TAX COURT OPINION

Case: Ameradream Corporation
Docket Number: 8367-09
Judge: Gustafson
Opinion Type: bench
Filed: 03/14/2012
Pages: 17

UNITED STATES TAX COURT WASHINGTON, DC 20217 RMM AMERADREAM CORPORATION, ET AL., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) Docket Nos. 8367-09, ) ) ) ) 8368-09. ORD E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith to petitioners and to respondent a copy of the pages of the transcript of the trial in the above cases before Judge David Gustafson at Denver, Colorado, on March 6, 2012, containing his oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decisions will be entered under Rule 155. (Signed) David Gustafson Judge Dated. Washington, D.C. March 14, 2012 SERVEDMar142012 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Judge David Gustafson March 6, 2012 Ameradream Corporation, Et Al. v. Commissioner Docket Nos. 8367-09, 836 -09 THE COURT: The Court has decided to render oral Findings of Fact and Opinion in these cases. The following represents the Court's oral Findings of Fact and Opinion, which shall not be relied on as precedent in any other case . This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code and Rule 152 of the Tax Court Rules of Practice and Procedure . By notice of deficiency dated January 14, 2009, the Internal Revenue Service (IRS) determined deficiencies in the Federal income tax of petitioner Ameradream Corporation for the years 2004, 2005, and 2006, an addition to tax under section 6651(a) (1) for failure to file a timely return for each of those three years, and an accuracy-related penalty under section 6662 (a) for. 2004 and 2005. Respondent ' s answer also pleaded that for 2006 Ameradream is liable for an addition to tax under section 6651(a) (2) for failure to timely pay tax. By notices of deficiency also dated January 14, 2009, the IRS determined deficiencies in the Federal income tax of petitioner Jan Gaudina for the same three years, an Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 accuracy-related penalty under section 6662(a) for 2004 and 2005, and an addition to tax under section 6651(a) (1) for failure to file a timely return for 2006. After the parties' concessions or settlement of various issues in the notices of deficiency issued to Ameradream and Mr. Gaudina, the issues remaining for decision are those addressed in the "Discussion" below. For the reasons explained hereafter, we find in favor of the IRS on all these issues except the addition to tax under section 6651(a) (2). Trial of this case was conducted on March 5, 2012, in Denver, Colorado. Mr. Gaudina represented both himself and (as a corporate o:fficer) Ameradream, and the IRS was represented by Sara J. Barkley. FINDINGS OF FACT Business activities In the early 1990s Mr. Gaudina participated in the formation of Ameradream Corporation, of which he has since then been an officer. Ameradream had two d.b.a.'s--"Home Theater International", which sold televisions and eventually sold real estate-related books and tapes over the Internet, and "Equity Reserve", which sold insurance. Ameradream was organized as a so-called "C Corporation" and thus was directly liable for its own taxes. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Also since the early 1990s, Mr. Gaudina has engaged in his own sole proprietorship that performs the same activities--selling televisions, books and 5 tapes, and insurance. Business accounts and records Ameradream's finances and the finances of the sole proprietorship were intertwined with each other and with Mr. Gaudina's personal finances. For his sole proprietorship Mr. Gaudina did not have any separate bank accounts or credit card accounts but used his personal accounts. Ameradream did have a checking account for each of its two d.b.a.'s; but it had no credit card account, so Mr. Gaudina used his personal credit card for Ameradream purchases. Mr. Gaudina also evidently Made Ameradream expenditures from his personal checking account; and he clearly made personal expenditures from the Ameradream accounts. Mr. Gaudina did not keep orderly records for either his own sole proprietorship or.Ameradream. Neither activity had ledgers or other books of account. Mr. Gaudina did not retain bank statements or credit card statements for either activity. He did retain check stubs for the checking account for one of Ameradream's d.b.a.'s (but not the other); and he Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 retained the carbon copies of some of the checks from his personal checking account; but in the absence of cancelled checks or bank statements, we cannot determine which checks were actually negotiated. He retained deposit slips for the checking account for one of Ameradream's d.b.a.'s (but not the other), but we cannot tell whether notations explaining the nature of some of the deposits as "Loans" were contemporary or were added later, and how much later. He retained receipts for credit card and cash purchases, but these include numerous obviously personal, non-business expenses (such as pet-related expenditures), and we cannot tell yhich, if any, of the receipts were business-related. Mr. Gaudina did not.maintain any log to keep track of vehicle use for either activity. Ameradream's:alleged pre-2004 losses Petitioners failed to prove, and we therefore cannot determine, whether and to what extent Ameradream incurred net operating losses ("NOLs") in the pre-suit years. Ameradream's distributions to Mr. Gaudina Ameradream made various expenditures on behalf of Mr. Gaudina, paying expenses that were his personal expenses. The parties have stipulated that these expenditures totaled $46,633 in 2004 and $21,370 Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 in 2005. (Mr. Gaudina contends that they were repayments of loans he had made to Ameradream.) Alleged loans to Ameradream before 2004 We cannot determine the extent, if any, to which Mr. Gaudina transferred money to Ameradream in the pre-suit years, nor whether such transfers were pursuant to loans. Tax returns Since at least as early as 1993, Ameradream did not file timely tax returns. On December 11, 2006, it filed untimely returns for the thirteen years 1993 through 2005, reporting losses for ea;ch year through 2003 and reporting profits in 2004 and 2005 (against which it reported NOL carryover de'ductions). Ameradream did not file a return for 2006, and during the examination (discussed below) the IRS prepared a "substitute for return" (SFR) pursuant to section 6020(b), which it issued on May 9, 2008. During that examination, Mr. Gaudina submitted to the examining agent an unsigned 2006 return for Ameradream (which reflected a profit, offset by NOL carryover deductions). Mr. Gaudina timely filed his tax returns for 2004 and 2005 by April 15 of the succeeding year. He did not timely file for 2006, but by agreement of the Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 parties the late-filing addition under section 6651(a) (1) is no longer at issue as to Mr. Gaudina, and we do not discuss it further. Examination The IRS examined Ameradream's and Mr. Gaudina's returns for 2004, 2005, and 2006. Mr. Gaudina produced to the IRS agent even fewer documents than he later produced at trial. However, by issuing subpoenas to banks, the agent was able to obtain some records for the years at issue. To the extent possible, she untangled the intertwined affairs of Ameradream, Mr. Gaudina's sole proprietorship, and his personal finances; determined the income and expenses attributable to each; and prepared an SFR for Ameradream for 2006. The IRS issued notices of deficiency to both Mr. Gaudina and Ameradream in January 2009. Proceedings in this Court Ameradream and Mr. Gaudina both filed petitions in this Court in April 2009. At that time, Mr. Gaudina resided in Colorado, and Ameradream's principal place of business was in Colorado. After further factual development of the case, the parties filed a "Stipulation of Settled Issues" on June 27, 2011, settling some of the issues in the notices of Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 deficiency for both petitioners. On March 5, 2012 (immediately before trial), they filed a "Supplemental Stipulation of Settled Issues", settling additional issues in Mr. Gaudina's notices of deficiency. Although the parties have not agreed on computations, Mr. Gaudina alleges--and we assume for present purposes--that in those stipulations the IRS has agreed to concede approximately three-fourths of the adjustments in the notices of deficiency. I. Burden of proof D.ISCUSSION The IRS's determination is presumed correct, and.the taxpayer generally bears the burden to prove his entitlement to any deductions it claims. Rule 142(a). Deductions are strictly a matter of legislative grace, and taxpayers must satisfy the specific requirements for any deduction claimed. See INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Furthermore, taxpayers are required to maintain records sufficient to substantiate their claimed deductions. See sec. 6001; 26 C.F.R. sec. 1.6001-1(a), Proced. & Admin. Regs. II. Ameradream issues A. Whether Ameradream may deduct, in any of the years at issue, NOLs carried forward Heritage. Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 from any years prior to 2004. Section 172(a) .provides, "There shall be allowed as a deduction for the taxable year an amount equal to *** the net operating loss carryovers to such year". Ameradream contends that it had a series of net operating losses in 1993 to 2003 and that it is entitled to claim a carryover of those losses into the years at issue--2004, 2005, and 2006. However, we have found that Ameradream did not establish any pre-2004 losses that could be carried forward. Its failure of proof was nearly wholesale. Ameradream did not prove that the income reported on the returns it filed (in December 2006) for the.years 1993 to 2003 included all the income of Ameradream, since none of the records are complete or reliable, and there are no records for one of the d.b.a.'s. And Ameradream did not prove its deductible expenses for those years but simply relied on the tax returns, which, in addition to being insufficient proof by their nature, are in this instance manifestly unreliable--prepared years after the fact, with almost no apparent documentary basis. As a result, we hold that Ameradream may not deduct, in any of the years at issue, NOLs carried forward from any years prior to 2004. B. Whether, for any of the years at issue, Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 Ameradream is liable for the addition to tax under section 6651(a) (1) for failure to timely file a return. Section 6651(a) (1) imposes an addition to tax for failure to f'ile a timely return. Under section 7491(c), the IRS has the burden of production with respect to this addition to tax, and it met that burden here: The parties stipulated that Ameradream's returns for 2004 and 2005 were received by the IRS not when due but on December 11, 2006. For 2006 the parties stipulated only the submission of an unsigned return, and Ameradream did not offer any copy of a filed return nor any evidence of its filing. Section 6651(a) (1) provides that the addition to tax applies "unless it is shown that such failure is due to reasonable cause and not due to willful neglect", and on this point Ameradream has the burden of proof. The implementing regulation provides, "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause." 26 C.F.R. sec. 301.6651-1(c), Proced. & Admin. Regs. No evidence was put on to show an exercise of ordinary business care and prudence, and we hold that Ameradream is liable for the addition to Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 tax under section 6651(a) (1) for each of the three years at issue. 12 C. Whether, for the year 2006, Ameradream is liable for an addition to tax under section 6651(a) (2) for failure to timely pay. tax. The notice of deficiency that the IRS issued to Ameradream did not assert an addition to tax under section 6651(a) (2) for failure to timely pay tax, but the IRS pleaded such a liability in its answer, putting it at issue. However, the parties thereafter filed on June 27, 2011, a "Stipulation of Settled Issues" stating that "the issues remaining for trial" for Ameradream were: the NOL carryover issue, the addition to tax under section 6651(a) (1) for all three years, and the negligence penalty under section 6662 for 2005. The section 6651(a) (2) addition was not. listed, and the IRS has not moved to be relieved from this stipulation. The TRS did include section 6651(a) (2) in the tally of issues in its pretrial memorandum and when this case was called for trial; but in the case of this self-represented taxpayer, we do not hold against him the failure to notice that this issue had crept back in, and we do not hold that he implicitly consented to the trial of this issue. Heritage Reporting Corporation (202) 628-4888 . 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 We therefore do not sustain the addition to tax under . 13 section 6651 (a) (2) . D. Whether, for the year 2005, Ameradream . .is liable ifor the accuracy-related penalty for negligence under section 6662 (b) (1) . Section 6662 (b) (1) imposes an "accuracy-related penalty" of 20 percent of the portion of the underpayment of tax that is attributable to the taxpayer's negligence or disregard of rules or regulations . The IRS asserts that Ameradream's understatement for 2005 was attributable t o negl igence . Under sect ion 7491 (c ) , t;he Commissioner bears the burden of production and must produce sufficient evidence that the imposition of the penalty is appropriate in a given case . : Once the Commissioner meets this burden, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Rule 142 (a) . For.purposes of section 6662, the term "negligence" includes a failure to exercise ordinary and reasonable care in the preparation of a tax return . 26 C . F . R . sec . 1. 6662 -3 (b) (1) , Income Tax Regs.. Negligence is.defined as a lack of due care or Heritage Reporting Corporation (202) 628-4888 14 failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934 (1985). The term "disregard" includes any careless, reckless, or intentional disregard of the rules or regulations. Sec. 6662(c). It also "includes any failure by the taxpayer to keep adequate books and records to substantiate items properly." 26 C.F.R. sec. 1.6662-3 (b) (1). By this standard, we find that Ameradream's 2005 understatement was the result of negligence. Its almost total failure to maintain reliable records was plainly negligent. Ameradream was also negligent in claiming NOL carryovers that were premised on prior-year losses that were rieported on very late-filed returns and for which virtually no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 . 17 substantiation existed. 18 19 20 21 22 23 24 25 Ameradream cannot successfully invoke any of the defenses that a taxpayer might assert against a negligence penalty: Ameradream had no "substantial authority" for its position (see sec. 6662(d) (2) (B)); it did not disclose its problematic reporting on its return and have a reasonable basis for it (see sec. 6662(d) (2) (B)); and it did not show reasonable cause and good faith for its erroneous reporting (see sec. Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 . 15 6664 (c) (1) ) . We theref ore hold Ameradream liable for the negligence penalty in 2005. .III. Gaudina issues A. Whether any of the amounts received by Mr.. Gaudina from Ameradream in 2004 and 2005 were repayments of loans made to Ameradream by Mr. Gaudina before 2004. The parties have stipulated that Ameradream paid Mr. Gäudina's personal expenses in amounts totaling $46,633 in 2004 and $21,370 in 2005, which the IRS treats as income to him; but Mr. Gaudina contends that these expenditures were, either in whole or in part, not properly includible in his gross income because they were non-taxable repayments of loans that he had thade to Ameradream in prior years . We have found, however, that no such loans were proved. Again, the proof was almost wholly lacking. To show the money going out from his personal finances to Ameradream, Mr. Gaudina presented only carbon copies of checks (without corresponding bank statements). To show the money going into Ameradream, he presented only deposit slips with apparently non-contemporaneous notations. To show the existence of loans, he presented "Promissory Notes"; but he Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16 admitted that they were sometimes prepared after the fact to characterize transfers that had already been made; and he offered at trial some such notes that he did not provide to the IRS during the audit, leaving us unable to rule out the likely possibility that they were prepared in anticipation of trial. To show supposed repayments of the loans, he did not point to a single payment that was identified as such; rather, he simply alleges that expenditures made by Ameradream for his benefit were repayments though not explicitly characterized as such. His position is not credible. B. Whether, for the years 2004 and 2005, Mr. Gaudina is liable for the accuracy-related penalty under section 6662(b).(1) for negligence. In determining Mr. Gaudina's liability for a negligence penalty under section 6662 (b) (1) for 2004 and 2005, we use the same analysis that we used in part II.D above in connection with Ameradream, and we find, for the same reasons, that the IRS carried its burden to show that Mr. Gaudina's reporting on his return reflected negligence--because of his failure to keep records, his unsubstantiated "Loans" treatment of Ameradream's payments on his behalf, and his under-reporting òf income and over-reporting of Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 17 deductions. Against the negligence penalty, Mr. Gaudina makes an argument that is presumably intended to assert reasonable cause and good faith under section 6664 (c) (1): He points out that the IRS eventually conceded approximately three-fourths of the adjustments in dispute, and he urges that he should therefore be forgiven for the minority of adjustments that he could not resist. .However, Mr. Gaudina was not exactly vindicated when the IRS, after obtaining records that Mr. Gaudina had failed to keep and spending hours and hours of time untangling his confused affairs, was able to satisfy itself that it should not defend many of its adjustments. More to the point, however, is the fact that the adjustments the IRS conceded are no longer at issue. Rather, what is now at issue in connection with the negligence.penalty is the adjustments that the IRS did not concede--and as to which the Court did not find in Mr. Gaudina's favor--because Mr. Gaudina could not ever substantiate the entries on his return, neither during the examination, nor in the pretrial process, nor at trial. As to these matters for which Mr. Gaudina had no evidence supporting his position, he cannot show reasonable cause by showing that he was Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 18 eventually able to substantiate other matters . We therefore hold that Mr. Gaudina is liable for the negligence penalty for 2004 and 2005. So that the liabilities of Ameradream and Mr. Gaudina can be recalculated to reflect the parties' concessions and the Court's holdings stated above, decision will be ;entered pursuant to Rule 155. This concludes. the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 4:30 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888