# T .C . Summary Opinion 2008-68

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T .C . Summary Opinion 2008-68

UNITED STATES TAX COUR T

RONALD MICHAEL AND LORRAINE ELIZABETH SKALKO, Petitioners v .
COMMISSIONER OF INTERNAL REVENUE, Responden t

Docket No . 10958-05S .

Filed June 18, 2008 .

Ronald Michael and Lorraine Elizabeth Skalko, pro se .
Brenda Fitzgerald , for respondent .

WELLS,

Judge : This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect
when the petition was filed .' Pursuant to section 7463(b), th e

'Unless otherwise indicated, all Rule references are to the
Tax Court Rules of Practice and Procedure, and all subsequent
section references are to the Internal Revenue Code as in effect
for the years in issue .

91

SERVED JUN 18 2008

- 2 -

decision to be entered is not reviewable by any other court, and
this opinion shall not be treated as precedent for .any other
case .
Respondent determined deficiencies in petitioners' incom e

taxes and penalties as follows :
Penalt y
Sec . 6662(a )
$1,162 .4 0

Year
2001

Deficiency
$5,812

2002

4,352

870 .4 0

2003

4,176

835 .2 0

The issues we must decide are : (1) Whether petitioners are
liable for deficiencies in taxable years 2001, 2002, and 2003
where the deficiencies arose in part from deductions petitioners
claimed on Schedule C, Profit or Loss From Business ; (2) whether
petitioners properly reported the gross receipts of their
businesses ; (3) whether petitioners may claim a dependency
exemption deduction for their daughter for 2003 ; and (4) whether
petitioners properly reported an early distribution from a
qualified pension or retirement plan ; and (5) whether petitioners
are liable for section 6662(a) accuracy-related penalties for
negligent failure to accurately report income or for substantial
understatements of income tax .
Background
Some facts have been stipulated and are so found . The
stipulation of facts and the attached exhibits are incorporated

- 3 herein by this reference . At the time the petition was filed,
petitioners resided in Georgia .
During 2001, 2002, and 2003 petitioner Ronald Skalko
(petitioner) operated two businesses as sole proprietorships .
The first business was a party equipment rental and bartending
service conducted under the name Pourmasters . The second
business was a newspaper delivery service (Newspaper Delivery) .
For part of the year Mr . Skalko also worked full time as a
seasonal employee of the Internal Revenue Service .

Car and Truck Expenses
Petitioner did not maintain contemporaneous mileage logs,for
car and truck expenses for Pourmasters and Newspaper Delivery .
Petitioner provided a noncontemporaneous log for Pourmasters and
Newspaper Delivery for 2001 . On Schedule C for Pourmas ers
petitioners claimed car and truck expense deductions of $5,175
for 2001, $7,665 for 2002, and $10,800 for 2003 of which
respondent allowed in the notice of deficiency the following :
$3,695 for 2001, $5,000 for 2002, and $6,873 for 2003 . On
Schedule C for Newspaper Delivery petitioners claimed car and
truck expense deductions of $3,450 for 2001 and $8,424 for 2003,
of which respondent allowed in the notice of deficiency the
following : $3,450 for 2001 and $3,600 for 2003 .

Depreciation Expense s
For 2001 petitioners deducted $7,000 in depreciation
expenses for Pourmasters . The documents petitioners provided to
respondent reported expenses of $7,297 .30 . Of that amount in the
notice of deficiency, respondent disallowed $1,968 .20 paid t o

purchase a refrigerator during 2001 and allowed $5,311 of the
remaining depreciation expense deductions claimed .
Legal Expense s
For 2001 petitioners deducted $3,500 in legal expenses for
Pourmasters . In 2001 petitioners paid $3,500 to J . William
Morse, an attorney, to defend Mr . Skalko against charges of
driving under the influence of intoxicants, possessing an open
container, and failing to maintain his lane while driving . In
the notice of deficiency respondent disallowed all of
petitioners' claimed legal expense deductions .

Itemized Deductions for Employee Business Expense s
For 2001 petitioners claimed deductions of $4,895 in
employee business expenses, and in the . notice of deficiency
respondent allowed $3,954 of the amounts claimed . For 2002
petitioners deducted $6,593 in employee business expenses for
Mrs . Skalko and $370 for Mr . Skalko, and of these amounts, in the
notice of deficiency respondent allowed $990 for language
training expenses and $2,964 for meal and entertainment expenses
for Mrs . Skalko . For 2003 petitioners deducted $5,117 in

5 employee business expenses for Mrs . Skalko and $240 for Mr .
Skalko, and of those amounts, in the notice of deficiency
respondent allowed $3,783 in employee business expenses for
Mrs . Skalko .
Wages
During 2001 petitioners' older son was a full-time student at
the University of Denver . Also during 2001 petitioners' younger
son was 17 years old and was a high school student . Petitioners
claimed that they employed both of their sons in Newspaper
Delivery . For 2001 petitioners deducted payments they claim they
paid their older son of $200 per week for 27 .5 weeks, for a total
of $5,500 . Additionally for 2001, petitioners claimed deductions
for payments they claim they made to their younger son of $200
per week for 15 weeks for a total of $3,000 . Petitioner claims
that he delivered newspapers for the remaining weeks of 2001 .
Petitioners failed to keep contemporaneous records of the days on
which their sons delivered newspapers as well as of any payments
made to their sons during 2001 . In the notice of deficiency
respondent disallowed all of the deductions claimed for wage s
paid to petitioners' sons .
Gross Receipt s
For 2001 petitioners' records indicate that petitioners'
gross receipts from Pourmasters were $18,532 .95 ; however, .
petitioners reported only $15,350 of gross income . In the notice

- 6 of deficiency respondent adjusted petitioners' gross receipts to
include an additional $3,182 .95 .

Other Expense s
For 2001, 2002, and 2003 petitioners claimed other expense
deductions for Pourmasters . Specifically, for 2001 petitioners
deducted $1,500 for telephone expenses, $250 in cleaning
expenses, $150 in postage expenses, and $500 in supplies . In the
notice of deficiency respondent disallowed $124 of the cell phone
expense deduction and allowed the remaining expense deductions
claimed for 2001 .
For 2002 petitioners deducted $2,500 in telephone expenses,
$150 in cleaning expenses, $150 in postage expenses, $3,697 in
supply expenses, and $1,250 in periodical expenses . In the
notice of deficiency respondent disallowed $1,000 of the
telephone expense deduction and $1,250 of the periodical expense
deduction and allowed the remaining expense deductions claimed
for 2002 . 2
For 2003 petitioners claimed deductions of $2,400 in
telephone expenses, $150 in cleaning expenses, $150 in postage
expenses, $500 in periodical expenses, and $5,525 in suppl y

2Although respondent intended in the notice of deficiency
that $2,250 in expense deductions claimed for taxable year 2002
should be disallowed for Pourmasters, the notice of deficiency
determined only a $1,000 adjustment . Respondent did no t

subsequently move to increase the deficiency accordingly .

- 7 expenses .

In the notice of deficiency respondent disallowed $900

of the telephone expense deduction and $500 of the periodical
expense deduction and allowed the remaining expense deductions .
Interest Expense s
For 2001 and 2002 petitioners claimed deductions for
interest expenses charged on credit cards they used for both
personal and business expenses . For 2001 petitioners deducted
$1,500 in interest expenses for Pourmasters .

Also, for 2002

petitioners deducted $ 2,500 in interest expenses for Pourmasters .
In the notice of deficiency respondent disallowed all of the
amounts deducted for those interest expenses .
Rent Expense s
For 2001, 2002 ,

and 2003 respondent disallowed petitioners'

claimed rent expense deductions for Pourmasters . Petitioners
deducted amounts for rent expenses

that they did not pay . During

the audit petitioners asserted that goods were used to pay rent
invoices in lieu of monetary compensation .

Travel / Meals and Entertainment Expense s
For Pourmasters for 2002 petitioners claimed $1,200 in
expense deductions for attending a bartending conference . For
2002 and 2003 petitioners claimed $1,050 as meal and
entertainment expense deductions related to Mr . Skalko's
attendance at a bartending conference . In the notice of
deficiency respondent disallowed all of the expense deductions .

- 8 -

Early Distributio n
During 2002 Mrs . Skalko received an early distribution of
$704 from a qualified pension or retirement plan . During 2003
Mrs . Skalko received $1,207 as an early distribution from a
qualified pension or retirement plan . In the notice of
deficiency respondent determined that the early distributions
were to be included in petitioners' income for the respective
taxable years .
Exemptions
During 2003 petitioners' daughter was 26 years old and
earned $11,091 in income . Petitioners' daughter filed a tax
return on which she claimed a personal exemption for herself and
also claimed the earned income tax credit . For 2003 petitioners
claimed a dependency exemption deduction for their daughter which
respondent disallowed in the notice of deficiency .
Discussion
Generally, respondent's determinations in the statutory
notice of deficiency are presumed correct . See Rule 142(a)(1) ;
Welch v . Helvering , 290 U .S . 111, 115 (1933) . Deductions are a
matter of legislative grace, and petitioners bear the burden of
proving that they are entitled to the deductions claimed . See
Rule 142(a) ;
(1992) ;

INDOPCO, Inc . v . Commissioner , 503 U .S . 79, 84

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

(1934) . Under certain circumstances, the burden of proof shifts

- 9 to the Commissioner . Sec . 7491(a)(1) . Section 7491(a) does not
shift the burden of proof to respondent because petitioners
failed to maintain records or comply with substantiation
requirements as required by section 7491(a)(2)(A) and (B) .
Where a taxpayer establishes that he incurred a business
expense but cannot prove the amount of the expense, the Court may
approximate the amount allowable, bearing heavily against the
taxpayer whose inexactitude is of his own making .

Cohan v .

Commissioner , 39 F .2d 540, 543-544 (2d Cir . 1930) (the Cohan
rule) . To apply the Cohan rule, however, the Court must have a
reasonable basis for approximating the amount of the expense .
Vanicek v . Commissioner , 85 T .C . 731, 742-743 (1985) . We are not
required to accept a taxpayer's unsubstantiated testimony that he
is entitled to a deduction . See Tokarski v . Commissioner , 87
T .C . 74, 77 (1986) ;

Hoang v . Commissioner , T .C . Memo . 2006-47 .

Petitioners failed to offer sufficient substantiation to
provide a reasonable basis for approximating the amounts of the
expenses . See Vanicek v . Commissioner ,

supra at 742-743 .

Petitioners substantiated the cost of a refrigerator, the
deduction for which respondent had disallowed ; however,
petitioners failed to demonstrate that they used it in one of
their businesses . In addition, petitioners failed to provide any
substantiation at trial that would permit the Court's use of the
Cohan rule . We conclude that petitioners have failed to carry

- 10 their burden to show that they are entitled to deductions in
excess of the amounts respondent allowed in the notice of
deficiency .

Accordingly ,

we uphold respondent ' s determinations

in the notice of deficiency for the taxable years in issue in
full .
We next consider whether petitioners are liable for
accuracy-related penalties pursuant to section 6662(a) .
Respondent determined section 6662(a) accuracy-related penalties
of $1,162 .40, $870 .40, and $835 .20 for taxable years 2001, 2002,
and 2003 . Respondent determined that petitioners' 2001, 2002,
and 2003 underpayments of tax were attributable to negligence or
disregard of rules and regulations, or alternatively that the
2001, 2002, and 2003 underpayments were attributable to
substantial understatements of income tax .
Pursuant to section 6662(a) and (b), a taxpayer may be
liable for a penalty of 20 percent of the portion of an
underpayment of tax due to negligence or disregard of rules or
regulations . The term "negligence" in section 6662(b)(1)
includes any failure to make a reasonable attempt to comply with
the Internal Revenue Code and any failure to keep adequate books
and records or to substantiate items properly . Sec . 6662(c) ;
sec . 1 .6662-3(b)(1), Income Tax Regs . Negligence has also been
defined as the failure to exercise due care or the failure to do
what a reasonable person would do under the circumstances . See

- 11 Allen v . Commissioner , 92 T .C . 1, 12 (1989), affd . 925 F .2d 348,
353 (9th Cir . 1991) ;

Neely v . Commissioner , 85 T .C . 934, 947

(1985) . The term "disregard" includes any careless, reckless, or
intentional disregard . Sec . 6662(c) .
The Commissioner has the burden of production with respect
to accuracy-related penalties . Sec . 7491(c) . To meet that
burden, the Commissioner must produce sufficient evidence
indicating that it is appropriate to impose the penalty . See
Higbee v . Commissioner , 116 T .C . 438, 446 (2001) . Once the
Commissioner meets his burden of production, the taxpayer must
come forward with persuasive evidence that the Commissioner's
determination is incorrect . Rule 142(a) ; see Higbee v .
Commissioner ,

supra at 446-447 . The taxpayer may meet this

burden by proving that he or she acted with reasonable cause and
in good faith . See sec . 6664(c)(1) ; sec . 1 .6664-4(b)(1), Income
Tax Regs .
We conclude that respondent has met his burden of production
under 7491(c) . The record shows that petitioners failed to keep
adequate books or records or to substantiate items properly for
tax years 2001, 2002, and 2003 . See sec . 6662(c) ; sec . 1 .66623(b)(1), Income Tax Regs . Accordingly, petitioners bear the
burden of proving that the accuracy-related penalties should not
be imposed with respect to any portion of the underpayments for

- 12 which they acted with reasonable cause and in good faith . See
sec . 6664(c)(1) ; sec . 1 .6664-4(b)(1), Income Tax Regs .
Petitioners claimed substantial deductions for which the y
failed to provide credible evidence that respondent's
determinations are incorrect . We conclude that petitioners have
failed to meet their burden of persuasion with respect to the
accuracy-related penalties . Thus, we conclude that petitioners
are liable for the section 6662(a) penalties for negligence
determined by respondent .

We have considered the parties' remaining arguments and
conclude that the arguments are either without merit or
unnecessary to reach .
To reflect the foregoing,

Decision will be entere d
for respondent .

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