Alejandro Hernandez, Jr. v. CIR ( 2020 )

Case: 19-60086 Document: 00515506082 Page: 1 Date Filed: 07/28/2020
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 19-60086 July 28, 2020
Summary Calendar
Lyle W. Cayce
Clerk
ALEJANDRO HERNANDEZ, JR.; EDITH G. ROMAN,
Petitioners-Appellants
v.
COMMISSIONER OF INTERNAL REVENUE
Respondent-Appellee
Appeal from a Decision of the
United States Tax Court
Tax Court No. 3069-17
Before CLEMENT, ELROD, and OLDHAM, Circuit Judges.
PER CURIAM: *
Alejandro Hernandez, Jr. and Edith G. Roman appeal a decision of the
Tax Court denying a motion to shift the burden of proof to the Commissioner
of Internal Revenue (“Commissioner”) and holding that there was a deficiency
in taxes due in the amount of $5,410 1 for taxable year 2014. We affirm.
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
1The Commissioner had also initially assessed an accuracy-related penalty of $1,082
but conceded this penalty in its pretrial memorandum to the Tax Court; accordingly, the Tax
Court held for Appellants with respect to the accuracy-related penalty.
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No. 19-60086
Appellants timely filed a 2014 tax return that included a Schedule C
claiming $33,774 in business-related deductions. Appellants were notified in
August 2016 that their return had been selected for examination. Following
examination, the Commissioner issued a deficiency notice disallowing all
$33,774 in deductions that Appellants had claimed on their Schedule C and
increasing Appellants’ income by $1,136 based on a cancellation of debt
reported on a Form 1099-C by Department Stores National Bank.
Appellants argue that the process provided during the examination was
inadequate and that the Tax Court erred in failing to shift the burden of proof
to the Commissioner at trial. Appellants, relying heavily on this court’s
decision in Portillo v. Commissioner of Internal Revenue, argue that the
Commissioner’s deficiency determination is a “‘naked’ assessment without any
foundation whatsoever.” 932 F.2d 1128, 1133 (5th Cir. 1991) (quoting United
States v. Janis, 428 U.S. 433, 442 (1976)).
“[We] review[] decisions of the Tax Court using the same standards we
use to review the decisions of district courts. We review findings of fact for
clear error and questions of law de novo.” Williams v. Comm’r, 795 F. App’x
920, 924 (5th Cir. 2019) (per curiam) (citing Estate of Duncan v. Comm’r, 890
F.3d 192, 197 (5th Cir. 2018)).
Appellants’ arguments with respect to the conduct of their examination
are meritless. The Tax Court found Appellants’ allegations of misconduct
against the examiner to be unsubstantiated. We find no evidence indicating
that this finding was clear error. Regardless, the law is well-settled that “the
presumption of correctness generally prohibits a court from looking behind the
Commissioner’s determination even though it may be based on hearsay or
other evidence inadmissible at trial.” Portillo, 932 F.2d at 1133; see also
Greenberg’s Express, Inc. v. Comm’r, 62 T.C. 324, 327 (1974) (“[T]his Court will
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not look behind a notice of deficiency to examine . . . the propriety of
respondent’s motives or of the administrative policy or procedure involved in
making his determinations.”).
The exception to this presumption of correctness, upon which Appellants
rely, is where the “government’s assessment falls within a narrow but
important category of a ‘“naked” assessment without any foundation
whatsoever.’” Portillo, 932 F.2d at 1133 (quoting Janis, 428 U.S. at 442). “[A]
court need not give effect to the presumption of correctness in a case involving
unreported income if the Commissioner cannot present some predicate
evidence supporting its determination.” Id. Appellants argue that the
Commissioner relies solely on the 1099-C filed by Department Stores National
Bank and that a deficiency notice that relies solely on a 1099-C is always a
“naked” assessment.
This argument is factually mistaken. The Commissioner did not rely
solely on the 1099-C. The presumption of correctness is only rebutted where
“the Commissioner cannot present some predicate evidence supporting its
determination.” Id. Whereas, in Portillo, the “Commissioner merely matched
[the] form 1099 with Portillo’s Form 1040 and arbitrarily decided to attribute
veracity to [the 1099],” here, the Commissioner conducted further inquiry and
did “attempt to substantiate the charge of unreported income by some other
means.” Id. at 1133–34. The Commissioner in this case procured a follow-up
affidavit from Department Stores National Bank attesting to the veracity of
the 1099-C, matched the debt to a Macy’s credit card loan in Hernandez’s
name, and produced an account statement verifying that the balance on the
loan at the time the debt was allegedly cancelled was equal to or greater than
the amount cancelled. Aside from their original form 1040, Appellants refused
to produce any contrary evidence, including a specific denial that the debt had
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been cancelled. As such, the notice of deficiency is not a naked assessment
with respect to the $1,136 of cancelled debt and the Tax Court did not err in
denying Appellants’ motion to shift the burden to the Commissioner.
With respect to the Schedule C deductions, Appellants’ burden shifting
argument is inapposite. “The burden of overcoming the presumption of
correctness in a deduction case properly rests with the taxpayer, who is the
best source of information for determining entitlement to the claimed
deductions.” Sealy Power, Ltd. v. Comm’r, 46 F.3d 382 (5th Cir. 1995); see also
Portillo, 932 F.2d at 1134 (“The taxpayer clearly bears the burden of proof in
substantiating claimed deductions.”). The Tax Court went to great lengths to
elicit some scintilla of evidence, whether documentary or testamentary, to
support the claimed deductions, but Appellants refused to provide any
substantiation for their claimed Schedule C deductions. They refused to testify
under oath before the Tax Court and provided neither documentation nor any
other evidence to support their claims. Appellants “failed to fulfill [their]
statutory obligation to maintain adequate records of [their] business
expenditures,” and thus the Tax Court correctly found them liable for taxes
related to disallowed Schedule C deductions. Portillo, 932 F.2d at 1135 (citing
26 U.S.C. § 6001).
The judgment of the Tax Court is AFFIRMED.
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