TAX COURT OPINION

Case: Thomas Nguyen
Docket Number: 11307-07S
Judge: Colvin
Opinion Type: bench
Filed: 06/18/2008
Pages: 13

RCt R 1' 1 11 VICE UNITED STATES TAX COURT WASHINGTON , DC 2021 7 THOMAS NGUYEN, Petitione r .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 of the above case b.efore Special . Trial Judge Robert N . Armen, Jr . at New York, New York (Westbury) on June 5, 2008., containing his oral findings of fact and opinion rendered at the conclusion of the trial . In accordance with the oral findings of fact and opinion, decision will be entered under Rule 155, Tax Court Rules of Practice and Procedure . (Signed ) Robert N . Armen, Jr. Special Trial Judg e Dated : Washingtpn, D .C . June 18, 2008 SERVED JUN 2 0 2008 iw~ 1 Bench Opinion by Special Trial Judge Robert N . Armen Jr . 2 June 5, 200 8 3 Nguyen v . Commissioner Docket No . 11307-07S 4 . THE COURT : The Court has decided to render oral 5 findings of Fact and opinion in this case, and the 6 following represents the Court's oral findings of Fac t 7 and Opinion . The oral findings of fact and opinion shall not be relied upon as precedent in any other case . This proceeding was heard as a Small Tax Cas e 10 pursuant to the-provisions of Section 7463 of th e 11 Internal Revenue Code of 1986, as amended, and Rules 170 12 through 175 of the Tax Court Rules of Practice an d 13 Procedure . 14 This bench opinion is made pursuant to the 15 authority granted by Section 7459(b) of the Interna l 16 Revenue Code of 1986, as amended, and Rule 152 of the Tax 17 Court Rules of .Practice and Procedure . . 18 Hereinafter in this bench opinion, and unless 19 otherwise indicted, All section numbers refer to th e 20 Internal Revenue Code, as amended, and in effect for 2002 21 and 2003, the taxable the years in issue, and all Rul e 22 numbers refer to the Tax Court Rules of Practice and 23 Procedure . 24 Thomas Nguyen appeared on his own behalf . Marc L . 25 . Caine appeared on behalf of Respondent . Heritage Reporting Corporation (202) 628-488 8 1 Respondent determined deficiencies in Petitioner's 2 Federal income taxes for 2002 and 2003 in the amounts of 3 $7,052 and $7,846, respectively . (Parenthetically, we 4 note that Respondent has-credited Petitioner for the 5 amounts withhc 'ld from his wages insofar as his ultimat e income tax liabilities for 2002 and 2003 are concerned . However, we note further that the determination of a statutory deficiency does not take such withheld amount s 9 into account . See Section 6211(b)(1) . ) 10 Respondent also . determined, for each of th e 11 taxable years in issue, additions to tax under Section 12 6651(a)(1) for failure to file and under Sectio n 13 6651(a)(2) for failure to pay . 14 Petitioner concedes that he received wages from 15 the City of New York in 2002 and-2003 in the amounts of 16 $47,355 and $51,946, respectively . Petitioner does not 17 contest, and therefore implicitly concedes, that Federal 18 income tax was withheld from his wages in the amount s 19 determined by Respondent in the notice of deficiency, and 20 not in any greater amounts . Respondent concedes tha t 21 Petitioner is entitled to an education credit in the 22 amount of $8 for 2002 . 23 After the parties' concessions, the issues for 24 decision .by the Court are as follows : 25 (1) Whether Petitioner is entitled to Schedule C Heritage Reporting Corporatio n (202) 628-4888 5 1 business deductions in the aggregate amount of $9,700 fo r 2 2002 ; 3 (2) whether Petitioner is entitled to Schedule C 4 business deductions in the aggregate amount of $11,071 5 for 2003 ; 6 (3) whether Petitioner is liable for additions to 7 tax under Section 6651(a)(1) for failure to file for 2002 8 and 2003 ; an d 9 (4) whether Petitioner is liable for additions to 10 tax under Section 6651(a)(2) for failure to pay for 2002 11 and 2003 . 12 Some of the facts have been stipulated, and they 13 are so found . Petitioner resided in the State of New 14 York at the time that the petition was filed with the 15 Court . 16 Petitioner is, by profession, a teacher . During -- 17 2002 and 2003, Petitioner was employed by the City of Ne w 18 York, and worked full-time, receiving wages in the 19 amounts of $47,355 and $51,946, respectively . Federal 20 income tax of $5,323 and $4,919 was withhold fro m 21 Petitioner's wages in 2002 and-2003, respectively, by the IN 22 City of New York . 23 Petitioner was also employed on a part-time basis 24 by Long Island University . The record does not disclose 25 the amount of wages that Petitioner may have received in Heritage Reporting Corporatio n (202) 628-4888 6 1 2002 and 2003 . Petitioner failed to file a Federal 2 income tax return for either 2002 or 2003 . 3 By separated notices dated February 20, 2007 , 4 Respondent determined deficiencies in, and additions to, 5 Petitioner's Federal income taxes for 2002 and 2003 . The 6 deficiencies are attributable to Petitioner's failure to 7 report his wages from the City of New York on income tax 8 returns for 2002 and 2003 . 9 The additions to tax under .Section 6651(a) are 10 attributable to Petitioner's failure to file returns for 11 2002 and 2003 . Finally, the additions to tax unde r 12 Section 6651(a)(2) are attributable to Petitioner' s 13 failure to pay tax, and'they are based on substitutes for 14 returns prepared by Respondent pursuant to Sectio n 15 6020(b) . See Section 6651(g) . 16 Petitioner timely filed a petition fo r 17 redetermination on May 21, 2007 . On December 26, 2007, 18 Respondent received a Form 1040'for 2002 from Petitioner . 19 On or about January 15,'2008, Respondent received a Form 20 1040 for 2003 from Petitioner . Respondent did no t 21 : process either Petitioner's Form 1040 for 2002 or 22 Petitioner's Form 1040 for 2003 . 23 On his Form 1040 for 2002, Petitioner reported the 24 wages that he received from the City of New York working 25 as a teacher, and he claimed an education credit in the Heritage Reporting Corporatio n (202) 628-4888 7 1 amount of $8 . Petitioner attached to his Form 1040 a 2 Schedule C, Profit or Loss from Business . 3 On his Schedule C, Petitioner reported no gross 4 receipts or sales, but claimed a total of $9,700 o f 5 expenses, consisting of $2,000 for legal and professional 6 services, $4,000 for rent, and $3,700 for travel . Petitioner described the principal business or profession as "Marketor [sic] and Business Developer", and he listed the business name as U Vinaworld Telecom 10 LLC", and the business address as his apartment . 11 On his Form 1040 for 2003, Petitioner reported th e 12 wages that he received from the City of New York working 13 as a teacher . Petitioner attached to his Form 1040 a 14 . Schedule C, Profit or Loss From Business . 15 On this Schedule C, Petitioner reported no gross 16 receipts or sales, but claimed-a total of $11,071 o f 17 expenses, consisting of $320 for legal and professional 18 services, $5,385 for rent, and $5,366 .for travel . Th e 19 other information on the Schedule C corresponded with the 20 Schedule C for 2002 . 21 We turn now to several fundamental principles of 22 tax litigation that inform our disposition of th e 23 disputed issues . 24 First, as a general rule, the Commissioner's 25 determinations are presumed correct, and the taxpayer Heritage Reporting Corporatio n (202) 628-4888 1 bears the burden of proving that those determinations are 2 erroneous . Rule 142(a) .- 3 This principle was firmly established by the 4 United States Supreme Court as early as 1933, and ha s 5 been reaffirmed by the Supreme Court as recently as 1992 . 6 See INDOPCO Inc . v . Commissioner , 503 U .S . 79, 84 (1992) ; 7 Welch v . Helvering , 290 U .S . 111, 115 (1933) . Although Section 7491(a) may serve to shift the 9 burden of proof to the Commissioner , that section has no 10 application to the present case in view of the fact that : 11 (1) Petitioner has not asserted its applicability ; (2 ) 12 Petitioner has failed to demonstrate that he maintained 13 the requisite books and records and that he full y 14 cooperated with reasonable requests by Respondent, see 15 Sec . 7491 ( a)(2) ; and ( 3) Petitioner failed to introduce 16 credible evidence sufficient to establish a prima facie 17 case, see Sec . 7491 ( a)(1) . 18 Second , deductions are a matter of legislative 19 grace, and the taxpayer bears the burden of proving that 20 he or she is entitled to any deduction claimed . Rule 21 . 142 ( a) ; Deputy v . duPont , 308 U .S . 488, 493 ( 1940) ; Ne w 22 23 Colonial Ice Co . v . Helvering , 292 U .S . 41, 440 (1934) ; Welch v . Helvering , supra . This includes the burden of 24 substantiation . Hradesky v . Commissioner , 65 T .C . 87, 90 25 (1975 ), affd . per curiam 540 F .2d 821 ( 5th Cir . 1976). Heritage Reporting Corporation (202) 628-4888 1 Third, the Court is not bound to accept as gospel, 2 the unverified and undocumented testimony of a taxpayer . 3 4 6 9 Hradesky v . Commissioner , supra ; Tokarski v . Commissioner , 87 T .C . 74, 77 (1986) . Indeed, in Krupp v . Commissioner , T .C . Memo . 2000-148, we stated that "As a trier of fact, it is our duty to listen to the testimony, observe the demeanor of the witnesses, weigh the evidence, and determine what we believe . " Similarly, in Diaz v . Commissioner , 58 T .C . 560 , 10 564 (1972), we observed that the process of distilling 11 truth from the testimony of witnesses , whose demeanor we 12 observe and whose credibility we evaluate , is the daily 13 grist of judicial life . 14 Based on these principles, we will be constraine d 15 to sustain Respondent's disallowance of deductions to the 16 extent that Petitioner does not sustain his burden o f 17 proof . 18 Petitioner does not sustain his burden of proo f 19 through the simple expedient of proclaiming that he has 20 .,proof ; that he has satisfied all requirements imposed by 21 law, and that he is entitled to the deductions claimed . 22 See Seaboard Commercial Corp . v . Commissioner , 28 T .C . 23 1034, 1051 (1957) (a taxpayer's income tax return is a 24 self-serving declaration that may not be accepted a s 25 proof for the deduction or exclusion claimed by the Heritage Reporting Corporatio n (202) 628-4888 1 0 1 taxpayer) ; Halle-v . Commissioner ,'7 T .C . 245 (1946) (a 2 taxpayer's return is not self-proving as to the truth of 3 its contents), affd . 175 F .2d 500 (2nd Cir . 1949) . 4 After all, a tax return is merely a statement of 5 the taxpayer's claim ; (cid:127)the return is not presumed to be 6 correct . Wilkinson v . Commissioner , 71 T .C . 633, 639 , (1979)( ; Roberts v . Commissioner , 62 T .C . 834, 837 (1974) . We turn now to the substantive law . Sectio n 9 -162(a) permits a deduction for the ordinary and necessary 10 expenses of carrying on a trade or business . In order 11 for a taxpayer to deduct expenses under Section 162(a), 12 the expenses must relate to a trade or busines s 13 'functioning at the time the expenses were incurred . See, 14 e .g ., Hardy v. . Commissioner , 93 T .C . 684, 687 (1989) , 15 affd . in part and remanded in part per order (10th Cir . 16 October 29, 1990 ) 17 A taxpayer is not carrying on a trade or business 18 for purposes of Section 162(a) until the business i s 19 functioning as a going concern and performing the 20 activities for which it was organized . Richmond 21 Television Corp . v . United States , 345 F .2d 901, 907 (4th 22 Cir . 1965) . 23 Carrying on a_trade or business requires a showing .24 of more than initial research into .; or investigation o f 25 business potential . Dean v . Commissioner , 56 T .C . 895, Heritage Reporting Corporatio n (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 1 1 902 (1971) ; McKelvey v . Commissioner , T .C . Memo . 2002-63 , affd . 76 Fed . Appx . 806 (9th Cir . 2003) . Business . operations must have actually commenced . Dean v . . Commissioner , supra at 90 .2 ; . McKelvey v . Commissioner , supra . Startup expenditures must be capitalized and ma y be amortized under Section 195 once the activity begins . The record in the instant case demonstrates tha t Petitioner did-not receive a single dollar of gros s receipts or sales in 2002 and 2003 . At trial, Petitioner , testified that he abandoned his Schedule C activit y sometime after the years in issue . _ In short, Petitioner provided no persuasiv e testimony that his activity had actually begun t o function as a going concern and to perform the activitie s for which it was being organized . 'Accordingly, we .sustain the Respondent' s disallowance of the deductions in issue . Next, we address-the addition to tax under Sectio n 6651(a)(1) for-failure to timely file . Section 6651(a ) authorizes the imposition of an addition to tax fo r failure to file a timely return unless the taxpaye r proves that such failure is dueto reasonable cause and - is not due to willful neglect . See United States v . Boyle , 469 U .S . 241, 245 (1985) ; Harris v . Commissioner , T .C . Memo . 1998-332 . Heritage Reporting Corporation (202) 628-4888 12 1 Section 7491(c) places the burden of production on 2 the commissioner to make, in effect, a prima facie cas e 3 that the addition to tax is appropriate . 4 Here Respondent has satisfied that burden by 5 demonstrating that Petitioner's 2002 Form 1040 was no t received until December 2007, and that Petitioner's 2003 Form 1040 was not received until January 2008 . Petitioner therefore bears the burden of proving that his failure to file was due to reasonable cause an d 10 not to willful neglect . Higbee v . Commissioner , 116 T .C . 11 . 438 (2001) . 12 In the instant case,-'the only "defense" offered by 13 Petitioner for his failure to file returns relates to his 14 professed belief that he had no, tax liability for either 15 of the taxable years in issue . 16 . However, Petitioner's professed belief does not 17 constitute reasonable cause . Knight v . Commissioner , 18 T .C . Memo . 1984-376 . Accordingly, we sustai n 19 Respondent's determination of the addition to tax . 20 Finally, we turn to the addition to tax under 21 Section 6651(a)(2) . Section 6651(a)(2) imposes an 22 addition to tax for'failure .to pay the amount of ta x 23 shown on a return . The addition to tax applies only whe n 24 the amount of tax is shown on areturn . Cabirac v . 25 Commissioner , 120 T .C .163, 170 (2003) . Heritage Reporting Corporatio n (202) 628-4888 13 1 Petitioner did not file returns for 2002 and 2003 . 2 However, Respondent made substitutes for returns (SFR ) 3 for those years pursuant to Section 6020(b) that qualify 4 as returns for purposes of Section 6651(a)(2) . 5 A return made by the Secretary under Sectio n 6 6020(b) is treated as the return filed by the taxpaye r 7 for purposes of determining the amount of the addition to 8 tax under Section 6651(a)(2) . Sec . 6651(g)(2) . Wheeler 9 v . Commissioner , 127 T .C . 200, 208-209 (2006), affd . 521 10 F .3d 1289 (10th Cir . 2008) . 11 Respondent has satisfied his burden of production 12 under Section 7491(c) by showing that SFRs were prepared 13 . and that Petitioner did not pay the tax shown thereon . 14 Petitioner therefore bears the burden of proving that his 15 failure to pay was due to reasonable cause and not t o 16 willful neglect . Higbee v . Commissioner , supra . 17 Petitioner again contends that his failure to pay 18 should be excused by his professed belief that he had no 19 tax liability for the years in issue . However , 20 Petitioner's professed belief does not constitut e 21 reasonable cause . See Knight v . Commissioner , T .C . Memo . 22 1984-376 . Accordingly, we sustain Respondent' s 23 determination of the addition to tax . 24 In order to give effect to our disposition of the 25 disputed issues, as well as the parties' concessions, Heritage Reporting Corporatio n (202) 628-4888