T.C. Summary Opinion 2009-124

UNITED STATES TAX COURT

THOMAS A. AND VERNESTER O. JOHNSON, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 29866-07S. Filed August 5, 2009.

Thomas A. Johnson and Vernester O. Johnson, pro sese.

Matthew D. Carlson, 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 in issue,
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1Adjustments to petitioners’ self-employment income and

self-employment income tax deduction are computational and will

be resolved consistent with the Court’s decision. See secs.

1401, 164(f).

and all Rule References are to the Tax Court Rules of Practice

and Procedure. 

Respondent determined for 2005 a deficiency in petitioners’

Federal income tax of $8,134 and an accuracy-related penalty

under section 6662(a) of $1,626.80.

The parties agree that $5,000 of petitioner Vernester O.

Johnson’s income reported on Form 1099-MISC, Miscellaneous

Income, from “Red Gum TIC” is properly reportable on Schedule C,

Profit or Loss From Business, rather than as “Wages, salaries,

tips, etc.” on line 7 of petitioners’ return. The issues

remaining for decision1 are whether petitioners are:

(1) Entitled to a home mortgage interest deduction; (2) entitled

to deduct expenses for supplies and legal and professional

services on Schedule C; (3) entitled to charitable contribution

deductions; and (4) 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. Petitioners resided in

California when the petition was filed.
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In January 1998 Maury and Pelipa Power, one-third joint

tenants, Trenton and Elvia Shultz, one-third joint tenants, and

Roman Hernandez and Refugio Perez, one-third joint tenants,

granted a deed to property (property) to Diversified Unlimited,

Inc., doing business as United Investments (Diversified). 

Diversified purchased the property subject to a “First note and

deed of trust” in favor of Knutson Mortgage Corp. (Knutson)

securing a note of $192,758.62.

In January 1998 petitioners entered into an executory

contract for the purchase of the property from Diversified. In

February 1998 the parties entered into an agreement for the sale

of real property by Diversified. According to the latter

agreement, petitioners agreed to purchase the property subject to

the first note and deed of trust in favor of Knutson. 

Petitioners also agreed to pay Diversified $15,000 by June 15,

1998. Attached to the sale contract is an affidavit in which

petitioners acknowledge “their awareness” that: (a) They are

purchasing the property subject to the encumbrance; (b) that

Diversified asks that petitioners assume the loan or refinance

the property after a 6-month period had expired; and (c) they

will be the “owner of title on record” of the property. 

Diversified subsequently issued to petitioners a “CORPORATION

GRANT DEED”, and petitioners issued to Diversified a deed of
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trust to secure a promissory note for $10,000 in favor of

Diversified.

The property was used as petitioners’ primary residence. 

Petitioners provided as evidence of interest payments copies of

cashier’s checks drawn on Washington Mutual Bank (WaMu) to

“Countrywide” or “Countrywide Home Loans”: (a) For $8,709.23

dated February 3, 2005, bearing the handwritten notation “OCT,

NOV, DEC, JAN, F [illegible]” (the space showing the remitter is

blank); (b) for $2,095.95 dated March 10, 2005, bearing the

handwritten notation “FEB” (the remitter is listed as Thomas A.

Johnson, Jr.); (c) for $13,491.75 dated July 28, 2005, bearing no

notation as to month nor the name of a remitter; and (d) for

$4,361.00 dated November 9, 2005, bearing no notation as to month

nor the name of a remitter. Petitioners also provided a copy of

a FedEx “tracking update” for a FedEx standard overnight envelope

shipped July 28, 2005, by Vanessa Johnson to Countrywide Home

Loans. Petitioners submitted copies of other checks drawn on

WaMu that show that they had made payments in 2003 and 2004 to

“Guaranty Residential Lending” the last of which, for $2,185.77,

was a cashier’s check dated November 22, 2004. 

Countrywide Home Loans sent a Form 1098, Mortgage Interest

Statement, to Maury and Pelipa Power, “Care of Vernester

Johnson”, reporting paid mortgage interest of $19,457 for 2005.
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New Century Mortgage sent petitioners a Form 1098 reporting paid

mortgage interest of $2,476.24 for 2005.

Discussion

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). Petitioners

did not present evidence or argument that they satisfied the

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

does not shift to respondent.

Mortgage Interest Deduction

Section 163(a) allows a deduction for interest paid or

accrued within the taxable year on indebtedness. The

“indebtedness” for purposes of section 163 must, in general, be

an obligation of the taxpayer and not an obligation of another.

Golder v. Commissioner, 604 F.2d 34, 35 (9th Cir. 1979), affg.

T.C. Memo. 1976-150; Smith v. Commissioner, 84 T.C. 889, 897

(1985), affd. without published opinion 805 F.2d 1073 (D.C. Cir.

1986). 

Individuals are allowed a deduction for “qualified residence

interest”. Sec. 163(h)(2)(D), (3). Qualified residence interest

includes interest paid to acquire the principal residence of the
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taxpayer or certain indebtedness secured by a personal residence. 

Sec. 163(h)(3). Respondent, however, argues that petitioners

have failed to provide adequate substantiation for their claimed

mortgage interest deduction.

Petitioners have not shown that they were directly liable on 

the mortgages for which they claimed a mortgage interest

deduction. In fact, the Form 1098 from Countrywide Home Loans

indicates that the mortgage was in the names of former owners of

an interest in petitioners’ residence, Maury and Pelipa Power. 

But section 1.163-1(b), Income Tax Regs., provides in pertinent

part: “Interest paid by the taxpayer on a mortgage upon real

estate of which he is the legal or equitable owner, even though

the taxpayer is not directly liable upon the bond or note secured

by such mortgage, may be deducted as interest on his

indebtedness.” 

Respondent did not assert that petitioners were not the

beneficial owners of their personal residence, and the evidence

shows that they were the legal owners of the property. The Court

assumes that the February 3, 2005, cashier’s check to Countrywide

was for the October, November, and December 2004 mortgage

payments and the January 2005 payment, and that about one-fourth

of the total was for January 2005 (likely penalty fees would have

been included in this apparently late payment). If the January

payment is added to the March 10, July 28, and November 9, 2005,
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payments, the total approximates the amount for which Countrywide

issued its Form 1098. The Form 1098 New Century Mortgage issued

reporting $2,476.24 of interest was sent in the name of

petitioner Vernester Johnson.

While the financing arrangements of petitioners’ home

purchase are less than clear, the preponderance of the evidence

leads the Court to conclude that petitioners were the legal and

equitable owners of the property and did make mortgage interest

payments to Countrywide Home Loan and New Century as claimed on

their return for 2005. 

Schedule C Expenses

Respondent disallowed petitioners’ deductions of $8,890 for

supplies and $6,500 for legal and professional services because

petitioners neither substantiated the expenses nor showed them to

be ordinary and necessary expenses paid during 2005 in carrying

on a trade or business.

Section 162 generally allows a deduction for ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business. Generally, no deduction is

allowed for personal, living, or family expenses. Sec. 262. 

Where a taxpayer has established that he has incurred a trade or

business expense, failure to prove the exact amount of the

otherwise deductible item may not always be fatal. Generally,

unless precluded by section 274, the Court may estimate the
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amount of an expense and allow a deduction to that extent. See

Finley v. Commissioner, 255 F.2d 128, 133 (10th Cir. 1958), affg.

27 T.C. 413 (1956); Cohan v. Commissioner, 39 F.2d 540, 543-544

(2d Cir. 1930). In order for the Court to estimate the amount of

an expense, however, there must be some basis upon which an

estimate may be made. Vanicek v. Commissioner, 85 T.C. 731, 742-

743 (1985). Without such a basis, an allowance would amount to

unguided largesse. Williams v. United States, 245 F.2d 559, 560

(5th Cir. 1957).

 Petitioners claimed the deductions for supplies and legal and

professional services as expenses that Thomas Johnson paid in

connection with his consulting business. At trial, however,

petitioners offered no evidence to substantiate the deductions. 

Since the Court has no basis on which to estimate the expenses,

respondent’s determination is sustained.

Charitable Contributions

Respondent disallowed for lack of substantiation

petitioners’ deduction of $2,800 for cash gifts to charity. 

Section 170(a)(1) allows a taxpayer to deduct a charitable

contribution only if verified under regulations prescribed by the

Secretary. The regulations, which require substantiation of the

taxpayer’s contribution, provide that if a taxpayer makes a

charitable contribution of money, the taxpayer shall maintain for

each contribution one of the following: 
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(i) A cancelled check.

(ii) A receipt from the donee charitable organization

showing the name of the donee, the date of the contribution,

and the amount of the contribution. A letter or other

communication from the donee charitable organization

acknowledging receipt of a contribution and showing the date

and amount of the contribution constitutes a receipt for

purposes of this paragraph (a).

(iii) In the absence of a canceled check or receipt

from the donee charitable organization, other reliable

written records showing the name of the donee, the date of

the contribution, and the amount of the contribution. [Sec.

1.170A-13(a)(1), Income Tax Regs.]

 

Petitioners allege that their contribution was in cash, and

they did not provide a canceled check to substantiate their

contribution. Petitioners provided a copy of a letter dated

December 27, 2005, from the “Continentals of Omega Boys and Girls

Club” (Club) that acknowledged a $2,800 donation but failed to

provide a date for petitioners’ contribution. The letter was

signed by Pelton Stewart, executive director.

Respondent called as a witness Richard Wright (Wright),

currently president of the board of directors of the Club. 

Wright was also president during 2005. Wright’s duties as

president include reviewing the Club’s financial information and

selecting and hiring the Club’s “chief professional officer”

(executive director). Wright identified petitioner Thomas

Johnson as having provided volunteer accounting services for the

Club and as having known or been a “friend” and possibly a
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2Wright testified that upon the removal of Pelton Stewart as

executive director in 2006, petitioner Thomas Johnson notified

Wright by letter that he would no longer serve as a volunteer to

the Club. 

fraternity brother of Pelton Stewart,2 the person who signed

petitioners’ donation letter. 

Wright testified that the Club maintained a list of donors

on spreadsheets that were updated monthly by a bookkeeper who

then provided them to the board. Wright, who brought the records

with him to court, testified that neither petitioner was listed

as a donor of any amount in 2005. Wright further supplied an

example of what a letter to a donor would have looked like in

2005. Wright testified that the letter petitioners supplied as

substantiation of their alleged donation differs in several

respects from the typical donor letter of 2005 and is not

characteristic of a letter that the Club would have sent to a

donor in 2005.

The Court finds that petitioners’ letter fails to meet the

substantiation requirements of section 1.170A-13(a)(1), Income

Tax Regs. It is not a receipt as defined by section 1.170A13(a)(1)(ii), Income Tax Regs., because it does not show the date

of the contribution. The letter does not qualify as “other

reliable written records” either because it lacks a donation

date. In addition, the records of the donee fail to reflect the

fairly sizeable donation petitioners claimed and is at variance
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with the form of letters sent to other donors of similar size

donations in 2005. Accordingly, petitioners are not entitled to

the claimed deduction.

Section 6662(a) 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, affd. 378 F.3d 432 (5th Cir.

2004). 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 addition to tax is appropriate. 

Higbee v. Commissioner, supra at 446.

Respondent determined that petitioners are liable for the

accuracy-related penalty under section 6662(a) for 2005. 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. 
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A “substantial understatement” of income tax exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000. See sec. 6662(d); 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

important factor is the extent of the taxpayer’s effort to assess

his proper tax liability for the year. Id.

Petitioners failed to substantiate business expense

deductions for supplies and legal and professional services. 

Petitioners also failed to properly substantiate their cash

charitable contributions and to properly report self-employment

taxes. They offered no evidence of reasonable cause or good

faith with respect to their treatment of these items. The 
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accuracy-related penalty under section 6662(a) is sustained on

account of negligence.

To reflect the foregoing, 

Decision will be entered

under Rule 155.