TAX COURT OPINION

Case: Patrick Demosthene
Docket Number: 17159-14S
Judge: Panuthos
Opinion Type: bench
Filed: 11/09/2015
Pages: 9

RMM UNITED STATES TAX COURT WASHINGTON, DC 20217 PATRICK DEMOSTHENE, Petitioner(s), v. COMMISSIONER OF INTERNAL REVENUE, Respondent 17159-14S. ) ) ) ) ) Docket No. ) ) ) ) ) ) ) ) ) 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 petitioner Patrick Demosthene and to respondent a copy of the pages of the transcript of the trial in the above case before Chief Special Trial Judge Peter J. Panuthos at New York, New York, on October 27, 2015, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) Peter J. Panuthos Special Trial Judge Dated: Washington, D.C. November 9, 2015 SERVED Nov 09 2015 Capital Reporting Company 3 1 2 Bench Opinion by Special Trial Judge Peter J. Panuthos 3 October 27, 2015 4 Patrick Demosthene v. Commissioner 5 6 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Docket No. 17159-14S The Court has decided to render oral findings of fact and opinion in this case and the following represents the Court's oral findings of fact and opinion. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This case was heard pursuant to the provisions of section 7463 of the Internal Revenue Code in effect when the petition was filed. Pursuant to section 7463(b), the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case. Respondent determined a deficiency of $8,436 in Petitioner's 2011 Federal income tax and accuracy-related penalty under section 6662(a) of $1,687.20, and an addition to tax pursuant to section 6651(a)(1) in the amount of $496.40. At trial, Respondent indicated that he made calculation errors in the Notice of Deficiency. While Petitioner limited his claimed schedule E loss to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 $12,500, Respondent disallowed schedule E losses in greater amounts. Respondent asserted that the reduced deficiency in this case should be $3,295 and that the addition to tax and penalty would consequently be reduced as well. As a result, the 6 Court will enter a decision under Rule 155. 7 The issues for decision are: (1) Whether 8 Petitioner is entitled to a claimed schedule E loss 9 with respect to a rental property; (2) Whether 10 Petitioner is liable for the accuracy-related penalty 11 12 13 14 15 16 17 under section 6662(a) and; (3) Whether Petitioner is liable for an addition to tax for failure to timely file a return. Background Some of the facts have been stipulated, and we incorporate the Stipulation of Facts by this reference. At the time the petition was filed, 18 Petitioner resided in New York. 19 20 21 22 23 24 25 During the years in issue, Petitioner worked as a driver for Playbill delivering the program to theaters in New York City five days per week. Petitioner purchased a single-family home sometime around 2000. Soon after moving into the home with his wife, he had some construction done converting the second floor and third-floor attic 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 into a rental unit. During 2011, Petitioner lived in the first floor of the home with his wife and two children. The second floor had a kitchen, bathroom, living room. The third floor had a bedroom. During the year in issue, Petitioner collected $725 monthly rent from the tenant who resided in the second and third floor of the house. Petitioner reported approximately $8,700 of rental income in 2011 and claimed expenses related to the rental property in excess of the income. The Court notes that the parties failed to provide a copy of the 2011 Federal income tax return. Thus, the parties utilized other schedules which may or may not reflect what was claimed on the return. Petitioner filed a 2011 tax return as married filing separately. In the Notice of Deficiency, and as adjusted by Respondent at trial, the rental expenses that exceed rental income were disallowed. The 19 Notice. of Deficiency explained that Petitioner was 20 21 22 23 24 25 not entitled to claimed expenses because "... you did not furnish the information needed to support the claimed deduction". In his pretrial memorandum, Respondent asserted multiple theories for the disallowance of the rental loss. As discussed below, we need not in this case consider all the theories of 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 6 disallowance since we are convinced that Petitioner failed in his burden of proof to establish entitlement to the claimed deductions and loss. Discussion In general, the Commissioner's determination of a deficiency is presumed correct, and the taxpayer has the burden of proving it incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Pursuant to section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. Petitioner did not allege or otherwise show that section 7491(a) applies. See sec. 7491(a)(2) (A) and (B). Therefore, 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Petitioner bears the burden of proof. See Rule 15 16 17 18 19 20 142(a). Deductions are a matter of legislative grace and it is clear that Petitioner has the burden of proof to entitlement to a claimed deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). It is also the taxpayer's responsibility to 21 maintain records sufficient to enable the 22 23 24 25 Commissioner to determine the correct tax liability. With respect to Petitioner's claimed schedule E deduction of $12,500, Petitioner presented some very vague testimony in support thereof. He 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 presented a purported receipt reflecting $15,000 paid to a contractor for work performed as his combined residence and rental property. The Court is not at 4 all satisfied as to the accuracy of this document, 5 6 7 8 9 10 11 12 13 14 15 16 and Petitioner failed to adequately explain how the purported expenses related to the rental portion of his property. In addition, it became clear during the trial that Petitioner failed to properly allocate non-depreciable items such as the land upon which the rental property is located. Petitioner apparently kept no contemporaneous records relating to activities of the rental portion of his home. Even if Petitioner had substantiated the claimed deduction and loss, we are further satisfied that Petitioner is not entitled to deduct the rental loss since it constitutes a passive activity loss. 17 While Petitioner might have been entitled to some 18 19 20 21 22 23 loss deduction under section 469(i), by virtue of filing his 2011 return as "married filing separately," he did not fully satisfy the provisions of that code section. With respect to a taxpayer who files "married filing separately," section 469(i)(5) (B) provides that a taxpayer who files a 24 married filing separate return and seeks to claim the 25 passive loss allowance must live apart from his 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 spouse at all times during the taxable year. The record is clear that Petitioner lived with his wife and children during the year in issue. Respondent's determination is sustained as adjusted at trial. Petitioner did not present any evidence that he timely filed his 2011 return and accordingly, the addition to tax under section 6651(a)(1) is sustained. Section 6662(a) imposes a penalty of 20 percent of the portion of an underpayment of tax attributable to the taxpayer's negligence, disregard of rules or regulations, or substantial understatement of income tax. "Negligence" includes any failure to make a reasonable attempt to comply 15 with the Code. See sec. 6662(c); sec. 1.6662- 16 17 18 19 20 21 22 23 24 25 3(b)(1), Income Tax Regs. The section 6662(a) accuracy-related penalty does not apply with respect to any portion of an underpayment if the taxpayer proves that there was reasonable cause for such portion and that he acted in good faith with respect thereto. Sec. 6664(c)(1). The determination of whether a taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the taxpayer's efforts to assess the proper tax 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 2 3 4 5 6 .7 8 9 liability; the knowledge and the experience of the taxpayer; and any reliance on the advice of a professional, such as an accountant. Sec. 1.6664- 4(b)(1), Income Tax Regs. Generally, the most important factor is the taxpayer's effort to assess the taxpayer's proper tax liability. Id. The underpayment of the tax required to be shown on Petitioners' return for the 2011 taxable year is attributable to negligence because Petitioner 10 failed to +epe-r-t(cid:16)254-supportclaimed deductions. 11 Petitioner must come forward with persuasive evidence 12 13 14 15 16 17 18 19 that the accuracy-related penalty should not be imposed with respect to the underpayment because he acted with reasonable cause and in good faith or for some other reason. See sec. 6664(c)(1); Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 446 (2001). Petitioner offered no argument or evidence to show that there was reasonable cause for the claimed deductions and that he acted in good faith 20 with respect to the 2011 underpayment. Respondent's determination of an accuracy-related penalty under section 6662(a)(1) is sustained. We have considered the parties' arguments and, to the extent not discussed herein, we conclude 21 22 23 24 25 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 10 1 the arguments to be irrelevant, moot, or without 2 merit. To reflect the foregoing, Decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 11:46 a.m., the above- entitled matter was concluded.) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com