TAX COURT OPINION

Case: Willie R. & Bernice A. Brooks
Docket Number: 17792-07S
Judge: Colvin
Opinion Type: bench
Filed: 03/16/2009
Pages: 9

SUQYY1t'C +~D - 5TT C p -MLUza .o UNITED STATES TAX COURT WASHINGTON , D .C . 2021 7 JAIME MORALES AND LORENA ORTIZ, Petitioners , v . ) Docket No . 24934-07S COMMISSIONER OF INTERNAL REVENUE , Respondent . ) 0 R D E R STA- T . S .T . jj- 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 of the above case before Specia l Trial Judge Lewis R . Carluzzo at Los Angeles, California, on February 12, 2009, containing his oral findings of fact and' opinion rendered at the conclusion of trial . In accordance with the oral findings of fact and opinion, an appropriate order will be issued and decision will be entered under Rule 155 . . (Signed ) Lewis R. Carluzzo Special Trial Judg e Dated : Washington, D .C . March 16, 2009 SERVED Mar 20 2009 3 1 Bench Opinion by Special Trial Judge Lewis R . Carluzzo 2 Docket No . 29434-07S February 12, 2009 3 Morales & Ortiz v . Commissione r 4 The Court has decided to render oral findings of 5 fact and opinion in this case , and the following represents 6 the Court ' s oral findings of fact and opinion . 7 This proceeding for the redetermination of a 8 deficiency is a Small Tax Case conducted pursuant to th e 9 provisions of section 7463 of the Internal Revenue Code of 10 1986, as amended, and Rules 170 through 175 of the Tax Court 11 Rules of Practice and Procedure . 12 This bench opinion is made pursuant to th e 13 authority granted by section 7459 ( b) of the Internal Revenue 14 Code of 1986, as amended, and Rule 152 of the Tax Cour t 15 Rules of Practice and Procedure . Subsequent sectio n 16 references made in this bench opinion are to the Internal 17 Revenue Code of 1986 , as amended , in effect for 2006 . Rule 18 references are to the Tax Court Rules of Practice an d 19 Procedure . 20 Jaime Morales appeared pro se . Go off the record 21 for a minute . 22 COURT REPORTER : Okay . 23 (Dicussion held off the record . ) 24 THE COURT : Halvor Melon appeared on behalf of 25 Respondent . There was no appearance by or on behalf of 'Heritage Reporting Corporatio n (202) 628-4888 4 1 Lorena Ortiz and she did not sign either of the stipulations 2 of fact entered into evidence in this case . The case wil l 3 be dismissed as to her for lack of prosecution ; 4 nevertheless, the decision entered with respect to her will 5 reflect the resolution of the issues resolved pursuant t o 6 this bench opinion . 7 In a notice of deficiency dated September 17, 8 2007, Respondent determined a $2,812 deficiency i n 9 Petitioner's 2006 Federal income tax . The issues fo r 10 decision are : (1) Whether Petitioners are entitled to an 11 earned income credit ; and (2) whether Petitioners ar e 12 entitled to a child tax credit . The resolution of each 13 issue depends upon the amount of Petitioners' "earned 14 income" for purposes of those credits, which in turn , 15 depends upon the amount of income earned by Jaime Morales, 16 Petitioner, during the year in issue . 17 At the time the petition was filed, Petitioners 18 resided in California . At all times relevant, they were 19 married to each other . Their 2006 timely-filed join t 20 Federal income tax return was prepared by a paid income tax 21 return prepares . As best as can be determined from th e 22 record, Petitioners and three of their children live d 23 together in an apartment during 2006 which they rented for 24 $1,400 per month . Apparently various family member s 25 contributed towards that rent expense . Heritage Reporting Corporation (202) 628-4888 5 1 During 2006, Petitioner was employed as a 2 handyman/gardener . Nothing in the record suggests that 3 Petitioner was otherwise employed during 2006 or had any 4 other source of income . Petitioner did not maintain a 5 checking account during 2006, and it appears that his 6 business transactions, and to some extent persona l 7 transactions, were conducted in cash or by money order . He 8 kept a record of business receipts in a booklet o f 9 preprinted invoices, but that booklet has been lost . 10 Nothing in the record suggests that he maintained any other 11 books and records with respect to the income earned an d 12 expenses incurred in connection with his self-employment as 13 a handyman/gardener . 14 Petitioner's business records for the period from 15 August 8, 2008, through February 9, 2009, show that hi s 16 income as a handyman/gardener totaled $4,145 . 17 Petitioner's 2006 joint Federal income tax return 18 includes a Schedule C, Profit or Loss From Business . The 19 items reported on that Schedule C are attributable to . 20 Petitioner's self-employment as a handyman/gardener . 21 Specifically, the Schedule C shows net profit of $15,736, 22 which amount takes into account $24,269 of gross receipts, 23 less $8,533 of business expense deductions . The $14,624 24 adjusted gross income reported on Petitioner's 2006 return 25 takes into account the net profit reported on th e Heritage Reporting Corporation (202) 628-4888 6 1 Schedule C, reduced by a $1,112 deduction for "one-half of 2 self-employment tax" . There is no taxable income reported 3 on the return because reducing Petitioner's adjusted gross 4 income by the sum of the standard deduction , plus fiv e 5 exemption deductions , one each for Petitioners , and one for 6 each of three of their children , results in a negativ e 7 number . Consequently there is no section 1 income tax 8 liability shown on the return . However , because of the net 9 profit reported on the Schedule C, Petitioner ' s return shows 10 a section 1401, tax on self-employment income, tax o f 11 $2,223 . That tax is offset by a $4,536 earned incom e 12 credit , computed by treating two of Petitioners ' children 13 each as a qualifying child for purposes of that credit, and 14 a $499, additional, child tax credit, computed as though 15 Petitioners did not have three or more qualifying children 16 for purposes of that credit . Taking into account th e 17 self-employment tax liability , offset by the 18 above-referenced refundable credits, Petitioners claimed a 19 refund of $2,872 on their 2006 return . Respondent ha s 20 withheld that entire refund, but agrees that Petitioners are 21 entitled to a refund of $60 . 22 In the notice of deficiency that forms the basis . 23 for this case, Respondent determined that the incom e 24 reported on the Schedule C from Petitioner ' s self-employment 25 as a handyman/gardener is overstated . In fact, in the Heritage Reporting Corporation (202) 628-4888 7 notice of deficiency , and at trial , Respondent takes the position that Petitioner ( 1) either had no income from self-employment , or (2) his income from self - employment did not exceed the expenses paid or incurred in connection with that employment . In either case, as .a result, the earned income credit and the additional, child tax credit claimed on Petitioner ' s return have been completely disallowed . Other adjustments made in the notice of deficiency are computational and need not be discussed . In general , and subject to various conditions and limitations , an eligible individual is entitled to an earned income credit . Sec . 32 ( a) . Furthermore , and again subject to various conditions and limitations , a taxpayer i s entitled to a credit for each qualifying child of the taxpayer . Sec 24 ( a) . Given the nature of the dispute in this case , it is not necessary to discuss or explain how these credits work . Suffice it to say, Petitioners' entitlement to either disallowed credit for 2006 depends upon the amount of Petitioner ' s "earned income ," as that term is defined for purposes of those credits . According to Respondent , they had none . According to Petitioners, their "earned income " for purposes of those credits , in effect, equals the adjusted gross income reported on their 2006 return . The definition of the term "earned income" fo r Heritage Reporting Corporation (202) 628-4888 8 1 purposes of both credits is contained in section 32 . Secs . 2 24(d) (1) (B) (i) , 32(c)(2) . As relevant here, the term 3 "earned income" includes "the amount of the taxpayer's net 4 earnings from self-employment for the taxable year ." Sec . 5 32(c)(2)(A)(ii) . Again, as relevant here, the term "ne t 6 earnings from self-employment" means "the gross incom e 7 derived by an individual from any trade or business carrie d on by such individual, less the deductions allowed which ar e 9 attributable to such trade or business" . Sec 1402(a) . The 10 term "trade or business," as used in the context of th e 11 issues here in dispute and with exceptions not relevan t 12 here, "shall have the same meaning as when used in section 13 162 ." Sec . 1402(c) . We are satisfied that Petitioner' s 14 handyman/gardening activity constituted a trade or business 15 within the meaning of section 162 during 2006, se e 16 Commissioner v . Groetzinger , 480 U .S . 23 (1987), and tur n 17 our attention to the amount of income Petitioner earned from 18 that trade or business during that year . 19 Mindful of the presumption of correctness to which 20 Respondent's determination is entitled, we find i t 21 unreasonable to proceed as though Petitioner worked fo r 22 nothing as a handyman/gardener during 2006 . Be that as it 23 may, considering Petitioner's failure to produce an y 24 meaningful records that demonstrates the amount of his 25 earnings from his self-employment during 2006 and his Heritage Reporting Corporatio n (202) 628-4888 9 1 failure to provide any specifics as . to the clients o r 2 customers who might have been the source of that income as 3 reported on the Schedule C, we, like Respondent, ar e 4 unwilling to accept as accurate the gross income s o 5 reported . We cannot help but to note that the earned income 6 credit claimed on Petitioner's return was the maximum amount 7 allowable that year, and appreciate Respondent's suspicions 8 with respect to the actual amount of income that Petitioner 9 might have earned . Nevertheless, suspicions are n o 10 substitute for evidence, and there is little evidence in the 11 record on either side of the controversy . 12 Taking into account what evidence there is 13 relating to the income Petitioner earned as a 14 handyman/gardener, we find that Petitioner's gross income 15 from his self-employment during 2006 was $12,000 . We 16 arrived at this figure with reference to the information 17 contained in the records that Petitioner currently maintains 18 showing income earned as a handyman/gardener in recen t 19 months . We have adjusted that amount slightly upward to 20 account for presumed seasonal variances and the current 21 state of the economy . 22 Consequently, we find that Petitioners' "earne d 23 income" for purposes relevant here, and the resultant earned 24 income credit and additional child tax credit to which they 25 are entitled is to be computed by taking into account (1 ) Heritage Reporting Corporation (202) 628-4888 A 1 0 1 the gross income from Petitioner's trade or business, as 2 found above, (2) the expenses claimed on the Schedule C , 3 none of which have been challenged, and (3) the recomputed 4 deduction allowed under section 164(f) . See sec . 5 32(c) (2) (A) (ii) . 6 To reflect the foregoing, an appropriate orde r 7 will be issued and decision will be entered under Rule 155 . 8 This concludes the Court's oral findings of fact 9 and opinion in this case . 10 (Whereupon, at 9 :45 a .m, the bench opinion in the 11 above-entitled matter was concluded . ) / / 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Heritage Reporting Corporation (202) 628-4888