TAX COURT OPINION

Case: Dean W. & Rebecca L. Dahlquist
Docket Number: 11339-09S
Judge: Colvin
Opinion Type: bench
Filed: 12/06/2010
Pages: 16

UNITED STATES TAX COURT WASHINGTON, DC 20217 DEAN W. & REBECCA L. DAHLQUIST, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) Docket No. 11339-09$ O R D E R 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 petitioners and to respondent a copy of transcript of Laurence J. Whalen at San Antonio, Texas, containing his oral findings of the proceedings in the above case before Judge fact and opinion rendered on November 3, 2010 . the pages of the In accordance with the oral findings of fact and opinion, decision will be entered for respondent . (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. December 6, 2010 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 3 Bench Opinion by Senior Judge Laurence J. Whalen November 3, 2010 Dahlquist v. Commissioner Docket No. 11339--09S 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. This proceeding was brought as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. In this bench opinion, all section numbers refer to the Internal Revenue Code, as amended and in effect for 2006, the taxable year in issue, unless stated otherwise, and all rule references are to the Tax Court Rules of Practice and Procedure . Pursuant to section 7463 (b) , the decision to be entered in this case is not reviewable by any other court, and this bench opinion shall not be treated as precedent for any other case. III. This bench opinion is made pursuant to the authority granted by section 7459 (b) and Rule 152. 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 IV. 4 Mr. Dean W. Dahlquist appeared on behalf of petitioners. Mr. Jeffrey D. Heiderschiet, Esquire, appeared on behalf of respondent. V. Respondent determined a tax deficiency of $7,671, and an addition to tax or penalty under section 6651(a) (1) of $340.60, in petitioners' Federal income tax for the taxable year 2006. The tax deficiency is attributable solely to the disallowance, for lack of substantiation, of a deduction for charitable contributions in the amount of $23,604 that was claimed by petitioners on Schedule A, Itemized Deductions, of their 2006 return. The. issues for decision are (1) whether petitioners are entitled to deduct, pursuant to section 170(a), "charitable contributions" in the aggregate amount of $23, 604, and (2) whether petitioners are liable for an addition to tax or penalty under section 6651(a) (1) in the amount of $340.60. VI. The parties submitted this case pursuant to Rule 122 on the basis of the pleadings and the facts recited in, and the exhibits attached to, their 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 5 Stipulation of Facts, filed October 22, 2010, and their Supplemental Stipulation of Facts, also filed October 22, 2010. The facts recited in those stipulations are so found, and the attached exhibits are taken into evidence. Petitioners filed their tax return for taxable year 2006 on May 11, 2007. Petitioners' return reports Mr. Dahlquist's wages of $60,623.33 from "NEYSO of San Antonio, Inc." (Northeast Youth Soccer Organization), and it states that his occupation is "Executive Director". Petitioners' return includes a Schedule A, Itemized Deductions, on which they claim a deduction for one or more gifts to charity in the aggregate amount of $23,604. The deduction is claimed on the line of Schedule A labeled "Gifts by cash or check." Thus, petitioners' return makes it clear that petitioners had made one or more charitable contributions by cash or check totaling $23,604. In due course after petitioners had filed their 2006 return, respondent mailed to them a notice of deficiency in which respondent disallowed the deduction for contributions claimed on Schedule A in the amount of $23,604. The notice states, "Since you did not establish that the amounts shown were (a) 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 6 contributions, and (b) paid, the amounts are not deductible." VII. Petitioners disagreed with respondent's determination, and they filed a petition asking the Court to redetermine the deficiency. They resided in San Antonio, Texas, at the time they filed their petition. Contrary to petitioners' return, which states that the contribution had been made entirely by "cash or check," petitioners' petition describes an entirely different type of contribution. According to the petition, the contribution was composed principally of property, with only a relatively small amount of services and cash. Paragraph 6 of their petition alleges that petitioners' contribution was composed of the following four items: (1) the donation of 6,800 yards or 5,231 tons of "base and fill material," worth $28,770, (2) the removal of 17-20 cedar trees worth $1,100, (3) an employee contribution to United Way of $1,464.11, and (4) a cash contribution to a church of more than $500. These four items total $31,834.11. The record does not explain how petitioners computed the amount of the deduction claimed on their return, $23,604. 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 7 In the case of both the alleged contributions to United Way of $1,464.11, item 3 above, and the alleged cash contribution of $500 or more to a church, item 4 above, respondent's answer denied the allegation for lack of sufficient knowledge or information. After respondent's answer, there is no further reference to either item in the record of this case. We conclude that, after filing their petition, petitioners abandoned their contention that they are entitled to a deduction for either item. We do not address either of these items further. VIII. Section 170(a) generally allows a deduction for any charitable contribution, as defined in section 170(c), that is made by the taxpayer during the taxable year. Section 170(c) defines the term "åharitable contribution" as "a contribution or gift" to or for the use of certain specified organizations. In this case, respondent does not dispute that in 2006 NEYSO Of San Antonio, Inc. was a qualified recipient pursuant to section 170(c). If a charitable contribution is made in property other than money (a noncash contribution), the amount of the taxpayer's contribution is the fair market value of the property at the time of the 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 contribution, subject to reduction as described below. Sec. 1.170A-1(c) (1), Income Tax Regs. However, a charitable contribution is deductible only if verified under regulations prescribed by the Secretary, sec. 170(a) (1), including certain substantiation requirements provided in section 1.170A-13(c) (2), Income Tax Regs. If a taxpayer makes a noncash contribution, the taxpayer generally must retain a receipt from the donee. Sec. 1.170A-13(b) (1), Income Tax Regs. The receipt must contain the name of the donee, the date and location of the contribution, and a description of the property in detail reasonably sufficient under the circumstances. Id. If the taxpayer claims a deduction in excess of $500 for a noncash contribution, the taxpayer must maintain written records that also indicate how the property was acquired, and the cost or adjusted basis of the property. Sec. 1.170A-13(b) (3), Income Tax Regs. The taxpayer must establish the reliability of the written records. Sec. 1.170A-13(a) (2) (i), (b) (2) (i), Income Tax Regs. If the taxpayer claims a deduction in excess of $5,000 for noncash contributions (other than certain publicly traded securities), he must: (1) Obtain a qualified appraisal for such property; (2) 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 9 attach a fully completed appraisal summary to the tax return on which the deduction is first claimed; and (3) maintain records containing the information required in section 1.170A-13(b) (2) (ii), Income Tax Regs. See sec. 1.170A-13(c) (2), Income Tax Regs. Section 170(e) (1) (A) limits the amount that may be deducted as a charitable contribution under section 170(a). It provides that charitable contributions must be reduced by the amount of gain that would not have qualified as long-term capital gain if the donated property had been sold at its fair market value on the date of the donation. See sec. 170(e) (1) (A). The allowable charitable contribution deduction for ordinary income property is limited to the basis of the property donated. See Lary v. United States, 787 F.2d 1538, 1540 (11th Cir. 1986); Glen v. Commissioner, 79 T.C. 208, 212 (1982); Morrison v. Commissioner, 71 T.C. 683, 688 (1979), affd. per curiam 611 F.2d 98 (5th Cir.1980). Finally, we note that no charitable contribution deduction is allowable under section 170 for contribution of services. Sec. 1.170A-l(g), Income Tax Regs. However, unreimbursed expenditures made incident to the rendition of services to an 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 10 organization, contributions to which are deductible, may constitute a deductible contribution. Id. VIII. We begin with several fundamental principles of tax litigation. First, as a general rule, the Commissioner's determinations are presumed correct, and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 142(a). This principle was firmly established by the United States Supreme Court as early as 1933 and has been reaffirmed by the Supreme Court as recently as 1992. See INDOPCO Inc. v Commissioner, 503 U.S. 79, 84 (1992). Second, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); Deputy v. duPont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This includes the burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir.. 1976). Third, the Court is not bound to accept the unverified and undocumented testimony of a taxpayer. Hradesky v. Commissioner, supra; Tokarski v. 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 26 11 Commissioner, 87 T.C. 74, 77 (1986). See also Lovell & Hart, Inc. v. Commissioner, 456 F.2d 145, 148 (6th Cir. 1972), affg. T.C. Memo. 1970-335; MacGuire v. Commissioner, 450 F.2d 1239, 1244 (5th Cir. 1971), affg. T.C. Memo. 1970-89; Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992). Fourth, a party's failure to introduce documentary evidence which is within his possession or control, and which, if true, would be favorable to him, gives rise to the presumption that, if produced, such evidence would be unfavorable. Recklitis v. Commissioner, 91 T.C. 874, 890 (1988); Pollack v. Commissioner, 47 T.C. 92, 108 (1966), affd. 392 F.2d 409 (5th Cir. 1968); Wichita Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), affd. 162 F.2d 513 (10th Cir. 1947). X. We discuss each of the remaining two items enumerated in the petition below: Base and Fill Material. The record contains a letter dated December 15, 2006, that was written by the Treasurer of NEYSO to petitioners which states as follows: "Thank you for your donation of over 6,800 cubic yards of base fill material, and tree clearing for parking at our property labor costs 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 26 27 28 29 30 located at ***. This in-kind donation will aid us in furthering our goals to provide youth soccer in San Antonio. 12 NEYSO of San Antonio, organization. Your contribution is tax deductible to the extent allowed by law. goods or services were provided in exchange for your generous donation. is a 501(c) (3) Inc. No Please keep this letter as a receipt for your gift. Again, thank you for your support." The record contains a proffer of Mr. Dahlquist's testimony at trial in which he claims to have obtained "the limestone base material" from the general manager of a company, "EFI," who had to dispose of it because he or his company needed to leave San Antonio and move to another city for a job, after "he" had been terminated because "he" was behind schedule on his present job. Mr. Dahlquist claims to have "bartered with my excess pallet racking" in order to have the fill material hauled to the site of a proposed parking lot needed by NEYSO. It is not clear whether Mr. Dahlquist claims to have sold the "pallet racking" and used the proceeds to pay a trucking company, or whether he claims to have given the pallet racking to the trucking company in return for the hauling. Mr. Dahlquist claims that the "inventory" cost of the pallet racking was $5,306 ,and its fair market value was $8,800. A spreadsheet in the record purporting to compute the inventory cost of the pallet racking is 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 13 indecipherable. Furthermore, it is not clear whose "inventory" the pallet racking came from. There is no appraisal of the fill material in the record. The record contains a letter dated September 17, 2010, from a representative of Integrated Realty Group. That letter refers to "the value of the dirt that was taken or excavated from his [Mr. Dahlquist's] property." However, there is nothing in the record to show that the vague reference in the letter to "the dirt" is a reference to the "limestone base material" for which petitioners claimed a deduction. Furthermore, there is nothing in the record to suggest that the author of the letter is a "qualified appraiser" within the meaning of section 170(f) (11) (E). It is not clear whether petitioner is claiming a deduction for the value of the pallet racking or the limestone base material. In any event, the record contains no evidence that Mr. -Dahlquist owned either the pallet racking or the fill material. Even accepting Mr. Dahlquist's vague and unsupported proffered testimony as true, we cannot accept petitioners' position that they are entitled to deduct the value of the subject limestone fill material as a charitable deduction under section 170. We reach this conclusion for a number of reasons, but it is necessary to 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 14 state only two of those reasons. First and foremost, petitioners claim a deduction of more than $5,000 for a contribution of property, but they failed to attach a "qualified appraisal" of the property to their return, as required by section 170(f) (11) (C), and they failed to maintain records containing the information required by section 1.170A13 (b) (2) (ii), Income Tax Regs. See sec. 1.170A-13(c) (2) (i), Income Tax Regs. Indeed, as discussed above, petitioners' return did not even disclose the fact that petitioners were claiming a deduction for the contribution of property. Rather, their return stated that the contribution had been made entirely by "cash or check." Second, even if we were to hold that petitioners are entitled to a deduction under section 170 with respect to the limestone fill material, the amount of the deduction would be reduced to zero by the application of section 170(e) (1) (A). There are two parts of this analysis. First, we note that petitioners claim that Mr. Dahlquist acquired the fill material and immediately transported it to the site of NEYSO's parking lot. This took less than one year. Thus, if the fill material had been sold by Mr. Dahlquist, rather than contributed to NEYSO, any gain would not have been long-term capital gain. See sec. 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 15 1222(3). Accordingly, pursuant to section 170(e) (1) (A), the amount of the charitable contribution would be reduced by the amount of the gain. The second part of the analysis involves the treatment of petitioners' basis, if any, in the fill material. We find that petitioners did not establish that they had any basis in the fill material. Accordingly, the amount realized by petitioners from the sale of the fill material would have equaled the gain realized from such sale and, pursuant to section 170(e) (1) (A), no part of such amount could be taken into account as a charitable contribution. We note Mr. Dah ist's vague roffered testimony at he rtered for the 'll material 'th palle acking that had inventor co t of $5,306 and a air market ue of $8,800. Removal of Cedar Trees. It appears that petitioners seek to deduct $610 as an unreimbursed expenditure incurred in connection with providing a service to NEYSO in the form of clearing the land on which the parking lot was to be built. The petition refers to the "removal of 17-20 cedar trees with stump with [sic] an additional fair market value of $1,100." On the other hand, Mr. Dahlquist's proffered testimony describes the money paid by Mr. Dahlquist to clear "14-16 cedar trees" for a "total removal cost $610." He claims to have "paid 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 16 4 boys $80 day [sic] on Saturday and $45 on Sunday" for a total labor cost of $520. Actually, the amount allegedly paid for labor totals $500, not the $520. Mr. Dahlquist also claims to have paid $90 to rent a chain saw for two days, for an aggregate expenditure of $590, rather than $610. Mr. Dahlquist's proffered testimony is uncorroborated. The record does not contain any documents, such as checks or invoices, to corroborate Mr. Dahlquist's proffered testimony that he made these expenditures. Furthermore, there is no testimony about whether these expenditures were reimbursed by NEYSO. As a result of this failure of proof, we reject petitioners' position that they are entitled to deduct $610 as a charitable contribution. XI. We must address one final point. Respondent bears the burden of production with respect to the addition to tax or penalty under 6651(a) (1) that was determined in the notice of deficiency. Sec. 7491(c). In order to meet this burden, respondent must produce sufficient evidence establishing that it is appropriate to impose this addition to tax or penalty. Once respondent has done so, the burden of proof is upon petitioners to establish reasonable cause and good faith. See Higbee v. 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 17 Commissioner, 116 T.C. 438, 449 (2001) . Here, respondent's burden of production is satisfied by the stipulation of the parties that petitioners filed their 2006 return on May 11, 2007, after the due date. Pet tiongrs have not sought to establish that their fai Federal income tax LL.akdJ.it ...i.Q. éma-k was due to a reasonable cause. Accordingly, we sustain the imposition of the penalty XII. In order to give effect to our disposition of the disputed issue, decision will be entered for respondent. XIII. THIS CONCLUDES THE COURT' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 10:40 a.m., the bench opinion in the above-entitled matter was concluded.) // // -// // // // // Heritage Reporting Corporation (202) 628-4888