TAX COURT OPINION

Case: Manuelito B. Rodriguez & Paz Rodriguez
Docket Number: 19122-19
Judge: Kerrigan
Opinion Type: bench
Filed: 08/09/2021
Pages: 12

Docket No.: 19122-19 Page 1 of 1 United States Tax Court Washington, DC 20217 Manuelito B. Rodriguez & Paz Rodriguez Petitioners v. Commissioner of Internal Revenue Respondent Docket No. 19122-19 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Judge Kathleen Kerrigan at the remote Charleston, West Virginia, containing her oral ﬁndings of fact and opinion rendered at the remote trial session at which the case was heard. In accordance with the oral ﬁndings of fact and opinion, decision shall be entered under Rule 155. (Signed) Kathleen Kerrigan Judge Served 08/09/21 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 Bench Opinion by Judge Kathleen Kerrigan April 21, 2021 3 Manuelito B. Rodriguez & Paz Rodriguez v. Commissioner Docket No. 19122-19 THE COURT: The Court has decided to render in this case the following as its oral findings of fact and opinion, which 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 and Procedure. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar amount. By notice of deficiency dated September 5, 2019, the Internal Revenue Service (IRS or respondent) determined deficiencies of $25,739 and $10,738, penalties pursuant to section 6662 of $4,468 and $2,544, additions to tax pursuant to section 6651(a)(1) of $4,487 and $2,544, respectively, for 2014 and 2015, and a deficiency of $52,132 and a penalty pursuant to section 6662(a) of $10,426 for 2016. Respondent has conceded some of the costs of goods sold (COGS) and some rent received by 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 petitioners for the years in issue. The issues for 4 consideration are whether petitioners are entitled to deduct business expenses for 2014 and additional rent for 2015 and 2016, to deduct additional COGS, to deduct a capital loss for 2015, to deduct other income for 2016, and are liable for the section 6662 penalties for the years in issue and additions to tax pursuant to 6651(a)(1) for 2014 and 2015. Trial of this case was conducted on April 19, 2021, during the remote Charleston, West Virginia trial session. Petitioners represented themselves and Halvor R. Melom represented respondent. The parties' stipulation of facts and accompanying exhibits were admitted into evidence. Petitioners were the only witnesses. We find the following facts: FINDINGS OF FACT Petitioners resided in California when they timely filed their petition. For 2014-16 (tax years in issue), petitioners filed Schedules C, Profit or Loss from Business, and reported income and expenses for an automotive repair business. For 2014 and 2015 petitioners filed Schedules C for the ownership of a Seven-Eleven store. Respondent disallowed other expenses, rent expenses and COGS for the automotive repair business for the years in issue. Some of the expenses disallowed 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 included travel expenses. 5 On their 2014 Federal income tax return, petitioners reported no wage income. Their wage transcript for 2014 shows that petitioners received a Form W-2, Wage and Tax Statement, for $13,595 paid to petitioner wife from Luz Clancy Et Al V Scripps Health. They filed their return for 2014 on July 26, 2015. With their 2015 Federal income tax return, petitioners filed a Form 4797, Sales From Business, and reported a capital loss of $98,217 from the sale of a Seven-Eleven Franchise. They reported the basis as $100,000 and the sales price as $1,783. They filed their return for 2015 on October 16, 2016. On their income tax return for 2017, petitioners reported $47,522 as a negative amount of other income. On April 5, 2019, a Civil Penalty Approval Form, showing section 6662 penalties for the years in issue, was signed by the revenue agent's immediate supervisor. On April 16, 2019, a 30-day letter which included section 6662 penalties for the years in issue was sent to 21 petitioner. 22 23 24 25 OPINION Generally, the Commissioner's determinations in a notice of deficiency are presumed correct, and a taxpayer bears the burden of proving those determinations 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 are incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 6 111, 115 (1933). Petitioners have neither claimed nor shown that they meet the specifications of section 7491(a) to shift the burden of proof to respondent as to any relevant factual issue. "Cost of goods sold" is an offset subtracted from gross receipts in determining gross income, sec. 1.61-3(a), 6(a), Income Tax Regs., and is not a "deduction", see Metra Chem Corp. v. Commissioner, 88 T.C. 654, 661 (1987). Any amount claimed as COGS must be substantiated, and taxpayers are required to maintain records sufficient for this purpose. Sec. 6001; Nunn v. Commissioner, T.C. Memo. 2002-250, slip op. at 16; sec. 1.6001-1(a), Income Tax Regs. Section 162(a) allows a taxpayer to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. An ordinary expense is one that commonly or frequently occurs in the taxpayer's business, Deputy v. du Pont, 308 U.S. 488, 495 (1940), and a necessary expense is one that is appropriate and helpful in carrying on the taxpayer's business, Welch v. Helvering, 290 U.S. at 113; sec. 1.162-1(a), Income Tax 23 Regs. 24 25 Deductions are a matter of legislative grace, and a taxpayer must prove his or her entitlement to a 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 7 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). To that end, taxpayers are required to substantiate each claimed deduction by maintaining records sufficient to establish the amount of the deduction and to enable the Commissioner to determine the correct tax liability. Sec. 6001; see also Higbee v. Commissioner, 116 T.C. 438, 440 (2001). Normally, the Court may estimate the amount of a deductible expense if a taxpayer establishes that an expense is deductible but is unable to substantiate the precise amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). This principle is often referred to as the Cohan rule. See, e.g., Estate of Reinke v. Commissioner, 46 F.3d 760, 764 (8th Cir. 1995), aff'g T.C. Memo. 1993-197. Certain expenses specified in section 274, such as travel expenses, including meals and lodging, are subject to heightened substantiation requirements. 20 Sec. 274(d)(1). 21 22 23 24 Petitioners provided no evidence to support any deductions beyond those conceded by respondent. Therefore, we do not allow any additional expenses or COGS, including expenses for 2014 that were not conceded 25 by respondent. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Unreported Income 8 In unreported income cases such as this, the Commissioner must establish "some evidentiary foundation" connecting the taxpayer with the income-producing activity or demonstrating that the taxpayer actually received unreported income. See Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th Cir. 1979), rev'g 67 T.C. 672 (1977). Respondent met the burden of production as to the unreported income determined in the notice of deficiency. Gross income generally includes all income from whatever source derived, including wages. Sec. 61(a); Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 429-430 (1955); Wilcox v. Commissioner, 848 F.2d 1007, 1008 (9th Cir. 1988), aff'g T.C. Memo 1987-255; sec 1.61-2(a)(1), Income Tax Regs. Respondent's inclusion of $13,595 in income for 2014 is sustained. 17 Capital Loss 18 19 20 21 22 23 24 Section 165 permits taxpayers to claim a deduction for any loss sustained during the taxable year and not compensated for by insurance or otherwise. Petitioners have offered no evidence regarding this issue. Accordingly, respondent correctly determined that petitioners received additional taxable income of $98,217 from the sale of a Seven-Eleven Franchise in tax 25 year 2015. 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 Other Income 9 Respondent disallowed the negative amount petitioners reported on their 2016 tax return as "Other Income" and described as "NOLD", meaning Net Operating Loss (NOL) deduction. As with all deductions, taxpayers are required to maintain adequate records substantiating a claimed NOL deduction. See Scharringhausen v. Commissioner, T.C. Memo. 2012-350, at *31-*32. Taxpayers claiming an NOL deduction bear the burden of substantiating the deduction by establishing both the existence of the NOL and the amount of any NOL that may be carried over to the subject years. Rule 142(a)(1); United States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235, 75 S.Ct. 733. To claim the deduction, taxpayers must file with their tax return a concise statement setting forth the amount of the NOL deduction claimed and all material and pertinent facts, including a detailed schedule showing the computation of the NOL deduction. Sec. 1.172-1(c), Income Tax Regs. Petitioners presented no evidence to support their position and, thus, have not met their burden of production as to this issue. We sustain respondent's disallowance of the negative income reported on petitioners' 2016 tax return as "Other Income". Section 6662(a) Penalty 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 Section 6662(a) and (b)(2) impose a 20% penalty 10 on an underpayment of tax if it is attributable to a substantial understatement of income tax. An understatement of income tax is "substantial" if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. Sec. 6662(d)(1)(A). Respondent bears the burden of production with respect to a section 6662 penalty. See sec. 7491(c). This burden of production includes producing evidence that respondent has complied with the procedural requirements of section 6751(b). Frost v. Commissioner, 154 T.C. 23, 34 (2020). Once respondent meets this burden, the taxpayer must come forward with contrary evidence. Id. In Clay v. Commissioner, 152 T.C. 223, 249 (2019), we held that the "initial determination" occurs no later than "when those proposed adjustments are communicated to the taxpayer formally as part of a communication that advises the taxpayer that penalties will be proposed and giving the taxpayer the right to appeal them with Appeals", and that a 30-day letter can serve as the initial determination for purposes of section 6751(b). See Clay v. Commissioner, 152 T.C. 223, 249 (2019). The requirements of section 6751(b) were met. Petitioners' understatement of income exceeds 10% of the tax required to be shown on their return. 1 2 3 4 5 6 7 8 9 Respondent has met respondent's burden of production by 11 demonstrating a "substantial understatement of income tax". The accuracy-related penalty does not apply with respect to any portion of the underpayment for which the taxpayer shows that he or she had reasonable cause and acted in good faith. Sec. 6664(c)(1); see Higbee v. Commissioner, 116 T.C. at 446-447. Petitioners have not shown that they had reasonable cause. Petitioners are 10 liable for the section 6662 penalty for the years in 11 issue. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Section 6651(a)(1) Addition to Tax Section 6651(a)(1) imposes an addition to tax if the taxpayer fails to file his or her income tax return by the required due date (including any extension of time for filing). A taxpayer has the burden of proving that failure to timely file was due to reasonable cause and not willful neglect. See sec. 6651(a)(1); Higbee v. Commissioner, 116 T.C. 438, 447 (2001). Under section 7491(c) the Commissioner bears the burden of producing evidence with respect to the liability of the taxpayer for any additions to tax. See Higbee v. Commissioner, 116 T.C. at 446-447. For 2014 and 2015 petitioners filed their income tax returns after the due date. Therefore, respondent's burden of production has been met. Petitioners did not establish that their 12 failure to file was due to reasonable cause. Accordingly, the section 6651(a)(1) addition to tax is sustained for the years 2014 and 2015. A decision will be entered under Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 1:15 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 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 CERTIFICATE OF TRANSCRIBER AND PROOFREADER 13 CASE NAME: Manuelito B. Rodriguez & Paz Rodriguez v. Commissioner DOCKET NO.: 19122-19 We, the undersigned, do hereby certify that the foregoing pages, numbers 1 through 13 inclusive, are the true, accurate and complete transcript prepared from the verbal recording made by electronic recording by Adrian Morris on April 21, 2021 before the United States Tax Court at its remote session in Charleston, WV, in accordance with the applicable provisions of the current verbatim reporting contract of the Court and have verified the accuracy of the transcript by comparing the typewritten transcript against the verbal recording. _______________________________________________ Meribeth Ashley, CET-507 Transcriber 5/4/21 Date _______________________________________________ Lori Rahtes, CDLT-108 Proofreader 5/4/21 Date