-
JOSEPH WAGES AND JENNIFER G. WAGES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWages v. Comm'rDocket No. 27579-12.
United States Tax Court T.C. Memo 2017-103; 2017 Tax Ct. Memo LEXIS 100;June 7, 2017, FiledDecision will be entered for respondent.
H operated bail bonding and towing businesses throughout tax years 2008, 2009, and 2010. In connection with his bail bonding business, H made payments into a surety's indemnity fund, deductions for which R denied for tax years 2008, 2009, and 2010. R also changed Ps' accounting method, requiring the inclusion in income of the indemnity fund's balance as of January 1, 2008.
With respect to H's business activities, Ps also claimed deductions for tax years 2008, 2009, and 2010, which R denied, for car and truck expenditures, office expenditures, insurance, subcontractors, cost of goods sold, depreciation, and supplies. R's further adjustments to Ps' tax items for the 2008, 2009, and 2010 tax years are not in dispute.
Held: R's adjustments are sustained because Ps have failed to prove by a preponderance of the evidence that the determinations in the notice of deficiency are incorrect.
*104 *100 James G. McGee, Jr., andWilliam H. Webb , for petitioners.Edwin B. Cleverdon ,Brooke W. Patterson , John F. Driscoll, andHorace Crump , for respondent.LARO, Judge.MEMORANDUM OPINION LARO,
Judge: This case arises out of respondent's adjustments to petitioners' returns for the 2008, 2009, and 2010 tax years. The case was submitted fully stipulated for decision without trial.See Rule 122 .sections 6651(a)(1) and6662(a) , respectively, for the taxable years and in the amounts as follows:Additions to tax Penalties Year Deficiency sec. 6651(a)(1) sec. 6662(a) 2008 $79,913 $11,986.95 $15,982.60 2009 37,316 9,329.00 7,463.20 2010 66,567 16,641.75 13,313.40 Petitioners have conceded all adjustments, along with the general applicability of the additions to tax under
section 6651(a)(1) and penalties undersection 6662(a) ,*105 except that they dispute respondent's change to their method of accounting and his disallowance of certain claimed deductions.After petitioners' concessions, we decide these remaining issues:
(1) whether petitioners may deduct for tax years 2008, 2009, and 2010 payments made to an indemnity fund maintained with respect to Joseph Wages' bail bonding*101 activity. We hold that they may not;
(2) whether respondent properly changed petitioners' accounting method with respect to Mr. Wages' indemnity fund related to his bail bonding activity, resulting in additional income for tax year 2008. We hold that he did;
(3) whether petitioners have substantiated their claimed deductions for car and truck expenditures, office expenditures, insurance, subcontractors, cost of goods sold, depreciation, and supplies for tax years 2008, 2009, and 2010 with respect to Mr. Wages' bail bonding activity. We hold that they have not.
Background I. Overview The parties submitted this case fully stipulated under
Rule 122 . The Court subsequently ordered the parties to file simultaneous opening and answering briefs. Respondent filed two briefs; petitioners opted to file only an opening brief. The stipulations of facts and settled issues are incorporated herein. Petitioners are*106 residents of Mississippi. This case is appealable to the Court of Appeals for the Fifth Circuit absent stipulation of the parties to the contrary.II. Mr. Wages' Business Activities While the Court left the record in this case open for a month and a half after the parties' submission of their first stipulation*102 of facts, no supplemental stipulation of facts followed during that time (one was filed later solely to introduce evidence of the petition's timely mailing); nor has either party moved to enter any substantive evidence beyond the agreed-upon statements in the first stipulation of facts and the stipulation of settled issues. Accordingly, we must render our decision on the basis of the record before us, limited as it may be.
The record shows that during the years at issue Mr. Wages operated bail bonding and towing businesses, to which respondent's adjustments relate. As part of his bail bonding business, Mr. Wages made certain payments to an indemnity fund. Furthermore, he claims to have incurred various expenses (which petitioners sought to deduct on their Federal income tax returns, and which, to the extent they remain disputed, are enumerated below) in the course of his bail bonding and towing businesses.
*107 III. Petitioners' Tax Returns Petitioners admit that they neglected to file timely their Federal income tax returns for the years in issue. Their 2008 return was due on October 15, 2009, but was filed on January 4, 2010. Their 2009 return was due on April 15, 2010, but was filed on*103 May 24, 2011. And their 2010 return was due on April 15, 2011, but was filed on October 19, 2011.
Petitioners' tax returns have not been entered into the record, nor have the parties stipulated the content thereof. Nonetheless, from the pleadings we gather that petitioners filed Schedules C, Profit or Loss From Business, on which they claimed deductions for the various expenses at issue here. Mr. Wages aggregated the income and expenses for his two businesses on a single Schedule C for each of the tax years 2008, 2009, and 2010. Petitioners attached a separate Schedule C for Jennifer Wages to their 2008 Federal income tax return, which they admit now to having been done in error.
IV. Respondent's Adjustments and Petitioners' Concessions Respondent on August 8, 2012, issued a notice of deficiency to petitioners with respect to their income tax liabilities for tax years 2008, 2009, and 2010. As we noted above, petitioners have conceded some of respondent's adjustments; we concern ourselves with only those that remain disputed.
*108 Respondent determined that payments into an indemnity fund in connection with Mr. Wages' bail bonding business were not currently deductible. Thus respondent adjusted*104 "other income" upward on Mr. Wages's 2008 Schedule C by changing petitioners' accounting method and including in income the $69,963 balance of the indemnity fund as of January 1, 2008, thereby offsetting all previous deductions petitioners had claimed with respect to that indemnity fund. Furthermore, respondent adjusted upward: (1) "insurance" on Mr. Wages' 2008 Schedule C by $46,398; (2) "other expenses" on Mr. Wages' 2009 Schedule C by $33,445; and (3) "other expenses" on Mr. Wages' 2010 Schedule C by $27,912. The parties agree that the amounts at issue are accurate but dispute the legal question of whether petitioners are entitled to claim current deductions for amounts paid to the indemnity fund.
In addition to his denial of a deduction for the indemnity fund payments, respondent disallowed several of petitioners' claimed Schedule C expense deductions on the grounds that petitioners failed to establish that the amounts were ordinary and necessary business expenses, were expended for the purposes designated, and were substantiated as required by
section 274(d) . Respondent also disallowed petitioners' claimed depreciation deductions on the grounds that petitioners failed to establish that any property*105 was depreciable or used in a trade*109 or business, or that they had a cost or other basis in it. Thus, respondent made the following disputed upward adjustments to the Schedule C items for the tax years specified:Item 2008 2009 2010 Car/truck expenses $24,589 $17,669 $8,794 Office expenses 3,500 -0- -0- Insurance -0- 4,499 4,881 Contract labor 121,500 -0- 148,64 COGS-- purchases -0- 63,687 -0- Depreciation/179 -0- 7,572 18,171 Supplies -0- -0- 19,924 Petitioners claim that, although they do not have all the underlying records with respect to these expenses, the stipulated documentation in this case is sufficient to support deductions for them.
The parties further agree that the adjustments in the notice of deficiency relating to self-employment tax, the deduction for self-employment tax, exemptions, and the net operating loss carryforward are automatic and subject to change based on the substantive adjustments in this case. The parties concur that the penalties under
section 6662(a) and the additions to tax undersection 6651(a)(1) apply as indicated in the notice of deficiency.*110 V. Timeliness of Petition The last day for petitioners to file a petition with the Court was November 6, 2012. The petition, signed by petitioners' counsel and dated November*106 6, 2012, was received and filed by the Court in the morning of November 13, 2012. The envelope in which the petition arrived bore "stamps.com" postage and a certified mail sticker with a tracking number. There was no postmark, however, and since the Court received the petition after the date prescribed for filing it, the Court sua sponte raised the question of its jurisdiction under
section 6213(a) to decide the case. Unless petitioners could show that they timely mailed their petition, they could not avail themselves of thesection 7502(a) mailbox rule, which allows a timely mailed document to be treated as timely filed.Notwithstanding initial difficulties in finding evidence of their timely mailing of the petition, petitioners eventually found a certified mail receipt and the corresponding return receipt, each bearing a tracking number corresponding to that on the envelope in which the petition was mailed. The certified mail receipt bore a U.S. Postal Service postmark dated November 6, 2012, which under
section 301.7502-1(c)(2) , Proced. & Admin. Regs., is treated as the postmark date of the mailed document. The parties jointly stipulated the validity of the certified mail receipt and further stipulated that it shows that petitioners*107 timely filed their*111 petition. Thus, we conclude that the petition (1) was contained in a properly addressed envelope, (2) was deposited within the prescribed time in the mail in the United States with sufficient postage prepaid, and (3) bore a constructive postmark as evidenced by the U.S. Postal Service postmark on the certified mail receipt.See sec. 301.7502-1(c)(1) and(2) , Proced. & Admin. Regs. Accordingly, petitioners have established the mailbox rule's applicability to their case,see sec. 7502(a) , and borne their burden of proving that we have jurisdiction thereover,see David Dung Le, M.D., Inc. v. Commissioner , 114 T.C. 268">114 T.C. 268aff'd ,22 F. App'x 837 (9th Cir. 2001) .Discussion I. Overview Generally, the Commissioner's determination of a taxpayer's liability for an income tax deficiency is presumed to be correct, and the taxpayer bears the burden of proving the determination improper by a preponderance of the evidence.
See Rule 142(a) ;Welch v. Helvering , 290 U.S. 111">290 U.S. 111INDOPCO, Inc. v. Commissioner , 503 U.S. 79">503 U.S. 79Sec. 6001 .*112 II. Petitioners' Proposed Findings of Fact Petitioners have asserted a number of facts in their brief. Petitioners' proposed findings of fact*108 explain the indemnity fund arrangement between Mr. Wages' bail bonding business and the surety for which it was acting as an agent. The proposed findings of fact further allege that an independent contractor appointed by petitioners as their agent with respect to the bail bonding business, who took over the daily operations of the business after Mr. Wages suffered a stroke, stole petitioners' records and established a competing bail bonding business. Petitioners state that they have initiated a lawsuit against the former contractor in the circuit court for Rankin County, Mississippi.
Respondent objects to most of petitioners' proposed findings of fact on two grounds: first, that petitioners failed to comply with
Rule 151(e)(3) , which requires that each finding of fact cite the "pages of the transcript or the exhibits or other sources relied upon to support the statement", and second, that the asserted facts are allegations not supported by the record before the Court.We agree with respondent. The record in this case, notwithstanding the Court's holding it open for a month and a half after the parties' submission of their first stipulation of facts, is barren. Whatever facts have been established*109 we recite in the "Background" section of this opinion. Petitioners' remaining proposed*113 findings of fact find no support in the record: There are no stipulations, exhibits, or any other sources corroborating them, outside unsworn statements made in petitioners' petition, pretrial memorandum, and brief. Thus, we must accept the limited record in this case as it stands and decide the disputed issues accordingly.
III. Deductibility of Payments to Indemnity Fund The parties agree that Mr. Wages made payments to an indemnity fund in the course of his bail bonding business. Respondent disallowed the current deduction thereof in the amounts of $46,398 for 2008, $33,445 for 2009, and $27,912 for 2010.
A. The Parties' Arguments In support of his disallowance of petitioners' deductions, respondent cites
Sebring v. Commissioner , 93 T.C. 220">93 T.C. 220See also, e.g., Zweifel v. Commissioner , T.C. Memo 2012-93">T.C. Memo. 2012-93Sebring ,*114 respondent argues, petitioners are unable to satisfy their burden of proof on this issue.Petitioners rest their argument on a different theory. They contend that the indemnity fund is controlled by a third-party surety and Mr. Wages' bail bonding business has no right to funds within the indemnity account, except insofar as a liability for which the business must indemnify the surety is discharged. Petitioners maintain that because the business has no control over or access to the funds, nor an expectation of their reacquisition, the amounts remitted to the fund should be deductible when paid. Petitioners further argue that should Mr. Wages' bail bonding business reacquire any sums from the indemnity fund in the future, those amounts should be recaptured in that year's gross receipts under the tax benefit rule codified in
section 111 .Respondent disagrees with petitioners' theory. First, he points out that petitioners' argument rests on allegations that are not part of the evidentiary record in the case and thus petitioners have not sustained their burden of proof. Second, respondent argues that the tax benefit rule requires the*111 inclusion in income only of a recovered amount for which the taxpayer had received a tax benefit in a prior year,
see Hillsboro Nat'l Bank v. Commissioner , 460 U.S. 370">460 U.S. 370Section 111 , respondent asserts,*115 ensures only that the liability resulting from the tax benefit rule does not exceed the benefit received in a prior year; it authorizes no deduction.B. Petitioners' Burden of Proof We agree with respondent that petitioners have failed to satisfy their burden of proof. As we observed above, the burden is on the taxpayer to prove by a preponderance of the evidence that the notice of deficiency is incorrect.
See Rule 142(a) ;Welch v. Helvering , 290 U.S. at 115*116 IV. Change of Petitioners' Accounting Method In the notice of deficiency, respondent changed petitioners' accounting method to include in income the $69,963 balance of the indemnity fund as of January 1, 2008. This change offset previous deductions petitioners had claimed with respect to payments remitted to the indemnity fund.
A. The Parties' Arguments Respondent points out that he has the authority under
sections 446(b) and481 to change a taxpayer's method of accounting. He also citesRankin v. Commissioner , T.C. Memo 1996-350">T.C. Memo. 1996-350aff'd ,138 F.3d 1286">138 F.3d 1286 (9th Cir. 1998), for the proposition that the change in treatment of amounts accumulated in a bail bond indemnity fund before the years in issue in that case was a proper change in method of accounting, because the change affected only the timing of inclusion and not its ultimate fact.See also Firetag v. Commissioner , T.C. Memo. 1999-355aff'd without published opinion ,232 F.3d 887">232 F.3d 887 (4th Cir. 2000). Since the record in this case includes no indication that the indemnity fund had any characteristics different from those of the fund inRankin Petitioners in their petition asserted that because respondent's audit and resultant notice of deficiency pertained only to tax years 2008, 2009, and 2010,*117 and the limitations periods for previous tax years had expired, the change in accounting method violated petitioners' procedural due process rights and was an attempt by respondent to circumvent the statute of limitations. However, petitioners failed to advance any argument on the accounting method change in their pretrial memorandum or their brief.
B. Petitioners' Burden of Proof From petitioners' failure in their pretrial memorandum and brief to argue the accounting method change separately from respondent's disallowance of their claimed deductions for the indemnity fund remittances, we infer that they have abandoned their due process and statute of limitations theories. Since petitioners have abandoned their separate arguments on the change of accounting method, and since they have adduced no evidence with respect to it, we find that they have failed to carry their burden of proof with respect to this adjustment.
See Rule 142(a) ;Welch v. Helvering , 290 U.S. at 115V. Deductions*114 for Claimed Expenses Respondent disallowed the deduction for tax years 2008, 2009, and 2010 of certain expenses for car and truck, office, insurance, subcontractors, cost of goods*118 sold, depreciation, and supplies. The denied deductions totaled $149,589 for tax year 2008, $93,427 for tax year 2009, and $200,415 for tax year 2010.
A. The Parties' Arguments Respondent argues that while
section 162(a) generally allows for the deduction of ordinary and necessary trade or business expenses, and whilesection 167(a)(1) generally provides a depreciation deduction for the exhaustion, wear, and tear of property used in a trade or business, petitioners have failed to substantiate their expenses in this case. Respondent points out that taxpayers are required to maintain sufficient records to establish their tax liability,see sec. 6001 ;Hradesky v. Commissioner , 65 T.C. 87">65 T.C. 87aff'd ,540 F.2d 821">540 F.2d 821 (5th Cir. 1976), and that self-serving declarations generally are not a sufficient substitute for records,Weiss v. Commissioner , T.C. Memo 1999-17">T.C. Memo. 1999-17section 274(d) , which imposes strict substantiation rules for certain trade or business expenses, including those for the use of most motor vehicles. In sum, respondent contends that the record in this case contains no documentation or substantiation of petitioners' claimed*115 expenses or depreciation deductions and that petitioners therefore are unable to satisfy their burden of proof on this issue.*119 For their part, petitioners assert that through no fault of theirs a third party took their records and that this entitles them to reconstruct their records to substantiate the deductions claimed. Petitioners point to
section 1.274-5T(c)(5), Temporary Income Tax Regs. ,50 Fed. Reg. 46022 (Nov. 6, 1985) , which allows taxpayers to substantiate deductions by reasonable reconstruction "[w]here the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer's control, such as destruction by fire, flood, earthquake, or other casualty". Petitioners further argue that underCohan v. Commissioner , 39 F.2d 540">39 F.2d 540Respondent in his answering brief points out that the
Cohan rule allows the Court to approximate the amount of an allowable deduction where a taxpayer has established that he paid or*116 incurred a deductible business expense but does not establish its amount; however, the rule applies only where there is sufficient evidence in the record to provide a basis for the estimate.See Vanicek v.*120 Commissioner , 85 T.C. 731">85 T.C. 731section 1.274-5T(c)(5), Temporary Income Tax Regs. ,supra , allows taxpayers to substantiate deductions by reasonable reconstruction, respondent urges that theCohan rule does not apply to the items required to be substantiated undersection 274(d) . Respondent argues that the record contains no evidence supporting the claimed deductions. It is irrelevant what documentation petitioners provided to respondent during the underlying examination, respondent contends, because underGreenberg's Express, Inc. v. Commissioner , 62 T.C. 324">62 T.C. 324B. Substantiation of Petitioners' Deductions We agree with respondent and find that petitioners have not substantiated their reported expenses. As we took pains to note above, the record in this case is sparse. Petitioners have presented nothing to the Court to establish either the fact of their payment of the expenses in question or the amounts thereof.
Petitioners urge us to apply the
Cohan rule to find in their favor. It is true that underCohan v. Commissioner , 39 F.2d at 543-544Green Gas Del. Statutory Tr. v. Commissioner , 147 T.C. 1">147 T.C. 1Williams v. United States , 245 F.2d 559">245 F.2d 559Vanicek v. Commissioner , 85 T.C. at 742-743Petitioners claim to have provided "voluminous reconstructed records" to respondent during examination. Yet none of these records have been provided to the Court. As respondent correctly noted, this Court does not look behind a notice of deficiency to examine the evidence used: Proceedings herein are de novo and based on the merits of the case and not on any previous record developed at the administrative level.
Greenberg's Express, Inc. v. Commissioner , 62 T.C. at 327-328In the absence of any evidence before us, we cannot apply
Cohan see Rule 142(a) ;Welch v. Helvering , 290 U.S. at 115VI. Additions to Tax and Penalties Section 6651(a)(1) imposes an addition to tax for failure to file a required return, unless such failure was due to reasonable cause and not willful neglect.Section 6662(a) imposes a 20% accuracy-related penalty on underpayments of tax by reason of negligence or disregard of rules or regulations, a substantial understatement of income tax, or a substantial valuation misstatement, among other grounds specified insection 6662(b) .In addition to deficiencies for tax years 2008, 2009, and 2010, respondent determined an addition to tax under
section 6651(a)(1) and a penalty undersection 6662(a) for each of those years. The parties stipulated that "[t]he penalties underI.R.C. §§ 6651(a)(1) and6662(a) , as indicated in the notice of deficiency, are applicable". Petitioners on brief*119 argued that because their claimed deductions were proper, the Court should abate the accuracy-related penalties determined against them undersection 6662(a) . We infer from the parties' stipulation that, in the event we hold against petitioners on their claimed deductions, they concur that*123 the additions to tax and the penalties were imposed correctly. We have held respondent's determinations of petitioners' deficiencies for each of the tax years at issue to be correct. Accordingly, the additions to tax and penalties undersections 6651(a)(1) and6662(a) , respectively, apply.VII. Conclusion Petitioners' claims that Mr. Wages suffered a stroke and his former associate purloined his records, if true, paint a tragic tale. Regrettably, there is no evidence in the record before us to substantiate either these claims or petitioners' claimed expense deductions. Nor is there sufficient evidence to justify petitioners' claimed deductions of indemnity fund contributions. Thus we must find that petitioners have failed to satisfy their burden of proving by a preponderance of the evidence that the notice of deficiency is incorrect.
We have considered all of the parties' arguments, and to the extent not discussed above, conclude that those*120 arguments are irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered for respondent .Footnotes
1. Unless otherwise indicated, section references are to the Internal Revenue Code applicable for the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.↩
Document Info
Docket Number： Docket No. 27579-12.
Citation Numbers： 113 T.C.M. 1467, 2017 Tax Ct. Memo LEXIS 100, 2017 T.C. Memo. 103
Judges： LARO
Filed Date： 6/7/2017
Precedential Status： Non-Precedential
Modified Date： 11/20/2020