Moacir Santos v. Commissioner

T.C. Memo. 2019-148
UNITED STATES TAX COURT
MOACIR SANTOS, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11847-15. Filed October 31, 2019.
Moacir Santos, for himself.
David M. Carl and Trent D. Usitalo, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GUSTAFSON, Judge: Petitioner Moacir Santos operated an engineering
and paving company through his wholly owned C corporation, Santos Engineering
Santos Pavers, Inc. (“SESP”). Throughout 2010 Mr. Santos used SESP’s bank
account to make cash withdrawals, electronic transfers to his personal bank
account, and payments of his personal expenses. Mr. Santos did not file his 2010
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[*2] Federal income tax return. Pursuant to section 6212(a)1 the Internal Revenue
Service (“IRS”) issued to Mr. Santos a statutory notice of deficiency (“SNOD”) on
January 30, 2015, which determined the following deficiencies in his Federal
income tax and additions to tax for tax years 2010, 2011, and 2012:
Additions to tax
Sec. Sec. Sec.
Year Deficiency 6651(a)(1) 6651(a)(2) 6654
2010 $166,635 $37,493 $38,326 $3,574
2011 70,701 15,908 12,019 1,400
2012 3,740 842 411 ---
Mr. Santos filed a timely petition under section 6213(a) for redetermination of the
deficiencies and additions to tax. After concessions by the parties,2 the issues for
decision are:
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code (“26 U.S.C.”; “the Code”) in effect for the relevant times, and all
Rule references are to the Tax Court Rules of Practice and Procedure. All dollar
amounts are rounded to the nearest dollar.
2
In “Respondent’s Seriatim Opening Brief” the Commissioner conceded
“the determinations in the notice of deficiency * * * for the taxable year 2012 and
* * * the additions to tax under [sections] 6651(a)(1), 6651(a)(2), and 6654 for
such year” and the addition to tax under section 6654(a) for the 2010 tax year.
Then in “Respondent’s Supplement to Seriatim Answering Brief” the
Commissioner conceded the deficiency and additions to tax for the 2011 tax year.
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[*3] (1) whether Mr. Santos had constructive dividend income of $156,469 in
2010 as a result of cash withdrawals, electronic transfers to his personal account,
and payments of personal and meal expenses, from SESP’s bank account (we hold
that he did);
(2) whether Mr. Santos’s filing status was unmarried, married filing
separately, or married filing jointly for the 2010 tax year (we hold that his filing
status was unmarried);
(3) whether Mr. Santos is liable for the addition to tax under section
6651(a)(1) for failure to timely file for the 2010 tax year (we hold that he is); and
(4) whether Mr. Santos is liable for the addition to tax under section
6651(a)(2) for failure to timely pay for the 2010 tax year (we hold that he is).
FINDINGS OF FACT
At the time Mr. Santos filed his petition, he resided in California.
Mr. Santos
Mr. Santos is the owner and operator of SESP, which he started after a
broken shoulder ended his career as a professional bull rider. In October 2010 Mr.
Santos’s son was born, and he married his son’s mother in 2011. Throughout
2010 Mr. Santos maintained a Wells Fargo business checking account in his name
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[*4] and another Wells Fargo business checking account in the name of SESP.
Mr. Santos purchased a house in March 2011.
Mr. Santos never filed his Federal tax returns for the 2010, 2011, and 2012
tax years.
SESP
In 2007 Mr. Santos incorporated SESP in the State of California as Santos
Construction, Inc. During the entire 2010 tax year, Mr. Santos was its sole
shareholder. At some point California’s Franchise Tax Board suspended SESP’s
corporate status for failure to meet tax requirements.
SESP had gross receipts for the taxable year 2010 in the amount of
$443,028. This amount represents the aggregate amount of deposits into Mr.
Santos’s personal and corporate bank accounts. SESP did not keep books and
records, so there was no way to distinguish between Mr. Santos’s personal
finances and the corporation’s.
In 2010 Mr. Santos expended SESP funds for his own use. He made cash
withdrawals from SESP’s bank account totaling $113,846 for his own use and not
for corporate expenses. Also for Mr. Santos’s personal use, SESP transferred
$560 from its corporate account to his personal bank account. In 2010 Mr. Santos
paid the cost of meals for himself totaling $13,146 by using SESP’s corporate
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[*5] debit card. SESP paid $28,917 worth of Mr. Santos’s other personal expenses
in 2010 (including: rent, travel, and childcare). The amounts SESP expended for
Mr. Santos personally totaled as follows:
Cash withdrawals $113,846
Electronic transfer 560
Meals 13,146
Other personal expenses 28,917
Total 156,469
(The “Meals” amount given above reflects adjustments that correct for meal
expenses that the Commissioner had initially categorized instead as
undifferentiated “personal expenses”.)
SESP’s earnings and profits were at least $165,445 in 2010.
Notice of deficiency
The IRS computed Mr. Santos’s income for 2010 by reference to bank
deposits and cash payments, plus personal and other nondeductible expenditures.
On the basis of the results of that analysis, the IRS prepared for Mr. Santos a
substitute for return for the year 2010 (pursuant to section 6020(b)) and issued to
him the SNOD dated January 30, 2015. That SNOD determined, among other
things, that Mr. Santos received unreported business income of $487,344 in 2010,
which resulted in a deficiency of $166,635, and that he was liable for additions to
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[*6] tax under sections 6651(a)(1) and (2) and 6654 for the 2010 tax year.
Mr. Santos timely mailed his petition to this Court on April 30, 2015.
Tax Court proceedings
Mr. Santos’s timely filed petition does not contest the amount of unreported
gross income stated in the SNOD but argues that he is entitled to additional
deductions therefrom and that his filing status was “married filing jointly”. This
case was first set for trial in April 2016 but was continued generally. The case
was then set for trial in September 2016, but Mr. Santos did not provide to the
Commissioner the documents he intended to offer into evidence until two business
days before his trial date; and on the day of trial, he asked for another continuance,
which the Court granted.
Trial was recalendared for March 2017, and in the interim Mr. Santos had
an accountant prepare his tax returns. He submitted to the Commissioner copies
of Forms 1040, “U.S. Individual Income Tax Return”, for the 2010, 2011, and
2012 tax years that were dated October 18, 2016, but neither he nor anyone
purporting to be his agent signed them. Each of Mr. Santos’s Forms 1040
included a Schedule C, “Profit or Loss From Business”, reporting SESP’s income.
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[*7] SESP’s gross receipts and constructive distributions
At the beginning of trial on March 28, 2017, almost two years after first
filing his petition, Mr. Santos moved to amend his petition to treat the gross
receipts as attributable to SESP rather than to himself personally. The Court
granted Mr. Santos’s unopposed motion. The parties stipulated that the amount of
gross receipts SESP received in 2010 was $443,028. Mr. Santos also provided to
the Commissioner a statement titled “SESP Profit and Loss Detail” for 2010,
which provided line item entries for income and expenses and stated that SESP’s
net income was $121,381.
As for Ms. Santos’s 2010 income, the Commissioner then proceeded under
the theory that in 2010 Mr. Santos had received constructive dividends from
SESP. The Commissioner posits that during 2010 Mr. Santos “drew no distinction
between the funds of his business and his personal funds”. The Commissioner
identified various categories of expenditures in SESP’s bank statements that he
argues were distributions to Mr. Santos--cash withdrawals, electronic transfers,
personal expenses, and meal expenses--and at trial he put on evidence of those
expenditures.
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[*8] Character of the distributions received by Mr. Santos
To determine the character of the constructive distributions, the
Commissioner calculated SESP’s earnings and profits for 2010. The
Commissioner posits that after adjustments to SESP’s financial statement and Mr.
Santos’s Schedule C for stipulated amounts, disallowed deductions, and statutorily
required adjustments are made, SESP’s earnings and profits were at least $165,445
in 2010. Therefore, he argues that all of the constructive distributions Mr. Santos
received from SESP in 2010 are dividends.
OPINION
I. Burden of proof
A. The taxpayer’s burden under the general rule
In general the IRS’s SNOD is presumed correct, and (with exceptions we
discuss below) the taxpayer has the burden of proving it to be wrong. Welch v.
Helvering, 290 U.S. 111, 115 (1933); see also Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79, 84 (1992).
Section 6001 requires that “[e]very person liable for any tax imposed by this
title, or for the collection thereof, shall keep such records, render such statements,
make such returns, and comply with such rules and regulations as the Secretary
may from time to time prescribe.” Taxpayers are thus required to keep records and
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[*9] maintain them as long as they may become material. See 26 C.F.R. sec.
1.6001-1(a), (e), Income Tax Regs.
The Court observes that, generally speaking, other than the receipts (which
we do not find credible for the reasons discussed below), Mr. Santos relies entirely
on his uncorroborated testimony and non-contemporaneous documents.
Mr. Santos fails to explain with any detail, or to substantiate with any
contemporaneous documentation or log, the amounts or business character he
alleges for the expenditures at issue. The Court need not accept a taxpayer’s
self-serving testimony when the taxpayer fails to present corroborating evidence.
Beam v. Commissioner, T.C. Memo. 1990-304 (citing Tokarski v. Commissioner,
87 T.C. 74, 77 (1986)), aff’d without published opinion, 956 F.2d 1166 (9th Cir.
1992). Accordingly, to the extent Mr. Santos has the burden, we do not accept
most of his self-serving testimony.
B. The Commissioner’s burdens
The foregoing general rules are subject to three qualifications that are
material here:
First, the U.S. Court of Appeals for the Ninth Circuit (to which an appeal in
this case would evidently be taken pursuant to section 7482(b)(1)(A)) has held
that, in cases involving unreported income, “before the Commissioner can rely on
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[*10] this presumption of correctness, the Commissioner must offer some
substantive evidence showing that the taxpayer received income from the charged
activity.” Weimerskirch v. Commissioner, 596 F.2d 358, 360 (9th Cir. 1979),
rev’g 67 T.C. 672 (1977). The “substantive evidence” here consists of stipulated
or undisputed facts showing that the payments remaining at issue came from
Mr. Santos’s corporation, SESP, and were spent for Mr. Santos’s benefit, so the
unreported constructive distributions satisfy this standard.
Second, with respect to a taxpayer’s liability for additions to tax,
section 7491(c) places the burden of production on the Commissioner. This issue
is discussed below in part IV.
Third, Rule 142(a) places the burden of proof on the Commissioner “in
respect of any new matter”--i.e., “new” in the Commissioner’s answer, as opposed
to the SNOD. Section 7522(a) requires that the SNOD “describe the basis
for * * * the tax due”. “A new theory that is presented to sustain a deficiency is
treated as a new matter when it either alters the original deficiency or requires the
presentation of different evidence.” Wayne Bolt & Nut Co. v. Commissioner, 93
T.C. 500, 507 (1989). “A new theory which merely clarifies or develops the
original determination is not a new matter in respect of which * * * [the
Commissioner] bears the burden of proof.” Id. The Commissioner may raise a
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[*11] new theory as long as the taxpayer receives fair warning of the intention to
base an argument upon the new theory and the taxpayer is not unfairly surprised or
prejudiced by it. See Pagel, Inc. v. Commissioner, 91 T.C. 200, 211-212 (1988),
aff’d, 905 F.2d 1190 (8th Cir. 1990); Estate of Gore v. Commissioner, T.C. Memo.
2007-169, 93 T.C.M. 1436, 1446-1447 (2007), supplemented by T.C.
Memo. 2007-370.
The Commissioner initially determined that Mr. Santos’s deficiency arose
from unreported Schedule C income; and Mr. Santos’s petition appeared to claim
that he was entitled to additional deductions. However, at trial Mr. Santos moved
to amend his petition (and the Commissioner did not oppose) to contend that the
unreported amounts were gross receipts of SESP and were therefore taxable as
SESP’s income, not his. The Commissioner conceded the point, but this
significant change prompted him to proceed under a new theory--i.e., that Mr.
Santos had received constructive dividends from SESP. Even though Mr. Santos’s
asserted tax liability was smaller under this new theory than the amount stated in
the SNOD, the Commissioner concedes that his constructive dividends argument
constitutes “new matter” since it required Mr. Santos to present different evidence.
See Wayne Bolt & Nut Co. v. Commissioner, 93 T.C. 507.
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[*12] The Commissioner’s constructive dividend argument was tried by the
implied consent of the parties. See Rule 41(b)(1). However, on brief, Mr. Santos
argues that he will be deprived of “due process if * * * [the Commissioner] is
allowed to proceed on a new theory first presented at the hearing”. We interpret
Mr. Santos’s argument to mean that he alleges that he was prejudiced because he
was unfairly surprised by the Commissioner’s constructive dividend argument.
We disagree. In the first place, he explicitly consented to the Commissioner’s
raising that contention. More important, Mr. Santos was the party who moved, on
the day of trial, to amend his pleading in a manner that required the Commissioner
to revise his position. Mr. Santos was neither surprised nor prejudiced by the
Commissioner’s constructive dividend argument. Consequently, the
Commissioner is permitted to advance his contention of constructive dividends;
but as to that contention he bears the burden of proof. He successfully sustained
that burden, as we now show in part II.
II. Constructive dividends
Under section 61(a), “gross income means all income from whatever source
derived”. Section 301(a) provides that distributions from a corporation to its
shareholders are treated in the manner provided in section 301(c). Section
301(c)(1) explains that to the extent that a distribution is a dividend (i.e., paid out
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[*13] of that corporation’s earnings and profits), that dividend is included in gross
income. See sec. 316. “A constructive dividend arises ‘[w]here a corporation
confers an economic benefit on a shareholder without the expectation of
repayment, * * * even though neither the corporation nor the shareholder intended
a dividend.’” Hood v. Commissioner, 115 T.C. 172, 179 (2000) (quoting Magnon
v. Commissioner, 73 T.C. 980, 993-994 (1980)).
A. Constructive distributions
“Corporate expenditures constitute constructive dividends only if (1) the
expenditures do not give rise to a deduction on behalf of the corporation, and
(2) the expenditures create ‘economic gain, benefit, or income to the
owner-taxpayer.’” P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084, 1088 (9th
Cir. 1987) (quoting Meridian Wood Prods. Co. v. United States, 725 F.2d 1183,
1191 (9th Cir. 1984)), aff’g T.C. Memo. 1984-549. “An expenditure generally
does not have independent and substantial importance to the distributing
corporation if it is not deductible under section 162.” Gow v. Commissioner, T.C.
Memo. 2000-93, slip op. at 38 (citing P.R. Farms, Inc. v. Commissioner, 820 F.2d
at 1089), aff’d, 19 F. App’x 90 (4th Cir. 2001). “‘[N]ot every corporate
expenditure which incidentally confers economic benefit on a shareholder is a
constructive dividend.’ The crucial test of the existence of a constructive dividend
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[*14] is whether ‘the distribution was primarily for the benefit of the
shareholder.’” Magnon v. Commissioner, 73 T.C. 994 (citing Loftin &
Woodard, Inc. v. United States, 577 F.2d 1206, 1214 (5th Cir. 1978), Crosby v.
United States, 496 F.2d 1384, 1388 (5th Cir. 1974), and Sammons v.
Commissioner, 472 F.2d 449 (5th Cir. 1972), aff’g in part, rev’g in part T.C.
Memo. 1971-145).
1. Cash withdrawals
The term “property”, as it is used in section 301(a) to describe distributions
from corporations, is defined as “money, securities, and any other property”. Sec.
317(a). The bank records show--and at trial Mr. Santos acknowledged--that he
withdrew $113,846 from SESP’s corporate account in 2010. We are persuaded
that these withdrawals were made not for business expenditures but for
Mr. Santos’s personal use.
a. Amounts deposited into Mr. Santos’s personal account
The Commissioner identified deposits to Mr. Santos’s personal account that
corresponded with certain withdrawals from SESP’s bank account, which totaled
$33,825. At trial Mr. Santos admitted that he deposited into his personal account
approximately $34,000 of the cash withdrawn from SESP’s account, and in his
post-trial brief he conceded that these withdrawals “were personal”, “were not
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[*15] proven to be for business expenses and therefore * * * [are] constructive
income for him.”
b. Amounts corresponding to receipts
The balance of the cash withdrawals (totaling $113,846) after the amounts
Mr. Santos deposited into his personal account ($33,825) are subtracted was
$80,021; and this difference corresponds closely to the $79,928 that (he says) he
used to pay for business-related expenses. At trial he provided receipts purporting
to prove this fact; however, these receipts are very problematic, and they indirectly
but convincingly underscore the personal character of the withdrawals:
First, the total value of the receipts Mr. Santos provided is $107,476, not the
$79,928 he alleges constituted business expenses. He does not specify which
receipts compose the $79,928 of supposed business expenses, and he does not
explain how he has a greater amount of receipts that are among his supposed
business expenses but do not constitute business expenses. It appears that he
fabricated the receipts before he settled on his final story and did not notice the
discrepancy.
Second, receipts that are ostensibly from different vendors appear to be
from the same receipt book. He did not explain this fact.
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[*16] Third, the chronology of the dates written on the receipts does not follow
the sequential order of the preprinted receipt numbers. For example, a receipt
numbered 238777 was dated July 2, 2010, for “New Fence our Richmond yard
labor”, but the subsequent receipt, numbered 238778, was dated December 28,
2010 (more than 6 months later), for a $7,200 payment on an “Excavator CAT-
308”. And the next receipt, numbered 238779, jumps back 10 months and is dated
February 28, 2010, allegedly for a payment on the same machinery.
Fourth, at trial another issue concerning the authenticity of Mr. Santos’s
receipts was pointed out to him:
[T]here are the indications on some of the documents that, because of
carbon paper use, that some of them are filled out while the others
were on top or were underneath them, so that we see impressions
from one another showing us, apparently, that they might have been
created simultaneously, rather than months apart from each other. In
some respects, it seems inevitable that they were prepared at least
almost simultaneously because the numbering of the receipts is
sequential and the numbers follow one right after another.
Mr. Santos had no explanation.
Mr. Santos’s testimony about the authenticity of the receipts was vague and
inconsistent, and the receipts raised many more questions than they answered.
Rather than substantiating a deductible business purpose for the cash withdrawals,
these manifestly bogus receipts revealed a deceptive intention and showed that the
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[*17] actual purpose of the cash withdrawals was other than the false proffered
business purpose. This is made even clearer by the fact that during 2010
Mr. Santos made only two cash withdrawals, in the amounts of $6,702 and $216,
from his personal account, indicating that for his expenditures in 2010 he was
principally using cash not from his own account but from the SESP account.
Therefore, we find that the entire amount withdrawn from SESP’s bank
account in 2010--both the conceded portion that was deposited into his personal
account and the portion for which he produced false receipts--created gain for
Mr. Santos, did not give rise to deductions by SESP, and was therefore a
constructive distribution.
2. Electronic transfer
Mr. Santos conceded at trial that he transferred $560 from SESP’s bank
account into his personal bank account. He made no argument that this electronic
transfer served a corporate purpose; and in his post-trial brief he conceded (in
explicit response to paragraph 2(B) of the Commissioner’s “Ultimate Findings of
Fact”) that this payment constituted “constructive dividends”.
3. Personal expenditures from SESP’s account
At trial the Commissioner entered schedules into evidence showing that
during the 2010 tax year SESP paid $28,917 worth of Mr. Santos’s personal
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[*18] expenses. Mr. Santos admitted that he used SESP’s bank account to pay for
all of his groceries in 2010, a gym membership, and other various personal
expenses, so the issue is not whether he used the SESP account for personal
expenses (he admits he did) but in what amounts.3 Mr. Santos concedes the
personal character of all of those amounts except for $5,867, which is attributable
to the following:
a. Rental payments for his personal residence
The Commissioner provided evidence that in 2010 SESP made two
payments of $935 for monthly rental of his personal residence. Generally, under
section 262(a) “no deduction shall be allowed for personal, living, or family
expenses.” Payments by the corporation of the expense for Mr. Santos’s personal
residence is plainly a personal expenditure on his behalf. Mr. Santos admits the
payments, so the Commissioner carried his burden for these amounts.
3
After concessions by the parties (including Mr. Santos’s concession of the
groceries, the gym membership, and the various other personal expenses), the
Commissioner argues that SESP paid $28,917 worth of Mr. Santos’s other
personal expenses in 2010. Mr. Santos concedes most of that and alleges that only
$5,867 was attributable to deductible business expenses. Certain meal expenses of
$1,064 were originally allocated to “personal expenses”, rather than “meal
expenses”, in the Commissioner’s computations. We have included that $1,064
with the other meal expenses discussed below in part II.A.4.
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[*19] However, Mr. Santos contended at trial that these two residential rent
payments were business expenses of SESP because he used “[p]robably 30-35
percent” of the house as a home office. In his post-trial brief he stated: “The
payments of expenses for Petitioner’s expenses for his business office at home are
corporate and not personal expenses, including utilities, and pro rata taxes and
mortgage expenses. * * * The payments by the corporate [sic] for Petitioner’s
home office expenses[4] are a business expense[] and not petitioner’s individual
expense”. This contention is unavailing to overcome the Commissioner’s showing
that these payments were income to Mr. Santos.
4
Despite the references to a “home office”, we do not perceive that Mr.
Santos is arguing that he should be entitled to a home office expense deduction
under section 280A(c)(1)(A)--which allows a taxpayer to deduct certain expenses
“to the extent such item is allocable to a portion of the dwelling unit which is
exclusively used on a regular basis * * * as the principal place of business for any
trade or business of the taxpayer”--to offset this income from SESP’s payment of
his rent. On his untimely and unsigned return, Mr. Santos reported income and
expenses of SESP on a Schedule C, but he did not report on line 30 thereof any
deduction for “Expenses for business use of your home”, nor did he attach the
required Form 8829, “Expenses for Business Use of Your Home”. At trial he did
not persuade us that any portion of his residence was used exclusively for business
purposes. Since he argued only that payment for the office (and not for residential
space per se) was a business expense, we perceive that Mr. Santos is not invoking
section 119(a)(2), which provides a limited circumstance in which an employer’s
provision of housing for an employee is excluded from the employee’s
income--i.e., where the lodging is furnished “for the convenience of the employer”
and “the employee is required to accept such lodging on the business premises of
the employer as a condition of his employment.” Mr. Santos did not allege facts
that would have warranted the section 119 exclusion.
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[*20] Mr. Santos did not substantiate the “utilities, and pro rata taxes and
mortgage expenses”, if any, that he bore. He did not even allege (much less make
any showing) that the amount of SESP’s two rent payments bore any relation to
costs allocable to any particular portion of the house. He seemed uncertain when
he testified about his home office, and his answers were vague. He did not offer
into evidence a floor plan of his house, any pictures of the office, or any
documents that would substantiate the percentage of the space used for a home
office or would otherwise permit a calculation of the supposed business portion of
the housing expense.
In sum, the Commissioner met his burden on this issue. Mr. Santos
effectively admitted that he received a personal benefit from these payments (i.e.,
the provision of rent for the place in which he resided), and his “home office”
contentions were not credible.
b. Payments to Ms. Pardin
Mr. Santos’s “personal, living, or family expenses” are not deductible by
SESP. The Commissioner showed that SESP made two payments to a
Ms. Shirlene Pardin, totaling $3,750; and Mr. Santos admitted that Ms. Pardin
worked as a nanny and cared for his newborn son. These undisputed facts carry
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[*21] the Commissioner’s burden of proving that SESP’s payments to Ms. Pardin
were constructive distributions to Mr. Santos.
To contend that these payments covered a business expense of SESP rather
than a personal expense of Mr. Santos, he testified that Ms. Pardin also cleaned his
supposed home office. That contention fails, however, for the same reason as his
contention regarding SESP’s payment of his residential rent: He established no
business-related use of a home office, and he showed no basis for allocating any
portion of Ms. Pardin’s compensation to any home office. He testified that she
also worked for SESP, but he did not substantiate or quantify this contention with
any evidence, other than his testimony; and he showed no SESP accounting entry
or other document indicating that SESP employed Ms. Pardin. He did not make
any serious challenge to the Commissioner’s showing that the payments to
Ms. Pardin were for personal expenses.
c. Payments for Mr. Santos’s lodging
Through bank records and the testimony that the Commissioner elicited
from Mr. Santos at trial, the Commissioner met his burden on this issue to show
that Mr. Santos received a personal economic benefit from SESP’s payment of
$247 for his lodging at the Matterhorn Motel and that it was not a deductible
expense. Section 274(d) provides that no deduction or credit under sections 162
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[*22] or 212 shall be allowed for travel expenses (including meals and lodging)
unless the taxpayer substantiates these expenses by adequate records or sufficient
evidence corroborating his own statements.5
Mr. Santos argues that he “stayed at the motel, which is in either Arizona or
Texas”, when he purchased a truck in Canada and drove the truck back home. His
argument contradicts SESP’s bank statement, which states that the charge for this
motel originated from California. Additionally, Mr. Santos failed to enter a
receipt, a log, or any other evidence of this trip into the record. The lodging
expense is not a business expense.
4. Payments of meal expenses
SESP’s bank records show that SESP paid $13,146 worth of meal expenses
in 2010. Generally, meals are non-deductible personal expenses. Sec. 262; 26
C.F.R. sec. 1.262-1(a), (b)(5), Income Tax Regs. Mr. Santos admitted at trial that
5
If section 274(d) does not apply, then “the Cohan rule”, derived from
Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930), may apply. Under
that rule, if a taxpayer adequately establishes that he paid or incurred a deductible
expense but does not establish the precise amount, then the Court may in some
instances estimate the allowable deduction, bearing heavily against the taxpayer
whose inexactitude is of his own making. However, section 274(d) sets stricter
substantiation rules that, when they apply, supersede the Cohan doctrine. See
Sanford v. Commissioner, 50 T.C. 823, 827-828 (1968), aff’d, 412 F.2d 201 (2d
Cir. 1969); sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed. Reg. 46014
(Nov. 6, 1985).
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[*23] some of the meal expenses were personal, and in his post-trial brief he
conceded (in explicit response to paragraph 2(D) of the Commissioner’s “Ultimate
Findings of Fact”) that SESP’s payments for these meals constituted “constructive
dividends”.
In summary, we conclude that the Commissioner met his burden and
proved, through bank records and Mr. Santos’s own admissions, that Mr. Santos
received $156,469 worth of distributions from SESP that were primarily for his
personal benefit and not for deductible expenses of SESP. See Meridian Wood
Prods. Co., 725 F.2d at 1191; Hood v. Commissioner, 115 T.C. 179-180.
B. Character of distributions
The Commissioner contends (and has the burden to prove, for the reason
discussed above) that SESP had sufficient earnings and profits to characterize the
constructive distributions Mr. Santos received as dividends. See Lerch v.
Commissioner, T.C. Memo. 1987-295, 1987 Tax Ct. Memo LEXIS 295, at
*59-*62, aff’d, 877 F.2d 624 (7th Cir. 1989). We find that the Commissioner met
that burden and that in 2010 SESP’s earnings and profits available for distribution
were in excess of the amount of constructive distributions Mr. Santos received.
Section 301 explains when a distribution from a corporation is included in
gross income, applied against basis, or treated as a gain from the sale or exchange
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[*24] of property. See sec. 301(c). A distribution of property made by a
corporation to a stockholder is included in the stockholder’s income as a dividend
to the extent of the corporation’s earnings and profits. See secs. 301(a), (c)(1),
316. A dividend is first paid from earnings and profits of the current taxable year,
and if the current earnings and profits are insufficient, the dividend is paid from
accumulated earnings and profits. Sec. 316(a). Therefore, the $156,469
distribution Mr. Santos received is a dividend only to the extent that the
Commissioner can prove that the amount of SESP’s earnings and profits available
for distribution was equal to or in excess of that amount. See sec. 301(c)(1).
The Code does not define the term “earnings and profits”. See sec. 316(a);
Henry C. Beck Co. v. Commissioner, 52 T.C. 1, 6 (1969), aff’d per curiam,
433 F.2d 309 (5th Cir. 1970). “[E]arnings and profits is a broad concept ‘which
the tax law has utilized “to approximate a corporation’s power to make
distributions which are more than just a return of investment.”’” Welle v.
Commissioner, 140 T.C. 420, 424 (2013) (quoting Henry C. Beck Co. v.
Commissioner, 52 T.C. 6).
The Commissioner submitted two calculations of SESP’s 2010 earnings and
profits, which were derived from SESP’s 2010 profit and loss statement and
Mr. Santos’s Schedule C. The Commissioner adjusted both to reflect stipulations
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[*25] by the parties, disallowed deductions, and statutorily prescribed methods for
calculating earnings and profits. The Commissioner demonstrated that in 2010
SESP’s earnings and profits were at least $165,445 (the lesser of its two
calculations).
On brief, the only argument that Mr. Santos advanced on the issue of
earnings and profits was that the Commissioner “has not proven that the alleged
constructive dividends were from earnings and profits, and failed [to] overcome
* * * [Mr. Santos’s] testimony concerning his use of cash to pay for the
corporation’s labor and materials.” We disagree. The Commissioner
demonstrated through two different calculations based on documents Mr. Santos
provided that in 2010, SESP’s earnings and profits were greater than the amount
of constructive distributions Mr. Santos received. Therefore, we conclude that the
entire amount of the $156,469 constructive distributions that Mr. Santos received
in 2010 from SESP was a constructive dividend. See sec. 301(c)(1).
III. Filing status
Section 7703(a)(1) provides that the determination of an individual’s filing
status shall be made as of the close of his taxable year. Mr. Santos admitted that
he was unmarried on December 31, 2010, and testified at trial that he did not
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[*26] marry until 2011. Accordingly, under section 1(c) his filing status for the
2010 tax year is unmarried.
IV. Additions to tax
A. Failure to file timely under section 6651(a)(1)
Section 6651(a)(1) authorizes the imposition of an addition to tax for failure
to file a timely return, unless the taxpayer proves that such failure is due to
reasonable cause and is not due to willful neglect. See also United States v. Boyle,
469 U.S. 241, 245 (1985). The addition consists of “5 percent of the amount of
such tax” for each month of delinquency, “not exceeding 25 percent in the
aggregate”; that is, the addition stops accruing after five months. Sec. 6651(a)(1).
The Commissioner determined Mr. Santos was liable for the addition to tax
imposed by section 6651(a)(1) for his failure to timely file his tax return for the
2010 tax year.
Mr. Santos does not dispute that he failed to file a timely return, and this
admission satisfies the Commissioner’s burden of production under section
7491(c). After Mr. Santos filed his petition in April 2015, he provided to the
Commissioner a copy of a 2010 tax return. That document was not signed by Mr.
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[*27] Santos,6 but even if it had been, it would not have affected the addition to
tax under section 6651(a)(1), since the addition reached its maximum of 25% in
2011 and stopped accruing. See Weaver v. Commissioner, T.C. Memo. 2004-108,
87 T.C.M. 1259, 1266 (2004).
The addition to tax applies “unless it is shown that such failure is due to
reasonable cause and not due to willful neglect”. Sec. 6651(a)(1). At trial
Mr. Santos admitted that he knew that he should have filed his return; but he made
several arguments for why he did not file his tax return and failed to pay his tax
liability--e.g., that he was in the process of purchasing his house, that the revenue
from his business declined, that he was unable to collect on debts owed to him by
other contractors, that he was defending several lawsuits, and other personal
reasons. However, the evidence shows that Mr. Santos did indeed purchase a
6
Generally, any return required to be made under any provision of the
internal revenue laws or regulations shall be signed in accordance with forms or
regulations prescribed by the Secretary. Sec. 6061(a). The regulations
promulgated under section 6061 require that “[e]ach individual * * * sign the
income tax return required to be made by him, except that the return may be
signed for the taxpayer by an agent who is duly authorized in accordance with
paragraph (a)(5) or (b) of section 1.6012-1 to make such return.” Sec. 1.6061-
1(a), Income Tax Regs. This Court has held that an unsigned return is “no return
at all.” Vaira v. Commissioner, 52 T.C. 986, 1005 (1969), aff’d on this issue,
rev’d and remanded on other grounds, 444 F.2d 770 (3d Cir. 1971); see also Elliott
v. Commissioner, 113 T.C. 125, 128 (1999). Accordingly, we find that Mr. Santos
never filed a return with the IRS for the 2010 tax year.
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[*28] house in March 2011 (the month before his 2010 return was due). His
accomplishment of this substantial transaction demonstrates that, contrary to his
testimony on this issue, he did have the time, resources, and ability to take care of
his business--including filing his 2010 return. On brief Mr. Santos simply states
that he is not liable for the addition to tax under section 6651(a)(1) but that, if he
is liable, the addition to tax should be based on a liability of only $62,740. We
disagree and find Mr. Santos liable for the failure-to-file addition to tax on the
basis of the entire amount required to be shown as tax on his return (which amount
shall be recomputed in accordance with this opinion).
B. Failure to pay under section 6651(a)(2)
Section 6651(a)(2) imposes an addition to tax for failure to timely pay the
amount of tax shown on a return. The liability was due to be paid on the
unextended due date of Mr. Santos’s 2010 return (i.e., in April 2011). See
sec. 6151. The addition to tax under section 6651(a)(2) applies only when an
amount of tax is shown on a return. Cabirac v. Commissioner, 120 T.C. 163, 170
(2003), aff’d without published opinion, 94 A.F.T.R.2d (RIA) 2004-5490 (3d Cir.
2004). The Commissioner’s burden of production with respect to the section
6651(a)(2) addition to tax required him to introduce evidence that a return
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[*29] showing Mr. Santos’s tax liability was filed for 2010. See Wheeler v.
Commissioner, 127 T.C. 200, 210 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008).
In cases such as this, where the taxpayer did not timely file a return or fails
to ever file a return for the year at issue, the Commissioner must introduce
evidence that a valid substitute for return was made pursuant to section 6020(b).
Sec. 6651(g)(2). He did so by means of the parties’ stipulating that he prepared
Form 13496, “IRC Section 6020(b) Certification”, to which was attached
Form 4549-A, “Income Tax Examination Changes”, and Form 886-A,
“Explanation of Items”, showing that the IRS prepared a substitute for return for
the 2010 tax year. To constitute a valid substitute for return under section
6020(b), “the return must be subscribed, it must contain sufficient information
from which to compute the taxpayer’s tax liability, and the return form and any
attachments must purport to be a ‘return’.” Spurlock v. Commissioner, T.C.
Memo. 2003-124, slip op. at 27. The 2010 substitute for return contains sufficient
information, purports to be a return, and is subscribed as required by section
6020(b).
As with the section 6651(a)(1) failure-to-file addition to tax, section
6651(a)(2) provides that the taxpayer is liable for the failure-to-pay addition to tax
“unless it is shown that such failure is due to reasonable cause and not due to
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[*30] willful neglect”. For the same reasons stated above, we reject Mr. Santos’s
“reasonable cause” arguments and find him liable for the section 6651(a)(2)
addition to tax.
To reflect the foregoing and the parties’ concessions,
Decision will be entered under
Rule 155.