T.C. Summary Opinion 2009-168

UNITED STATES TAX COURT

BERNICE E. AKANNO, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 13778-07S. Filed November 12, 2009.

Wilfred I. Aka, for petitioner.

Alexander D. Devitis, for respondent.

COHEN, Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect

when the petition was filed. Pursuant to section 7463(b), the

decision to be entered is not reviewable by any other court, and

this opinion shall not be treated as precedent for any other

case. Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the years in issue, and
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all Rule references are to the Tax Court Rules of Practice and

Procedure.

Respondent determined deficiencies of $30,580 and $39,148 in

petitioner’s Federal income taxes for 2004 and 2005,

respectively. Respondent also determined section 6662(a)

penalties of $6,116 and $7,829.60 for 2004 and 2005,

respectively. After concessions, the issues for decision are

whether petitioner received unreported interest income, whether

she is entitled to itemized deductions or rental loss deductions

beyond those conceded by respondent, whether she is entitled to

exemptions for dependents not conceded by respondent, and whether

she is liable for the accuracy-related penalties.

Background

Petitioner resided in California at the time her petition

was filed. During 2004 and 2005, petitioner worked full time as

a licensed nurse, primarily working the night shift at various

hospitals. 

During the years in issue, petitioner had an ownership

interest in a 12-unit residential property. Ten of the units

were rented or available for rent. Petitioner and some of her

relatives occupied part of the property as their residence. 

Petitioner actively participated in management of the property

but was not a real estate professional during 2004 or 2005.
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On her Form 1040, U.S. Individual Income Tax Return, for

2004, petitioner claimed four dependents, including her child,

two uncles, and a niece. On her Form 1040 for 2005, petitioner

claimed six dependents, including her child, two uncles, a niece,

and two unidentified persons. One of the uncles claimed as a

dependent on both returns filed his own Federal income tax return

for 2004 on which he claimed a personal exemption, an earned

income credit, and a refund. Respondent has conceded

petitioner’s claims with respect to her child but disputes the

additional dependent exemptions claimed for the uncles, niece,

and unidentified persons. 

On her Forms 1040 for 2004 and 2005, petitioner reported,

respectively, wages of $112,413 and $178,102 and deducted rental

losses of $87,624 and $123,877. During the proceedings in this

case, she reduced her claimed rental expenses from $117,212 to

$108,137 for 2004 and from $123,877 to $104,378 for 2005.

Petitioner failed to report a State income tax refund received in

2004, and the parties have now agreed that she must include in

income the amount of $660 for that year. She failed to report

$136 and $116 in interest income on an account jointly maintained

with her brother during 2004 and 2005, respectively. Petitioner

has conceded that she failed to report $17,936 in rental income

in 2005.
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Respondent has conceded that petitioner is entitled to

deduct mortgage interest of $18,554 for 2004, has allowed

comparable mortgage interest claimed in 2005, and has conceded an

additional $20,000 per year in other rental expenses, including

estimated depreciation. In making the concessions, respondent

considered petitioner’s personal use of a portion of the property

and the probability that her coowner paid some of the expenses.

On her tax returns, petitioner claimed itemized deductions

including unreimbursed employee business expenses of $18,341 in

2004 and $15,767 in 2005. The claimed employee business expenses

consisted of vehicle expenses for which she failed to maintain 

contemporaneous records or other means of substantiation required

by section 274(d). Respondent has conceded that petitioner is

entitled to deduct $4,000 in employee business expenses for each

year.

Procedural Matters

Because petitioner failed to produce documents or answer

questions during the examination of her returns for 2004 and

2005, separate notices of deficiency were sent to her determining

unreported income and disallowing claimed exemptions and

deductions. On June 18, 2007, she filed a petition in which she

elected to have this case conducted under the small tax case

procedures established pursuant to section 7463. She requested

Los Angeles, California, as the place of trial.
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By notice served April 4, 2008, this case was set for trial

in Los Angeles on September 8, 2008. Petitioner failed to appear

for trial on September 8, and counsel for respondent appeared and

filed a motion to dismiss the case for lack of prosecution. The

motion recounted petitioner’s failure to respond to

correspondence and phone calls from respondent’s counsel in

attempts to resolve this case or prepare it for trial. The Court

ordered petitioner to show cause why the case should not be

dismissed. On December 10, 2008, petitioner’s response to order

to show cause was filed. In her response, petitioner attributed

her failure to appear for trial to domestic difficulties. She

represented that she had retained the services of Wilfred I. Aka

to help her present the information that would support her

position. The Court’s order to show cause was discharged, and

the case was returned to the general docket for trial or other

disposition.

By notice served January 2, 2009, this case was set for

trial in Los Angeles on June 1, 2009. On April 17, 2009,

respondent filed a motion for an order to show cause pursuant to

Rule 91(f), setting forth petitioner’s continuing failure to

respond to communications from respondent. Attached to

respondent’s motion was a proposed stipulation and a series of

exhibits. Petitioner was ordered to show cause by May 6, 2009,

why the matters set forth in the proposed stipulation attached to
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respondent’s motion should not be deemed stipulated. Petitioner

failed to respond, the order to show cause was made absolute, and

the facts and evidence set forth in respondent’s proposed

stipulation were deemed established for purposes of this case.

The case was called for trial on June 1 and recalled on June

2, 2009. Petitioner orally moved for a continuance, which was

granted over respondent’s objection. The case was then set for

trial during the trial session commencing on July 20, 2009, in

Los Angeles. On July 14, 2009, Wilfred I. Aka entered his

appearance as counsel of record. He had been involved with the

issues in the case, however, by at least December 2008 according

to petitioner’s response to the Court’s first order to show

cause.

When the case was called for trial on July 20, 2009,

petitioner had neither executed a stipulation of facts nor moved

to be relieved of the deemed stipulations. Petitioner testified

at trial, and certain documents were received in evidence. The

trial was conducted consistent with section 7463(a) and Rule

174(b), in that the Federal Rules of Evidence were not applied. 

Leading questions were permitted. In part because of the small

case designation, respondent’s counsel consented to withdrawal of

one of the items previously deemed stipulated.

At the conclusion of trial, petitioner sought to revoke her

election of small case procedures made when the petition was
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filed and applied in the two prior trial settings. The Court

ruled that the request to revoke the election was untimely. The

only issues in this case are routine and factual. There is no

reason to discontinue the proceedings conducted pursuant to

petitioner’s election and followed through trial by the parties

and the Court. See sec. 7463(d); Rule 171(c). 

Also at the conclusion of trial, the Court commented on the

unsatisfactory state of the record and suggested that the parties

meet in an attempt to exchange additional information and resolve

additional issues. The parties were ordered to report on any

progress within 30 days and were given options concerning

posttrial briefs. Petitioner did not comply with the Court’s

suggestion and instead filed a brief that ignored evidence in the

record and argued facts that were contradicted or not supported

by evidence in the record. She declined respondent’s offer to

interview her claimed dependents. Respondent in a posttrial

brief nonetheless made the concessions mentioned above.

Discussion

Generally, petitioner has the burden of proving that the

determinations in the notices of deficiency are erroneous. See

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Petitioner has not satisfied the conditions for shifting the

burden of proof to respondent under section 7491(a) because she

did not comply with the requirements to substantiate deductions,
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did not maintain all required records, and did not cooperate with

reasonable requests for information, documents, meetings, and

interviews. See sec. 7491(a)(2). 

The only unreported income item remaining in dispute is the

interest on a joint bank account, which petitioner admitted

receiving. She argues, through her counsel, that she was not

required to report that interest income because her brother

reported it on his returns, but she testified that she does not

know whether her brother reported it. Petitioner’s argument with

respect to this item is contrary to her testimony and is

unavailing. She must include in her income $136 for 2004 and

$116 for 2005. See sec. 61(a)(4).

Petitioner failed to provide any documentary evidence or

specific testimony that she provided more than half of the

support for her uncles and her niece or any other claimed

dependent. (For 2005 petitioner failed to provide any evidence

that her niece had not provided over one-half of her own support

for the year. See sec. 152(c)(1)(D), (2)(B)). She testified

only that she provided support for them as follows:

Q About how much of living expenses did you

provide for these people?

A As much as their need was, and I provided

enough for what they needed; for what they need as

their needs I did. But I can’t put together right now

how much it is.
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She did not name in her testimony the unidentified persons

claimed on her return for 2005. Although she said that her

relatives were not employed during the years in issue, she did

not explain or negate other sources of their support, such as

other relatives or public assistance. See section 152(a) in

effect for 2004 and section 152(d)(1) in effect for 2005. Her

testimony in this regard is vague and unreliable. She has not

established her entitlement to the dependency exemptions.

It appears from petitioner’s testimony and from the

documents in evidence that petitioner used part of the rental

property as her residence. The property address was shown as

petitioner’s address on the Forms W-2, Wage and Tax Statement,

received in evidence. Petitioner produced miscellaneous receipts

relating to work done at the property and to expenses, such as

utilities, relating to the property. Petitioner did not allocate

the expenses of the property between rental expenses and expenses

attributable to her residence, and she did not prove that she

paid the amounts claimed. Real property tax records relating to

the building occupied and rented by petitioner suggested that she

was a coowner of the property with her brother and that 2 units

of the 12-unit property were “owner occupied”. Various receipts

petitioner presented at the time of trial did not fully

substantiate even the reduced amounts claimed for rental

expenses. Petitioner’s reported earnings and rents received do
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not appear sufficient to support the multiple dependents and to

pay the deductible expenses that she claimed. No deductions in

excess of those respondent conceded are allowable. 

Petitioner’s claimed deductions for business use of her

vehicle have not been substantiated by adequate records as

required by section 274(d). A passenger vehicle is listed

property under section 280F(d)(4). Thus deductions are

disallowed unless the taxpayer adequately substantiates the

amount of the expense; the time and place of business use of the

vehicle; and the business purpose of the vehicle use. These

rules were adopted to preclude estimates based solely on a

finding that some deductible business expenses were incurred, as

allowed in other contexts. See Sanford v. Commissioner, 50 T.C.

823, 827-828 (1968), affd. per curiam 412 F.2d 201 (2d Cir.

1969). 

Petitioner’s counsel reconstructed the estimated business

mileage petitioner claimed, guessing at odometer readings during

2004 and 2005, and substantially reduced the employee business

expenses claimed for vehicle use. The reconstruction used her

current address rather than the address of her residence in 2004

and 2005 and was patently unreliable. Petitioner’s testimony did

not provide the necessary substantiation of time and place that

the expenses were incurred. Petitioner is not entitled to any
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deductions for business use of her vehicle in excess of the

amounts respondent conceded.

During the examination of her returns and for 2 years after

her petition was filed, petitioner did not produce documents or

otherwise cooperate in the determination of her tax liabilities. 

With respect to the disallowed deductions and exemptions,

petitioner declined the opportunity after the trial, which

included respondent’s offer to interview her claimed dependents,

to establish greater entitlements. For over 6 months before

trial, she had a tax professional assisting her. At this point,

we infer that no additional substantiating or corroborating

evidence exists.

Petitioner has offered no explanation for the failure to

report $17,936 in rental income in 2005 and a State income tax

refund in 2004. Her alleged reason for not reporting interest

received in both years is contradicted by her testimony. She

alleges in her posttrial brief that she provided all of the

underlying documents to her tax preparer and that they were

subsequently lost without fault on her part, but the evidence

does not support that assertion. At trial, petitioner merely

responded to leading questions about the preparation of her

returns; she did not testify about any lost records. 

Section 6662(a) and (b)(1) and (2) imposes a 20-percent

accuracy-related penalty on any underpayment of Federal income
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tax attributable to a taxpayer’s negligence or disregard of rules

or regulations, or a substantial understatement of income tax.

Section 6662(d)(1)(A) defines “substantial understatement of

income tax” as an amount exceeding the greater of 10 percent of

the tax required to be shown on the return or $5,000. In this

case, a Rule 155 computation will be required because of

respondent’s concessions, and it is not clear at this point

whether the remaining understatements will be substantial.

Respondent asserts petitioner’s negligence as an alternative

ground for imposition of the penalty for each year. Petitioner

failed to comply with substantiation requirements specific to the

deductions and exemptions claimed on her returns, claimed

deductions on the returns in excess of those established or even

claimed at trial, and failed to report income in each year. 

These indicia of negligence satisfy respondent’s burden of

production with respect to the penalties. See sec. 7491(c). 

The accuracy-related penalty under section 6662(a) will not

be imposed with respect to any portion of the underpayment as to

which the taxpayer acted with reasonable cause and in good faith.

Sec. 6664(c)(1). The decision as to whether a taxpayer acted

with reasonable cause and in good faith is made by taking into

account all of the pertinent facts and circumstances. Sec.

1.6664-4(b)(1), Income Tax Regs. Petitioner’s conclusory denials

of negligence and generalized assertions that she provided all of
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the necessary information to her tax return preparer are

unpersuasive on the record in this case and do not establish

reasonable cause. The section 6662(a) penalties will be

sustained.

In the answer, respondent asserted that petitioner’s rental

losses were limited by section 469, relating to passive

activities. Because we do not allow any deductions beyond those

conceded by respondent, it is not necessary to address that

issue. We have considered the other arguments of the parties;

they are either irrelevant or lack merit. For the reasons set

forth above,

Decision will be entered

under Rule 155.