Court Opinion

ID: 9916350
Source: CourtListenerOpinion
Date Created: 2024-01-09 20:02:06.354081+00
Date Added: 2024-06-11T13:25:05.645025
License: Public Domain

United States Tax Court

                                T.C. Memo. 2024-4

             WILLIAM M. HEFLEY AND AIMEE J. HEFLEY,
                           Petitioners

                                           v.

               COMMISSIONER OF INTERNAL REVENUE,
                           Respondent

                                     __________

Docket No. 17455-16.                                        Filed January 9, 2024.

                                     __________

William M. Hefley and Aimee J. Hefley, pro sese.

Randall B. Childs and A. Gary Begun, for respondent.

         MEMORANDUM FINDINGS OF FACT AND OPINION

      GALE, Judge: Respondent determined the following deficiencies
and penalties with respect to petitioners’ federal income tax for taxable
years 2011–13 (years at issue):

                                                         Penalty
                      Year           Deficiency
                                                        § 6662(a) 1
                      2011            $16,545             $3,309
                      2012             26,172               5,234
                      2013             52,175             10,435

       The issues for decision are whether petitioners (1) properly
calculated their net income on Schedules C, Profit or Loss From

       1 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C. (Code), in effect at all relevant times, and Rule references are to
the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to
the nearest dollar.

                                 Served 01/09/24
                                   2

[*2] Business, for the years at issue, (2) are allowed certain itemized
deductions for 2011 reported on their Schedule A, Itemized Deductions,
and (3) are liable for section 6662(a) accuracy-related penalties for the
years at issue.

                         FINDINGS OF FACT

      Some of the facts are stipulated and are so found. The Stipulation
of Facts and the attached Exhibits are incorporated herein by this
reference. Petitioners were residents of Florida when they timely filed
the Petition.

       Petitioners are a married couple who filed joint returns for the
years at issue. Both petitioners were practicing attorneys, licensed in
Florida. During 2011 and most of 2012 petitioner William M. Hefley
was employed by the law firm then known as Conroy, Simberg, and
Ganon. During 2011 and 2012 petitioner Aimee J. Hefley had her own
solo legal practice, the Law Firm of Aimee J. Hefley, P.A. (law firm).
Mr. Hefley began working for the law firm in 2013.

      During the years at issue Ms. Hefley maintained eight bank
accounts. During the examination of petitioners’ returns, respondent
conducted a bank deposits analysis of each of the accounts. The analyses
determined that petitioners had additional unreported gross receipts
from the law firm of $17,372, $31,241, and $118,076 for 2011, 2012, and
2013, respectively. Petitioners submitted an amended return for 2013
during the examination, reporting gross receipts from the law firm of
$230,241.

       On their 2011 federal income tax return, petitioners claimed a
deduction for $11,035 in unreimbursed employee business expenses as
well as $6,000 in charitable contribution deductions on their Schedule A.
Petitioners attached to their 2011 return Form 8283, Noncash
Charitable Contributions, to support their donations.

       On their Form 8283, petitioners listed donations of children’s
clothing and toys as having been made to Goodwill on March 10 and 12,
2011, respectively.    However, receipts from Goodwill petitioners
submitted list the dates of the donations as March 10 and 12, 2012.
They reported the donated property as having a combined adjusted basis
and fair market value of $10,000 and $6,000, respectively. Petitioners
claim to have determined the value of these donations by looking at
catalogs.
                                           3

[*3] On Schedules C of their 2011, 2012 and 2013 federal income tax
returns, petitioners claimed various business expense deductions
related to the law firm. Respondent disallowed entirely the following
expense deductions: meals and entertainment; travel; employee benefit;
depreciation; car and truck; supplies; AAA, license, and parking;
automobile fuel; automobile repairs and maintenance; bank service
charges for 2012; and clothing and uniform.

      Respondent allowed deductions for the following expense
categories that petitioners did not claim: utilities; merchant fees;
postage and delivery; process server; computer and internet; and
business use of home for 2013. Petitioners reported and respondent
made adjustments to the following expense categories: office expenses
for 2011–13; bank service charges for 2011 and 2013; computer and
internet for 2011; postage and delivery for 2011; business use of home
for 2011 and 2012; answering service for 2012; and merchant fees for
2012.

       The revenue agent examining petitioners’ returns concluded that
petitioners were liable for section 6662(a) penalties for the years at
issue. The revenue agent’s immediate supervisor approved imposition
of the foregoing penalties on January 29, 2016, by signing a Civil
Penalty Approval Form. 2 Respondent issued petitioners the notice of
deficiency on May 10, 2016. Petitioners did not receive any notice or
letter giving them an opportunity to request a conference with the
Internal Revenue Service (IRS) Office of Appeals 3 before receiving the
notice of deficiency.

      The Court held a partial trial with respect to the deficiencies and
penalties, reserving for a future trial the issue of section 6015 relief. 4

        2 Petitioners object to the admission of the Civil Penalty Approval Form and

an accompanying declaration on the grounds of hearsay and relevance (but not
authenticity). We admitted the Form, but not the declaration. The Form is relevant
and not hearsay because it is a verbal act. See, e.g., United States v. Rojas, 53 F.3d
1212, 1216 (11th Cir. 1995); Gundotra v. Commissioner, T.C. Memo. 1995-303, aff’d
per curiam, 149 F.3d 1168 (4th Cir. 1998) (unpublished table decision).
        3 On July 1, 2019, the IRS Office of Appeals was renamed the IRS Independent

Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981,
983 (2019). We will use the name in effect at the times relevant to this case, i.e., the
Office of Appeals or Appeals.
        4 The Petition sought review of both the notice of deficiency and a concurrently

issued notice of determination denying Ms. Hefley’s request for section 6015 relief with
respect to the years at issue. After the partial trial, Ms. Hefley moved to withdraw
that portion of the Petition seeking review of the denial of section 6015 relief, which
                                          4

[*4] Petitioners declined to provide any direct testimony at the trial.
Moreover, Ms. Hefley refused to sign a supplemental stipulation agreed
to by Mr. Hefley and respondent that contained exhibits that may have
substantiated some of the deductions disallowed in the notice of
deficiency. Accordingly, that evidence is not in the record.

                                    OPINION

I.     Deficiencies

       Petitioners have not addressed the unreported gross receipts or
disallowed deductions determined in the notice of deficiency. They are
accordingly properly treated as having abandoned those issues. See
Lunsford v. Commissioner, 117 T.C. 183, 187 (2001); Nicklaus v.
Commissioner, 117 T.C. 117, 120 n.4 (2001). Even if they were construed
to have disputed the unreported gross receipts, respondent has
established a sufficient evidentiary foundation connecting petitioners to
the income-producing activity, as it is undisputed that Ms. Hefley
operated a solo legal practice during 2011 and 2012, where Mr. Hefley
began working in 2013. See Blohm v. Commissioner, 994 F.2d 1542,
1549 (11th Cir. 1993), aff’g T.C. Memo. 1991-636; Walquist v.
Commissioner, 152 T.C. 61, 67–68 (2019). Respondent having met this
“minimal” evidentiary foundation, it is petitioners’ burden to prove the
unreported income determination to be arbitrary or erroneous. See
Blohm v. Commissioner, 994 F.2d at 1549; Walquist, 152 T.C. at 67–68.
Petitioners have offered no evidence or argument in that regard.

       As for the disallowed deductions, the determinations in the notice
of deficiency disallowing the deductions are presumptively correct, and
petitioners bear the burden of showing the determinations are
erroneous. See Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115
(1933). Deductions are a matter of legislative grace, and petitioners
must prove their own entitlement to any deduction. See INDOPCO, Inc.
v. Commissioner, 503 U.S. 79, 84 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934). Petitioners have adduced no
evidence to do so. They did not provide direct testimony at trial and
certain documentary evidence they submitted is not in the record as a
result of Ms. Hefley’s refusal to stipulate it.

we have granted. Consequently, no further trial is needed with respect to Ms. Hefley’s
entitlement to section 6015 relief.
                                          5

[*5] For the foregoing reasons, we will sustain respondent’s
determinations as to the deficiencies for the years at issue.

II.    Penalties

       Respondent determined that petitioners are liable for an
accuracy-related penalty under section 6662(a) for each year at issue.
The Commissioner bears the burden of production with respect to any
individual taxpayer’s liability for any penalty imposed by the Code.
§ 7491(c). To meet this burden, the Commissioner must come forward
with sufficient evidence indicating that the imposition of the penalty is
appropriate. See Higbee v. Commissioner, 116 T.C. 438, 446–47 (2001).
Once the Commissioner meets his burden of production, the taxpayer
bears the burden of proving error in the determination, including
producing evidence of reasonable cause or other exculpatory factors. Id.

       Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20%
of any portion of an underpayment of tax required to be shown on a
return that is attributable inter alia to any substantial understatement
of income tax or to negligence. A substantial understatement of income
tax exists if the amount of the understatement for the taxable year
exceeds the greater of 10% of the amount of tax required to be shown on
the return for the taxable year or $5,000. § 6662(d)(1). For each year at
issue, petitioners’ understatement exceeds 10% of the amount of tax
required to be shown on the return. Thus, respondent has met his
burden of showing that imposition of an accuracy-related penalty is
appropriate. 5

        Respondent’s burden of production for an accuracy-related
penalty under section 6662(a) also includes demonstrating compliance
with the procedural requirements of section 6751(b)(1). See Graev v.
Commissioner, 149 T.C. 485, 492–93 (2017), supplementing and
overruling in part 147 T.C. 460 (2016). Section 6751(b)(1) provides that
“[n]o penalty under [Title 26, the Internal Revenue Code] shall be
assessed unless the initial determination of such assessment is
personally approved (in writing) by the immediate supervisor of the
individual making such determination.” In the statute “assessed” refers
to a ministerial function, “the formal recording of a taxpayer’s tax
liability on the tax rolls,” which is “the last of a number of steps required
before the IRS can collect” a tax or penalty from a taxpayer. Laidlaw’s

        5 In view of our conclusion regarding the substantial understatement bases for

the accuracy-related penalties for the years at issue, we find it unnecessary to decide
whether respondent has met his burden with respect to negligence.
                                     6

[*6] Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066, 1071
(9th Cir. 2022) (quoting Chai v. Commissioner, 851 F.3d 190, 218 (2d
Cir. 2017), aff’g in part, rev’g in part T.C. Memo. 2015-42), rev’g and
remanding 154 T.C. 68 (2020).

       The written supervisory approval described in section 6751(b) is
not required to take any specific form. See Palmolive Bldg. Invs., LLC
v. Commissioner, 152 T.C. 75, 85–86 (2019). But we have held that it
generally must be obtained no later than (1) the date on which the
Commissioner issues the deficiency notice or (2) the date, if earlier, on
which the Commissioner makes a formal communication to the taxpayer
of his determination to assert a penalty and gives the taxpayer the right
to appeal the penalty with the Office of Appeals. See Belair Woods, LLC
v. Commissioner, 154 T.C. 1, 15 (2020); Clay v. Commissioner, 152 T.C.
223, 249–50 (2019), aff’d, 990 F.3d 1296 (11th Cir. 2021). The Court of
Appeals for the Eleventh Circuit, to which an appeal in this case
presumptively lies, has adopted a more liberal timing rule. It has held
that “the IRS satisfies [s]ection 6751(b) so long as a supervisor approves
an initial determination of a penalty assessment before it assesses those
penalties.” Kroner v. Commissioner, 48 F.4th 1272, 1276 (11th Cir.
2022), rev’g in part T.C. Memo. 2020-73.

       We have no occasion here to consider whether to adhere to our
own precedent or that of the Eleventh Circuit because the timing of the
supervisory approval in this case would satisfy either standard. The
immediate supervisor of the revenue agent who proposed the penalties
at issue gave her written approval by signing the Civil Penalty Approval
Form on January 29, 2016. The notice of deficiency was issued to
petitioners on May 10, 2016, and they did not receive any notice or letter
giving them an opportunity to request a conference with the Office of
Appeals before the notice of deficiency was issued to them. Thus,
approval was timely under this Court’s precedents. And because
assessment of the penalties has not yet occurred—indeed, pursuant to
section 6213(a) it will not occur until our decision in this case has become
final—the standard adopted by the Eleventh Circuit has also been
satisfied.

      Petitioners have not claimed or shown that they had reasonable
cause for the understatements. We accordingly will sustain the section
6662(a) penalties for the years at issue.
                                    7

[*7]   To reflect the foregoing,

       Decision will be entered for respondent.