TAX COURT OPINION

Case: Ibrahim Doar
Docket Number: 6922-12
Judge: Marvel
Opinion Type: bench
Filed: 07/01/2014
Pages: 13

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 IBRAHIM DOAR, Petitioner(s), v. ) ) ) ) ) Docket No. 6922-12 COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ORD ER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit to petitioner and to respondent a copy of the pages of the transcript of the proceedings in the above case before Judge L. Paige Marvel at Hartford, Connecticut, on May 22, 2014, containing the Court's oral findings of fact and opinion rendered at the trial session at which this case was heard. In accordance with the Court's oral findings of fact and opinion, decision will be entered pursuant to Tax Court Rule 155. (Signed) L. Paige Marvel Judge Dated: Washington, D.C. July 1, 2014 SERVED Jul 01 2014 Capital Reporthig Company 1 Bench Opinion by HONORABLE L. PAIGE MARVEL 3 2 May 22, 2014 3 Ibrahim Do-ar v. Commissioner 4 Docket No. 6922-12 5 THE COURT: The Court has decided to render 6 oral findings of fact and opinion in this case, and 7 8 the following represents the Court's oral findings of fact and opinion. The oral findings of fact and 9 opinion shall not be relied upon as precedent in any 10 other case. 11 This bench opinion is made pursuant to the 12 authority granted by section 7459(b) of the Internal 13 Revenue Code of 1986 (Code) as amended and Rule 152 14 of the Tax Court Rules of Practice and Procedure. 15 Unless otherwise indicated, subsequent section 16 17 references made in the bench opinion are to the Code as amended and in effect for the year in issue and 18 Rule references are to the Tax Court Rules of 19 Practice and Procedure. Some monetary amounts have 20 been rounded to the nearest dollar. 21 22 23 Ibrahim Doar appeared pro se. John Aletta appeared on behalf of respondent. Respondent determined a deficiency in 24 petitioner's Federal income tax of $4,595, an 25 addition to tax under section 6651(a)(1) of $1,149, (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company . 1 and an accuracy-related penalty under section 6662(a) 2 of $919, for 2005. The issues for decision 3 are: (1) whether petitioner failed to report gross 4 4 5 6 7 8 9 10 11 receipts of $37,760 from the operation of his laundromat business in 2005, (2) whether petitioner is liable for an addition to tax under section 6651(a)(1); and (3), whether petitioner is liable for an accuracy-related penalty under section 6662(a) for 2005. FINDINGS OF FACT Some of the facts have been stipulated. The 12 stipulations of fact and facts drawn from stipulated 13 exhibits are incorporated herein by this reference. 14 Petitioner resided in Connecticut when he petitioned 15 16 17 this Court. During 2005 petitioner owned and operated a laundrómat business known as Hood Laundromat. 18 Petitioner earned income from the operation of the 19 laundromat as customers deposited money into washers 20 and dryers on the premises and purchased laundry 21 detergents and other products from vending machines 22 maintained by petitioner. Because the machines were 23 coin operated, petitioner also maintained a money 24 machine that customers could use to convert paper 25 money into the coins needed to operate the washers (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company . 5 1 and dryers. Petitioner regularly emptied the 2 washers, dryers and vending machines of the coins the 3 4 5 customers had paid and deposited at least some of the coins back into the money machine. Petitioner also regularly removed from the money machine the paper 6 money the customers had converted into coins. 7 8 During 2005 petitioner maintained a bank account in the name of Hood Laundromat at Webster 9 Bank and a bank account in his own name at Wachovia 10 Bank. During 2005 the petitioner deposited the paper 11 money he had. removed from the moñey machine totaling. 12 $46,431 into Hood Laundromat's bank account at 13 Webster Bank and he deposited an additional $37,759 14 into his personal bank account at.Wachovía Bank. 15 Petitioner did not deposit any of the coins he 16 removed from the washers, dryers, and vending 17 machines at the laundromat into the Webster Bank 18 account. Petitioner reluctantly conceded at trial 19 that some customers would bring their own coinage and 20 laundry products to the laundromat and would not use 21 the money changing machine. 22 In early 2006 petitioner paid a return 23 preparer to prepare and timely file his 2005 return 24 25 (original 2005 return). For reasons that are unclear from the record, respondent never processed (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 1 petitioner's original 2005 return, and it is unclear 6 2 3 4 from the record whether petitioner's original 2005 . return was ever filed. On February 21, 2008, respondent issued a notice of deficiency to 5 petitioner (first notice). In the first notice 6 7 respondent determined that petitioner failed to report gross receipts from his laundromat of $84,191. 8 Petitioner failed to file a petition with this Court 9 regarding the first notice, and respondent 10 11 12 subsequently assessed the liabilities determined in the first notice. On May 26, 2009, petitioner filed a Form 13 1040, U.S. Individual Income Tax Return (2005 14· return), for 2005. On that same day petitioner also 15 filed a Form 1040X, Amended U.S. Individual Income 16 Tax Return, for 2005. On a Schedule C, Profit Or 17 Loss From Business, attached to his 2005 Form 1040, 18 petitioner reported gross income of $46,431, total 19 expenses of $58,813, and a net loss of $12,382 from 20 his Hood Laundromat business. 21 Subsequently, respondent abated the previous 22 assessment for 2005. On January 5, 2012, respondent 23 issued a notice of deficiency to petitioner for 2005 24 (second notice). In the second notice respondent 25 determined that petitioner failed to report gross (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company receipts of $37,760 on his 2005 return. ANALYSIS I. Burden of Proof. Generally, the Commissioner's determination 1 1 2 3 4 5 of a deficiency is presumed correct, and the taxpayer 6 7 bears the burden of proving that the determination is improper. Rule 142(a)(1), Welch v. Helvering, 290 8 U.S. 111, 115 (1933). However, under section 9 7491(a)(1), if a taxpayer produces credible evidence 10 with respect to any factuál issue relevant to 11 ascertaining the taxpayer's liability for any tax 12 13 imposed by subtitle A or B of the Code and satisfies the requirements of section 7491(a)(2), the burden of 14 proof on any such issue shifts to the Commissioner. eradibk 15 Because petitioner has failed to introduce evidence 16 that he satisfied the requirements of section 7491(a) 17 18 the burden of proof remains on him. The United States Court of Appeals for the 19 Second Circuit, to which an appeal in this case 20 appears to lie absent a stipulation to the contrary, 21 see sec. 7482(b)(1)(A), (2), has held that for the 22 presumption of correctness to attach to the notice of 23 deficiency in unreported income cases, the 24 Commissioner must establish some evidentiary 25 foundation connecting the taxpayer with the income- (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 8 1 producing activity. See Llorente v. Commissioner, 2 3 649 F.2d 152, 156, (2d Cir. 1981), aff'g in part, rev'g in part and remanding 74 T.C. 260 (1980). 4 Respondent has introduced sufficient evidence that a 5 6 7 8 likely source of the unreported income at issue in this case was the laundromat that petitioner operated throughout 2005, and consequently,the presumption of correctness attaches to the unreported income 9 adjustment in.the notice of deficiency, and 10 petitioner bears the burden of proof with respect to 11 12 13 that issue. II. Unreported Taxable Income. Gross income includes "all income from 14 whatever source derived" including gross income 15 derived from business. See sec. 61(a)(2). 16 Petitioner ·admits that he failed to maintain books 17 18 and records for his laundromat business, and we infer from petitioner's testimony at trial that he did not 19 have a reliable way of keeping track of the gross 20 21 receipts .from his laundromat business. Petitioner testified that the deposits into his Wachovia account 22 were from non-taxable sources, specifically from two 23 people who paid petitioner to stay in his home during 24 25 2005. Petitioner testified that the two people paid in cash to cover housing costs such as the mortgage (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 9 1 payment, utilities, cable, and related items. 2 However, petitioner did not call either of these 3 people, and he did not produce any documentary 4 5 6 7 8 9 evidence to corroborate his testimony. We do not find petitioner's uncorroborated testimony about cash . payments to be credible particularly because it is readily apparent to the Court that petitioner did not report all of the gross receipts generated by the laundromat. We therefore find that he has failed to 10 carry his burden of proving that the amounts he 11 deposited into his Wachovia account -were not gross 12 income derived from his laundromat business. See 13 Rule 142(a). Accordingly, we conclude that 14 petitioner had unreported gross income of $37,759 in 15 16 17 2005. III. Addition to Tax and Penalty. A. Burden of Proof. The Commissioner bears the burden of 18 production with respect to. taxpayer's liability for A 19 additions to tax and penalties and must produce 20 sufficient evidence indicating that it is appropriate 21 22 to impose the additions to tax and penalties. See sec. 7491(c), Higbee v. Commissioner, 116 T.C. 438, 23 446 (2001). Once the Commissioner carries the burden 24 of production, the taxpayer must come forward with 25 persuasive evidence that the Commissioner's (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 10 1 determination is incorrect or that the taxpayer had 2 reasonable cause or substantial authority for the 3 position. See Higbee v. Commissioher, 116 T.C. at 446-447. 4 5 B. Addition to Tax Under Section 6 6651(a)(1). 7 8 9 Section 6651(a)(1) authorizes the imposition of an addition to tax for failure to timely file a return, unless it is shown that such 10 failure is due to reasonable cause and not due to 11 willful neglect. See United States v. Boyle, 469 12 U.S. 241, 245 (1985). A failure to timely file a 13 Federal income tax return is due to reasonable cause 14 if the taxpayer exercised ordinary business care and 15 prudence but nevertheless was unable to file the 16 return within the prescribed time. See sec. 17 301.6651-1(c)(1), Proced. & Admin. Regs. 18 Petitioner credibly testified that he paid 19 a return preparer to prepare and timely file his 2005 20 returñ. Respondent introduced a transcript of 21 petitioner's account for 2005 that shows that 22 respondent received and processed an amended return, 23 but it contains no entry for an original return filed 24 either in 2006 or in 2009. The parties stipulated 25 that petitioner filed an original 2005 return in (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 11 1 2009, but the stipulation does not address 2 petitioner's contention that he had a return preparer 3 prepare and file a return on his behalf in March 4 2006. Because the transcript does not contain any 5 entry confirming that petitioner filed an original 6 7 8 9 2005 return, the transcript is not credible and does not satisfy respondent's burden of producing evidence to prove that petitioner failed to timely file a return for 2005. Consequently we conclude that respondent 10 has not met his burden of producing credible evidence ® 11 12 13 14 15 that petitioner is liable for the addition to tax under section 6651(a)(1). See sec. 7491(c). C. Accuracy-Related Penalty Under Section 6662(a). Section 6662(a) and (b)(1) authorizes the 16 Commissioner to impose a 20 percent penalty on an 17 underpayment of tax that is attributable to, among 18 other things, negligence or disregard of rules or 19 regulations. The term "negligence" includes any 20 failure to make a reasonable attempt to comply with 21 the provisions of the Internal Revenue laws, and the 22 23 term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c); sec. 1.6662- 24 3(b)(1) and (2), Income Tax Regs. "Negligence" also 25 includes any failure by the taxpayer to keep adequate (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 12 1 books and records or to substantiate items properly. 2 Sec. 1.6662-3(b)(1), Income Tax Regs. Disregard of 3 4 5 6 7 8 rules and regulations "is 'careless' if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position," and "is 'reckless' if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial 9 deviation from the standard of conduct that a 10 reasonable person would observe." Sec. 1.6662- 11 3(b)(2), Income Tax Regs; see also Neely v. 12 Commissioner, 85 T. C. 934, 947 (1985) . 13 The accuracy-related penalty does not apply 14 with respect to any portion of the underpayment for 15 which the taxpayer shows that there was reasonable 16 cause and that he or she acted in good faith. Sec. 17 18 6664(c)(1). The decision as to whether a taxpayer acted with reasonable cause and in good faith is made 19 on a case-by-case basis, taking into account all of 20 the pertinent facts and circumstances. See sec. 21 1.6664-4(b)(1), Income Tax Regs. "Circumstances that 22 may indicate reasonable cause and good faith include 23 an honest misunderstanding of fact or law that is 24 reasonable in light of all of the facts and 25 circumstances, including the experlence, knowledge (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company 13 1 2 3 and education of the taxpayer." Id. Petitioner was required but failed to report all of the gross receipts from his laundromat 4 business on his 2005 return. This failure was due, 5 at least in part, to petitioner's failure to keep 6 adequate books and records. Respondent has therefore 7 met his burden of producing evidence showing that a 8 section 6662(a) penalty for an underpayment of tax· 9 attributable to negligence or disregard of rules or 10 regulations with respect to the understatement for 11 - 2005 is appropriate. 12 13 14 Petitioner failed to produce credible evidence that he acted with reasonable cause and in good faith with respect to the underpayment. 15 Accordingly, petitioner is liable for a section 6662(a) 16 penalty for an underpayment of tax attributable to 17 negligence or disregard of rules or regulations for 2005. 18 19 We have considered the parties' remaining 20 arguments and, to the extent not discussed above, 21 conclude that those arguments are irrelevant, moot or 22 without merit. 23 To reflect the foregoing and a $1 24 discrepancy between the gross receipts determined in 25 the notice of deficiency. and the stipulated deposits (866) 448 - DEPO www.CapitalReportingCompany.com 2014 Capital Reporting Company into the petitioner's Wachovia account, decision will 14 be entered under Rule 155. This concludes the Court's oral findings of fact and opinion. (Whereupon, at 9:50 a.m., the above entitled matter was concluded) 1 2 3 4 5 6 8 9 10 11 12 13 14 15 16 17. 18 19 20 21 22 23 24 25 (866) 448 - DEPO www.CapitalReportingCompany.com 2014