TAX COURT OPINION

Case: Charles J. Mathieu, Jr. & Elina C. Mathieu
Docket Number: 8100-15S
Judge: Colvin
Opinion Type: bench
Filed: 04/14/2016
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 CHARLES J. MATHIEU, JR. & ELINA C. MATHIEU, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) Docket No. 8100-15S. ) ) ) ) ) ORDER 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 case at Washington, D.C. on February 26, 2016, containing the oral findings of fact and opinion rendered at the conclusion of the trial. In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155. (Signed) John O. Colvin Judge Dated: Washington, D.C. April 14, 2016 SERVED APR 1 4 2016 Capital Reporting Company 3 1 2 Bench Opinion by Judge John O. Colvin February 26, 2016 3 Charles J. Mathieu & Elina C. Mathieu v. Commissioner 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Docket No. 8100-15S THE COURT: At the end of the trial in this case on Wednesday, I sent a briefing schedule and then I reviewed the record and my notes after the trial, and I am able to provide a bench opinion in the case. And so, the briefing schedule is vacated. 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 bench opinion is rendered pursuant to Section 7459(b) and Rule 152. All citations to sections, unless otherwise noted, are to the Internal Revenue Code for the year5 c at issue. Citations to rules are to the Tax Court Rules of Practice and Procedure. Petitioners are self-represented. William J. Gregg and Deborah Aloof represented respondent. 24 Mrs. Mathieu did not attend the trial. We will enter 25 decision with respect to her on the same basis that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 it is entered for Mr. Mathieu, whom we will refer to as petitioner. Respondent determined that petitioners have income tax deficiencies in amounts of $17,892 for 2011 and $16,886 for 2012, and that they are liable for an addition to tax under Section 6651(a)(1) for 2011 in the amount of $971 for failure to timely file, and an accuracy-related penalty under Section 6662 in the amounts of $3,578 and $3,377 for 2011 and 2012, respectively. One group of issues in this case is whether or to what extent petitioners are entitled to charitable contributions deductions and various Schedule C deductions for 2012 and 2011. We hold they are entitled to those deductions to the extent discussed below. The other issues relate to the additions to tax and penalty. We hold petitioners are liable as discussed below. FINDINGS OF FACT Petitioners were husband and wife during the 2011 and 2012 tax years. Petitioner has a master's degree in electrical engineering from Johns Hopkins University. During 2011 and 2012, he received about $11,000 and $14,000 as a part-time instructor with the University 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 1 2 of Phoenix. During 2011 and 2012, he received wages in the amounts of $37,000 and $88,935 from Soft-Con 3 Enterprises. Finally, during 2012, he also received 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 wages of just under $30,000 from Federal Working Group, Incorporated. Petitioner operated a landscaping business under the business name OS Landscaping in 2011 and 2012. Petitioner and his wife owned three automobiles and no trucks during the years at issue. Petitioners received no extension for filing their 2011 return and filed that return late, on June 17, 2012. Petitioners timely filed their 2012 return. On their 2011 and 2012 returns, petitioners deducted charitable contributions in the amounts of $26,035 and $30,937. This included deductions for cash and non-cash contributions in the amounts of $18,926 and $7,109 in 2011 and cash and non-cash contributions of $12,457 and $18,480 for 2012. Petitioners included Schedules C in their 2011 and 2012 tax returns for petitioners' landscaping business. As shown in the record, on those Schedules C, petitioners reported more than $8,000 in income from the landscaping activity and 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 more than $20,000 in deductions for each year at 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 issue. Burden of Proof SUMMARY OPINION Respondent's determination is presumed correct, and the taxpayer bears the burden to prove any adjustment to the income as determined by respondent. Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a). Petitioners must meet the specific requirements for any deduction claimed. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Taxpayers are also required to maintain records sufficient to substantiate their claimed deductions. See Sec. 6001; see also Treas. Reg. 1.170A-13(b) (requirements for charitable contributions of property other than money). The taxpayer must substantiate both the amounts paid and the purpose of the claimed deductions. Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Petitioners did not show that the burden of proof shifts to respondent under Section 7491. Therefore, the burden of proof remains 22 with petitioners to establish entitlement to the 23 deductions disputed by respondent. 24 Charitable Contributions 25 Section 170(a) allows for the deduction of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 charitable contributions made by a taxpayer. For each cash contribution, a taxpayer must maintain a canceled check, a receipt from the donee charitable organization showing the name of the donee, and the date and amount of the contribution; or other reliable records showing the name of the donee, date of the contribution, and the amount of the contribution. § 1.170A-13(a)(1). For non-cash contributions, the taxpayer must maintain a receipt from the donee organization listing the name of the donee, the date and location of the contribution, and a description of the property sufficient to determine its fair market value. 14 Exhibits 5-P, 6-R, 7-P, and 8-P 15 16 17 18 19 20 Petitioners offered into evidence Exhibits 5-P, 7-P, and 8-P, which are documents purporting to list weekly contributions petitioners made to three churches in 2011 and 2012; St. John the Baptist Church, in Edgar, Louisiana; St. Joseph's Church in Upper Marlboro, Maryland, and Woodstream Church in 21 Mitchellville, Maryland. 22 23 24 There are serious problems with the credibility of these exhibits. Exhibit 6-R, offered by respondent, contains a memo signed by an official 25 with the Woodstream Church, which states that 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 petitioners contributed $150 in 2011 and $450 in 2012. Exhibit 6-R conflicts with Exhibit 5-P, which states that petitioner contributed much more than those amounts during the same periods as the dates covered by Exhibit 6-P. Unlike Exhibit 6-R, 6 Exhibit 5-P contains no signature from a church 7 official. Exhibit 8-P lists weekly contributions to 8 a church in Louisiana while petitioner was living in 9 Maryland. Petitioner testified that he mailed these 10 11 12 13 14 15 amounts of cash each week to that church. That seems like an improbable way to deliver more than 20 contributions averaging more than $100 per contribution. Petitioner testified that he said he picked up the document from the Louisiana church on a trip to the church in March 2012 and obtained 16 Exhibits 5-P and 8-P from the churches in time to 17 18 19 20 21 22 23 24 25 file tax returns for those years. That testimony seemed perfunctory and unpersuasive. Exhibits 5-P, 7-P, and 8-P have an almost identical format, appearance, and font even though they appeared to come from three churches in two years. Only Exhibit 7-P was on a church letterhead. The exhibits shared identical text in many respects. Thus we did not admit into evidence Exhibits 5-P, 7- P, and 8-P. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 We admitted Exhibit 6-R, which shows he contributed cash in 2011 and 2012, and we will allow those amounts for 2011 and 2012. 4 Exhibits 9-P and 10-P 5 6 7 8 9 Exhibits 9-P and 10-P were admitted into evidence and show that petitioner contributed used property to several organizations during 2011 and 2012. The exhibits include several tables listing the items given and assigning a value to each one. 10 Petitioner testified that the value he used was only 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 percent less than the purchase price. We think a deeper discount would be appropriate, and so we reduced the value for all items by 40 percent compared to the values shown in Exhibits 9-P and 10- P. That is, if the value for an item shown in the table is $10, we discount the value to $6 and allow the deduction in the amounts resulting from applying that approach to all the items listed in the tables. Due to lack of required detail, we allow no further deductions based on Exhibits 9-P and 10-P. Schedule C Deductions The 2011 and 2012 tax returns each included a Schedule C, Profit or Loss from Business, for petitioners' landscaping business, operating under the business name OS Landscaping. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 1 2 3 4 5 6 7 8 A taxpayer may deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Sec. 162. Because deductions would be allowed under Section 183(b)(2) in the amounts discussed below whether or not the activity was operated for profit, we need not decide whether petitioner had a profit 9 motive. 10 11 12 13 14 15 16 17 18 19 20 21 22 Respondent allowed about $3,500 in these deductions for each year. Based on petitioner's testimony at trial and a review of the receipts in evidence, in addition to the amounts allowed by respondent, we allow the following amounts totaling $4,145 for 2011: equipment rental, $3,058; supplies from Lowe's, $984; and lawn mower gas, $103. In addition to the amounts allowed by respondent, we also allow the following amounts totaling $2,506 for 2012: pens and business cards, $456; equipment rental, $354; purchases from All Seasons, $563; plants, $74; and supplies, $372. Under § 274(d)(4), no deduction is allowed 23 with respect to the use of listed property unless the 24 25 taxpayer substantiates by adequate records or by sufficient evidence, corroborating the taxpayer's own 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 statement, the amount of such expense or other item, the time and place of the use of the property, the business purpose of the expense, and the business relationship to the taxpayer of persons using the property. Listed property includes passenger automobiles, travel, meals and entertainment. § 280F(d)(4) (A)(i). If documentary evidence of the expenditure is not available, the taxpayer may use his own statement, whether written or oral, containing specific information in detail as to such element, and other corroborative evidence sufficient to establish such element. Treas. Reg. §§ 1.274- 5T(c) (3)(i))A) & (B). We allow no further deductions for car and truck expenses, travel, and meals and entertainment, because petitioner did not satisfy the heightened substantiation requirements of Section 274(d). Petitioner did not sufficiently explain why there was a need to incur expenses for meals and entertainment or to have frequent client meetings in a home office for an activity which petitioner described was primarily to provide lawnmowing and routine lawn maintenance services. Petitioner has provided receipts but did not maintain separate business records. His records 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 do not satisfy requirements of Sections 162, 274(d), and 6001 and do not provide an adequate basis for us to decide, beyond the extent stated above, that expenses are deductible. Similarly, beyond the extent stated above, his testimony did not suffice to 6 make up for the gaps in the records. For example, 7 8 9 10 11 12 13 14 petitioner claimed that 91 percent of the use of a sedan was for his landscaping activity but also said he was able to perform services for some of his customers by walking to their houses. He would have used a vehicle to pick up supplies, but the record provides no mileage log or other information to provide a basis for estimating the amount of the use of his vehicle for his landscaping activity. 15 Addition to Tax and Penalties 16 17 18 19 20 21 22 23 Respondent asserted an addition to tax, pursuant to Section 6651(a) (1), for 2011. Respondent also asserted penalties, under Section 6662, for the 2011 and 2012 tax years. Generally, respondent bears the burden of production for the additions to tax and penalties proposed in the notice of deficiency. Sec. 7491(c). Respondent has met that burden here. 24 Addition to Tax for Late Filing Under Section 25 6651(a)(1) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 1 2 3 4 5 6 7 8 9 Pursuant to Section 6651(a)(1), an addition to tax will be imposed upon a taxpayer who fails to file a federal income tax return by its due date, determined with regard to any extension of time for filing previously granted. The addition equals 5 percent of the net amount due for each month that the return is late, not to exceed 25 percent. The addition to tax is inapplicable, however, if it is shown that the failure to timely file was due to 10 reasonable cause and not due to willful neglect. 11 Petitioners bear the burden of proving that their 12 13 14 15 failure to timely file was due to reasonable cause and not to willful neglect. See Higbee v. Commissioner, 116 T.C. 348, 447 (2001). Petitioners' income tax return for the 2011 tax year was due 16 April 15, 2012, because they did not require an 17 18 19 20 21 22 extension of time for filing the tax return. They filed that return on June 17, 2012. Petitioners have not shown reasonable cause for their failure to timely file. Thus they are liable for the addition to tax under Section 6651(a)(1) for 2011. 23 Accuracy-Related Penalty Under Section 6662 24 25 Section 6662 imposes a penalty of 20 percent of the part of the underpayment of tax that 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 14 is attributable to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. A substantial understatement of tax exists when a taxpayer understates his income by the greater of $5,000 or 10 percent of the tax required to be shown on his return. Section 6662(d). Due to our holding above, the understatement for 2011 and 2012 is substantial under Section 6662(d). Under Section 6664(c)(1), a taxpayer who is otherwise liable for the accuracy-related penalty may avoid the liability if he can show, first, that there was a reasonable cause for the underpayment and, second, that he acted in good faith with respect to the underpayment, shall he imposed Whether the taxpayer acted with reasonable cause and in good faith depends on the pertinent facts and circumstances, including the experience, knowledge, and education of the taxpayer, Treas. Reg. Sec. 1.664-4(b)(1); but the most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper tax liability, id. Petitioners have not shown that the substantial understatement or absence of proper books 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 15 and records was due to reasonable cause. Thus this defense to the accuracy-related penalty is not available to them. We conclude that petitioners are liable under Section 6662, and thus we need not reach the issue of negligence. Decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:44 p.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com