TAX COURT OPINION

Case: Mark C. Hasson & Suzanne M. Pagano
Docket Number: 15265-17S
Judge: Carluzzo
Opinion Type: bench
Filed: 02/04/2019
Pages: 9

UNITED STATES TAX COURT WASHINGTON, DC 20217 DRC MARK C. HASSON & SUZANNE M. PAGANO, ET AL., Petitioners, v. ) ) ) ) ) Docket No. 15265-17S, 25142-17S COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ORDER 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 petitioners and to respondent a copy of the pages of the transcript of the trial in the above cases before Chief Special Trial Judge Lewis R. Carluzzo at Los Angeles, California, 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, an appropriate order will be issued, and decision will be entered under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. February 4, 2019 SERVED Feb 05 2019 Bench Opinion by Special Trial Judge Lewis R. Carluzzo 3 December 6, 2018 Mark C. Hasson & Suzanne M. Pagano v. Commissioner of Internal Revenue Docket Nos. 15265-17s and 25142-17S THE COURT: The Court has decided to render oral findings of fact and opinion in this consolidated case and the following represents the Court's oral findings of fact and opinion (bench opinion). Unless otherwise noted, section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for the relevant period, and Rule references are to the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) and Rule 152. Each case for the redetermination of a deficiency consolidated in this proceeding is a small tax case subject to the provisions of section 7643 and Rules 170 through 175. Except as provided in Rule 152(c), this bench opinion shall not be cited as authority, and pursuant to section 7463(b) the decision entered in this case shall not be treated as precedent for any other case. There was no appearance by or on behalf of petitioners. Albert B. Brewster appeared on behalf of respondent. 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 cribers (973J4062250|operations@escribetsnet|www.escribersaet In a notice of deficiency dated April 20, 2017, 4 respondent determined a deficiency in petitioners' 2014 Federal income tax (2014 notice). In the 2014 notice respondent also imposed a section 6651(a) addition to tax and a section 6662(a) penalty. In a notice of deficiency dated August 29, 2017, respondent determined a deficiency in petitioners' 2015 Federal income tax (2015 notice). In the 2015 notice, respondent imposed a section 6651(a) addition to tax and a section 6662(a) penalty. At the trial, conducted in Los Angeles, California, on December 4, 2018, respondent made a claim for an increased deficiency for 2015, see sec. 6214(a), and made an oral motion to conform the pleadings to the proofs. See Rule 41(b). The issues for decision for 2014 are: (1) whether petitioners overstated expense deductions claimed on a Schedule C, Profit or Loss from Business, included with their 2014 joint Federal income tax return (2014 return); (2) whether petitioners are liable for a section 6651(a) addition to tax; and (3) whether petitioners are liable for a section 6662(a) accuracy related penalty. The issues for decision for 2015 are: (1) whether petitioners understated gross receipts shown on a Schedule C included with their 2015 joint Federal income tax return (2015 return); (2) whether petitioners 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 (97334062250loperationsøescribersmet|www.esaibersmet overstated expense deductions claimed on that Schedule C; 5 (3) whether petitioners are liable for a section 6651(a) addition to tax; (4) whether petitioners are liable for a section 6662(a) penalty; and (5) whether petitioners are liable for an increased deficiency as claimed by respondent at the trial. All of the facts recited in respondent's Rule 91(f) motions are found pursuant to procedures contemplated by that Rule. Some of those facts will be summarized in the following portions of this bench opinion. When the petition was filed in this case, petitioners lived in California. References to petitioner, are to Mark Hasson. According to the Schedule C attached to petitioners' 2014 and 2015 returns, during each year petitioner was in the trade or business of income tax return preparation. He conducted that business as a sole proprietor and reported the income and deductions attributable to that business on those Schedules C. For each yea fÒrespondent disallowed all, or portions of, some of the deductions claimed on the Schedule C. For 2015, after conducting a bank deposit analysis of the four bank accounts maintained by petitioners during that year, respondent determined that petitioners' Schedule D income was understated by 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 (973)406-2250loperation59escribersmet|www.esaibersmet 6 $38,333.03. Of that amount, $23,011, is shown as an adjustment in the 2015 notice, and the balance is supported by evidence respondent introduced at trial. Several computational adjustments are made in both the 2014 notice and the 2015 notice, but those adjustments will not be addressed in this bench opinion. Schedule C Dedúctions - 2014 and 2015 As we observed in opinions too numerous to count, deductions are a matter of legislative grace, and the taxpayer bears the burden of proof to establish entitlement to any claimed deduction. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v Commissioner, 292 U.S. 435, 440 (1934). (Nothing in the record suggests that the provisions of section 7491(a) are applicable, and we proceed as though they Àre not.) This burden requires the taxpayer to substantiate deductions claimed by keeping and producing adequate records that enable the Commissioner to determine the taxpayer's correct tax liability. Section 6001; Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff'd per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v. Commissioner, 43 T.C. 824, 831-832 (1965). A taxpayer claiming a deduction on a Federal income tax return must demonstrate that the deduction is allowable pursuant to some statutory provision and must further substantiate 1 2 3 4 5 6 7 8 9 10 12 13 14 15 16 17 18 19 20 21 22 23 24 25 pn)406-2250loperationseescrbers.net|www.esenbers.net that the expense to which the deduction relates has been 7 paid or incurred. See section 6001; Hradesky v. Commissioner, 65 T.C. at 90; section 1.6001-1(a), Income Tax Regs. If petitioners kept adequate records to substantiate their entitlement to the deductions here in dispute, then they have not provided them to respondent or to the Court. Furthermore, they did not appear at trial and they did not submit any evidence by stipulation or otherwise to support their claim to the deductions here in dispute. That being so, petitioners have failed to establish that they are entitled to the deductions disallowed in whole or in part in each notice. Respondent's disallowances of those deductions, or portions of those deductions, are sustained. 2015 Understatement of Income According to the 2015 notice, petitioners understated their 2015 income by $23,011. According to a bank deposit analysis of petitioners' four banks accounts conducted by respondent's agent, the understatement totaled $38,333.03. See DiLeo v. Commissioner, 96 T.C. 858 (1991); Tokarski v. Commissioner, 87 T.C. 74 (1986). Respondent's evidence is sufficient to connect petitioners to an income gener-ating activity, namely, petitioner's income tax return preparation business. See sec. 61(a)(1) 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 (9733406-2250|operationseescribetsnetimvw.esenbersnet and (2); Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979). Because respondent has linked petitioners to an income generating activity, the burden of proof is on them to establish that respondent's adjustment increas1ng 8 petitioner's Schedule C income as shown in the 2015 notice is erroneous. This they have failed to do. Otherwise, the burden of proof is on respondent to establish an understatement of income greater than shown in the 2015 notice because that additional understatement presumably would result in an increased deficiency. See Rule 142(a). The 2015 bank deposit analysis offered into evidence by respondent, supported by the testimony of the agent that conducted the analysis satisfies respondent's burden. From what has been submitted, we find that petitioners understated their 2015 income by $38,033.03. To allow our finding to be given effect, respondent's oral motion to conform the pleadings to the proofs made at trial will be granted. As noted at trial, however, because of petitioners' section 7463 election and the intended informality of proceedings subject to that election, respondent need not submit an amendment to his answer. Section 6651 additions to tax Respondent has imposed a section 6651(a) addition to tax for each year in issue. That addition to 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 (973)40 2250|operationseescribersmet|www.escribersnet tax is sometimes referred to as a "late filing penalty". 9 Respondent bears the burden of production with respect to the imposition of the section 6651(a) additions to tax here in dispute. See sec. 7491(c). Petitioners' 2014 return was not filed when due. Neither was petitioners' 2015 return. Nothing in the record suggests that petitioners had reasonable cause for failing to file either return when due, and respondent bears no burden to demonstrate that there was none. See Higbee v. Commissioner, 116 T.C. 438 (2001-). It follows that petitioners are liable for a section 6651(a) addition to tax for each year in issue, and we so find. Section 6662(a) Penalty The underpayment of tax, understatement of income tax, and deficiency (or increased deficiency as appropriate) are all computed in the same manner. See secs. 6211, 6662(d)(2)(A) and 6664(a). For each year the amount of the understatement of income tax exceeds $5,000, which means that the understatement of income tax is a substantial understatement of income within the meaning of section 6662(b) (2) and (d). That in turn means that petitioners are liable for the penalty for each year if respondent has otherwise met his burden of production to establish that the pénalty is supported by the requisite supervisory approval. See secs. 6751 and 7491(c); Chai v. 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 cdbers (973)406-2250|operatiorneescribersnetlwww.escribersaet. 10 Commissioner, 851 F.3d 190 (2d Cir. 2017); Graev v. Commissioner, 149 T.C. (Dec. 20, 2017). The record contains a civil penalty approval form for each year. Respondent's burden of production has been met, and petitioners are liable for a section 6662(a) penalty for each year in issue. To reflect the foregoing, an appropriate order will be issued, and decision will be entered under Rule 155. This concludes the Court's bench opinion in this case. (Whereupon, at 11:36 a.m., 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 ) cribers (973J406-22501operations@escribersnet|wwwescribers.net