Steven D. Cox
v. Commissioner, TC Memo 2013-75 , Code Sec(s) 61; 446. STEVEN D. COX,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Case Information:
[pg. 673] Code Sec(s): 61; 446 Docket: Dkt. No. 26960-11. Date Issued:
03/12/2013.
Judge: Opinion
by Marvel, J. Tax Year(s): Years 2004, 2005. Disposition: Decision for Taxpayer
in part and for Commissioner in part. HEADNOTE 1. Unreported
income—reconstruction of income—bank deposits method— proof. IRS's bank
deposits reconstruction of pro se general contractor/longtime nonfiler's
unreported income from various cos. for his “qualifier” services was largely
upheld: IRS linked taxpayer to income producing activity, such that presumption
of correctness attached, via his admissions to receiving and depositing
payments from stated cos. into his personal and/or his proprietorship's
accounts; IRS [pg. 674] also showed that it was reasonable to use bank deposits
method for reconstructing taxpayer's income because he didn't produce books and
records or cooperate with IRS; and revenue agent properly computed taxable
deposits for 1 year. However, agent wrongly included 1 deposit for other year.
Further, taxpayer showed that he was entitled to additional reduction for few
other deposits that he, acting as mere conduit transmitted, to client.
Reference(s): ¶ 615.047(5) ; ¶ 4465.69(23) Code Sec. 61; Code Sec. 446 2. Gross
income—interest—burden of proof and production—information returns. IRS's
determination that pro se general contractor/longtime nonfiler had to include
in his gross income interest earned on his checking and savings accounts was
upheld: interest income was clearly includible under Code Sec. 61(a)(4) ; and
IRS established specific amounts at issue via bank statements and Forms
1099-INT, to which taxpayer in turn didn't raise any reasonable dispute that
would trigger Code Sec. 6201(d) 's burden of production-shifting provision or
otherwise introduce credible evidence contesting IRS's determination.
Reference(s): ¶ 615.047(10) ; ¶ 62,015.01(30) Code Sec. 61; Code Sec. 6201 3.
Business deductions—ordinary and necessary expenses—construction
expenses—substantiation—lost or stolen records. Pro se general
contractor/longtime nonfiler's deductions for wage and materials expenses were
denied due to lack of substantiation: although taxpayer kept some records and
claimed that others were stolen, he didn't make any effort to reconstruct same
or substantiate his claims with 3d-party testimony, invoices and receipts, or
other secondary evidence, and instead offered only vague testimony about paying
some laborers and purchasing materials. Reference(s): ¶ 1625.019(5) Code Sec.
162; Code Sec. 274 4. Failure to timely file returns penalties—burden of proof
and production— reasonable cause. Failure to timely file returns penalties were
upheld against pro se general contractor/longtime nonfiler: IRS met its burden
of production on penalties' applicability via stipulations that taxpayer didn't
file for years at issue; and claim that he didn't understand how to complete his
returns and couldn't afford to hire return preparer didn't constitute
reasonable cause for not filing. Reference(s): ¶ 66,515.14(5) ; ¶ 74,915.03(15)
Code Sec. 6651; Code Sec. 7491 5. Failure to pay tax shown due on returns
penalties—burden of proof and production—substitute returns. Failure to pay tax
shown due on returns penalties were upheld against pro se general
contractor/longtime nonfiler for years for which he failed to file returns, but
for which IRS prepared substitute returns: IRS met its burden of production on
penalties' applicability with account transcripts and other proof that
substitute returns were prepared in accord with Code Sec. 6020(b) and that
taxpayer didn't pay amounts shown due thereon; and he didn't show he was unable
to pay or would have suffered undue hardship if he had. Reference(s): ¶
66,515.14(15) ; ¶ 74,915.03(20) Code Sec. 6651; Code Sec. 7491 6. Failure to
pay estimated tax penalties—burden of proof and production— required annual
payment. Failure to pay estimated tax penalties were upheld against pro se
general contractor/longtime nonfiler: IRS met its burden of production on
penalties' applicability with taxpayer's admissions and account transcripts
showing he paid no estimated taxes despite having required annual payments for
each year at issue. Reference(s): ¶ 66,545.03(30) ; ¶ 74,915.03(25) Code Sec.
6654; Code Sec. 7491 Syllabus Official Tax Court Syllabus Counsel Steven D.
Cox, pro se. Brianna B. Taylor and Peter T. McCary, for respondent. MARVEL,
Judge MEMORANDUM FINDINGS OF FACT AND OPINION In a notice of deficiency issued
to petitioner on August 26, 2011, respondent determined deficiencies in
petitioner's Federal income tax of $48,946 and $6,522 for 2004 and 2005,
respectively, and additions [pg. 675] to tax under [*2] sections 6651(a)(1) 1
and (2) and 6654 for 2004 and 2005. The issues for decision are: (1) whether
petitioner failed to report gross receipts of $155,227 and $28,815 on Schedules
C, Profit or Loss From Business, for 2004 and 2005, respectively; (2) whether
petitioner received interest income of $289 and $208 for 2004 and 2005,
respectively; (3) whether petitioner is entitled to business expense deductions
for the years in issue; and (4) whether petitioner is liable for the additions
to tax as determined by respondent for the years in issue. FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of
facts are incorporated herein by this reference. Petitioner resided in Georgia
when he filed his petition. I. Petitioner's Background and Businesses After
graduating from high school petitioner began working as a carpenter. He
eventually applied for a general contractor's license. After receiving his
general contractor's license petitioner began working as a “qualifier” by allowing
construction businesses to use his general contractor's license. During the
years in [*3] issue petitioner received payment for his qualifier services from
various construction businesses, including Puente Contracting, Inc. (Puente
Contracting), Harrington Homes Corp. (Harrington Homes), MCB Shell Contractor,
MCB Framing, and Marco Custom Builder. During the years in issue petitioner
also worked on smaller construction projects. He provided construction services
for individuals and for Creative Coast Builders. II. Petitioner's Bank Accounts
2 A. AmSouth Account During 2004 and 2005 petitioner maintained an account at
AmSouth Bank titled in the name of Equity Three Enterprises (AmSouth account).
3 On the account package agreement he identified Equity Three Enterprises as a
sole [*4] proprietorship business. Petitioner was the only individual with
signatory authority over the AmSouth account. During 2004 petitioner made
deposits into the AmSouth account totaling $147,131. The deposits included
checks drawn on accounts of petitioner, Puente Contracting, Cheryl N. Lee, and
Harrington Homes, as well as a check drawn on Equity Three Enterprises' Bank of
America account and made payable to petitioner. During 2005 petitioner made
deposits into the AmSouth account totaling $15,404. The deposits included
checks drawn on accounts of Puente Contracting, UNITRIN direct, and Marco
Custom Builders. B. Suncoast Account During the years in issue petitioner
maintained a personal checking and savings account at Suncoast Schools Credit
Union (Suncoast account). He was the only individual with signatory authority
over the Suncoast account. During the years in issue petitioner earned interest
on the funds in his Suncoast account. During 2004 petitioner made deposits into
the Suncoast account of $73,700. The deposits included checks drawn on accounts
of Equity Three Enterprises, MCB Framing, Marco Custom Builders, Inc., MCB
Shell Contractor, and Creative Coast Builders, as well as a $30,000 wire
transfer from Wells Fargo. [*5] During 2005 petitioner made deposits of $63,106
into the Suncoast account. The deposits included checks drawn on the accounts
of MCB Shell Contractor, Creative Coast Builders, Martha Mejia Masonry, Marco
Custom Builder, and Maureen McCormick. 4[pg. 676] III. Reconstruction of
Petitioner's Income and the Notice of Deficiency Petitioner failed to file
Federal income tax returns for 2004 and 2005. Respondent subsequently performed
a bank deposits analysis with respect to petitioner's 2004 and 2005 taxable
years. Respondent determined that petitioner made taxable deposits into his
AmSouth account of $144,531 and $11,315 for 2004 and 2005, respectively, and
made taxable deposits into his Suncoast account of $10,696 and $17,500 for 2004
and 2005, respectively. Accordingly, respondent determined that petitioner made
total taxable deposits of $155,227 and $28,815 for 2004 and 2005, respectively.
Respondent also had received Forms 1099-INT, Interest Income, from SunCoast,
reporting that petitioner received interest income of $289 and $208 for 2004
and 2005, respectively. On the basis of respondent's bank deposits analysis and
the third-party payor information, respondent prepared substitutes for returns
for petitioner under section 6020(b). [*6] Respondent subsequently mailed to
petitioner the notice of deficiency for 2004 and 2005. On the basis of
petitioner's bank deposits, respondent determined that petitioner failed to
report on Schedules C gross receipts of $155,227 and $28,815 for 2004 and 2005,
respectively. On the basis of the Forms 1099-INT filed by SunCoast, respondent
determined that petitioner failed to report interest income of $289 and $208
for 2004 and 2005, respectively. Respondent also determined that petitioner was
liable for additions to tax under sections 6651(a)(1) and (2) and 6654 for 2004
and 2005. IV. Petitioner's Compliance History Petitioner failed to file Federal
income tax returns for 2000 through 2009. The record contains no indication
that petitioner has ever filed Federal employment tax returns or made any
estimated tax payments. Petitioner's history shows an extended failure to
comply with his tax reporting and payment obligations. Petitioner also failed
to cooperate with the revenue agent assigned to the examination for his 2004
and 2005 taxable years. OPINION I. Burden of Proof Generally, the
Commissioner's determinations in a notice of deficiency are presumed correct,
and the taxpayer bears the burden of proving that the [*7] determinations are
erroneous. See Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 [12 AFTR
1456] (1933). The burden of proof shifts to the Commissioner, however, if the
taxpayer produces credible evidence to support the deduction or position, the
taxpayer complied with the substantiation requirements, and the taxpayer cooperated
with the Secretary 5 with regard to all reasonable requests for information.
Sec. 7491(a); see also Higbee v. Commissioner, 116 T.C. 438, 440-441 (2001).
Petitioner does not contend that section 7491(a)(1) should shift the burden
here, and the record establishes that he did not satisfy the section 7491(a)(2)
requirements. Accordingly, petitioner bears the burden of proof with respect to
all disputed factual issues. II. Petitioner's Unreported Income Section 61(a)
defines gross income as “all income from whatever source derived” and includes
compensation paid for services, whether furnished by the taxpayer as an
employee, a self-employed person, or an independent contractor. A [*8] taxpayer
must maintain books and records establishing the amount of his or her gross
income. Sec. 6001. If a taxpayer fails to maintain the required books and
records, the Commissioner may determine the taxpayer's income by any method
that clearly reflects income. See sec. 446(b); Petzoldt v. Commissioner, 92
T.C. 661, 693 (1989). The Commissioner's reconstruction of income “need only be
reasonable in light of all surrounding facts and circumstances.” Petzoldt v.
Commissioner, 92 T.C. at 687. The Commissioner has great latitude in
reconstructing a taxpayer's income. See sec. 446(b); Petzoldt v. Commissioner,
92 T.C. at 687, 693. The Commissioner may [pg. 677] reconstruct a taxpayer's
income using third-party information returns.See Parker v. Commissioner, 117
F.3d 785 [79 AFTR 2d 97-2889] (5th Cir. 1997); Ketler v. Commissioner, T.C.
Memo. 1999-68 [1999 RIA TC Memo ¶99,068]. The Commissioner also may use bank
records and other third-party records to reconstruct a taxpayer's income. See
Parkinson v. Commissioner, 647 F.2d 875, 876 [47 AFTR 2d 81-1435] (9th Cir.
1981), aff'g T.C. Memo. 1979-319 [¶79,319 PH Memo TC]; see also Williams v.
Commissioner, 999 F.2d 760, 764 [72 AFTR 2d 93-5501] (4th Cir. 1993), aff'g
T.C. Memo. 1992-153. As noted above, the Commissioner's deficiency
determination normally is entitled to a presumption of correctness. See Rule
142(a). However, the U.S. Court of Appeals for the Eleventh Circuit, to which
an appeal in this case would [*9] lie absent a stipulation to the contrary, see
,sec. 7482(b)(1)(A), (2), has held that the Commissioner's determination of
unreported income is entitled to a presumption of correctness only if the
determination is supported by a minimal evidentiary foundation linking the
taxpayer to an income-producing activity, Blohm v. see Commissioner, 994 F.2d
1542, 1549 [72 AFTR 2d 93-5347] (11th Cir. 1993), aff'g T.C. Memo. 1991-636
[1991 TC Memo ¶91,636]. Once the Commissioner produces evidence linking the
taxpayer to an income-producing activity, the presumption of correctness
applies and the burden of production shifts to the taxpayer to rebut that
presumption by establishing that the Commissioner's determination is arbitrary
or erroneous. Id.; see also United States v. Janis, 428 U.S. 433, 441-442 [38
AFTR 2d 76-5378] (1976). Petitioner admitted that he received payments from
Puente Contracting, MCB Framing, MCB Shell Contractor, Harrington Homes, and
Equity Three Enterprises in exchange for the use of his general contractor's
license. Petitioner also admitted that he received payments from Ms. Lee,
Creative Coast Builders, and Martha Mejia Masonry in exchange for his
construction services. He admitted that he deposited the payments into his
AmSouth and Suncoast accounts. Respondent introduced into evidence petitioner's
bank records, which confirm that petitioner deposited into his accounts
payments from his various clients and earned interest income with respect to
his Suncoast account. Because this [*10] evidence is sufficient to link
petitioner to an income-producing activity, the presumption of correctness
applies and he has the burden of producing evidence to rebut that presumption.
A. Petitioner's Unreported Gross Receipts The bank deposits method is a
permissible method of reconstructing income. See Clayton v. Commissioner, 102
T.C. 632, 645 (1994); see also Langille v. Commissioner, T.C. Memo. 2010-49 [TC
Memo 2010-49], aff'd, 447 Fed. Appx. 130 [108 AFTR 2d 2011-7254] (11th Cir.
2011). Bank deposits constitute prima facie evidence of income. See Tokarski v.
Commissioner, 87 T.C. 74, 77 (1986). The Commissioner need not show the likely
source of a deposit treated as income, but the Commissioner “must take into
account any nontaxable source or deductible expense of which *** [he] has
knowledge” in reconstructing income using the bank deposits method. See Clayton
v. Commissioner, 102 T.C. at 645-646. However, the Commissioner need not follow
any “leads” suggesting that a taxpayer has deductible expenses. DiLeo v.
Commissioner, 96 T.C. 858, 872 (1991), aff'd, 959 F.2d 16 [69 AFTR 2d 92-998]
(2d Cir. 1992). After the Commissioner reconstructs a taxpayer's income and
determines a deficiency, the taxpayer bears the burden of proving that the
Commissioner's use of the bank deposits method is unfair or inaccurate. See
Clayton v. Commissioner, 102 T.C. at 645; DiLeo v. Commissioner, 96 T.C. at
883. The taxpayer must [*11] prove that the reconstruction is in error and may
do so, in whole or in part, by proving that a deposit is not taxable. See
Clayton v. Commissioner, 102 T.C. at 645. Petitioner failed to produce any
books or records relating to his income for the years in issue. Petitioner also
failed to cooperate with respondent and respondent's revenue agent to determine
the amounts of his gross [pg. 678] receipts for the years at issue. Although
petitioner claims that he maintained records and that these records were
stolen, he did not make any attempt to reconstruct these records or to
cooperate with respondent to determine the proper amounts of his gross receipts
for the years in issue. See, e.g., Jones v. Commissioner, T.C. Memo. 1994-230
[1994 RIA TC Memo ¶94,230], aff'd without published opinion 68 F.3d 460 [76
AFTR 2d 95-7202] (4th Cir. 1995); Famularo v. Commissioner, T.C. Memo. 1984-37
[¶84,037 PH Memo TC]. Therefore, we find that it was reasonable for respondent
to use the bank deposits method to reconstruct petitioner's income.
Accordingly, petitioner bears the burden of proving that respondent's
determinations are arbitrary or erroneous. Petitioner argues that respondent's
income reconstruction treated some nontaxable deposits as income. In defending
against the Commissioner's reconstruction of income, the taxpayer bears the
burden of showing whether and to what extent the Commissioner included deposits
derived from nontaxable sources. [*12] Dodge v. Commissioner, 981 F.2d 350, 357
[71 AFTR 2d 93-412] (8th Cir. 1992), aff'g in part, rev'g in part 96 T.C. 172
(1991). Nontaxable items include interaccount transfers, returned checks, and,
in some instances, money a taxpayer receives merely as a conduit. See MacGregor
v. Commissioner, T.C. Memo. 2010-187 [TC Memo 2010-187], aff'd, __Fed. Appx.
__, 111 A.F.T.R.2d (RIA) 2013-314 (9th Cir. Dec. 21, 2012); Taylor v.
Commissioner, T.C. Memo. 2009-235 [TC Memo 2009-235]; Estate of Kalichuk v.
Commissioner, T.C. Memo. 1964-336 (holding that taxpayers were merely conduits
and had not received taxable income where the taxpayers deposited checks into
their account on behalf of third parties and transmitted the check proceeds to
the third parties shortly thereafter). First, petitioner contends that with
respect to the checks from Harrington Homes, he did not receive income equal to
the stated amounts of the checks. Petitioner testified that he deposited the
checks from Harrington Homes on behalf of one of his clients. He testified that
the client did not have a general contractor's license; accordingly, the client
used petitioner's general contractor's license. He further testified that after
the client received a check from Harrington Homes, the client would present the
check to petitioner and petitioner would deposit the check into his account.
Petitioner testified that he would retain a percentage of the check amount as a
fee for the use of his general contractor's license and that he would [*13]
return to the client the balance of the check amount. Petitioner testified that
he returned the balance by paying his client with a check drawn on his AmSouth
account. During 2004 petitioner deposited into his AmSouth account five checks
from Harrington Homes: (1) check No. 5165, dated January 29, 2004, for $68,152;
(2) check No. 5190, dated February 12, 2004, for $5,000; (3) check No. 5239,
dated February 24, 2004, for $24,012.50; (4) check No. 5241, dated February 25,
2004, for $11,560; and (5) check No. 5335, dated March 30, 2004, for $29,307.
Petitioner's AmSouth account statements show that petitioner wrote three large
checks during that period: (1) a check credited on January 30, 2004, for
$66,150; (2) a check credited on February 26, 2004, for $38,672; and (3) a
check credited on April 5, 2005, for $28,307. Petitioner did not deposit into
his account any checks from Harrington Homes during 2005. Respondent did not
introduce into evidence the canceled checks drawn on petitioner's AmSouth
account. Petitioner did not produce any of his own records or call any
witnesses to corroborate his testimony that he was not entitled to the full
amounts of the checks he deposited from Harrington Homes. Nevertheless, we find
petitioner's testimony credible. A review of petitioner's AmSouth account
statements shows that in January, February, and April, he wrote checks [*14]
drawn on his account that correspond with the amounts of the Harrington Homes
checks deposited in January, February, and March. This evidence is consistent
with petitioner's testimony regarding his right to income with respect to the
Harrington Homes checks. Furthermore, we note that with respect to petitioner's
AmSouth account, respondent determined that he had unreported gross receipts of
$144,532 and $11,315 during 2004 and 2005, respectively. The discrepancy be[pg.
679] tween the amounts of gross receipts determined for 2004 and 2005 supports
a finding that petitioner did not earn gross receipts of $144,532 as determined
by respondent. Accordingly, we find that his gross receipts for 2004 must be
reduced by $133,129, the amount of funds petitioner, acting as a mere conduit,
transmitted to his client. Second, petitioner contends that the $2,600 deposit
into his Suncoast account during 2004 does not constitute taxable income
because he transferred the funds from one of his business bank accounts.
Petitioner's Suncoast account statement shows that on June 25, 2004, he
deposited into his account $2,900. Notations on petitioner's account statement,
apparently made by respondent's revenue agent, show that petitioner deposited
cash of $2,600 as well as a $300 check. Respondent's revenue agent determined
that only the cash portion of petitioner's deposit constituted taxable income.
[*15] Petitioner's AmSouth account statements do not show any corresponding
withdrawals around the time of his cash deposit. In addition, our review of the
bank account statements for Equity Three Enterprises and Elkam Construction,
Inc., accounts purportedly related to petitioner's business activities do not
show any corresponding withdrawals around the time of his cash deposit.
Accordingly, we find that respondent's revenue agent properly included the
$2,600 cash deposit in petitioner's gross receipts for 2004. Third, petitioner
argues that check No. 1009 should be excluded from the calculation of gross
receipts. Check No. 1009 is a $95.60 payment from Creative Coast Builders to
petitioner dated November 30, 2004. Petitioner testified that he previously had
purchased nails for Creative Coast Builders and the $95.60 payment was a reimbursement
for that purchase. In the absence of corroborating evidence, we find his
testimony regarding the disputed check to be self-serving and unreliable. See
Tokarski v. Commissioner, 87 T.C. at 76-77. Petitioner has failed to introduce
credible evidence that check No. 1009 constituted nontaxable income.
Accordingly, we find that respondent's revenue agent properly included the
$95.60 payment in petitioner's gross receipts for 2004. Having decided that
respondent acted reasonably in using an indirect method to reconstruct
petitioner's income and having considered petitioner's [*16] arguments
regarding whether such income constituted taxable income, we now review
respondent's calculations of petitioner's taxable income for the years in
issue. To prove how respondent calculated petitioner's gross receipts,
respondent introduced copies of petitioner's AmSouth and Suncoast bank account
statements as well as the revenue agent's spreadsheets. Our analysis of the
revenue agent's income reconstruction spreadsheet and petitioner's bank
statements convinces us that the revenue agent erroneously included in
petitioner's gross receipts check No. 213. Check No. 213 constituted a payment
of $1,000 from Ms. Lee to petitioner. Petitioner deposited check No. 213 into
his AmSouth account during 2004, but the check was returned, presumably for
insufficient funds. Respondent's revenue agent failed to exclude this check in
calculating petitioner's gross receipts for 2004. Accordingly, we will reduce
petitioner's Schedule C gross receipts for 2004 by $1,000 in addition to the
amounts discussed supra pp. 13-14. Our analysis of petitioner's bank account
statements and the revenue agent's spreadsheet confirms that the revenue agent
properly reconstructed petitioner's Schedule C gross receipts for 2005.
Accordingly, we sustain respondent's determination with respect to petitioner's
Schedule C gross receipts for 2005. [*17] In summary, we find that petitioner
had gross receipts of $21,088 and $28,815 for 2004 and 2005, respectively, that
he should have reported on Schedules C. B. Petitioner's Unreported Interest
Income Section 61(a)(4) includes interest in a taxpayer's gross income.
Petitioner's Suncoast account statements establish that he received interest
income for the years in is[pg. 680] sue. Furthermore, respondent introduced
Forms 1099-INT with respect to the interest income adjustments, and petitioner
has raised no reasonable dispute with respect to the accuracy of the
information returns; therefore, the burden of production with respect to the
income does not shift to respondent under section 6201(d). 6 Petitioner has
failed to introduce any credible evidence contesting respondent's
determinations that he received interest income from Suncoast of $289 and $208
in 2004 and 2005, respectively. Because interest must be included [*18] in
petitioner's income under section 61, we sustain respondent's determinations
with respect to the interest income from Suncoast. III. Business Expenses
Generally, a taxpayer is entitled to deduct ordinary and necessary expenses
paid or incurred in carrying on a trade or business. Sec. 162(a);Am. Stores Co.
v. Commissioner, 114 T.C. 458, 468 (2000). An expense is ordinary if it is
customary or usual within the particular trade, business, or industry or if it
relates to a transaction “of common or frequent occurrence in the type of
business involved.” Deputy v. du Pont, 308 U.S. 488, 495 [23 AFTR 808] (1940).
An expense is necessary if it is appropriate and helpful for the development of
the business. See Commissioner v. Heininger, 320 U.S. 467, 471 [31 AFTR 783]
(1943). Personal, living, or family expenses generally are not deductible. See
sec. 262(a). Deductions are a matter of legislative grace, and ordinarily a
taxpayer must prove that he is entitled to the deductions he claims. INDOPCO,
Inc. v. Commissioner, 503 U.S. 79, 84 [69 AFTR 2d 92-694] (1992). A taxpayer
must maintain records to substantiate claimed deductions and to establish the
taxpayer's correct tax liability. Higbee v. Commissioner, 116 T.C. at 440; see
also sec. 6001. The taxpayer must produce such records upon the Secretary's
request. Sec. 7602(a); see also sec. 1.6001-1(e), Income Tax Regs. Adequate
substantiation must establish the [*19] amount and purpose of a claimed
deduction. Higbee v. Commissioner, 116 T.C. at 440; see also Hradesky v.
Commissioner, 65 T.C. 87 (1975), aff'd per curiam, 540 F.2d 821 [38 AFTR 2d
76-5935] (5th Cir. 1976). In deciding whether a taxpayer adequately
substantiated a claimed deduction, we are not required to accept the taxpayer's
“self-serving, unverified, and undocumented testimony.” Shea v. Commissioner,
112 T.C. 183, 189 (1999). When a taxpayer establishes that he paid or incurred
a deductible expense but does not establish the amount of the expense, we may estimate
the amount of the deductible expense. Cohan v. Commissioner, 39 F.2d 540,
542-544 [8 AFTR 10552] (2d Cir. 1930). However, we cannot estimate the amount
unless the taxpayer introduces evidence that he paid or incurred the expense
and the evidence is sufficient for us to develop a reasonable estimate.
Williams v. United States, 245 F.2d 559, 560 [51 AFTR 594] (5th Cir. 1957). In
estimating the amount, we bear heavily upon the taxpayer who failed to maintain
and produce the required records. See Cohan v. Commissioner, 39 F.2d at 544.
Petitioner contends that he has adequately substantiated his Schedule C
expenses because his income and expense records were stolen following the years
at issue and because he has introduced evidence, in the form of his own
testimony and other documents, showing the expenses he incurred. [*20] When a
taxpayer's records have been destroyed or lost due to circumstances beyond the
taxpayer's control, the taxpayer may substantiate his expenses by making a
reasonable reconstruction of the expenditures or use. See sec. 1.274-taxpayer
is required to reconstruct what records he can. See, e.g., Chong v.
Commissioner, T.C. Memo. 2007-12 [TC Memo 2007-12], slip op. at 9. If the
taxpayer establishes that the records were lost or destroyed because of
circumstances be[pg. 681] yond his control, 7 he must nevertheless substantiate
his expenditures through secondary evidence. See Boyd v. Commissioner, 122 T.C.
305, 320 (2004). While we acknowledge that petitioner kept some records 8 and
that he testified that other records were lost or destroyed, he still had an
obligation to substantiate his expenditures. Petitioner made no effort to
reconstruct his records [*21] or to substantiate his expenses with secondary
evidence such as third-party testimony or invoices and receipts. Petitioner
testified that he paid laborers and purchased materials for work on his
construction projects, but his testimony was vague and unspecific and we find
it insufficient to provide a basis for estimating the expenses. In the absence
of corroborating evidence, we are not required to accept petitioner's
testimony. See Tokarski v. Commissioner, 87 T.C. at 77. Petitioner has failed
to prove that he is entitled to any deductions for business expenses. IV.
Additions to Tax If the taxpayer assigns error to the Commissioner's
determination that he is liable for an addition to tax, the Commissioner has
the burden, under section 7491(c), of producing evidence with respect to the
liability of the taxpayer for the addition to tax. See Higbee v. Commissioner,
116 T.C. at 446-447. To meet his burden of production, the Commissioner must
come forward with sufficient evidence that it is appropriate to impose the
addition to tax. Id. Once the Commissioner meets his burden, the taxpayer must
come forward with evidence sufficient to persuade this Court that the
determination is incorrect. Id. Respondent determined that petitioner is liable
for additions to tax for failure to timely file returns for 2004 and 2005 under
section 6651(a)(1). Section [*22] 6651(a)(1) imposes an addition to tax for
failure to file a return timely in the amount of 5% of the tax required to be
shown on the return for each month during which such failure continues, not to
exceed 25% in the aggregate, unless it is shown that such failure is due to
reasonable cause and not due to willful neglect. The parties stipulated that
petitioner failed to file returns for 2004 and 2005. Respondent has satisfied
the burden of production under section 7491(c), and petitioner must come
forward with evidence sufficient to persuade the Court that respondent's
determination is erroneous. Petitioner claims that he did not file his returns
because he did not understand how to complete a Federal income tax return and
he could not afford to hire a return preparer. Petitioner's explanation does
not constitute reasonable cause for his failure to file. See, e.g., Cox v.
Commissioner, 54 T.C. 1735, 1744 (1970); Blair v. Commissioner, T.C. Memo.
1991-456 [1991 TC Memo ¶91,456]. Petitioner did not argue that his failure to
file returns was due to reasonable cause and not due to willful neglect, and he
presented no credible evidence on the issue. Accordingly, we hold that
petitioner is liable for section 6651(a)(1) additions to tax for 2004 and 2005.
9 [*23] Respondent also determined that petitioner is liable for additions to
tax for failure to pay tax shown on a return under section 6651(a)(2). Section
6651(a)(2) imposes an addition to tax for failure to pay timely the amount of
tax shown on a return. The section 6651(a)(2) addition to tax applies only when
an amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. 163,
170 (2003). Petitioner did not file 2004 and 2005 returns. However, respondent
prepared substitutes for returns under section 6020(b). A return made by the
Secretary under section 6020(b) is treated as the return filed by the taxpayer
for purposes of determining [pg. 682] whether the section 6651(a)(2) addition
to tax applies. Sec. 6651(g)(2); Wheeler v. Commissioner, 127 T.C. 200, 208-209
(2006), aff'd, 521 F.3d 1289 [101 AFTR 2d 2008-1696] (10th Cir. 2008).
Respondent introduced into evidence substitutes for returns that satisfy the
requirements of section 6020(b), as well as a copy of petitioner's account
transcripts. The substitutes for returns and the account transcripts establish
that petitioner failed to pay the tax shown on the substitutes for returns.
Respondent has satisfied the burden of production under section 7491(c).
Petitioner did not introduce any evidence that he was unable to pay the tax
owed or that he would have suffered undue hardship if he had paid the tax on
the due date. See sec. [*24] 301.6651-1(c), Proced. & Admin. Regs.
Accordingly, we hold that petitioner is liable for the section 6651(a)(2) additions
to tax for 2004 and 2005. 10 Respondent also determined that petitioner is
liable for additions to tax for failure to pay estimated tax under section
6654. Section 6654 imposes an addition to tax for underpayment of a required
installment of estimated tax. Each required installment of estimated tax is
equal to 25% of the “required annual payment”, which in turn is equal to the
lesser of (1) 90% of the tax shown on the taxpayer's return for that year (or,
if no return is filed, 90% of his or her tax for such year), or (2) if the
taxpayer filed a return for the immediately preceding taxable year, 100% of the
tax shown on that return. Sec. 6654(d)(1)(A) and (B). A taxpayer has an
obligation to pay estimated tax only if he has a “required annual payment”. Wheeler
v. Commissioner, 127 T.C. at 212. Petitioner admitted that he did not make any
estimated tax payments for the years in issue. Respondent introduced copies of
petitioner's account transcripts which show that petitioner did not make any
estimates tax payments. Respondent also introduced evidence that petitioner
failed to file Federal income tax returns for 2003-05, and petitioner
stipulated that he failed to file returns for 2003-05. On [*25] the basis of
this information and the evidence with respect to petitioner's income for the
years in issue, we are able to conclude that petitioner had required annual
payments for 2004 and 2005. Accordingly, we hold that petitioner is liable for
the section 6654(a) additions to tax for 2004 and 2005. 11 We have considered
the remaining arguments made by the parties and, to the extent not discussed
above, conclude those arguments are irrelevant, moot, or without merit. To
reflect the foregoing, Decision will be entered under Rule 155. 1
Unless otherwise indicated, section references are to the Internal
Revenue Code in effect for the years in issue, and Rule references are to the
Tax Court Rules of Practice and Procedure. Some monetary amounts have been
rounded to the nearest dollar. 2 The record contains copies of
AmSouth bank account statements purportedly related to petitioner's business
activities: (1) an account titled in the name of Equity Three Enterprises,
Inc.; (2) an account titled in the name of Equity Three Partners, Inc.; and (3)
two accounts, both titled in the name of Elkcam Construction, Inc. Respondent
did not include in petitioner's gross receipts any amounts deposited into these
accounts. 3 During the years at issue Equity Three Enterprises also
maintained a bank account at Bank of America. The record does not contain any
bank account statements with respect to this account. 4 Ms.
McCormick is petitioner's ex-wife. 5 The term “Secretary” means
“the Secretary of the Treasury or his delegate”, sec. 7701(a)(11)(B), and the term
“or his delegate” means “any officer, employee, or agency of the Treasury
Department duly authorized by the Secretary of the Treasury directly, or
indirectly by one or more redelegations of authority, to perform the function
mentioned or described in the context”, sec. 7701(a)(12)(A)(i). 6
Under sec. 6201(d), if a taxpayer asserts a reasonable dispute with
respect to any item of income reported on an information return filed by a
third party and the taxpayer meets certain other requirements, the Commissioner
bears the burden of producing reasonable and probative information, in addition
to the information return, concerning the deficiency attributable to the income
item. The burden shifts to the Commissioner only if the taxpayer fully
cooperates with the Commissioner by providing, within a reasonable period of
time, access to and inspection of all witnesses, information, and documents
within the control of the taxpayer as reasonably requested. See id. 7
Petitioner testified that he kept records of his income and
expenses on his computer. He further testified that his brother stole his
computer after the years in issue. Petitioner testified that he filed a police
report with respect to the theft, but he did not introduce the police report as
evidence. 8 While petitioner testified that he maintained records,
he also testified that he did not maintain records of his business expenses,
that he relied on his bank statements to calculate his business expenses, and
that he paid some expenses in cash. Accordingly, although we find that
petitioner kept some records, we are unable to find that he maintained adequate
records to substantiate his business expenses. Because petitioner made no
attempt to reconstruct his expenses, however, we need not delve further into
the adequacy of his recordkeeping. 9 The amounts of the sec.
6651(a)(1) additions to tax for 2004 and 2005 must be adjusted to reflect the
adjustments to gross receipts calculated in this opinion. 10 The
amounts of the sec. 6651(a)(2) additions to tax for 2004 and 2005 must be
adjusted to reflect the adjustments to gross receipts calculated in this
opinion. 11 The amounts of the sec. 6654(a) additions to tax for
2004 and 2005 must be adjusted to reflect the adjustments to gross receipts
calculated in this opinion. © 2
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