TAX COURT OPINION

Case: Lafayette Jonathan Manneh
Docket Number: 15815-13
Judge: Laro
Opinion Type: bench
Filed: 07/08/2015
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 LAFAYETTE JONATHAN MANNEH, Petitioner . v. COMMISSIONER OF INTERNAL REVENUE, Respondent ) ) ) ) ) ) ) ) ) Docket No. 15815-13. ORDER Pursuant to Rule 152(b), Tax Court Rules of Practice and Procedure, it is ORDERED that the Clerk ofthe Court shall transmit herewith to petitioner and to respondent a copy ofthe pages ofthe transcript ofthe trial in the above case before Judge David Laro at New York, New York, containing his oral findings of fact and opinion rendered at the trial session at which the case was heard. In accordance with the oral findings of fact and opinion, a decision will be entered under Rule 155. (Signed) David Laro Judge Dated: Washington, D.C. July 8, 2015 SERVED JUL - 9 2015 Capital Reporting Company 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Bench Opinion by Judge David Laro June 5, 2015 Lafayette Jonathan Manneh Docket No. 15815-13 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. This opinion is rendered pursuant to the authority of Internal Revenue Code Section 7459(b) and Rule 152 of the Tax Court Rules of Practice and Procedure. Hereinafter, section references will be to the Internal Revenue Code, and Rule references 16 will be to the Tax Court Rules of Practice and 17 18 19 20 21 22 23 24 25 Procedure. Background This is a deficiency case where respondent issued a notice of deficiency to petitioner for the tax year 2010. In that notice of deficiency, respondent determined a deficiency in federal income tax of $7,815, and an accuracy-related penalty under Section 6662(a) of $1,563. The deficiency relates to the disallowance of 866.488.DEPO wwk.CapitalReportingCompany.com Capital Reporting Company 4 1 2 expenses petitioner claimed on his Schedule C, Profit or Loss From Business, and Schedule A, Itemized 3 Deductions, of the Form 1040, U.S. Federal Income Tax 4 Return, filed for the tax year 2010. On his Schedule 5 6 7 C, petitioner claimed gross income of $9,000 and total expenses of $24,880, for a business loss of $15,880. On his Schedule A, petitioner claimed 8 miscellaneous deductions of $14,750. Respondent 9 disallowed the entire amount of petitioner's Schedule 10 11 12 13 14 15 16 17 A deductions, as well as the following Schedule C expenses: utilities expenses of $3,500; taxes and licenses expenses of $2,000; rent or lease expenses of $4,000; office expenses of $2,000; cost of goods sold of $9,850. The notice of deficiency also claimed that for the 2010 tax year, petitioner failed to report a taxable jtate refund, credit or offset of $2,271, and taxable interest income of $12. 18 Petitioner bears the burden of proof to establish 19 20 21 22 23 24 25 entitlement to the claimed expenses pursuant to Rule 142(a). At trial, petitioner did not produce any documentation to substantiate his claimed deductions or expenses. At the time the petition was filed, petitioner resided in New York with two minor children. In addition to his regular employment, petitioner had a 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 5 tax preparation business. Petitioner conducted his tax preparation business out of his place of residence. On April 4, 2013, respondent issued petitioner a notice of deficiency. On July 3, 2013, petitioner timely filed a petition disputing the determinations in the notice of deficiency. Discussion I. Schedule C and Schedule A Deductions The taxpayer has the burden of proof with respect to the determinations made in the notice of deficiency in proving his entitlement to deductions. Deductions are a matter of legislative grace. Welch v. Helvering, 290 U.S. 111, 115 (1933); Rule 142(a). Section 162(a) allows as a deduction all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. A trade or business expense is ordinary for purposes of Section 162 if it is normal or customary within a particular trade, business, or industry, and is necessary if it is appropriate and helpful for the development of the business. With respect to the burden of proof, Section 7491(a) provides that the Commissioner may have the burden of proof under certain circumstances. The · 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 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 provisions of Section 7491 do not apply because petitioner did not move to shift the burden, and we conclude that the burden of proof remains upon petitioner. Petitioner testified that he incurred expenses in operating his tax preparation business. He testified that he purchased a computer, tax preparation software, and office supplies and created a mini-office in his residence. In addition, petitioner testified he sometimes traveled in order to provide his clients tax preparation services. However, he could not provide any documentation to substantiate these purported business expenditures. Furthermore, petitioner lacked adequate business books and records to substantiate how he used his personal residence for business use or to show his purported business-related travel expenses. 18 Petitioner provided no other evidence to substantiate 19 20 21 any of his claimed business expenses. At trial, petitioner testified but failed to substantiate his claimed Schedule C deductions for 22 utilities, taxes and licenses, rent expenses, office 23 24 25 expenses, and cost of goods sold. In addition, petitioner failed to substantiate his claimed Schedule A deductions for unreimbursed employee 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 expenses. Accordingly, we sustain respondent's disallowance of petitioner's Schedule C and Schedule A expenses for the tax year 2010. II. Unreported Taxable Interest and State Taxable Refund, Credit, or Offset As a general rule, gross income includes a refund of state income tax in the year received, to the extent that the payment of such tax was claimed as a deduction in a prior taxable year, which resulted in a reduction of federal income tax. See Sec. lll(a); Kadunc v. Commissioner, T.C. Memo. 1997- 92. Section 61(a)(4) provides that interest income is generally taxable. In unreported income cases, the Commissioner in some circumstances may be required to show a "minimal evidentiary foundation" for the determined deficiencies, which may consist of evidence linking the taxpayer to an income-producing 19 activity. Phillips v. Commissioner, T.C. Memo. 2008- 20 21 22 23 24 25 9. Where the Commissioner presents some evidence that the taxpayer has received unreported income, the burden of proof shifts to the taxpayer to show that the Commissioner's determination was arbitrary or in error. Id. Here, respondent provided account transcripts 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 8 1 2 3 4 5 6 7 8 9 10 11 12 13 showing that the New York State Department of Taxation and Finance issued to petitioner a Form 1099-G, Certain Government Payments of $2,271 for the 2010 tax year. Respondent provided a certified true copy of the Form 1099-G, as well as a certified true copy of petitioner's refund history from his 2009 New York State tax return. The account transcripts further show that Municipal Credit Union issued to petitioner a Form 1099-INT, Interest Income of $12 for the 2010 tax year. Thus, respondent has established his minimal evidentiary foundation, shifting the burden of proof to petitioner with respect to the interest and state tax refund income. / 14 Petitioner failed to produce any credible evidence 15 with respect to these issues. Accordingly, we 16 17 18 19 20 21 22 23 24 25 sustain respondent's determination of additional interest and state tax refund income. s= III. Accuracy-related Penalty Under Section 6662(a) Respondent determined that petitioner is liable for Section 6662 accuracy-related penalty of $1,563. N Section 6662(a) imposes a 20% accuracy-related penalty on any portion of any underpayment of tax that is attributable to (1) negligence or disregard of the rules and regulations, or (2) any substantial understatement of income tax. The Commissioner bears 866.488.DEPO www.Capita1ReportingCompany.com Capital Reporting Company 9 1 2 3 4 5 6 7 8 9 10 11 the burden of producing sufficient evidence to support imposing an accuracy-related penalty. See Sec. 7491(c). Once the Commissioner has actabliched this burden of production, the burden of proof shifts to the taxpayer to prove that the penalty is improper. See Sec. 6662 (d) ; Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Petitioner's deficiency for the tax year 2010 is $7,815. This amount exceeds the greater of $5,000 or 10% of the tax required on the 2010 return. As a result, respondent has met his burden of production 12 with respect to a Section 6662(a) penalty for 13 14 15 16 substantial understatement of tax. Section 6664(c) provides that an accuracy- related penalty decc not ply to any portion of the underpayment with respect to which the taxpayer acted 17 with reasonable cause and in good faith. The 18 19 20 21 22 23 24 25 determination of whether the taxpayer acted in good faith is made on case-by-case basis, CG account all A facts and circumstances. taking into Sec. 1.6664- ) 4 (b) (1), Income Tax Regs. The taxpayer has the burden of proof to show that the imposition of the penalty is inappropriate. See Rule 142; Higbee v. Commissioner, 116 T.C. at 446-447. Here, petitioner failed to prove that the imposition of the penalty is 866.488.DEPO www.CapitalReportingCompany.com Capital Reporting Company 10 inappropriate. Accordingly, we sustain respondent's imposition and find petitioner liable for the accuracy-related penalty under Section 6662 (a) regarding his underpayment of tax for the 2010 tax year. As a result of our finding, we therefore do not need to consider either of respondent's alternate grounds for imposing the Section 6662(a) accuracy- related penalty. V. Conclusion As a result of this opinion, a decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion. (Whereupon, at 8:14 a.m., in the above- entitled matter was concluded.) 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