Court Opinion

ID: 4340615
Source: CourtListenerOpinion
Date Created: 2018-11-14 08:37:08.499683+00
Date Added: 2024-06-11T14:48:47.397713
License: Public Domain

T.C. Summary Opinion 2017-16

                         UNITED STATES TAX COURT

                      RITA LOPEZ, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 20235-15S.                         Filed March 16, 2017.

      Juan C. Beritan, for petitioner.

      Steven D. Tillem and Courtland Roberts (student), for respondent.

                              SUMMARY OPINION

      CARLUZZO, Special Trial Judge: This case was heard pursuant to the

provisions of section 74631 of the Internal Revenue Code in effect when the

petition was filed. Pursuant to section 7463(b), the decision to be entered is not

      1
       Unless otherwise indicated, section references are to the Internal Revenue
Code of 1986, as amended, in effect for the years in issue. Rule references are to
the Tax Court Rules of Practice and Procedure.
                                         -2-

reviewable by any other court, and this opinion shall not be treated as precedent

for any other case.

      In a notice of deficiency dated May 20, 2015 (notice), respondent

determined deficiencies of $5,048 and $4,888 in petitioner’s 2012 and 2013

Federal income tax, respectively. The issues for decision are whether for each

year petitioner: (1) had “earned income” in the amount she reported, entitling her

to an earned income tax credit and an additional child tax credit under sections

32(a) and 24(d), respectively and (2) is subject to the restrictions prescribed in

section 32(k)(1)(B)(ii).

                                     Background

      Some of the facts have been stipulated and are so found. At all times

relevant, including the date the petition was filed, petitioner along with her two

minor daughters lived in a rented three-bedroom apartment in New York, New

York. The record does not show the rent, if any, petitioner paid for her residence

or the extent of any other personal or living expenses.

      During the years in issue petitioner was a self-employed cosmetologist,

specializing in hairstyling. She operated her unlicensed cosmetology business

from her residence and met with at least 12 of her customers regularly, charging

anywhere from $10 to $50 per appointment. Most of her customers consisted of
                                       -3-

her neighbors and friends. To the extent petitioner received any formal

cosmetology training or licensing with respect to her cosmetology business, it

occurred after 2013.

      Petitioner did not maintain a bank account during the years in issue, nor did

she maintain any contemporaneous business records showing the income and

expenses attributable to her business. According to petitioner, her customers paid

her in cash, and she did not provide receipts for those payments.

      In addition to the income petitioner earned from her cosmetology business,

she received $2,000 of nonemployee compensation related to referral fees from

Toyota of Hackensack (Toyota) in 2013, which is reported on a Form 1099-MISC,

Miscellaneous Income, issued to her by Toyota for that year.

      For each year in issue petitioner’s timely filed Federal income tax return

was prepared by a paid income tax return preparer. On her 2012 return petitioner

claimed head of household filing status, and on her 2013 return she claimed single

filing status. As relevant, each return includes a Schedule C, Profit or Loss From

Business, relating to petitioner’s cosmetology business. Among other items and as

relevant here, on the Schedules C petitioner reported gross income of $17,800 and

$17,581 for 2012 and 2013, respectively. Petitioner reported $2,015 in expenses
                                        -4-

on the Schedule C for 2012, resulting in a net profit of $15,785 for that year.

Petitioner did not report any expenses on the Schedule C for 2013.

       On each return petitioner claimed two dependency exemption deductions,

an earned income tax credit, and an additional child tax credit. The nonemployee

compensation of $2,000 from Toyota was not reported on her 2013 return.

      In the notice respondent adjusted petitioner’s income for each year by

eliminating the Schedule C gross receipts. As a result, respondent disallowed or

decreased the amounts of the above-referenced credits that petitioner claimed.

Respondent further determined that in accordance with the provisions of section

32(k)(1)(B)(ii) petitioner is barred from claiming an earned income tax credit for

certain future years.

                                     Discussion

      Generally, the Commissioner’s determinations are presumed correct, and the

taxpayer bears the burden of proving that those determinations are erroneous.

Rule 142(a); see INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch

v. Helvering, 290 U.S. 111, 115 (1933).2 Credits, like deductions, are a matter of

      2
        Petitioner does not claim and the record does not show that the provisions
of sec. 7491(a) are applicable, and we proceed as though they are not.
                                        -5-

legislative grace, and the taxpayer bears the burden of proving entitlement to any

deduction or credit claimed. Deputy v. du Pont, 308 U.S. 488, 493 (1940).

I. Earned Income Tax Credit and Additional Child Tax Credit

      Section 32(a)(1) allows an eligible individual a credit against his or her

income tax. The credit is computed as a percentage of the taxpayer’s “earned

income”. Id. The term “earned income” is defined in section 32(c)(2)(A) and

includes wages and net earnings from self-employment. A taxpayer claiming the

credit must establish that he or she had earned income and the amount of that

income. See, e.g., Blore v. Commissioner, T.C. Memo. 2000-326.

      Section 24(a) provides that a taxpayer is allowed a credit against his or her

income tax for the taxable year with respect to each qualifying child of the

taxpayer for which the taxpayer is allowed a dependency exemption deduction

under section 151.

      The dispute between the parties with respect to petitioner’s entitlement to

these credits is focused on the amounts of income she claims to have earned from

her cosmetology business. According to petitioner, she earned $17,800 and

$17,581 from that business in 2012 and 2013, respectively. Relying upon the

absence of any bank or other contemporaneous records that support petitioner’s
                                         -6-

claims, respondent argues that she had no earned income from that business during

those years.

       Although petitioner maintained no business records with respect to her

cosmetology business, we find that she was engaged in a cosmetology business

during the years in issue as she claims. Notarized written statements from

petitioner’s clients, each dated in March 2015 and provided to respondent during

the pendency of respondent’s examination of her 2012 and 2013 Federal income

tax returns, corroborate her testimony that she was paid to provide cosmetology

services to at least 12 regular customers. We appreciate respondent’s suspicions

in situations seemingly designed to maximize the refundable credits here in

dispute, but respondent has not introduced any direct evidence casting doubt on

petitioner’s claim to have been in the cosmetology business during either year in

issue. While we are not obligated to accept petitioner’s testimony on her business

practices, see Tokarski v. Commissioner, 87 T.C. 74, 77 (1986), neither are we

obligated to reject it.

       On the other hand, respondent’s presentation at trial raises questions

regarding the legitimacy of the written statements petitioner relied upon to support

her claims, but there is not sufficient evidence in the record to persuade us to

ignore those statements completely. In the absence of written records showing
                                         -7-

how the amount of gross income shown on each Schedule C was actually

computed, and taking into account the information shown on some of the written

statements from her customers, we find that petitioner’s gross receipts from her

cosmetology business totaled $10,000 each year. Any inexactitude inherent in our

finding is attributable to petitioner’s lack of contemporaneous records. Cf. Cohan

v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). Accordingly, petitioner is

entitled for each year to an earned income tax credit and an additional child tax

credit that take into account the foregoing findings.

II. Section 32(k)

      Section 32(k)(1)(B)(ii) disallows an earned income tax credit for “the period

of 2 taxable years after the most recent taxable year for which there was a final

determination that the taxpayer’s claim of credit under this section was due to

reckless or intentional disregard of rules and regulations (but not due to fraud).”

Respondent determined that the restrictions imposed by section 32(k)(1)(B)(ii) are

applicable to petitioner for each year in issue.

      It would appear that our findings will result in the reduction of petitioner’s

claimed earned income tax credit for each year, but we expect that the credit will

not be entirely disallowed for either year. Consequently, we make no comment in

this proceeding regarding the application of section 32(k). We note, however, that
                                       -8-

the failure to maintain adequate records to support items shown on a return can

support a finding of negligence for purposes of section 6662(a). See sec. 1.6662-

3(b)(1), Income Tax Regs.

      To reflect the foregoing,

                                                   Decision will be entered

                                             under Rule 155.