T.C. Summary Opinion 2010-50

UNITED STATES TAX COURT

JAMES L. WRIGHT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7440-09S. Filed April 20, 2010.

James L. Wright, pro se.

John Spencer Hitt, for respondent.

DEAN, Special Trial 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, subsequent section references

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

and Procedure.

Respondent determined for 2005 a deficiency in petitioner’s

Federal income tax of $19,318 and an accuracy-related penalty

under section 6662(a) of $3,863.60.

The parties agree that petitioner is not entitled to

itemized deductions in excess of the standard deduction for a

single taxpayer. The parties also agree that petitioner is

entitled to deduct on Schedule C, Profit or Loss From Business,

only the following expenses: (a) “Other” of $2,376, 

(b) $949 for utilities, (c) $1,660 for supplies, (d) $2,997 for

rent, (e) $7,000 for legal fees, and (f) $1,188 for office

expenses. The parties agree that petitioner failed to report on

Schedule C of his Federal income tax return an additional $22,641

of gross receipts and sales. The issues remaining for decision

are whether petitioner: (1) Failed to report $7,003.07 in excess

of the gross receipts and sales that he now admits he failed to

report, and (2) is liable for the accuracy-related penalty under

section 6662(a).

Background

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

The stipulation of facts and the exhibits received in evidence

are incorporated herein by reference. Petitioner resided in

Illinois when the petition was filed. 
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Petitioner during the year 2005 was a sole proprietor doing

business as James Wright Tax and Accounting. The parties

stipulated that petitioner maintained a business checking account

with Harris Bank in the name of the proprietorship. Aside from

the deposits on which the parties agree, respondent’s examination

revealed two additional bank “teller deposits”, $3,500 on

December 5 and $3,503.07 on December 21, 2005. Respondent

determined them to be income. 

Petitioner did not maintain adequate books and records that

recorded his income for 2005, and he did not produce any evidence

from the bank or otherwise that would indicate the nature of the

disputed deposits.

Discussion

Disputed Deposits

Generally, the Commissioner’s determinations in a notice of

deficiency are presumed correct, and the taxpayer has the burden

of proving that those determinations are erroneous. See Rule

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

cases the burden of proof with respect to relevant factual issues

may shift to the Commissioner under section 7491(a). Petitioner

did not argue or present evidence that he satisfied the

requirements of section 7491(a). Therefore, the burden of proof

does not shift to respondent.
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Petitioner and respondent agree that petitioner did not

report all of his gross receipts for 2005. Petitioner argues

that the disputed deposits are loan proceeds from his life

insurance policy or amounts “from cash savings”, or that he may

have “borrowed * * * [them] from someone”. Petitioner also

testified that “every now and then” he sold life insurance during

the year for which he would receive commissions. 

Petitioner failed to offer any documentary evidence about

the nature of the disputed deposits. Even his testimony was

vague and indefinite. This Court is not bound to accept a

taxpayer’s self-serving, unverified, and undocumented testimony. 

Shea v. Commissioner, 112 T.C. 183, 189 (1999); Tokarski v.

Commissioner, 87 T.C. 74, 77 (1986).

The Court sustains respondent’s determination that the two

deposits totaling $7,003.07 represent unreported income for 2005.

Accuracy-Related Penalty

Section 7491(c) imposes on the Commissioner the burden of

production in any court proceeding with respect to the liability

of any individual for penalties and additions to tax. Higbee v.

Commissioner, 116 T.C. 438, 446 (2001); Trowbridge v.

Commissioner, T.C. Memo. 2003-164. In order to meet the burden

of production under section 7491(c), the Commissioner need only

make a prima facie case that imposition of the penalty or
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addition to tax is appropriate. Higbee v. Commissioner, supra at

446.

Respondent determined that petitioner is liable for an

accuracy-related penalty under section 6662(a). Section 6662(a)

imposes a 20-percent penalty on the portion of an underpayment

attributable to any one of various factors, including negligence

or disregard of rules or regulations and a substantial

understatement of income tax. See sec. 6662(b)(1) and (2). 

“Negligence” includes any failure to make a reasonable attempt to

comply with the provisions of the Internal Revenue Code,

including any failure to keep adequate books and records or to

substantiate items properly. See sec. 6662(c); sec.

1.6662-3(b)(1), Income Tax Regs. A “substantial understatement”

is an understatement of tax that exceeds the greater of 10

percent of the tax required to be shown on the return or $5,000. 

See sec. 6662(d)(1)(A); sec. 1.6662-4(b), Income Tax Regs.

Section 6664(c)(1) provides that the penalty under section

6662(a) shall not apply to any portion of an underpayment if it

is shown that there was reasonable cause for the taxpayer’s

position and that the taxpayer acted in good faith with respect

to that portion. The determination of whether a taxpayer acted

with reasonable cause and in good faith is made on a case-by-case

basis, taking into account all the pertinent facts and

circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most
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important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year. Id.

Petitioner had a substantial understatement of tax for 2005

since the understatement amount exceeded the greater of 10

percent of the tax required to be shown on the return or $5,000. 

Petitioner claimed itemized deductions and business expenses to

which he was not entitled and underreported his business income. 

The Court concludes that respondent has produced sufficient

evidence to show that the imposition of the accuracy-related

penalty under section 6662 is appropriate. 

Petitioner, a tax return preparer, did not show that his

underreporting of income and overreporting of deductions were

actions taken with reasonable cause and in good faith. 

Respondent’s determination of the accuracy-related penalty under

section 6662(a) for 2005 is sustained.

To reflect the foregoing, 

Decision will be entered

under Rule 155.