TAX COURT OPINION

Case: Dallas T. & Vivian Hilliard
Docket Number: 23690-11S
Judge: Whalen
Opinion Type: bench
Filed: 11/07/2012
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 DALLAS T. & VIVIAN HILLIARD, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) ORDE R Docket No. 23690-11S 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 and to respondent a copy of the pages of the transcript of the proceedings in the above-case before the undersigned at Tampa, Florida, containing the oral findings of fact and opinion rendered on September 13, 2012. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. Dated: Washington, D.C. November 5, 2012 (Signed) Laurence J. Whalen Judge SEVED NOV - 7 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 BENCH OPINION 2 Bench Opinion by Judge Laurence J. Whalen 3 Dallas T. & Vivian Hilliard September 10, 2012 (Trial Date) 3 4 5 6 7 8 9 I. 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. II. 10 This proceeding was brought as a Small Tax 11 Case pursuant to the provisions of section 7463 of the 12 13 Internal Revenue Code, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and 14 Procedure. In this bench opinion, all section numbers 15 refer to the Internal Revenue Code, as amended and in 16 effect for 2009, the taxable year in issue, unless 17 stated otherwise, and all rule references are to the 18 Tax Court Rules of Practice and Procedure. Pursuant to 19 section 7463 (b), the decision to be entered in this 20 case is not reviewable by any other court, and this 21 bench opinion shall not be treated as precedent for any 22 other case. 23 24 III. This bench opinion is made pursuant to the 25 authority granted by section 7459 (b) and Rule 152. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 2 IV. Mr. Dallas T. Hilliard and Mrs. Vivian 3 Hilliard appeared in these proceedings on their own 4 behalf. Mark j. Tober, Esquire, appeared on behalf of 4 5 6 7 8 9 Re spondent . V. Respondent determined a tax deficiency of $7,502, and a penalty under section 6662 (a) of $1,500.40, in Petitioners' Federal income tax for the 10 taxable year 2009. The tax deficiency is attributable 11 solely to the disallowance, for lack of substantiation, 12 of a deduction for charitable contributions in the 13 amount of $26,795 that was claimed by Petitioners on 14 Schedule A, Itemized Deductions, of their 2009 return. 15 The issues for decision are (1) whether Petitioners are 16 entitled to deduct, pursuant to section 170(a), 17 18 "charitable contributions" in the aggregate amount of $26,795, and (2) whether Petitioners are liable for an 19 addition to tax or penalty under section 6662 (a) in the 20 amount of $1,500.40. 21 22 VI. Some of the facts have been stipulated by the 23 parties. The Stipulation of Facts filed by the parties 24 and the exhibits attached thereto are hereby taken into 25 evidence. Petitioners resided in Palm Bay, Florida, at (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 5 1 2 3 4 the time their petition was filed with the ourt. Petitioners filed their tax return for taxable year 2009 without extension. Their return states that the husband' s occupation is "retired". 5 Before he retired, he worked for the FAA at its 6 7 8 9 location in Oklahoma City, OK. Petitioners' return lists wife's occupation as "accountant". Petitioners' 2009 return reported adjusted gross income of $223,689. The return included a 10 Schedule A, Itemized Deductions, on which they claim 11 deductions for gifts by cash or check of $26,345 and 12 for gifts other than by cash or check of $450, a total 13 of $26,795. 14 In due course after Petitioners had filed 15 their 2009 return, Respondent mailed to them a Notice 16 of Deficiency in which Respondent disallowed the 17 deduction for contributions claimed on Schedule A in 18 the amount of $26, 795. The notice states, "Since you 19 did establish that the amounts shown were (a) 20 contributions, and (b) paid, the amounts are not 21 deductible . " 22 Petitioners disagreed with Respondent's 23 determination, and they filed a petition as!king the 24 Court to redetermine the deficiency. The petition 25 gives the following reason they disagree with the IRS (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 determination: 2 "The examiner unilaterally disallowed 3 all my charitable deductions, even the ones not 6 4 5 6 7 8 requiring documentation. My computer hard drive was corrupted [sic] doing [sic] my move from Óklahoma [sic to Òlorida [sic] and it held all my documentations L [sic]. My charitable deductions was [sic] less in 2009 than in the previous years as a percentage of income. 9 My taxes was [sic] audited because I had a large stock 10 11 12 income which I reported correctly. " VII. Section 170(a) (1) allows a deduction for 13 charitable contributions as defined in section 170(c) 14 15 that are made by the taxpayer during the taxable year if verified under applicable regulations. Generally a 16 cash contribution can be substantiated by (1) a 17 canceled check, (2) a receipt from the donee 18 organization, or (3) other reliable written records 19 showing the name of the donee, the date of the 20 contribution, and the amount of the contribution. Sec. 21 1.170A-13(a) (1), Income Tax Regs. For a contribution 22 of $250 or more, a taxpayer must substantiate the 23 contribution by a contemporaneous written 24 acknowledgment by the donee organization. Sec. 25 170(f) (8) (A). (866) 448 - DEPO CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 2 Petitioners have not met the requirements of section 170. First, they failed to identify all of the 3 organizations to which the contributions were made and, 4 thus, failed to prove that all of their charitable 5 contributions were made to organizations specified in 6 7 8 section 170(c). Second, they failed to adequately substantiate their claimed charitable contributions. The record relating to the claimed charitable 9 contributions is limited to husband's trial testimony 10 and is unsupported by any written substantiation in the 11 12 13 form of canceled checks, bank records, or receipts from the donee organizations. When a taxpayer's records are lost or 14 destroyed through circumstances beyond his control, the 15 taxpayer is entitled to substantiate deductions by 16 reconstructing expenditures through credible evidence . 17 Villarreal v. Commissioner, T.C. Memo. 1998-420 (citing 18 Malinows ki v. Commis sioner, 71 T . C. 1120, 1125 (1979) ) . 19 However, this Court is not bound to accept unverified, 20 undocumented testimony of a taxpayer. Id. (citing 21 Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. 22 per curiam 540 F.3d 821 (5th Cir. 1976)). 23 24 VIII. We begin with several fundamental principles 25 of tax litigation. First, as a general rule, the (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 8 1 Commissioner's determinations are presumed correct, and 2 the taxpayer bears the burden of proving that those 3 determinations are erroneous. Rule 142(a). This 4 principle was firmly established by the United States 5 Supreme Court as early as 1933 and has been reaffirmed 6 more recently by the Court. See INDOPCO Inc. v. 7 Commissioner, 503 U. S. 79, 84 Second, deductions are a 8 matter of legislative grace, and the taxpayer bears the 9 burden of proving that he or she is entitled to any 10 deduction claimed. Rule 142(a); Deputy v. duPont, 308 11 U.S. 488, 493 (1940); New Colonial Ice Co. v. 12 Helvering, 292 U.S. 435, 440 (1934). This includes 13 the burden of substantiation. Hradesky v. 14 Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 15 16 540 F.2d 821 (5th Cir.1976). Third, as mentioned above, the Court is not 17 bound to accept the unverified and undocumented 18 testimony of a taxpayer. Hradesky v. Commissioner, 19 supra; Tokarski v. Commissioner, 87 ·T.C. 74, 77 (1986) . 20 Fourth, a party's failure to introduce 21 documentary evidence which is within his possession or 22 control, and which, if true, would be favorable to him, 23 gives rise to the presumption that, if produced, such 24 evidence would be unfavorable. Recklitis v. 25 Commissioner, 91 T.C. 874, 890(1988); Pollack v. (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 Commis sioner, 47 T . C. 92, 10 8 (1966) , af fd . 392 F. 2d 2 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. 3 Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 9 4 5 6 513 (10th Cir. 1947). IX. The husband testified that, circa 2003, he 7 noticed that if he made charitable contributions by 8 check, then he would receive letters and calls 9 soliciting other contributions s a result, he decided 10 11 to make all of his charitable contributions in cash and for no more than $200. He further testified that, 12 during the year in issue, he traveled approximately 3 13 to 4 days a week for his employer. He said that it was 14 his practice to make cash contributions of $200 from 15 his travel expense reimbursements. He said that he 16 would make such contributions to the Council Food Bank 17 18 and to a homeless shelter that were located on his way to work. Petitioner said that he stopped to make such 19 contributions approximately 30 times during 2009. In 20 this connection, we note that 30 times $200 equals 21 $6,000, well below the amount deducted. 22 The husband further testified that during 23 their move from Oklahoma City, Oklahoma, to Palm Bay, 24 Florida, following his retirement from the FAA, the 25 movers lost the contents of his desk which included (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 10 1 unspecified documentation for his charitable 2 contributions. He also testified that his computer 3 4 5 hard drive was somehow "corrupted" during the move. Petitioners did not introduce evidence to substantiate their claimed charitable contributions, 6 other than husband's self-serving and unsupported 7 testimony at trial. Petitioners apparently made no 8 attempt to contact any of the recipient chariti.es to 9 obtain records of their contributions. Significantly, 10 neither a representative of any of the donee 11 organizations nor i estified to corroborate the 12 13 claimed charitable contributions. Furthermore, husband's testimony in this case 14 was extremely vague. The Court listened to the 15 husband's testimony and had an opportunity to judge his 16 credibility. Based upon that, the Court does not credit 17 the husband's testimony. For the reasons set forth 18 above, we sustain Respondent's determination and 19 disallow all of the charitable contribution deductions 20 21 22 claimed for taxable year 2009. X. The second substantive issue in this case is 23 whether Petitioners are liable for the accuracy-related 24 penalty under section 6662 (a) . Section 6662 (a) imposes 25 a penalty equal to 20 percent of any underpayment of (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 11 1 tax that is attributable, among other things, to (1) 2 negligence or disregard of rules or regulations, or (2) 3 4 5 a substanti.al understatement of income tax. See sec. 6662 (a ) , (b) (1) and (2 ) . The term "negligence" includes any failure to 6 make a reasonable attempt to comply with the Internal 7 Revenue Code, and the term "disregard" includes any 8 9 10 11 12 13 careless, reckless, or intentional disregard. Sec. 6662 (c). Negligence can include any failure by the taxpayer to keep adequate records and to substantiate items properly. Sec. 1.6662-3(b) (1), Income Tax Regs. An understatement of income tax is "substantial" if it exceeds the greater of 10 percent 14 of the tax required to be shown on the return, or 15 $5,000. Sec. 6662 (d) (1) (A) . As relevant herein, an 16 17 "understatement" is defined as the excess of the tax required to be shown on the return over the tax 18 actually shown on the return. Sec. 6662 (d) (2) (A) . 19 Whether the accuracy-related penalty is 20 applied because of negligence or disregard of rules or 21 22 regulations, or a substantial understatement of tax, the accuracy-related penalty does not apply to any 23 portion of the underpayment if it is shown that there 24 was reasonable cause for the taxpayer's position and 25 that the taxpayer acted in good faith with respect to (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 12 1 2 3 4 5 6 that portion. Sec. 6664 (c) (1) ; sec. 1. 6664-4 (b), Income Tax Regs.; see United States v. Boyle, 469 U.S. 241, 242 (1985). Section 7491 (c) places on the Commissioner the burden of production with respect to a taxpayer's liability for a penalty such as the accuracy-related 7 penalty under section 6662 (a). However, the ultimate 8 burden of persuasion remains on the taxpayer. Swain v. 9 Commissioner, 118 T.C. 358, 363 (2002); Higbee v. 10 Commissioner, 116 T.C. 438, 446-448 (2001); see Rule 11 12 13 142(a); INDOPCO, Inc. v. Commissioner,503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933). We find that Respondent satisfied his burden 14 of production under section 7491(c) in the light of 15 Petitioners' negligent failure to make a reasonable 16 attempt to reconstruct their contributions after their 17 records were lost in the move. See sec. 1.6662- 18 3(b) (1), Income Tax Regs. Furthermore, the record of 19 this case convincingly demonstrates that Petitioner 20 substantially understated his income tax for 2009. In 21 contrast, Petitioners did not address this issue at 22 23 24 trial and, thus, they failed to show any reason why they should not be held liable for that penalty. See sec. 6664 (c) (1). Accordingly, we sustain Respondent's 25 determination of the accuracy-related penalty under (866) 448 - DEPO www.CapitalReportingCompany.com 2012 Capital Reporting Company Dallas T. & Vivian Hilliard 09-13-2012 1 2 3 4 section 6662 (a) for taxable year 2009. XI. In order to give effect to our disposition of the disputed issue, decision will be entered for 13 5 Respondent. XII. (Whereupon, THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2012