TAX COURT OPINION

Case: Fletcher H. Hyler
Docket Number: 10208-12S
Judge: Dean
Opinion Type: bench
Filed: 10/23/2013
Pages: 8

UNITED STATES TAX COURT WASHINGTON, DC 20217 FLETCHER H. HYLER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) O R D E R Docket No. 10208-12S. Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk of the Court shall transmit herewith the pages of the to petitioner and to respondent a copy of transcript of Judge John F. Dean at San Francisco, California, containing his oral the trial session at which the case was heard. the trial in the above case before Special Trial fact and opinion rendered at findings of In accordance with the oral findings of fact and opinion, decision will be entered for respondent. (Signed) John F. Dean Special Trial Judge Dated: Washington, D.C. October 23, 2013 SERVED OCT 25 2013 Capital Reporting Company Bench Opinion by Special Trial Judge John F. Dean 3 September 11, 2013 Fletcher H. Hyler v. Commissioner Docket No. 10208-12S 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. In this bench opinion, all section numbers refer to the Internal Revenue Code in effect for the taxable year at issue, and all rule references are to the Tax Court Rules of Practice & Procedure. This case was heard pursuant to provisions of Section 7463 of the Internal Revenue Code in effect at the time the petition was filed. The decision to be entered is not reviewable by any other court, and this opinion should not be cited as authority. Respondent determined a $12,825 deficiency in petitioner's federal income tax for 2009, and an accuracy-related penalty of $2,565, under Section 6662(a). The issues for decision are whether petitioner is entitled to deduct, one: office expenses; two: expenses for legal and professional services; and, three: is liable for the accuracy- 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 2 3 4 related penalty under Section 6662(a). Petitioner's liability for additional self- employment tax and his entitlement to a self- employment tax deduction is computational and is, 5 will be, determined by the Court's resolution of the 6 7 8 9 10 11 12 other issues in this case. The stipulated facts and exhibits are incorporated herein by reference. Petitioner resided in California at the time the petition in this case was filed. Petitioner filed his 2009 federal income tax return with a Schedule C, Profit and Loss From Business. 13 Petitioner listed his business as "Consulting", and 14 15 16 17 18 19 20 reported gross income of $60,000. Petitioner reported no other income except for taxable interest of $66. Petitioner reported $8,200 of car and truck expenses, $48,000 of office expenses, and $33,700 of legal and professional service expenses, for a business loss of $29,900 and adjusted gross income of 21 minus $28,844. 22 23 24 25 Respondent disallowed both petitioner's office expenses and his legal and professional service expenses. In general, the Commissioner's 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 5 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 determination set forth in a notice of deficiency is presumed correct, and the taxpayer bears the burden of showing that the determination is in error. Rule 142 (a); Welch v. Helvering, 290 US 111, 115 (1933). Pursuant to Section 7491(a), the burden of proof as to factual matters shifts to the Commissioner under certain circumstances. Because petitioner has not alleged or shown that the requirements of Section 7491(a) have been met, the burden of proof does not shift to respondent. Section 6001 and the regulations promulgated thereunder require taxpayers to maintain records sufficient to permit verification of income and expenses. As a general rule, if the trial record provides sufficient evidence that the taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the exact amount of the deduction to which he or she is otherwise entitled, the Court may estimate the amount of such expense and allow the deduction to that extent. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2nd Cir. 1930). However, in order for the Court to estimate the amount of an expense, the Court must have some reasonable basis upon which an estimate may be made. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 6 1 2 3 4 5 6 .7 8 Vanicek v. Commissioner, 85 TC 731, 743 (1985). Without such a basis, any allowance would amount to unguided largesse. Williams v. Commissioner, 245 F.2d 559, 560 (5th Cir. 1957). At trial, petitioner provided no original records or any reconstructions of records to substantiate his deductions. In fact, he offered no evidence that he was actually in business in 2009. 9 His testimony consisted primarily of his explaining 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 why he did not have his records and why he did not reconstruct his records. Petitioner testified that, (1): he lost his records because he moved three times since 2009; (2): his house "burned to the ground" in 2012; (3): his bank failed to reply to his request for records of his checks; and, (4): his lawyer refused requests for his payment records. The Court is unpersuaded by the explanations offered by petitioner. Petitioner also argued that the notice of deficiency itself was improperly issued and therefore void. He based the latter argument, he's testified, on his interpretation of language from the Internal Revenue Manual. The Internal Revenue Manual, however, does not have the force of law and does not confer any rights on taxpayers. Fargo v. 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 1 Commissioner, 447 F.3d 706, 713 (9th Cir. 2006); 2 Carlson v. United States, 126 F.3d 915, 922 (7th Cir. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1997); Marks v. Commissioner, 947 F.2d 983, 986 at n. 1 (DC Cir. 1991), holding that it is well settled that the provisions of the Internal Revenue Manual are directory rather than mandatory, are not codified regulations, and clearly do not have the force and effect of law. Respondent's determination to disallow the deductions for office expenses and legal and professional service is sustained. Respondent determined that for 2009, petitioner underpaid a portion of his income tax due to negligence or disregard of rules or regulations, and that there was a substantial underpayment of tax. Section 6662(a) imposes a 20 percent penalty on the portion of an underpayment of tax attributable to any of various factors, including negligence or disregard of rules or regulations and a substantial understatement of income tax. See Section 6662(b) (1) and (2). "Negligence" includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code, including any failure to keep adequate books and records or to substantiate 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 items properly. See Section 6662(c); Section 1.6662- 3(b) (1), Income Tax Regs. A substantial understatement includes an understatement of tax that exceeds the greater of 10 percent of the tax required to be shown on the return, or $5,000. See Section 6662(d); Section 1.6662-4(b), Income Tax Regs. Section 6664 (c) (1) provides that the penalty under Section 6662 shall not apply to any portion of an underpayment if it is shown that there was a reasonable cause for the taxpayer's position and that the taxpayer acted in good faith with respect to that portion. The determination of 14 whether a taxpayer acted with reasonable cause and in 15 16 17 18 19 20 21 22 23 24 25 good faith is made on a case-by-case basis, taking into account all 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 his proper tax liability for the year. Id. Petitioner reported on his return a tax of zero dollars, and the tax required to be shown on the return is $12,825. Petitioner's underpayment of tax exceeds the greater of $5,000 and 10 percent of the tax required to be shown on the return. Petitioner 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 has a substantial understatement for 2009. The Court concludes that respondent has produced sufficient evidence of negligence to show that the accuracy-related penalty under Section 6662 is appropriate for 2009. Because there is a substantial understatement of tax,.the Court need not address whether there was negligence or disregard of rules or regulations. Petitioner did not show that there was a 10 reasonable cause for, and that he acted in good faith 11 with respect to, the understatement of tax for 2009. Respondent's determination of the accuracy- related penalty under Section 6662(a) for 2009 is sustained. To reflect the foregoing, decision will be entered for respondent. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 2:14 p.m., the above- entitled matter was concluded.) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 866.488.DEPO www.CapitalReportingCompany.com