The opinion
T.C. Summary Opinion 2007-182
UNITED STATES TAX COURT
THOMAS EDWARDS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9025-06S. Filed October 24, 2007.
John G. Pierce, for petitioner.
Jeffrey S. Leuchtefeld, for respondent.
PANUTHOS, Chief Special Trial Judge: This case was heard
pursuant to section 7463 of the Internal Revenue Code in effect
when the petition was filed. Pursuant to section 7463(b), the
decision to be entered is not reviewable by any other court, and
this opinion shall not be treated as precedent for any other
case. Unless otherwise indicated, all section references are to
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the Internal Revenue Code for the year in issue and all Rule
references are to the Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner’s 2001
Federal income tax of $7,514 and additions to tax under section
6651(a)(1) of $1,691, under section 6651(a)(2) of $1,578, and
under section 6654 of $297.
After concessions,1 the issues for decision are: (1)
Whether petitioner is entitled to business expense deductions for
2001 and (2) whether petitioner is liable for additions to tax
for failing to file a 2001 tax return, for failing to pay the
amount shown as due on a tax return, and for failing to pay
estimated taxes.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts, with accompanying exhibits, is
incorporated herein by this reference.
At the time he filed the petition, petitioner resided in
Apopka, Florida. Petitioner has installed ceramic tile since
1957, and he operated a tile business in 2001. Petitioner
accepted checks in payment for work performed and cashed those
1
At trial, respondent conceded that petitioner is entitled
to a filing status of married filing jointly and to a deduction
for home mortgage interest paid in 2001.
By stipulation, petitioner conceded that for 2001 he
received $7,224 of Social Security income and $27,066 of
nonemployee compensation, and did not file a 2001 tax return.
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checks at the banks on which they were drawn. Petitioner paid
workers and paid other expenses in cash. During 2001, petitioner
used an extended-cab pickup truck to transport his crew and
materials to tile jobs.
Petitioner did not make any estimated tax payments and did
not pay any withholding taxes in 2001. Petitioner did not file a
tax return for either 2000 or 2001.
Pursuant to section 6020(b), respondent prepared a
substitute for return for 2001. Respondent included self-
employment income reported on Forms 1099-MISC, Miscellaneous
Income, and Social Security benefits reported on Form SSA-1099,
Social Security Benefit Statement, on the substitute for return.
Respondent allowed a personal exemption and a standard deduction
on the substitute for return.2 Respondent issued a notice of
deficiency. Petitioner timely filed a petition for
redetermination.
Discussion
The parties have stipulated the items of income but dispute
whether petitioner is entitled to deductions for expenses related
to his tile business.3 Petitioner did not submit a Schedule C,
2
As indicated supra note 1, respondent concedes the filing
status and home mortgage interest deduction.
3
Respondent does not dispute that petitioner’s installation
of tile in 2001 qualifies as a trade or business for Federal
income tax purposes. On the record as a whole, the Court presumes
(continued...)
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Profit or Loss From Business, reflecting expense deductions
claimed. Rather, he claims deductions for cash payments to his
crew and for costs of transporting his crew and materials to tile
jobs. We will address these deductions first and then consider
the additions to tax determined by respondent.
I. Burden of Proof
A. Deficiency
In general, a taxpayer bears the burden of proof. Rule
142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The burden
of proof on factual issues that affect the taxpayer’s liability
may be shifted to the Commissioner if the taxpayer introduces
credible evidence with respect to such issues and satisfies the
requirements under section 7491(a)(2) to substantiate items,
maintain required records, and cooperate fully with the
Commissioner’s reasonable requests. Sec. 7491(a).
The burden of proof with respect to the deficiency
respondent determined remains with petitioner because he has
neither taken a position as to whether the burden should be
shifted to respondent nor established that he has complied with
the requirements of section 7491(a).4
3
(...continued)
that petitioner’s business was a sole proprietorship.
4
Even though petitioner did not assert a reasonable dispute
with respect to the income reported on the Forms 1099-MISC,
Miscellaneous Income, so as to require respondent to verify the
(continued...)
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B. Additions to Tax
Pursuant to section 7491(c), the Commissioner has the burden
of production as to whether a taxpayer is liable for an addition
to tax. To meet this burden, he must produce sufficient evidence
showing that imposition of the addition to tax is appropriate in
the particular case. Higbee v. Commissioner, 116 T.C. 438, 446
(2001).
Once respondent meets this burden, petitioner must come
forward with persuasive evidence that respondent’s determination
is incorrect. See Rule 142(a); Higbee v. Commissioner, supra at
447. As a defense to the additions to tax, petitioner bears the
burden of proof regarding reasonable cause and lack of willful
neglect or the applicability of an exception. Secs. 6651(a),
6654(e).
II. Business Expense Deductions
As a general rule, section 162(a) authorizes deductions for
“all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business”.
Taxpayers are required to maintain records sufficient to
substantiate each claimed deduction. Sec. 6001; Hradesky v.
4
(...continued)
information returns per sec. 6201(d), respondent introduced in
evidence canceled checks substantiating most of the payments.
Moreover, the parties stipulated the nonemployee compensation
income.
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Commissioner, 65 T.C. 87, 89-90 (1975), affd. 540 F.2d 812 (5th
Cir. 1976); sec. 1.6001-1(a), Income Tax Regs.
When a taxpayer adequately establishes that he paid or
incurred a deductible expense but does not establish the precise
amount, we may in some circumstances estimate the allowable
deduction, bearing heavily against the taxpayer whose
inexactitude is of his own making. Cohan v. Commissioner, 39
F.2d 540, 544 (2d Cir. 1930).
We can estimate the amount of the deductible expense only
when the taxpayer produces evidence sufficient to establish a
rational basis upon which the estimate can be made. Vanicek v.
Commissioner, 85 T.C. 731, 743 (1985).
Petitioner claims deductions for (1) compensation paid to
his crew and (2) business transportation expenses. He asks the
Court to accept his testimony as to the amounts paid and the
expenses incurred, and to estimate the deductions allowable. We
discuss these expenses in turn.
A. Compensation Expense Deductions
Petitioner asserts that he hired several people in 2001 to
help him install tile. Petitioner dealt primarily in cash. He
paid his helpers in cash. He did not issue or file Forms 1099-
MISC. He explained that he did not have a bank account for the
business because checks made out in the name of a company were
difficult to cash.
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Petitioner stated that Michael McKinney (Mr. McKinney), whom
petitioner referred to as his son, maintained records of how many
weeks each helper worked so that each could be paid.
Melvin Burrell (Mr. Burrell), identified at trial as
petitioner’s other son, worked in petitioner’s tile business for
at least 15 years. Petitioner and Mr. Burrell each testified as
to the following distribution of cash among petitioner and his
crew in 2001:
Recipient Payment
Petitioner $8,000
Michael McKinney 8,000
Melvin Burrell 4,500
Arthur Edwards 4,500
Jeff Robinson 800
Berian Justice 800
Total cash distributed 26,600
Total paid to workers 18,600
Mr. Burrell claimed that he worked for petitioner for the
entire year 2001, working a standard 8 hours per day, 5 days a
week. Mr. Burrell did not report the $4,500 he claims petitioner
paid him in 2001 or file a tax return for 2001. Mr. Burrell
testified that he did not file a 2001 tax return because he did
not receive a Form 1099-MISC from petitioner.
Compensation is deductible as a trade or business expense
only if it is (1) reasonable in amount, (2) based on services
actually rendered, and (3) paid or incurred. See O’Connor v.
Commissioner, T.C. Memo. 1986-444; sec. 1.162-7(a), Income Tax
Regs.
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Petitioner claims he paid each worker, in cash, more than
the $600 reporting threshold of section 6041(a). However, he
failed to prepare or submit the required information returns to
the Internal Revenue Service. See sec. 1.6041-1(a)(1) and (2),
Income Tax Regs. Petitioner asserted that Mr. McKinney
maintained records of how much each person worked so each could
be paid, but petitioner did not produce any records to support
payments to his crew and did not call Mr. McKinney to testify at
trial.
We are not required to, and do not, accept petitioner’s
self-serving testimony without corroborating evidence. See
Geiger v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971),
affg. per curiam T.C. Memo. 1969-159; Lerch v. Commissioner, T.C.
Memo. 1987-295, affd. 877 F.2d 624 (7th Cir. 1989).
Mr. Burrell claimed that he earned $4,500 for working full
time for petitioner in 2001. The Court does not find this
testimony credible. Accordingly, Mr. Burrell’s testimony does
not corroborate petitioner’s testimony.
To the extent such payments of compensation were made,
petitioner did not produce adequate records. Mr. Burrell’s
failure to report the $4,500 he claims he was paid casts doubt on
whether any amounts were actually paid. Petitioner’s failure to
file information returns casts further doubt as to the
compensation payments. See Haeder v. Commissioner, T.C. Memo.
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2001-7; Martens v. Commissioner, T.C. Memo. 1990-42, affd.
without published opinion 934 F.2d 319 (4th Cir. 1991).
Petitioner did not introduce any credible evidence which
would provide a basis for the Court to conclude that deductible
compensation was paid. Nor is there sufficient evidence to
estimate the amount of compensation paid. We conclude that
petitioner is not entitled to a business expense deduction for
the $18,600 he claims he paid to his crew.5
B. Transportation Expense Deductions
Petitioner asserts that his truck was driven approximately
100,000 miles during 2001 for his business and that Mr. McKinney
kept all the receipts for gasoline purchases and other business
expenses. Mr. Burrell asserts that it was he who drove
petitioner’s truck to the job sites and that he drove close to
100,000 miles for the business in 2001.
Section 274(d) supersedes the general rule of Cohan v.
Commissioner, supra, and prohibits the Court from estimating the
taxpayer’s expenses with respect to certain items. Sanford v.
Commissioner, 50 T.C. 823, 827-828 (1968), affd. per curiam 412
5
The Court notes that each member of petitioner’s crew is
related to petitioner (two sons, two nephews, and a grandson).
When deductions are claimed for compensation paid to family
members, the Court carefully scrutinizes the transactions. Hamdi
v. Commissioner, T.C. Memo. 1993-38, affd. without published
opinion 23 F.3d 407 (6th Cir. 1994). Because we conclude that
petitioner has failed adequately to substantiate the payments
claimed, further scrutiny is not required.
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F.2d 201 (2d Cir. 1969). Section 274(d) imposes strict
substantiation requirements for, inter alia, traveling expenses
and expenses with respect to listed property. Listed property is
defined in section 280F(d)(4) to include passenger automobiles
and other property used for transportation.
Pursuant to section 274(d), a taxpayer must substantiate a
claimed automobile expense with adequate records or sufficient
evidence corroborating his own testimony as to: (1) The amount
of the expenditure; (2) the mileage for each business use of the
automobile and the total mileage for all use of the automobile
during the taxable period; (3) the date of the business use; and
(4) the business purpose for the use of the automobile. Sec.
1.274-5T(b)(6), Temporary Income Tax Regs., 50 Fed. Reg. 46016
(Nov. 6, 1985).
Petitioner seeks to deduct expenses for driving to job sites
throughout Florida. The only detail he offers is vague testimony
of roughly 100,000 miles driven in 2001. Aside from his own
self-serving testimony and the testimony of Mr. Burrell,
petitioner has not offered any evidence to satisfy the threshold
requirement of showing that any transportation expenses were paid
or incurred in carrying on a particular trade or business. A
fortiori, such evidence necessarily falls short of meeting the
heightened substantiation requisites of section 274.
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Petitioner failed to satisfy the substantiation requirements
of section 274(d) and introduced no receipts for gasoline or
other transportation expenses. The expenses claimed for
transporting crew and materials and for business use of a truck
in 2001 are not deductible.
III. Additions to Tax
Respondent determined additions to tax for failure to file a
tax return, sec. 6651(a)(1), for failure to pay tax reported on a
return, sec. 6651(a)(2), and for failure to pay estimated tax,
sec. 6654(a).
Petitioner routinely hired a tax return preparer. He
claimed that he turned the responsibility for managing the
financial aspects of his business over to Mr. McKinney in 2000.
Petitioner argues that he should not be held liable for the
additions to tax because he relied on Mr. McKinney to prepare and
file his tax returns.
A. Section 6651(a)(1): Failure To File a Tax Return
The parties stipulated that petitioner did not file a
Federal income tax return for 2001 and that he had gross income
of $34,290. His income exceeded the threshold of section
6012(a)(1)(A). Therefore, he had an obligation to file a return.
Respondent made a substitute for return for petitioner under
section 6020(b). A return prepared under section 6020(b) is to
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be disregarded for purposes of determining the amount of the
addition to tax under section 6651(a)(1). Sec. 6651(g)(1).
Respondent has met his burden of production under section
7491(c) with respect to imposing the addition to tax under
section 6651(a)(1). Accordingly, it is petitioner’s burden to
prove that he had reasonable cause and lacked willful neglect in
not filing his return. See sec. 6651(a); United States v. Boyle,
469 U.S. 241, 245 (1985); Higbee v. Commissioner, 116 T.C. at
446-447; sec. 301.6651-1(a)(1), Proced. & Admin. Regs.
Petitioner claimed that for 2001 Mr. McKinney promised to
handle the record keeping for the business and to hire someone to
prepare and file the tax returns. He asserts that he relied on
Mr. McKinney’s promise and only learned that Mr. McKinney had not
kept this promise when he received the notice of deficiency from
respondent.
A taxpayer has a duty to file a complete and accurate tax
return and cannot avoid that duty by placing responsibility with
an agent. United States v. Boyle, supra at 252; Metra Chem Corp.
v. Commissioner, 88 T.C. 654, 662 (1987). “Morever, it is well
established that an * * * [agent’s] failure to prepare and file a
return does not itself constitute reasonable cause for failure to
file within the meaning of section 6651(a).” Bradley v.
Commissioner, 57 T.C. 1, 11 (1971).
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Mr. McKinney’s failure to meet petitioner’s expectations
with respect to preparing and filing petitioner’s tax return does
not excuse petitioner’s failure to file his own tax return.
Because petitioner has failed to offer satisfactory evidence
of reasonable cause and lack of willful neglect for his failure
to file, respondent’s determination that he is liable for the
addition to tax under section 6651(a)(1) is sustained.
B. Section 6651(a)(2): Failure To Pay Amount Shown as Tax
Respondent has met his burden of production under section
7491(c) with respect to imposing the addition to tax under
section 6651(a)(2) because the record clearly reflects that
petitioner did not pay the amount shown as due on a tax return.6
As with petitioner’s failure to file, discussed above,
petitioner’s reliance on Mr. McKinney does not excuse
petitioner’s failure to pay the tax due for 2001.
Petitioner failed to offer sufficient evidence of reasonable
cause and lack of willful neglect for his failure to pay the tax
due for 2001. Accordingly, respondent’s determination that
petitioner is liable for the addition to tax under section
6651(a)(2) is sustained.
6
Under sec. 6651(g)(2), the substitute for return is to be
treated as a return filed by petitioner for purposes of
determining the amount of the addition to tax under sec.
6651(a)(2).
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C. Section 6654: Failure To Pay Estimated Income Tax
Section 6654 imposes an addition to tax for failure to make
timely and sufficient payments for estimated taxes. Petitioner
challenged the applicability of each addition to tax respondent
determined. Therefore, in order to satisfy his burden of
production under section 7491(c) for the section 6654 addition to
tax, respondent must produce the evidence necessary to enable the
Court to conclude that petitioner had an obligation to make an
estimated tax payment. Wheeler v. Commissioner, 127 T.C. 200,
211 (2006). Specifically, respondent must produce evidence
showing that petitioner had a “required annual payment” as
defined by section 6654(d)(1)(B) for the year at issue. Id.
Under section 6654(d)(1)(B), “required annual payment” means
the lesser of--
(i) 90 percent of the tax shown on the return for
the taxable year (or, if no return is filed, 90
percent of the tax for such year), or
(ii) 100 percent of the tax shown on the return of
the individual for the preceding taxable year.
Clause (ii) shall not apply if the preceding taxable
year was not a taxable year of 12 months or if the
individual did not file a return for such preceding
taxable year.
Petitioner did not file a tax return for 2000. Therefore,
under the flush language of section 6654(d)(1)(B), clause (ii)
does not apply with respect to determining the required annual
payment for 2001. Petitioner had a tax liability for 2001 but
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did not file a tax return for 2001. Therefore, the Court
concludes that petitioner had a required annual payment for 2001,
pursuant to the parenthetical language in section
6654(d)(1)(B)(i).
The section 6654 addition to tax is mandatory unless
petitioner can place himself within one of the computational
exceptions provided by section 6654(e). See Recklitis v.
Commissioner, 91 T.C. 874, 913 (1988); Grosshandler v.
Commissioner, 75 T.C. 1, 20-21 (1980). There is no exception for
reasonable cause or lack of willful neglect. Estate of Ruben v.
Commissioner, 33 T.C. 1071, 1072 (1960).
Petitioner has not shown that any of the statutory
exceptions under section 6654(e) applies. Respondent's
determination as to the addition to tax under section 6654(a) is
sustained.
Respondent’s determinations are sustained except to the
extent of concessions made.
To reflect the foregoing,
Decision will be entered
under Rule 155.