internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi b01-plr-126773-01 date date x date date this responds to a letter dated date and subsequent correspondence submitted on behalf of x requesting relief under sec_1362 of the internal_revenue_code facts x was incorporated on date and began doing business date the shareholders of x desired that x elect s_corporation treatment effective on date but the election to be treated as an s_corporation was not timely filed accordingly x requests a ruling that it will be treated as an s_corporation effective date law and analysis sec_1362 provides that a small_business_corporation may elect to be an s_corporation sec_1362 provides the rule on when an s election will be effective sec_1362 provides in relevant part that if an s election is made within the first two and one-half months of a corporation's taxable_year then the corporation will be treated as an s_corporation for the year in which the election is made under sec_1362 however if an s election is made after the first two and one-half months of a corporation's taxable_year then that corporation will not be treated as an s_corporation until the taxable_year after the year in which the s election is filed sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply plr-126773-01 x did not file an election to be treated as an s_corporation under sec_1362 x has however established reasonable_cause for not making a timely s election and is entitled to relief under sec_1362 conclusion based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be treated as an s_corporation effective date within days from the date of this letter x should submit a properly completed form_2553 effective date with a copy of this letter attached to the relevant service_center except as specifically set forth above no opinion is expressed or implied as to the federal_income_tax consequences of the transaction described above under any other provision of the code specifically no opinion is expressed concerning whether x is in fact an s_corporation for federal tax purposes this ruling is directed only to the taxpayer s requesting it sec_6110 of the code provides that it may not be used or cited as precedent s dianna k miosi sincerely chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


t c memo united_states tax_court estate of david j dickerson deceased dorothy dickerson executor and dorothy dickerson et al petitioners v commissioner of internal revenue respondent docket nos filed date audrey j orlando for petitioner lavonne d lawson for respondent memorandum opinion vasquez judge respondent determined the following deficiencies in additions to and penalties on petitioners' federal income taxes cases of the following petitioners are consolidated herewith michael and beverly michoff docket no michael michoff jr and kimberly l michoff f k a kimberly colombo docket no estate of david dickerson and dorothy dickerson the dickersons year deficiency penalty sec_6662 dollar_figure big_number dollar_figure big_number michael michoff sr and beverly michoff michoff srs year deficiency additions to tax penalty sec_6653 a sec_6661 sec_6662 dollar_figure big_number big_number big_number dollar_figure -0- -0- dollar_figure big_number -0- -0- -0- -0- dollar_figure michael michoff jr michoff jr year deficiency sec_6651 sec_6653 sec_6654 sec_6661 sec_6662 additions to tax penalty dollar_figure big_number big_number big_number dollar_figure big_number -0- -0- 1dollar_figure big_number -0- dollar_figure big_number -0- -0- -0- -0- -0- -0- dollar_figure -0- -0- dollar_figure michael michoff jr and kimberly michoff f k a kimberly columbo together known as michoff jrs year deficiency penalty sec_6662 dollar_figure dollar_figure kimberly colombo year deficiency addition_to_tax penalty sec_6653 a sec_6661 dollar_figure dollar_figure dollar_figure if the penalty under sec_6653 applies the penalty under sec_6653 will also apply sec_6653 include sec_50 percent of the interest attributable to that portion of the underpayment which is due to negligence or disregard of the rules or regulations pursuant to respondent's motion these cases have been consolidated for trial briefing and opinion all section references are to the internal_revenue_code in effect for the years in issue all rule references are to the tax_court rules_of_practice and procedure after concessions the issues for decision are issues with respect to the dickerson sec_1 whether the dickersons incurred taxable gain in the amount of dollar_figure in the tax_year from the sale of two lots of real_property whether the dickersons received rental income in the amount of dollar_figure in the tax_year from the rental of real_property whether the dickersons received unreported taxable_income in the and tax years in the amounts of dollar_figure and dollar_figure respectively the following issues have been conceded the michoff srs claimed exemptions to which they were not entitled for their sons michael michoff jr and steven michoff in the tax_year the michoff srs claimed exemptions to which they were not entitled for steven michoff in the and tax years the michoff srs received unreported interest_income in the and tax years in the amounts of dollar_figure and dollar_figure respectively the michoff srs failed to report taxable state_income_tax refunds on their and income_tax returns in the amounts of dollar_figure and dollar_figure respectively michael michoff jr received unreported interest_income in the and tax years in the amounts of dollar_figure and dollar_figure respectively respondent concedes the deficiency against kimberly michoff for the tax_year whether the dickersons are entitled to any schedule c deductions with regard to a christmas_tree farm for the and tax years whether the dickersons are entitled to schedule a deductions for loan origination fees and mortgage interest in the and tax years and if any underpayments of tax exist whether such underpayments by the dickersons are due to negligence or disregard of rules or regulations issues with respect to the michoff srs whether the michoff srs failed to report a taxable withdrawal from their pension fund in the amount of dollar_figure for the tax_year whether the michoff srs received unreported taxable_income in the and tax years in the respective amounts of dollar_figure dollar_figure dollar_figure and dollar_figure whether the michoff srs are entitled to itemized_deductions for casualty losses and telephone expenses for their and tax years whether the michoff srs are entitled to any schedule c deductions with regard to a christmas_tree farm for their tax_year if any underpayments of tax exist whether such underpayments by the michoff srs are due to negligence or disregard of rules or regulations and whether the michoff srs substantially understated their tax in the and tax years issues with respect to michoff jr and kimberly michoff whether michoff jr received unreported income in the and tax years in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively whether the michoff jrs had unreported taxable_income in the tax_year in the amount of dollar_figure whether michoff jr realized a capital_gain from the sale of a partnership_interest in the tax_year in the amount of dollar_figure whether michoff jr is entitled to any schedule c deductions with regard to a limousine activity for his tax_year whether michoff jr failed to timely file his federal_income_tax returns for the and tax years whether michoff jr failed to pay estimated_tax for the and tax years if any underpayments exist whether the underpayments of tax for michoff jr are due to negligence or disregard of rules or regulations whether michoff jr substantially understated his tax for the tax_year and if any underpayment_of_tax exists whether such underpayment by the michoff jrs for the tax_year is due to negligence or disregard of rules or regulations some of the facts have been stipulated and are so found the stipulation of facts and attached exhibits are incorporated herein by this reference all petitioners in these consolidated cases resided in california at the time they filed their respective petitions these consolidated cases involve three generations of the same family for convenience we combine our findings_of_fact with our opinion under each separate issue heading burden of production petitioners argue that the notices of deficiency are arbitrary and excessive on their face and therefore the burden of production should shift to respondent we disagree respondent's determinations are entitled to a presumption of correctness rule a 290_us_111 the burden is upon petitioners to demonstrate in the first instance that the determination is arbitrary and unreasonable in order to deprive it of the presumption of correctness 40_tc_373 petitioners have failed to so demonstrate respondent has provided sufficient evidence to convince this court that the notices of deficiency were neither arbitrary nor unreasonable therefore unless otherwise indicated for all of the issues the burden rests with petitioners to demonstrate that respondent's determinations are erroneous rule a a rare exception to this rule is where the commissioner in a case involving unreported income introduces no evidence but rests on the presumption of correctness and the taxpayer challenges the deficiency on the grounds that it is arbitrary 87_tc_609 affd without published opinion 827_f2d_774 11th cir the commissioner in these circumstances must show some minimal evidentiary foundation connecting the taxpayer to an income- producing activity or to the funds 680_f2d_1268 9th cir affg an order of this court 596_f2d_358 9th cir revg 67_tc_672 whether or not respondent has substantiated her determination of unreported income with this evidentiary foundation will be discussed as the issue is addressed for each petitioner petitioners in these cases rely heavily on their own testimony we found some of petitioners' testimony to be general vague conclusory and or questionable in certain material respects under the circumstances presented here we are not required to and generally do not rely on petitioners' testimony to sustain their burden of establishing error in respondent's determinations see 877_f2d_624 7th cir affg tcmemo_1987_295 440_f2d_688 9th cir affg per curiam tcmemo_1969_159 87_tc_74 gain from the sale of real_property in date the dickersons received dollar_figure in proceeds from the sale of property located at lot of lake mont pines lot the dickersons had a zero basis in lot also in the dickersons sold lot of lake mont pines lot for dollar_figure the dickersons' total basis in lot was dollar_figure the parties have stipulated that the dickersons had taxable gain from the sale of the two lots in the amount of dollar_figure the dickersons now argue that they should be entitled to increased basis in the property due to litigation costs which were not reimbursed the evidence relating to these costs was solely in the form of trial testimony petitioners presented no further evidence of any litigation costs petitioners have failed to prove that any litigation costs were incurred and if they had been incurred why petitioners are entitled to an increase in basis as a result we sustain respondent on this issue rental income respondent argues that the dickersons received unreported rental income in in the amount of dollar_figure the dickersons leased residential property the green ridge residence to roger and linda barrett the barretts in the dickerson sec_3 this was conceded by petitioners on brief received a dollar_figure cleaning deposit from the barretts in that year the dickersons received payments from the barretts with regard to the lease of the green ridge residence in the amount of dollar_figure each on date date and date the dickersons never lived at the green ridge residence the dickersons presented no arguments why this amount should not be included in income we therefore consider this issue to be abandoned and sustain respondent on this issue see 22_tc_593 unreported income--general respondent using a bank_deposits and expenditures analysis determined that each of the petitioners had unreported income for some of the years in issue the united_states court_of_appeals for the ninth circuit to which an appeal of this case would lie has held that in order for the presumption of correctness to attach to the notice_of_deficiency in unreported income cases the commissioner must come forward with substantive evidence establishing some evidentiary foundation linking the taxpayer to the income-producing activity weimerskirch v commissioner supra pincite or demonstrating that the taxpayer received unreported income edwards v commissioner f 2d pincite see also 774_f2d_932 9th cir affg an order of this court we must examine the record to determine whether there is a minimal evidentiary foundation supporting respondent's determination of unreported income the record however does contain substantive evidence supporting respondent's determination of unreported income revenue_agent anita russell using a bank_deposits analysis determined that petitioners had unreported income use of the bank_deposits method for reconstructing income is well established 96_tc_858 affd 959_f2d_16 2d cir 64_tc_651 affd 566_f2d_2 6th cir under the bank_deposits method there is a rebuttable_presumption that all funds deposited to a taxpayer's bank account constitute taxable_income 335_f2d_671 5th cir 132_f2d_775 2d cir affg 45_bta_104 dileo v commissioner supra pincite once there is evidence of actual receipt of funds by the taxpayer that taxpayer has the burden of proving that all or a part of those funds are not taxable tokarski v commissioner supra the commissioner must take into account any nontaxable sources of deposits of which she is aware in determining the portion of the deposits that represent taxable_income but she is not required to trace deposits to their source 92_tc_661 this case is distinguishable from weimerskirch v commissioner supra pincite where the commissioner did not attempt to substantiate the charge of unreported income by any other means such as by showing weimerskirch's net_worth bank_deposits cash expenditures or source and application of funds id additionally in weimerskirch the taxpayer was not shown by admissible evidence to have actually possessed any of the funds that the commissioner determined to be taxable_income in the instant case the various petitioners were connected to the funds forming the basis of the deficiency by respondent's analysis of bank_deposits and expenditures c onnecting the taxpayer to the funds that form the basis of the deficiency is sufficient to give him the burden of proving the deficiency determination erroneous schad v commissioner t c pincite respondent has substantiated her determination with predicate evidence she used the bank_deposits and cash_expenditures_method of income reconstruction see 994_f2d_1542 11th cir affg tcmemo_1991_636 once the tax_court has found the commissioner has made a minimal evidentiary showing the deficiency determination is presumed correct 937_f2d_1548 10th cir affg tcmemo_1989_552 the key is connecting taxpayers to assets not to a business the burden_of_proof therefore lies with petitioners to show error in respondent's determinations unreported income--the dickersons revenue_agent anita russell using a bank_deposits analysis determined that the dickersons had unreported income in the amounts of dollar_figure and dollar_figure for the tax years and respectively the dickersons made specific payments on their primeline credit account in the total amount of dollar_figure which is in issue in the tax_year these were not however the total payments made by the dickersons on their primeline credit account in the tax_year the dickersons made deposits into their el dorado savings account in the amounts of dollar_figure and dollar_figure in the and tax years respectively these were not the total deposits made into this account in the and tax years respondent also identified a cash expenditure which she added to the unreported income of the dickersons for the tax_year this expenditure was the purchase of a cashier's check in the amount of dollar_figure for purposes of purchasing the green ridge drive residence petitioners argue that the dollar_figure cashier's check was purchased with loans from dan maggard however the check from dan maggard was deposited into the el dorado account petitioners failed to show a canceled check that was used to petitioners objected to respondent's proposed finding of fact which reads as follows respondent's revenue_agent conducted a bank_deposits analysis of the dickerson's income for and on brief however petitioners do not dispute that respondent's revenue_agent conducted a bank_deposits analysis rather they argue that it was conducted improperly this is typical of the argumentative and contradictory statements that appear throughout petitioners' briefs purchase the cashier's check nor did they otherwise prove that the funds to purchase the check came from the el dorado account petitioners have failed to establish that the cashier's check was purchased with funds from nontaxable sources dorothy dickerson testified that some of the money that she deposited into her el dorado savings account was from checks from michoff jr her grandson and that the rest was from cash that she had gathered here and there petitioners further argue that the deposits came from gambling winnings that were offset by losses for both the and tax years the dickersons reported substantial income from gambling as well as losses to offset that income in performing the bank_deposits analysis respondent's agent backed out any gambling income that was reported on the dickersons' income_tax returns the dickersons have failed to prove any additional gambling_losses beyond those already reported by them and allowed by respondent in the and tax years additionally petitioners contend that the dollar_figure which they paid toward their primeline credit account came from their cash reserves as well as previous withdrawals from that account petitioners however offered no persuasive evidence to substantiate this claim petitioners have failed to meet their burden_of_proof regarding this amount a dollar_figure deposit made into the el dorado account on date came from a cashier's check purchased by dan maggard and payable to michoff jr michoff jr then endorsed the check over to the dickersons this money was given to the dickersons by michoff jr either as a gift or as a loan and is not therefore taxable to the dickersons respondent identified gambling as a source of the dickersons' additional income dorothy dickerson loves to gamble dorothy dickerson could not identify what amounts she won and lost at gambling respondent further contends that the dickersons engaged in transactions with michoff jr from whom they received moneys and with whom they freely transferred property respondent contends that michoff jr had sources of income which included a lucrative activity of selling drugs respondent has not made any preliminary showing of why income from a drug selling activity of michoff jr should result in income to the dickersons however respondent has shown gambling to be a possible source of additional income which is sufficient to satisfy respondent's initial burden of connecting the dickersons to an income-producing activity furthermore even without this showing respondent has met her minimal evidentiary burden by performing a bank_deposits analysis with respect to all items except the dollar_figure deposit petitioners have failed to show that the source of the funds was nontaxable respondent's determination is sustained as to all amounts above the dollar_figure loan origination fees and mortgage interest in and the dickersons contend that they are entitled to a deduction of dollar_figure for loan origination fees incurred to purchase the green ridge residence in additionally the dickersons argue that they are entitled to deductions for mortgage interest of dollar_figure and dollar_figure for the years and respectively respondent contends that they are not entitled to these deductions because they were not made on a qualified_residence within the meaning of sec_163 sec_163 allows a deduction for any qualified_residence_interest sec_163 provides inter alia that qualified_residence_interest includes acquisition_indebtedness with respect to any qualified_residence of the taxpayer a qualified_residence includes the principal_residence of the taxpayer as well as one other residence which is used by the taxpayer as a residence sec_163 this includes use by a family_member including a grandson sec_280a sec_267 michoff jr the dickerson's grandson lived in the green ridge residence during except for the months the residence was rented to the barretts the green ridge residence therefore qualifies as a qualified_residence during because the residence was used by a family_member for the requisite number of days during the year the dickersons have established that they are entitled to deduct the loan origination fee sec_5 as well as the mortgage interest subject_to substantiation sec_280a and c respondent further argues that the dickersons have not substantiated the claimed deductions and therefore are not entitled to them petitioners provided a u s department of housing and urban development settlement statement settlement statement which substantiates that petitioners paid dollar_figure in loan origination fees as well as some amount of interest if the record provides sufficient evidence that the dickersons paid the mortgage interest but they are unable to prove the exact amount we can estimate the amount of the payments 39_f2d_540 2d cir in order for the court to make such an estimate we must have some basis in fact upon which an estimate may be made 85_tc_731 without such a basis any allowance would amount to unguided largesse 245_f2d_559 5th cir mrs dickerson testified that the dickersons paid the mortgage on the green ridge residence although we cannot determine the exact amount of interest_paid by the dickersons we conclude that based on mrs dickerson's testimony and the settlement statement it was at least as much as claimed on their schedule a and therefore we hold that they the loan origination fees are deductible ratably over the life of the loan sec_461 cf 91_tc_917 revd 905_f2d_1182 8th cir are entitled to the claimed deductions respondent is sustained to the extent petitioners deducted loan origination fees above those ratably allocable to the tax_year christmas_tree farm the dickersons claimed schedule c expense deductions with regard to a tree farm business in the amounts of dollar_figure and dollar_figure in the and tax years respectively the dickersons claimed schedule c losses for the tree farm business in the tax years and the dickersons reported zero receipts with regard to the tree farm business in the and tax years the dickersons reported dollar_figure in receipts with regard to the tree farm business in the tax_year respondent argues that the dickersons are not entitled to the claimed deductions because the tree farm business was not engaged in for profit within the meaning of sec_183 this is a factual inquiry requiring a weighing of the evidence in the record petitioners contend that they entered into and carried on the tree farm activity with the requisite profit objective and that as a result the deductions are allowed under sec_162 or sec_212 sec_183 provides generally that if an activity is not engaged in for profit no deduction attributable to such activity shall be allowed except as provided in sec_183 sec_183 defines an activity_not_engaged_in_for_profit as any activity other than one with respect to which deductions are allowable for the taxable_year under sec_162 trade_or_business or under paragraph or of sec_212 expenses for the production_of_income for a deduction to be allowed under sec_162 or sec_212 or taxpayers must establish that they engaged in the activity with an actual and honest objective of making an economic profit independent of tax savings 91_tc_686 affd 893_f2d_656 4th cir 78_tc_642 affd without opinion 702_f2d_1205 d c cir their expectation of profit need not have been reasonable however they must have entered into the activity or continued it with the objective of making a profit 91_tc_371 sec_1_183-2 income_tax regs the burden is on petitioners to show error in respondent's determination that the christmas_tree farming activity was not engaged in for profit rule a whether the requisite profit objective exists is determined by looking to all the surrounding facts and circumstances 94_tc_41 sec_1_183-2 income_tax regs greater weight is given to objective facts than to a taxpayer's mere statement of intent 84_tc_1244 792_f2d_1256 4th cir sec_1_183-2 income_tax regs sec_1_183-2 income_tax regs provides a list of factors to be considered in the evaluation of a taxpayer's profit objective the manner in which the taxpayer carries on the activity the expertise of the taxpayer or his advisers the time and effort expended in carrying on the activity the expectation that assets used in the activity may appreciate in value the success of the taxpayer in carrying on other similar or dissimilar activities the taxpayer's history of income or losses from the activity the amount of occasional profits if any from the activity the financial status of the taxpayer and elements of personal pleasure or recreation the number of factors for or against the taxpayer is not necessarily determinative but rather all facts and circumstances must be taken into account and more weight may be given to some factors than to others cf 70_tc_715 affd 615_f2d_578 2d cir this list is nonexclusive and no single factor or even a majority of factors necessarily controls 86_tc_360 sec_1_183-2 income_tax regs after weighing all of the objective factors coupled with petitioner's statements of intent we conclude that the dickersons were not engaged in the tree farming activity for profit there is objective evidence which shows that the dickersons did not have a profit objective in carrying on the tree farming_business the dickersons gave away many trees no business records were kept there were losses over many years the dickersons only reported receipts in one year of operation and the trees provided personal pleasure because they were located at the dickerson's residence petitioners offer no legal argument but to say that they were engaged in the tree farming activity for profit they offer no evidence but their own uncorroborated testimony petitioners have failed to meet their burden_of_proof petitioners are however entitled to deduct their expenses to the extent that they received gross_income from the activity sec_183 to the extent that respondent has disallowed expenses in excess of gross_receipts for the tree farming activity for the and tax years we sustain respondent failure to report pension fund withdrawal in the michoff srs made a taxable withdrawal from their pension_plan in the tax_year in the amount of dollar_figure the michoff srs failed to report their pension income this withdrawal was an early distribution from their pension_plan the parties stipulated to the above facts and the michoff srs made no argument in their opening brief concerning the issue in their reply brief the michoff srs object to the stipulated facts and contend that this withdrawal was a total_distribution as a result of the disability of mr michoff sr and therefore the 10-percent penalty should not apply see sec_72 gross_income includes any amount received from an annuity including a retirement_plan where an exception does not apply sec_72 additionally unless an exception applies there is a 10-percent additional tax on early_withdrawals from qualified_retirement_plans sec_72 the michoff srs have offered no testimonial or documentary_evidence to contradict their stipulations or to support an exclusion respondent's determination is therefore sustained on this issue unreported income--michoff srs revenue_agent anita russell using a bank_deposits analysis determined that the michoff srs received unreported taxable_income in the and tax years based on this analysis respondent after concessions argues that the michoff srs had unreported income for those years in issue in the amounts of dollar_figure dollar_figure dollar_figure and dollar_figure respectively the michoff srs purchased a cashier's check from el dorado savings and loan association for the purpose of purchasing real_property in the amount of dollar_figure in the tax_year the michoff srs made deposits in the amounts of dollar_figure and dollar_figure which are in issue to their el dorado savings and loan association account in the and tax years respectively these deposits do not make up the total amount deposited into this account in these years the michoff srs made deposits into their placer savings account in the amounts of dollar_figure and dollar_figure which are in issue in the and tax years respectively these deposits do not make up the total amount of deposits into this account in and some of these deposits were part of larger deposits the michoff srs made a payment on their bank of america visa account in the amount of dollar_figure on date respondent contends that the above deposits and expenditures are from unreported income of the michoff srs the michoff srs contend that the amounts at issue came from the following sources insurance refund cash reserve gambling winnings equal losses withdrawn and replaced from accounts cash withdrawn and replaced refund repayment of loan to michael michoff and transfer from golden union the michoff srs argue that beverly michoff had saved money over many years and hid it from her husband because he had a gambling problem they contend that many of the deposits in issue came from this cash reserve beverly michoff testified that at one time she had almost dollar_figure in cash in a can petitioners argue that some of the cash reserves came from a personal injury settlement of michoff sr beverly michoff testified that around they received approximately dollar_figure in settlement of the back injuries of mr michoff sr no documentary_evidence was presented regarding the personal injury settlement and beverly michoff's testimony in this regard was vague beverly michoff testified that she took the settlement money along with money from the paychecks of michoff sr and hid them from michoff sr the funds that she used allegedly came from a personal injury settlement of michoff sr as well as the paychecks of michoff sr which were made out to him and which he picked up at work we find it unlikely that beverly michoff could have taken these funds and hid them from michoff sr for so many years additionally beverly michoff testified that her husband did not believe in banks however during the years in issue the michoff srs actively used savings accounts credit card accounts and a credit_union account under all the circumstances we are not required to accept the self-serving testimony of petitioner tokarski v commissioner t c pincite based on our review of the record and the circumstances we find beverly michoff's explanation of a cash hoard not to be credible the explanations of the michoff srs as to their other deposits and expenditures which are at issue are equally lacking in credibility they seek to rely on uncorroborated testimony and unsupported argument this is not sufficient evidence to meet their burden_of_proof the michoff srs have failed to prove that any of the amounts at issue are from nontaxable sources as a source of additional income respondent identified the transactions of the michoff srs with their son respondent argues that the evidence shows that the michoff srs freely transferred moneys and property between themselves and michoff jr and that michoff jr was involved in the sale of drugs during this period which resulted in substantial income to himself and to his family including the michoff srs respondent contends that the michoff srs received money from michoff jr from his drug business but offers no explanation of why this would be taxable to the michoff srs we conclude that this is not a taxable source_of_income to the michoff srs respondent did however analyze the bank_deposits and expenditures of the michoff srs to determine the amount of unreported income petitioners have failed to prove that any of the disputed amounts are from nontaxable sources respondent is sustained on this issue casualty losses and telephone expenses the michoff srs claimed miscellaneous_itemized_deductions for alleged job required phone usage in the and tax years in the amounts of dollar_figure and dollar_figure respectively the michoff srs admitted on brief that no evidence was provided to establish the deductions claimed for the alleged job required phone usage petitioners failed to meet their burden_of_proof and therefore respondent's determination regarding the deductions for phone usage is sustained the michoff srs claimed itemized casualty_loss deductions for the and tax years in the amounts of dollar_figure and dollar_figure respectively michael michoff sr did not testify on behalf of the michoff srs beverly michoff did not know in what years the alleged casualty losses occurred beverly michoff was unsure whether the items for which casualty losses were claimed were insured the michoff srs did not provide any documentary_evidence to establish the alleged casualty losses claimed on the and income_tax returns of the michoff srs the michoff srs have the burden of proving that they are entitled to the deduction 76_tc_459 the michoff srs have failed to meet this burden thus respondent is sustained on this issue christmas_tree farm for the tax_year respondent determined that the michoff srs improperly claimed schedule c deductions in the amount of dollar_figure with regard to a christmas_tree farm business in their answers to respondent's requests for admissions the michoff srs admit that they were not entitled to claim any loss on the christmas_tree farm during the years in issue additionally the parties have stipulated that the michoff srs claimed schedule c deductions to which they were not entitled pertaining to a christmas_tree farm the michoff srs never sold any trees from the tree farm on brief the michoff srs contend that they entered the tree farm business with the intent to make a profit petitioner has the burden_of_proof as to both the deductibility and substantiation of her claimed business_expenses rule a 90_tc_74 based upon the lack of any evidence provided by petitioners and taking into account their stipulations and admissions we find that they have failed to carry their burden_of_proof with respect to both the deductibility and the amount of the claimed deductions accordingly we sustain respondent on this issue substantial_understatement penalty--michoff srs respondent determined additions to tax of dollar_figure and dollar_figure under sec_6661 for the tax years and respectively for the michoff srs sec_6661 imposes an addition_to_tax of percent of the amount of any underpayment attributable to a substantial_understatement of tax an understatement is the difference between the amount required to be shown on the return and the amount actually shown on the return and is substantial if it exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure sec_6661 and a the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position or has substantial_authority for the tax treatment of an item sec_6661 sec_1 a income_tax regs petitioners have the burden of proving they are not liable for the addition_to_tax rule a the michoff srs contend that they should not be liable for the substantial_understatement_penalty because their understatement for each of the years and was minimal based on our findings it is clear that the michoff srs did substantially understate their federal_income_tax respondent is sustained to the extent consistent with this opinion there is an underpayment attributable to such understatement for each of the years and unreported income--michoff jr revenue_agent anita russell conducted a bank_deposits analysis of the and tax years of michoff jr respondent additionally refers to the united_states bureau of labor statistics bls in order to determine petitioner's unreported income for each of the years in issue based on this analysis respondent after concessions argues that michoff jr had unreported income of dollar_figure dollar_figure dollar_figure and big_number in the and tax years respectively as a potential source for additional income respondent argues that michoff jr had a lucrative business selling drugs michoff jr was convicted of a felony in california for possession of drugs for sale deposits were made into the michaels michaels autobody shop's the autobody shop capfed account in the amount of dollar_figure in the tax_year michael juarez testified that he did not remember making deposits in this amount into the capfed account for the autobody shop in the tax_year the autobody shop's capfed account remained active through october of and deposits were made into that account through october of no records from the autobody shop were ever provided to respondent's revenue_agent respondent's revenue_agent computed the autobody shop's profit as follows total receipts of dollar_figure consist of the deposits into its bank account of dollar_figure and cash expenditure for annual rent which was approximately dollar_figure from this total ms russell subtracted cost_of_goods_sold of percent ms russell computed that the partnership had a net profit of dollar_figure michoff jr retained a 25-percent interest in the autobody shop through ms russell therefore determined that the net profit of michoff jr was dollar_figure which wa sec_25 percent of the net profit from the partnership neither michoff jr nor michael juarez filed a partnership return for the autobody shop for the tax_year michoff jr made a dollar_figure cash down payment on the purchase of property from mr and mrs knight the knight property in the tax_year michoff jr contends that the source of this payment was a loan from dan maggard however michoff jr failed to prove this contention michoff jr testified that these funds came from a loan and he presented a list of loans which he claims to have received from dan maggard this list was recently prepared by michoff jr in preparation for this litigation additionally it is only signed by dan maggard and not michoff jr mr maggard signed this document at the request of michoff jr at trial mr maggard testified that he did not remember the terms of these loans he further testified that he and michoff jr did not document these loans michoff jr later testified that they did document the various loans furthermore until there is no evidence that any of the amounts were ever repaid michoff jr has failed to prove that any of the funds came from loans michoff jr made deposits into his downey savings account in the amount of dollar_figure which is in issue in the tax_year this is not the total amount of deposits in this account in the tax_year this amount does not include dollar_figure that was identified as a transfer michoff jr made a deposit of dollar_figure into kimberly michoff's great western account in the tax_year this amount is not the total amount deposited into this account in the tax_year by michoff jr michoff jr conceded on brief that this deposit has not been identified as coming from a nontaxable source michoff jr made deposits into his pacific valley bank account in the amount of dollar_figure in the tax_year in the tax_year michoff jr made payments to the knights in the amount of dollar_figure toward the purchase of the knight property of this amount respondent contends that dollar_figure cannot be traced to previously taxed or nontaxable sources of the dollar_figure michoff jr admits that dollar_figure is from unknown sources michoff jr did not file an income_tax return for the or tax_year in the tax_year michoff jr made payments of dollar_figure toward the purchase of the knight property michoff jr made deposits in the amount of dollar_figure in his world savings bank account in the tax_year these amounts are not the total amount of deposits to this account in the tax_year michoff jr reported total income for the tax_year in the amount of dollar_figure michoff jr and kimberly michoff expended the following amounts in the tax_year on the green ridge residence dollar_figure as a deposit dollar_figure and dollar_figure the total amount of dollar_figure was spent by michoff jr and kimberly michoff on the green ridge residence in the tax_year the dollar_figure is the same amount that the dickersons expended on a cashier's check in the same year to purchase the green ridge residence petitioners do not argue that this is a duplication and without evidence to so indicate we do not assume that it is on brief petitioner argues that there was no proof offered that michael michoff jr had dollar_figure in funds for the green ridge property purchase we find the parties' stipulation to this fact to be sufficient proof that this amount was expended by michoff jr and kimberly michoff the stipulation reached by the parties states that the funds were expended by michoff jr and kimberly michoff the deficiency for the tax_year was asserted only against the income_tax of michoff jr however because of the deemed concession discussed below we do not inquire into what portion of the funds were expended by kimberly michoff michoff jr made deposits to his world savings bank accounts of dollar_figure which is in issue in the tax_year these are not the total amount of deposits made into these accounts in the tax_year respondent contends that the source of the dollar_figure in payments and the dollar_figure in deposits has not been identified by petitioners in response to respondent's proposed findings_of_fact on these issues michoff jr states objection dollar_figure receipts from limousine business reported on petitioner's schedule 'c' and included in dollar_figure gross_receipts because this is the only objection to respondent's proposed findings_of_fact regarding those amounts we consider the dollar_figure expenditure to have been conceded to be unreported income additionally michoff jr provided no evidence that the dollar_figure came from previously_taxed_income michoff jr made deposits into his placer savings account in the amount of dollar_figure which is in issue in the tax_year this amount is not the total amount deposited into this account in the tax_year of this amount michoff jr contends that dollar_figure came from kimberly michoff's salary the only proof of this source is the vague unsubstantiated testimony of michoff jr michoff jr contends that most of the remaining we rely extensively on petitioners' responses to respondent's proposed findings_of_fact on brief petitioners state petitioners have extensively explained their 'unreported income' in the objection to respondent's requested findings_of_fact and therefore it is unnecessary to repeat them here amounts came from a refund his salary or a gift the only proof of these amounts is again his vague unsubstantiated testimony furthermore for dollar_figure michoff jr offers no source but contends that it is not taxable_income michoff jr and kimberly michoff lived together during and pursuant to the bls the personal living expenditures excluding housing for a couple in and would be dollar_figure dollar_figure dollar_figure respectively pursuant to the bls the personal living expenditures_for a couple in would be dollar_figure in her notice_of_deficiency respondent used the bls to reconstruct petitioner's income this court and other courts have approved the use of those statistics as an acceptable and reasonable method of reconstructing income e g 786_f2d_1063 11th cir affg tcmemo_1984_536 54_tc_1530 michoff jr contends that he should not be charged with personal living_expenses for because he was residing with his grandparents and they were providing his room and board additionally he contends that any incidental_expenses he had were covered by amounts he received from loans gifts and repayments by michael juarez in her determination respondent used bls statistics that excluded housing for as well as for and michoff jr has not established that he did not have personal expenditures or that the amounts paid for personal expenditures came from nontaxable sources michoff jr has the burden of proving that respondent's determinations are in error rule a he has failed to meet this burden with regard to any of the amounts determined to be unreported income respondent is sustained on this issue unreported income--michoff jr and kimberly michoff michoff jr and kimberly michoff filed a joint federal_income_tax return for the tax_year respondent's revenue_agent conducted a bank_deposits analysis of the tax_year of michoff jr and kimberly michoff based on this analysis respondent after concessions argues on brief that michoff jr and kimberly michoff had unreported income of dollar_figure in the tax_year petitioners concede the deposits in but claim that they were transfers from accounts loans and gifts and that some of the amounts were duplicated by the revenue_agent and counted more than once the amount that michoff jr and kimberly michoff spent on personal expenditures by check was subtracted from the bank_deposits total michoff jr and kimberly michoff made deposits into their first interstate bank account in the amount of dollar_figure which is in issue in the tax_year this amount is not the total amount of deposits into this account in the tax_year the michoff jrs made deposits into their placer savings bank accounts in the amount of dollar_figure in the tax_year petitioners argue that many of these deposits came from their wages which were reported on their individual_income_tax_return however they have offered no proof of this beyond vague unsubstantiated testimony additionally respondent's revenue_agent backed out net_income that was reported on petitioners' return when she performed her bank_deposits analysis michoff jr contends that a dollar_figure deposit which is in issue came from the sale of a porsche to bill mckay michoff jr contends that he purchased the porsche for dollar_figure and put dollar_figure worth of repairs into the car other than his own testimony which we find lacking in credibility michoff jr presented three exhibits as proof of his purchase_price and cost of repairs these exhibits lack any probative value as well as any indicia of trustworthinessdollar_figure as proof of his purchase_price michoff jr submitted two exhibits to the court first michoff jr submitted a document from the state board_of equalization occasional sales use_tax unit this document is a letter which states that michoff jr 's certificate of purchase_price indicating his purchase_price of the car was selected for routine verification and that he would need to submit other evidence providing verification of value this document proves nothing as it is merely a request for information second michoff jr submitted a bill of sale purportedly showing that he purchased a porsche for dollar_figure however this bill of sale lacks a vehicle identification_number a transfer date and the address of the seller there is no indication that this is an actual bill of sale as proof of the cost of repairs michoff jr submitted a pile of receipts these receipts do not show for what car the parts were ordered or the work done additionally michoff jr included receipts dated as late as date for a car which continued we have considered petitioners' arguments regarding all other deposits that are in dispute and consider them to be without merit petitioners have failed to carry their burden of proving a nontaxable source with respect to the disputed deposits and expenditures therefore we hold that respondent is sustained on this issue capital_gains from the sale of a partnership_interest in prior to the years in issue michoff jr had a 50-percent partnership_interest in michaels michaels autobody shop the autobody shop at the beginning of michoff jr disposed of half of his partnership_interest in the autobody shop retaining a 25-percent interest the parties stipulated that the amount of capital_gain from that disposition was dollar_figure respondent determined that michoff jr failed to report this gain despite these stipulations michoff jr argues that he had no gain from the sale of his partnership_interest michoff jr offered no documentary_evidence to disprove respondent's determinations and chose instead to rely on unsubstantiated claims on brief michoff jr has failed to meet his burden_of_proof we therefore sustain respondent on this issue limousine activity in her notice_of_deficiency respondent disallowed schedule c deductions claimed by michoff jr on his income_tax return continued he claims to have sold on or prior to date with regard to an alleged limousine service respondent's determinations carry the presumption of correctness michoff jr must establish that he is entitled to the claimed deductions rule a deductions are a matter of legislative grace petitioner has the burden of showing that he is entitled to any deduction claimed 292_us_435 michoff jr attempts to meet his burden_of_proof through his own testimony as well as various receipts on brief michoff jr had no objection to the following proposed findings_of_fact by respondent relating to the receipts the receipts are deficient as follows a the copy of the receipt in the amount of dollar_figure does not indicate what it's for or who issued it or when it was made b a receipt in the amount of dollar_figure is for the tax_year c a receipt in the amount of dollar_figure is for the tax_year d a receipt in the amount of dollar_figure is for the tax_year e the all parts auto store receipts b m automotive parts receipts carl chevrolet receipts kragen auto receipts checker schuck's kragen receipt 49er auto parts invoice color-rite paint co invoice c h paint equipment supply invoice and carl chevrolet invoice do not indicate whether they are for a limousine activity or for some other use such as personal_use f many of these items are invoices and do not indicate that payments were made g the swift dodge document statement for dollar_figure is an invoice and not a receipt h the central valley towing document is duplicated several times the insurance application is duplicated several times the check made out to gilbert insurance is duplicated several times the swift dodge document is duplicated several times michoff jr has offered no evidence that the claimed deductions were ordinary and necessary to a trade_or_business the receipts offered do not indicate that they were incurred with regard to the limousine activity of michoff jr or with regard to any business activity additionally many of the receipts offered to substantiate the claimed deductions were duplicated and were for tax years not subject_to this issue michoff jr has failed to substantiate most of his claimed deductions and he has failed to establish that any of the claimed deductions were for expenses ordinary and necessary to a trade_or_business accordingly respondent's determination regarding this issue is sustained failure to timely file federal_income_tax returns respondent contends that michoff jr is liable for the addition_to_tax for failure to timely file for the and tax years michoff jr contends that he had less than dollar_figure of income for each of those years and thus was not required to file a return it is undisputed that michoff jr failed to file an income_tax return for the and tax years sec_6651 provides an addition_to_tax for failure to timely file an income_tax return by the prescribed due_date unless the taxpayer can establish that such failure was due to reasonable_cause and not willful neglect although reasonable_cause is not defined in the code the regulations state if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time then the delay is due to a reasonable_cause sec_301_6651-1 proced admin regs willful neglect has been defined as a conscious intentional failure or reckless indifference 469_us_241 in the instant case regarding michoff jr we have found that he did have income sufficient to require the filing of a return in both the and tax years the unverified belief of michoff jr that he had no taxes owing does not constitute reasonable_cause of the sort that will allow him to escape the addition_to_tax under sec_6651 see olsen v commissioner tcmemo_1993_432 we sustain respondent on this issue failure to pay estimated_tax respondent determined an addition_to_tax for failure to pay estimated_tax for the and tax years for michoff jr sec_6654 imposes an addition_to_tax for failure to pay estimated income_tax michoff jr contends that he did not have sufficient income in or to require him to pay estimated_taxes michoff jr bears the burden of proving that he is not liable for this penalty rule a michoff jr contends that he had a loss carryover from his business in and thus did not have sufficient income in or to require him to pay estimated_taxes michoff jr offered no proof regarding his entitlement to such a loss carryforward nor that such a loss would have reduced his income such that he would not be required to pay estimated_taxes once again he makes conclusory and unsupported arguments that fail to support his burden_of_proof respondent is sustained on this issue substantial_understatement penalty--michoff jr respondent determined an addition_to_tax of dollar_figure under sec_6661 for the tax_year for michoff jr sec_6661 imposes an addition_to_tax of percent of the amount of any underpayment attributable to a substantial_understatement of tax an understatement is the difference between the amount required to be shown on the return and the amount actually shown on the return and is substantial if it exceeds the greater of percent of the tax required to be shown on the return for a taxable_year or dollar_figure sec_6661 and a the understatement is reduced to the extent that the taxpayer has adequately disclosed his or her position or has substantial_authority for the tax treatment of an item sec_6661 sec_1 a income_tax regs petitioner has the burden of proving he is not liable for the addition_to_tax rule a the only argument of michoff jr is that he is not liable for understating his taxes in and thus should not be charged with the substantial_understatement addition_to_tax based on our findings in this case there was a substantial_understatement and thus respondent's determination is sustained additions to tax for negligence and accuracy-related_penalty respondent determined that all petitioners in these cases are liable for additions to tax or accuracy-related_penalties for negligence for the years in which they had underpayments different sections apply to the various years in issue sec_6653 and b for and a for a for and negligence is defined as a lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances 85_tc_934 petitioners bear the burden of proving that respondent's determinations are erroneous rule a the dickersons claim that they should not be liable for the negligence_penalty because they are entitled to the deductions they claimed or because their unreported rental income was offset by expenses this is essentially arguing that they are not liable for the negligence_penalty because they did not underpay their tax we have already found that they did underpay their tax respondent is sustained with respect to the negligence_penalty resulting from underpayments by the dickersons the michoff srs admit they unintentionally omitted items from their tax_return due to inadvertence and lack of knowledge but contend that they should not be burdened with additions to tax for negligence or the accuracy-related_penalty the michoff srs have failed to offer any proof that they were not negligent in their underpayment respondent is sustained with respect to the additions to tax and the negligence_penalty resulting from underpayments by the michoff srs for the taxable years and the contention of michoff jr that he is not liable for additions to tax for negligence consists of one sentence michael michoff jr is not liable for the penalties due under irc sections a a and a b because he was not guilty of negligence or disregard of rules or regulations this contention is not an argument it is a conclusion respondent is sustained on this issue michoff jr presented no argument that he is not liable for the negligence_penalty for the tax_year the burden rests with petitioner to prove that respondent's deteminations are in error rule a we cannot be sure that petitioner intended to abandon the issue but in any case respondent's determination of the applicable penalty resulting from the underpayment_of_tax must be sustained with respect to the tax_year of michoff jr for the tax_year michoff jr and kimberly michoff argue that they are not liable for the accuracy-related_penalty because they have accounted for all of the deposits which were questioned by the revenue_agent as we have already found they did not respondent is sustained on this issue we have considered all arguments by petitioners and to the extent not discussed above find them to be irrelevant or without merit to reflect the foregoing decisions will be entered under rule


tcmemo_2010_247 united_states tax_court phu m and yvonne d au petitioners v commissioner of internal revenue respondent docket no filed date phu m and yvonne d au pro sese anna a long for respondent memorandum findings_of_fact and opinion cohen judge respondent determined a dollar_figure deficiency in petitioners’ federal_income_tax for and a dollar_figure penalty under sec_6662 the deficiency and penalty resulted from disallowance of gambling_losses claimed to offset other income of petitioners all section references are to the internal_revenue_code code in effect for findings_of_fact some of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in california at the time the petition was filed on their jointly filed form_1040 u s individual_income_tax_return for petitioners reported adjusted_gross_income of dollar_figure on schedule a itemized_deductions they deducted gambling_losses totaling dollar_figure as other miscellaneous deductions petitioners did not report any gambling winnings and they had no gambling winnings during petitioners’ federal tax_return was prepared using h_r block’s software known as taxcut opinion sec_165 provides that losses from wagering transactions shall be allowed only to the extent of the gains from such transactions petitioners acknowledge that they had no gains from their gambling activities during therefore they are not entitled to deduct the losses that they claimed sec_6662 and b and imposes a 20-percent accuracy-related_penalty on any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax sec_6662 defines negligence as including any failure to make a reasonable attempt to comply with the provisions of the code and defines disregard as any careless reckless or intentional disregard disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation sec_1_6662-3 income_tax regs an underpayment is substantial if the understatement_of_tax exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 considering the erroneous nature of the deduction and the amount of the resulting underpayment_of_tax respondent has satisfied the burden of producing evidence that the penalty is appropriate see sec_7491 116_tc_438 an exception to the penalty under sec_6662 applies in cases where there was reasonable_cause for any portion of the underpayment and the taxpayer acted in good_faith sec_6664 the determination of whether the taxpayer acted with reasonable_cause and in good_faith depends on the pertinent facts and circumstances including the taxpayer’s efforts to assess such taxpayer’s proper tax_liability the knowledge and the experience of the taxpayer and the reliance on the advice of a professional such as an accountant sec_1_6664-4 income_tax regs petitioners have the burden of showing reasonable_cause see higbee v commissioner supra pincite petitioners contend that they followed the instructions on the tax preparation software that they used in preparing their tax_return asserting that the software was approved by the irs they indicate that they were unaware of the provisions of the code and that they did not consult any internal_revenue_service irs publications or professional tax advisers before claiming deductions equaling almost half of their reported income in the software instructions are not in the record so we cannot determine how the error occurred we doubt that the instructions if correctly followed permitted a result contrary to the express language of the code petitioners may have acted in good_faith but made a mistake in the absence of evidence of a mistake in the instructions or a more thorough effort by petitioners to determine their correct_tax liability we cannot conclude that they have shown reasonable_cause for the underpayment_of_tax on their return petitioners ask the court to consider correspondence exchanged between them and various representatives of the irs before trial in which an irs representative offered to concede the penalty petitioners declined the concession because they also sought relief from the interest accruing on the underpayment and to have the deficiency reduced in this proceeding however we have no jurisdiction over interest that has not been assessed see generally sec_6404 131_tc_54 the correspondence between petitioners and the irs representatives therefore is not relevant to the issues that we decide petitioners have also referred to their inability to pay the amounts owing as a result of our rulings here their claimed financial hardship can be raised in a proceeding commenced under sec_6330 only if and when collection efforts are made and a notice_of_determination sustaining collection efforts is sent to them ability to pay is also not relevant in this case finally with the notice of trial sent months before the trial date and at the call of the calendar petitioners as pro_se taxpayers were offered the opportunity to confer with volunteer attorneys to discuss the case and to consider the possibility of negotiated settlement without charge to petitioners they did not take advantage of the opportunities when offered and sought delay to consult an attorney only after the court announced the impending resolution of the case against them thus they gave up the possibility of pretrial settlement with possible savings to themselves and prolonged the period in which interest is accruing the variety of services offered by volunteer attorneys frequently results in negotiated settlements it is unfortunate when those who could benefit from the assistance offered by such attorneys do not take advantage of it after a case has been tried and the result stated the opportunity no longer exists to reflect the foregoing decision will be entered for respondent