UNITED STATES TAX COURT

T.C. Memo. 2003-247

UNITED STATES TAX COURT

JIMMY A. PRINCE, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 9120-02.

Filed August 18, 2003.

Jimmy A. Prince, pro se.

Jean Song, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

LARO, Judge:

Petitioner petitioned the Court to redetermine

respondent’s determinations as to petitioner’s 1997, 1998, and

1999 Federal income taxes.

Respondent determined for those

respective years that petitioner had deficiencies of $36,861,

$89,210, and $71,454 and was liable for section 6662(a)

- 2 accuracy-related penalties of $7,372, $17,842, and $14,291.1

Respondent also determined as to 1997 that petitioner was liable

for a $9,215 addition to tax under section 6651(a)(1).

Following concessions,2 we are left to decide:

1.

Whether the 3-year period of limitations under section

6501(a) has run on 1997.

2.

We hold it has not.

Whether petitioner may deduct self-employment expenses

in amounts greater than those allowed by respondent.

We hold he

may not.

3.

Whether petitioner may deduct for 1998 a $37,181 net

operating loss (NOL) carryover.

4.

We hold he may not.

Whether petitioner may deduct dependency exemptions for

his daughter Keauna (Keauna) and his son Zik (Zik).

We hold he

may not.

1

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the subject years, Rule

references are to the Tax Court Rules of Practice and Procedure,

and dollar amounts are rounded.

2

In addition to the concessions made explicitly, we

consider petitioner to have conceded respondent’s determination

of unreported income by virtue of the fact that petitioner did

not address this issue on brief. We hold without further comment

that petitioner underreported the 1997 and 1998 gross income of

his sole proprietorship by $5,261 and $26,631, respectively, as

determined by respondent. See Levin v. Commissioner, 87 T.C.

698, 722-723 (1986), affd. 832 F.2d 403 (7th Cir. 1987);

Zimmerman v. Commissioner, 67 T.C. 94, 104 n.7 (1976); see also

Remuzzi v. Commissioner, T.C. Memo. 1988-8, affd. without

published opinion 867 F.2d 609 (4th Cir. 1989).

- 3 5.

status.

6.

Whether petitioner may use the head of household filing

We hold he may not.

Whether petitioner is liable for the addition to tax

determined by respondent under section 6651(a)(1).

We hold he

is.

7.

Whether petitioner is liable for the accuracy-related

penalties determined by respondent under section 6662(a).

We

hold he is.

FINDINGS OF FACT

Some facts were stipulated.

The stipulated facts and the

accompanying exhibits are incorporated herein by this reference.

We find the stipulated facts accordingly.

Petitioner resided in

Los Angeles, California, when his petition was filed.

Petitioner’s daughter is Keauna, and his son is Zik.

Petitioner

did not reside with Keauna during the subject years, and we do

not find in the record that he resided with Zik either.

Petitioner filed with the Commissioner 1997, 1998, and 1999

Forms 1040, U.S. Individual Income Tax Return, using the filing

status of “Head of Household”.

He reported on those returns that

his dependents were Keauna and Zik.

On his 1997 and 1999

returns, petitioner reported a loss of $9,614 and income of $954,

respectively, from his sole proprietorship named Jasmak Auto

Parts (Jasmak).

On his 1998 return, petitioner reported income

of $17,609 from Jasmak and an NOL carryover of $37,181 for

- 4 purported losses from Jasmak for 1994 through 1997.

The items of

income from Jasmak were the only items of income reported on

petitioner’s 1997 through 1999 returns.

Petitioner filed his

1997 tax return with the Commissioner on March 26, 1999.

The respective returns reported that petitioner calculated

Jasmak’s profit (loss) for 1997 through 1999 as follows:

Gross receipts

Returns and allowances

Cost of goods sold:

Beginning inventory

Purchases

Ending inventory

1997

1998

1999

$233,394

-0-

$407,173

(7,846)

$356,977

-0-

72,411

114,367

56,270

130,508

102,886

56,270

279,762

81,431

254,101

144,226

81,431

220,877

83,236

219,072

137,905

2,206

23,562

4,785

529

9,167

-036,000

2,446

1,049

2,985

150

1,200

991

8,058

182

94

355

1,760

839

517

20,200

433

7,581

2,028

-0-

4,394

24,348

6,097

-07,971

1,782

36,000

1,686

-02,338

1,143

1,200

929

8,058

215

106

1,070

-0272

674

22,000

428

8,245

3,061

3,226

Gross profit

Expenses:

Advertising

7,212

Commissions and fees

19,460

Insurance

3,428

Interest

-0Legal and prof. services 2,678

Office expense

-0Rent

36,000

Repairs and maintenance

5,152

Supplies

1,648

Taxes and licenses

197

Travel

795

Utilities

2,750

Bank charges

425

Depreciation

4,565

Dues and subscriptions

82

Freight

1,274

Janitorial

320

Medical/health

-0Miscellaneous expenses

110

Postage

301

Salary expense

11,000

Security

422

Telephone

6,342

Transportation

3,435

Sales tax

3,118

- 5 Finance charges

Other

Interest expense

Profit (loss)

727

530

529

112,500

(9,614)

-0-0-0127,117

17,109

982

-0726

136,951

954

The “Salary expense” represented payments which Jasmak made to

petitioner for his services.

Petitioner now acknowledges that

the deduction of these payments was improper.

In 2000, the Commissioner began auditing petitioner’s 1997

through 1999 taxable years.

As a result of this audit, the

Commissioner increased (decreased) petitioner’s reported taxable

income as follows and reflected these adjustments in the subject

notice of deficiency mailed to petitioner on February 21, 2002:

1997

1998

1999

$16,338

$26,631

$24,988

5,952

19,261

1,315

3,428

2,410

52,174

-011,000

3,118

4,439

1,767

-023,397

4,801

4,785

8,240

127,641

6,760

20,200

2,985

5,307

1,040

2,610

24,105

4,848

6,097

7,174

100,764

-022,000

3,226

5,770

1,530

-0-

37,181

-0-

Self-employment income:

Unreported gross receipts

Self-employment expenses:

Advertising

Commissions

Depreciation

Insurance

Legal

Purchases

Returns and allowances

Salary

Sales tax

Telephone

Transportation

Other items of income:

NOL carryover

AGI adjustments:

- 6 Insurance

Self-employment

-0(5,549)

(594)

(6,337)

-0(7,166)

1,900

5,300

122,853

2,000

7,938

271,975

2,050

7,040

205,036

Deductions and exemptions:

Standard deduction

Exemptions

At trial, respondent conceded as to 1997 that he incorrectly

disallowed $49,529 of the purchases, $2,308 of the sales tax

expense, and $4,449 of the advertising expense.

Respondent also

conceded that petitioner’s 1997 gross income did not include

$11,077 of the determined unreported gross receipts and that

petitioner’s 1999 gross income did not include any of the

determined unreported gross receipts.

OPINION

1.

Burden of Proof

Taxpayers generally must prove respondent’s determinations

wrong in order to prevail.

Rule 142(a)(1); Welch v. Helvering,

290 U.S. 111, 115 (1933).

As one exception to this rule, section

7491(a) places upon respondent the burden of proof with respect

to any factual issue if the taxpayer maintained adequate records,

satisfied applicable substantiation requirements, cooperated with

respondent, and introduced during the court proceeding credible

evidence on the factual issue.3

3

The legislative history of

The relevant language of sec. 7491 provides:

(continued...)

- 7 section 7491(a) clarifies that taxpayers must prove that they

have satisfied the adequate records, substantiation, and

cooperation requirements before that section places the burden of

proof upon the Commissioner.4

H. Conf. Rept. 105-599, at 239

(1998), 1998-3 C.B. 747, 993 (“The taxpayer has the burden of

proving that it meets each of these conditions, because they are

necessary prerequisites to establishing that the burden of proof

3

(...continued)

SEC. 7491. BURDEN OF PROOF.

(a) Burden Shifts Where Taxpayer Produces Credible

Evidence.-(1) General rule.--If, in any court

proceeding, a taxpayer introduces credible

evidence with respect to any factual issue

relevant to ascertaining the liability of the

taxpayer for any tax imposed by subtitle A or

B, the Secretary shall have the burden of

proof with respect to such issue.

(2) Limitations.--Paragraph (1) shall

apply with respect to an issue only if-(A) the taxpayer has complied

with the requirements under this

title to substantiate any item;

(B) the taxpayer has

maintained all records required

under this title and has cooperated

with reasonable requests by the

Secretary for witnesses,

information, documents, meetings,

and interviews; * * *

4

The text of the statute requires that the taxpayer satisfy

the remaining (credible evidence) requirement as a condition of

placing the burden of proof upon respondent.

- 8 is on the Secretary.”).

The legislative history provides further

as to the term “credible evidence”, which is not defined in the

statute, that

Credible evidence is the quality of evidence which,

after critical analysis, the court would find

sufficient upon which to base a decision on the issue

if no contrary evidence were submitted (without regard

to the judicial presumption of IRS correctness). A

taxpayer has not produced credible evidence for these

purposes if the taxpayer merely makes implausible

factual assertions, frivolous claims, or tax

protestor-type arguments. The introduction of evidence

will not meet this standard if the court is not

convinced that it is worthy of belief. If after

evidence from both sides, the court believes that the

evidence is equally balanced, the court shall find that

the Secretary has not sustained his burden of proof.

[Id. at 240-241, 1998-3 C.B. at 994-995.]

We have in previous cases involving section 7491 applied the

definition of the term “credible evidence” as discerned from the

legislative history.

E.g., Higbee v. Commissioner, 116 T.C. 438,

442-443 (2001); Forste v. Commissioner, T.C. Memo. 2003-103;

Managan v. Commissioner, T.C. Memo. 2001-192.

here.

We do likewise

We conclude that section 7491(a) does not apply here to

place the burden of proof upon respondent in that petitioner has

failed to introduce during this proceeding credible evidence on

any factual issue.

We note that section 7491(a) also is

inapplicable here in that we do not find that petitioner

maintained adequate records, satisfied applicable substantiation

requirements, or cooperated with the Commissioner.

- 9 2.

Period of Limitations

Section 6501(a) generally gives the Commissioner 3 years

from the date on which a return is filed to assess a tax as to

that return.

Petitioner filed his 1997 tax return with the

Commissioner on March 26, 1999, and the Commissioner mailed the

subject notice of deficiency to petitioner on February 21, 2002.

We conclude that respondent’s issuance to petitioner of the

notice of deficiency for 1997 was within the 3-year period of

section 6501(a).5

3.

Self-Employment Expenses

In addition to the general burden of proof discussed above,

petitioner must prove his entitlement to any deduction, e.g., by

maintaining sufficient records to substantiate his claimed

deductions.

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934); Lychuk v. Commissioner, 116 T.C. 374, 384 (2001); see

also sec. 6001; sec. 1.6001-1(a), Income Tax Regs.

Petitioner’s

burden requires that he introduce sufficient evidence to:

(1) Make a prima facie case establishing that respondent

committed the errors alleged in the petition and (2) overcome the

evidence favorable to respondent.

See Lobe v. Commissioner, T.C.

Memo. 2001-204; Lawler v. Commissioner, T.C. Memo. 1995-26.

5

Petitioner asserts on brief that he mailed his 1997 return

to the Commissioner on Apr. 20, 1998, and that the return filed

on Mar. 26, 1999, was simply a copy of that return. We find

these assertions unsupported by the credible evidence in the

record and decline to rely upon them.

- 10 Petitioner has failed to carry his burden of proof as to

this issue.

The record does not disprove respondent’s

determination as to the self-employment expenses, as adjusted by

respondent’s concessions at trial.

determination, as adjusted.

We sustain that

Lobe v. Commissioner, T.C. Memo.

2001-204 (and cases cited therein).

4.

NOL Deduction

Section 172 allows a taxpayer to deduct an NOL for a taxable

year.

The amount of the NOL deduction equals the sum of the NOL

carryovers plus NOL carrybacks to that year.

Sec. 172(a).

Absent an election to the contrary, an NOL for any taxable year

must first be carried back 3 years and then carried over 15

years.

Sec. 172(b)(1)(A), (2), and (3).6

Petitioner, as a

taxpayer attempting to deduct an NOL, bears the burden of

establishing both the existence of the NOL and the amount of any

NOL that may be carried over to 1998.

Rule 142(a)(1); United

States v. Olympic Radio & Television, Inc., 349 U.S. 232, 235

(1955); Keith v. Commissioner, 115 T.C. 605, 621 (2000).

Such a

deduction is a matter of legislative grace; it is not a matter of

right.

United States v. Olympic Radio & Television, Inc., supra

at 235; Deputy v. du Pont, 308 U.S. 488, 493 (1940).

6

In 1997, sec. 172(b)(1)(A) was amended to generally

require a 2-year carryback and a 20-year carryover for NOLs

incurred in taxable years beginning after Aug. 5, 1997. Neither

party asserts that this amendment is applicable here, and we

conclude it is not.

- 11 Petitioner claimed on his return that the NOL applied in

1998 arose in 1994 through 1997.

The record does not establish

that petitioner incurred an NOL in any of those years.

We

sustain respondent’s determination as to this issue.

5.

Dependency Exemptions/Filing Status

Section 152(a) allows a taxpayer such as petitioner to treat

a son and a daughter as dependents if the taxpayer provided

during the taxable year more than half of the support of each.

See also sec. 151(a), (c) (individual taxpayer may deduct an

exemption amount for each of his or her dependents).

Support

generally includes amounts used for a dependent’s food, shelter,

clothing, medical and dental care, education, and the like.

1.152-1(a)(2)(i), Income Tax Regs.

Sec.

To meet the support test

required as to a dependent, a taxpayer must show:

(1) The total

amounts received by the dependent from all sources, (2) the

amounts actually applied for the support of the dependent, (3)

the sources which contributed to the total support costs expended

on behalf of the dependent, and (4) that the taxpayer provided

over half of the total expenditures for the dependent’s support.

Barnes v. Commissioner, T.C. Memo. 1986-585.

Petitioner has not persuaded us that he provided more than

one-half of the support of either Keauna or Zik.

We conclude

that he is not entitled to treat either of them as his dependent.

We also conclude that petitioner may not file as head of

- 12 household.

Under section 2(b)(1)(A)(i), an individual such as

petitioner will qualify for head of household status if he

maintains as his home a household that is the principal place of

abode of a son or daughter for more than one-half of the taxable

year.

The record establishes that petitioner did not reside with

Keauna during the subject years and does not establish that Zik

resided with him either.

6.

Addition to Tax/Accuracy-Related Penalties

Section 6651(a)(1) imposes an addition to tax for failing to

file a return on or before the specified filing date unless it is

shown that this failure is due to reasonable cause and not due to

willful neglect.

Reasonable cause may exist if a taxpayer

exercised ordinary business care and prudence and was nonetheless

unable to file the return within the date prescribed by law.

Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.

Willful neglect

means a “conscious, intentional failure or reckless

indifference.”

United States v. Boyle, 469 U.S. 241, 245 (1985).

Section 6662(a) imposes a penalty of 20 percent on the

portion of an underpayment of tax attributable to, among other

things, a substantial understatement of tax.

(2).

Sec. 6662(b)(1) and

A substantial understatement of tax is one that exceeds the

greater of 10 percent of the tax required to be shown on the

return or $5,000.

Sec. 6662(d)(1)(A).

An accuracy-related

penalty does not apply to any portion of an understatement as to

- 13 which the facts and circumstances show that the taxpayer acted

with reasonable cause and in good faith.

Sec. 6664(c)(1); sec.

1.6664-4(b)(1), Income Tax Regs.

Respondent bears the burden of production with respect to

this addition to tax and these accuracy-related penalties.

7491(c).

Sec.

In order to meet this burden, respondent must produce

sufficient evidence establishing that it is appropriate to impose

these items.

Once respondent has done so, the burden of proof is

upon petitioner.

Higbee v. Commissioner, 116 T.C. at 449.

Respondent has satisfied his burden of production with

respect to the addition to tax in that the record establishes

that petitioner filed his 1997 tax return after its due date.

Respondent has also satisfied his burden of production with

respect to the section 6662(a) accuracy-related penalties to the

extent that the record establishes that petitioner understated

his tax for each of the subject years by the greater of 10

percent of the tax required to be shown on the return or $5,000.

With regard to both the addition to tax and the accuracy-related

penalties, petitioner must establish reasonable cause in order to

prevail.

Id.

Petitioner filed his 1997 tax return more than 11

months after the due date, and he has presented no evidence

establishing that his failure to file that return timely was due

to reasonable cause and not due to willful neglect.

Petitioner

has also failed to introduce any evidence establishing that he

- 14 acted with reasonable cause or in good faith with respect to the

items underlying the accuracy-related penalties.

We sustain

respondent’s determination as to the addition to tax and the

accuracy-related penalties (to the extent that the parties

computation(s) under Rule 155 establishes that petitioner

understated his tax for each of the subject years by the greater

of 10 percent of the tax required to be shown on the return or

$5,000).

All arguments made by the parties and not discussed herein

have been rejected as meritless.

To reflect concessions,

Decision will be

entered under Rule 155.