TAX COURT OPINION

Case: Promenade Homes, Inc.
Docket Number: 7165-14S
Judge: Whalen
Opinion Type: bench
Filed: 02/10/2015
Pages: 14

UNITED STATES TAX COURT WASHINGTON, DC 20217 PROMENADE HOMES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ORDER Docket No. 7165-14S 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 each party in the above case a copy of the pages of the transcript of the proceedings in the above-case before the undersigned at Dallas, Texas, containing the oral findings of fact and opinion rendered on January 28, 2015. In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) Laurence J. Whalen Judge Dated: Washington, D.C. February 10, 2015 SERVED FEB 1 2 2015 Capital Reporting Company Bench Opinion by Senior Judge Laurence J. Whalen 3 January 28, 2015 Promenade Homes, Inc. v. Commissioner Docket Number 7165-14S I. THE COURT HAS DECIDED TO RENDER ORAL FINDINGS OF FACT AND OPINION IN THIS CASE AND THE FOLLOWINER REPRESENTS THE COURT'S ORAL FINDINGS OF FACT AND OPINION. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 179 of the Tax Court Rules of Practice and Procedure. Hereinafter all section references are to the Internal Revenue Code, as amended and in effect for the taxable year in issue, and all rule references are to the Tax Court Rules of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Practice and Procedure. Pursuant to section 7463(b), 20 21 22 23 24 25 the decision to be entered in this case cannot be reviewed in any other court and this bench opinion shall not be treated as precedent for any other case. III. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 4 IV. Mr. Stan Davis appeared in these proceedings on behalf of Petitioner, Promenade Homes, Inc. Ms. Vivian Bodey, Attorney at Law, appeared on behalf of Respondent. V. Issues: Respondent determined a deficiency in the Petitioner's federal income tax for taxable year 2011 in the amount of $35,664 and a penalty under section 6662(d) of $7,133. The deficiency is based on a single adjustment to Petitioner's return, an increase of $134,394 in the amount of gross receipts reported on Petitioner's return from $1,827,925 to $1,962,319. The adjustment, in turn, is based a Form 1099-MISC for 2011 that was issued to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Petitioner by Burghli Investments, LLC ("Burghli") 17 reporting the payment of non-employee compensation to 18 Petitioner of $1,962,319.29, that is, $134,394 more 19 than the amount reported on Petitioner's return. 20 Burghli is an unrelated company with which Petitioner 21 22 23 engaged in its real estate construction business during 2011. There are two issues for decision. First, 24 whether Petitioner is subject to tax on additional 25 gross receipts of $134,394 as determined by 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company Respondent; second, if Petitioner is subject to tax on the additional gross receipts, whether Petitioner is liable for the accuracy-related penalty under 5 section 6662(a). VI. des! Some of the facts have been stipulated by 'the parties and are so found. Petitioner is a C corporation. Petitioner n ' sole shareholder and president is Mr. Stan Davis. At the time the petition in this case Petitioner's principal place of WdL4 h f4Á business was Houston, Texas. During 2011 Petitioner was engaged in the business of building single-family residences. As 1 2 3 4 5 6 7 8 9 10 11 12 13 14 mentioned, Petitioner engaged in that business during 15 16 17 2011 with an unrelated company, Burghli. On construction projects on which Petitioner and Burghli worked togethe payment for the project was issued to 18 Burghli and after deducting its costs attributable to 19 20 the project Burghli remitted the remaining proceeds to Petitioner or to a payee on Petitioner's behalf. 21 Petitioner did not issue invoices to Burghli or to 22 23 24 25 any other entity for these projects. As mentioned earlier, Burghli issued a Form 1099-MISC for 2011 in which it reported aggregate non-employee compensation to Petitioner of LJW jbd 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 7 $1,962,319.29, or $134,394 more than the gross receipts thd Petitioner reported on its 2011 return. The record contains copies of 32 checks totaling $1,962,319.29 that were paid to Petitioner (vis. 23 checks totaling $1,607,278.06), or paid to one of three corporations on Petitioner's behalf (vis. 9 checks totaling $355,041.23). The relationship of 8 Petitioner and the three corporations which received 9 checks from Burghli on Petitioner's behalf is not 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 fully described in the record, except that Petitioner g accountant referred to them as, "factoring companies." VII. Petitioner's Position?. Petitioner asserts that its representatives did not receive the Form 1099 from Burghli until shortly before trial and it was not until the petitioner's president and accountant had reviewed the F 1099 and the checks from Burghli that they fully understood the nature of the issue in this case. Petitioner's accountant testified generally that Petitioner's 2011 return was correct as filed. He said that when Petitioner received cash from a factoring company that amount was not income but was a liability. He explained that Respondent's L3'W/jbd 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 adjustment to the return adding unreported income in the amount of $134,394 was a, "single-sided entry," that is, a credit entry with no offsetting debit. He explained that generally the receipt of income is recorded by a business as a credit transaction. There must be a corresponding debit, either cash or a receivable, to balance the company's books. He further explained that a company's income and expense accounts are closed to the retained earnings account 10 on the balance sheet. Based on the fact that 11 Petitioner's books were in balance he concluded that 12 all of the income from Burghli had been reported by 13 Petitioner. 14 15 16 17 By accepting Respondent's determination that Petitioner had received, "phantom income" of $134,394 Petitioner would have a credit in that amount but no debit to.offset it, and in order for 18 Petitioner's books to remain in balance there must be 19 a corresponding NOL to offset the income. 20 Petitioner's accountant said that Petitionerwm Ü5 LJW)jbd 21 willing to accept Respondent's adjustment if the 22 23 24 25 company can offset the adjustment with an NOL. In his closing argument Petitioner's president confirmed that Petitioner had agreed to accept Respondent's adjustment, "in an attempt to 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 settle the matter," and Petitioner was no longer pursuing that issue. He said that nevertheless, he would like to offset the income with the NOL. VIII. We begin with several fundamental principles of tax litigation. First, as a general rule, the Commissioner's determinations are presumed correct and the taxpayer bears the burden of proving that those determinations are erroneous. Rule 10 142(a). This principle was firmly established by the 11 United State Supreme Court as early as 1933 and has 12 13 14 15 16 17 18 19 20 21 22 23 24 25 been reaffirmed by the Supreme Court more recently. See INDOPCO v. Commissioner, 503 U.S. 79, 84 (1992). We note that section 7491(a)(1) shifts the burden of proof to the Commissioner in certain cases, "if, in any Court proceeding a taxpayer introduces credible evidence with respect to any factual issue." In this case Petitioner's president did not claim or show that Petitioner meets the specifications of section 7491(a) to shift the burden of proof to Respondent as to any relevant factual issue. Second, deductions are a matter of legislative grace and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a). This includes the 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87 at 90 (1975), affirmed per curiam 540 F.2d 821 (5th Circuit, 1976.) Third, the Court is not bound to accept as true the unverified and undocumented testimony of a taxpayer. Hradesky v. Commissioner, supra; Tokarski v. Commissioner, T.C 87 Tax Cout L 74 at 77 (1986) . Even when taxpayer's testimony is uncontroverted we are not required to accept it if it is improbable, unreasonable or questionable. Lovell & Hart Inc. v. Commissioner 456 F2d 145 at 148 (6th Circuit, 1972), affirming T.C. Memo. 1970-335; MacGuire v. Commissioner, 450 F2d, 1239 at 1244 (5th Circuit, 1971), affirming T.C. Memo. 1970-89, Niedringhaus v. Commissioner, 99 Tax Court 202 at 212, (1992) . Fourth, a party's failure to introduce documentary evidence which is within his possession or control and which he implies would be favorable to him gives rise to the presumption that if produced, such evidence would be unfavorable. Recklitis v. Commissioner, T C. 91 Eav Geeet 874 at 890 (1988) ; Pollack v. Commissioner, 47 T.C. 92 at 108 (1966), affirmed 392 F.2d 409 (5th Circuit 1968; Wichita Terminal 24 Elevator Co. v. Commissioner, TC, 6 Tax Cout 1158 at 25 1165 (1946), affirmed 162 F.2d 513 (10th Circuit 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1947) . Finally, a tax return is merely a statement of the taxpayer's claim, the return is not presumed 10 1 2 3 4 TC. to be correct. Wilkinson v. Commissioner, 71 Ga-xTC. 62 -T-e«- 5 Geeet 633 at 639; Roberts v. Commissioner, 6 Geert 834 at 837; see also Seaboard Commercial Corp. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 v. Commissioner, 28 T= Court 1034 at 1051 (1957) (stating that a taxpayer's income tax return is a self-serving declaration that may not be accepted as proof for the deduction or exclusion claimed by the taxpayer) ; Halle v. Commissioner, 7 hv rnnrt- .245 (1946) (stating that a taxpayer's return is not self- proving as to the truth of its contents), affirmed 175 F.2d 500 (2d Circuit 1949.) IX. Discussion: The Commissioner ' s determinations in the notice of deficiency are generally presumed correct and taxpayers bear the burden of proving otherwise. Rule 142. However, in order for the presumption of correctness to arise in cases involving unreported income the Commissioner 22 must make a minimal evidentiary showing. Example, 23 24 25 Blohm V. Commissioner, 994 F.2 1542 (11th Circuit 1993). We find that Respondent has made such a showing in this case and is entitled to the 866.488.DEPO www.CapitalReportingCompany.com I Capital Reporting Company 11 1 2 3 4 5 6 7 8 9 presumption of correctness. Unreported Income: Petitioner's president made it clear during trial and in his closing statement that Petitioner was not arguing that it is not subject to tax on the unreported income determined by Respondent in the notice of deficiendy. In view of this concession we sustain Respondent's determination that for 2011 Petitioner is subject to tax on gross receipts of $1, 962,319.29. 10 Net Operating Loss Deduction: At trial 11 Petitioner's president raised the question whether 12 Petitioner is entitled to offset the additional 13 14 15 16 17 18 19 20 21 22 23 24 25 income determined by Respondent with a deduction under section 172 of net operating loss carryovers from 2006 or 2008 forward. The Court believes that during trial Petitioner's president intended to seek leave to amend the petition to include this issue under Rule 41. The Court granted such leave. Petitioner's president called Petitioner's accountant as a witness. The accountant testified about Petitioner's need to offset the unreported income determined by Respondent with net operating losses. The account's testimony was general and theoretical in nature. In summary, he stated that application of Petitioner's NOL carryovers was 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 12 necessary from an accounting perspective to offset the inclusion in gross income of the unreported income determined by Respondent. Otherwise, he stated that Petitioner's books would not be in balance. The accountant was not asked about the proposed amended return for 2008 and he never discussed any specific facts regarding Petitioner's NOL carryovers. Petitioner's president did not testify. We find that Petitioner failed to show that it is entitled to a deduction under section 172 for 2011. X. Accuracy-Related Penalty: Subsection (a) of section 6662 1mposes an accuracy-related penalty of 20 percent of the portion of any underpayment attributable to causes specified in subsection (b). Respondent asserts that the penalty is justified in this case because the underpayment is due to a substantial understatement of income tax, subsec. (b)(2). A C corporation substantially understates its income tax for any taxable year when the amount of the understatement exceeds the lesser of (1) 10 percent of the tax required to be shown on the return (or, if greater, $10,000), or (2) $10,000,000. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 13 Section 6662(d) (1)(B). Tax is not understated to the extent that the treatment of the item related thereto is based on substantial authority or is adequately disclosed in the return or in a statement attached to the return and there is a reasonable basis for the tax treatment of such item by the taxpayer. Section 662(d)2(2)(B). The accuracy-related penalty does not apply to any portion of an underpayment if it is shown that there was reasonable cause for that portion of the understatement and that the taxpayer acted in good faith with respect to all or that portion of the understatement. Section 664(c)(1); section 1.6664- 4(b), Income Tax Regs. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. Section 1.6664-4(b)(1), Income Tax Regs. The most important factor is the extent of the taxpayer's effort to assess the taxpayer's proper liability for such year. Id. Section 7491(c) places on the Commissioner the burden of production with respect to a taxpayer's liability for any penalty. To satisfy Respondent's burden of production Respondent must come forward 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 with "sufficient evidence indicating that it is 14 2 3 4 5 6 7 8 9 appropriate to impose" the accuracy-related penalty. Higbee v. Commissioner, 116 T-a.v-CÅu.r..t 438 at 446 LJW jbd (2001). Although Respondent bears the burden of production with respect to the accuracy-related penalty under section 6662(a), Respondent "need not introduce evidence regarding reasonable cause * * * or similar provisions. * * * the taxpayer bears the burden of proof with regard to those issues." Id. 10 Petitioner bears the burden of proving that he had 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 reasonable cause for, and acted in good faith, with respect to any portion of the underpayment such that he should not be liable for the accuracy-related penalty. See section 6664(c)(1). In this case Respondent has shown that the amount of the understatement exceeds 10 percent of the tax required to be shown on Petitioner's 2011 return and is greater than $10,000. Accordingly, Respondent has satisfied his burden of production under section 7491(c). Petitioner's president, on the other hand, did not explicitly address the penalty at trial and Petitioner did not show that there was reasonable cause for the underpayment or that Petitioner acted in good faith with respect to the underpayment. Thus, we sustain Respondent's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company determination that Petitioner is liable for the 15 penalty. XI. In order to give effect to the foregoing, decision will be entered for Respondent. XII. THIS CONCLUDES THE COURT'S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon, at 9:03 a.m., the above- entitled matter was concluded.) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com