TAX COURT OPINION

Case: Roy G. Magnuson
Docket Number: 22368-13
Judge: Gustafson
Opinion Type: bench
Filed: 09/20/2014
Pages: 12

UNITED STATES TAX COURT WASHINGTON, DC 20217 ROY G. MAGNUSON, Petitioner, v. ) ) ) JRN ) Docket No. 22368-13. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the pages of the transcript of the proceedings before Judge David Gustafson at Columbia, South Carolina, on September 9, 2014, containing his oral findings of fact and opinion, 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 trial in the above case before Judge Gustafson at Columbia, South Carolina, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral fimdings of fact and opinion, decision will be entered under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. September 20, 2014 SERVED Sep 22 2014 Capital Reporting Company 3 Bench Opinion by Judge David Gustafson September 9, 2014 ROY G. MAGNUSON v. COMMISIONER Docket No. 22368-10 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the 1 2 3 4 5 6 7 8 9 10 Internal Revenue Code, and Tax Court Rule 152; and it 11 12 13 14 15 16 17 18 shall not be relied on as precedent in any other case. Petitioner Roy G. Magnuson filed no tax return for the year 2010. By a notice of deficiency dated June 24, 2013 (Ex. 3-J), the Internal Revenue Service ("IRS") determined a deficiency in Mr. Magnuson's 2010 Federal income tax, plus additions to tax. The issues for decision are how much taxable compensation 19 Mr. Magnuson received from his employer and whether 20 21 22 23 24 he is entitled to any deductions above those the IRS allowed. The case was tried in Columbia, South Carolina, on September 8, 2014. Mr. Magnuson represented himself, and respondent was represented by David 25 McCallum. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 FINDINGS OF FACT In 2010 Mr. Magnuson was employed by Detail 3 Roofing, Inc. ("DRI"). In 2010 he received from DRI 4 5 compensation totaling $53,849, and DRI reported that amount to Mr. Magnuson and to the Government on Form 6 W-2. DRI did not withhold any income tax from that 7 8 9 compensation. (Ex. 4-J.) Mr. Magnuson alleges that some of this compensation exceeded his actual earnings and that DRI's principal, Mr. David Zimmer, 10 included additional amounts as intended support for 11 Mr. Magnuson's Christian ministry activity (discussed 12 13 14 15 16 below). However, there is no testimonial or documentary corroboration for this allegation, and for social security tax purposes DRI evidently accounted for the entire payments as wages. We find that the entire $53,849 was indeed wages to Mr. 17 Magnuson. 18 Mr. Magnuson considered himself devoted to 19 Christian ministry; and to that end he spent -- to an 20 21 22 extent he did not document and that we cannot find -- some portion of this DRI compensation on ministry- related activities. He presented no documentation 23 whatsoever to corroborate those expenditures. He 24 made some of the expenditures in connection with 25 activities of "Muse Ministries", an entity about 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 19 20 21 22 23 24 25 which our record includes very little information and no documentation. Mr. Magnuson did not allege or show that Muse Ministries qualifies for tax exemption under section 501(c)(3) or is a church for purposes of section 508(c)(1) (A), nor did he allege or show that he made contributions to Muse Ministries or that his ministry expenditures were for the benefit of Muse Ministries.or acknowledged by.it in any fashion. He alleged that in 2010 he made some contributions to Faith Independent Church, but he did not know whether he made them by cash or check, did not know the amounts, and had no documentation to substantiate any contributions. We are unable to find any charitable contributions. Mr. Magnuson alleges that in 2010 he lived under a "vow of poverty", so that he had a moral obligation to spend money on ministry rather than on himself. However, he did not describe any detail about the timing or nature of this vow; he did not surrender to anyone else any control over the spending of his compensation; and he did not show that he was obliged to account to anyone for his expenditures or his activities. He explained that the vow was between himself and Jesus Christ. We assume that this explanation is subjectively sincere; 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 but as an objective matter, we find that Mr. Magnuson did not have any discernible or verifiable vow that affected his dominion over his earnings. In 2010 Mr. Magnuson owned a home on which he had two mortgages, both of which were sold by one 6 mortgage company to another. To the total of four 7 mortgage companies he paid a total of $7,395 in 8 mortgage interest on his home in 2010. (He also 9 presumably paid deductible real property tax, but he 10 11 12 13 14 did not know the amount or substantiate any payment.) Mr. Magnuson did not file a Federal income tax return for 2010. (Stip. 2.) The IRS received from DRI a Form W-2 reporting Mr. Magnuson's 2010 compensation, so -- after first unsuccessfully asking 15 Mr. Magnuson for his 2010 return -- the IRS prepared 16 17 18 19 20 21 22 23 24 a substitute for return ("SFR") pursuant to section 6020(b) (Ex. 2-J), and issued to him a notice of deficiency (Ex. 3-J) on June 24, 2013. In the notice the IRS determined: that all of Mr. Magnuson's compensation from DRI was taxable income; that, in lieu of itemized deductions, Mr. Magnuson was entitled to the standard deduction of $5,700; and that he was liable for the resulting deficiency plus additions to tax. On September 23, 2013, Mr. 25 Magnuson timely mailed a petition to this Court 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company challenging the IRS's deficiency determination. At that time he resided in South Carolina. 7 OPINION I. General evidentiary principles The IRS's determination in the notice of deficiency is presumed correct. Mr. Magnuson challenges that generality by citing Scar v. Commissioner, 814 F.2d 1363,1370 (9°' Cir. 1987), rev'g 81 T.C. 855(1983). However, what Scar holds is that if a purported notice of deficiency reveals on its face that no determination of a tax deficiency has been made with respect to the taxpayer who is named in the notice, then it does not meet the requirements of section 6212(a), and this Court has no jurisdiction to hear a case arising from it. However, in this case, the IRS clearly made a determination about Mr. Magnuson based on information about compensation he had received from DRI. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Plainly, there was a determination here, and it is 20 21 22 23 24 25 presumed correct. The taxpayer generally bears the burden to prove his entitlement to any deductions he claims, Rule 142(a); and a taxpayer must satisfy the specific requirements for any deduction he claims, see INDOPCO, Inc. v. Commissioner, 503 U.S. 79,84(1992). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 Mr. Magnuson argues that the burden of proof is on 2 3 4 respondent, and for this argument he cites section 7491. Subsection (a) of that section may shift the burden if "a tax payer introduces credible evidence 5 with respect to any factual issue", but Mr. Magnuson 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 did not produce credible evidence. Therefore, as to tax liability, the burden did not shift in this case. (Subsection (c) of that section imposes a burden of production on the Commissioner as to penalties and additions to tax, which we discuss below.) Taxpayers are required to maintain records sufficient to substantiate their income and deductions. See sec. 6001; 26 C.F.R. sec. 1.6001- 1(a); see also id. Sec. -1(e)("The books or records***shall be retained so long as the contents thereof may become material in the administration of any internal review law"). Mr. Magnuson did not do so. He alleges that his record-keeping was confounded by the break-up of his marriage and by an antagonistic and uncooperative ex-spouse. Assuming that to be true, if Mr. Magnuson were to establish that he incurred a deductible expense but could not show the precise amount of the deductible expense, then the Court would estimate the amount on the basis of less-than-optimal evidence. In making the 866.488.DEPO www.CapitaIReportingCompany.com Capital Reporting Company 9 1 2 estimate, the Court "bear[s] heavily if it chooses upon the taxpayer whose inexactitude is of his own 3 making". Cohan v. Commissioner, 39 F.2d 540,543-544 4 5 6 7 8 9 (2d Cir. 1930). This Cohan rule, which Mr. Magnuson invokes, may indeed fill in gaps in one's proof, but it does not remedy a wholesale failure of proof. In this case, Mr. Magnuson did not show expenditures that were deductible in their nature, and he did not provide any evidence to substantiate the amounts of 10 any such expenditures. The IRS began asking Mr. 11 Magnuson about his 2010 return no later than February 12 13 14 2013 -- i.e., less than 2 years after it had been due in April 2011, and when records should have been retrievable -- but in the year and a half since then 15 Mr. Magnuson failed to retrieve or reconstruct 16 17 18 19 20 records that would refute the IRS's determination at issue here. II. Taxable income Mr. Magnuson has essentially conceded his receipt of the compensation that DRI reported and on 21 which the IRS's notice of deficiency is based. 22 23 Section 61(a) broadly defines gross income as "all income from whatever source derived", and Mr. 24 Magnuson's intention to devote part of his 25 compensation to ministry-related expenditures does 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 not affect its character as taxable income to him. III. Deductions If Mr. Magnuson devoted a portion of his DRI compensation to religious purposes, then the manner in which that might affect his tax liability is as contributions to or for the benefit of a tax-exempt organization described in sections 501(c)(3) and 170(c)(2). However, Mr. Magnuson made no attempt to substantiate charitable contributions in the manner required by the regulations (cf. 26 C.F.R. sec. 1.170A-13(a)(1)), nor even to show that he made expenditures for the benefit of an exempt organization. We therefore cannot allow any deduction for a charitable contribution. However, in conjunction with Mr. Magnuson's testimony, the IRS's transcripts of third-party reporting (Ex. 4-J)do show (and the IRS conceded at trial) that Mr. Magnuson spent $7,395 in mortgage interest on his home. This amount is deductible as "qualified residence interest" under section 163(h)(3), and it is greater than the standard deduction of $5,700 that the IRS allowed Mr. Magnuson in the notice of deficiency. Consequently, he should be allowed to deduct the greater amount, and his 2010 income tax liability must be recomputed. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 IV. Additions to tax The IRS has the burden of production to show that Mr. Magnuson is liable for the three additions to tax determined against him in the notice of deficiency. See section 7491(c). The Commissioner carried that burden in this case. A. Failure to file Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to file a timely return, and Mr. Magnuson stipulated that he failed to file a return for 2010. (Stip. 2.) The addition applies "unless it is shown that such failure is due to reasonable cause and not due to willful neglect". Sec. 6651(a)(1). Mr. Magnuson made no express contention of reasonable cause for his non-filing in 16 April 2011 or at any time thereafter, and we see no 17 18 19 20 21 grounds for such a contention. B. Failure to pay Section 6651(a)(2) imposes an addition to tax for failure to pay the amount of tax shown on a return, and the Commissioner contends that Mr. 22 Magnuson is liable for this addition for 2010. A 23 24 25 return made by the Secretary under section 6020(b)-- i.e., an SFR--is treated as "the return filed by the taxpayer for purposes of determining the amount of 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 1 2 3 4 5 6 7 8 9 10 11 12 13 the addition" under section 6651(a)(2). See sec. 6651(g)(2). Mr. Magnuson stipulated that the Commissioner prepared an SFR for him (see Stip. 4; Ex. 2-J), and the Commissioner has thus carried is burden of production to show that Mr. Magnuson is liable for the addition to tax under section 6651(a)(2). Mr. Magnuson has not made any defense, and he is liable for the failure-to-pay addition to tax. C. Failure to pay estimated tax Section 6654 imposes an addition to tax on an individual taxpayer who underpays his estimated tax. A taxpayer must pay estimated tax for any year in 14 which he has a "required annual payment". Sec. 15 16 17 18 19 6654(d). A "required annual payment" is defined in section 6654(d)(1)(B), in pertinent part, as "the lesser of (i) 90 percent of the tax shown on the return for the taxable year (or, if no return is filed, 90 percent of the tax for such year)", or (ii) 20 if the individual filed a return for the preceding 21 22 23 24 25 taxable year, then "100 percent of the tax shown on the return of the individual for the preceding taxable year." Thus, the IRS's burden of production under section 7491(c) requires it to produce, for each year for which the addition is asserted, 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 evidence that the taxpayer had a required annual payment under section 6654(d); and in order to do so, it must demonstrate the tax shown on the taxpayer's return for the preceding year or that the taxpayer filed no return. The Commissioner met this burden here by showing that Mr. Magnuson did not file a return for 2009 (rather, the IRS prepared an SFR; see Ex. 5-J). Consequently, the Commissioner carried his burden of production to show that Mr. Magnuson is liable for the section 6654 addition, and he made no defense. He is therefore liable for this addition for failure to pay estimated tax. So that the tax liability (and the corresponding additions to tax) can be recomputed, decision will be entered under Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:21 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