TAX COURT OPINION

Case: In God and Trust, a.k.a. In God We Trust
Docket Number: 9939-04
Judge: Swift
Opinion Type: memo
Filed: 10/11/2005
Pages: 11

T.C. Memo. 2005-236 UNITED STATES TAX COURT NHUSS TRUST, ET AL.,¹ Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 9938-04, 9939-04, 10070-04, 10071-04. Filed October 11, 2005. I saa . Anthony V. Diosdi, for petitioners. John W. Strate and Thomas D. Greenaway, for respondent. MEMORANDUM FINDINGS OF FACT AND OPINION SWIFT, Judge: Respondent determined deficiencies and penalties in petitioners' Federal income tax as follows: 1 Cases of the following petitioners are consolidated herewith: 9939-04; RJ Pendergraft Trust, Joyce Pendergraft, Trustee, docket No. 10070-04; Riley and Joyce Pendergraft, docket No. 10071-04. In God We Trust, docket No. In God and Trust, a.k.a. BERVED OCT 1 1 2005 . - 3 - total amounts of $83,216 and $89,197 for 1999 and 2000, respectively, with respect to the tax adjustments relating to the three trusts, the gain on the sale of petitioners' residence, and the donation of the van. FINDINGS OF FACT Some of the facts have been stipulated and are so found. At the time the petition was filed, petitioners resided in Gilroy, California. Petitioners' Residence In 1972, petitioners purchased for $45,000 a residence located in San Jose, California. In 2000, petitioners sold the residence for $790,000. Set forth in the schedule below is a list of various categories of improvements that petitioners claim they made on their residence prior to its sale in 2000, the total improvement costs petitioners claim they incurred in each category, and the improvement costs relating to each category that respondent has allowed. Improvement Category of Residence Swimming pool Second story addition Interior remodeling Exterior Alarm Total Petitioners Claim $ 28,000 38,515 60,000 114,500 43,191 1,864 $286,070 Costs Respondent Has Allowed $28,000 6,245 16,665 1,022 3,527 825 $56,284 Donation of Van In October of 1996, petitioners purchased a 1996 Ford E150 conversion van. On October 30,·2000, petitioners donated the van to the Cancer Fund. At the time of the donation, the van had been used in petitioners' furniture business and had approximately 220,000 miles on it,3 and the van had, among other things, a cracked windshield and a broken fender. At the time of the donation, the Kelley Bluebook indicated generally a wholesale value of $14,.750 and a retail value of $20,425 for a van of the same year, make, and model. On November 10, 2000, Mr. Monte Sobrero appraised the van at $19,750. The record does not reflect who hired Mr. Sobrero, how much Mr. Sobrero was paid, or who paid Mr. Sobrero for his appraisal. The record is also unclear as to whether the van was still in petitioners' possession at the time of its appraisal by Mr. Sobrero. Mr. Sobrero's stated appraisal qualifications include 40 years as a craftsman in metal finishing and paint restoration, 30 years as a licensed automotive dealer in California, 15 years as owner-operator of an automotive shop, 10 years as owner-manager 3 Petitioner testified that the van was driven between 55,000 and 60,000 miles a year in petitioners' business. petitioners indicated that 72,000 miles. On their 2000 joint Federal furniture income tax return, in 2000 petitioners drove the van - 7 - Petitioner did not seek a second opinion regarding the legitimacy of NTS or its trust services. Petitioner did not investigate Mr. Fritz's background or attempt to confirm Mr. Fritz's qualifications. Petitioner did not consult his personal accountant about NTS's proposal that he establish trusts as a means to protect assets and reduce tax liabilities. . Petitioners did not research NTS. Instead, in addition to Mr. Fritz, petitioners relied on information provided to them by representatives of NTS and by other purported clients of NTS. Other than NTS's promotional materials, petitioners did not receive any written advice, such as a written opinion from an attorney, regarding the promotional materials received from NTS. On August 21, 1997, pursuant to information received by petitioners at the NTS seminar, petitioners formed RJ Pendergraft Trust using a trust indenture notarized by an NTS employee. • Petitioner was the grantor, and petitioners were named trustees of RJ Pendergraft Trust. On August 22, 1997, two additional trusts, NHUSS Trust and In God We Trust, were formed using declarations of trust notarized by an NTS employee, which declarations were prepared by NTS. NHUSS, Inc., was grantor, and petitioners were named trustees of NHUSS Trust. NHUSS Trust was grantor, and petitioners were named trustees of In God We Trust. ._ 9 _ furniture business was reported, and improper deductions were claimed for purported distributions to the other two trusts (RJ Pendergraft Trust and In God We Trust) and for alleged business expenses relating to petitioners' furniture business, all of which offset NHUSS Trust's reported income, and resulted in no tax liability being reported on NHUSS Trust's tax returns. On the 1999 and 2000 trust Federal income tax returns of RJ Pendergraft Trust and In God We Trust, various improper deductions were claimed for business and personal expenses that offset the trusts' reported income and that resulted in no tax liability being reported. The following schedules summarize the gross income, taxable income (loss), and tax liability reported on the above joint individual and trust Federal income tax returns for 1999 and 2000: • 1999 Date Filed 04/10/00 04/10/00 04/10/00 04/09/00 Type of Return Trust Trust Trust Joint Taxpayer NHUSS Trust In God We Trust RJ Pendergraft Trust Petitioners Gross Income $886,784 149,180 244,850 4,800 Reported Taxable Tax Income (Loss) Liability ($69) (62) (72) -0- -0- -0- -0- -0- 2000 Date Filed 04/10/01 04/10/01 04/10/01 04/09/01 Type of Return Trust Trust Trust Joint Taxpayer NHUSS Trust In God We Trust RJ Pendergraft Trust Petitioners Gross Income $805,884 169,425 696,857 4,800 Reported Taxable Income (Loss) Tax Liability ($73) (55) (60) -0- -0- -0- -0- -0- - 11 - In November of 2002, a second request was made by respondent for petitioners' books and records. During respondent's audit examination, petitioners did not provide to respondent the requested books and records. On April 2, 2004, respondent mailed to petitioners separate notices of deficiency for 1999 and 2000 with respect to NHUSS Trust, RJ Pendergraft Trust, and In God We Trust. In the notices of deficiency, respondent determined, among other things, that in 1999 and 2000 various claimed deductions (e.g., deductions relating to purported distributions made between the trusts and business expense deductions relating to the furniture business) were not properly substantiated, that in 1999 and 2000 rental income was not reported, and that in 1999 and 2000 various charitable deductions (including the charitable deduction for the donation of the van) claimed by RJ Pendergraft Trust were not properly substantiated. Also on April 2, 2004, respondent mailed to petitioners a notice of deficiency for 1999 and 2000 relating to petitioners' joint individual Federal income tax liabilities. Respondent determined, among other things, that for 1999 and 2000 the trusts' income and expenses were to be collapsed into petitioners' income and expenses and that for 2000 petitioners 4(...continued) treat petitioners' respect still in issue. to the tax adjustments relating to the three trusts as liability for the negligence penalty with - 13 - 2000 Trust Income and Expenses to Be Charged to Petitioners income adjustment income income NHUSS Trust In God We Trust Ordinary recapture income Rental Cost of goods sold Gross income adjustment Commission expense Car and trust expense Home office expense Meals and entertainment expense Travel expense Charitable deduction Amount $786,223 (169,425) 29,770 19,200 (265,153) (70,000) (27,334) (18,374)* (7,866) (2,766) (1,035) (336) * At trial, respondent stated that the parties agreed that petitioners' car and truck expenses in 2000 were $15,691. the car and truck expenses were $18,374, and we use the stipulated amount. The parties, however, stipulated in writing that The parties' stipulation does not separately identify any income and expenses of RJ Pendergraft Trust that are to be charged to petitioners. We understand, however, that the income and expenses of RJ Pendergraft Trust were appropriately collapsed into petitioners' income and expenses and are reflected in the above figures. Burden of Proof OPINION Generally, under section 7491(a), the burden of proof relating to factual issues relevant to an individual's tax liability may shift from the taxpayer to respondent where the taxpayer: (1) Has credible evidence to substantiate the item in question; (2) has maintained appropriate records relating - 15 - The basis of property is determined by its cost. Sec. 1012; Gandy v. Commissioner, T.C. Memo. 1997-532, affd. 199 F.3d 440 (5th Cir. 1999). Respondent contends that petitioners have failed to substantiate a cost basis in their residence above the $163,148 determined by respondent at trial and that petitioners therefore in 2000 realized $126,852 in capital gain on the sale.6 With one exception noted below, we regard all of the costs petitioners claim in excess of the $163,148 allowed by respondent as not sufficiently substantiated. We do allow petitioners an increase of $24,945 in their cost basis to reflect additional swimming pool improvement costs that are reflected in petitioners' contemporaneous records (Appendix B). Respondent himself has allowed all of the other costs reflected in Appendix B, and evidence relating to the swimming pool is as credible as the evidence relating to the other items allowed by respondent. We believe petitioners' contemporaneous records (Appendix B) substantiate a $24,945 increase in' the cost basis of the swimming pool to a total swimming pool cost of $31,190. The following schedule reflects our findings with regard to petitioners' cost basis in the residence at the time of its sale in 2000: 6 respondent allows, in capital gain. The sale price of $790,000, less the $163,148 cost basis less the $500,000 exemption, equals $126,852 - 17 - Petroleum Co. v. Commissioner, 104 T.C. 584, 637 (1995), affd. 142 F.3d 442 (9th Cir. 1998).' Six weeks after petitioners donated the van, petitioners' van was sold for an amount almost $13,000 less than Mr. Sobrero's appraisal. In his appraisal, Mr. Sobrero failed to account for the mileage of the van, which mileage, based on petitioner's testimony, would have been approximately 220,000 miles. On the evidence before us, we conclude that the fair market value of petitioners' van on the date of its donation, for purposes of the claimed charitable contribution deduction, was its $6,900 sale price in December of 2000. Section 6662(a) Negligence Penalty Under section 6662(a), a penalty is imposed on "any portion of an underpayment of tax required to be shown on a return" that is attributable to negligence or to disregard of the rules or regulations. Sec. 6662(b)(1). Respondent has asserted the negligence penalty against petitioners with respect to the adjustments collapsing the reported income and expenses of the three trusts into petitioners' income and expenses, the gain on the sale of petitioners' residence, and the donation of the van. We note that the American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 884, 118 Stat. 1632, effective for years beginning after 2004, added a provision in sec. 170 generally limiting a taxpayer's charitable deduction relating to a donation of a vehicle to the actual sales price of by the donee organization. Sec. 170(f) (12)(A)(ii). the vehicle when sold -- 19 - Under the circumstances, we find that petitioners' underpayments of Federal income taxes for 1999 and 2000 were due to negligence and that petitioners are liable for the section 6662(a) negligence penalty for 1999 and 2000 with respect to the adjustments relating to the three trusts, to the gain on the sale of petitioners' residence, and to the donation of the van. We have considered all arguments made herein, and, to the extent not addressed, we conclude that they are without merit or are irrelevant. To reflect the foregoing, Decisions will be entered under Rule 155. - 21 - Appendix C Improvements and costs testified to at trial without supporting documentation: Category of Installed alarm system Improvement Swimming pool Swimming pool and spa Cement deck Wrought Replaced wrought Solar panels Replaced solar panels iron fence iron fence Cost Q 1,864 $ 15,370 14,200 1,200 2,000 2,745 3,000 Second story addition Added second story, stairs, plumbing $ 60,000 Interior remodeling Re-carpeted (three times) Master bedroom, bathrooms, kitchen remodel Plumbing repairs Soft water system Re-tiled master bathroom shower Replaced water heater Chair molding, hallways Crown molding, living and dining rooms (two times), etc. roof lighting flower beds Exterior Plants, Replaced gutters Storage shed, Second storage shed Replaced sidewalk Replaced garage door Backyard electrical Added door from garage to yard Side yard electrical Garage exterior lighting Replaced roof Shutters Replaced redwood fence (two times) Total $ 15,000 87,000 2,000 750 5,000 2,000 750 2r000 $ 6,000 1,200 3,900 800 1,000 700 300 500 500 450 22,500 3,341 2r000 $ 1,864 38,515 60,000 114,500 43,191 $258,070 .