TAX COURT OPINION

Case: Richard A. Boring & Margaret A. Boring
Docket Number: 4030-16S
Judge: Guy
Opinion Type: bench
Filed: 03/09/2018
Pages: 14

JRN UNITED STATES TAX COURT WASHINGTON, DC 20217 RICHARD A. BORING & MARGARET A. BORING, Petitioners, v. ) ) ) ) ) Docket No. 4030-16S. 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 petitioners 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 Los Angeles, California, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. decision will be entered under Rule 155. In accordance with the oral findings of fact and opinion, It is further ORDERED that the parties shall submit computations under Rule 155, Tax Court Rules of Practice and Procedure,¹ on or before June 7, 2018. (Signed) Daniel A. Guy, Jr. Special Trial Judge Dated: Washington, D.C. March 9, 2018 ¹Petitioners can access the text of Rule 155 on the Court's website at www.ustaxcourt.gov. Petitioners should consider discussing the preparation of the computations with respondent's counsel. SERVED Mar 09 2018 Bench Opinion by Special Trial Judge Daniel A. Guy, Jr. February 14, 2018 Richard A. Boring & Margaret A. Boring v. Commissioner of 3 Internal Revenue Docket No. 4030-16s 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. The oral findings of fact and.opinion shall not be relied upon as precedent in any other case. This proceeding for the redetermination of 1 2 3 4 5 6 7 8 9 10 11 . 12 deficiencies is a small tax case conducted pursuant to the 13 provisions of section 7463 of the Internal Revenue Code of 14 1986, as amended, and Rules 170 through 174 of the Tax 15 Court Rules of Practice and Procedure. 16 This bench opinion is made pursuant to the 17 authority granted by section 7459(b) of the Internal 18 Revenue Code of 1986, as amended, and Rule 152 of the Tax 19 Court Rules of Practice and Procedure. Hereinafter in 20 this bench opinion, section references are to the Internal 21 Revenue Code of 1986, as amended, in effect for 2011.and 22 2012 (years in issue), and Rule references are to the Tax 23 Court Rules of Practice and Procedure. 24 Respondent issued a notice of deficiency to 25 petitioners determining that they are liable for income 4 1 2 3 4 5 6 7 8 9 tax deficiencies of $23,073 and $15,866 for the taxable years 2011 and 2012, respectively, attributable largely to the disallowance of certain expenses that. petitioners claimed on Schedules C, Profit or Loss From Business, fór lack od substantiation. Re,spondent also determined that petitioners are liable for additions to tax under section 6651(a) (1) and accuracy-related penalties under section 6662(a) for the years in issue. Petitioners, husband and wife, and resideñts of 10 California, filed a timely petition for redetermination 11. with the Court pursuant to.section 6213(a). Petitioners 12 13 subsequently amended their pétition. Respondent filed an answer to the amended petition which included affirmative 14 allegations disallowing the following additional expenses 15 claimed bh petitioners on Schedule C for 2011: office 16 expenses of $159, depreciation expenses of $5,498, and 17 vehicle expenses of. $8,120:. Respondent further asserted 18. that petitioners did nöt carry on the Schedule C activity 19 as a tradh or business, and the activity did not generate 20 the gross! receipts of $24,172 and $11,276 as reported on 21 Schedules C for the taxable years 2011 and 2012, 22 respectively. Finally, respondent asserted that 23 petitionerÁ are liable for penalties under section 6663(a) 24 for fraudplent underpayments of täx required to be shown 25 on their ax returns för the years in issue. 5 1 2 3 4 5 6 7 8 9 Peti.tioners appeared at trial pro se. Respondent was represented by Christopher J. Richmond and Justine S. Coleman. The parties filed with the Court a stipulati n of facts, with accompanying exhibits, that is incorpora ed herein by this referénce. The parties. agree that petitioners paid mortgage interest and real estate taxes of $10, 476 and $9, 009 in the taxable. years 2011 and 2012, respectively. The parties further agree that if fhe Court concludes that 10 petitioners are. not entitled to deduct those ekpenses on 11 Schedules C for the bpsiness use of their home in 2011 and 12 2012, theh petitioners may deduct those amounts on 13 Schedules A, Itemized Deductions, for the years in issue. 14 Responden also concedés that petitioners are entitled to 15 claim an Atemized deduction of $12, 615 for a charitable 16 17 contribution for the taxable year 2012. - The issues remaining for decision are whether 18 petitione s are (1) entitled to deduct various expenses 19 reported an Schedules C; (2) liable fór additions to tax 20 under sec ion 6651(a)(1), and (3) liable for fraud 21 penalties under section 6663 (a) or,. ;i.n the alternative, 22 accuracy-telated penalties utider section 6662 (a) . 23 Petitioners are quite familiar with the Tax 24 cCourt havìng filed multiple petitions over a period of 26 m:any year . Most recently, the Court sustainéd 6 1 2 3· 4 5 6 7 respondent's determination of tax deficiencies for the taxable ears 2007, 2008, and 2009 in Boring v. Commissiqner, T.C. Summary Opinion 2014-105, and for the taxable year 2010 in Boring v. Commissioner, T.C. Summary Opinion 2015-68. Those cases, like this one, addressed similar continuing issues arising primarily from petitioners' efforts to súbstantiate and deduct expenses 8 ' which thdy attribute to Mr. Boring's sole proprietorship 9 activity known as Rambor Technologies (Rambor). In both 10 11 12 13 cases, the Court.concluded that petitioners failed to substantiate expenses reported on Schedules C and sustained respondent's determination that they were liable for accuracy-related penalties under section 6662(a). 14 Backgrou4d 15 . During 2011 and the first quarter of 2012, Mr. 16 Boring wds employed full time as an engineer at Tecom 17 Industries Inc. (Tecom). Mr. Boring's job duties included 18 work on communication systems for manned and unmanned 19 aïrcraft. Mr. Boring collected unemployment benefits for 20 the remainder of.2012. Mrs. Boring was employed full 21 time as a boòkkeeper with the Conejo Valley School 22 District during the years in issue. 23 24 25 Petitioners fìled a joint Form 1040, U.S. Individual Income Tax Return, for 2011, on July 21, 2014, and a joint Form 1040 for 2012 on March 31, 2015. 1 2 3 4 5 6 Petitioners attached Schedules C to both tax returns reporting that Rambor earned gross receipts of $24,172, offset by total·expenses of .$119,673, in 2011,, and gross receipts of $11,276, offset by total expenses of $58,274, in 2012. Petitioners have a long history of reporting substantial losses from thé Rambor activity resulting in 7. net.1òsses in excess of $1 million since 1990. Mr. 8 9 10 11 12 Bering's efforts to achieve commercial success through Rambor are described in Borihg v. Commissioner, T.C. Summary Opinion 2015-68, and need not be repeated here. The IRS selected petitioners' tax returns for the years in issue for examination. Petitioners failed to 13 produce any documents to substantiate the Schedule C 14' expenses.during the examination process, as part o·f the 15 Appeals review process, in response to respondent's .16. informal and formal discovery requests before the tr-ial, 17 or at the trial of this case. 18 Discussion 19 20 21 22 The Commissioner's determination of a taxpayer's liability in a notice of deficiency normally is presumed correct, and the taxpayer bears the burden of proving that the determination is incorrect. Rule 142(a) Welch v. 23 Helvering, 290 U.S. Ill, 115 (1933). In contrast, 24 25 respondent béars the burden of proof in respect of increased deficiencies asserted for the first time in 8 1 2 3 4 5 6 7 8 9 10 11 respondent's answer to the petition.. Rule 142(a)(1). Deductiöns are a matter of legislative grace, and the taxpayer generally bears the burden of proving entitlement to any deduction claiMed. Rule 142(a); ..INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (19.92); New Colonial Ice Co. v. Helvering, 2.92 U.S. 435, 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.. Commis.sioner, 65 T.C. 87, 89-90 (1975), aff'd per cüriam, 540 F.2d 821 (5th 12 Cir. 1976). 13 Under section 162(a), a deduction is allowed for 14 ardinary and necessary expenses. paid or incurred durcing 15 16 the taxable year in carrying on ·any trade or business. A deduc,tion normally is not available, however, for 17 personal, living, or family expenses. Sec. 262(a). 18 Whether an expenditure satisfies the requirements for 19 deductibility under section 162 is a question of fact. See 20 Commissioner v. Heininger, 320 U.S. 467, 475 (1943). 21 22 Pdtitioners offered no objective evidence to substantiaté the Rambor expenses that respondent 23 disallowed in the notice of. deficiency. Althopgh 24 petitioners asserted that records exist to substantiate 25 the expenses, they failed to produce those documents even 9 1 2 3 4 5 6 7 8 9 10 11 12 13 though they were given ample opportunity to do so. It follows that the Schedule C expehses that respondent disallowed in the notice of deficiency are sustained. Because we conclude that' these expenses cannot be claimed on Schedules C, it follows that petitioners' mortgage interest and real estate payments, discussed above, are eligible for deduction as.itemized deductions on Schedules A for the years in issue. Respondent likewise has shown the petitioners are not entitled to deduct the additional expenses identified in respondent's answer to the amended petition and that the Rambor activity did not generate the gross receipts that petitioners reported for the years in issue. 14 Petitioners acknowledged at trial that they improperly 15 16 17 claimed personal expenses on Schedules C for the years in issue, including for example, personal vehicle expenses (based on the number of miles that they drove to work), 18 monthly car payments for those vehicles, and depreciation 19 expenses for those vehicles.. In an effort to justify the 20 many expenses in question, Mr. Boring explained that he 21 had "perceived a corporate partnership" between Rambor and 22 his employer Tecom to share his (and Rambor's) 23 intellectual property, but he acknowledged that in fact 24 25 there was no such partnership or agreement. M-r. Boring acknowledged that Rambor did not.actually receive the 10 gross receipts reporied on Schedules C fbr the years in issue and that the amounts reported were intended to reflect his estimate of the value of intellectual property trans.ferred from Rambor to Tecom. Under the circumstances, the additional adjustments outlined in respondent's answer are sustained. Section 6651 (a) (1) 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 necjlect. The 1 2 3 4 5 6 7 8 9 10 11 12 13 addition to tax under section 6651(a) (1) is 5% of the tax 14 15 16 17 18 required to be shown on a return for each month, or a fractiori thereof, for which there is a failure to file the return, not to exceed 25% in the aggregåte. The parties stipulated- that petitioners' tax returns for 2011 and 2Ól2 were delinquently filed on July. 19 21, 2014, and March 31, '27015, respectively. Mr. Boring 20 21 22 23 testified that he was unable to file his tax returns in a timely fashion because he was suffering from a medical condition that left him lethargic and urlable to maintain focus. In the absence of any objective evidence of the 24 nature and extent of Mr. Boring's illness during the 25 period in question, we are not convinced that petiti.oners . have shown reasonable cause súfficient to set aside. the additions to tax prescribed in section 6651(a) (1). These 11 additions to tax are sustained. Section 6663(a) Respondent sserted in the answer to the amended petition that petitióners are liable for fraud penalties under section 6663(a). The record indicates that Mr. Richmond's recommendation to assert fraud penalties in respondent's answer Lkas approved by his immediate supervis r. Petitioners testified at trial that they did not inteÑd to evade the payment of any taxes they may owe. If any part of an underpayment o a tax return is due to fraud, section 6663(a) imposes gn the taxpayer filing the return a penalty equal to 75% of the part of the underpayment attributapie to fraud. To prove that a taxpayer is liable for the pehalty, the Commissioner must prove by clear and convincing evidence that (1) an underpay ent of tax exists,.and (2) some part of the 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 underpayment is due to fraud. See secs. 6663(b),.7454(a); 20 Rule 142(b); DiLeo r. Commissionqr, 96 T.C. 858, 873, 21 (1991), áff'd, 959 F.2d 16 (2d Cir. 1992). If the 22 Commissipner hroves that any part of an underpayment is .23 attributable to fraud, then the entire underpayment shall 24 be treat'ed as attributable to fraud unless the taxpayer 25 shows b.y a preponderance of the evidence that a part was 12 1 2 3 4 5 6 7 8 9 not s,o attributable. See sec. 6663.(b). If fraud is determined for multiple taxable years, the Commissioner's burden "applies separately for each of the years." Temple v. Commissioner, T.C. Memo. 2000-337, aff'd, 62 Fed. Appx. 605 (.6th Cir. 2003). The Commissioner satisfies this burden by showing that "the taxpayer intended to evade taxes known to be owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes." DiLeo v. Commissioner, 96 T.C. 1Ò at 874. Fraud "does not include negligence, carelessness, 11 misunderstanding or unintentional understatement of 12 income." United States v. Pechenik, 236 F.2d 844, 846 (3d 13 Cir. 1956). 14 The existence of fraud is a question of fact to 1.5 be resolved upon consideration of the entire record. See 16 DiLeo v. Commissioner, 96 T.C. at 874. Fraud is never 17 presumed and must be established by independent evidence 18 of fraudulent intent. See Baumgardner v. Commissioner, 19 251 F.2d 311, 322 (9th Cir. 1957), aff'g T.C. Memo 1956- 20 21 112. Fraud is not proven when a court is left with only a suspicion of fraud, and even a strong suspicion is not 22 sufficient to establish a taxpayer's liability for the 23 24 fraud penalty. See Olinger v. Commissioner, 234 F.2d 823, 824 (5th Cir. 1956), aff'g in part and rev'g in part on 25 another groünd T.C. Memo. 1955-9. 13 1 2 3 4 5 6 7 8 9 There is circumstantial evidence in this case that would support a finding of some of the traditional "badges" of fraud, including unde.rstatements öf tax and failure to maintain or produce adequate records. See Bradford v..Commissioner, 786 F.2d 303, 307 (9th Cir. 1986) aff'g T.C. Memo 1984-601. The Court is not persuaded, however, that the reáord establishes clear and convincing evidence that petitioners intendêd to evade taxes within the meaning of section 6663(a). Because we 10 conclude that petitioners arey not líable for fraud 11. penalties, as asserted in respondent's answer, we turn to 1.2 13 respondent's alternative detè.rmination that petitioners are liable for accuracy-related penalties. 14 Section 6662(a) 15 Séction 6662(a) and (bf(l) and (2) imposes an 16 accuracy-related penalty equal to 20% of the amount of any 17 18 underpayment of tax that is due to the taxpayer's negligence år disregard of rules or regulatións or that is 19 attributable to any substantial understatement of income 20 21 22 23 24 25 tax. Negligence is ßefïned as a failure to make a reasonable attempt to comply with the Code and the term "disregard" inbludes any careless, reckless, or intentional disregard. Sec. 6662(c). With respect tó an individual taxpayer's liability f.or any penalty,. section 7491(c) places on the Cribers 14 1 2 3 4 5 6 7 8 9 Commissioner the burden of production, thereby requiring the Commissioner to come forward with sufficient evidence indicating that it is appropriate to impose the penalty. Higbee v.. Commissioner, 116 T.C. 438, 446-447 (2000). Once the Commissioñer meets his burden of production the taxpayer mu(cid:0)541tcome forward with persuasive evidence that the commissioner's determination is incorrect. Higbee v. Commissïoner, 116 T.C. at 447; see Rule 142(a); Welch v. Helvering, 290 U.S..at 115.. The Commissioner, however, 10 bears the burden of proof in respect of an increase 11 penalty asserted in an amendment to .answer. Rule 12 13 14 15 142(a)(1). The record includes penalty approval forms which show that the examining agent's supervisor approved the initial determinatiön of the assessment of accuracy- 16 relate,d peñalties for the years in issue. See.sec. 17 18 6751(b)(1). Moreover, as discussed abóve, petitioners failed to substantiate expenses claimed on Schedule C and 19 otherwise claimed deductions for personal expenses in 20 disregard of applicable statutory provisions. 21 Consequently, we find that respondent met his burden of 22 production in respect to the penalty determined in the 23 notice of deficiency and his burden of proof in respect of 24 25 the increased penalty asserted in the answer. Mr. Boring prepared and filed the couple's tax cribers 1 returns for the years in issue. He did. not offer 2 meaningful defense to the imposition of an accuracy- . 15 related penalty in this case other than to assert that respondent had erred in determining a deficiency. On this record the Court concludes that petitioners were negligent and disregarded rules and regulations in preparing and filing their tax returns for the year in issue. Consequently, respondent's determination that petitioners are liable for accuracy¬related penalties under Section 6662 (·a) for the yea.rs in issue is sustained. Consistent with the foregoing, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 3:00 p.m., the above-entitled matter was concluded.) 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 .