TAX COURT OPINION

Case: Hirsi Ali Warsame
Docket Number: 19034-10S
Judge: Haines
Opinion Type: bench
Filed: 05/03/2011
Pages: 10

UNITED STATES TAX COURT WA SHINGTON, DC 20217 HIRSI ALI WARSAME, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) ) ) ORDER Docket No. 19034-10S 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 transcript of Seattle, Washington on April 21, 2011, containing his oral findings of the conclusion of trial. the trial of this case before Judge Haines at fact and opinion rendered at the pages of the the In accordance with the oral findings of fact and opinion, decision will be entered under Rule ],5p . (Signed) Harry A. Haines Judge Dated: Washington, D.C. May 3, 2011 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 3 Bench Opinion By Senior Judge Harry A. Haines April 21, 2011 Warsame v. Commissioner Docket No.: 19034-10S 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. The oral findings of fact and opinion shall not be relied upon as precedent in any other case. Respondent determined a $3,609 deficiency in petitioner's 2008 Federal income tax and a $720.60 accuracy-related penalty undër section 6662(a). After concessions, the remaining issues for decision are: (1) Whether petitioner is entitled to claim an exemption for his brother; (2) whether petitioner is entitled to claim the head of household filing status; and (3) whether petitioner is liable for the accuracy- related penalty under section 6662(a). Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended, and Rule references are to the Tax Court Rules of Practice and Procedure. The parties' stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioner is an individual who maintained Heritage Reporting Corporation (202) 628-4888 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 4 his legal residence in the state of Washington at the time his petition was filed in this case. In early 2008, petitioner's 19-year-old brother lived with his mother. However, his brother's repeated violent and criminal behavior caused problems with his mother's landlord. In June of 2008, the brother moved into petitioner's household and lived with petitioner throughout the remainder of the year. Petitioner timely filed his Form 1040, U.S. Individual Income Tax Return, for 2008. On the return he reported wages of $15,461, claimed head of household filing status, a dependency exemption for his brother, and an earned income credit of $2,917. On July 7, 2010, respondent mailed to petitioner a notice of deficiency for 2008, determining a deficiency of $3,609 and penalties under section 6662(a) of $720.60. Respondent determined that petitioner had received unreported income of $608 and $262 from Avis Rent-A-Car System, L.L.C. and fróm Menzies Aviation USA, Inc., respectively, and that petitioner was ineligible for the claimed head of household filing status, the dependency exemption, and the earned income credit. On August 25, 2010, petitioner filed a petition with this Court in response to the notice of deficiency. Petitioner Heritage Reporting Corporation (202) 628-4888 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 5 concedes that in 2008 he received $608 and $262 from Avis Rent-A-Car System, L.L.C. and from Menzies Aviation USA, Inc., respectively. In general, the Commissioner's 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 U.S. 111, 115 (1933). Deductions are a matter of legislative grace. Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 -(1934). A taxpayer bears the burden of proving entitlement to any deduction claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering, supra; Wilson v. Commissioner, T.C. Memo. 2001-139. Dependency Exemption Deductions A taxpayer is entitled to claim a dependency exemption only if the claimed dependent is a "qualifying child" or a "qualifying relative" as defined under section 152(c) and (d). Sec. 152(a). A qualifying child is defined as the taxpayer's child, brother, sister, stepbrother, or stepsister, or a descendant of any of them. Sec. 152(c) (1) and (2). A qualifying child must meet all of the following Heritage Reporting Corporation (202) 628-4888 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 6 requirements: (1) Bear a relationship to the taxpayer such as a brother who is younger than the taxpayer, (2) have the same principal place of abode as the taxpayer for more than one-half of the taxable year, (3) be under the age of 19, and (4) not provide more than one-half of his own support. Sec. 152(c). Because petitioner's brother was 19 years old in 2008, he is not a qualifying child. An individual who is not a qualifying child may, under certain conditions, qualify as a dependent if he is a qualifying relative. Sec. 152(a). Under section 152(d) (1), a qualifying relative is an individual: (A) Who bears a qualifying relationship to the taxpayer; (B) whose gross income for the year is less than the section 151(d) exemption amount; (C) who receives over one-half of his support from the taxpayer for the taxable year; and (D) who is not a qualifying child of the taxpayer or of any other taxpayer for the taxable year. Petitioner's brother bears a qualifying relationship to petitioner as defined under section 152(d) (2) (B). Petitioner's brother engaged in criminal activity during 2008. He was not gainfully employed. The Court is satisfied that the gross income earned by petitioner's brother in 2008 was less Heritage Reporting Corporation (202) 628-4888 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 7 than the exemption amount as defined in section 151(d). We also find that petitioner provided.more than one-half of his brother's support. Rental receipts were received as was petitioner's testimony as to other support. Because petitioner's brother was not his qualifying child and could not be the qualifying child of any other taxpayer because of his age, petitioner is entitled to claim a dependency exemption for his brother as a qualifying relative for 2008. Head of Household Filing Status Section 1(b) establishes a special tax rate for an individual taxpayer who files a Federal income tax return as a head of household. Section 2(b) in pertinent part defines a head of household as an individual taxpayer who: (1) Is unmarried as of the close of the taxable year and is not a surviving spouse; and (2) maintains as his home "a household that constitutes for more than one-half of the taxable year the principal place of abode, as a member of such household, of a dependent for whom the taxpayer is entitled to a deduction for an exemption under section 151. See also, e.g., Rowe v. Commissioner, 128 T.C. 13, 16-17 (2007). The taxpayer is considered as maintaining a household only if the taxpayer furnishes Heritage Reporting Corporation (202) 628-4888 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 8 over one-half of the cost of maintaining the household. Sec. 2(b) (1). Because petitioner was unmarried at the close of the taxable year, was not a surviving spouse, and maintained a household for more than one-half of the taxable year for his brother, petitioner qualifies for head of household filing status. Earned Income Credit An eligible individual is entitled to a credit against his Federal income tax liability, calculated as a percentage of his earned income, subject to certain limitations. Sec. 32(a) (1); Rowe v. Commissioner, supra at 15. Different percentages and amounts are used to calculate the earned income credit, depending on whether the eligible individual has no qualifying children, one qualifying child, or two or more qualifying children. Sec. 32(b); Rowe v. Commissioner, supra at 15. A "qualifying child" for purposes of section 32(b) means a qualifying child of the taxpayer as defined in section 152(c). Sec. 32(c) (3) (A). As discussed above, because petitioner's brother was 19 years old in 2008, petitioner did not have a qualifying child in 2008 as defined by sèction 152(c). Accordingly, petitioner is not entitled to an earned income credit with respect to his brother for Heritage Reporting Corporation (202) 628-4888 | | 9 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 2008. Penalty Respondent determined that petitioner is liable for an accuracy-related penalty under section 6662(a) for 2008. Under section 7491(c), the Commissioner bears the burden of production with respect to penalties. Once the burden of production is met, the taxpayer must come forward with evidence sufficient to show that that penalty does not apply. Higbee v. Commissioner, 116 T.C. 438, 447 (2001). Section 6662(a) and (b) (1) impose a penalty equal to 20 percent of the amount of an underpayment attributable to negligence or disregard of ruleå or regulations. Under section 6662(c), negligence includes any failure to make a reasonable attempt to comply with the provisions of the Internal Revenue Code. Under section 6664(c) (1), an accuracyk related penalty is not imposed on any portion of the underpayment as to which the taxpayer acted with reasonable cause and in good faith. The taxpayer bears the burden of proof with regard to those issues. Higbee v. Commissioner, supra at 446. The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case- Heritage Reporting Corporation (202) 628-4888 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 10 by-case basis, taking into account all pertinent facts and circumstances, including the extent of the i taxpayer's efforts to assess his or her proper tax liability; and the taxpayer's education, knowledge, and experience. Sec. 1.6664-4(b) (1), Income Tax Regs. The extent of the taxpayer's efforts to assess the proper tax liability is generally the most important factor. Id. Although respondent has proved, and petitioner has conceded, that he failed to report income earned of $608 and $262 from Avis Rent-A-Car System, L.L.C. and from Menzies Aviation USA, Inc., respectively, petitioner testified that he had been trying to qualify for jobs in the United States after he had moved here in 2007. The money from Avis and Menzies were payments made for training classes. Petitioner has no knowledge of Federal income taxes and relied on Dahir Hussein with Khayrad Tax Services in Seattle to prepare his 2008 Federal income tax return. In view of his recent arrival in the United States, petitioner's reliance on Mr. Hussein for the preparation of his 2008 Federal income tax return is reasonable. Accordingly, petitioner has demonstrated reasonable cause and good faith, and we hold that the accuracy-related penalty under section 6662(a) does Heritage Reporting Corporation (202) 628-4888 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 11 not apply. In reaching our holdings, we have considered all arguments made, and, to the extent not mentioned, we conclude that they are moot, irrelevant, or iwithout merit. To reflect the foregoing, decision will be entered under Rule 155. This concludes the Court's oral findiügs of facts and opinion. (Whereupon, at 2:31 p.m., the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888