Le Beau v. Comm'r ( 2014 )

T.C. Memo. 2014-198
UNITED STATES TAX COURT
CHARLES PAUL LE BEAU, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9312-11. Filed September 30, 2014.
Charles Paul Le Beau, pro se.
Jeffrey A. Schlei, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: For several years petitioner Charles Paul Le Beau has
failed to timely file his Federal income tax returns. Before the Court are
petitioner’s returns for 2002 through 2007. With the exception of the 2007 return,
all of the returns were filed long after they were due.
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[*2] In each return petitioner admitted that he did not have records but estimated
the amounts set forth on the return. In a notice of deficiency, respondent
disallowed a number of business expense deductions and other claimed deductions
and determined deficiencies for 2002 through 2007 and determined additions to
tax and penalties for 2002 through 2006. The issues for decision are:
(1) whether petitioner is entitled to certain deductions claimed on Schedule
A, Itemized Deductions, and Schedule C, Profit or Loss From Business, for each
year at issue greater than those allowed by the respondent in the notice of
deficiency. We hold he is to a limited extent;
(2) whether petitioner is liable for the additions to tax, pursuant to section
6651(a)(1),1 for the years 2002, 2003, 2004, 2005, and 2006. We hold he is; and
(3) whether petitioner is liable for accuracy-related penalties, pursuant to
section 6662(a), for the years 2002, 2003, 2004, 2005, and 2006. We hold he is.
FINDINGS OF FACT
Petitioner resided in California when he filed his petition. Petitioner did not
file his income tax returns for 2002 through 2006 until 2008. Petitioner filed his
2007 Federal income tax return in April 2008.
1
Unless otherwise indicated all section references are to the Internal
Revenue Code in effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
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[*3] Petitioner’s income tax returns for the years at issue state: “Taxpayer has
lost records and has estimated amounts reported on tax return. Taxpayer believes
they [sic] have estimated within plus or minus 5% or 10%.”
Petitioner operated a law practice and another business during portions of
the years at issue. Respondent accepts as reported his income from the businesses
but disputes some of the expenses. Petitioner has presented no evidence
concerning the contested wage and contract labor expense deductions.
For both 2003 and 2004 petitioner paid office rental expenses of $12,600.
Petitioner claimed that he used his automobile 100% for business, and he deducted
related expenses accordingly. However, he has failed to substantiate this use.
Approximately 80% of petitioner’s medical expenses during the years at
issue were covered by insurance and the record does not contain sufficient
evidence to establish how many unreimbursed medical expenses fell upon
petitioner.
By agreement of the parties, certain income and deduction items originally
attributed to petitioner’s spouse, Victoria Joy Le Beau, in a notice of deficiency
issued to Mrs. Le Beau, will instead be attributed to petitioner. We specifically
find that the revised annual itemized real estate tax deductions resulting from this
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[*4] agreement are to be no less than $6,578 for the years in issue upon the basis
of the record of trial.
Before the years at issue petitioner built a pool at his personal residence and
claimed medical expense deductions related to the building of the pool and the
pool maintenance. Petitioner was advised to lose weight, and he testified the pool
assisted his weight loss. The pool maintenance expense was $1,440 annually for
the years at issue; the record does not establish the capital cost of the pool.
Petitioner has attached to his brief numerous documents that were not made
part of the record at trial. Petitioner has not filed any motions to reopen the record
to allow additional documentation that was not presented at trial. These
documents are not evidence. See Rule 143(c).
OPINION
On the returns for the years at issue, petitioner claimed various deductions
on Schedule A and a number of business expense deductions on Schedule C. In
the notice of deficiency respondent disallowed some of the deductions because
petitioner failed to substantiate the related items. Petitioner’s lack of attention to
maintaining appropriate records and timely filing his tax returns is the core issue
of this case.
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[*5] As we have often recognized, deductions are a matter of legislative grace,
and the taxpayer bears the burden of proving that he is entitled to any deduction
claimed. Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992);
New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). This includes the
burden of substantiation. Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d
per curiam, 540 F.2d 821 (5th Cir. 1976). Taxpayers must maintain books and
records sufficient to substantiate the amounts of items for which they claim
deductions. Sec. 6001; sec. 1.6001-1(a), (e), Income Tax Regs.
Petitioner, by his own admission, estimated all of the deductions stated on
his tax returns, asserting that he lost his records. In an attempt to meet his burden
of substantiation, petitioner has presented documents relating to various medical
and business expenses. We will not consider additional documents petitioner
attached to his posttrial brief as we explained at trial that documents submitted
posttrial would not be admitted.
A. Medical Expense Deductions
The medical records do not support petitioner’s argument that he should be
allowed the medical expense deductions that respondent disallowed. The records
show only the costs he paid and do not reflect any reimbursement or insurance
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[*6] payments that may have offset the expenses. Petitioner concedes that his
insurance paid most of his medical expenses.
At trial the Court instructed petitioner to provide spreadsheets that would
specifically tie the amounts of the deductions petitioner claimed to the documents
included in the record. Petitioner has failed to do this, and the Court simply
cannot find a basis to hold that petitioner is entitled to deduct any of the additional
expenses reflected in the documents.
Petitioner also claimed medical expense deductions for costs he paid to
build and maintain a pool that he claims to have used for therapeutic purposes. A
stipulated document indicates the pool was built in 2001, but the only evidence
petitioner has presented to support the medical purpose for the expense is his
testimony that doctors told him to lose weight.
Section 213 provides a deduction for medical care expenses, not
compensated by insurance, that exceed 7.5% of the taxpayer’s adjusted gross
income. “Medical care” expenses are defined as amounts paid “for the diagnosis,
cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting
any structure or function of the body”. Sec. 213(d)(1) (A). An expenditure for
medical care is deductible if it is strictly confined to expenses incurred primarily
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[*7] for the prevention or alleviation of a physical or mental defect or illness. Sec.
1.213-1(e)(1)(ii), Income Tax Regs.
In some circumstances, a taxpayer may deduct a capital expenditure as a
medical expense in the year of payment, but only to the extent the expenditure
exceeded the increase in value of the underlying property resulting from the
expenditure. Cherry v. Commissioner, T.C. Memo. 1983-470; Polacsek v.
Commissioner, T.C. Memo. 1981-569; sec. 1.213-1(e)(1)(iii), Income Tax Regs.
Petitioner has not presented evidence concerning when he paid for the pool and
whether the expenditure exceeded the resulting increase in property value.
Accordingly, petitioner is not entitled to the deduction.
Petitioner has also failed to carry the burden of proving the pool was
primarily for the treatment of medical ailments. Accordingly, he may not deduct
as medical expenses the amounts he paid for pool maintenance, and these
expenses would not exceed the 7.5% deductibility threshold in any event.
B. Allowable Deductions
Petitioner has established that in 2003 and 2004 he paid rental expenses in
connection with his business. These expenses are deductible for those years, but
all other Schedule C business expenses for which respondent has disallowed
deductions are not deductible because they have not been substantiated. Likewise,
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[*8] we found petitioner paid real estate tax in excess of the amounts respondent
determined for 2003 and 2004. This is the only adjustment we find to
respondent’s Schedule A adjustments.
C. Penalties for Failure To Timely File
Section 6651(a)(1) imposes an addition to tax for failure to file a timely
return. This addition to tax is equal to 5% of the amount of tax required to be
shown on the return for each month the return is not filed, not to exceed 25% in
the aggregate.
To avoid this addition to tax, the taxpayer must prove that his failure to file
was: (1) due to reasonable cause, and (2) not due to willful neglect. Sec.
6651(a)(1); United States v. Boyle, 469 U.S. 241, 245 (1985); Church of
Scientology v. Commissioner, 823 F.2d 1310, 1321 (9th Cir. 1987), aff’g 83 T.C.
381 (1984). “A failure to file a tax return on the date prescribed leads to a
mandatory penalty unless the taxpayer shows that such failure was due to
reasonable cause and not due to willful neglect.” McMahan v. Commissioner, 114
F.3d 366, 368 (2d Cir. 1997), aff’g T.C. Memo. 1995-547.
Reasonable cause under section 6651 means the exercise of ordinary
business care and prudence. Walter v. Commissioner, 753 F.2d 35, 40 (6th Cir.
1985), aff’g T.C. Memo. 1983-202; sec. 301.6651-1(c)(1), Proced. & Admin.
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[*9] Regs. Willful neglect is defined as a conscious, intentional failure or reckless
indifference. Boyle, 469 U.S. at 245. A failure to timely file a Federal income tax
return is due to reasonable cause if the taxpayer exercised ordinary business care
and prudence and, nevertheless, was unable to file the return within the prescribed
time. Sec. 301.6651-1(c)(1), Proced. & Admin. Regs.
Taxpayers have the burden of proving that the failure to file is due to
reasonable cause and not willful neglect. Rule 142(a); Cluck v. Commissioner,
105 T.C. 324, 339 (1995); Baldwin v. Commissioner, 84 T.C. 859, 870 (1985);
Davis v. Commissioner, 81 T.C. 806, 820 (1983), aff’d without published opinion,
767 F.2d 931 (9th Cir. 1985).
Petitioner has produced no evidence to show that his failure to timely file
his returns was due to reasonable cause and not willful neglect. Accordingly, the
addition to tax is sustained for each of the years 2002-06.
D. Accuracy-Related Penalties
Respondent determined that an accuracy-related penalty under section
6662(a) should be imposed for each of the years 2002-06. Section 6662(a) and
(b)(1) imposes a penalty equal to 20% of the amount of any underpayment
attributable to negligence or disregard of rules or regulations. The term
“negligence” includes any failure to make a reasonable attempt to comply with tax
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[*10] laws, and “disregard” includes any careless, reckless, or intentional
disregard of rules or regulations. Sec. 6662(c).
Negligence also includes any failure by the taxpayer to keep adequate books
and records or to substantiate items properly. Negligence is strongly indicated
where a taxpayer fails to make a reasonable attempt to ascertain the correctness of
a deduction on a return which would seem to a reasonable and prudent person to
be too good to be true under the circumstances. Sec. 1.6662-3(b)(1), Income Tax
Regs.
Section 6664(c)(1) provides an exception to the imposition of the accuracy-
related penalty if the taxpayer establishes that there was reasonable cause for the
underpayment and that the taxpayer acted in good faith with respect to the
underpayment. Sec. 1.6664-4(a), Income Tax Regs. The determination of
whether the taxpayer acted with reasonable cause and in good faith is made on a
case-by-case basis, taking into account the pertinent facts and circumstances. Sec.
1.6664-4(b) (1), Income Tax Reg. Once the Commissioner presents a prima facie
case that the penalty should apply, the taxpayer bears the burden of proving that he
or she acted with reasonable cause. Higbee v. Commissioner, 116 T.C. 438, 446-
449 (2001).
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[*11] The imposition of the accuracy-related penalty is appropriate because
petitioner has claimed deductions that he himself admits are estimates. Because
petitioner did not keep adequate books and records and failed to substantiate items
underlying the claimed deductions, we find that his underpayments resulted from
negligence and sustain the accuracy-related penalty against him. His blanket
claim that the records for all the years at issue were lost is simply not credible.
In conclusion, with the exception of the deductions allowed herein
respondent’s deficiency determinations are sustained as well as the determined
additions to tax and penalties.
In reaching our holdings herein, we have considered all arguments made,
and, to the extent not mentioned above, we conclude they are moot, irrelevant, or
without merit.
To reflect the foregoing,
Decision will be entered under
Rule 155.