T.C. Memo. 2002-101

UNITED STATES TAX COURT

HIEN X. PHAM, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8004-00. Filed April 15, 2002.

Hien X. Pham, pro se.

Michael A. Skeen, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in

petitioner’s Federal income taxes of $58,283 for 1996 and $59,226

for 1997, an addition to tax under section 6651(a)(1) of

$14,794.25 for 1997, and accuracy-related penalties under section
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1 After concessions, respondent now contends that

petitioner is liable for deficiencies in his Federal income taxes

of $27,555 for 1996 and $15,512 for 1997, an addition to tax of

$3,865.75 under sec. 6651(a)(1) for 1997, and accuracy-related

penalties under sec. 6662(a) of $5,511 for 1996 and $3,102.40 for

1997. 

6662(a) of $11,656.60 for 1996 and $11,845.20 for 1997.1 After

concessions, the issues for decision are:

1. Whether respondent bears the burden of proof under

section 7491(a) as to the items of income and deduction

disallowed in the notice of deficiency. We hold that respondent

does not.

2. Whether petitioner had unreported income of $64,108.94

for 1996 and $21,942.75 for 1997. We hold that he did.

3. Whether petitioner may deduct miscellaneous expenses

related to his Schedule C business of $15,302 for 1996 and

$25,746 for 1997. We hold that he may not.

4. Whether petitioner is liable for the addition to tax for

failure to timely file under section 6651(a)(1) for 1997. We

hold that he is not.

5. Whether petitioner is liable for the accuracy-related

penalty under section 6662(a) for 1996 and 1997. We hold that he

is.

Section references are to the Internal Revenue Code in

effect for the applicable years. Rule references are to the Tax

Court Rules of Practice and Procedure.
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FINDINGS OF FACT

Some of the facts are stipulated and are so found.

A. Petitioner

Petitioner resided in Orange, California, when he filed the

petition. He is a technician who repairs copy machines. He

operated a copy machine service business known as Copy Care

Technology in 1996 and 1997. He sometimes hired subcontractors

to repair copy machines. 

B. Petitioner’s Bank Accounts

Petitioner made the following deposits in his bank accounts

in 1996 and 1997:

1996

 Amount

 Bank deposited

Wells Fargo $1,410.57

Wells Fargo (2) 135,805.44

Bank of America 56,956.71

 Total 194,172.72

1997

 Amount

Bank deposited

 Wells Fargo $118,031.27

 Bank of America 81,772.02

 Total 199,803.29

C. Petitioner’s Income Tax Returns

Petitioner filed his 1996 income tax return on April 15,

1997. He obtained a 4-month extension of time to file his 1997

return until August 17, 1998. He filed his 1997 income tax

return on August 17, 1998. He included with each of his 1996 and
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1997 returns a Schedule C, Profit or Loss From Business, for Copy

Care Technology. He deducted business expenses of $56,500 for

1996 and $97,752 for 1997 on the Schedules C.

D. Respondent’s Examination of Petitioner’s 1996 and 1997

Returns

Revenue Agent Colleen Warren (Warren) began her examination

of petitioner’s 1996 and 1997 returns in December 1998, when she

met with petitioner at his home. He refused to talk to Warren at

that time. Warren then invited petitioner to meet with her at

her office. She asked petitioner for copies of his 1996 and 1997

bank statements, invoices, and canceled checks to support his

1996 and 1997 Schedule C expense deductions. Petitioner did not

respond to Warren’s December 1998 document requests, meet with

her, or respond to her telephone calls. She sent petitioner

several letters to attempt to schedule a conference. Petitioner

did not respond to these letters. Warren also gave petitioner

the option of meeting instead with her manager, but petitioner

refused.

Petitioner told Warren that he could not understand English.

Warren then asked a revenue agent who spoke Vietnamese to contact

petitioner. Petitioner asked that agent to contact him at

petitioner’s mother’s home. The agent left a message there for

petitioner to telephone the agent. Petitioner did not return the

agent’s call.
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Warren issued summonses to petitioner’s banks and obtained

petitioner’s 1996 and 1997 bank statements.

E. Respondent’s Determination

Warren performed a bank deposits analysis and characterized

each of petitioner’s 1996 and 1997 deposits as taxable or

nontaxable. She characterized the following as nontaxable: 

Checks deposited by petitioner with insufficient funds; returned

deposits; loans from petitioner’s father; a $37.72 check from Air

Touch Cellular deposited on April 12, 1996; a $588.32 check from

Kelley Escrow deposited on August 7, 1996; a $25 check from AT&T

deposited on August 7, 1996; and a $560 redeposit made on August

19, 1997.

Respondent determined that petitioner received unreported

income of $118,413 in 1996 and $78,150 in 1997. Respondent

disallowed business expense deductions of $46,500 in 1996 and

$87,752 in 1997.

Respondent transferred petitioner’s case to Appeals Officer

Heidi Peterson (Peterson) in September 2000, after the petition

in this case was filed. In early October 2000, Peterson wrote to

petitioner to schedule a conference and to request information

and documents that Warren had previously requested. Shortly

before the date Peterson had proposed for the conference,

petitioner told Peterson that he did not have the requested
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documents. Peterson rescheduled the conference for late November

2000.

Petitioner then retained Mr. Covarrubias (Covarrubias) to

represent him in his dealings with respondent. Covarrubias asked

Peterson to reschedule the conference for the end of December

2000. Peterson did so. Covarrubias attended that conference and

gave Peterson some of petitioner’s canceled checks. Covarrubias

later gave Peterson a box containing unorganized personal and

business invoices and petitioner’s credit card statements.

Warren organized petitioner’s records. Warren identified

the expenses which she thought were deductible. Warren then

recomputed petitioner’s income and expenses for 1996 and 1997 as

follows:

1996

Nontaxable items, Wells Fargo (2) $17,284.18

Nontaxable items, Bank of America 41,767.28

Returned deposits, Bank of America 8,613.32

Gross receipts per return 62,399.00

Unreported income 64,108.94

 Total deposits for 1996 194,172.72

1997

Nontaxable items, Wells Fargo $560.00

Nontaxable items, Bank of America 65,232.54

Gross receipts per return 112,068.00

Unreported income 21,942.75

 Total deposits for 1997 199,803.29
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2 Shortly before trial respondent allowed additional

deductions for Schedule C business expenses of $1,759 for 1996

and $6,512 for 1997.

3 Sec. 7491 provides in pertinent part: 

SEC. 7491. BURDEN OF PROOF. 

(a) Burden Shifts Where Taxpayer Produces Credible

Evidence.-- 

(1) General rule.--If, in any court

proceeding, a taxpayer introduces credible

evidence with respect to any factual issue

relevant to ascertaining the liability of the

taxpayer for any tax imposed by subtitle A or

B, the Secretary shall have the burden of

proof with respect to such issue. 

(2) Limitations.--Paragraph (1) shall

apply with respect to an issue only if-- 

(A) the taxpayer has complied with

the requirements under this title to

substantiate any item; 

(B) the taxpayer has maintained all

(continued...)

Warren concluded that petitioner had allowable Schedule C

business expenses of $39,439 for 1996 and $65,494 for 1997.2

OPINION

A. Whether Respondent Bears the Burden of Proof as to Items of

Income and Deduction

Petitioner contends that respondent bears the burden of

proof under section 7491(a) as to the items of income and

deduction disallowed in the notice of deficiency. We disagree.

The Commissioner bears the burden of proof under section

7491(a)3 if the taxpayer has: (1) Complied with substantiation 
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3(...continued)

records required under this title and

has cooperated with reasonable requests

by the Secretary for witnesses,

information, documents, meetings, and

interviews; * * *.

4 Sec. 7491 applies to court proceedings arising in

connection with examinations beginning after July 22, 1998. See

Internal Revenue Service Restructuring & Reform Act of 1998, Pub.

L. 105-206, sec. 3001(a), 112 Stat. 726. The examination in this

case began after July 22, 1998. Thus, sec. 7491 applies.

requirements under the Internal Revenue Code, sec. 7491(a)(2)(A);

(2) maintained all records required by the Internal Revenue Code,

sec. 7491(a)(2)(B); (3) cooperated with reasonable requests by

the Secretary for information, documents, and meetings, id.; and

(4) introduced at trial credible evidence with respect to any

factual issue relevant to ascertaining his or her liability for

any tax imposed under subtitle A or B, sec. 7491(a)(1).4 

Petitioner did not substantiate his deductions, keep records

of his income and expenses, or cooperate with respondent’s

agents. Thus, petitioner bears the burden of proving that

respondent’s determination is incorrect as to the items of income

and deduction disallowed in the notice of deficiency. Sec.

7491(a); Rule 142(a)(2).

B. Whether Petitioner Had Unreported Income

Respondent contends respondent’s bank deposits analysis

shows that petitioner had unreported income of $64,108.94 in 1996

and $21,942.75 in 1997. Petitioner does not dispute respondent’s
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5 Petitioner’s contention on brief differs slightly from

his contention at trial. On brief, he contended that deposits in

his bank accounts “that are large and end in ‘000', such as

$1,000.00, $3,000.00, and $5,000.00, are loan funds I received

from my family and friends.” At trial, he contended that bank

deposits of $1,000 or more were funds which were lent to him by

friends and family and then identified the five specific deposits

(shown above) as loans. He did not show that any of the deposits

respondent used to determine unreported income were loans.

use of the bank deposits method to reconstruct his income for

1996 and 1997. 

Petitioner contends that he had the following nontaxable

sources of income: Loans from his friends, brothers, or sister

of $1,600 on March 5, 1996, $4,500 on April 24, 1997, $3,800 on

June 18, 1997, $3,000 on June 20, 1997, and $3,000 on July 1,

1997.5 We disagree.

Petitioner has no promissory notes or records showing that

these amounts were loans or that he repaid them. He did not

identify specific individuals who lent him these amounts. 

Petitioner’s testimony that these deposits were loans was vague

and uncorroborated. We are not convinced that the source of any

of the bank deposits respondent counted as unreported income for

petitioner in 1996 and 1997 was a nontaxable loan. We conclude

that petitioner had unreported income of $64,108.94 in 1996 and

$21,942.75 in 1997.

C. Whether Petitioner May Deduct More Business Expenses Than

Respondent Allowed for 1996 and 1997

Petitioner deducted more miscellaneous expenses related to

his Schedule C business than respondent allowed for 1996 and
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1997. Respondent disallowed deductions of $15,302 for 1996 and

$25,746 for 1997 because petitioner did not substantiate them.

Petitioner contends that he paid $15,302 in 1996 and $25,746

in 1997 to hire a receptionist and a repair technician to fix

copy machines for him. However, petitioner offered no evidence

other than his testimony, which was vague and uncorroborated. 

Petitioner did not identify the receptionist or the repair

technician or indicate when they worked for him or when he made

the payments. 

We conclude that petitioner may not deduct more

miscellaneous expenses related to his Schedule C business than

respondent allowed for 1996 and 1997.

D. Whether Petitioner Is Liable for the Addition to Tax for

Failure To Timely File His 1997 Income Tax Return

Respondent contends that petitioner is liable for the

addition to tax under section 6651(a) for failure to timely file

his income tax return for 1997. Petitioner received an automatic

4-month extension to file his 1997 income tax return until

August 17, 1998. Petitioner filed his 1997 return on August 17,

1998. Thus, petitioner timely filed his 1997 return. Sec.

6651(a)(1).

Respondent alleges that petitioner’s extension to file is

invalid because petitioner did not properly estimate his tax

liability for 1997 or remit the estimated tax when he applied for

the extension. The Commissioner bears the burden of production
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with respect to penalties and additions to tax. Sec. 7491(c). 

To meet the burden of production under section 7491(c), the

Commissioner must come forward with evidence showing that it is

appropriate to impose the particular penalty but need not

introduce evidence of elements such as reasonable cause or

substantial authority. Higbee v. Commissioner, 116 T.C. 438, 446

(2001); H. Conf. Rept. 105-599, at 241 (1998), 1998-3 C.B. 747,

995. The request for an extension is not in the record, and,

thus, we cannot tell how much tax petitioner estimated was due. 

There is no evidence to support respondent’s allegation that

petitioner’s extension is invalid, or that petitioner did not

properly estimate the amount of tax due and remit the estimated

tax with the extension request. We conclude that respondent has

failed to meet the burden of production under section 7491(c),

that petitioner’s extension is valid, and that he is not liable

for the addition to tax for failure to timely file his 1997

income tax return.

E. Whether Petitioner Is Liable for the Accuracy-Related

Penalty

Taxpayers are liable for a penalty equal to 20 percent of

the part of the underpayment attributable to negligence or

disregard of rules or regulations. Sec. 6662(a) and (b)(1). 

Negligence includes failure to make a reasonable attempt to

comply with internal revenue laws or to exercise ordinary and

reasonable care in preparing a tax return. Sec. 6662(c). 
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Petitioner alleged nontaxable sources of income of $1,600

for 1996 and $14,300 for 1997, but he did not dispute that he had

a substantial amount of unreported income in those years; in

effect, petitioner conceded that he had unreported income of

$62,508 for 1996 and $7,642 for 1997. In addition, petitioner

did not produce to respondent’s agent during the audit adequate

substantiation of the items in dispute. A taxpayer’s failure to

properly substantiate items is evidence of negligence. See sec.

6662(c); Higbee v. Commissioner, supra at 449; sec. 1.6662-

3(b)(1), Income Tax Regs. These facts are sufficient to meet

respondent’s burden of production under section 7491(c) relating

to petitioner’s liability for the accuracy-related penalty.

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

apply to any part of an underpayment if the taxpayer shows that

there was reasonable cause for that part of the underpayment, and

that the taxpayer acted in good faith in view of the facts and

circumstances. Sec. 6664(c)(1). The taxpayer bears the burden

of proving that the failure is due to reasonable cause and not

willful neglect. Higbee v. Commissioner, supra at 446. 

Petitioner contends that he is not liable for the accuracyrelated penalty. However, he offered no evidence to support his

contention. Petitioner suggests that he and Warren had a bad
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working relationship, but he did not explain how this is relevant

to whether he is liable for the accuracy-related penalty for the

years in issue.

We conclude that petitioner is liable for the accuracyrelated penalty under section 6662(a) for 1996 and 1997.

To reflect concessions and the foregoing,

Decision will be

entered under Rule 155.