T.C. Memo. 1996-8 

UNITED STATES TAX COURT

EARNEST AND LAURA TILLMAN, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

EARNEST TILLMAN, Petitioner v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent. 

Docket Nos. 4281-94, 13423-94. Filed January 18, 1996.

Earnest Tillman and Laura Tillman, pro sese.

Diane L. Worland, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge: Earnest Tillman and Laura Tillman petitioned

the Court to redetermine respondent’s determination of a

deficiency in their 1989 Federal income tax, an addition thereto

under section 6651(a)(1), and a penalty for negligence under

section 6662(a). Respondent reflected this determination in a

notice of deficiency issued to Earnest Tillman and Laura Tillman

on December 7, 1993. 
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Earnest Tillman petitioned the Court to redetermine

respondent’s determination of a deficiency in his 1990 and 1991

Federal income taxes and additions thereto under sections

6651(a)(1) and 6654. Respondent reflected this determination in

a notice of deficiency issued to Earnest Tillman on April 26,

1994. 

The notices of deficiency show the following deficiencies,

additions to tax, and penalty:

Earnest and Laura Tillman, docket No. 4281-94

Additions to Tax Penalty

Year Deficiency Sec. 6651(a)(1) Sec. 6662(a)

1989 $27,770 $6,967 $5,057

Earnest Tillman, docket No. 13423-94

 Additions to Tax 

Year Deficiencies Sec. 6651(a)(1) Sec. 6654

1990 $33,203 $8,301 $2,179

1991 53,119 13,280 3,046

In an amendment to her answer, respondent alleges that

Mr. Tillman is liable for deficiencies for 1990 and 1991, greater

than those amounts shown in the corresponding notice. The

greater deficiencies, respondent states, stem from: (1) An

insurance payment that Mr. Tillman received in 1990 to cover the

theft of his fully depreciated truck, and (2) moneys that

Mr. Tillman received in 1990 and 1991, for sales that he did not

report on his Schedules C, Profit or Loss From Business. The
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amendment also states that Mr. Tillman is liable for larger

additions to tax on account of the increased deficiencies.

The cases were consolidated for trial, briefing, and

opinion. Following concessions, we must decide:

1. Whether petitioners may deduct expenses on their 1989,

1990, and 1991 Schedules C, that were not allowed by respondent.

2. Whether petitioners may deduct interest and taxes on

their 1989, 1990, and 1991 Schedules A, Itemized Deductions, that

were not allowed by respondent.

3. Whether unemployment compensation received by

Mrs. Tillman in 1989 is includable in petitioners’ 1989 gross

income.

4. Whether Mr. Tillman’s 1990 and 1991 Schedules C failed

to report income from sales of $22,197 and $43,475, respectively.

5. Whether Mr. Tillman failed to report income for 1990,

stemming from his receipt of an insurance payment covering the

theft of his fully depreciated truck.

6. Whether petitioners are liable for additions to their 

1989, 1990, and 1991 taxes under section 6651(a)(1).

7. Whether Mr. Tillman is liable for additions to his 1990

and 1991 taxes under section 6654. 

8. Whether petitioners are liable for a penalty for 1989

under section 6662(a).

We hold for respondent on all issues. Unless otherwise

stated, section references are to the Internal Revenue Code in
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effect for the years in issue. Rule references are to the Tax

Court Rules of Practice and Procedure. Dollar amounts are

rounded to the nearest dollar. Earnest Tillman and Laura Tillman

are separately referred to as Mr. Tillman and Mrs. Tillman,

respectively. We use the term “petitioners” to refer to

Mr. Tillman, or Mr. Tillman and Mrs. Tillman, as may be

appropriate.

FINDINGS OF FACT

Petitioners are husband and wife. They resided in LaPorte,

Indiana, when they petitioned the Court. They filed a 1989,

1990, and 1991 Form 1040, U.S. Individual Income Tax Return,

using the status of “Married filing joint return”. They filed

the 1989 return on April 13, 1992, and they filed the 1990 and

1991 returns on July 18, 1994. Petitioners’ 1989 tax return did

not include $1,152 of unemployment compensation that Mrs. Tillman

received during that year.

Petitioners’ 1989 through 1991 Schedules A reported the

following taxes and interest:

 1989 1990 1991

Taxes $3,492 $3,492 $843

Interest 6,477 5,931 6,064 

Respondent allowed the following amounts:

 1989 1990 1991

Taxes $3,475 $662 $662 

Interest 6,111 5,593 5,469
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Petitioners have a trucking business, Tillman Trucking

(Trucking), that they operate as a sole-proprietorship. 

Petitioners’ 1990 Schedule C reports Trucking’s gross receipts as

$125,226. Included in these receipts are $98,187 from Edward C.

Levy, $5,615 from Howard Belstra, and $21,424 from Crawford

Materials Co. (Crawford). Not included in these receipts is

another $22,197 that Trucking received from Crawford for sales to

it during 1990. Petitioners’ 1991 Schedule C reports Trucking’s

gross receipts as $157,353. All of these receipts are from

Edward C. Levy. Not included in these receipts is $43,475 that

Trucking received from Crawford for sales to it during 1991.

Trucking’s 1989 through 1991 expenses, as reported by

petitioners on their Schedules C, are as follows:

 1989 1990 1991 

Car & truck expenses $42,942 - 0 - $12,500 

Truck payment - 0 - $31,710 - 0 -

Truck seats (2) - 0 - - 0 - 780

Trucks paint - 0 - - 0 - 3,500

Trailer tarps - 0 - - 0 - 1,350

Trailer payment - 0 - - 0 - 7,000 

Depreciation 11,871 5,940 - 0 -

Insurance 15,955 9,600 10,800

Rent or lease 2,100 2,100 - 0 -

Vehicles, mach. equip - 0 - - 0 - 2,100

Repairs 39,440 20,107 39,123

Truck wash - 0 - 850 2,296

Taxes & licenses 6,590 5,241 7,412

Travel & tolls - 0 - 1,400 1,800 

Utilities 4,450 3,350 2,800

Fuel 35,005 22,274 38,000

Tires 4,700 4,500 4,057

Battery box - 0 - - 0 - 570 

Oil, fuel & air filter 945 500 1,175

Lube filter 230 390 - 0 -

CB radio, oil, hoist, A’freeze 745 1,050 2,070
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1 Petitioners erroneously reported that these expenses

totaled $183,883. The total is actually $164,973.

 

2 However, she did allow petitioners to deduct the portion

of these payments that she determined was interest. She also let

petitioners deduct the depreciation that they reported for the

1988 Peterbilt.

Nuts, bolts, & master - 0 - - 0 - 1,600

Total 183,8831 109,012 138,933

Respondent allowed the following amounts:

 1989 1990 1991 

Depreciation--1988 Peterbilt $11,871 $5,940 - 0 -

Insurance 16,056 10,212 $10,800

Rent or lease 2,100 - 0 - - 0 -

Repairs 27,720 12,952 23,321

Truck wash - 0 - 717 - 0 - 

Taxes & licenses 6,590 1,996 4,474

Utilities 4,631 3,672 3,672

Fuel 35,005 22,274 39,054

Tires 5,202 5,128 6,022

Oil, fuel & air filter 945 751 - 0 - 

Lube Filter 230 390 - 0 - 

CB radio, oil, hoist, A’freeze 745 1,050 2,078

Nuts, bolts, & masters - 0 - - 0 - 860

Truck interest 10,941 6,103 1,927

Total 122,036 71,185 92,208

Respondent did not allow payments of $42,942 and $31,710 

reported by petitioners for 1989 and 1990, respectively, as

expenses of a 1986 Peterbilt truck and a 1988 Peterbilt truck.2

Mr. Tillman acquired the 1986 Peterbilt in January 1986, and he

began using it in Trucking’s business during that year. In

acquiring the 1986 Peterbilt, Mr. Tillman signed three agreements

with Pro Am Leasing, Inc. (Pro Am). The first agreement was

entitled “MASTER LEASE/PURCHASE AGREEMENT”. This agreement
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3 Pro Am had purportedly purchased the truck from the seller

in January 1987, at a total cost of $85,227.

stated that Pro Am was “renting” the 1986 Peterbilt to

Mr. Tillman, and that he was paying Pro Am 60 months of “rent” at

$1,604 per month.3 It also stated: (1) Mr. Tillman was liable

for all taxes, fees, and other charges on the truck;

(2) Mr. Tillman was responsible for maintaining the truck;

(3) Mr. Tillman had title to the truck; (4) Mr. Tillman was

responsible for insuring the truck, at his own expense;

(5) Mr. Tillman assumed and bore the entire risk of loss on the

truck, including loss from damage, theft, or destruction; and

(6) Mr. Tillman “shall have and shall be deemed to have properly

exercised an option to purchase” the truck upon his timely

payment of all monthly “rents” due under the agreement. Under

the second agreement, Mr. Tillman was “treated as the purchaser

of the [1986 Peterbilt] for purposes of the investment credit". 

Under the third agreement, Mr. Tillman acknowledged that the

“lease” was assigned to Michigan National Bank for collection of

the “rent”. 

Immediately after the acquisition, Mr. Tillman applied to

the State of Michigan for title to the 1986 Peterbilt, stating

that "I am the purchaser of the [1986 Peterbilt]". Mr. Tillman

also registered the truck in Indiana, stating that he was the

owner, and the State of Indiana issued him a certificate of

title. In 1987, in his stated capacity as owner of the 1986
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Peterbilt, Mr. Tillman agreed to lease the truck to Indian

Trucking Co., Inc., and he signed a credit application with

Pro Am. 

For at least the 1-year period ended December 13, 1990,

Mr. Tillman insured the 1986 Peterbilt with Canal Insurance Co.

(Canal). On July 19, 1990, Mr. Tillman notified Canal that the

truck had been stolen on June 13, 1990. Mr. Tillman’s written

notification states: "When your policy was issued to the Insured

[Mr. Tillman], Insured was the sole and unconditional owner of

the [1986 Peterbilt]." The truck was worth $43,500 at the time

of its theft, and Mr. Tillman’s policy with Canal provided for a

$1,000 deductible on the theft. For Federal income tax purposes,

the truck was fully-depreciated; i.e., Mr. Tillman had no basis

in it.

Later that year, Canal issued a $42,500 check payable to

Mr. Tillman and Michigan National Bank to cover the theft, and

Mr. Tillman, in his stated capacity as owner of the 1986

Peterbilt, transferred his title in the truck to Canal. Pro Am

also certified that Mr. Tillman was the owner of the truck, and

that its security interest in the truck was terminated. On or

about April 1, 1990, Mr. Tillman purchased a 1982 Mack truck for

$8,500, to replace the 1986 Peterbilt.

With respect to the 1988 Peterbilt, Mr. Tillman acquired

that truck in 1987 from Peterbilt Motors Co. (Motors). Motors

issued Mr. Tillman a certificate for it, reflecting that Motors
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4 Mr. Tillman had borrowed $80,157 from Pro Am to acquire

the 1988 Peterbilt. The loan agreement states:

Borrower warrants and agrees that: * * * Borrower

is the owner of the Collateral free from any liens,

encumbrances or security interests except for the

security interest granted hereby, and will defend the

Collateral against all claims and demands of all

persons at any time claiming the same or any interest

therein; * * * 

sold him the truck subject to the security interests of National

Bank of Detroit and Pro Am.4 A document was filed with the State

of Indiana, reflecting that Mr. Tillman purchased the 1988

Peterbilt truck in 1987 for $71,944. Later that year, the State

of Indiana issued a certificate of title to Mr. Tillman showing

that he owned the 1988 Peterbilt, and that the lienholders were

National Bank of Detroit and Pro Am. Pro Am issued Mr. Tillman a

statement showing that his interest charges would be $10,513 for

1988, if he timely made all of his required payments.

OPINION

Petitioners must prove that respondent's determinations set

forth in her notices of deficiency are incorrect. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). Respondent must

prove the increased deficiencies asserted in her amendment to

answer. Rule 142(a); Estate of Bowers v. Commissioner, 94 T.C.

582, 595 (1990). 

1. Additional Schedule C Expenses

An individual may deduct all ordinary and necessary expenses

paid or incurred during the taxable year in carrying on a trade
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or business. Sec. 162(a). Whether expenditures are “ordinary”

and “necessary” generally are questions of fact. Commissioner v.

Heininger, 320 U.S. 467 (1943). 

We agree with respondent that petitioners may not deduct any

expenses on their Schedules C, other than the ones she has

allowed. Petitioners have not persuaded us that they incurred

any other expenses (including the disallowed amounts reported on

their tax returns), or, even if they had, that these other

expenses were ordinary and necessary under section 162(a). 

See also sec. 6001 (petitioners must keep sufficient records to

substantiate any deduction otherwise allowable by the Code). 

With respect to the 1986 and 1988 Peterbilts, respondent

determined that Mr. Tillman purchased these trucks. Petitioners

claim that Mr. Tillman leased them. To support their claim,

petitioners rely primarily on the fact that some of the documents

surrounding the acquisition use the terms “lease” or “rent”. We

are not persuaded. Whether a transaction is a sale or a lease

does not rest on the name given to the transaction by the parties

thereto, either in or out of the surrounding documents. What is

critical is the intent of the parties. We must ask ourselves:

“What did the parties to the transaction believe the legal effect

of the transaction to be?” M & W Gear Co. v. Commissioner,

446 F.2d 841, 844 (7th Cir. 1971), affg. in part, revg. in part,

and remanding 54 T.C. 385 (1970). With this in mind, we are

unpersuaded that Mr. Tillman’s acquisitions of the Peterbilts
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5 The parties have stipulated that Mr. Tillman would have

been required to make 60 monthly payments of $1,604, had he

purchased the 1986 Peterbilt with a 20-percent downpayment and

financed the rest at an interest rate of 14.5 percent.

 

6 We also note that Mr. Tillman’s rental payments are not

deductible under sec. 162(a)(3). Sec. 162(a)(3) allows a

deduction for rental payments for the use or possession of

property to which the taxpayer has not taken title, or is not

(continued...)

were intended to be other than purchases. The acquisition

documents, but for the use of the terms “rent” and “lease”,

contain language that is more indicative of purchases than of

leases, and Mr. Tillman, by his own actions, represented himself

to third parties (including the Internal Revenue Service) as a

purchaser of the trucks. We also find relevant the facts:

(1) The agreement underlying the acquisition of the 1986

Peterbilt provided that Mr. Tillman would “purchase” the truck

upon his payment of the total “rent”, and (2) the total “rent”

was a close approximation of the total amount that Mr. Tillman

would have had to have paid had he financed the truck’s purchase

with a financial lender.5 The fact that a purported lessee will

pay a nominal fee to acquire “leased” property upon the

expiration of the “lease” tends to show that the property was

actually sold to him or her, M & W Gear Co. v. Commissioner,

54 T.C. 385, 395 (1970), affd. on this issue 446 F.2d 841 (7th

Cir. 1971), and the fact that no payment is required, as is true

with the case at hand, tends to show the same. We hold for

respondent on this issue.6
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6(...continued)

taking title, or in which he has no equity.

2. Additional Schedule A Deductions

For reasons similar to those stated above, we agree with

respondent that petitioners may not deduct more interest or taxes

on their Schedules A than she has allowed. We hold for

respondent on this issue.

3. Taxability of Unemployment Compensation

Gross income includes unemployment compensation. Sec.

85(a). Given the facts that Mrs. Tillman received $1,152 of

unemployment income in 1989, and that petitioners did not report

this amount on their 1989 tax return, we must hold for respondent

on this issue.

4. Unreported Sales Income

Gross income includes income from whatever source derived. 

Sec. 61(a). Petitioners agree that Trucking received $43,621 and

$43,475 in gross receipts from Crawford during 1990 and 1991,

respectively, and that petitioners’ tax returns reported only

$21,424 of these receipts for 1990 and none of them for 1991. We

hold that petitioners failed to report $22,197 in sales income

for 1990, and $43,475 in sales income for 1991.

5. Receipt of Insurance Proceeds

A taxpayer realizes gain on a conversion (e.g., a loss) to

the extent that the insurance proceeds connected thereto exceed

the adjusted basis of the underlying property. Sec. 1001(a). 
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A taxpayer may elect to defer recognition of the gain to the

extent that the insurance proceeds do not exceed the cost of

qualifying property that is purchased to replace the converted

property. Sec. 1033(a)(2). A taxpayer's failure to recognize

the gain is considered an election under section 1033(a)(2). 

Sec. 1.1033(a)-2(c)(2), Income Tax Regs.

Respondent alleges that Mr. Tillman should have recognized a

$34,000 gain in 1990 on account of his insurance recovery. We

agree. In 1990, he received $42,500 from Canal to cover the

theft of the 1986 Peterbilt, and he had no basis in the truck for

Federal income tax purposes. Thus, Mr. Tillman realized a

$42,500 gain. Because $8,500 of this gain is considered

deferred, due to the fact that he purchased the Mack truck in

1990, he should have recognized the remaining gain of $34,000 in

1990. He failed to do so. We hold for respondent on this issue.

6. Addition to Tax Under Sec 6651(a)(1)

Respondent determined additions to tax under section

6651(a)(1) in each year, asserting that petitioners failed to

file timely a Federal income tax return. We have found that all

of petitioners’ tax returns were filed untimely; they were filed

outside of the periods of time mentioned in section 6072(a) and

6081(a). In addition, the record does not show that any of the

untimely filings was due to reasonable cause and not due to

willful neglect. Thus, we sustain respondent’s determination

that petitioners are subject to additions to tax under section
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6651(a)(1) in each year. See Waitzkin v. Commissioner, T.C.

Memo. 1992-216. 

7. Additions to Tax Under Sec. 6654

Respondent determined additions to Mr. Tillman’s 1990 and

1991 taxes under section 6654, asserting that he failed to pay

estimated tax. An addition to tax under section 6664 is

mandatory unless one of the exceptions contained in that section

applies. Recklitis v. Commissioner, 91 T.C. 874, 913 (1988). 

None of these exceptions apply. Thus, we sustain respondent on

this issue.

8. Penalty Under Sec. 6662(a)

Respondent determined a penalty under section 6662(a) for

petitioners’ 1989 taxable year, asserting that their underpayment

of income tax for 1989 was due to negligence or intentional

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

penalty equal to 20 percent of the portion of the underpayment

attributable to negligence. 

Negligence is defined to include any failure to make a

reasonable attempt to comply with the provisions of the Code.

Sec. 6662(c). Negligence has also been defined to include a lack

of due care or a failure to do what a reasonable and ordinarily

prudent person would do under the circumstances. Accardo v.

Commissioner, 942 F.2d 444, 452 (7th Cir. 1991), affg. 94 T.C.

96 (1990). Petitioners must prove that respondent's

determination of negligence is erroneous. Id. at 452; Bixby v.
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Commissioner, 58 T.C. 757, 791-792 (1972). They have failed to

do so; thus, we sustain respondent on this issue.

To reflect the foregoing, 

Decisions will be

 entered under Rule 155.