TAX COURT OPINION

Case: Daniel Alan Near & Denise Frances Mayhugh
Docket Number: 14239-09S
Judge: Armen
Opinion Type: bench
Filed: 07/05/2011
Pages: 10

UNIT'ED STATES TAX COURT WASHINGTON, DC 20217 DANIEL ALAN NEAR AND DENÌSE FRANCES MAYHUGH, Petitioners v. ÖOMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) .Docket No. 14239-09S. 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 the hearing of the above case before Special Trial Judge Robert N. Armen Jr. at San Francisco, California, on June 20, 2011, containing his oral rendered at the conclusion of findings of the hearing fact ànd opinion the pages of the In accordance with the oral findings of fact and opinion, an Order of Dismissal rand Decision will be entered. (Signed) Robert N. Armen, Jr. Special Trial Judge Dated: Washingto-1, D.C. July 5, 2311 2n\/EO JUL -5 201 1 2 3 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Bench Opinio by Special Trial Judge Robert N. Armen, Jr. Daniel Alan $fear & Denise Frances Mayhugh v. Commissioner Docket- No. 1 239-09S June 21, 2011 3. 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 findlings of fact and opinion shall not be relied upon as prec dent in any other case. II. This proceeding was heard as a Small Tax case pursuant" to t.he provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. III. Th s bench opinion is made pursuant to the authority gr nted 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, and unless otherwise in icated, all section numbers refer to the Internal Revenue Code, as amended and in effect for the taxable year in issue, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure . // Heritage Reporting Corporation (202) 628-4888 IV. 4 L . Katrine Shelton appeared on behalf of respondent . In contrasts there was no appearance by or on behalf of either petitioner. Foc 2007, respondent determined a deficiency in, and an accuracy-related penalty on, petitioners' Federal income tax in the amounts of $12,272.00 and $2,454.40, 1 2 3 4 5 6 7 8 9, respectively. 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 VI. Th issues for decision by the Court are as follows: (1 whether petitioners are -entitled to certain specific Scl dule C deductions; (2) whether petitioners are entitled to an itemized deduction for charitable contributions made by cash or check; an (30 whether petitioners are liable for the accuracy-rel ted penalty under section 6662 (a) . Ot ser adjustments made by respondent in the notice of deficiency are purely mechanical, i.e , computational, in nature. fóund. VII. The facts have been stipulated, and they are so Heritage Reporting Corporation (202) 628-4888 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 Petitioners resided in the State of California at the time that the petition was filed with the Court. Th taxable year at issue in this case is the calendar year 2007. Pe:itioner Daniel Alan Near (hereinafter referred to as "petitioner" in the singular) is, by profession, an attorney. During 2007, petitioner wás employed as an attorney by Nhe State of:California. In addition to his employment, etitioner provided legal services as a sole proprietor. Pelitioners filed a Federal income tax return (Form 1040) Eor 2007. On their return, petitioners reported compensation of $157,103, as well as modest amounts of (1) taxable inte est and (2) a refund of State income tax. Petitioners- affset against the total of such income a loss of $18,834 reported on a Schedule C, Ptofit or Loss From Business, fr m the "Law Office of Dan Near". In claiming the Schedule C.loss, petitioner reported gross income of $17,356 and claimed total deductions oi $36,190. Among the deductions were ones for (1) rent or Lease of other business property of $2,415, (2) office expen e of $14,310, and (3) travel, meals, and entertainmen of $5,827. Pe itioners also attached to their 2007 return a Schedule A, temized Deductions. On their Schedule 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 2O 21 22 23 24 25 6 petitioners claimed total itemized deductions of $42,073. Included in this total was a deduction for charitable gifts by cash or check of $25,000. Petitioners' 2007 return was selected for examination. Ultimately, respondent issued a notice of deficiency determining a deficiency in income tax of $12,272 equal to the difference between petitioners' corrected tax liability of $27,601 and the tax reported on their return of $15,329. In the notice, respondent also determined an accuracy-related penalty únder section 6662(a) of $2,454.40. h deficiency in tax is based on the disallowance in full, of (1) petitioner's Schedule C deductions f r rent or lease of other business, property, office.expen e and travel, meals, and entertainment and (2) petitioners' Schedule A deduction for charitable gifts by cash or chec . The accuracy-related penalty is based on, inter alia, substantial understatement of income tax. Burden of Proof - Deficiency in Tax VIII. In general, the Commissioner's determination set forth in a notice of deficiency is presumed correct, and the taxpayer bea:ts the.burden of showing that the determination is in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933) . Pursuant to "section 7491(a) , the burden of proof as to factual matters shifts to the Commissioner under Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 certain circumstances. Petitioners have neither alleged that section 7491(a) applies, nor have they established their compliance with the prerequisites -to its application. See sec. 7491(a) (2) (A)'and (B). Further, petitioners failed to introduce credible evidence with respect to any factual issue relevant to ascertaining their liability. Accordingly, section 7491(a) does not apply, and petitioners bear the burden of proof.' See Rule 142(a). Principles Gaverning Substantiation Co trary to petitioners' apparent view, the fact that~a taxpa er reports a deduction on the taxpayer's income tax return ahd attaches some IRS-prescribed form inosupport of that dedu tion is not sufficient to substantiate the deduction cl imed on the return. Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979); Roberts v. Commissioner, 62 T.C. 834, 837 (1974). In addition, deductions are a matter of legislative grace, and the taxpayer bears the burden of proof to est blish entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Commissioner, 292 U.S. 435, 440 (1934). This burden requires the taxpayer to substantiate claimed deductions by keeping and producing adequate records that enable the Commissioner to determine the taxpayer s correct tax liability. Sec. 6001; sec. Heritage Reporting Corporation (202) 628-4888 8 1.6001-1(a) and (e), Income Tax Regs.; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), affd. per curiam 540 F.2d 821 (5t Cit. 1976). Furthermore, section 170 and the regulations thereunder establish specific requirements governing the substantiatiån of charitable contributions. E.g., sec. 170(f) (8), (£7); sec. 1.170A-13, Income Tax Regs. Finally, no deduction is allowable for traveling expenses (including meals and lodging while away from home) or entertainnent expenses unless the deduction is sùbstantiate in accordance with the strict substantiation requirements of section 274(d). -Sanford v. Commissioner, 50 .TiC. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. L.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Noy. 6, 1985) . Analysis Petitioners failed to introduce a scintilla of evidence, either documentary or testimonial, in support of any of the d sallowed, deductions. Accordingly, it follows that petitio ers failed to satisfy their burden of proof. Respondent's deficiency determination must therefore be sustained. Accuracy-related Penalty Respondent also determined in the notice of deficiency that petitioners are liable for the accuracy- 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 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 related penalty under section 6662(a) based on, inter alia, a substantial understatement of income tax for 2007. Sectilon 6662(a) idposes a penalty equal.to 20- percent of any underpayment of tax that is due to a substantial understatement of income tax. See sec. 6662(a), (b) (2). Jul individual substantially understates his or her income tax when the reported tax is understated by the greater of 10-percent of.the tax required to be shown on the return or $5, 000 . Sec. 6662 (d) (1) (A) . Ho ever, the adcuracy-related penalty does not apply to any portion of an underpayment if it is shown that there- was reasonable cause for the taxpayer's position and that the taxpayer acted in good faith with respect to that portion. Sec. 6664(c) (1); sec. i.6664-4(b), Income Tax Regs. The d termination"of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all 1 the pertinent facts and circumstance . Sec. 1.6664-4(b) (1), Income.Tax Regs. The most important factor is the extent of the taxpayer's effort to assess his or her proper tax liability for such year. Id. Seation 7491(c) places on the Commissioner the burden of pr duction (but not the burden of proof) with respect to a taxpayer's liability for any penalty. Respondent s tisfied his burden of production because 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 10 record shows that petitioners substantially understated their income tax for 2007 by an amount that exceeds the greater of 10-percent of the tax required to be shown on the return or $5, OOO . See sec . 6662 (d) (1) (A) (ii) ; Higbee v. Commissioner, 116 T.C. 438, 442 (2001). Accordingly, petitioners bear the burden of proving that the accuracy- related penalty should -not be imposed with, respect to any portion of t e understatement . See sec . 6664 (c) (1) ; Higbee v. Commissioher, supra at 446. Petitioners introduced no evidence whatsoever regarding th penalty issue, and-there is nothing in the record to even suggest that the penalty -might not be applicable. Accordingly, it follows that petitioners failed to satisfy their burden of proof. Respondent's penalty determination must therefore be sustained. IX. Finally, a postscript: . Petitioners did not appear for trial. In view of their failur to appear, as well as their failure to cooperate in the preparation of this case in the months preceding the trial date, respondent filed a Motion To Dismiss For ack Of Prosecution. However, because a stipulation of facts, albeit skeletal in nature, had been filed by the parties last year at a prior session, the Court felt obliged to decide this case based on the evidence 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 23 11 adduced, meager as it was. If the parties had not previously f iled a stipulation of facts and if the circumstances had otherwise been identical, the Court would have, without hesitation, granted respondent's motion and dismissed pe:itioners' case for lack of prosecution. X. In order to give effect to the foregoing, an order and decision will be entered denying as moot respondent's Motion To Diomiss For Lack Of Prosecution¯ and deciding that petitioners are liable for the deficiency in tax and the accuracy-related penalty as determined by respondent in the notice of deficiency. XI. This concludes the Court's oral findings of fact and opinion .in this case. (Whereupon, at 10i12 a.m., the bench opinion -in the above-entitled matter was concluded.) // // // // // // / / Heritage Reporting Corporation (202) 628-4888