Amnesty National v. Commissioner

T.C. Memo. 2019-63
UNITED STATES TAX COURT
AMNESTY NATIONAL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 4570-17. Filed June 3, 2019.
Darlene R. Esposito (an officer), for petitioner.
William J. Gregg, Bartholomew Cirenza, and Benjamin H. Weaver, for
respondent.
MEMORANDUM OPINION
LAUBER, Judge: With respect to petitioner’s Federal income tax for 2014,
the Internal Revenue Service (IRS or respondent) determined a $19,006 deficiency
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[*2] in tax and a $3,801 accuracy-related penalty under section 6662(a).1
Respondent has moved for summary judgment under Rule 121, contending that
there are no disputed issues of fact and that he is entitled to judgment as a matter
of law. We will grant the motion and sustain respondent’s determinations.
Background
The following facts are derived from the parties’ pleadings, respondent’s
motion papers, including the exhibits attached thereto, and facts deemed estab-
lished under Rule 91(f). Petitioner had its principal place of business in New
Jersey when it timely petitioned this Court.
Petitioner during 2014 was a New Jersey corporation taxable under sub-
chapter C. Petitioner’s sole officer, shareholder, and employee was Darlene
Esposito, who appeared on its behalf in this Court. Petitioner filed a Form 1120,
U.S. Corporation Income Tax Return, for 2014. On this return it reported gross
receipts of $27,671, a $9,500 offset against gross receipts for claimed “returns and
allowances,” and dividend income of $38,908, yielding total reported income of
$57,079. Petitioner claimed deductions totaling $44,805 for compensation of offi-
1
All statutory references are to the Internal Revenue Code in effect for the
year at issue, and all Rule references are to the Tax Court Rules of Practice and
Procedure. We round all dollar amounts to the nearest dollar.
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[*3] cers, pension and profit sharing plans, employee benefits, depreciation, and
unspecified “other” deductions.
On November 30, 2016, the IRS issued petitioner a timely notice of defici-
ency for 2014 disallowing for lack of substantiation the claimed offset against
gross receipts and all of the claimed deductions. The notice also disallowed, for
lack of substantiation, reported capital losses of $70,888.2 Concluding that
petitioner was taxable as a “qualified personal service corporation,” the IRS calcu-
lated the tax using a flat 35% rate, see secs. 11(b)(2), 448(d)(2), and determined
the deficiency and penalty set forth above.
On February 27, 2017, Ms. Esposito filed a petition in her name seeking
redetermination of Amnesty National’s deficiencies for 2014 and 2015. She at-
tached to the petition the notice of deficiency referenced above, but no IRS notice
regarding her own tax liability or that of Amnesty National for 2015. Represent-
ing that no notice of deficiency had been issued to Ms. Esposito, respondent
moved to dismiss for lack of jurisdiction with respect to the 2015 tax year and to
substitute Amnesty National for Ms. Esposito as the petitioner in this case. We
2
Petitioner reported no capital gains, and a C corporation cannot deduct
capital losses against its other income. See sec. 1211. The effect of disallowing
petitioner’s capital losses was thus to prevent them from being carried to another
year. See sec. 1212.
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[*4] granted both motions. Thus, the only tax liability currently before us is
Amnesty National’s corporate income tax liability for 2014.
On January 17, 2018, respondent sent petitioner a letter informally request-
ing that it produce documents to substantiate its claimed deductions and inviting
Ms. Esposito to a conference on February 9, 2018. The day before the scheduled
conference, Ms. Esposito informed respondent’s counsel that she would not ap-
pear but would forward any available documents by February 16, 2018. Respon-
dent’s counsel never received any documents. He sent a second letter to Ms.
Esposito on February 21, 2018, explaining that he would serve formal discovery if
she did not respond. She did not respond.
On February 28, 2018, pursuant to Rule 72, respondent served on petitioner
a request for production of documents, including the following:
• invoices and receipts to substantiate the claimed reduction to gross
receipts for returns and allowances;
• contracts, canceled checks, or other documents to substantiate the claimed
deduction for compensation of officers;
• plan documents, canceled checks, or other documents to substantiate the
claimed deductions for pension, profit sharing plans, and employee benefits;
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[*5] • invoices showing cost basis and schedules to substantiate the claimed
deduction for depreciation;
• bills, invoices, and canceled checks to substantiate the claimed “other”
deductions; and
• brokerage statements and transaction slips to substantiate the claimed
capital losses.
After receiving no response from petitioner during the ensuing eight weeks,
respondent filed on April 17, 2018, a motion to compel production of documents.
We granted that motion and directed petitioner to produce the requested docu-
ments by May 7, 2018. When petitioner produced no documents by that date,
respondent moved to impose sanctions. By order dated May 17, 2018, we directed
petitioner to respond to that motion by May 25, 2018, warning that failure to
respond could lead to an order that “all documents covered by respondent’s
request which petitioner should have produced to respondent shall be excluded
from evidence in this case.” Petitioner produced no documents by May 25, 2018.
Four months later, on September 21, 2018, Ms. Esposito filed a response to
our May 17, 2018, order. Her response consisted of eight pages of irrelevant ma-
terial that did not address, much less supply justification for, petitioner’s failure to
produce the requested documents. On September 24, 2018, as authorized by Rule
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[*6] 104(c), we granted respondent’s motion for sanctions, ordering that
“petitioner shall not be permitted to introduce into evidence at trial any documents
that should have been made available to IRS counsel in response to this Court’s
order dated April 24, 2018,” and that “petitioner shall be deemed to have no
documentary evidence relating to the matters enumerated in respondent’s Request
for Production of Documents served on petitioner on February 28, 2018.”
On April 17, 2018, respondent also filed a motion to show cause why pro-
posed facts and evidence, as set forth in a proposed stipulation of facts, should not
be accepted as established under Rule 91(f). One proposed fact was that petitioner
“has no substantiation for” any of the deductions claimed on its Form 1120 for
2014. We directed petitioner to show cause by May 14, 2018, why the matters
covered by respondent’s proposed stipulation of facts should not be deemed estab-
lished. On May 18, 2018, petitioner filed a response to our order that was evasive
--indeed, barely intelligible--and was not fairly directed to the proposed stipula-
tion. See Rule 91(f)(3). On September 24, 2018, we made our order to show
cause absolute, ordering that “the facts and evidence set forth in respondent’s pro-
posed Stipulation of Facts, marked Exhibit A to respondent’s motion to show
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[*7] cause filed April 17, 2018, are hereby deemed established for purposes of this
case.”3
On March 13, 2019, respondent filed a motion for summary judgment con-
tending that there are no disputed issues of material fact because all relevant facts
have been conceded or deemed established. On March 14, 2019, we directed peti-
tioner to respond to that motion by April 15, 2019. On April 22, 2019, petitioner
filed a response that does not address respondent’s motion or otherwise suggest
that there exist any disputed issues of material fact.
Discussion
A. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly,
time-consuming, and unnecessary trials. Fla. Peach Corp. v. Commissioner, 90
T.C. 678, 681 (1988). Under Rule 121(b) the Court may grant summary judgment
when there is no genuine dispute as to any material fact and a decision may be
rendered as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
3
On September 6, 2018, respondent submitted a supplemental stipulation of
facts, including a copy of petitioner’s Form 1120 for 2014 and its IRS account
transcript. In our September 24, 2018, order we directed petitioner to show cause
why that supplemental stipulation of facts should not be accepted as established.
Petitioner filed no response, and on March 14, 2019, we made that order absolute
and deemed the supplemental stipulation of facts established.
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[*8] (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). In deciding whether to grant
summary judgment, we construe factual materials and inferences drawn from them
in the light most favorable to the nonmoving party. Ibid. However, the
nonmoving party “may not rest upon the mere allegations or denials” of its
pleadings but instead “must set forth specific facts showing that there is a genuine
dispute for trial.” Rule 121(d); see Sundstrand Corp., 98 T.C. 520. Petitioner
has set forth no facts showing that there is a genuine dispute for trial. We
conclude that this case is appropriate for summary adjudication.
B. Disallowed Deductions
On its 2014 Form 1120 petitioner reported total income of $66,579. This
equaled the sum of gross receipts of $27,671 and dividends of $38,908. The IRS
did not adjust these figures, and there is no dispute concerning petitioner’s in-
come.
The notice of deficiency disallowed a reduction to gross receipts of $9,500
for “returns and allowances” and claimed expense deductions for compensation of
officers, pension and profit sharing plans, employee benefits, depreciation, and
unspecified “other” deductions ($44,805 in the aggregate), yielding total adjust-
ments of $54,305. The IRS also disallowed reported capital losses of $70,888,
which did not affect computation of the deficiency.
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[*9] Deductions are a matter of legislative grace. The taxpayer bears the burden
of proving its entitlement to all deductions claimed. Rule 142(a). The taxpayer al-
so bears the burden of substantiating its claimed deductions by keeping and pro-
ducing records sufficient to enable the IRS to determine the correct tax liability.
Sec. 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); sec.
1.6001-1(a), (e), Income Tax Regs.
Through informal and formal discovery, respondent repeatedly requested
production of documents substantiating petitioner’s offset to gross receipts, each
category of claimed expense deductions, and the claimed capital losses. After
petitioner repeatedly failed to comply with these requests and our orders, we
granted respondent’s motion for sanctions, ordering that petitioner “shall be
deemed to have no documentary evidence relating to the[se] matters.” Because
petitioner has failed to carry its burden of proving its entitlement to the gross re-
ceipts offset, expense deductions, and losses reported on its return, we sustain all
of the adjustments determined in the notice of deficiency.
C. Tax Calculation
For 2014, the tax year at issue, C corporations were generally taxed at the
graduated rates specified in section 11(b)(1). However, a “qualified personal ser-
vice corporation” as defined in section 448(d)(2) was ineligible for graduated rates
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[*10] and was subject to income tax at a flat rate of 35%. See sec. 11(b)(2). A
“qualified personal service corporation” was a corporation (1) substantially all of
whose activities involved the performance of services in specified professional
fields and (2) substantially all of whose stock was owned by employee(s)
performing services for the corporation. See sec. 448(d)(2).
The IRS determined in the notice of deficiency that petitioner was a “per-
sonal service corporation” because substantially all of its activities involved the
performance of services by Ms. Esposito, its sole officer, shareholder, and em-
ployee. Petitioner’s Form 1120 arguably contained an admission to this effect,
because it included a fully completed Schedule H, Section 280H Limitations for a
Personal Service Corporation (PSC). In any event petitioner has not disputed, at
any point in this case, the IRS’ determination that it is a qualified personal service
corporation. We accordingly sustain the calculation of tax as set forth in the
notice of deficiency.
D. Accuracy-Related Penalty
The notice of deficiency determined a 20% accuracy-related penalty under
section 6662(a), concluding that “all or part of the underpayment of tax * * * is
attributable to * * * negligence or disregard of rules or regulations.” See sec.
6662(b)(1). “Negligence” includes “any failure to make a reasonable attempt to
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[*11] comply” with the internal revenue laws, and “disregard” includes “any
careless, reckless, or intentional disregard.” Sec. 6662(c).
Since petitioner is a corporation, respondent has no burden of production
with respect to the penalty. See sec. 7491(c) (providing that the Secretary shall
have the burden of production “with respect to the liability of any individual for
any penalty”); NT, Inc. v. Commissioner, 126 T.C. 191, 195 (2006). The section
6662 penalty does not apply to any portion of an underpayment “if it is shown that
there was a reasonable cause for such portion and that the taxpayer acted in good
faith with respect to * * * [it].” Sec. 6664(c)(1). The decision whether the taxpay-
er acted with reasonable cause and in good faith is made on a case-by-case basis,
taking into account all pertinent facts and circumstances. Sec. 1.6664-4(b)(1),
Income Tax Regs. A taxpayer may be able to demonstrate reasonable cause and
good faith by showing reliance on professional advice. Ibid.
Petitioner has woefully failed to make this showing. From all that appears,
petitioner failed to maintain during 2014 adequate business records as required by
section 6001. Petitioner supplied no documentary evidence of any kind to sub-
stantiate the deductions at issue. And petitioner has not alleged any reliance on
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[*12] professional advice. We accordingly sustain respondent’s determination of
a negligence penalty.4
To implement the foregoing,
An appropriate order and decision
will be entered for respondent.
4
Petitioner does not challenge the IRS’ compliance with section 6751(b),
which requires that the initial determination of any penalty be “personally
approved (in writing) by the immediate supervisor of the individual making such
determination.” See Chai v. Commissioner, 851 F.3d 190, 217-218 (2d Cir. 2017),
aff’g in part, rev’g in part T.C. Memo. 2015-42.