TAX COURT OPINION

Case: Richard I. Bailey
Docket Number: 5359-17S
Judge: Guy
Opinion Type: bench
Filed: 04/17/2018
Pages: 11

SYM UNITED STATES TAX COURT WASHINGTON, DC 20217 RICHARD I. BAILEY, Petitioner, v. ) ) ) ) Docket No. 5359-17S. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ORDER 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 petitioner and to respondent a copy of the pages of the transcript of the trial in the above case before Special Trial Judge Daniel A. Guy, Jr., at Philadelphia, Pennsylvania, 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 for respondent. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. April 17, 2018 SERVED Apr 17 2018 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. 3 March 14, 2018 Richard I. Bailey v. Commissioner of Internal Revenue Docket No. 5.359-17S 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. Thé oral findings of fact and opinioh shall not be relied upon as precedent in any other case. 1 2 3 4 5 6 7 8 9 10 This proceeding for the redetermination of 11 deficiencies is a small tax case conducted pursuant to thè 12 Provisions of section 7463 of the .In'ternal Revenue Code of 13 1986, as aménded, and Rules. 170 through 174 of the Tax 14 Court-Rules of Praótice and Procedure. 1$ This bench opinion is made pursuant to the 16 authority granted by section 7459(b) of the Internal Revenue Code of 198.6, as amended, and Rule 152 of the Tax 18 Court Rulés of Practice and Proceduré. .Heréinafter in 19 this bench opinion,. section references are to the Internal 20 Revenue Code of 1986, as amended,. in effect for 2013 and 21 2014, and Rule references are to the Tax Court Rules of 22 Practice and Procedure. 23 24 Respondent determined deficiencies of $8,697 and $6,500 in petitioner's Federal incom°é tax for the taxable 25 years 2013 and 2014 (yèars in issue), respectively.. 1 2 3 4 5 6 8 9 10 11 12 13 14 15 Respondent also determined that petitioner is liable for additions to tax under section 6651(a)(1) of $434.85 and $650 for the taxable years 20i3 and 2014, respectively, and accuracy-related penalties under section 6662(a) of $1,739.40 and $1,300, for the taxable years 2013 and 2014, respectively. Petitioner resided in New Jersey at the time the petition was filed, and he appeared at trial pro se. Gary J. Merken appeared on behalf of respondent. The parties filed with the Court a stipulation of facts, with accompanying exhibits, that is incorporated herein by this reference... The issues for decision are whether petitioner is (1) entitled to deductions claimed on Schedules A, Itemized Deductions, Schedules C, Profit or Loss From 16 Business, and Schedules E, Supplemental Income or Loss, 17 18 19 (2) liable for additions to tax under section 6651(a)(1), and (3) liable for accuracy-related penalties under section 6662(a). 20 Background 21 22 Mr. Bailey testified that he owned or co-owned four rental real estate properties in the City of 23 Philadelphia during the years in issue, that he collected 24 little in the way of rents, and that he made large 25 expenditures to maintain and manage the properties. 5 1 2 3. 4 5 6 7 8 9 10 11 12 13 14 Records maintained by the City of Phihadelphia show that petitioner was issued rental licenses for two of the properties in question in March 2014, but .there were no other records of rental licenses or applications for permits to conduct repairs át the próperties in question in 2013 or 2014. Petitioner filed Form 1040, U.S. Individual Income Tax Return, for 2013 on May 12, 2014, and he filed Form 1040 for 2014 on May 22,. 2015. Petitioner explained that he did not feel compelled to timely file his tax returns for the years in issue because he believed that he owed no tax for either year. Petitioner attached Schedules A, C, and E to his tax return for 2013. Petitioner testified that he 15 reported income and expenses related to his rental real 16 estate activity on both Schedules C and E for böth of the 17 years in issue. As for Schedule A, .respondent dedermined 18 19 that petitioner is got entitled to deductions of $14,1.72 for real estate taxes and $613 för miscellaneous expenses. O Petitioner reported on Schedule E that he received rents 21 of $19,809 for thé .four properties in question, offset by 22 23 . . total expenses of $38,099, including $12,570 for repair expenses. Respondent disallowed the deduction for repair 24 expenses for lack of substantiatioh. As for Schedule C, 25 petitioner claimed additional expenses related to his . 1 2 3 4 5 6 7 8 9 rental real estate activity, totaling $22,958, including $9,827 for vehicle expenses. Respondent disallowed all of the deductions petitioner claimed on Schedule C for lack of substantiation of the underlying expenses. . Petitioner attached Schedules A, C, and E to his tax return for 2014. As for Schedule A, respondent disallowed itemized deductions of $6,750 for real estate taxes and $6,750 for mortgage interest expenses. Petitioner reported on Schedule E that he received rents 10 of $14,339 for the four properties in question, offset by 11 12 13 14 total expenses of $31,436, including repair expenses of .$8,781. Respondeñt disallowed the repair expenses for lack of substantiation. As for Schedule C, petitioner claimed additional expenses totaling $24,219 related to 15 .his rental real estate activity. Respondent disallowed 16 deductiòns of $21,236 that petitioner claimed· òn Schedule 17 C for lack of substantiation of the underlying expenses. 18 Discussion 19 As a general rule, the..Commissioner's . 20 determination of a= taxpayer's liability in a notice of. 21 deficiency is ·presumed correct, and the taxpayer bears the 22. burden of proving that the. determination is incorrect. 23 Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). 24 Deductions and credits are a matter of legislative grace, 25 and the taxpayer.gegerally bears the burden of proving entitlement to any deduction or credit claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 7 440 (1934). A taxpayer must substantiate deductions claimed by keeping and producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability. Sec. 6001; Hradesky v. Commissioner, 65 T.C. 87, 89-90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976). A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is 1 2 3 4 5 6 7 8 9 10 11 12 allowable pursuant to a statutory provision and must 13 14 further substantiate that the expense to which the deduction relates has been paid or incurred. Sec. 6001; 15 Hradesky v. Commissioner, 65 T.C. at 89-90. 16 Under section 162(a), a deduction is allowed for 17 ordinary and necessary expenses paid or incurred during 18 the taxable year in carrying on any trade or business. A 19 deduction is not allowed, however, for personal, living, 20 or family expenses. Sec. 262(a). Whether an expenditure 21 satisfies the requirements for deductibility under section 22 23 24 25 162 is a question of fact. See Commissioner v. Heininger, 320 U.S. 467, 475 (1943). Section 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel 8 1 2 3 4 5 6 7 8 (including meals and lodging), entertainment, and gifts, and with respect to "listed property". Sanford v. Commissioner, 50 T.C 823, 826-829 (1968), aff'd per curiam, 412' F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs. As relevant here, the term "listed property" includes passenger autómobiles. Sec. 280F(d)(4) (A)(i). To satisfy the requirements of section 274(d), a taxpayer generally must maintain adequate records and docúment,ary evidenc.e which, in combination, O are sufficient to establish the amount, date, and business 11 12 13 14 purpose for a covered expenditure or business use of listed property. Sec. 1.274-5T(b)(6), (c)(1), Temporary Income Tax Regs. Section 1 274-5T(c)(2),. Temporary Income Tax 15 Regs., provides in relevant part that "adequate r.ecords" 16 generally consist o:f an account book, a diary, a log, a 1 statement of expense, trip sheets, or a similar.record 18 made at or near the time .of the expenditure or use, along 19 with supporting documentary evidence. Section 1.274- pg 5(j)(2), Income Tax Regs.., próvides that the strict 21 22 substantiation req irements of section 274(d) for vehicle expenses must be met even where the optional standard 23 mileage rate is used. 24 Petitioner offered.no records to substantiate 25 the expenses underlyihg the disputed d'eductions that he claimed on Schedules A for the years in issue. It follows that respondent's adjustments to petitioner's itemized 9 deductions are sustained. Petitione.r offered a mileage log that hé had prepared after the examination of his.tax returns for the years in issue and which purportedly shows the numbèr of 1 2 3 4 5 6 7 miles that he drove for business purposes in 2013. 8 9 10 11 Because the mileage log was not prepared at or near the time of the expenditures in question, it do.es not satisfy the strict substantiatión requirements of.section 274(d) for vehicle expenses. Petitioner failed to offer any 12 additional documents or reeörds to substantiate the 13 numerous expenses ünderlying the deductions he had claimed 14 15 on Schedules C and disallowed by respondent. In the absence. of any objective.evidence corroborating 16 Petitioner's testimony regarding -the disputed 17 18 expenditures, respondent's determination disallowing the deductions petitioner claimed on Schedules C for the years 19 in issue is sustained. 20 21 22 Petitioner offered four "invoices", one fróm Sam The Cement Man, two from Kenneth Jackson Home Remodeling, and one from Metropolitan Contractors, in an effort to 23 substantiate some of the repair expenses that he had 24 reported on Schedule E for 2013. The hándwriting on three 2(cid:0)540of the invoices suggests that they were written by the 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 same .person, a development which casts serious doubt on the authenticity of the documents. In any event, petitioner offered no bank or credit card records to show that he actually paid the amounts listed on the invoices. His testimony that he paid all repair expenses in cash, and did not obtain cash receipts, lacks credibility. Consequently, we give no weight to the invoices and . reSPondent's determination disallowing deductions that petitioner claimed on Schedules E for repair expenses for the years in issue is sustained. Section 6651(a)(1) provides for an addition to tax if a taxpayer fails to file his or her tax return by the date prescribed in the Internal Revenue Code unless the taxpayer can show that the failure to timely file was due to reasonable cause and not willful neglect. The . . (cid:16)042 16 addition to tax under section 6651(a)(1) is 5% of the tax 17 18 required to be shown on a return for each month, or a fraction thereof, for which there is a failure to file the 19 return, not to exceed 25% in the aggregate. 20 21 22 The .parties stipulated that petitioner's tax returns for 2013 and 2014 were delinquently filed on May 12, 2014, and May 22, 2015,.respectively. Petitioner's 23 explanation that he did not feel obliged to timely file 24 his tax returns because he did not believe that he owed 25 any tax for the years in issu'e ·does not amount to . 11 reasonable cause sufficient to set aside the additions to tax prescribed in section 6651(a)(1). Consequently, the additions to tax are sustained. . Section 6.662(a) and (b)(1) and (2) imposes an accuracy-related penalty equal to 20% of the amount of any underpayment of tax that is due to the taxpayer's negligence or disregard of rules or regulations or that is attributable to any substantial understatement of income tax. Negligence is defined as a failure to make a reasonable attempt to comply with the Code and the term "disregard" includes any careless, reckless, or intentional disregard. Sec. 6662(c). With respect to an individual taxpayer's 1 2 3 4 5 6 7 8 9 10 11 12 13 14 liability for any penalty, section 7491(c) places on the 15 Commissioner the burden of produc·tion, thereby requiring 16 17 the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. 18 Higbee v. Commissioner, 116 T.C. 438, 446-447 (2000). The 19 20 record includes a penalty approval form which shows that the examining agent's supervisor approved the initial 21 determination of the assessment of accuracy-related 22 Penalties for the years in issue. See sec. 6751(b) (1). 23 Once the Commissioner meets his burden of production, the 24 25 taxpayer must come forward with persuasive evidence that the Commissioner's determination is incorrect. Higbee v. 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Commissioner, 116 T.C. at 447; s-ee Rule 142(a); Welch v. Helvering, 290 U.S. at 115. As discussed above, petitioner failed to produce adequate records to substantiate numerous.expenses underlying deductions that he had claimed on Schédules A, C, and E for the yeays in issue. Mdreover, the record indicates that-petitioner claimed many of the same expenses on both Schedules C and E. Coñsequently, we find that respondent met his burden of production in respect of the accuracy-related penalties. Petitidner preparéd his own tax returns for the years in issue and hè did not offèr a meaningful defense to the impositión of accuracy-related penalties in this casé other than to assert that respondent had erred in . 15 determining the deficiencies.. That matter having been 16 17 resolved against petitionér, respondent's determination that he is liable for accuracy-related penalties under 8 section 6662(a) is sustained. 19 20 21 22 23 24 25 Consistent with the foregoing, decision will be entered for respondent. -This concludes the Court's oral findings of fact and opiñion in this case. (Whereupon, at 10:42 a.m., the above-entitled matter was conóluded.) .