T.C. Memo. 2014-63

UNITED STATES TAX COURT

BRAD S. HERSHBERGER, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 279-12, 280-12, Filed April 8, 2014.

 281-12.

Brad S. Hershberger, pro se.

Jamie M. Stipek, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KERRIGAN, Judge: Respondent determined the following deficiencies and

penalties in these consolidated cases with respect to petitioner’s Federal income

tax for tax years 2006, 2007, and 2008:
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[*2]

Year Deficiency

Penalty

sec. 6662(a)

2006 $8,368 $1,674

2007 6,890 1,378

2008 855 171

Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the tax years in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure. We round all monetary amounts to

the nearest dollar.

After concessions, the issues for consideration are whether petitioner (1)

received rental income greater than the rental income he reported on his Schedules

E, Supplemental Income and Loss, for tax years 2006 and 2007; (2) is entitled to

deduct repair expenses he reported on his Schedules E for tax years 2006 and

2007; (3) is entitled to deduct charitable contributions he reported on his

Schedules A, Itemized Deductions, for tax years 2006, 2007, and 2008; and (4) is

liable for accuracy-related penalties under section 6662(a) for tax years 2006,

2007, and 2008.
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[*3] FINDINGS OF FACT

Some of the facts are stipulated and are so found. Petitioner resided in

Kansas when he filed the petitions. Petitioner worked for Cessna Airport, Inc.,

during 2006, 2007, and 2008.

On January 8, 2009, petitioner filed a Form 1040, U.S. Individual Income

Tax Return, for tax year 2006. On his Schedule A petitioner claimed a deduction

for charitable cash contributions of $8,100. On his Schedule E petitioner listed

ownership of three residential rental properties in Wichita, Kansas, located on the

following streets: E. Gilbert (Gilbert property), Allen (Allen property), and Ellis

(Ellis property). Petitioner reported rental income from the Gilbert property, the

Allen property, and the Ellis property of $3,270, $3,100, and $3,120, respectively. 

Petitioner reported repair expenses in connection with the Gilbert property, the

Allen property, and the Ellis property of $6,231, $5,972, and $6,103, respectively. 

On February 10, 2009, petitioner filed a Form 1040 for tax year 2007. On

his Schedule A petitioner claimed a deduction for charitable cash contributions of

$9,000. On his Schedule E petitioner listed continued ownership of the Gilbert

property, the Allen property, and the Ellis property. Petitioner reported rental

income from the Gilbert property, the Allen property, and the Ellis property of

$3,223, $3,127, and $3,152, respectively. Petitioner reported repair expenses in
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[*4] connection with the Gilbert property, the Allen property, and the Ellis

property of $6,314, $5,817, and $6,099, respectively. 

Petitioner filed timely a Form 1040 for tax year 2008. On July 13, 2009,

petitioner filed a Form 1040X, Amended U.S. Individual Income Tax Return, for

tax year 2008. On his Schedule A petitioner claimed a deduction for charitable

cash contributions of $5,720. 

On September 21, 2011, respondent issued petitioner a notice of deficiency

for tax years 2006, 2007, and 2008. Respondent disallowed petitioner’s repair

expense and charitable contribution deductions for lack of substantiation and

included additional rental income because of unexplained deposits in petitioner’s

bank account records. 

OPINION

I. Burden of Proof

Generally, the Commissioner’s determinations in a notice of deficiency are

presumed correct, and a taxpayer bears the burden of proving those determinations

are erroneous. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). 

Petitioner has not claimed or shown that he meets the requirements of section

7491(a) to shift the burden of proof to respondent on any relevant factual issues.
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[*5] Taxpayers must maintain records adequate to substantiate their income and

deductions. Sec. 6001. These records should be sufficient to establish the amount

of the gross income or other items shown on the tax return. Sec. 1.6001-1(a),

Income Tax Regs. The taxpayer shall retain these records as long as they may

become material in the administration of the Internal Revenue Code. Sec. 1.6001-

1(e), Income Tax Regs.

II. Unreported Income

Section 61(a) defines gross income as “all income from whatever source

derived” unless otherwise provided. Respondent reconstructed petitioner’s rental

income for tax years 2006 and 2007 using the bank deposits method. Where the

taxpayer fails to keep sufficient records under section 6001, the Commissioner

may compute taxable income through a method that “does clearly reflect income”. 

Sec. 446(b); Petzoldt v. Commissioner, 92 T.C. 661 (1989).

The Commissioner’s use of the bank deposits method has long been

approved when the taxpayer fails to keep sufficient records under section 6001. 

Nicholas v. Commissioner, 70 T.C. 1057, 1064 (1978); see also Good v.

Commissioner, T.C. Memo. 2012-323, at *25. This method “assumes that all

money deposited in a taxpayer’s bank account during a given period constitutes

taxable income, but the Government must take into account any nontaxable source
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[*6] or deductible expense of which it has knowledge.” Clayton v. Commissioner,

102 T.C. 632, 645-646 (1994). The bank deposits method provides prima facie

evidence of income, and the Commissioner is not required to prove the likely

source of the income. Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). The

taxpayer shoulders the burden of establishing that items “should be excluded from

income or allowed as deductions.” Gemma v. Commissioner, 46 T.C. 821, 833

(1966); see also Clayton v. Commissioner, 102 T.C. at 645.

Respondent produced copies of petitioner’s Bank of America records for tax

years 2006 and 2007. The bank records indicate that petitioner made the

following bank deposits on the following dates:

Date Deposit amount

 Sept. 5, 2006 $2,500

Sept. 15, 2006 4,000

Dec. 11, 2006 7,000

June 12, 2007 12,000

Respondent contends that these deposits were additional rental income that

petitioner did not report on his Forms 1040. Petitioner testified that the bank

deposits were all derived either from paychecks for wages he received from

Cessna Airport, Inc., and reported on his Forms 1040 or checks he received from
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[*7] the U.S. Treasury as refunds of Federal tax. Petitioner did not provide

documents to corroborate his testimony. Petitioner did not call any witnesses to

corroborate his testimony. The record is devoid of any evidence, other than

petitioner’s testimony, that the deposits were excludible from income or allowable

as deductions. Petitioner’s unsupported testimony is insufficient to meet his

burden. We sustain respondent’s determinations with respect to petitioner’s

unreported rental income.

III. Rental Repair Deductions

Deductions are a matter of legislative grace, and the taxpayer must prove his

or her entitlement to a deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79,

84 (1992). Section 212(2) allows for a deduction of all the ordinary and necessary

expenses paid or incurred during the taxable year for the management,

conservation, or maintenance of property held for the production of income. A

taxpayer may deduct properly substantiated repair expenses for properties held out

for rent under section 212.

A taxpayer claiming a deduction on a Federal income tax return must

demonstrate that the deduction is allowable pursuant to a statutory provision and

must further substantiate that the expense to which the deduction relates has been
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[*8] paid or incurred. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90

(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976).

Petitioner produced receipts for 2006 and 2007 that he contends substantiate

his repair expenses. These receipts are vague and do not include the nature and

date of the repairs, the name of the individual or company that performed the

repairs, the details concerning what work was performed, or the type of materials

used in the repairs. The receipts were printed on blank paper rather than on the

official letterhead of a business. Petitioner testified that a man named Juan

Rodriguez made the repairs and prepared the receipts in 2006 and that a man

named Jose Martinez made the repairs and prepared the receipts in 2007. 

Petitioner did not call either Mr. Rodriguez or Mr. Martinez as a witness to verify

the cost of the repairs or to authenticate the receipts, and therefore respondent did

not have an opportunity to cross-examine them. Petitioner’s uncorroborated and

vague receipts are not credible. We sustain respondent’s disallowance of

petitioner’s repair expense deductions. 

IV. Charitable Contributions

Section 170(a)(1) allows a deduction for contributions to charitable

organizations defined in section 170(c). Section 170(f)(8) provides substantiation

requirements for certain charitable contributions. Specifically, section
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[*9] 170(f)(8)(A) provides: “No deduction shall be allowed under subsection (a)

for any contribution of $250 or more unless the taxpayer substantiates the

contribution by a contemporaneous written acknowledgment of the contribution

by the donee organization that meets the requirements of subparagraph (B).” For

donations of money the donee’s written acknowledgment must state the amounts

contributed, indicate whether the donee organization provided any goods or

services in consideration for the contribution, and provide a description and a

good-faith estimate of the value of any goods or services provided by the donee

organization. See sec. 179(f)(8)(B); sec. 1.170A-13(f)(2), Income Tax Regs. 

Section 170(f)(17) provides: “No deduction shall be allowed under subsection (a)

for any contribution of a cash, check, or other monetary gift unless the donor

maintains as a record of such contribution a bank record or a written

communication from the donee showing the name of the donee organization, the

date of the contribution, and the amount of the contribution.” Section 170(f)(17)

is effective only for charitable contributions made in tax years beginning after

September 17, 2006. Section 170(f)(17) applies to petitioner for tax years 2007

and 2008. For tax year 2006, section 1.170A-13(a) (1)(iii), Income Tax Regs.

requires in the absence of a canceled check the name of the donee, the date of the

contribution, and the amount of the contribution. Respondent argues that
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[*10] petitioner is not entitled to deduct charitable contribution reported on his

Schedules A because none of the contributions were substantiated. Petitioner

testified that the charitable contributions were the result of a tithe that he paid to

his church. Petitioner provided no receipts, bank records, or documentation

showing the donee and date of the contribution for any tax year in issue. We

sustain respondent’s disallowance of petitioner’s charitable contribution

deductions. 

V. Accuracy-Related Penalties

Respondent determined that for each year in issue petitioner is liable for an

accuracy-related penalty pursuant to section 6662(a). Section 6662(a) provides a

penalty for an underpayment attributable to negligence or disregard of rules or

regulations within the meaning of section 6662(b)(1).

The Commissioner bears the burden of production regarding the taxpayer’s

liability for any penalty. Sec. 7491(c); see also Higbee v. Commissioner, 116 T.C.

438, 446-447 (2001). Once the Commissioner has met this burden, the taxpayer

must provide persuasive evidence that the Commissioner’s determination was

incorrect. See Rule 142(a); Higbee v. Commissioner, 116 T.C. at 447.

Negligence includes any failure to make a reasonable attempt to comply

with the provisions of the internal revenue laws, to exercise due care, or to do
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[*11] what a reasonable and prudent person would do under the circumstances. 

Sec. 6662(c); Neely v. Commissioner, 85 T.C. 934, 947 (1985); sec. 1.6662-

3(b)(1), Income Tax Regs. Negligence also includes any failure by a taxpayer to

keep adequate books and records or to substantiate items properly. Sec. 1.6662-

3(b)(1), Income Tax Regs. Respondent has demonstrated that petitioner failed to

keep accurate records with respect to his rental income, rental repair expenses, and

charitable contributions. Respondent has shown that petitioner acted negligently

with respect to 2006, 2007, and 2008.

The accuracy-related penalty does not apply with respect to any portion of

an underpayment for which it is shown that the taxpayer had reasonable cause and

acted in good faith. Sec. 6664(c)(1). For purposes of section 6664(c) a taxpayer

may be able to establish reasonable cause and good faith by showing reliance on

professional advice. Sec. 1.6664-4(b)(1), Income Tax Regs. 

Petitioner testified that his Forms 1040 for 2006, 2007, and 2008 were

prepared by his accountant. Petitioner did not call his accountant to testify, and

petitioner could not recall what documents he provided to his accountant to

prepare his returns. Petitioner has failed to provide evidence that his accountant

was a competent professional with sufficient expertise and that he provided the

accountant with necessary and accurate information. See Neonatology Assocs.,
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[*12] P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir.

2002). Petitioner did not show reasonable cause for failing to keep adequate

books and records in order to substantiate items properly. We hold that for each

year in issue petitioner is liable for a section 6662(a) penalty for negligence.

Any contentions we have not addressed are irrelevant, moot, or meritless.

To reflect the foregoing,

Decision will be entered under 

Rule 155 at docket No. 279-12.

Decisions will be entered for

respondent at docket Nos. 280-12

and 281-12.