Carl David Lucas & Jasmine Lucas ( 2024 )

United States Tax Court
T.C. Summary Opinion 2024-22CARL DAVID LUCAS AND JASMINE LUCAS,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 11907-20S. Filed October 9, 2024.
—————
Carl David Lucas and Jasmine Lucas, pro sese.
Matthew D. Lucey and Gabriella N. Paez, for respondent.
SUMMARY OPINION
LANDY, Judge: This case was heard pursuant to the provisions
of section 7463 1 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 for any other case.
Respondent determined a $29,600 deficiency in petitioners’
federal income tax and a $2,828 section 6662(a) accuracy-related penalty
for tax year 2018. After concessions, 2 the issues for decision are whether
1 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (Code), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure. We round
all monetary amounts to the nearest dollar.
2 At trial petitioners conceded that they (1) received and failed to report income
from Principal Life Insurance Co. (Principal Life) as shown on Form 1099–R,
Served 10/09/24
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(1) petitioners received and failed to report wages of $174,995;
(2) petitioners are entitled to itemized deductions claimed on their 2018
Form 1040X, Amended U.S. Individual Income Tax Return;
(3) petitioners had excess federal tax withholdings of $7,689;
(4) Ms. Lucas is entitled to innocent spouse relief; and (5) petitioners are
liable for a section 6662(a) accuracy-related penalty.
Background
During the year in issue Ms. Lucas served as a senior program
manager and was employed by and received wages from the District of
Columbia Government and Friends of Guest House. Mr. Lucas served
as a reservist in the U.S. Army, and he was employed by and received
wages from the Defense Finance and Accounting Service (DFAS) and
Cybraics Defense Corp. (Cybraics). To perform his duties as a reservist,
Mr. Lucas drove from his home in Maryland to New Jersey 12 times,
372 miles per round trip, for training.
Petitioners separated in 2019. While separated, Ms. Lucas timely
prepared and filed petitioners’ Form 1040, U.S. Individual Income Tax
Return. At that time Ms. Lucas resided in California, and Mr. Lucas
resided in Maryland. Mr. Lucas provided to Ms. Lucas the Forms W–2,
Wage and Tax Statement, he received from his employers. On their 2018
Form 1040, petitioners reported total income of $81,407, consisting of
wages of $76,445 from DFAS and a state tax refund received of $4,962.
Respondent selected petitioners’ 2018 Form 1040 for examination
and issued a Notice of Deficiency (Notice) determining that they failed
to report all income received, were liable for a 10% additional tax for
early distribution from a qualified plan, and were liable for a section
6662(a) accuracy-related penalty. The penalty received timely
managerial approval. On September 28, 2020, petitioners, then residing
in Maryland, timely filed a Petition for redetermination of the deficiency
and penalty. Petitioners attached an executed 2018 Form 1040X with
Schedule A, Itemized Deductions, and Schedule 1, Additional Income
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc., (2) are liable for the 10% additional tax upon receipt of the
income from Principal Life, and (3) are not entitled to claim the American Opportunity
Tax Credit. Respondent conceded that petitioners were entitled to (1) claim the child
and dependent care credit, child tax credit, and additional child tax credit, (2) deduct
state and local income taxes of $10,000, (3) deduct home mortgage interest of $22,563,
and (4) a credit for excess Social Security taxes withheld of $1,110.
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and Adjustments to Income, to their Petition. Respondent did not
process the 2018 Form 1040X.
On the amended return petitioners claimed itemized deductions
for medical expenses of $35,310 and noncash charitable contributions of
$85,000 on their Schedule A, and Armed Forces Reservist expenses of
$29,445 on their Schedule 1. 3 Petitioners claimed noncash charitable
contribution deductions for a $50,000 donation to Goodwill on
November 2, 2018, and a $35,000 donation to Friends of Guest House on
December 1, 2018. Petitioners provided a “Donation Receipt” on
Goodwill letterhead, which contained no description of the items
donated, and a “Donor Receipt/Acknowledgment” on Friends of Guest
House letterhead, which stated that the organization received
“20 books” from Ms. Lucas. As to the claimed Armed Forces Reservist
expense, the parties stipulated that Mr. Lucas incurred $2,433 in
nonmeal, unreimbursed travel expenses.
Before trial respondent and Ms. Lucas filed a Stipulation of
Settled Issues (Stipulation) resolving issues raised in the Notice, the
deductions claimed on the amended return, and Ms. Lucas’s request for
innocent spouse relief. Mr. Lucas declined to execute the Stipulation. 4
Discussion
I. Burden of Proof
In general, the Commissioner’s determinations set forth in a
Notice of Deficiency are presumed correct, and the taxpayers bear the
burden of proving that the determinations are in error. Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933). Petitioners failed to
establish that the burden of proof shifted to respondent. See § 7491(a).
3 Petitioners claimed a moving expense deduction of $13,800 on their
Schedule 1, but no testimony or other evidence was presented to support the expense.
We deem this issue abandoned and conceded by petitioners, and we do not address it
further.
4 Because Mr. Lucas did not sign the Stipulation, and he otherwise disputes
the Court’s granting innocent spouse relief to Ms. Lucas, we determine that we are not
bound by the Stipulation. We are free to make an independent determination of
whether innocent spouse relief should be granted. See Rule 91(e).
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II. Unreported Income
Gross income means “all income from whatever source derived.”
§ 61(a); see also Commissioner v. Glenshaw Glass Co., 348 U.S. 426,
429–31 (1955). Gross income includes income derived from
compensation for services. See § 61(a)(1).
In cases of unreported income, “the Commissioner must establish
a ‘minimal evidentiary showing’ connecting the taxpayer[s] with the
alleged income-producing activity,” Walquist v. Commissioner, 152 T.C.
61, 67 (2019) (quoting Blohm v. Commissioner, 994 F.2d 1542, 1548–49
(11th Cir. 1993), aff’g T.C. Memo. 1991-636), “or demonstrate that the
taxpayer[s] actually received unreported income,” id. (citing Edwards v.
Commissioner, 680 F.2d 1268, 1270 (9th Cir. 1982)). “Once the
Commissioner makes the required threshold showing, the burden shifts
to the taxpayer[s] to prove by a preponderance of the evidence that the
Commissioner’s determinations are arbitrary or erroneous.” Id. at 67–68
(first citing Helvering v. Taylor, 293 U.S. 507, 515 (1935); and then citing
Tokarski v. Commissioner, 87 T.C. 74 (1986)). The Commissioner may
rely on a third-party income report if taxpayers do not raise a reasonable
dispute about its accuracy. See § 6201(d).
Respondent has met his burden. Petitioners stipulated that they
received wages of $206,609. Petitioners did not dispute the accuracy of
the wages reported to respondent on the 2018 Forms W–2 or their
receipt of that income. At trial petitioners testified that they received
income from their four employers, and they knew of the requirement to
file a return reporting their income received. Respondent established a
sufficient evidentiary basis to connect petitioners with the unreported
income. Petitioners presented no other evidence that any unreported
income was nontaxable or subject to any offsets or deductions. We
sustain respondent’s determination of unreported income.
III. Excess Tax Withholding Pursuant to Section 31
On the 2018 Form 1040 petitioners reported income tax withheld
on Forms W–2 and 1099–R of $19,960. In the Notice, respondent
determined that petitioners overstated the amount withheld. The
parties stipulated that petitioners had $12,271 of income tax withheld
for 2018 and therefore overreported $7,689 of tax withheld.
A deficiency is determined “without regard to the credit under
section 31.” § 6211(b)(1). Moreover, “the [taxpayer’s] overstatement of
the taxes withheld on [the taxpayer’s] wages does not constitute a
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deficiency within the meaning of section 6211.” Bregin v. Commissioner,
74 T.C. 1097, 1102 (1980); Pope v. Commissioner, T.C. Memo. 2020-62,
at *6–7; see Trimble v. Commissioner, T.C. Memo. 2018-36, at *6.
Consequently, “we lack jurisdiction to redetermine an adjustment to
withholding credits.” Pope, T.C. Memo. 2020-62, at *6–7 (citing Bregin,
74 T.C. at 1102).
IV. Deductions Claimed on the Amended Tax Return
Deductions are a matter of legislative grace, and taxpayers bear
the burden of proving entitlement to any deduction claimed. See 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).
Taxpayers claiming a deduction on a return must demonstrate
that the deduction is provided for by statute and must further
substantiate that the expense to which the deduction relates has been
paid or incurred. § 6001; Hradesky v. Commissioner, 65 T.C. 87, 89–90
(1975), aff’d per curiam, 540 F.2d 821 (5th Cir. 1976); Meneguzzo v.
Commissioner, 43 T.C. 824, 831–32 (1965); Treas. Reg. § 1.6001-1(a).
Taxpayers are required to maintain records sufficient to enable the
Commissioner to determine the correct tax liability. See § 6001; Treas.
Reg. § 1.6001-1(a).
A. Schedule A Deductions
1. Medical Expenses
Petitioners seek to deduct $35,310 for medical expenses. Section
213(a) allows a deduction for “expenses paid during the taxable year, not
compensated for by insurance or otherwise, for medical care of the
taxpayer, his spouse, or a dependent,” to the extent such expenses
exceed 7.5% of adjusted gross income. See also § 213(f)(2). Expenses
must be substantiated with a statement or an itemized invoice from the
individual or entity that received payment for medical services detailing
the recipient, cost, and nature of services. Treas. Reg. § 1.213-1(h).
Petitioners testified that their child developed a serious medical
condition requiring treatment in 2018, but they did not present any
evidence described in Treasury Regulation § 1.213-1(h) to substantiate
the expenses before or at trial. With respondent’s assent, we held the
record open posttrial until January 3, 2024, to allow petitioners to
submit evidence substantiating medical expenses paid. Petitioners
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failed to provide any documents. Therefore, we determine that
petitioners are not entitled to deduct any medical expenses.
2. Noncash Charitable Contributions
Petitioners seek to deduct $85,000 for noncash charitable
contributions. Taxpayers may deduct charitable contributions made
within the taxable year. § 170(a)(1). Noncash contributions must be
evidenced by a receipt from the donee organization unless it is
impractical to do so. See Treas. Reg. § 1.170A-13(b)(1). The receipt must
show (1) the name of the donee organization; (2) the date and location of
the contribution; and (3) the property description in detail reasonably
sufficient under the circumstances. Id. Noncash contributions in excess
of $250, $500, and $5,000 are subject to additional substantiation
requirements. Treas. Reg. § 1.170A-13(b)(3), (c), (f).
The receipt from Goodwill fails to meet the substantiation
requirements because it neither (1) lists the date of contribution nor
(2) provides a reasonably sufficient description of the property donated.
At trial Ms. Lucas testified that she donated 43 legal textbooks,
treatises, and dictionaries to Friends of Guest House. We find Ms.
Lucas’s testimony unsubstantiated and not corroborated. See Tokarski,
87 T.C. at 77 (holding that we are not required to accept vague,
uncorroborated, or self-serving testimony as reliable and true). The
receipt from Friends of Guest House also fails to meet the substantiation
requirements because “20 books” is not a description that is reasonably
sufficient given the claimed $35,000 donation value for the books.
Because petitioners failed to satisfy the baseline substantiation
requirements imposed on all noncash charitable contributions, we
decline to address the additional substantiation requirements that are
imposed on noncash charitable contributions of $250 or more, more than
$500, or more than $5,000. Consequently, we determine that petitioners
are not entitled to deduct $85,000 for noncash charitable contributions.
B. Schedule 1 Deduction for Certain Business Expenses for
Reservists
Petitioners seek a deduction of $29,445 for reservist business
expenses. Members of reserve components of the U.S. Armed Forces may
deduct travel expenses incurred during “any period during which such
individual is more than 100 miles away from home in connection with”
their service. §§ 62(a)(2)(E), 162(p). The parties stipulated that Mr.
Lucas incurred $2,433 while traveling 4,464 total miles to and from his
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reservist training, and the record before us substantiates this. We
sustain the parties’ agreement that Mr. Lucas incurred $2,433 in travel
expenses. Petitioners presented no other evidence for the remaining
$27,012 of reported reservist expenses; we find they are not entitled to
deduct this additional amount.
V. Request for Innocent Spouse Relief
Ms. Lucas requested innocent spouse relief under section 6015(b),
which respondent agreed to as evidenced in the Stipulation. 5 Mr. Lucas
asserts that Ms. Lucas is not entitled to relief because she, not an
independent or disinterested return preparer, failed to report all of their
income on the 2018 Form 1040, and thus, she was aware of the missing
income.
Married taxpayers may elect to file a joint return. § 6013(a).
Generally, spouses who file a joint tax return are each liable for the
accuracy of that return and the full tax liability under section 6013(d)(3).
Butler v. Commissioner, 114 T.C. 276, 282 (2000). A spouse may seek
relief from this joint and several liability under section 6015(b). We
apply a de novo standard of review to any determination made by the
Commissioner under section 6015. See § 6015(e)(7); Porter v.
Commissioner, 132 T.C. 203, 210 (2009), superseded in part by statute,
Taxpayer First Act, Pub. L. No. 116-25, § 1203, 133 Stat. 981, 988 (2019).
While a requesting spouse generally bears the burden of proving
she is entitled to relief, it is an open question whether the nonrequesting
spouse now bears the burden of proof when the Commissioner and the
requesting spouse are aligned on the decision to grant relief.
See Kraszewska v. Commissioner, T.C. Memo. 2024-26, at *6–7 (citing
Stergios v. Commissioner, T.C. Memo. 2009-15, 2009 WL 151485, at *4).
We decline to answer this question, and instead, we decide the issue of
whether Ms. Lucas is entitled to innocent spouse relief by a
preponderance of the evidence. See id. For the reasons stated below, we
deny Ms. Lucas’s request for relief under section 6015(b).
There is no dispute that the requirements of section 6015(b)(1)(A),
(B), and (E) have been met. However, the evidence before the Court does
not show that Ms. Lucas satisfies the requirement of section
6015(b)(1)(C) and (D). Section 6015(b)(1)(C) requires that the requesting
5 The evidence before us does not show whether Ms. Lucas requested relief
under section 6015(c) or (f) in the alternative.
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spouse “establish[] that in signing the return . . . she did not know, and
had no reason to know, that there was such [an] understatement.”
In 2018 Ms. Lucas received income from the District of Columbia
Government and Friends of Guest House. Ms. Lucas prepared and filed
petitioners’ 2018 Form 1040 without including the wages she received
from her two employers. Mr. Lucas provided to Ms. Lucas the two Forms
W–2 he received from his employers. The 2018 Form 1040 included only
Mr. Lucas’s wages received from DFAS, and Ms. Lucas failed to include
the entire amount of wages Mr. Lucas received from Cybraics.
Therefore, we find that Ms. Lucas had actual knowledge that the 2018
Form 1040 did not include all income she and Mr. Lucas received for
2018. See Cheshire v. Commissioner, 115 T.C. 183, 192–93 (2000), aff’d,
282 F.3d 326 (5th Cir. 2002); see also Treas. Reg. §§ 1.6015-2(c), 1.6015-
3(c)(2)(i)(A) (“In the case of omitted income, knowledge of the item
includes knowledge of the receipt of the income.”). We also find that Ms.
Lucas knew an understatement existed when she filed the return.
Because the requirements of section 6015(b) are conjunctive, we decline
to address section 6015(b)(1)(D), and we determine that Ms. Lucas is not
entitled to relief. See Alt v. Commissioner, 119 T.C. 306, 313 (2002), aff’d,
101 F. App’x 34 (6th Cir. 2004).
VI. Accuracy-Related Penalty Pursuant to Section 6662(a)
Respondent determined that petitioners are liable for a section
6662(a) accuracy-related penalty. Section 6662(a) and (b)(2) imposes a
20% accuracy-related penalty on any portion of an underpayment of tax
that is attributable to the taxpayers’ “substantial understatement of
income tax.” An understatement of income tax is substantial if the
amount of the understatement for the taxable year exceeds the greater
of 10% of the tax required to be shown on the return or $5,000.
§ 6662(d)(1)(A). Whether the understatement of income tax on
petitioners’ return is substantial within the meaning of the Code will be
determined when petitioners’ tax liability is recomputed under Rule
155.
Respondent obtained timely approval to impose the penalty, see
§ 6751(b)(1), and petitioners did not present any evidence that their
understatement was due to reasonable cause, see § 6664(c)(1);
Treas. Reg. § 1.6664-4(b)(1). Accordingly, we determine that petitioners
are liable for the section 6662(a) and (b)(2) accuracy-related penalty for
2018 to the extent the understatement of income tax is substantial.
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To reflect the foregoing,
Decision will be entered under Rule 155.