax Regs. (use of mileage rate does not relieve taxpayer of obligation to
substantiate “time” of business use within meaning of section 274(d)(4)(B));
sec. 1.274-5T(b)(6)(ii), Temporary Income Tax Regs., supra (interpreting
“time” of business use in section 274(d)(4)(B) to mean “date of * * * use”),
and
(3) the “business purpose of each use” of the vehicle, sec. 1.274-5(j)(2), Income
Tax Regs.; sec. 1.274-5T(6)(iii), Temporary Income Tax Regs. To meet the
“adequate records” requirements of section 274(d) for vehicle expenses, a
taxpayer choosing the mileage-rate option must maintain (1) an account
book, a diary, a log, a statement of expense, trip sheets, or similar records,
and (2) documentary evidence (such as receipts or bills), which, in
combination, are sufficient to establish the required “elements”, including
the mileage, the date, and the business purpose of each business use of the
vehicle. See sec. 1.274-5(j)(2), Income Tax Regs.; sec. 1.274-5T(c)(2),
Temporary Income Tax Regs., 50 Fed. Reg. 46017 (Nov. 6, 1985).
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[*67] The mileage, the date, and the business purpose of each business use of the
vehicle must be recorded “at or near the time” of each business use. See sec.
1.274-5T(c)(2)(ii), Temporary Income Tax Regs., supra. To be considered made
“at or near the time” of each use, the record must be made when the taxpayer had
full present knowledge of the mileage, the date, and the business purpose of each
business use of the vehicle. See id. subdiv. (ii)(A). A record made weekly is
considered to satisfy the full present knowledge requirement. See id.
In the absence of “adequate records” sufficient for purposes of section
274(d), a taxpayer choosing the mileage-rate option must substantiate each of the
“elements” (including the mileage, the date, and the business purpose of each
business use of the vehicle) by “sufficient evidence corroborating * * * [the
taxpayer’s] own statement”. Id. subpara. (1). Substantiation by “sufficient
evidence corroborating [the taxpayer’s] own statement” requires the taxpayer to
establish these elements “(A) [b]y * * * [the taxpayer’s] own statement, whether
written or oral, containing specific information in detail as to such element; and
(B) [b]y other corroborative evidence sufficient to establish such element.” Sec.
1.274-5T(c)(3)(i), Temporary Income Tax Regs., 50 Fed. Reg. 46020 (Nov. 6,
1985).
- 68 -
[*68] Barnes claimed car and truck expense deductions of $6,930 and $6,544 on
the Schedules C for Barnes & Barnes Financial Services for 2008 and 2009,
respectively. In the notice of deficiency, the IRS disallowed these deductions in
full. In the stipulation of facts, the IRS conceded that Barnes is entitled to
deductions for Barnes & Barnes Financial Services for car and truck expenses of
$3,465 for 2008 and $3,277 for 2009.
During trial Barnes offered two sets of spreadsheets listing her alleged car
and truck expenses for Barnes & Barnes Financial Services for 2008 and 2009.
Both were admitted into evidence. The first set of mileage spreadsheets contains
Barnes’s calculations that she is entitled to deductions for Barnes & Barnes
Financial Services for car and truck expenses of $7,100.95 for 2008 and $6,544.34
for 2009. The second set of mileage spreadsheets contains Barnes’s calculations
that she is entitled to deductions for Barnes & Barnes Financial Services for car
and truck expenses of $6,582.26 for 2008 and $6,504.74 for 2009. Barnes
explained during trial that the difference between the second set of mileage
spreadsheets and the first is that the second omits some of the trips listed in the
first that the IRS disputed as to deductibility. From this explanation we conclude
that Barnes concedes that expenses for the trips removed from the first set of
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[*69] mileage spreadsheets are nondeductible. Thus, it is the second set of
mileage spreadsheets that presents Barnes’s position as of the trial.
For each trip, the second set of mileage spreadsheets describes:
• the date of each trip,
• the starting point and destination for each trip (e.g., “Drove from
Baytown [her accounting job for Robert Half at the Exxon Mobil
refinery in Baytown] to office [Barnes & Barnes Financial Services’s
office in Houston]”),
• the miles driven on each trip, and
• the amount of the annual expense incurred on the basis of standard
mileage rates.16
Most of the listed trips are from Barnes’s accounting job for Robert Half at the
Exxon Mobil refinery in Baytown to Barnes & Barnes Financial Services’s office
in Houston (a 36-mile trip). Other trips are listed in the second set of mileage
spreadsheets as well. In total, the second set of mileage spreadsheets states that
16
It appears that this amount is equal to the miles driven multiplied by the
standard mileage rate, which was 50.5 cents per mile for the first six months in
2008, Rev. Proc. 2007-70, sec. 2.01(1), 2007-2 C.B. 1162, 1163, 58.5 cents per
mile for the last six months in 2008, IRS Announcement 2008-63, 2008-2 C.B.
114, 114, and 55 cents per mile for 2009, Rev. Proc. 2008-72, sec. 2.01(1), 2008-2
C.B. (Vol. 2) 1286, 1286.
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[*70] Barnes drove 12,346.8 business miles in 2008 and 11,826.8 business miles
in 2009.
In her post-trial briefs Barnes concedes that expenses for trips from her
church to the office of Barnes & Barnes Financial Services are nondeductible. She
claims that after accounting for this concession, her deductible car and truck
expenses are $6,002.96 for 2008 (compared to $6,582.26 in the second set of
mileage spreadsheets) and $5,942.92 for 2009 (compared to $6,504.74 in the
second set of mileage spreadsheets).
It appears that Barnes did not create the second set of mileage spreadsheets
contemporaneously with the trips they purport to record. The second set of
mileage spreadsheets is not dated and Barnes did not testify as to when she
prepared the mileage spreadsheets. Attached to the first set of mileage
spreadsheets were two blank calendars that had been printed from the website
http://www.timeanddate.com on March 5, 2014. These calendars were not
attached to the second set of mileage spreadsheets, but the second set was a
revised version of the first set, and therefore the second set postdates the first set.
That means that the second set of mileage spreadsheets was prepared sometime
after the two calendars attached to the first set of mileage spreadsheets were
printed, i.e., March 5, 2014, which is several years after the trips in question. The
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[*71] record does not indicate what information Barnes used to compile the first or
second set of mileage spreadsheets. It is implausible that five to six years after the
alleged business trips took place Barnes had full present knowledge of the dates of
the trips, the miles traveled, or the business purpose of these trips. See sec. 1.274-
5T(c)(2)(ii)(A), Temporary Income Tax Regs., supra. The mileage spreadsheets
therefore were not prepared at or near the time of the trips the spreadsheets were
meant to record. The mileage spreadsheets are therefore not adequate records of
the trips. Id. Barnes provided no evidence to corroborate her mileage
spreadsheets. Therefore, there is insufficient evidence corroborating Barnes’s own
statement, i.e., the mileage spreadsheets. See id. subpara. (3)(i). Barnes’s mileage
spreadsheets do not satisfy the strict substantiation requirements of section 274(d).
Accordingly, we hold that Barnes is not entitled to deductions for Barnes &
Barnes Financial Services for car and truck expenses beyond the amounts the IRS
conceded in the stipulation of facts, i.e., $3,465 for 2008 and $3,277 for 2009.
b. Internet
Internet expenses have been characterized as utility expenses rather than
expenses related to the use of listed property (such as computer equipment). See
Verma v. Commissioner, T.C. Memo. 2001-132, slip op. at 12. So characterized,
internet expenses are not governed by the strict substantiation rules of section
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[*72] 274(d). Therefore, pursuant to the Cohan rule the amount of deductible
internet expenses can be estimated by a court, provided, however, that the court
has a reasonable basis for making an estimate of the amount of the expense related
to business use. See Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985)
(estimate must have reasonable evidentiary basis).
At trial and in her post-trial briefs Barnes contends that she is entitled to
business-expense deductions for Barnes & Barnes Financial Services of $311.64
in each of 2008 and 2009 for expenses she incurred for internet service at her
personal residence. Barnes did not claim an internet-expense deduction on any of
the Schedules C attached to her 2008 or 2009 tax return. And Barnes did not raise
a claim to internet-expense deductions in her petition. However, the IRS does not
contend that this failure to plead the deductibility of internet expenses bars the
Court from considering the issue.
The IRS does not appear to dispute that Barnes actually paid $311.64 in
both 2008 and 2009 for internet service at her personal residence. The IRS
contends that Barnes has not shown that she used the internet at her personal
residence for business purposes and accordingly is not entitled to a business-
expense deduction for these expenses.
- 73 -
[*73] Barnes testified that she used the internet at her personal residence for
business purposes (i.e., conducting research and transmitting tax returns) and for
personal purposes. However, Barnes did not provide us with a reasonable
evidentiary basis for estimating the portion of time that the internet at her personal
residence was used for business purposes. Accordingly, we hold that Barnes is not
entitled to a deduction for Barnes & Barnes Financial Services for any portion of
her home internet expenses for 2008 or 2009. See id. at 742-743 (estimate must
have reasonable evidentiary basis).
c. Supplies
Barnes claimed a supplies-expense deduction of $2,503 on the Schedule C
for Barnes & Barnes Financial Services for 2009. The Schedule C did not include
an itemized list of the supplies expenses. In the notice of deficiency, the IRS
allowed a deduction of $672. The notice of deficiency did not indicate which
particular supplies expenses corresponded to the $672 allowance. In the
stipulation of facts the IRS agreed that Barnes was entitled to a supplies-expense
deduction for Barnes & Barnes Financial Services of $3,752. The stipulation of
facts itself did not indicate which particular supplies expenses corresponded to the
$3,752 concession. However, the IRS would clarify this during trial, as explained
below.
- 74 -
[*74] At trial Barnes asserted that she is entitled to a total supplies-expense
deduction of $4,861.93 for Barnes & Barnes Financial Services for 2009.17 Barnes
produced a spreadsheet listing a total of 48 expenses that she claimed to have paid
or incurred for business supplies for Barnes & Barnes Financial Services during
2009. Expenses listed on this spreadsheet were for, among other things, a “DVD
player”, “toner”, “supplies”, “earphones”, “business equipment property taxes”,
and “software”. The sum of the expenses listed on the spreadsheet is $4,861.93.
Pursuant to an agreement of the parties made on the record at trial, the Court treats
this spreadsheet as if Barnes had testified to the information contained in the
spreadsheet.18
As explained above, the IRS has agreed in the stipulation of facts that
Barnes is entitled to a supplies-expense deduction of $3,752. At trial, the IRS
stated that the $3,752 concession is based in part on its concession that 33 of the
48 expenses on Barnes’s spreadsheet are deductible. The total expense
17
In her post-trial briefs, Barnes continued to assert that she is entitled to a
total supplies-expense deduction of $4,861.93 for Barnes & Barnes Financial
Services for 2009. In Barnes’s first post-trial brief she also included the number
“$4,830.54” in a table that lists the amount she claims she is entitled to deduct for
supplies for 2009. Barnes did not explain this number or itemize this amount.
18
This agreement is similar to the agreement with respect to another
spreadsheet prepared by Barnes with respect to her alleged sources of nontaxable
deposits. We described that agreement supra note 9.
- 75 -
[*75] corresponding to these 33 expenses is $3,710.85. This leaves $41.15 of the
$3,752 concession unaccounted for.19 It is unnecessary for us to consider the
deductibility of the 33 expenses the IRS concedes are deductible. Our task is
instead to determine the deductible amount of the 15 unconceded expenses. If this
amount exceeds the remaining IRS concession of $41.15, then Barnes is entitled to
a supplies-expense deduction greater than the $3,752 amount of the IRS
concession. Below is the information in Barnes’s spreadsheet, with the 15
disputed expenses in bold.
Date Payee Description Amount
Jan. 6, 2009 Coastal Teacher Supplies $8.42
Jan. 12, 2009 Acme Business Business cards 64.95
Jan. 12, 2009 Staples Supplies 77.92
Jan. 19, 2009 Office Depot Supplies 15.24
Jan. 26, 2009 Office Depot Copy paper 101.21
Feb. 9, 2009 Quill Corp. 5606 Tax forms W-2 6-pt laser 20.88
Feb. 10, 2009 Quill Corp. Tax forms laser link software 68.61
and forms
Feb. 25, 2009 Walmart Sam’s Club Supplies 60.53
Mar. 2, 2009 Amegy Harris County Business equipment property 23.54
taxes
Mar. 9, 2009 Proseries Software Sales Pay per return - business return 32.48
19
$3,752 ! $3,710.85 is $41.15.
- 76 -
[*76]
Mar. 12, 2009 Apple Store Earphones 31.39
Mar. 12, 2009 Apple Store Supplies 31.39
Mar. 17, 2009 Office Depot Toner 276.11
Mar. 31, 2009 Proseries Software Sales Pay per return - business return 32.48
Apr. 6, 2009 Proseries Software Sales Pay per return - business return 32.48
Apr. 6, 2009 Proseries Software Sales Pay per return - business return 32.48
Apr. 17, 2009 Office Depot Norton Virus Protection 116.89
software and envelopes
Apr. 17, 2009 Norton Software Norton Virus Protection 49.99
software renewal
Apr. 27, 2009 Proseries Software Sales Pay per return - business return 32.48
Apr. 27, 2009 Proseries Software Sales Pay per return - business return 32.48
May 1, 2009 Proseries Software Sales Pay per return - business return 32.48
May 1, 2009 Proseries Software Sales Pay per return - business return 32.48
June 2, 2009 Office Depot Binding combs 4.78
June 2, 2009 Office Depot Presentation envelopes 286.77
June 4, 2009 Office Depot Business card stock 7.99
June 4, 2009 Dollar Tree Stores Pens for office 29.23
June 15, 2009 HiEd Software Co. Microsoft Office Enterprise 15.16
June 15, 2009 Best Buy Software 212.11
June 17, 2009 Micro Electron Palm Pilot to store tax contacts 539.98
and Data Storage System
June 25, 2009 Target Haier DVD player for training 140.71
June 30, 2009 Proseries Software Sales Proseries Professional Edition 1,406.17
July 2, 2009 FedEx Kinko’s Copies 16.37
Aug. 15, 2009 Apple Store Glare screen 16.18
- 77 -
[*77]
Sept. 22, 2009 Proseries Software Sales Pay per return - business return 49.80
Sept. 22, 2009 Proseries Software Sales Pay per return - business return 3.25
Sept. 27, 2009 Target Surge protectors for office 35.70
Oct. 27, 2009 Proseries Software Sales Pay per return - business return 32.48
Oct. 30, 2009 City Office Supply Office supplies 11.90
Nov. 6, 2009 Staples Office organizers 77.92
Nov. 16, 2009 Quill Corp. Binding covers 141.32
Nov. 17, 2009 Office Depot Toner 89.56
Nov. 19, 2009 Quill Corp. Matte texture binding spines 25.97
Nov. 23, 2009 GBC Binding supplies 58.05
Nov. 24, 2009 Proseries Software Sales Pay per return - business return 32.48
Dec. 5, 2009 Target Batteries 11.91
Dec. 17, 2009 Quill Corp. 1203-4 LSR Link software; tax 86.66
forms; binding spines
[no date given] Office Depot Toner 290.09
Dec. 28, 2009 Proseries Software Sales Pay per return - business return 32.48
Total 4,861.93
We proceed to determine which, if any, of the 15 disputed supplies expenses
are deductible under section 162(a). These correspond to the bolded entries in the
last table.
As an initial matter, we conclude that the second entry of $31.39 from the
Apple Store was a duplicate. Accordingly, Barnes is not entitled to a deduction
for the second $31.39 entry. We also conclude that Barnes is not entitled to a
- 78 -
[*78] deduction for the $116.89 expense at Office Depot because the receipt
indicates that this expense was subsequently refunded to Barnes. The remaining
13 expenses total $1,002.80. The record contains corroborating evidence of
payment (in the form of evidence other than the spreadsheet, such as receipts or
copies of checks) of only $215.43 out of this $1,002.80 amount. Barnes did not
provide corroborating evidence of payment for the remaining $787.37 amount, i.e.,
$1,002.80 ! $215.43. We are not required to, and do not, rely on Barnes’s self-
serving and unsubstantiated testimony (through the form of her spreadsheet) to
establish that the uncorroborated $787.37 in disputed expenses was paid or
incurred by Barnes. See Tokarski v. Commissioner, 87 T.C. at 77. Therefore, we
find by a preponderance of the evidence that Barnes paid only $215.43 out of the
$1,002.80 amount.
The documentary evidence for these $215.43 in purchases is:
• a check for $15.24 written to Office Depot for a purchase that
according to the spreadsheet was for “Supplies”,
• a receipt for $31.39 from the Apple Store for earphones,
• a receipt for $140.71 from Target that, according to the spreadsheet,
was for a DVD player,
- 79 -
[*79] • a receipt for $16.18 from the Apple Store for a protective phone
screen, and
• a receipt for $11.91 for batteries from Target.
The documentary evidence shows that the items were purchased but does not show
that they were purchased for business purposes. The mere fact that an item was
purchased does not mean the expense is deductible under section 162(a). The
expense must be an expense of Barnes’s business and not a personal expense. See
secs. 162(a), 262(a). The sole purchase listed above about which Barnes testified
with any specificity was the DVD player she purchased from Target for $140.71.
The IRS does not appear to contest whether Barnes actually incurred an expense
of $140.71 for this DVD player. The IRS disputes the deductibility of this
expense because it argues that Barnes purchased the DVD player for personal,
rather than business, purposes. At trial, Barnes testified that she bought the DVD
player in order to “do [continuing-education] units” for training purposes, and
“because I didn’t have a DVD player on my television or in my home.” We do not
know where Barnes kept the DVD player. She may have kept it at her house.
Without knowing the location of the DVD player, it is difficult to say that Barnes
- 80 -
[*80] did not buy and use the DVD player for substantial personal use. We
conclude on the basis of the record that this was a personal expense.20
For the remainder of the $215.43 amount, Barnes failed to prove that these
were business expenses. Given the record, we are unable to determine the
business purpose of her purchase of “[s]upplies”, earphones, a protective phone
screen, or batteries. Without this knowledge, it is difficult to say that Barnes did
not purchase these items for personal use. Barnes has failed to prove by a
preponderance of the evidence that these expenses were business expenses, and
she is therefore not entitled to a business-expense deduction for them.
Barnes has failed to prove by a preponderance of the evidence that she is
entitled to deductions for any of the disputed supplies expenses for Barnes &
Barnes Financial Services for 2009. Accordingly, we hold that she is not entitled
to a deduction for supplies expenses for Barnes & Barnes Financial Services for
2009 in excess of the $3,752 the IRS already conceded in the stipulation of facts.
20
We note that although the IRS does not contend that the DVD player is
listed property, it appears that a tenable argument could be made that a DVD
player is “property of a type generally used for purposes of entertainment,
recreation, or amusement”. See sec. 280F(d)(4)(iii). If a DVD player were listed
property, then deductions for the expense of a DVD player would be subject to the
strict substantiation requirements of sec. 274(d). See sec. 274(d)(4).
- 81 -
[*81] 3. Barnes is not entitled to charitable-contribution deductions for 2008
or 2009 in excess of the amounts allowed in the notice of deficiency
($12,576 for 2008 and $16,381 for 2009).
Section 170(a)(1) allows a deduction for any “charitable contribution” made
by the taxpayer during the taxable year. A “charitable contribution” is defined as
“a contribution or gift to or for the use of” a charitable organization. Sec. 170(c).
One type of charitable contribution is donating money or property directly to a
charitable organization. A second type of charitable contribution is placing money
or property in trust for a charitable organization. Such a transfer is, pursuant to
section 170(c), a contribution “for the use of” a charitable organization. See Davis
v. United States, 495 U.S. 472, 485 (1990). A third type of charitable contribution
may arise when a taxpayer performing services for a charitable organization incurs
unreimbursed expenses. Section 1.170A-1(g), Income Tax Regs., is consistent
with this, stating: “No deduction is allowable under section 170 for a contribution
of services. However, unreimbursed expenditures made incident to the rendition
of services to an organization contributions to which are deductible may constitute
a deductible contribution.” The expenses of rendering services are deductible
because they constitute contributions “to” the charitable organization in the words
of section 170(c). Van Dusen v. Commissioner, 136 T.C. 515, 523 n.14 (2011).
- 82 -
[*82] Section 170(f)(8)(A) provides that “[n]o deduction shall be allowed under
* * * [section 170(a)] for any contribution of $250 or more unless the taxpayer
substantiates the contribution by a contemporaneous written acknowledgment of
the contribution by the donee organization that meets the requirements of * * *
[section 170(f)(8)(B)].”21 Section 170(f)(8)(B) requires a donee organization’s
written acknowledgment to state the amount contributed, indicate whether the
donee organization provided any goods or services in consideration, in whole or in
part, for the contribution, and include a description and good-faith estimate of the
value of any goods or services provided by the donee organization. Section
170(f)(8)(C) provides that a written acknowledgment is considered
contemporaneous if it was obtained by the taxpayer on or before the earlier of (1)
the date the taxpayer filed the original return for the taxable year of the
contribution, or (2) the due date (including extensions) for filing the original
return for the year. See also sec. 1.170A-13(f)(3), Income Tax Regs. Pursuant to
section 1.170A-13(f)(10), Income Tax Regs., a taxpayer who incurs unreimbursed
21
Sec. 170(f)(8)(D) provides that a taxpayer is relieved of the obligation to
substantiate his or her contribution with the contemporary written acknowledg-
ment required by sec. 170(f)(8)(A) if the donee organization reports the contribu-
tion on a return filed in accordance with the regulations. Barnes does not assert,
and the evidence in the record does not suggest, that Williams Temple Church
filed any such return. Therefore, this exception is inapplicable here.
- 83 -
[*83] expenses “incident to the rendition of [charitable] services” is treated as
having obtained a contemporaneous written acknowledgment of the contributed
expenses, in satisfaction of the requirements of section 170(f)(8)(A), if the
taxpayer (1) “Has adequate records * * * to substantiate the amount of the
expenditures”, and (2) acquires a contemporaneous written acknowledgment from
the donee organization containing (A) a description of the services provided by the
taxpayer, (B) a statement of whether the donee organization provides any goods or
services in consideration, in whole or in part, for the unreimbursed expenditures,
and (C) a description and good-faith estimate of the value of any goods or services
provided by the donee organization.
Generally, the taxpayer bears the burden of proving that the determinations
in the notice of deficiency are erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. at 115. However, the IRS bears the burden of proof on issues for which the
taxpayer shows that the requirements of section 7491(a) are satisfied. Higbee v.
Commissioner, 116 T.C. at 442; see Rolfs v. Commissioner, 135 T.C. at 483
(taxpayer bears burden of proving that requirements of section 7491(a) have been
met). With respect to this issue--the availability of charitable-contribution
deductions--we conclude that Barnes has failed to prove that the requirements of
- 84 -
[*84] section 7491(a) have been met. Therefore, Barnes bears the burden of proof
with respect to the charitable-contribution deductions.
d. 2008
On the Schedule A attached to her 2008 tax return Barnes claimed a total
charitable-contribution deduction of $16,727. Because the Schedule A did not
contain an itemized list of contributions, we cannot tell what contributions form
the $16,727 total. In the notice of deficiency, the IRS allowed a charitable-
contribution deduction of $12,576 for 2008. Because the notice of deficiency did
not itemize any particular contributions, we cannot tell which contributions were
determined to be deductible as part of the $12,576 total. However, at trial the IRS
conceded that the Court should treat the notice of deficiency as having determined
that Barnes was entitled to a deduction of $961 for a church trip costing $5,112,
and as having determined that Barnes was entitled to a deduction of $11,615 for
charitable contributions unrelated to the church trip. The IRS further stated that
even though it considered the $961 allowance of a deduction for the church trip in
the notice of deficiency to be an error, it would not contest the deductibility of the
$961. Also, the IRS stated that it does not contest the deductibility of the $11,615
of charitable contributions unrelated to the church trip. The only contribution for
which Barnes seeks a deduction (besides the amounts allowed in the notice of
- 85 -
[*85] deficiency) is the remaining $4,151 cost of the church trip. Our task
therefore is to determine how much, if any, of the total $5,112 cost of this church
trip Barnes may deduct. If the deductible portion of this $5,112 cost exceeds
$961, then Barnes’s charitable-contribution deduction for 2008 would exceed the
$12,576 allowed in the notice of deficiency.
Barnes visited Dar es Salaam, Tanzania, and Nairobi, Kenya, on the trip.
The trial record contains descriptions of the sites that she visited as well as
numerous photographs, presumably taken during site visits. Part of the trip
consisted of visits to orphanages and schools. However, Barnes also went on at
least one safari during this trip.
Barnes paid $5,112 to Genesis Travel for the trip. The trip was organized
by Williams Temple Church. In exchange for her $5,112 payment, Barnes
received airplane tickets, meals, and lodging.
The IRS does not contest whether Barnes made this $5,112 payment for the
church trip in 2008. Rather, the IRS argues that parts of this trip were personal
and that Barnes has not provided a contemporaneous written acknowledgment
from the donee organization, Williams Temple Church, that satisfies section
170(f)(8)(A).
- 86 -
[*86] Barnes did not contribute money or property directly to Williams Temple
Church for this trip. Instead she paid a third party, Genesis Travel, for the
expenses associated with this trip. Thus Barnes is entitled to a
charitable-contribution deduction only if these expenses were, in the words of
section 1.170A-1(g), Income Tax Regs., “expenditures made incident to the
rendition of services” to Williams Temple Church. We assume, arguendo, that at
least part of the trip was incident to the rendition of services to Williams Temple
Church, and therefore a portion of the expenses of the trip would generally be
considered deductible as expenses incurred by a church member on a church trip.
See, e.g., Smith v. Commissioner, 60 T.C. 988, 993-994 (1973). However, even
under this favorable assumption, Barnes would still need to satisfy the
contemporaneous written acknowledgment requirement.
In her post-trial brief Barnes alleges, without citing any part of the record,
that she provided adequate substantiation under section 170(f)(8) to deduct the
cost of this trip. The trial record contains a letter from Williams Temple Church to
the IRS which states that Barnes paid $5,112 to go on this trip. This letter does
not contain a “description of the services provided by * * * [Barnes]”, a “statement
of whether or not * * * [Williams Temple Church] provide[d] any goods or
services in consideration, in whole or in part, for the unreimbursed expenditures”,
- 87 -
[*87] or a “description and good faith estimate of the value of any goods or
services provided by * * * [Williams Temple Church].” See sec. 1.170A-
13(f)(10), Income Tax Regs. Therefore, the contents of this letter fail to meet the
requirements of a contemporaneous written acknowledgment for purposes of
section 1.170A-13(f)(10), Income Tax Regs. Furthermore, this letter does not
state “[w]hether the donee organization provided any goods or services in
consideration, in whole or in part” or provide “[a] description and good faith
estimate of the value of any goods or services * * * [provided by the donee
organization] or, if such goods or services consist solely of intangible religious
benefits, a statement to that effect.” See sec. 170(f)(8)(B)(ii) and (iii). Therefore,
the contents of this letter also fail to meet the requirements of a contemporaneous
written acknowledgment set forth by section 170(f)(8)(B). And lastly, this letter is
dated December 15, 2010. The due date for Barnes to file her 2008 tax return was
April 15, 2009, and she filed her return on September 11, 2010. The earlier of
these two dates is April 15, 2009. Therefore, pursuant to section 170(f)(8)(C), the
date by which Barnes was required to obtain a written acknowledgment from
Williams Temple Church was April 15, 2009. This letter, dated December 15,
2010, is not a contemporaneous written acknowledgment under section
170(f)(8)(C).
- 88 -
[*88] Barnes failed to substantiate her $5,112 payment for the church trip with a
contemporaneous written acknowledgment from Williams Temple Church, as
required by section 170(f)(8)(A). Therefore, Barnes is not entitled to a charitable-
contribution deduction for this payment. See sec. 170(f)(8)(A). Accordingly, we
hold that Barnes is not entitled a charitable-contribution deduction for 2008 in
excess of the $12,576 allowed by the IRS in the notice of deficiency.
e. 2009
Barnes reported a charitable-contribution deduction of $17,766 on the
Schedule A attached to her 2009 tax return. In the notice of deficiency, the IRS
allowed a charitable-contribution deduction of $16,381 for 2009. At trial and in
her post-trial briefs Barnes contends that she is entitled to a charitable-contribution
deduction of $20,581 for 2009, without explaining how this number was
calculated or why it is greater than the amount she reported on her tax return. In
her post-trial briefs, her contention is found in the following statement: “The issue
remains whether petitioner is entitled to Schedule A deductions for contributions
in the amount of $17,226.00 and $20,581.00 for the years 2008 and 2009,
respectively, rather than $12,576.45 and $16,380.99 as reported from the audit
analysis.” (Emphasis added.) Also in her post-trial briefs, Barnes claims:
“During the court hearing, the IRS conceded the 2009 amount claimed [i.e.,
- 89 -
[*89] $20,581] (Trans. p. 66).” This is incorrect. At no point has the IRS
conceded that Barnes is entitled to a deduction for charitable contributions in
excess of the $16,381 allowed in the notice of deficiency for 2009. The IRS has
consistently asserted through the course of this litigation that Barnes is entitled to
a charitable-contribution deduction of only the $16,381 allowed in the notice of
deficiency.
The trial record contains 227 pages of copies of cashed checks, identified as
Exhibit 9-J, adduced by Barnes in an attempt to substantiate her charitable
contributions for 2009. The parties stipulated that Exhibit 9-J consists of “copies
of cancelled checks which petitioner claims are charitable contributions for * * *
2009”. The checks in Exhibit 9-J total $17,983.99, which is $1,602.99 more than
the $16,381 that the IRS allowed in the notice of deficiency. Most of these checks
were written to various churches, including Williams Temple Church.
Barnes must prove entitlement to deduct at least $16,382 in order to be
allowed a deduction of even one dollar more than the $16,381 deduction allowed
in the notice of deficiency. We easily conclude that at least $6,844 of the
$17,983.99 in checks fails to satisfy the requirements of section 170 for charitable-
contribution deductions. This $6,844 is the total of checks in the following
amounts: $600, $500, $300, $250, $500, $400, $1,009, $500, and $500 paid to
- 90 -
[*90] Williams Temple Church (totaling $4,559), a check for $1,000 paid to Save
Africa’s Children, a check for $300 paid to “Holy Redeemer”, a check for $350
paid to Southern California First, a check for $350 paid to the order of “Cash”
(and unaccompanied by corroborating evidence that the payment was made to a
charitable organization), and a check for $285 to Texas Southeast First. Barnes
did not provide the required contemporaneous written acknowledgment by the
relevant donee organization of any of the alleged contributions listed above, all of
which exceed $250. See sec. 170(f)(8)(A). Once these $6,844 worth of checks is
removed from the larger set of $17,983.99, Barnes is left with only $11,139.99 in
checks for which a charitable-contribution deduction could be taken. Even if a
deduction were available for this $11,139.99, it falls well short of the $16,381
deduction already allowed by the IRS in the notice of deficiency.
Barnes failed to prove by a preponderance of the evidence that she is
entitled to a charitable-contribution deduction for 2009 beyond the amount
allowed by the IRS in the notice of deficiency. Accordingly, we hold that Barnes
is not entitled to a charitable-contribution deduction for 2009 in excess of the
$16,381 allowed by the IRS in the notice of deficiency.
- 91 -
[*91] 4. Barnes is not entitled to rental-property-expense deductions (that is,
deductions for the expenses of owning rental property) for 2008 or 2009,
except that Barnes is entitled to a $932.49 deduction for real-property taxes
for 2009.
Section 212(2) allows a deduction for all ordinary and necessary expenses
paid or incurred during the taxable year for the management, conservation, or
maintenance of property held for the production of income, such as rental
property.
Section 280A(a) provides:
SEC. 280A(a). General Rule.--Except as otherwise provided in
this section, in the case of a taxpayer who is an individual * * *, no
deduction otherwise allowable under this chapter [i.e., Chapter 1 of
the Code, which includes section 212] shall be allowed with respect
to the use of a dwelling unit which is used by the taxpayer during the
taxable year as a residence.
Section 280A(b) provides:
SEC. 280A(b). Exception for Interest, Taxes, Casualty Losses,
Etc.--Subsection (a) shall not apply to any deduction allowable to the
taxpayer without regard to its connection with his trade or business
(or with his income-producing activity).
Section 164(a)(1) allows a deduction for certain taxes, including state and
local property taxes, regardless of whether the taxes were paid or incurred in
connection with a trade or business or income-producing activity. See Tschetter v.
Commissioner, T.C. Memo. 2003-326, slip op. at 21. Therefore, section 280A(a)
- 92 -
[*92] does not limit deductions for property taxes. See secs. 164(a)(1), 280A(b);
DiDonato v. Commissioner, T.C. Memo. 2013-11, at *96.
The Durham Drive property includes a dwelling unit within the meaning of
section 280A. See sec. 280A(f)(1)(A) (a dwelling unit for purposes of section
280A includes a house and all structures or other property appurtenant to such
house). A dwelling unit is used by the taxpayer as a residence during the taxable
year if the taxpayer uses it for personal purposes for more than the greater of (a)
14 days during the taxable year or (b) 10% of the number of days during the
taxable year that the unit is rented at a fair rental value. Sec. 280A(d)(1)(A) and
(B). A taxpayer is deemed to have used a dwelling unit for personal purposes for
each day that the unit is used by another individual who pays rent for the day
below fair rental value. Sec. 280A(d)(2)(C). Whether a dwelling unit is rented for
fair rental value is determined by considering the facts and circumstances of each
case, sec. 280A(d)(2)(C), including comparable rents in the area, see, e.g., Langley
v. Commissioner, T.C. Memo. 2013-22, at *6.
Barnes reported rental income and expenses for the Durham Drive property
on the Schedule E of her 2008 tax return and the Schedule E of her 2009 tax
return. For 2008, Barnes reported rents received for the Durham Drive property of
$800 and total expenses for the Durham Drive property of $10,274, and claimed a
- 93 -
[*93] net rental-property loss of $9,474, i.e., $10,274 ! $800. For 2009, Barnes
reported rents received for the Durham Drive property of $1,000 and total
expenses for the Durham Drive property of $10,151 (including $1,094 for property
taxes) and claimed a net rental-property-loss of $9,151, i.e., $10,151 ! $1,000.
In the notice of deficiency, the IRS (1) disallowed all rental-property-
expense deductions Barnes claimed for both 2008 and 2009, and (2) re-
characterized the amounts Barnes reported as rental income for both 2008 ($800)
and 2009 ($1,000) as Barnes’s “other income” instead of as rental income.
Generally, the taxpayer bears the burden of proving that the determinations
in the notice of deficiency are erroneous. Rule 142(a); Welch v. Helvering, 290
U.S. at 115. The IRS bears the burden of proof for issues for which the taxpayer
shows that the requirements of section 7491(a) are satisfied. Higbee v.
Commissioner, 116 T.C. at 442; see Rolfs v. Commissioner, 135 T.C. at 483
(taxpayer bears burden of proving that requirements of section 7491(a) have been
met). With respect to the tax treatment of Barnes’s rental income and expenses for
the Durham Drive property we conclude that Barnes has failed to prove that the
requirements of section 7491(a) have been met. Therefore, Barnes bears the
burden of proof with respect to the rental-property-expense deductions.
- 94 -
[*94] At trial Barnes presented documentary proof of payment for expenses
related to the Durham Drive property of only $1,325 for 2008 and $2,287 for
2009. In her post-trial briefs Barnes continued to claim that she was entitled to
rental-property-expense deductions of $10,274 and $10,151 for 2008 and 2009,
respectively, the amounts she had reported on her tax returns.
The IRS contends that section 280A(a) bars Barnes from deducting
expenses attributable to the Durham Drive property because, according to the IRS,
the rent Barnes charged to her tenant (a cousin named Timothy Dixon) was below
the fair-rental value of the property. The IRS raises no other argument that the
deductions Barnes claimed as the expenses of the Durham Drive property should
be disallowed.
As discussed supra, Barnes inherited a 50% interest in the Durham Drive
property from her father upon his death in 2001. Cassandra Mallett, Barnes’s
sister, inherited the other 50% interest in the Durham Drive property. Her father’s
will gave Barnes the option to buy her sister’s ownership interest in the Durham
Drive property for $16,000. But Barnes did not buy her sister’s ownership interest
in the Durham Drive property until 2013. Thus, at all times during the 2008 and
2009 tax years Barnes and her sister each held a 50% interest in the Durham Drive
property.
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[*95] Barnes rented the Durham Drive property to her cousin, Timothy Dixon,
during 2008 and 2009. She charged Dixon $200 per month in rent. At $200 per
month, Dixon should have paid $2,400 in each year. But Barnes received from
Dixon rent of only $800 for 2008 and $1,000 for 2009.22 Despite Dixon’s failure
to pay the full rent, Barnes never began eviction proceedings against him.
The evidence at trial demonstrates that the Durham Drive property was
worth at least $275,000 in 2008 and 2009.23 As we have said, Barnes bears the
22
In the notice of deficiency the IRS, consistent with the amounts reported
on Barnes’s tax returns, included in Barnes’s income the total rents that Barnes
received for the Durham Drive property--$800 for 2008 and $1,000 for 2009.
Barnes did not argue that she should include only 50% of the rents in her income
(because her sister owned 50% of the property in 2008 and 2009). Therefore, we
sustain the IRS’s uncontested determinations, consistent with Barnes’s tax returns,
that 100% of the rents received for the Durham Drive property are includible in
Barnes’s income.
23
Neither party takes a position regarding the value of the Durham Drive
property, but several documents were provided at trial and admitted into evidence
that relate to the value of the Durham Drive property. According to electronic
printouts from the website http://www.hcad.org/records, the value of the Durham
Drive property (both the land and the structure) was $276,176 as of both January
1, 2008 and 2009. According to a document titled “Duplicate Tax Receipts” from
the Harris County Tax Assessor-Collector, the tax value of the Durham Drive
property was $276,176 in 2008 and 2009. According to the summary page for an
insurance policy that Barnes purchased for the Durham Drive property from
Farmers Insurance Exchange, the value of the Durham Drive property was
estimated to be $283,000 in 2008 and $288,000 in 2009.
Although it is true that Barnes bought her sister’s one-half interest in the
Durham Drive property in 2013 (for $3,000), this purchase (between sisters) is not
(continued...)
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[*96] burden of proving the fair rental value of Durham Drive property. See Rule
142(a). Although Barnes attempted to explain that she had to rent out the Durham
Drive property at a low rent because of damage to the house, she did not give
details regarding the damage. The alleged damage is not readily discernable from
the pictures she introduced. We do not know how much it would have cost Barnes
(or any tenant) to repair the alleged damage. (If it would have cost very little to
repair the damage, then the damage would not have justified a substantial
reduction in rent.) Additionally there is no evidence in the record of the market
rent for houses comparable to the Durham Drive property (damaged or
undamaged). The rent Barnes charged Dixon ($200 per month, or $2,400 on an
annualized basis) is relatively low compared to the $275,000 value of the house.
We are unwilling to ascribe the seemingly low rent either to the damage to the
house or to prevailing market conditions. For the foregoing reasons, we conclude
that Barnes failed to prove that the Durham Drive property was rented for a fair
rental value at any point during 2008 or 2009.
To determine whether Barnes used the Durham Drive property as a
residence during each taxable year, we first calculate the number of days she used
23
(...continued)
a reliable guide to the value of the Durham Drive property.
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[*97] the property for personal purposes during each year. Because Dixon used
the property every day during each of the years, and because Dixon did not pay
fair rental value for any of these days, Barnes is deemed to have used the property
for personal purposes on all 365 days of each year. See sec. 280A(d)(2). Next we
compute the greater of (a) 14 days and (b) 10% of the number of days during each
year for which the property was rented at a fair rental value. Sec. 280A(d)(1).
The property was rented at a fair rental value during 0 days of each year. The
greater of 14 days and 0 days is 14 days. The number of days each year Barnes
used the property for personal purposes--365 days--is greater than 14 days.
Therefore, Barnes used the Durham Drive property as a residence during each
taxable year. Barnes cannot deduct expenses with respect to the Durham Drive
property, with a potential exception in this case for property taxes. See sec.
280A(a) and (b).
Section 280A(b) provides that “[section 280A](a) shall not apply to any
deduction allowable to the taxpayer without regard to its connection with his trade
or business (or with his income-producing activity).” Section 164(a)(1) allows a
deduction for certain taxes, including state and local property taxes, regardless of
whether they were paid or incurred in connection with a trade or business or
income-producing activity. See Tschetter v. Commissioner, slip op. at 21.
- 98 -
[*98] Therefore, section 280A(a) does not limit deductions for property taxes. See
secs. 164(a)(1), 280A(b); DiDonato v. Commissioner, at *96. Accordingly, even
though we hold that Barnes used the Durham Drive property as a residence during
each year, Barnes might still be entitled to deduct the property taxes that she paid
for the Durham Drive property for each tax year at issue.
For 2008, Barnes paid no property taxes (or any other expenses of the type
that would not be barred by section 280A(a)) for the Durham Drive property.
For 2009, Barnes reported payment of $1,094 in property taxes for the
Durham Drive property. The IRS fully disallowed deductions for the reported
rental expenses ($10,151 for 2009) reported on Barnes’s Schedule E for the
Durham Drive property, which included the $1,094 in property taxes for the
Durham Drive property. Therefore, the IRS disallowed any deduction for property
taxes for the Durham Drive property.24
24
Barnes reported $1,094 of property taxes as a deduction on Schedule E,
the attachment on which she reported the income and expenses of the Durham
Drive property. Barnes also reported $2,505 of real-estate taxes as a deduction on
Schedule A to her 2009 return, but the return does not describe these taxes. Thus,
the return does not explain which property the $2,505 in taxes relates to. The
notice of deficiency allowed the entire $2,505 as a deduction. The IRS does not
argue that the $932.49 Barnes paid in property taxes on the Durham Drive
property in 2009 was part of the $2,505 deduction reported by Barnes on her
Schedule A and disallowed by the notice of deficiency.
- 99 -
[*99] The trial record contains a check for $932.49 for property taxes for the
Durham Drive property that Barnes paid in 2009. We find that Barnes paid
$932.49 for property taxes for the Durham Drive property in 2009. Section 164(a)
allows a deduction for state and local property taxes. Accordingly, we hold that
Barnes is entitled to deduct the $932.49 in property taxes that she paid for the
Durham Drive property in 2009.25
5. Barnes is liable for section-6662(a) accuracy-related penalties for 2008 and
2009.
In the notice of deficiency the IRS determined that Barnes was liable for
accuracy-related penalties under section 6662(a) of $4,606.40 and $6,352.60 for
2008 and 2009, respectively. The IRS contends that Barnes’s underpayment of tax
for each of these years is attributable to negligence or, alternatively, to a
substantial understatement of income tax.
Section 6662(a) imposes a 20% penalty on an underpayment of tax
attributable to any of the causes listed in subsection (b). These causes include “(1)
[n]egligence or disregard of rules or regulations” and “(2) [a]ny substantial
understatement of income tax.” Sec. 6662(b)(1) and (2). An understatement of
25
Barnes was only a 50% owner of the Durham Drive property in 2009, but
the IRS does not argue that the $932.49 deduction should be reduced by 50%
accordingly.
- 100 -
[*100] income tax generally is the excess of (i) the amount of the tax required to
be shown on the return for the taxable year, over (ii) the amount of the tax
imposed which is shown on the return. Sec. 6662(d)(2)(A). A substantial
understatement of income tax is defined as any understatement exceeding the
greater of “(i) 10 percent of the tax required to be shown on the return for the
taxable year, or (ii) $5,000.” Sec. 6662(d)(1)(A). The penalty under section
6662(a) does not apply if the taxpayer can demonstrate that the taxpayer (1) had
reasonable cause for the underpayment and (2) acted in good faith with respect to
the underpayment. Sec. 6664(c)(1).
With respect to any penalty, section 7491(c) imposes the burden of
production on the IRS. Higbee v. Commissioner, 116 T.C. at 446. This requires
the IRS to come forward with evidence indicating that it is appropriate to impose
the relevant penalty. Sec. 7491(c); Higbee v. Commissioner, 116 T.C. at 446.
Once the IRS has met this burden, the taxpayer bears the burden of proving that
the penalty is inappropriate because, for example, the taxpayer acted with
reasonable cause and in good faith. Higbee v. Commissioner, 116 T.C. at 447.
Whether substantial understatements of income tax exist, and if so, in what
amounts, will depend upon the recalculation of Barnes’s 2008 and 2009 tax
liabilities given the stipulations and concessions made by the parties and the
- 101 -
[*101] holdings reached in this opinion. We leave these calculations to the parties
under Rule 155.
Regardless of whether her underpayments were due to substantial
understatements of income tax, we hold that they were due to Barnes’s negligence.
For the years in issue, we conclude that Barnes acted negligently by failing to keep
adequate books and records and by not exercising reasonable care in determining
her proper tax liabilities. See sec. 1.6662-3(b)(1), Income Tax Regs. Barnes was
unable to substantiate the business expenses, charitable contributions, and nearly
all of the rental losses that the IRS disallowed and disputed at trial. Barnes
claimed Schedule-C deductions that were personal, such as her home internet
expenses, or not supported by adequate documentation, such as her claimed car
and truck expenses. The mileage spreadsheets that Barnes adduced in an attempt
to substantiate her claimed car and truck expenses lacked credibility and
reliability. In sum, Barnes was negligent in complying with her income tax
obligations.
Barnes asserts a defense to the section-6662(a) penalties on the basis of
reasonable cause and good faith. See sec. 6664(c)(1). In her post-trial briefs,
Barnes alleges that
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[*102] [i]n preparing her tax returns, the petitioner [i.e., Barnes] specifically
consulted IRS publications 17, 463, 535 and 529. * * * The petitioner
introduced as evidence receipts for almost every expense deducted.
However, if any receipts were missing, the petitioner “provided proof
that the expenses herein dispute were paid” whether with bank
statements or credit card statements.
Barnes’s underpayments did not result from any apparent misunderstanding of the
tax laws but rather from her failure to substantiate expenses underlying claimed
deductions with adequate records. Barnes failed to provide adequate records
substantiating most of the disputed business expenses, charitable contributions,
and rental losses. Barnes is an accountant with decades of experience preparing
federal income-tax returns. She knew, or should have known, that she was
required to maintain adequate records to support the various tax positions that she
reported. Because of her failure to do so we hold that Barnes has not shown that
her underpayment of tax for 2008 or 2009 was due to reasonable cause and good
faith.
For the foregoing reasons, we conclude that Barnes has not established a
defense to, and is liable for, the section 6662(a) accuracy-related penalties for
2008 and 2009.
- 103 -
[*103] In reaching our holdings, we have considered all arguments made,
and, to the extent not mentioned, we conclude that they are moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.