Ricky R. & Pamela D. Williams v. Commissioner , 2013 T.C. Summary Opinion 60 ( 2013 )

PURSUANT TO INTERNAL REVENUE CODE
SECTION 7463(b),THIS OPINION MAY NOT
BE TREATED AS PRECEDENT FOR ANY
OTHER CASE.
T.C. Summary Opinion 2013-60UNITED STATES TAX COURT
RICKY R. WILLIAMS AND PAMELA D. WILLIAMS, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 8499-11S. Filed July 22, 2013.
Ricky R. Williams and Pamela D. Williams, pro sese.
L. Katrine Shelton, for respondent.
SUMMARY OPINION
PANUTHOS, Chief Special Trial 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), the decision to be entered is not
reviewable by any other court, and this opinion shall not be treated as precedent
-2-
for any other case. Unless otherwise indicated, subsequent section references are
to the Internal Revenue Code in effect for the year in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
In a notice of deficiency dated January 6, 2011, respondent determined a
deficiency in petitioners’ Federal income tax of $24,973 and a section 6662(a)
accuracy-related penalty of $4,994 for the 2007 tax year. After concessions,1 the
issues for decision are: (1) whether petitioners may exclude a portion of their
income as a parsonage or rental allowance pursuant to section 107(2); and (2)
whether petitioners are liable for the accuracy-related penalty under section
6662(a).
Background
Some of the facts have been stipulated, and we incorporate the stipulation
and the accompanying exhibits by this reference. Petitioners resided in California
when their petition was filed.
1
Petitioners neither addressed at trial nor provided any evidence to support
the deductions claimed on Schedule A, Itemized Deductions, and Schedule C,
Profit or Loss From Business, that respondent disallowed for tax year 2007.
Accordingly, those amounts are deemed conceded by petitioners. See Rule
149(b). Further, petitioners neither addressed at trial nor provided any evidence to
prove that they did not omit Schedule C income, and this issue is likewise deemed
conceded. See id.; see also Roat v. Commissioner, 847 F.2d 1379, 1383 (9th Cir.
1988).
-3-
Ricky R. Williams (petitioner) is an ordained minister with a master’s in
divinity. He entered into an employment agreement (agreement) with the St. John
Missionary Baptist Church (church) in September 2005 under which he became
the church’s permanent pastor. Under the agreement, petitioner received a starting
salary of $80,000 per year. The agreement specified that the church would
provide petitioner with a $500 housing allowance for six months from the date
petitioner signed the agreement. That six-month period could be extended with a
majority vote of approval of the church’s Deacon Ministry. The agreement was
otherwise silent with respect to a housing allowance.
Petitioners timely filed a joint Federal income tax return for tax year 2007.
Petitioners reported Mrs. Williams’ income from the Young Men’s Christian
Association as wages on their return. The church paid petitioner as a contract
worker. Consistent with this, petitioner reported his income on Schedule C.
Petitioners reported $85,077 in gross receipts on the Schedule C attached to their
return and deducted $82,076 in expenses.
The notice of deficiency determined that petitioners had unreported
Schedule C gross receipts or sales of $18,256 and disallowed the following
deductions for lack of substantiation: (1) Schedule C deductions of $29,989 for
business use of home, $14,457 for supplies, and $13,678 for car and truck
-4-
expenses and (2) Schedule A deductions of $2,229 for cash contributions. The
notice of deficiency also determined a section 6662(a) penalty of $4,994.
On April 11, 2011, petitioners filed the petition, asserting that they had
supporting documentation for the amounts reported on their 2007 return. At some
point, petitioners submitted to respondent an amended Schedule C, which differed
from the Schedule C filed with their return as follows:
Schedule C
Income Original Amended
Gross receipts or sales $85,077 $101,733
Returns and allowances --- 33,126
Gross income 85,077 68,607
Expense Original Amended
Car and truck $13,678 $8,514
Depreciation 2,230 3,620
Legal and professional services 1,506 1,000
Supplies 14,457 5,185
Travel 8,935 8,863
Meals and entertainment 4,829 1,155
-5-
Utilities 6,452 ---
Business use of home 29,989 ---
Other expenses1 --- 29,355
1
The $29,355 of “other expenses” on the amended Schedule C consists of
$18,256 for direct reimbursement, $1,652 for dry cleaning, $53 for equipment
purchase, $1,095 for furniture purchase, $1,065 for health care, $492 for Internet,
$1,440 for parking and tolls, and $5,302 for other expenses of postage,
professional services, repairs and maintenance, robes, and telephone.
The adjustments in the notice of deficiency are based on petitioners’ original
Schedule C. At trial petitioners did not dispute the adjustments in the notice of
deficiency but instead asserted that the $33,126 claimed as “returns and
allowances” on the amended Schedule C was a parsonage allowance.
Discussion
In general, the Commissioner’s determinations set forth in a notice of
deficiency are presumed correct, and the taxpayer bears the burden of proving that
these determinations are in error. Rule 142(a); Welch v. Helvering, 290 U.S. 111,
115 (1933). Pursuant to section 7491(a), the burden of proof as to factual matters
shifts to the Commissioner under certain circumstances. Petitioners did not allege
that section 7491(a) applies. See sec. 7491(a)(2)(A) and (B). Therefore,
petitioners bear the burden of proof. See Rule 142(a).
-6-
I. Parsonage Allowance
Compensation for services is generally included in gross income. Sec.
61(a)(1). Section 107(2) provides that the gross income of a minister does not
include “the rental allowance paid to him as part of his compensation, to the extent
used by him to rent or provide a home and to the extent such allowance does not
exceed the fair rental value of the home, including furnishings and appurtenances
such as a garage, plus the cost of utilities.” As a prerequisite for this exclusion,
the taxpayer must establish that there was a designation of the rental allowance
pursuant to official church action before payment. Sec. 1.107-1(b), Income Tax
Regs. The regulations state in pertinent part:
The term “rental allowance” means an amount paid to a minister to
rent or otherwise provide a home if such amount is designated as
rental allowance pursuant to official action taken * * * in advance of
such payment by the employing church or other qualified
organization when paid after December 31, 1957. The designation of
an amount as rental allowance may be evidenced in an employment
contract, in minutes of or in a resolution by a church or other
qualified organization or in its budget, or in any other appropriate
instrument evidencing such official action. The designation referred
to in this paragraph is a sufficient designation if it permits a payment
or a part thereof to be identified as a payment of rental allowance as
distinguished from salary or other remuneration.
Respondent does not contest petitioner’s status as a “minister” under section
107(2); rather, respondent argues that the claimed parsonage allowances were not
-7-
properly designated in accordance with the applicable regulations. Petitioners
bear the burden of proving that the amounts at issue were properly designated as a
rental allowance by official church action before payment. See Rule 142(a).
The employment agreement that petitioner entered into with the church in
September 2005 provides that the church would assist petitioner with a $500 per
month housing allowance for six months from the date petitioner signed the
agreement but does not designate any other amount as a rental allowance.
Petitioner did not assert that the six-month period was extended. Petitioner
provided a purported second employment agreement at trial. Although the second
employment agreement is dated 2005, it was signed by petitioner and the church in
2012. Petitioner asserts that the second agreement was intended to clarify the
original employment agreement because the original agreement was a “generic-
type layout contract” between petitioner and the church in which “some of the
stuff * * * had not been defined”. The second employment agreement discusses a
parsonage allowance and provides that “Parsonage allowance shall include all
cost[s] associated with facilitating a proper living facilities [sic] for the Employee
and his family. In short these costs shall include but not [be] limited to: Monthly
rental or Mortgage costs, Gardening, Cable TV, Internet Service Costs, Security
System Maintenance, Repair[s] and Maintenance, Utilities, Etc.”
-8-
The original employment agreement does not designate a rental allowance,
and the second employment agreement was executed in 2012 and therefore could
not designate a rental allowance before payment in 2007. Petitioners have
therefore not established that the amounts at issue were properly designated as a
rental allowance by official church action before payment. See sec. 1.107-1(b),
Income Tax Regs. Accordingly, petitioners have not established that petitioner is
entitled to a parsonage allowance. See Boyer v. Commissioner, 69 T.C. 521, 533
(1977); Eden v. Commissioner, 41 T.C. 605, 607 (1964); Logie v. Commissioner,
T.C. Memo. 1998-387.
II. Accuracy-Related Penalty
Respondent determined that petitioners are liable for the accuracy-related
penalty under section 6662(a) and (b)(2) for an underpayment attributable to a
substantial understatement of income tax with respect to the year in issue.
Section 6662(a) and (b)(2) imposes a penalty equal to 20% of the amount of
any underpayment that is due to a substantial understatement of income tax. An
individual substantially understates his or her income tax when the understatement
exceeds the greater of 10% of the tax required to be shown on the return or
$5,000. Sec. 6662(d)(1)(A). Respondent has the burden of production with
respect to the accuracy-related penalty. See sec. 7491(c).
-9-
The underpayment of tax required to be shown on petitioners’ 2007 Federal
income tax return is due to a substantial understatement of income tax because the
understatement exceeds $5,000 and is greater than 10% of the tax required to be
shown on the return. See sec. 6662(b)(2), (d)(1); sec. 1.6662-4(b)(1), Income Tax
Regs. Respondent’s burden of production under section 7491(c) has been
satisfied.
The accuracy-related penalty is not imposed, however, with respect to any
portion of an underpayment if the taxpayer can establish that he acted with
reasonable cause and in good faith with respect to such portion. Sec. 6664(c)(1).
The determination of whether a taxpayer acted with reasonable cause and in good
faith depends on the pertinent facts and circumstances, including the taxpayer’s
efforts to assess the proper tax liability, the knowledge and the experience of the
taxpayer, and the reliance on the advice of a professional, such as an accountant.
Sec. 1.6664-4(b)(1), Income Tax Regs.
Petitioners omitted income from their 2007 Federal income tax return and
have not established that they maintained adequate records of the expenses
deducted on the return. Though petitioner asserted at trial that the 2007 return was
prepared by a return preparer, the 2007 return is signed by petitioners and
indicates that it was self-prepared. We understand that petitioners are not tax
- 10 -
experts, but we conclude that they did not act with reasonable cause and in good
faith and that they are liable for the accuracy-related penalty under section 6662(a)
for taxable year 2007.
To reflect the foregoing,
Decision will be entered for
respondent.