T.C. M em o . 2 0 1 8 -1 6 3

UNITED STATES TAX COURT

ALEJ ANDRO HERNANDEZ, J R., AND EDITH G. ROM AN, Pet i t i o ners v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 3 0 6 9-1 7. Fi l edSep t em b er 2 5 , 2 0 1 8
.
Al ejan dro Hern an d ez, J r., an dEd i t h G. Ro m an , p ro s es e. Bro ckE. Wh al en an dDo n al dD. Pri v er, fo r res p o n d en t .

M EM ORANDUM FINDINGS OF FACT AND OPINION VASQUEZ, Ju d ge: Res p o n d en td et erm i n eda d efi ci en cy o f $ 5 ,4 10 an dan
accu racy -rel at edp en al ty

o f $ 1 ,0 8 2 u n d er s ect i o n 6 6 6 2 (a) wi t h res p ectt o p et i t i o n ers ’ 2 0 14 Fed eral i n co m e t ax . Al l s ect io n referen ces are t o th e In t ern al Rev enu e Co de i n effect fo r t h e t ax y ear i n i s s u e, an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 2
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[* 2 ] Aft er co n ces si o ns , 1 t h e i s s u es fo r d eci si o n are wh et h er p et i t i o n ers : (1 ) fai l edt o rep ort can cel lat i o n o f i n d eb ted n es s i n co m e u n d er s ect i o n 6 1 (a)(1 2 )
an d (2 ) s ub s t an t i at edd edu ct i o n s cl ai m edo n thei r Sch edu l e C, Pro fi to r Lo s s Fro m Bu s i nes s. FINDINGS OF FACT Pet i t i o ners Al ejan dro Hern an d ez, J r., an d Ed i t h G. Ro m an res i dedi n Tex as wh en th ey fi l edth ei r p et i t i o n . At t ri al p et i ti o n ers refu s edt o s t i p u l at e an y d o cu m en t s , refu s edt o t es t i fy , an ds t at edo n th e reco rdth atthey d i d n o ti n t en dt o
o ffer ev i den ce reg ard i n g th ei r i n co m e an dd edu ct i o n s . Pet i t i o ners fi l eda 2 0 1 4 Fed eral i n co m e t ax retu rn wh ich i n cl u deda Sch edu l e C o n wh i ch th ey cl ai m edv ari o u s b u si n es s ex p en s e d edu ct i o ns . Res po n d en trecei v ed a Fo rm 1 09 9 -C, Can cel l at i o n o f Deb t(COD), fro m Dep art m en tSt o res Nat i o nal Ban ki n d i cat i n g th at p et i t i o n ers h adrecei v edCOD i n co m e o f $ 1,1 3 6.8 5 i n 2 0 1 4 . Pet i t i on ers d i dn o trep o rtth e p urp o rt ed COD i n co m e o n th ei r 2 0 1 4 retu rn .

1 Res p o n den tco n ced edth e s ec. 6 66 2 (a) accu racy -rel at edp en al t y i n h i s p ret ri al m em o ran du m .- 3
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[* 3 ] OnNo vem

b er 1 5, 2 0 1 6 , res p o n d en tt i m el y i s s u ed p et it i on ers a n o t i ce o f d efi ci en cy

d et erm i n i n g th at t h ey

h adu n rep o rt edCOD i n co m e o f $ 1 , 1 36 . Th erei n
res p o n d en t al s o d i s al l o wedm o s to f p et i t i o ners ’ Sch edu l e C ex pen s es , s t at in g :

“ W e h av e d i s al l o wedth e am ou n ts h o wno n y o u r ret u rn b ecau se y oud i d n o t fu rn i sh i n fo rm at i o n n eed edt o s up p o rtth e cl ai m ed d edu ct i o n .” Res p o n d en t ’ s d i s al lo wan ces are as fo l lo ws : Ex p en s e Am o u n t Trav el $ 3 ,0 0 0 Offi ce 1 ,6 5 1 Leg al /p ro fes s i o n al s erv i ces 1 0 ,0 0 0 Car an d t ru ck 8 ,8 8 0 Al l o t h er 1 1 0 ,2 4 3 To t al 3 3 ,7 7 4
1 Th e “ al l o t h er” cat eg o ry o f ex p en s es i n cl u d es : p o st o ffi ce b o x, p o s t ag e fees , cel l u l ar/ i n t ern et , s o ft ware, referen ce b o o k s, ad vert i s i n g , ren t/ l eas e, an d s up p li es . Pet i t i o ners t i m el y

fi l eda p et i t i o n wi t h th is Co u rtfo r red et erm i n at i o n .- 4
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[* 4 ] OPINION I. Bu rd en o f Pro o f Gen eral ly , th e Co m

m i s s i o n er’ s d et erm i n at i o n o f a d efi ci en cy i s p res u m ed
co rrect , an dth e t ax p ay er h as the b urd en o f p ro v i ng i ti n co rrect . 2 Ru l e 1 4 2 (a); W el ch v . Hel v eri n g , 2 9 0 U.S. 1 1 1 , 1 1 5 (1 9 3 3). Th e U.S. Co urt of Ap p eal s fo r t h e Fi ft h Ci rcu it , wh ere an ap p eal i n t h i s cas e g en eral l y l i es , h as reco g n i zedth at“ a co u rtn eedn o tg i v e effect t o t h e p res u m p t i o n
o f co rrect n es s i n a cas e i n v ol v i n g u n rep o rt edi n co m e i f t h e Co m m i s si o n er can n o t p res en ts o m e p red i cat e ev id en ce s up p o rt in g i t s d et erm i n at i o n .” Po rt il l o v . Co m m i s s i o n er, 9 3 2 F.2 d1 1 2 8 , 1 1 3 3 (5 t h Ci r. 1 9 9 1 ), aff’ g i n p art , rev ’ g i n p art
an d rem an di n g i n p artT.C. M em o. 1 9 9 0 -6 8 . If the Co m m i s si on er’ s d et erm i n at i o n i s d eem edarb i trary , th e p res u m p t i o n o f co rrect n es s d o es n otap p ly , an dth e Co m m i s s i o n er wi ll b ear t h e b u rd eno f p ro v i n g i tco rrect . Id
.

2 Th e b u rd en o f p ro o f s h i ft s t o th e Co m m i s s i o n er, h o wev er, i f t h e t ax p ay er p ro duces cred i b l e ev i d en ce t o s up p o rtth e d edu ct i o n o r p o s i ti o n , th e t ax pay er co m p l iedwi t h t h e s ub s t an t i at i on req u i rem en t s , an dthe t ax p ay er co o p erat edwi t h t h e Secret ary

wi t h reg ardt o al l reas on ab l e req u es ts fo r i n fo rm at i o n . Sec. 7 4 9 1 (a); s ee al so Hi g b ee v . Co m

m i s s i o n er, 1 1 6 T.C. 4 3 8 , 4 4 0 -4 4 1 (2 0 01 ). Th e t erm “ Secret ary ” m ean s th e Secret ary o f t h e Treas ury

o r h i s d el eg at e. Sec. 7 7 0 1 (a)(1 1 )(B). Pet i t i o n ers d o n o tco n t en d t h ats ec. 7 4 9 1 (a)(1 ) s h ou l ds h i ftth e b u rd enh ere; an d becau s e p et i t i o n ers d idn o t ev enat tem ptt o p u to n ev i den ce, t h ey d i dn o t s at i s fy

th ats ect i o n ’ s req u i rem en ts .- 5
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[* 5 ] Ci t i n g Po rt i l l o v . Co m m i s s i o n er, p et i ti o n ers arg u e t h atres p o nd en t ’ s d et erm i n at i o n t h atp et i t i o ners recei v edu n rep o rt edCOD i nco m e was arb i t rary b ecau s e res p o n den trel i ed o n a t h i rd -p art y i n fo rm at io n retu rn . Ho wev er, we fi n d Po rt i ll o t o b e d i s t i n g u i sh ab l e fro m th e i n s t an tcas e. In Po rt i l l o th e Co m

m i s s i o n er p res en t edn o co m p el l i n g ev i d en ce o f t h e al l eg edu n d errep o rt edi n co m e o t h er t h an t h e d i fferen ce b et ween M r. Po rt i l l o ’ s
co n tract or’ s Fo rm

1 0 9 9 an dM r. Po rt i l l o ’ s t ax retu rn . Here, i n ad d i t i o n t o th e Fo rm 1 0 9 9 -C, res p o n d en tp ro v i d eda 2 0 1 4 cred i tcards t at em en tfro m Dep art m en t St o res Nat i o nal Ban ks h o wi ng a b al an ce du e fro m p et i t i o n er h u s ban do f $ 1 ,5 3 2 .7 9 . Th i s ev i den ce d em o n s t rat es th at p et i t i o n er h u s b an dwas th e acco u n t h o l d er an do weda d eb ti n ex ces s o f t he $ 1 ,1 36 .8 5 s h o wno n t h e i n fo rm at i o n retu rn as can cel ed . Po rt i l l o d eal twi th a s i tu at i o n wh ere t h e Co m m i s si on er fai l ed t o s up p l y co m p el li n g p red i cat e ev i d en ce o f t h e u n rep o rt edi n co m e. Here, h o wev er, res p o n d en td i ds up p l y d o cu m en t ary

p red icat e ev i d en ce s up p o rt i n g th e
n o t i ce o f d efi ci en cy . 3 Fu rt herm o re, p et i t i o n ers d i dn o t m ak e an y effo rtt o d en y th at t h ey recei v ed t h e i n co m e i n qu es t i o n . Co n s eq u en t l y , we can n o tco ns i d er t h em t o h av e m ad e a

3 Becau s e res p o n d en th as p ro v i d eds ub s t an t i v e ev id en ce o f p et i t i o n ers ’ u n rep o rt edCOD i n co m e, t h e d efi ci en cy n o t i ce i s n o ta “ n ak edas s es s m en t ” as p et i t i o n ers co n t en d . See Pet zo l d tv . Co m m i s s i o n er, 9 2 T.C. 6 6 1 , 6 9 1 (1 9 89 ).- 6
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[* 6 ] reas on ab l e d en i al , an dth ey h av e n o tes t ab li s hedth atth e d et erm i n at i o n i n th e
n o t i ce t h atth ey

recei v edu n rep o rt edi n co m e was arb it rary . 4 Hav i n g as s ig n edth e b u rd en o f p ro o f, we tu rn t o an an al y s i s o f t h e ap p li cab l e l aw as i trel at es to th e i s s u es p res en ted
. II. Un rep o rt edIn co m e W e fi rs tad dres s wh et h er p et i t i o n ers fai l ed t o rep ortCOD i n co m e u n d er
s ect i on 6 1 (a)(1 2 ). Gro s s i n co m e i n cl u d es al l i n co m e fro m wh at ev er s ou rce d eri v ed . Sec. 6 1 (a). COD i n co m e i s s p eci fi cal l y i n cl u d edas an i t em

o f g ro s s i n co m e. Sec. 6 1 (a)(1 2 ). Th e reco rdes t ab l is h es th atp et i t io n ers recei v edi nco m e fro m
can cel l at i o n o f a cred i tcardd eb tt o Dep art m en tSt o res Nat i o nal Ban k . Wh i l e p et i t i o n ers o b

ject edt o t h e d o cu m en t s res p o n d en to ffered t o es t ab l i sh th ei r i n co m e, t h ey o ffered n o ev i den ce o f t h ei r i n co m e d es p it e rep eat edreq u es t s t o d o s o. W e

4 Un d er s ec. 6 2 0 1 (d ), i f a t ax p ay er as s ert s a reas o n ab l e d i sp u te wi t h res p ect t o an i t em

o f i nco m e rep o rt edo n an i n fo rm at i o n retu rn fi l ed b y a t h i rd p art y

an d t h e t ax p ay er m eet s cert ai n o t h er req u i rem en t s, t h e Co m m i s si on er b ears th e b u rd en o f p ro du ci n g reas o nab l e an dp ro b at i v e ev i d en ce, i n ad d i t i on t o the i nfo rm at i o n retu rn , co n cern i ng th e d efi ci en cy at t ri b ut ab l e t o t h e i n co m e i t em . Pet i t i o n ers h av e n o trai sedan y

reas o n ab l e d is p u t e wi t h res p ectt o th e accu racyo f t h e i n fo rm at i o n retu rn . Co n s eq u en t l y , th e b u rd en o f p ro du ct io n wi t h res p ectt o th e i n co m e d i d n o t s h i ftt o res p o nd en t u n d er s ec. 6 2 0 1 (d ).- 7
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[* 7 ] th erefo re s u s t ai n res p o nd en t ’ s d et erm in at i o n t h atp et i ti o n ers recei v edCOD i n co m e o f $ 1,1 3 6 fro m

Dep art m en tSt o res Nat io n al Ban ki n 2 01 4
. III. Sch edu l e C Dedu ct i o n s W e n ex td eci d e wh eth er p et i t i o n ers s ub s t an t i at edth e d edu ct i o n s cl ai m edo n t h ei r Sch edu l e C. Dedu ct i o n s are a m at t er o f l eg i s l at i v e g race, an dt ax p ay ers h av e t h e b u rd en
o f s h o w i n g th at t h ey

are en t i t l edt o an y

d edu ct i o n cl ai m ed . See Ru l e 1 4 2 (a); INDOPCO, In c. v . Co m

m i s s i o ner, 5 0 3 U.S. 7 9 , 8 4 (1 99 2 ); New Co l o n i al Ice Co
. v . Hel v eri n g , 2 9 2 U.S. 4 3 5 , 4 4 0 (1 9 3 4 ). Tax p ay ers are req ui redt o m ai n t ai n
reco rd s th atare s u ffi ci en t t o en ab l e t h e Co m m i ss i on er t o d et erm i n e th ei r co rrect t ax l i ab i l i t y . Sec. 6 0 01 ; s ec. 1 .6 0 0 1 -1 (a), In co m e Tax Reg s . Ad d i t i o nal l y , t ax p ay ers b ear t h e b u rd en o f s ub s t an t i at i n g th e am ou n tan dp u rp o se o f t h e i t em cl ai m edas a d edu ct i o n . Hrad es ky v . Co m m is s i o n er, 6 5 T.C. 8 7 , 8 9 -9 0 (1 9 7 5 ), aff’ dp er cu ri am , 5 4 0 F.2 d8 2 1 (5 th Ci r. 1 97 6 ). Pet i t i o ners refu s edt o i n tro du ce an y ev i d en ce o r t es ti m o n y

t o s ub s t an t i at e t h ei r rep ort edb u s i n es s ex p en s es , arg u i n g i n s teadth atres p o nd en t s ho u ldb ear t h e- 8
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[* 8 ] b u rd en o f p ro of. 5 Fo r t h e reas o n s s t at eds up ra p art I, p et i t i o n ers ’ m o ti o n t o
s h i ftth e b u rd en o f p ro o f was d en i ed
. Attri al th e Co u rtwarn edp et i t i o n ers th atth ei r fi l i n g o f a m o ti o n t o s h i ftth e b u rd eno f p ro of wo u ldn o t ex cu s e t h em fro m th ei r b u rd en t o s ub s t an t i at e th ei r rep o rt edb u s i n es s ex p en s es an do ffered them s ev eral ad d i t i o n al o p po rtu ni ti es t o i n t ro du ce ev i d en ce t o s at i s fy th ei r b urd en . Ho wev er, p et i t i o n ers co n t i n u edt o
as s ertth ei r arg u m en tthatthe b u rd en o f p ro o f s ho u l db e s h i ft ed t o res p o n den tan d
o ffered n o t es t i m o n y o r o t h er ev i d en ce t o s ub s tan t i at e t h ei r rep o rt edb u s i n es s
ex p en s es . Acco rd i n g l y , we s u st ai n res p o n d en t ’ s d i s al l o wan ce o f p et i ti o ners ’ d educt i o n s fo r b us i nes s ex p en s es cl ai m edo n t h ei r Sch edu l e C. By fi l i n g a p et i t i o n i n th is Co u rt , p et i t i o n ers g ai nedan o p p o rtu n i t y fo r a d e
n o v o red et erm i n at i o n o f t h e d efi ci en cy d et erm i n edi n t h e n ot ice. Th e Co u rtev en g ran t edp et i ti o n ers a fo u r-m o n t h co n t in u an ce at a p rev io u s t ri al s es s i o n t o g i v e t h em an o p p o rtu n it y

t o s ecu re ev i d en ce s up po rt i n g th ei r ret urn p o s i t i o ns . In s t ead
o f t ak i ng ad v an tag e o f t h i s o p po rtun i t y , p et i ti o n ers refu s edt o co o p erat e wi t h th e

5 Pet i t i o n ers al l eg edth atth e rev en u e ag en t wh o co n du ct edth e au d i t o f t h ei r t ax return s was d ecei t fu l an d u n fai r du ri ng th e ex am i n at i o n . Becau s e p et i t i o n ers fai l edt o o ffer an y

ev id en ce at tri al , we fi ndth at t h e reco rds h o ws n o ev i d en ce o f m i s co n du ct .- 9
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[* 9 ] Co u rtan dfai l edt o p res en ts ub s tan t i at in g ev i d en ce. Acco rd in g l y , we up h o l d
res p o n d en t’ s d et erm i n at i o n . In reach i n g al l o f o ur h o l d i n g s h erei n , we h av e co n s i d ered al l arg u m en t s
m ad e b y th e p art i es , an dt o t h e ex t en tn o tm en t i o n edab o ve, we fi n d t hem t o b e i rrel ev an t , m o ot , o r wi th o u tm eri t . To refl ectthe fo reg o i n g an d res p on d en t ’ s co nces s i o n , Deci s i o n wi ll b e en t eredfo r
res p o nd en t as t o the d efi ci en cy an d fo r p et i ti o n ers as t o th e s ect i o n 6 6 62 (a) accu racy -rel at edp en al t y .