TAX COURT OPINION

Case: Delores Ann Beechler
Docket Number: 274-10S
Judge: Colvin
Opinion Type: bench
Filed: 10/21/2010
Pages: 11

UNITED STATES TAX COURT WASHINGTON, DC 20217 DELORES ANN BEECHLER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) Docket No. 274-10S ) ) O R D E R 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 Laurence J. Whalen at Peoria, Illinois, containing his oral findings of fact and opinion rendered on September 15, 2010. the proceedings in the above case before Judge the pages of the 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. October 21, 2010 SERVED OCT 252010 L 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 Laurence J. Whalen Delores A. Beechler v. Commissioner Docket No. 274-10S September 15, 2010 L. 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. II. This proceeding was heard as a Small Tax Case pursuant to the provisions of Ssection 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. Hereinafter, in this bench opinion, all section numbers refer to the Internal Revenue Code, as amended and in effect for 2005 and 2006, the taxable years in issue, unless stated otherwise, and all Rule numbers refer to the Tax Court Rules of Practice and Procedure . Pursuant to Section 7463 (b) , the decision to be entered in this case is not reviewable by 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. 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 IV. Ms . Delores Ann Beechler appeared on her own behalf in this proceeding, and Mr. Robert M. Romasko, Esquire, appeared on behalf of respondent . V__ For the taxable years 2005 and 2006, respondent issued a notice of deficiency in which he determined deficiencies in petitioner' s Federal income taxes in the amounts of $6,513 and $13,567, respectively. Respondent also determined an accuracy-related penalty under Section 6662(a) for both years in the amounts of $1,302 and $2,713, respectively. VI. The issues for decision by the Court are as follows: (1) Whether petitioner under reported the gross C. receipts from her concrete contracting business in the amount of $37,479 for 2005 and $47,832 for 2006; (2) Whether petitioner is entitled to Schedule C deductions for car and truck expenses in the amounts claimed on her 2005 and 2006 income tax returns; and (3) Whether petitioner is entitled to Schedule C deductions for other expenses in the amounts claimed on her 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 2005 and 2006 income tax returns. 5 VII. Some of the facts have been stipulated by the parties, and those facts are so found. Petitioner resided in Virden, Illinois, at the time the petition was filed with the Court. Petitioner attached to each of her income tax returns for 2005 and 2006 a Schedule C, Profit or Loss from Business, with respect to her business as a concrete contractor, Beechler Concrete. On her Schedule C for 2005, petitioner reported gross receipts or sales of $119,250 and, among other deductions, she claimed deductions for other expenses of $8,680, and car and truck expenses of $14,102. On her Schedule C for 2006, petitioner reported gross receipts or sales of $87,772, and, among other deductions, she claimed deductions for other expenses of $10,742, and car and truck expenses of $16,723. In the subject notice of deficiency, respondent determined increases in the gross receipts of the business of $37,479 for 2005, and $47,832 for 2006. Respondent also disallowed for lack of substantiation petitioner's deductions of other expenses to the extent of $1,907 and $2,363 for the two years in issue, and disallowed for lack of substantiation petitioner's deductions of car and truck expenses to the extent of $2,820 and $3,345 for the two 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 years in issue. Respondent made other adjustments in the notice of deficiency which either favor petitioner or follow as a consequence of the above adjustments, and they are not discussed herein. 6 We begin with the black letter law that informs our VIII. decision. Unreported Income: Taxpayers are required to maintain records sufficient to show whether they are liable for Federal income taxes. Sec. 6001; Sec. 1.6001-1(a), and (e), Income Tax Regs. If a taxpayer fails to maintain records adequate to determine her correct tax liability, then the Commissioner is entitled to reconstruct her income by any reasonable method. See Erikson v. Commissioner, 937 F.2d 1548, 1553 (10th Cir.1991), affg. T.C. Memo.1989-552. Courts have long sanctioned the use of the bank deposits method as a reasonable method for computing income. E.g., Estate of Mason v. Commissioner, 64 T.C. 651, 656, 1975 WL 3104 (1975), affd. 566 F.2d 2 (6th Cir.1977). Furthermore, where a bank deposit analysis is used, the bank deposits are prima facie evidence of the receipt of income. See Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Where the Commissioner has determined that certain deposits are income, the 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 taxpayer has the burden of showing that the determination is incorrect. Estate of Mason v. Commissioner, supra at 657. Respondent's bank deposits analysis in this case shows that petitioner had unreported income during 2005 and 2006. The bank deposit analysis was performed by a tax compliance officer who started by totaling all of the deposits made to petitioner's bank accounts. To that total, the tax compliance officer added "cash back" from the deposits, and she subtracted known nontaxable sources, such as tax refunds and transfers between the accounts. Finally, the tax compliance officer subtracted non-taxable income amounts that were included in the deposits, such as money received from petitioner's father, and deposits of petitioner's husband's income. At trial, petitioner did not allege any error in respondent's income reconstruction using the bank deposits method. She sought to explain the cause of the unreported income determined by respondent. She testified that the unreported income was comprised of the deposits of cash, as opposed to checks, from her father, the deposit of cash repayments of loans to family members, the deposit of cash repayments of the cost of four trailers that she purchased for family members, the deposit of cash repayments of loans to employees, and the deposit of payroll checks that she cashed for family, friends, and employees. 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 8 explained that she came to the Court with the firm knowledge that she was right. Unfortunately, she also came to Court without any evidence. Her testimony was vague and rambling. With no evidence to support her testimony, we must approve respondent's determination that petitioner had unreported income in the amounts determined in the notice of deficiency, and we hereby do so. Deductions: Generally, deductions are a matter of legislative grace, and the taxpayer bears the burden of proving entitlement to any deduction claimed. Rule 142(a); Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). The Commissioner's determination disallowing a deduction is presumed correct, and the taxpayer bears the burden of proving that the Commissioner's determination is erroneous. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Although Section 7491(a) may serve to shift the burden of proof to the Commissioner under certain circumstances, it does not do so here for at least three reasons: Petitioner failed to raise the matter; petitioner failed to comply with substantiation requirements, see.Sec. 7491(a) (2) (A) and (B); and petitioner failed to introduce credible evidence, see Sec. 7491(a) (1). Accordingly, in this case, petitioner bears the burden of proof. 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 9 Section 162(a) allows as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. In contrast, personal, living, and family expenses are generally not allowable as deductions. Sec. 262(a). As mentioned above, the taxpayer is required to maintain records sufficient to establish the amount of her income and deductions. Sec. 6001; Sec. 1.6001-1(a) and (e), Income Tax Regs. However, if a taxpayer establishes that she has incurred a deductible expense, but she is unable to substantiate the exact amount of that expense, we are permitted, under the so-called Cohan rule, to estimate the deductible amount. See Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Before we may do so, the taxpayer must first provide evidence sufficient to establish a rational basis upon which an estimate can be made. E.g., Vanicek v. Commissioner, 85 T.C. 731, 743 (1985). Section 274(d) supersedes the Cohan rule and prohibits the Court from estimating a taxpayer's expenses with respect to certain items. See Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs. Thus, Section 274(d) (4) imposes strict substantiation requirements with respect to any listed property as defined in Section 280F(d) (4). "Listed property" specifically includes any 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 passenger automobile, any other property used as a means of transportation, such as trucks and other vehicles used for transporting persons or goods, and any cellular telephone (or other similar telecommunications equipment). See Sec. 280F(d) (4) (A); Sec. 1.280F-6T(b) (2), Temporary Income Tax Regs. In order to obtain a deduction for a listed property, a taxpayer must substantiate by adequate records or sufficient evidence to corroborate the taxpayer's own testimony the amount of the expense, the time and place of the use, and the business purpose of the use. Sec. 274(d); Sec. 1.274-5T(c), Temporary Income Tax Regs. Although a contemporaneous log is highly desirable, it is not an absolute sine qua non. Sec. 1.274-5T(c) (1) and (c) (3), Temporary Income Tax Regs. As was true in the case of the unreported income determined,by respondent, petitioner presented nothing to challenge respondent's disallowance of the deductions for other expenses and car and truck expenses claimed on the Schedules C filed with her returns. At trial, she merely attempted to attack the methodology of the tax compliance officer without offering anything specific to show that an error was made by the tax compliance officer. Once again, we must approve respondent's determination in the notice of deficiency disallowing the deductions claimed by 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 for other expenses and car and truck expenses, and we hereby do so. 11 IX. We must address one final point. Respondent bears the burden of production with respect to the accuracy-related penalty. Sec. 7491(c). In order to meet this burden, respondent must produce sufficient evidence establishing that it is appropriate to impose this penalty. Once respondent has done so, the burden of proof is upon petitioner to establish reasonable cause and good faith. Higbee v. Commissioner, 116 T.C. 438, 449 (2001). Here, respondent has satisfied his burden of production by showing that petitioner's understatement was substantial as it exceeded the requisite statutory amount. Petitioner did not mention the penalty under Section 6662(a) at trial, and she has not sought to establish that her failure to pay Federal income tax liability isn full was due to a reasonable cause. Accordingly, we sustain the imposition of the substantial understatement penalty. X In order to give effect to our disposition of the disputed issue, decision will be entered for respondent. Heritage Reporting Corporation (202) 628-4888 i 2 3 4 5 6 7 8 9 10 11 12 13 14 is 16 17 18 19 20 21 22 23 24 2s XI. 12 THIS CONCLUDES THE COURT' S ORAL FINDINGS OF FACT AND OPINION IN THIS CASE. (Whereupon at 9:05 a.m. the bench opinion in the above-entitled matter was concluded.) // // // // // // // // // // // // // // // // // // // // Heritage Reporting Corporation (202) 628-4888