TAX COURT OPINION

Case: Xiangcun Shi
Docket Number: 6852-17S
Judge: Guy
Opinion Type: bench
Filed: 10/18/2018
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 XIANGCUN SHI, Petitioner, v. ) ) ) ) Docket No. 6852-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) 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 Special Trial Judge Daniel A. Guy, Jr., at Los Angeles, Cal, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. October 18, 2018 SERVED Oct 18 2018 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. 3 October 3, 2018 Xiangcun Shi v. Commissioner of Internal Revenue Docket No. 6852-17S 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. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of a deficiency is a small tax case conducted pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 174 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter in this bench opinion, section references are to the Internal Revenue Code of 1986, as amended, in effect for 2014, and Rule references are to the Tax Court Rules of Practice and Procedure. Background Petitioner resided in California at the time the petition was filed and he appeared at trial pro se. 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 Cri'Oers (973)406-2250|operationseescribeanet|www.escribers.net Daniel C. Chavez appeared on behalf of respondent. The 4 parties filed with the Court a stipulation of facts, with accompanying exhibits. The record shows that the Internal Revenue Service (IRS) received and processed an electronically filed Form 1040, U.S. Individual Income Tax Return, for the taxable year 2014, bearing petitioner's name, as well as his California address, phone number, and social security number. The tax return was very detailed and included as attachments a Form 4562, Depreciation and Amortization, a Form 8829, Expenses for Business Use of Your Home, and a Schedule C, Profit and Loss from Business. The Schedule C reported gross receipts of $181,100 attributable to an "International Sales" activity. The Schedule C reported numerous itemized expenses totaling $134,888 and expenses for business use of home of $29,151, leaving net business income of $17,061, an amount that was carried over to line 12 of the tax return. The tax return included a standard deduction, a single personal exemption deduction, and reported tax due of $2,794, comprising income tax of $383 and self- employment tax of $2,411. There is no clear indication on the tax return whether it was prepared and filed by petitioner or someone 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 (973)406-2250loperationsøescribers.netlwww.escribers.net else. The tax due, however, was paid by way of a charge applied against petitioner's credit card. The IRS examined the tax return and issued a notice of deficiency to petitioner determining a Federal income tax deficiency of $32,077 and an accuracy-related penalty under section 6662(a) of $6,415 for the taxable year 2014. The deficiency is attributable to the disallowance of deductions for certain expenses reported on Schedule C, namely travel expenses of $15,731, legal and professional expenses of $54,058, and contract labor expenses of $25,381. Petitioner invoked the Court's jurisdiction by filing a timely petition for redetermination pursuant to section 6213(a). Petitioner alleged in the petition and asserted at trial that the tax return in question was totally fabricated, that he did not work or otherwise conduct any trade or business in 2014, and that the tax return was filed without his knowledge to "trap" him. At trial, petitioner stated that he graduated from a university in China, moved to the U.S. in 1995, and he conducted a travel business for about 10 years before he purportedly retired in 2005. During that period of time, petitioner maintains he filed Federal income tax returns. Petitioner testified that in 2014 he was 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 (9733406-2250loperationseescribers.net|www.escribers.net supported by his affluent daughter, who lived and worked in China, and that he made several trips between the U.S. 6 and China that year to help take care of his aging parents. Petitioner also testified that he spent a considerable amount of his time in China attending educational seminars and health improvement programs all of which were paid for by his daughter. Attached to the parties' stipulation of facts are receipts that appear to relate to the above-mentioned seminars that petitioner offered "to substantiate alleged legal and professional services expenses". Petitioner testified that on one of his trips to China in 2014, his girlfriend had suggested that he meet with an individual in Beijing who might assist him in obtaining U.S. citizenship. Petitioner says he met with the unnamed individual who told him that he should file a Federal income tax return to enhance his chances of gaining U.S. citizenship. Petitioner further testified that he provided this individual with personal information, including his social security number and credit card information. Finally, petitioner testified that the individual later became unhappy with him after he rejected the individual's request for a loan. Petitioner failed to identify the individual in question. The 2014 tax return includes a reference to the 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 (973) 406-2250 j operationseescribersmet [ www.escribers.net Hexi Hotel in Gansu Province, China, in connection with the application of capitalization rules for real or personal property under section 263 and related regulations. Petitioner acknowledged that he was acquainted with the owners of the property. Discussion The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioner does not contend, and the record does not suggest, that the burden of proof should shift to respondent pursuant to section 7491(a). Although petitioner maintains that the tax return for 2014 was fabricated and filed without his consent, the Court is not obliged to accept a taxpayer's testimony that is self-serving and uncorroborated by objective evidence. See, e.g., Cluck v. Commissioner, 105 T.C. 324, 338 (1995). Petitioner offered no objective evidence, or the testimony of a credible witness, to corroborate his version of the events that unfolded in 2014. His testimony was vague, lacked important details, was at times inconsistent, and on the whole unconvincing. Considering all the facts and circumstances, the Court 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 BEEE (9733406-2250loperationseescribers.net[www.escribers.net finds that petitioner either filed the tax return himself or consented to having the return filed on his behalf. Deductions are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976). Although petitioner asserts that the tax return was a fabrication, he nevertheless offered a few receipts in an attempt to substantiate some of the expenses claimed on Schedule C. The Court finds that petitioner did not present any objective evidence to corroborate his testimony that the tax return was a complete fabrication. There would seem to have been a number of avenues available to petitioner to provide his case, but he offered the Court nothing but his own self-serving testimony. Nor did he provide any receipts or similar business records that would serve to substantiate the Schedule C expenses that respondent disallowed in the 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 Cri'Oers (973)406-2250|operations@escribers.net|www.escribersmet 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 9 notice of deficiency. The receipts attached to the stipulation of facts bear no discernable relationship to the professional and legal expenses in dispute. On this record, respondent's determination that petitioner is liable for a Federal income tax deficiency is sustained. Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20% of the amount of any underpayment of tax that is attributable to (1) negligence or disregard of rules or regulations or (2) any substantial understatement of income tax. The term "negligence" includes any failure to make a reasonable attempt to comply with the provisions of the Code, and the term "disregard" includes any careless, reckless, or intentional disregard of rules and regulations. Sec. 6662(c). An understatement means the excess of the amount of the tax required to be shown on the return over the amount of the tax imposed which is shown on the return, reduced by any rebate. Sec. 6662(d)(2)(A). An understatement is substantial in the case of an individual if the amount of the understatement for the taxable year exceeds the greater of 10% of the tax required to be shown on the return or $5,000. Sec. 6662(d)(1) (A). Section 6664(c)(1) provides an exception to the imposition of the accuracy-related penalty if the taxpayer establishes that there was reasonable for, and the (973)406-2250|operations@escribersæt|www.escribersmet cavbt- DG- taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-4(a), Income Tax Regs. The 10 determination of whether the taxpayer acted in reasonable cause and in good faith is made on a case-by-case basis, taking into account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. With respect to an individual taxpayer's liability for any penalty, section 7491(c) places on the Commissioner the burden of production, thereby requiring the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the Commissioner meets his burden of production, the taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Id, at 447; see Rule 142(a); Welch v. Helvering, 290 U.S. at 115. Respondent has discharged his burden of production under section 7491(c). We have sustained respondent's deficiency determination, and the resulting underpayment exceeds both 10% of the tax required to be shown on petitioner's tax return and $5,000. Sec. 6662(d)(1)(A). The record also includes a civil penalty approval form executed by the IRS tax examiner's group manager approving the section 6662(a) penalty asserted in the notice of deficiency. See sec. 6751(b). 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Cflbers (973)406-2250|operations@escribers.riet|wwwascribers.net 11 Petitioner offered no defense to the imposition of an accuracy-related penalty for the year in 1ssue. Given his educational background and past experience filing Federal income tax returns, the Court concludes that petitioner did not make sufficient efforts to determine his proper tax liability. In short, he failed to show reasonable cause for the tax underpayment at issue. Considering all the facts and circumstances, we sustain respondent's determination that petitioner is liable for an accuracy-related penalty for the year in issue. Decision will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:40 a.m., the above-entitled matter was concluded.) 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (973)406-2250|operationseescribersnet|www.escribersaet