TAX COURT OPINION

Case: Edward T. & Jennifer B. Garrison
Docket Number: 3745-07
Judge: Wells
Opinion Type: memo
Filed: 02/10/2009
Pages: 8

T .C . Memo . 2009-3 2 UNITED STATES TAX COURT FILE S EDWARD T . AND JENNIFER B . GARRISON, Petitioners v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 3745-07 . Filed February 10, 2009 . Edward T . and Jennifer B . Garrison, pro se . Edwina L . Jones , for respondent . MEMORANDUM FINDINGS OF FACT AND OPINION WELLS, Judge : Respondent determined a deficiency of $48,341 in petitioners' 2002 Federal income tax and .a $9,668 .20 accuracy- related penalty under section 6662(a) .' The issues we mus t 'All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure . SERVED Feb 10 2009 J - 2 - --decide are : (1) Whether petitioners are entitled to deduct fo r taxable year 2002 contract labor expenses in excess of thos e allowed by respondent ; and (2) if not, whether, pursuant to section 6662(c), petitioners were negligent . For .the reasons set forth'below, we sustain respondent's determinations . i FINDINGS OF FAC T Some of the facts have been stipulated and are so found . The stipulation of facts and the attached-exhibits ar e incorporated herein by this reference . Petitioners are husband and wife and resided in North Carolina at the time they filed the petition . On April 15, 2003, petitioners timely filed their joint 2002 Federal income tax return . During 2002 petitioners owned and operated a construction business known as Mecklenburg Framing . On Schedule C, Profit or Loss From Business, of their 2002 joint return, petitioners reported gross receipts from Mecklenburg Framing of $881,439 and a claimed deduction for contract labor expenses of $885,035 . During respondent's examination of petitioners' 2002 Federal income tax return, petitioners . submitted copies of Forms 1099 MISC, Miscellaneous Income, showing'nonemployee compensation pai d by Mecklenburg Framing to various contract laborers .2 Th e 2Petitioners did not file the Forms 1099-MISC wit h respondent nonemployee compensation reported on the Forms 1099-MISC was as - 3 - follows : Recipient Amoun t Sanchez Framing D & D Construction Jesus Garcia Rosales d .b . a Garcia Construction Luis Felipe Rosales Zarate Rigoberto Arreola Total $480,958 .0 6 54,215 .7 1 35,838 .0 9 15,300 .1 5 66,080 .3 3 652,392 .3 4 Petitioners also created and provided respondent a comprehensive list of those contract laborers allegedly paid by Mecklenburg Framing for services, rendered during taxable year 2002 . The aggregate amount of .contract labor expenses . provided on the list equaled that claimed on Schedule C of petitioners' 2002 joint return . Petitioners did not, however, submit any . canceled checks or other documentation substantiating the claimed expenses . On November 15, 2006, . respondent sent petitioners a notice of deficiency for taxable year 2002 .3 Respondent allowed a deduction for contract labor expenses of $652,414 that was based on the aforementioned Forms 1099-MISC petitioners submitted . ' 3On Sept . 14, 2005, petitioners executed a Form 872, Consent to Extend the Time to Assess Tax, which extended the time within which respondent could assess any Federal income tax due wit h .respect to petitioners' 2002 tax year to Dec . 31, 2007 . 4Respondent notes that there is a $21 .66 difference between the amount allowed as a deduction in the notice of deficiency ($652,414) and the amount set forth on Forms 1099-MISC prepare d (continued . . .) - 4 - Respondent .disallowed the remaining $232,621 of petitioners' claimed contract labor expenses, resulting in a deficiency determination of $48,341 . Respondent also imposed an accuracy- related-penalty of $9,668 .20 . Petitioners timely petitioned th e Court . On October 15, 2007, 1 day before trial, petitioner s provided respondent a document entitled "Mecklenburg Framing Employee Contact List" ., which included the names of alleged contract laborers and their corresponding Social Security numbers . Respondent discovered, however, .that most of the Social Security numbers did not match the corresponding names of the . contract laborers . Moreover, . Mecklenburg Framing did not issue Forms 1099-MISC to any of the contract laborers listed on-the Mecklenburg Framing Employee Contact List . Petitioners also produced a document entitled "Mecklenburg Framing 1099 Detail for the period from January through December 2002" .5 Petitioners did not, however, . produce or offer at trial any canceled . checks or testimony from any contract laborer to substantiate the amounts allegedly paid by Mecklenburg Framing as set forth in that document . 4( . . .continued) by petitioners ($652,392 .34) . Respondent offers no explanation as to the discrepancy and concedes the issue . 5Notably, .this document did not include any of the individuals listed on the Mecklenburg Framing Employee Contact List . OPINION We consider whether petitioners are entitled to Schedule C deductions for contract labor expenses in excess of those'allowed 'by respondent for taxable year :2002 and whether petitioners are liable for an accuracy-related . penalty under section 6,662(a) . 1 . Disallowed Deductions Deductions are a matter. of legislative grace, . and a taxpayer . bears the burden of proving that he or she has complied with th e specific requirements for any deduction claimed . See Rule'' 142(a) ; INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 84 .(199 2 New Colonial Ice Co . v . Helvering , .292U .S . 435 ; .440 (1934) : A taxpayer may deduct all ordinary and necessary expenses paid,or incurred during the taxable year in carrying on a trade o r business if the taxpayer maintains sufficient records . to substantiate the expenses . Secs . 162(a), 6001 ; Deputy v . du Pont , 308 U .S . 488, 495-496 (1940) ; Hradesky v : Commissioner , 65. T .C . 87, 90 (1975), affd . per curiam 540 F .2d'821 (5th Cir . 1976) ;, sec . 1 .6001-1(a .), Income~Tax Regs .. Petitioners have provided'no'credible evidence ,substantiating their claimed contract labor expenses fo r Mecklenburg Framing . Petitioners did not offer any-canceled checks corroborating their . disallowed expense deductions . No r did they offer any testimony from any of the alleged contrac t laborers to confirm payment for' services . Indeed, the .only - 6 - evidence petitioners submitted to verify the deductions in issue was self-serving documents . they generated themselves . ' In sum, petitioners failed to offer any credible . evidence to substantiate the amounts paid by Mecklenburg Framing for the contract labor expenses in issue . Consequently, we hold that petitioners have failed in their burden of proof and, therefore, are not entitled to a deduction in excess of the amount respondent allowed in the notice of deficiency . 2 . Accuracy-Related Penalt y Section 6662 provides for an accuracy-related penalty equal to 20 percent of an underpayment if the. underpayment is due to a taxpayer's negligence or disregard of rules or regulations . Sec . 6662(a) and (b)(1) . For purposes of section 6662, a taxpayer is negligent when he or she fails "'to do what a reasonable an d ordinarily prudent person would do under the circumstances . . Korshin v . Commissioner , 91-F .3d 670, 672 (4th Cir . 1996)(quoting Schrum v . Commissioner ,,33 F .3d 426, 437 (4th Cir . 1994), affg . in part and vacating in part T .C . Memo . 1993-124), affg . T .C . Memo . 1995-46 ; Neely v . Commissioner , 85 T .C . 934, 947 (1985)(quoting Marcello v . Commissioner , 380 F .2d 499, 506 (5t h 6Under sec . 7491(a)(1), if a taxpayer introduces credible evidence with respect to any factual issue, the burden of proof shifts to the Commissioner . In the instant case, the burden of proof does not shift to respondent because petitioners did not maintain adequate books and records and were unable to substantiate by credible evidence $232,621 of their claimed Schedule C contract labor expenses . See sec . 7491~(a)(1) and (2 7 - Cir . 1967 ), affg . in part and remanding in part 43 T .C . 168 (1964 ) and T .C . Memo . 1964 - 299) . "Negligence " includes any failure to keep adequate books and records or to substantiate items properly . Sec . 6662 ( c) ; sec . 1 .6662 - 3(b)(1), Income Tax Regs . A taxpayer may avoid the application of an accuracy-relate d penalty by proving that he or she acted with reasonable cause an d in good faith . Sec . 6.664(c) . Whether a taxpayer acted with reasonable cause and good faith is measured by examining the relevant facts and circumstances and, most importantly, the extent to which a taxpayer attempted to assess his or her prope r tax liability . See Neely v . Commissioner , supra ; Stubblefield v . Commissioner , . T .C . Memo . 1996-537 ; sec 1 .6664-4(b)(1), Income Tax Regs . As noted above, petitioners failed to keep adequate books and records or to substantiate the claimed contract labor expenses for Mecklenburg Framing . Such a failure is prima facie evidence of negligence . See sec . 1 .6662-3(b), Income Tax Regs . On the basis of the record, we conclude that petitioners have failed to meet their burden of proving that they acted with reasonable cause and in good faith . We therefore sustain respondent's determination that petitioners are liable for the $9,668 .20 accuracy-related penalty pursuant to section 6662(a) on .4/ the underpayment associated with the disallowed contract labor expenses . We have considered all of the contentions and arguments of the parties,that are not discussed herein, and we conclude that . they are without merit, irrelevant, or moot . To .reflect the foregoing,. Decision will be entere d for respondent .