T.C. Memo. 1998-91

UNITED STATES TAX COURT

KERN S. AND SOLEDAD D. SMITH, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 27712-96. Filed March 3, 1998.

Kern S. Smith and Soledad D. Smith, pro sese.

Thomas G. Schleier, for Respondent.

MEMORANDUM OPINION

PARR, Judge: Respondent determined a deficiency in

petitioners' Federal income tax for the taxable year 1993 in the

amount of $60,448, an addition to tax of $15,113 under section

6651(a)(1), and a penalty of $12,090 under section 6662(a). All

section references are to the Internal Revenue Code in effect for

the taxable year in issue, and all Rule references are to the Tax
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1 Petitioners conceded that Mr. Kern Smith (petitioner)

received $183,585 as self-employment income which petitioners

failed to report. Respondent conceded petitioners are entitled

to deduct $114,394 in previously unclaimed deductions. 

Court Rules of Practice and Procedure, unless otherwise

indicated.

After a concession,1 the issues for decision are as follows:

(1) Whether petitioners are entitled to previously unclaimed 

Schedule C deductions in excess of the amount conceded by

respondent. We find they are not. 

(2) Whether petitioners are liable for an addition to tax

pursuant to section 6651 for late filing. We hold they are.

(3) Whether petitioners are liable for a penalty pursuant to

section 6662 for negligence. We hold they are.

Certain automatic adjustments will be required in the

calculation of self-employment tax and related items of a

computational nature flowing from our findings.

Some of the facts have been stipulated and are so found. 

The stipulated facts and accompanying exhibits are incorporated

into our findings by this reference. When they filed their

petition herein, petitioners resided in Oakland, California.

Petitioners filed their individual Federal income tax return

for 1993 on October 13, 1995. The return was due on April 15,

1994. Petitioners had neither sought nor been granted an

extension of time in which to file.
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Petitioners reported wages of $4,558 consisting of $950 paid

to Mrs. Soledad Smith (Mrs. Smith) by Heritage Flamingo

Apartments and $3,608.26 paid to Mr. Smith (petitioner) by

Alameda Newspapers, Inc. On line 12 (business income) of Form

1040, petitioners reported $16,147. They did not attach a

Schedule C as required, nor did they claim any deductions or cost

of goods sold. 

Petitioner also received nonemployee compensation from the

Alameda Newspaper Group in the amount of $183,585 during 1993,

which petitioners failed to report. Neither did they deduct any

expenses connected with this sum. 

A statutory notice of deficiency was sent to petitioners on

October 1, 1996. On June 26, 1997, they attempted to file an

amended income tax return, Form 1040X, on which they reported the

$183,585 and claimed deductions totaling $178,636. 

Although requested to do so, petitioners did not meet with

respondent or present any substantiation for the claimed

deductions until January 26, 1998, 6 days before the beginning of

the trial session on which this case was scheduled. The Court’s

standing pre-trial order (which was served on petitioners by the

Court on August 26, 1997, and a copy of which respondent had sent

them when requesting an earlier meeting) stated: “Any documents

or materials which a party expects to utilize in the event of

trial * * *, but which are not stipulated, shall be identified in
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writing and exchanged by the parties at least 15 days before the

first day of the trial session.” No such documents were shown to

respondent within the allotted time, and the Court ruled that

they were inadmissible at trial. Nevertheless, in the interest

of fairness respondent’s agent did consider petitioners'

documents and conceded deductions totaling $114,394, as follows:

Schedule C On 1040X Allowed 

Advertising $4,271 $5,579 

Car and truck 12,972 9,040 

Depreciation 1,088 0 

Insurance 283 283 

Legal & prof. 3,441 3,441 

Office exp. 1,244 1,244 

Other business prop. 5,750 0 

Supplies 5,736 3,625 

Taxes and license 835 835 

Meals & ent. 91 91 

Utilities 811 811 

Answering service 1,890 0 

Bank charges 224 224 

Consulting 1,500 1,500 

Demos/training 81 81 

Dues/pubs. 75 75 

Equinox 16,009 0 

Management fees 5,970 0 

Misc. 310 310 

Newspaper 10,813 0 

Postage 471 471 

Printing 781 781 

Sales promotion 1,011 1,011 

Telephone 6,292 6,477 

Carriers 96,687 78,515 

 Totals $178,636 $114,394 

Respondent's determinations in the statutory notice of

deficiency are presumed correct, and petitioners bear the burden
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of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S.

111, 115 (1933). Section 61(a) includes in gross income all

income from whatever source derived, including gross income

derived from business. Sec. 61(a)(2).

Petitioners have shown, and respondent has conceded, that

they are entitled to deduct $114,394 in business expenses, and we

so find.

Section 6651(a)(1) imposes an addition to tax for failure to 

file a timely return, unless the taxpayer establishes: (1) The

failure did not result from willful neglect, and (2) the failure

was due to reasonable cause. Petitioners did not offer any

reason for the late filing of their return. Therefore,

respondent’s determination is sustained.

Next we consider whether petitioners are liable for a

negligence penalty under section 6662(a). The penalty amounts to

20 percent of the portion of the underpayment attributable to

negligence. Respondent determined that the entire underpayment

is due to negligence. We agree.

"Negligence" includes any failure to make a reasonable

attempt to comply with the Internal Revenue Code. Sec. 6662(c).

Petitioner failed to report $183,585 in income. In response

to a question from the Court, he testified that he was trying to

operate his business out of a trust in order to avoid taxes, but

that he "did not do it correctly". He apparently believed that
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merely by designating his business income as "trust" income he

would not have to report it. Petitioner did not file a trust

return, nor did either petitioner consult an accountant or an

attorney to determine whether the $183,585 should be reported. 

In short, petitioners did not do what a reasonable and ordinarily

prudent person would do under the circumstances. Neely v.

Commissioner, 85 T.C. 934, 947 (1985). Moreover, though

instructed on line 12 of Form 1040 to do so, petitioners did not

file a Schedule C, even as to the business income of $16,147

which they did report. We find that petitioners are liable for

the negligence penalty.

To reflect the foregoing, 

 Decision will be entered

 under Rule 155.