TAX COURT OPINION

Case: Eric L. & Thays Pritchard
Docket Number: 1024-08S
Judge: Colvin
Opinion Type: bench
Filed: 11/26/2008
Pages: 11

UNITED STATES TAX COURT WASHINGTON , DC 2021 7 ERIC L . AND THAYS PRITCHARD, Petitioner s v . ) Docket No . 1024-08S . COMMISSIONER OF INTERNAL REVENUE , Respondent O R D E R Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it i s 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 Judge Joseph H . Gale at Nashville, Tennessee, on October 30, 2008, containing his oral findings of fact and opinion rendered at the conclusion of trial . Decision will be entered under Rule 155 in accordance with the oral findings of fact and opinion . (Signed) Joseph H . Gale Judge Dated : Washington, D .C . November 26, 2008 SERVED Nov 28 2008 1 Bench Opinion by Judge Joseph H . Gale Oct .30,200 8 2 Eric L . & Thays Pritchard Docket No . 1024-08 S 2 4 THE CLERK : Docket Number 1024-08 S, Eric L . 5 And Thays Pritchard . 6 THE COURT : The Court has decided to render 7 oral findings of fact and opinion in this case, and 8 the following represents the Court's oral findings of 9 fact and opinion . The oral findings of fact an d 10 opinion shall not be relied upon as precedent in any 11 other case . 12 This proceeding was heard as a Small Tax 13 Case pursuant to the provisions of Section 7463 of the 14 Internal Revenue Code of 1986, as amended, and Rules 15 170 through 175 of the Tax Court Rules of Practice and 16 Procedure . 17 This bench opinion is made pursuant to the 18 authority granted by Section 7459(b) of the Internal 19 Revenue Code of 1986, as amended , and Rule 152 of the 20 Tax Court Rules of Practice and Procedure . 21 Unless otherwise indicated, all sectio n 22 references are to the Internal Revenue Code of 1986 in 23 effect for the year in issue, and all rule references 24 are to the Tax Court Rules of Practice and Procedure . 25 Petitioner Eric L . Pritchard appeared on his Heritage Reporting Corporatio n (202) 628-4888 3 1 own behalf . There was no appearance by Petitione r 2 Thays Pritchard . Hereinafter references to petitioner 3 in the singular are to Petitioner Eric L . Pritchard 4 and references to petitioners in the plural are to 5 both petitioners . Appearing as counsel for th e 6 respondent was Caroline R . Krivacka . 7 Respondent determined a deficiency o f 8 $12,152 in federal income tax with respect to th e 9 petitioner's 2003 taxable year, and an additions tax 10 under Section 6651(a)(1) of $3,682 . After concessions 11 the issues for decision are, (1) whether petitioners 12 are entitled to car and truck expenses claimed o n 13 Schedule C of their 2003 federal income tax return ; 14 (2) whether petitioners are entitled to other expenses 15 claimed on their Schedule C for small tools and 16 building supplies in amounts greater than thos e 17 conceded by respondent ; (3) whether petitioners are 18 liable for a Section 6651(a)(1) addition to tax for 19 failure to file a timely return for 2003, and (4) 20 whether respondent should be permitted to amend the 21 pleadings to assert a fraud penalty under Section 6663 22 or in the alternative a negligence penalty unde r 23 Section 6662(a) . 24 Some of the facts hb stipulated and are so 25 found . Heritage Reporting Corporation (202) 628-4888 4 1 Petitioners resided in Tennessee when the 2 petition in this case was filed . 3 Petitioners filed a joint federal income tax 4 return for 2003 on April 14th, 2006 . 5 During 2003 petitioner was a carpente r 6 specializing in the construction, installation and 7 remodeling of staircases . Petitioner worked as a 8 subcontractor in residential construction o r 9 renovation in the Nashville, Tennessee area during 10 2003, primarily for Mark Poe Construction . 11 On Schedule C of his 2003 return petitioner 12 claimed car and truck expenses of $7,200, and othe r 13 expenses totaling $40,765 for small tools and building 14 supplies in connection with his carpentry business . 15 Respondent issued petitioners a notice of deficiency 16 disallowing all of the foregoing expenses an d 17 petitioners filed a timely petition for 18 redetermination . 19 At trial, in an effort to prove hi s 20 entitlement to the car and truck expenses claimed, 21 petitioner offered an income journal that contained, 22 according to petitioner's testimony, his handwritten 23 entries for purchases of some but not all of the 24 gasoline he purchased for his work vehicle and some 25 but not all of the miles he drove from his business Heritage Reporting Corporatio n (202) 628-4888 5 1 headquarters to job sites , between job sites and t o 2 suppliers for materials . petitioner testified that 3 he made the entries on a weekly rather than dail y 4 basis . 5 With respect to the $40,765 in other 6 expenses claimed for small tools and buildin g 7 supplies , respondent now concedes that petitioners are 8 entitled to claim $5 , 863 .52 in tools and building 9 supplies expense . At trial petitioner offered proof 10 in support of the remaining claimed expense in th e 11 form of several pages of invoices from building supply 12 firms and certain canceled checks he had written t o 13 such firms . 14 On cross-examination of the petitioner, 15 respondent ' s counsel demonstrated to the Court's 16 satisfaction that petitioner had falsified thes e 17 documents in several instances by adding extra digits 18 to the dollar figures, typically adding $1,000 to the 19 invoice amount, altering the dates and/or adding items 20 and charges that were not present on the original . 21 In one instance a canceled check had been 22 altered so that the handwritten dollar figure wa s 23 $1,000 higher than the figure for which the check was 24 actually negotiated , as indicated by the financia l 25 institution ' s computer - generated figure for the check Heritage Reporting Corporatio n (202) 628-4888 1 and printed at the base thereof . 2 In another instance respondent had obtained 3 before trial the seller's record of an invoice tha t 4 petitioner offered as evidence at trial, and the 5 version of the invoice offered by petitioner, whe n 6 compared to the seller's record, had been altered with 7 respect to the date, items purchased and amoun t 8 charged . The invoice from the seller's records 9 reflected a sale of materials totaling $114 .72, 10 whereas the version of the invoice offered b y 11 petitioner indicated a sale of materials totaling 12 $4,586 .93 . 13 The document falsification shown in this 14 case is serious . These misrepresentations by the 15 petitioner render all of his evidence, both hi s 16 documentary evidence and his testimony, unworthy of 17 belief . 18 The Court will therefore disregard all of 19 such evidence . Petitioners have the burden of proof 20 with respect to the deductions for the expenses a t 21 issue . See Rule 142(ay, Deputy v . duPont , 308 U .S . 22 488, 493 (1940) ; New Colonial Ice Co . v . Helverinct , 23 292 U .S . 435, 440 (1934) ; Welch v Helvering , 290 U .S . 24 111, 115, (1933) . This includes the burden o f 25 substantiation . Hradesky v . Commissioner , 65T .C . 87, Heritage Reporting Corporatio n (202) 628-4888 7 1 90 (1975) ; affd . Per curiam 540 F .2d . 821, )5th Cir . 2 1976) ; see also Section 7491(a) (providing for a shift 3 in the burden of proof to the Commissioner only where 4 the taxpayer has substantiated deductions . ) 5 Because petitioners have the burden of proof 6 and the evidence petitioner has presented is no t 7 credible, the Court finds that petitioners have failed 8 to substantiate any amount of car and truck expens e 9 for 2003 and any amount of other expense for tools and 10 building supplies beyond that conceded by respondent . 11 We, therefore, sustain the deficiency resulting from 12 the disallowance of the car and truck expenses and the 13 other expenses for small tools and building supplies, 14 except to the extent of the amounts conceded b y 15 respondent . 16 We next address whether petitioners are 17 liable for a Section 6651(a)(1) addition to tax for 18 failure to file timely their 2003 return . Section 19 6651(a)(1) imposes an addition to tax for any failure 20 to file a return by its due date . The addition i s 21 equal to five percent of the amount required to be 22 shown as tax on the return for each month or portion 23 thereof that the return is late up to a maximum of 25 24 percent . The addition of tax does not apply if the 25 failure to file timely is due to reasonable cause an d Heritage Reporting Corporation (202) 628-4888 8 1 not willful neglect . Section 6651(a)(1) . cc-' 2 Under Section 7491 ; respondent bears the 3 burden of production with respect to petitioner' s 4 liability for the Section 6651(a)(1) addition to tax . 5 This means that respondent 'must come forward wit h 6 sufficient evidence indicating that it is appropriate 7 to impose the relevant penalty .' Higbee v . 8 Commissioner , 116 T .C . 438, 446, (2001) . Petitioners 9 bear the burden of proof with respect to an y 10 exculpatory factors such as reasonable cause . I~ . 11 d ' . at 446--447 . 12 Petitioners ' return for 2003 was due on 13 April 15th , 2004 . See Section 6072 ( a) . The parties 14 have stipulated that the return was filed on Apri l 15 14th , 2006 . We therefore conclude that respondent has 16 met the Section 7491 V burden of production wit h t 17 respect to the Section 6651(a)(1) addition to tax . As 18 to whether petitioners hav& reasonable cause for the 19 late filing, petitioner offered very little in the way 20 of an excuse in his testimony, stating only that the 21 return wasn't filed on time because he was getting his 22 life together . We conclude that petitioners have not 23 shown reasonable cause for their failure to fil e 24 timely and sustain respondent's determination of the 25 Section 6651(a)(1) addition to tax . Heritage Reporting Corporation (202) 628-4888 9 1 We turn finally to the issue of the fraud or 2 negligence penalties . At the conclusion of the trial 3 respondent's counsel made an oral motion to confor m 4 the pleadings with the proof to assert a penalty for 5 fraud under Section 6653, or in the alternativ e 6 negligence under Section 6662(a) . 7 The granting of a motion to conform th e 8 pleadings to the evidence under Rule 41(b) is within 9 the discretion of the Court, controlled by soun d 10 reason and fairness . Law v . Commissioner , 84 T .C ., 11 985, 990 (1985) . The Court shall allow the pleadings 12 to be amended, 'freely when justice so requires . ' 13 Rule 41 (b) (2) . 14 Prejudice to the other party is the key 15 factor in deciding whether to allow an amendment to 16 the pleadings . Rule 41(b)(2) ; Kroh v . Commissioner , 17 98 T .C . 383, 389 (1992) ; Law v . Commissioner , 84 T .C . 18 at 990 ; Graham v . Commissioner , T .C . Memo 2005-68 . 19 Where the Commissioner seeks to amend the 20 pleadings at the conclusion of a trial to asser t 21 fraud, this Court has generally refused to permi t 22 amendment where the Commissioner had in his possession 23 the evidence tending to show fraud before trial . See 24 25 Julicher v . Commissioner , T .C . Memo . 2002-55 ; Pallante v . Commissioner , T .C . Memo . 1989-334 . Heritage Reporting Corporation (202) 628-4888 10 . 1 This is so because the taxpayer is 2 prejudiced by being deprived of a reasonabl e 3 opportunity to defend against fraud . In this case it 4 is clear that respondent had the incriminatin g 5 evidence in his possession prior to trial . The 6 invoices and checks offered by petitioner were part of 7 the exhibits attached to the parties' stipulations , 8 prepared before trial, and the invoices respondent 9 obtained from one of petitioner's suppliers ha d 10 obviously been secured before trial . 11 We note also tha with respect to wha t 12 justice requires in this caslo the sanction that has 13 been effectively imposed upon petitioner for hi s 14 falsification of documents is the Court's disregard of 15 all of his evidence in support of the claime d 16 expenses, which total almost $48,000 . 17 Following Julicher and Pallante , and 18 applying the same reasoning with respect to the 19 assertion of the negligence penalty, we shall deny 20 respondent's oral motion to amend the pleadings to 21 conform with the evidence so as to assert a fraud or 22 negligence penalty . 23 To reflect the foregoin OVdecision will be 24 entered under Rule 155 . (~ 25 This concludes the Court's oral findings of Heritage Reporting Corporatio n (202) 628-4888 11 1 fact and opinion in this case . 2 This also concludes this session of the Tax 3 Court in Nashville and the court stands adjourne d 4 until the next trial session . Thank you all . 5 (Whereupon, at 5 :31 p .m ., the bench opinion 6 in the above-entitled matter was concluded . ) 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Heritage Reporting Corporation (202) 628-4888