TAX COURT OPINION

Case: Thomas Kelly Marenic
Docket Number: 213-14
Judge: Gustafson
Opinion Type: bench
Filed: 03/20/2015
Pages: 10

UNITED STATES TAX COURT WASHINGTON, DC 20217 THOMAS KELLY MARENIC, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent PA ) ) ) ) Docket No. 213-14. ) ) ) ORDER Pursuant to the opinion of the Court as set forth in the transcript of the proceedings at Washington, D.C., on March 6, 2015, 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 undersigned judge at Washington, D.C., 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 under Rule 155. (Signed) David Gustafson Judge Dated: Washington, D.C. March 20, 2015 SERVED Mar 20 2015 Capital Reporting Company 3 1 Bench Opinion by Judge David Gustafson 2 March 6, 2015 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Thomas Kelly Marenic v. Commissioner Docket No. 213-14 THE COURT: The Court has decided to render the following as its oral Findings of Fact and Opinion in this case. This Bench Opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code (26 U.S.C.), and Tax Court Rule 152; and it shall not be relied on as precedent in any other case. By a notice of deficiency dated November 25, 2013 (Ex. 2-J), the Internal Revenue Service ("IRS") determined a deficiency in the Federal income tax of petitioner Thomas Kelly Marenic for the year 2011, plus an accuracy-related penalty. The issue for us to decide is whether Mr. Marenic received income that he failed to report. For the reasons explained below, we hold that he did, though in an amount less than the IRS determined. Trial of this case was conducted on March 3, 2015, in Washington, D.C. Mr. Marenic represented himself; and respondent, the Commissioner of the IRS, was represented by William Gregg. FINDINGS OF FACT 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 1 2 3 4 5 6 7 8 9 10 11 12 13 Inc. and LLC Like his father, Mr. Marenic works in the field of computer security. His father had a company named "Next Generation Information Solutions, Inc." (which we refer to as "Inc."). Inc. was a subcontractor of a company named Chiliad Publishing ("Chiliad"), which was in turn a contractor for the Department of Homeland Security ("DHS"). Sometime in the year 2011, it became expedient for Mr. Marenic's father to become an employee of DHS and to have his company Inc. stop subcontracting for DHS. With his father's encouragement, Mr. Marenic formed a company to serve as a subcontractor for 14 Chiliad doing some of the same work that Inc. had 15 16 17 18 19 20 21 22 23 24 25 done. Mr. Marenic gave his company a name almost identical to Inc.'s name--i.e., "Next Generation Information Systems, LLC" (which we refer to as "LLC"). 2011 income Chiliad paid its subcontractors monthly. In four of the first five months of 2011, Chiliad paid Inc. four checks totaling $90,720, including a check for $22,080 dated 5/10/2011. In August through September of 2011, Chiliad paid LLC six checks totaling $84,600. (Ex. 5-P.) 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company I 5 1 2 3 Mr. Marenic established a bank account for LLC. A deposit of $22,080 was made into that account on June 6, 2011. (Ex. 5-P. ) We conclude that this was 4 Chiliad's 5/10/2011 check to Inc. 5 6 7 8 9 In 2011 Mr. Marenic received wages of $15,538 from Inc. for work that he performed in the first half of the year and received wages of $14,423 from LLC that he arranged to pay himself for work that he performed in the second half of the year. (Ex. 6-R. ) 10 On his accountant's advice, he later stopped paying 11 12 13 14 15 16 17 18 19 20 21 himself wages, since income to the LLC was already income to him. 2011 return Mr. Marenic, along with his then-wife (not a petitioner in this case) timely filed his 2011 income tax return on October 15, 2012. (Stip. 2; Ex. 1-J.) On it he reported as income his wife's wages, and the Inc. and LLC wages described above. The Schedule C attached to his return reported income in the amount of the $84,600 derived from Chiliad's checks to LLC and claimed a deduction for the wages paid to Mr. 22 Marenic (and reported as such elsewhere on the 23 24 25 return) . Information returns For 2011 Inc. prepared--and submitted to the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 Social Security Administration ("SSA") and to Mr. 2 Marenic--a Form W-2 showing Mr. Marenic's Inc. wages 3 4 5 6 7 8 9 10 11 of $15,538. (Ex. 6-R, p. 1.) There is no dispute about this amount. For 2011 Chiliad prepared--and submitted to the IRS and to Mr. Marenic--a Form 1099-MISC showing non- employee compensation paid to LLC in the amount of $175,320. (Ex. 3-J, p.1; Ex. 6-R, p. 4.) That amount was the total of Chiliad's checks to LLC and Inc. That is, in its reporting, Chiliad combined the similarly named entities. At the request of Mr. 12 Marenic and his father, Chiliad later issued a 13 1.4 15 16 17 18 19 20 21 22 23 24 25 corrected Form 1099-MISC to LLC in the amount of $84,600 (Stip. 5), i.e., the total of the checks to LLC, but this correction was never reflected on the IRS's computerized records. For 2011 LLC (acting through its accountant under Mr. Marenic's authority) prepared--and submitted to the SSA and to Mr. Marenic--a Form W-2 showing Mr. Marenic's LLC wages of $14,423. The form was submitted to SSA "on tape" and was recorded by the IRS as "on file" on "04-05-2012". (Ex. 6-R, p. 2.) On June 2, 2012 (i.e., nearly two months later), the IRS (not the SSA) received on paper (not "on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 tape") a Form 1099-MISC purporting to be from LLC and showing non-employee compensation supposedly paid to 3 Mr. Marenic in the amount of $49,626. (Ex. 6-R, p. 4 5 6 7 8 9 10 11 12 13 14 15 16 4.) Mr. Marenic testified credibly that he did not authorize such a Form 1099-MISC, does not know who submitted it, and does not know the significance of the amount it reflects. LLC's records As far as our trial record shows, LLC does not keep books and records. Rather, Mr. Marenic relies on bank statements to show its financial activity. However, he is unable to explain the transactions on the bank statements--even a transacti.on as significant as the $22,080 June 2011 deposit (obviously from Chiliad) or a subsequent unexplained $10,000 check (Ex. 4-R, first page). We find that 17 Mr. Marenic was negligent in keeping records. 18 Notice of deficiency 19 20 21 22 23 24 25 The IRS received the information returns described above, compared them to Mr. Marenic's tax return, and determined (correctly) that he had not reported all of the income reflected on those information returns. In particular, the nonemployee compensation reflected on Chiliad's Form 1099 ($175,320) and on the Form 1099 supposedly from LLC 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 ($49,626) totaled $244,946, whereas Mr. Marenic's Schedule C had reported only revenue of $84,600--an apparent omission of $140,346. On November 25, 2013, the IRS issued its notice of deficiency for 2011 (Ex. 2-J), determining the resulting deficiency; and Mr. 6 Marenic timely filed his petition on January 3, 2014. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 At that time he resided in Virginia. I. Burden of proof OPINION As a general rule, the IRS's determination is presumed correct, and the taxpayer bears the burden to prove any adjustment to the income the IRS determined. See Rule 142(a). In this case, however, the IRS relied on Forms 1099 submitted by third parties to attribute income to Mr. Marenic. The IRS may indeed rely on information returns (Forms W-2 and 1099) from third-party payors when determining a taxpayer's tax liability. See, e.g., Cabirac v. Commissioner, 120 T.C. 163, 167 (2003). But if "[i]n any court proceeding ... a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary ... and the taxpayer has fully cooperated 24 with the Secretary ..., the Secretary shall have the 25 burden of producing reasonable and probative 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 information concerning the deficiency in addition to such information return." Sec. 6201(d). We hold that Mr. Marenic has asserted a reasonable dispute as to the income reported on the Form 1099 from Chiliad (which failed to distinguish Inc. and LLC) and the Form 1099 ostensibly from LLC (which is of unknown origin), so that the Commissioner has the burden in this suit to produce "reasonable and probative information" showing additional income. II. Additional income The only additional income for which the Commissioner produced probative information is the $22,080 that was deposited into LLC's account on June 6, 2011. It is obvious that this was the check from 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Chiliad to Inc. Mr. Marenic gives no alternative 17 18 19 20 21 22 23 24 25 explanation. A bank deposit is prima facie evidence of income, Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), and we hold that the Commissioner has, to this extent, proved taxable income not otherwise reported on Mr. Marenic's return. We resist the urge to speculate that other amounts (such as the opening balance on the earliest bank statement in the record) might also be taxable income. The notice of deficiency was based solely on 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 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 the information returns, and neither during an audit nor at trial did the IRS perform a bank deposits analysis to reconstruct Mr. Marenic's income. III. Negligence penalty Section 6662 provides for the imposition of a penalty equal to 20 percent of the portion of an underpayment which is attributable to negligence or disregard of the rules or regulations. Sec. 6662(a), (b)(1). For purposes of that section, the term "negligence" includes a failure to exercise ordinary and reasonable care in the preparation of a tax return. 26 C.F.R. sec. 1.6662-3(b)(1). Negligence is defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Neely v. Commissioner, 85 T.C. 934, 947 (1985). The term "disregard" includes any careless, reckless, or intentional disregard of the rules or regulations. Sec. 6662(c). The taxpayer bears the responsibility to maintain books and records that are sufficient to establish his income. See sec. 6001; 26 C.F.R. sec. 1.446-1(a)(4). Negligence "includes any failure by the taxpayer to keep adequate books and records to substantiate items properly." 26 C.F.R. sec. 1.6662-3(b)(1). 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Mr. Marenic failed to keep accurate records, and 11 this resulted in his failure to report all of his income. These facts warrant the imposition of the penalty and satisfy the Commissioner' s burden of production under section 7491(c) to show that the penalty is applicable. Mr. Marenic has not raised any defense or shown any reason that the penalty should not apply, and we hold that he is liable for the accuracy-related penalty on the deficiency. So that the tax liability can be recalculated, decision will be entered pursuant to Rule 155. This concludes the Court's oral Findings of Fact and Opinion in this case. (Whereupon, at 12:41 p.m., the above-entitled 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 matter was concluded.) 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com