T.C. Memo. 2017-8
UNITED STATES TAX COURT
LOIS BRODMERKLE AND
ROBERT HOWARD BRODMERKLE, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 108-13. Filed January 9, 2017.
Lois Brodmerkle and Robert Howard Brodmerkle, pro sese.
Amy B. Ulmer, Janice B. Geier, and Nhi T. Luu, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
NEGA, Judge: Respondent issued a notice of deficiency to petitioners
determining deficiencies in income tax, additions to tax, and accuracy-related
penalties as follows:1
1
Unless otherwise indicated, all section references are to the Internal
(continued...)
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[*2]
Addition to tax Penalty
1
Year Deficiency sec. 6651(a)(1) sec. 6662(a)
2007 $32,940 $8,235 $6,588
2008 49,541 12,385 9,908
2009 33,138 --- 6,628
2010 37,282 --- 7,456
1
The amounts referred to herein reflect the updated calculations by
respondent. Respondent reduced the amount of the deficiency from that reflected
on the notice of deficiency for tax years 2007 and 2008 for two reasons: First
respondent found errors with respect to the Internal Revenue Service’s bank
deposit analysis and therefore reduced the amount of unreported Schedule C gross
receipts for 2008. Second, petitioners provided respondent with documentation
with respect to their claimed deductions for 2007 and 2008. The updated
deficiencies for 2007 and 2008 also reduce the associated additions to tax and
penalties for those years.
The issues for decision are whether respondent made proper adjustments to
petitioners’: (1) deductions claimed on Schedule A, Itemized Deductions, for tax
years 2007-10, (2) deductions claimed on Schedule C, Profit or Loss From
Business, for tax years 2007-10, (3) Schedule C gross receipts for tax year 2008,
(4) other income reported on Form 1040, U.S. Individual Income Tax Return, for
1
(...continued)
Revenue Code (Code) in effect for the years at issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure. All dollar amounts are rounded to
the nearest dollar.
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[*3] tax year 2010, (5) claimed net operating loss (NOL) carryovers for tax years
2007-10, and (6) unclaimed deductions for self-employment health insurance for
tax years 2008 and 2009.2
Additionally, we must determine whether petitioners are liable for additions
to tax under section 6651(a)(1) for tax years 2007 and 2008 and accuracy-related
penalties under section 6662(a) for tax years 2007-10. We find for respondent in
regard to each of the above issues.
FINDINGS OF FACT
Some of the facts are stipulated and are so found. The stipulation of facts
and the attached exhibits are incorporated herein by this reference. Petitioners
resided in Oregon when the petition was filed.
During the taxable years at issue Robert Brodmerkle was the owner of R H
Brodmerkle Enterprises, which he operated as a sole proprietorship. Petitioners,
filing jointly for the tax years at issue, reported tax items for R H Brodmerkle
Enterprises on Schedules C, attached to their Forms 1040. Petitioners did not
timely file their Federal income tax returns for 2007 and 2008 but did timely file
their returns for 2009 and 2010.
2
Petitioners have not challenged respondent’s determination allowing a
deduction for self-employment health insurance for tax years 2008 and 2009.
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[*4] On October 4, 2012, respondent sent petitioners a notice of deficiency for
tax years 2007-10 and made the following adjustments to their Federal income tax
returns for those years. First, respondent determined petitioners failed to report
$24,637 of adjusted gross income for taxable year 2008, by using the bank
deposits method, and $5,005 of cancellation of indebtedness income from FIA
Card Services, N.A., for taxable year 2010. Next, respondent disallowed
petitioners’ claimed Schedule A deductions and Schedule C expense deductions
for the tax years at issue in the following amounts:
Disallowed Schedule A Disallowed Schedule C
Year itemized deductions expense deductions
2007 $37,098 $176,419
2008 25,658 199,371
2009 32,903 133,606
2010 50,771 148,094
The allowed itemized deductions totaled less than the standard deduction for each
of tax years 2009 and 2010; and thus in lieu of the claimed Schedule A itemized
deductions, respondent allowed petitioners the standard deduction for each of
those tax years. Additionally, the notice of deficiency disallowed petitioners’
claimed NOL carryover deductions for tax years 2007-10. Respondent also
determined that petitioners were entitled to previously unclaimed self-employed
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[*5] health insurance deductions of $4,044 and $3,354 for tax years 2008 and
2009, respectively, as well as deductions for self-employment adjusted gross
income for tax years 2007-10 of $7,725, $9,032, $8,360, and $8,306, respectively.
Lastly as a result of the aforementioned adjustments, the notice of deficiency
determined deficiencies in both petitioners’ Federal income tax and self-
employment tax. Petitioners timely filed a petition for redetermination of the
deficiencies.
On March 9, 2015, respondent served on petitioners a request for
admissions. Petitioners did not respond to the request for admissions. As a result,
all matters as to which respondent requested admissions--including $24,637 of
unreported income calculated by using the bank deposits method, and $5,005 of
cancellation of indebtedness income--are deemed admitted under Rule 90(c) and
are conclusively established pursuant to Rule 90(f). See Marshall v.
Commissioner, 85 T.C. 267, 272 (1985); Freedson v. Commissioner, 65 T.C. 333
(1975), aff’d, 565 F.2d 954 (5th Cir. 1978).
OPINION
I. Burden of Proof
The Commissioner’s determinations in a notice of deficiency are generally
presumed correct, and the taxpayer ordinarily bears the burden of proving those
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[*6] determinations erroneous. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). For cases appealable to the Court of Appeals for the Ninth Circuit,
such as the current case, the Commissioner may not rely on the presumption of
correctness with regard to a deficiency determination unless that determination is
supported by a proper foundation of substantive evidence. Weimerskirch v.
Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979) (indicating the proper
foundation of substantive evidence is a “minimal evidentiary foundation”), rev’g
67 T.C. 672 (1977); see Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d,
445 F.2d 985 (10th Cir. 1971).
Deductions are a matter of legislative grace. Deputy v. Du Pont, 308 U.S.
488, 493 (1940). Taxpayers must comply with specific requirements for any
deductions claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Commissioner, 292 U.S. 435, 440 (1934). If,
however, the taxpayer produces credible evidence with respect to any factual issue
relevant to ascertaining his Federal income tax liability, the burden of proof shifts
from the taxpayer to the Commissioner as to that factual issue. Sec. 7491(a)(1).
The shifting of the burden of proof, however, is conditioned upon the taxpayer’s
first demonstrating that he meets the requirements of section 7491(a)(2),
including: (1) substantiating any item as required by the Code, (2) maintaining all
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[*7] records required by the Code, and (3) cooperating with the Commissioner’s
reasonable requests for witnesses, information, documents, meetings, and
interviews. See sec. 6001; sec. 1.6001-1(a), Income Tax Regs. Petitioners do not
contend, and the evidence does not establish, that the burden of proof shifts to
respondent under section 7491(a) as to any issue of fact.
The Commissioner bears the burden of production with respect to any
additions to tax under section 6651 and accuracy-related penalties under section
6662. See sec. 7491(c); Higbee v. Commissioner, 116 T.C. 438, 446 (2001).
Once the burden of production is met, a taxpayer bears the burden of proof,
including the burden of proving reasonable cause for late filing or underpayment
of Federal income tax. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at
446-447.
II. Petitioners’ Tax Liabilities
Section 162(a) allows a taxpayer to deduct “all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or
business”.
Section 172(a) allows a taxpayer to deduct an amount equal to the aggregate
of NOL carryovers plus NOL carrybacks to the taxable year. A taxpayer bears the
burden of establishing the existence and proper amount of the NOL claimed to be
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[*8] carried to the taxable year and can satisfy that burden by filing with his return
for such year a concise statement which sets forth the amount of the NOL
deduction claimed and all material and pertinent facts relative thereto, including a
showing of the NOL deduction computation. Hoopengarner v. Commissioner,
T.C. Memo. 2003-343 (citing United States v. Olympic Radio & Television, Inc.,
349 U.S. 232, 235 (1955), Keith v. Commissioner, 115 T.C. 605, 621 (2000), and
Jones v. Commissioner, 25 T.C. 1100, 1104 (1956), rev’d and remanded on other
grounds, 259 F.2d 300 (5th Cir. 1958)); sec. 1.172-1(c), Income Tax Regs.
Taxpayers are required to maintain records sufficient to establish the
amounts of income, deductions, credits, and other items reported on their Federal
tax returns. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
In respondent’s request for admissions, respondent indicated that petitioners
had $24,637 of unreported income for 2008 as determined by the bank deposits
method. Petitioners failed to respond to the request for admissions, and thus it is
deemed admitted under Rule 90(c) and conclusively established pursuant to Rule
90(f) that petitioners had $24,637 of unreported income for 2008. Respondent has
thus satisfied his burden of establishing a proper foundation of substantive
evidence with regard to the alleged unreported income. See Weimerskirch v.
Commissioner, 596 F.2d at 361-362.
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[*9] Before trial petitioners submitted to respondent documents consisting of
invoices and canceled checks, which are reflected in the current disputed
deficiencies. See table supra p. 2. Petitioners failed to submit additional
documentation before or during trial. At trial petitioners testified that they could
provide additional documentation relevant to the years at issue should the Court
grant them leave. On May 17, 2016, the Court granted petitioners leave until June
9, 2016, to produce any additional documentation that would have been offered
into evidence at trial. Contrary to their testimony, petitioners failed to provide
additional documentation after trial with respect to their alleged unreported
income or their claimed deductions. Thus petitioners have not satisfied their
burden, or substantiated any of their claimed deductible expenses currently in
dispute. Accordingly, petitioners are not entitled to their claimed deductible
expenses to the extent determined by respondent.
III. Section 6651(a)(1) Additions to Tax for Tax Years 2007 and 2008
Section 6651(a)(1) provides for an addition to tax when a taxpayer fails to
file a return timely unless the taxpayer proves that the failure was due to
reasonable cause and not due to willful neglect. Late filing is due to reasonable
cause “[i]f the taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed time”. Sec. 301.6651-
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[*10] 1(c)(1), Proced. & Admin. Regs. For each month or fraction thereof for
which the failure continues, section 6651(a)(1) adds 5% of the tax required to be
shown on the return, up to a maximum addition of 25%.
The parties have stipulated that petitioners’ Federal income tax returns for
both tax years 2007 and 2008 were due on April 15, 2008 and 2009, respectively,
and that both returns were filed on April 11, 2010. Respondent has therefore
satisfied the burden of producing evidence that petitioners’ 2007 and 2008 tax
returns were filed late. See Wheeler v. Commissioner, 127 T.C. 200, 207-208
(2006), aff’d, 521 F.3d 1289 (10th Cir. 2008). At trial petitioners testified that
during the years at issue and continuing through the date of trial, they both
suffered from various medical conditions. We find that while these medical
conditions have been compounded and exacerbated over the years, they did not at
the time prevent petitioners from timely filing their 2007 and 2008 tax returns.
Further, petitioners have presented no other evidence to suggest that failure to
timely file was due to reasonable cause. Accordingly, we hold petitioners liable
for the additions to tax under section 6651(a)(1) for tax years 2007 and 2008.
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[*11] IV. Section 6662(a) Penalties Determined Against Petitioners for Tax
Years 2007-10
Section 6662(a) and (b)(1) and (2) imposes an accuracy-related penalty on
any portion of an underpayment of Federal income tax that is attributable to,
among other things, the taxpayer’s “negligence or disregard of rules or
regulations” or “substantial understatement of income tax.”
An understatement of Federal income tax is substantial if the amount of the
understatement for the taxable year exceeds the greater of 10% of the tax required
to be shown on the return or $5,000. Sec. 6662(d)(1)(A). If the understatements
of income tax for the years at issue are substantial, the Commissioner has satisfied
the burden of producing evidence that the penalties are justified.
Once the Commissioner has met his burden, the taxpayer may rebut the
evidence that a section 6662(a) accuracy-related penalty is appropriate if he can
demonstrate (1) reasonable cause for the underpayment and (2) that he acted in
good faith with respect to the amount paid. Sec. 6664(c)(1). A determination of
reasonable cause and good faith “is made on a case-by-case basis, taking into
account all pertinent facts and circumstances.” Sec. 1.6664-4(b)(1), Income Tax
Regs.
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[*12] After concessions, petitioners’ deficiency amounts for tax years 2007-10 are
$32,940, $49,541, $33,138, and $37,282, respectively. Petitioners reported
Federal income tax liabilities of zero for all of the years at issue. After
concessions, petitioners’ deficiency amounts for tax years 2007-10 exceed $5,000,
which is greater than 10% of the tax required to be shown on petitioners’ returns
for those years. The understatements of income tax for the years at issue are
substantial, and thus respondent’s burden has been satisfied.
Petitioners, again, point to their medical conditions as a defense to the
accuracy-related penalties and have not presented any other evidence of
reasonable cause for any portions of the underpayments. We find that petitioners’
medical conditions during the years at issue did not rise to the level of reasonable
cause and thereby preventing them from filing accurate tax returns. Accordingly,
we sustain the accuracy-related penalties respondent determined for those years.
To reflect the foregoing,
Decision will be entered
under Rule 155.