T.C. Memo. 1998-387

UNITED STATES TAX COURT

KENNETH & LINDA J. LOGIE, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9915-97. Filed October 29, 1998.

Linda J. Logie, pro se.

Rebecca T. Hill, and Marion T. Robus, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

THORNTON, Judge: Respondent determined a deficiency of

$14,322 in petitioners' 1994 Federal income tax and a $2,864

accuracy-related penalty under section 6662(a). 

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue, and
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1 In the notice of deficiency, respondent determined that

petitioners had unreported capital gain in the amount of $20,956

resulting from the sale of certain stock. After taking into

account petitioners' cost basis in the stock, respondent conceded

prior to trial that petitioners are entitled to a capital loss of

$3,673 from this transaction.

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

Procedure.

After a concession by the respondent,1 the issues remaining

for decision are: (1) Whether petitioners may exclude a portion

of their income as a parsonage or rental allowance pursuant to

section 107(2); (2) whether petitioners are entitled to certain

claimed deductions for supplies and utility expenses; (3) whether

the issue of additional amounts claimed by petitioners as medical

expenses is properly before the Court; (4) whether petitioners

are liable for self-employment tax; (5) whether petitioners are

liable for tax with respect to receipt of Social Security

benefits; and (6) whether petitioners are liable for an accuracyrelated penalty under section 6662(a).

FINDINGS OF FACT

The parties have stipulated some of the facts, which are so

found. The stipulation of facts is incorporated herein by this

reference. Petitioners are husband and wife who resided in

Oakland, California, when they filed their petition.

During the year at issue, petitioner Kenneth Logie (Mr.

Logie) was minister and petitioner Linda J. Logie (Mrs. Logie)
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was associate minister of the Interdenominational Gospel Chapel

in Oakland, California. The chapel held services five times a

week in a rented building in Oakland and had approximately 100

members.

Mr. Logie's Wage and Tax Statement (Form W-2) from the

Interdenominational Gospel Chapel for the 1994 tax year listed

wage income in the amount of $548 and listed other income in the

amount of $4,712, which was described as "Parsonage". Mrs.

Logie's Form W-2 from the Interdenominational Gospel Chapel for

the 1994 tax year listed wage income in the amount of $20,276 and

listed other income in the amount of $10,000, which was described

as "Parsonage".

Petitioners reported their income for 1994 on a joint Form

1040, which showed no tax liability. Petitioners excluded from

gross income those amounts listed and described on their Forms 

W-2 as "Parsonage", totaling $14,712, and separately deducted

this same amount as an adjustment to income. On the Schedule C

attached to their return, petitioners reported a loss of $1,143

from a business described as "Linda Logie Distributor Matol

Botanical." On the Schedule C, petitioners claimed cost of goods

sold in the amount of $10,251. This amount included supplies

expenses in the amount of $1,400, which was separately and

duplicatively deducted on line 22 of the Schedule C. Petitioners

also claimed on their Schedule C utilities expenses for telephone
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use in 1994 in the total amount of $1,396. In addition,

petitioners claimed various itemized deductions, including

medical and dental expenses in the amount of $11,976.

During 1994, Mr. Logie received $6,445 in Social Security

benefits. Petitioners did not report any Social Security

benefits on their 1994 return. Petitioners paid no selfemployment tax on the compensation paid to them by the

Interdenominational Gospel Chapel. 

Respondent issued a notice of deficiency determining a

deficiency in petitioners' joint Federal income taxes in the

amount of $14,322 for 1994. In the notice of deficiency,

respondent disallowed both the exclusion from income and the

adjustment to income for the claimed parsonage allowance. 

Respondent disallowed the duplicative Schedule C deduction for

supplies expense in the amount of $1,400. Respondent also

disallowed $1,102 of the total $1,396 petitioners claimed as

Schedule C deductions for telephone expenses, on grounds that

petitioners failed to show that the amount disallowed was not a

personal expense. Respondent did not challenge petitioners'

claimed medical and dental expenses or other itemized deductions.

Respondent also determined a deficiency in petitioners'

self-employment taxes for 1994 in the amount of $5,213, and

allowed a corresponding income tax deduction in the amount of

$2,607. In addition, respondent determined that petitioners were
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liable for tax with respect to $5,478 received as Social Security

benefits. 

Respondent further determined that petitioners are liable

for an accuracy-related penalty pursuant to section 6662(a) of

$2,864 for 1994.

OPINION

Parsonage Allowance

Section 107(2) provides that the gross income of a minister

does not include "the rental allowance paid to him as part of his

compensation, to the extent used by him to rent or provide a

home". As a prerequisite for this exclusion, the taxpayer must

establish that there was designation of the rental allowance

pursuant to official church action before payment. Sec. 1.107-

1(b), Income Tax Regs. The regulations state in pertinent part:

The term "rental allowance" means an amount paid to a minister

to rent or otherwise provide a home if such amount is

designated as rental allowance pursuant to official action

taken * * * in advance of such payment by the employing church

or other qualified organization when paid after December 31,

1957. The designation of an amount as rental allowance may be

evidenced in an employment contract, in minutes of or in a

resolution by a church or other qualified organization or in

its budget, or in any other appropriate instrument evidencing

such official action. The designation referred to in this

paragraph is a sufficient designation if it permits a payment

or a part thereof to be identified as a payment of rental

allowance as distinguished from salary or other remuneration.

Respondent does not contest petitioners' status as

"ministers" under section 107(2); rather, respondent argues that

the claimed parsonage allowances were not properly designated in

accordance with the applicable regulations. Petitioners bear the
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2 Petitioners' W-2 forms do not constitute substantiation

in this regard because, among other reasons, they were issued

after the payments were made.

3 Mrs. Logie testified that she had "been researching the

Internal Revenue Code and * * * read about the housing allowance"

and felt it "would be unjust and unfair not to include that as

part of" their joint Federal income tax return.

burden of proving that the amounts at issue were properly

designated as a rental allowance by official church action before

payment. See Rule 142(a). The record is devoid of any such

evidence.2 To the extent it addresses this issue, Mrs. Logie's

testimony suggests that the characterization of part of

petitioners' income as parsonage allowances was an afterthought.3

Accordingly, we sustain respondent's determinations with

respect to the amounts claimed as parsonage allowances. See

Boyer v. Commissioner, 69 T.C. 521, 533 (1977); Eden v.

Commissioner, 41 T.C. 605, 607 (1964).

Schedule C Deductions

Respondent disallowed a duplicative $1,400 deduction for

supplies expenses and disallowed $1,102 of claimed telephone

expenses as being personal in nature. The Commissioner's

determinations are presumed correct, and the taxpayer bears the

burden of proving that those determinations are erroneous. Rule

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

petitioners' brief alludes in its statement of facts to

respondent's disallowance of these claimed Schedule C expenses,
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petitioners failed to discuss this issue either at trial or on

brief, and offered no evidence with respect to this issue. 

Accordingly, we sustain respondent's determination with

respect to the disallowed Schedule C deductions. 

Medical Expenses

On their 1994 joint Federal income tax return, petitioners

claimed itemized deductions of $11,976 for medical and dental

expenses. Respondent made no adjustment to this amount in the

notice of deficiency. At trial, petitioners claimed they were

entitled to additional medical expenses in the amount of $6,490

for hearing aids.

Petitioners failed to raise this issue in either their

original or amended petitions. Furthermore, petitioners have

never requested leave to amend their pleadings. Petitioners had

ample time to file such a motion, and although petitioners are

pro se litigants, they are familiar with this Court's rules and

procedures. For example, on April 2, 1998, just 11 days before

trial, petitioners filed a motion for leave to file a second

amended petition in order to raise additional arguments. The

Court granted that motion on April 7, 1998. Petitioners did not

raise the issue of increased medical deductions in that motion,

but waited until the trial. 

The purpose of the pleadings is to give the parties and the

Court fair notice of the matters in controversy and the basis for
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4 Moreover, even if the Court were to consider this issue,

the record is insufficient to establish that petitioners are

entitled to medical deductions in excess of those claimed on

their return. At trial, petitioners introduced into evidence a

(continued...)

their respective positions. Rule 31(a). It is well settled that

this Court ordinarily will not consider issues that have not been

pleaded. See Estate of Mandels v. Commissioner, 64 T.C. 61, 73

(1975); Estate of Horvath v. Commissioner, 59 T.C. 551, 556

(1973). An issue is not properly raised unless the opposing

party is given fair notice and is not surprised or put at a

substantial disadvantage. Markwardt v. Commissioner, 64 T.C.

989, 997 (1975); Estate of Horvath v. Commissioner, supra at 555. 

 Refusal to consider an issue not raised in the pleadings is

particularly proper where the issue is a factual one and where

respondent is unaware of petitioners' position until trial. 

Estate of Mandels v. Commissioner, supra at 73. In this case,

petitioners submitted new medical receipts to respondent the

morning of trial. Respondent did not have an adequate

opportunity to evaluate this new issue and petitioners' evidence

supporting it. Petitioners' delay in raising this issue is

prejudicial to respondent. See Russo v. Commissioner, 98 T.C. 28

(1992); O'Rourke v. Commissioner, T.C. Memo. 1990-161.

Accordingly, petitioners' claim of additional medical

expenses is not properly before the Court, and we decline to

consider it.4
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4(...continued)

mass of materials ostensibly to substantiate the medical and

dental expenses claimed on their Form 1040 as filed, as well as

the additional amounts claimed at trial for hearing aids. The

materials are not readily susceptible of interpretation or

analysis. One receipt, for example, in the amount of $5,900,

does not identify the purpose of the receipt; nor is there proof

of payment such as a canceled check. Other than to contend that

they are entitled to additional deductions for hearing aids,

petitioners did not testify regarding these alleged expenses or

call any witnesses to support their claim to the deductions. On

the basis of this record, the Court is unable to ascertain

whether the medical expenses claimed on the return in fact

exclude the expenses for hearing aids, or the extent to which any

of these items may represent allowable unreimbursed medical

expenses under sec. 213.

Self-Employment Tax

Section 1401 provides that a tax shall be imposed on the

self-employment income of every individual. Petitioners have the

burden of proving that they are not liable for self-employment

taxes. Rule 142(a). Petitioners failed to offer any evidence or

make any arguments that they are not liable for self-employment

taxes. Consequently, we hold that petitioners are liable for

self-employment taxes. 

Social Security Benefits

Section 86 requires that, if a taxpayer's modified adjusted

gross income plus one-half of his or her Social Security benefits

exceeds a certain base amount, a portion of the taxpayer's Social

Security benefits shall be included in taxable income. 

Petitioners failed to offer any evidence or make any arguments

with respect to respondent's determination with respect to this
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issue. Consequently, we hold that petitioners are liable for tax

on Social Security benefits pursuant to section 86.

Accuracy-Related Penalty

Respondent determined that petitioners are liable for an

accuracy-related penalty under section 6662(a) for negligence or

disregard of rules or regulations. Section 6662(a) imposes a 20-

percent penalty on the portion of an underpayment that is

attributable to negligence or disregard of rules or regulations. 

Under section 6662(c), "negligence" includes failure to make a

reasonable attempt to comply with the provisions of the Internal

Revenue Code. Negligence is a “‘lack of due care or failure to

do what a reasonable and ordinarily prudent person would do under

the circumstances.’” Neely v. Commissioner, 85 T.C. 934, 947

(1985) (quoting Marcello v. Commissioner, 380 F.2d 499, 506 (5th

Cir. 1967), affg. in part and remanding per curiam 43 T.C. 168

(1964)). “Disregard” includes careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). 

No penalty shall be imposed if the taxpayer acted in good

faith and there was reasonable cause for the underpayment. Sec.

6664(c)(1). The burden is on the taxpayer to prove the

Commissioner's imposition of the penalty is in error. Luman v.

Commissioner, 79 T.C. 846, 860-861 (1982); Bixby v. Commissioner,

58 T.C. 757 (1972).
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The entire underpayment of petitioners' tax was due to

negligence or disregard of rules or regulations. On their 1994

joint Federal income tax return, petitioners claimed double tax

benefits for parsonage allowances and failed to meet the

requirements of section 107. They also claimed a double

deduction for certain supplies expenses and claimed an excessive

amount for utilities expenses. Petitioners neglected to report

benefits received from Social Security. Moreover, petitioners

completely disregarded their liability for self-employment tax. 

Accordingly, respondent's imposition of an accuracy-related

penalty under section 6662(a) is sustained.

To reflect the foregoing and the concession made by

respondent,

Decision will be entered

under Rule 155.