TAX COURT OPINION

Case: Felix & Hope Martinez
Docket Number: 3814-11
Judge: Kroupa
Opinion Type: bench
Filed: 04/25/2012
Pages: 7

UNITED STATES TAX COURT WASHINGTON, D.C. 20217 FELIX AND HOPE MARTINEZ, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) O R D E R Docket No. 3814-11 Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioners and to respondent a copy of transcript of Diane L. Kroupa at San Francisco, California, on April 2, 2012, containing her oral the proceedings in the above case before Judge fact and opinion. findings of the pages of the In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Diane L. Kroupa Judge Dated: Washington, D.C. April 25, 2012 SERVED APR 2 6 2012 . 3 Bench Opinion by Judge Diane L. Kroupa April 2, 2012 Felix & Hope Martinez v. Commissioner Docket No. 3814-11 THE COURT: 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. These oral findings of fact and opinion shall not be relied upon 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 & Procedure.. All section references are to the Internal Revenue Code for 2008 and all rule references are to the Tax Court Rules of Practice & Procedure. Russell Stanaland appeared on behalf of Petitioners, and Melissa Quale appeared on behalf of Respondent. FINDINGS OF FACT Petitioners resided in California when they filed the petition. Petitioner filed a timely form 1040, US individual income tax return, for 2008. Petitioner worked as a landscaper for Ted Novak, owner of Paradise Restored, during 2008. Paradise Restored paid Petitioner for performing landscaping services both as an employee and non-employee. Respondent received information that Petitioner 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 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 4 received a form 1099-MISC, miscellaneous income, reporting $13,500 of non-employee compensation, and a form W-2, wage and tax statement, reporting $11,100 of employee compensation from Paradise Restored for 2008. Petitioners reported the income reflected on the form W-2 but did not report the income reflected on the form 1099-MISC. Respondent issued Petitioners a deficiency notice determining a deficiency in, and an accuracy-related penalty with respect to, Petitioners' federal income tax for 2008. Petitioners timely filed a petition for redetermination. OPINION We must decide two issues. The first issue is whether Petitioners failed to report as income certain non- employee compensation reflected on form 1099-MISC. The second issue is whether Petitioners are liable for an accuracy-related penalty under section 6662(a). All other issues are computational matters that depend on our resolution of the first issue, and need not be addressed. We begin with the burden of proof. The Commissioner's determinations are generally presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). A rare exception to this rule is where the Heritage Reporting Corporation (202) 628-4888 5 Commissioner, in a case involving unreported income, introduces no evidence but rests on the presumption of correctness. Schad v. Commissioner, 87 T.C. 609, 618 (1986), affd. without published opinion, 827 F.2d 774 (11th Cir. 1987). The United States Court of Appeals for the Ninth Circuit, to which an appeal of this case would lie, has held that before the presumption of correctness attaches to the deficiency notice in an unreported income case, the Commissioner must come forward with substantive evidence establishing some evidentiary foundation linking the taxpayer to the income-producing activity, or demonstrating that the taxpayer received unreported income. See Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), revg. 67 T.C. 672 (1977). Here, Respondent offered the testimony of Mr. Novak, who testified that Petitioner performed landscaping services for Paradise Restored, and that Mr. Novak paid Petitioner the non-employee compensation reflected on the form 1099-MISC for 2008. Mr. Novak also explained that landscaping work is seasonal, and that he paid Petitioner approximately $25,000 in 2008, half as an employee and half as an independent contractor, as Mr. Novak did with other service providers in 2008. We found Mr. Novak's testimony credible and 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 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 therefore find that the record contains sufficient substantive evidence to support Respondent's determination of unreported income. Petitioner claims and testified that he did not receive the non-employee compensation nor the form 1099- MISC. Petitioner seems to be saying he does not know how much income he received in 2008. We find this lacks credibility. Taxpayers know roughly how much they make each year, and failing to report over half of his income is simply not credible. Moreover, the Court need not accept a taxpayer's self'-serving testimony when the taxpayer fails to present other probative evidence. Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner, 87 T.C. 74, 77 (1986)). We find that Petitioner received the income reported on the form 1099-MISC. We now address whether Petitioners are liable for the accuracy-related penalty. A penalty applies to any underpayment of tax that is due, among other things, to a substantial understatement of income tax. See sec. 6662(a), (b) (2). A substantial understatement is one which exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. Sec. 6662(d) (1). 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 The.commissioner bears the burden of production under section 7491(c) and the taxpayer bears the burden of proof with respect to reasonable cause. Higbee v. Commissioner, 116 T.C. 438 (2001). Respondent has met his burden of production that there was a substantial understatement of income tax for 2008, as the amount Petitioners reported on the return substantially understated the amount of tax required to be shown on the return. The accuracy-related penalty under section 6662(a) does not apply, however, to any portion of an underpayment if it is shown that there was reasonable cause for the taxpayer's position and that the taxpayer acted in good faith with respect to that portion.. Sec. 6664 (c) (2); sec. 1 1.6664-4(b), Income Tax Regs. ' The determination of whether a taxpayer acted with reasonable cause and good faith is made on a case-by-case basis. As stated previously, taxpayers bear the burden of proof as to reasonable cause and willful neglect. Higbee v. Commissioner, 116 T.C. at 447. Petitioners have failed to show reasonable cause for the underpayment for 2008, and have not shown that they acted in good faith with respect to any portion of the underpayment. Petitioners failed to provide any information as to Petitioners' knowledge or experience. The Court found 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 8 compelling that Mr. Novak sent the form W-2 and the form 1099-MISC to Petitioner at the same address and neither was returned as non-deliverable. Accordingly, we hold that Petitioners are liable for the accuracy-related penalty under section 6662(a). To give effect to the foregoing, decision will be entered for Respondent. This concludes the Court's oral findings of fact and opinion in this case. Thank you. (Whereupon, at 9:19 a.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888