Veronica Chu v. Commissioner

T.C. Memo. 2005-110UNITED STATES TAX COURT
VERONICA CHU, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12902-03. Filed May 17, 2005.
Veronica Chu, pro se.
John W. Strate, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$61,0181 and additions to tax under sections 6651(a)(1) and (2),2
and 6654(a) of $15,255, $5,679, and $3,208, respectively, with
1
All amounts are rounded to the nearest dollar.
2
Unless otherwise stated, all section references are to
the Internal Revenue Code, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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regard to petitioner’s 2000 Federal income tax. After
concessions,3 the issues for decision are: (1) Whether
petitioner is entitled to a loss carryover; (2) whether
petitioner is entitled to itemized deductions for State income
tax payments and unreimbursed employee expenses; (3) whether
petitioner is liable for an addition to tax pursuant to section
6651(a)(1); and (4) whether petitioner is liable for an addition
to tax pursuant to section 6654(a).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. Petitioner resided in
Palo Alto, California, at the time she filed her petition.
Petitioner’s Returns
During 2000, petitioner was an employee of Phoenix
Technologies, Inc. (Phoenix). Petitioner was paid $193,099 by
Phoenix and had $1,235 of Federal income tax withheld by Phoenix.
Petitioner also received $14,996 from the sale of Insilicon
stock. Petitioner did not make estimated tax payments for 2000.
Petitioner did not file a Form 1040, U.S. Individual Income
Tax Return, for the taxable years 1998, 1999, and 2000.
Petitioner submitted to the Court an unfiled Form 1040 for
3
Respondent conceded the sec. 6651(a)(2) addition to tax.
Respondent also conceded that petitioner is entitled to a $14,513
deduction for State income taxes.
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the year 2000. The return was signed on May 1, 2004. In the
section labeled “Income”, petitioner listed $208,095 of income on
line 7 Wages, salaries, tips, etc. and on line 17 an $854,722
loss from S corporations. Petitioner listed her total income on
line 22 and adjusted gross income on line 33 as zero.
Petitioner was required to file a Schedule E, Supplemental
Income and Loss, to describe the $854,722 loss. Schedule E
allows taxpayers to list the income or loss of their S
corporation. Petitioner’s attached Schedule E contains only
petitioner’s name, Social Security number, the Topaz Group,
Inc.’s (Topaz) name, an indication that Topaz is an S
corporation, Topaz’s employer identification number, and an
indication that all of petitioner’s investment was at risk.
Petitioner had the authority to request copies of Topaz’s
bank statements.
A document dated April 10, 1995, and entitled “Unanimous
Written Consent of the Board of Directors of Topaz Group, Inc.”,
shows 836,540 Topaz shares issued to petitioner and 12,500 issued
to David Wood. On Topaz’s 1996 Form 1120, U.S. Corporation
Income Tax Return, the Schedule K statement shows petitioner
holding 55 percent of Topaz’s stock. Topaz’s 1997 and 1998
Schedules K-1, Shareholder’s Share of Income, Deductions,
Credits, etc., show petitioner as 100-percent shareholder of
Topaz’s stock. Topaz’s 1999 and 2000 Schedules K-1 do not show
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petitioner’s percent ownership of Topaz’s stock.
Topaz’s Returns
Topaz reported a $2,509 loss on its Form 1120S, U.S. Income
Tax Return for an S Corporation, for the year 1996. On Schedule
D, Capital Gains and Losses, Topaz reported a $709,297 gain from
the sale of Aptus stock.
Topaz reported a $284,434 loss on its Form 1120S for the
year 1997.4 The portion of the return labeled Tax and Payments
is blank. In the Income (Loss) section of Schedule K,
Shareholders’ Shares of Income, Credits, Deductions, etc., Topaz
claimed an $894,722 loss on the Other Income (loss) line. Also
written on the line is “See Sch.” The attached document labeled
Form 1120S, Page 3, Schedule K, Line 6-Other Income (Loss), shows
an $894,722 long-term business loss. Also on its Schedule K,
Topaz claimed a $1,180,895 loss on the Income (loss) line in the
Other section.
On the attached Schedule D, Capital Gains and Losses and
Built-In Gains, an $894,722 long-term capital loss is listed on
the sale of Aptus Stock. Reported on the schedule is an $894,722
basis, and the column labeled Sales price is blank.
Topaz did not file a Form 1120S for the taxable years 1998,
1999, and 2000.
4
Respondent stated at trial that the return was timely
filed. We note that the return was signed by petitioner on May
11, 2004.
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Petitioner submitted to the Court Topaz’s unfiled Forms
1120S for the years 1998, 1999, and 2000. Topaz’s unfiled Form
1120S for the year 1998 shows $8,658 of ordinary income. Topaz’s
unfiled return for 1999 shows a $95 loss.
Topaz’s unfiled Form 1120S for the year 2000 was signed by
petitioner on May 1, 2004. The return contains four zeroes in
four different boxes in the Income section and on Schedule D the
description Upstream Stock and date of acquisition, August 1,
2000, are listed. The return does not contain any additional
information.
Meetings
Petitioner did not attend meetings with respondent scheduled
for January 13, April 13 and 20, or May 6 and 11, 2004.
OPINION
I. Deficiency
A. Burden of Proof
Section 7491(a) places the burden of proof on the
Commissioner with regard to certain factual issues involving
examinations commenced after July 22, 1998. Petitioner does not
assert that section 7491(a) shifts the burden to respondent.
Therefore, the burden of proof remains on petitioner.5 See Maher
v. Commissioner, T.C. Memo. 2003-85.
5
Petitioner also did not comply with reasonable requests
by respondent for meetings in order to shift the burden to
respondent. Sec. 7491(a)(2).
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B. Loss Carryover
Petitioner deducted a carryover of Topaz’s claimed loss for
1997 on her 2000 Federal income tax return. Taxpayers are
required to maintain adequate records to substantiate claimed
losses, and taxpayers bear the burden of proving that they are
entitled to claimed losses. Sec. 6001; Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
Section 1366(a) provides, generally, that income, losses,
deductions, and credits of an S corporation are passed through
pro rata to its shareholders on their individual income tax
returns. Secs. 1363(a), 1366(a). Section 1366(b) provides that
the character of each item of income is determined as if it were
realized directly from the source from which the corporation
realized it, or incurred in the same manner as it was by the
corporation. A shareholder’s gross income includes a pro rata
share of the S corporation’s gross income. Sec. 1366(c). The
shareholder’s basis, once computed, limits the amount of losses
and deductions that may be taken into account by a shareholder
for the taxable year. Sec. 1366(d). Any losses and deduction
that the shareholder is not entitled to deduct currently are
carried forward. Id.Petitioner submitted as evidence a document entitled
“Unanimous Written Consent of the Board of Directors of Topaz
Group, Inc.” that listed 836,540 Topaz shares issued to
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petitioner for $836,540. Petitioner also testified that she had
balance sheets for Topaz. Petitioner did not submit any
documents related to the calculation of her Topaz stock basis.
Petitioner has not provided evidence sufficient to establish
her Topaz stock basis. Therefore, petitioner has not established
that she is entitled to deduct the carryover loss on her 2000
Federal income tax return.
C. Itemized Deductions
Petitioner argues that she is entitled to deductions for
State income taxes and unreimbursed employee expenses.
Deductions are a matter of legislative grace, and petitioner
bears the burden of proving that she is entitled to the
deductions claimed. See Rule 142(a); INDOPCO, Inc. v.
Commissioner, 503 U.S. 79 (1992); New Colonial Ice Co. v.
Helvering, 292 U.S. 435 (1934). Taxpayers are required to
maintain records that are sufficient to enable the Commissioner
to determine their correct tax liability. See sec. 6001; sec.
1.6001-1(a), Income Tax Regs. In addition, the taxpayer bears
the burden of substantiating the amount and purpose of the item
for the claimed deduction. See Hradesky v. Commissioner, 65 T.C.
87, 90 (1975), affd. per curiam 540 F.2d 821 (5th Cir. 1976).
1. State Income Taxes
Petitioner claimed a $15,749 deduction for State income
taxes paid during 2000. Section 164(a)(3) provides, inter alia,
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that State income taxes are allowed as a deduction for the
taxable year within which they are paid or accrued. Respondent
conceded that petitioner was entitled to a $14,513 State income
tax deduction. Petitioner did not produce any evidence at trial
to substantiate the additional claimed $1,236 State income tax
deduction. Therefore, petitioner cannot deduct the additional
$1,236.
2. Unreimbursed Employee Expenses
Petitioner claimed a $3,376 deduction for unreimbursed
employee business expenses incurred during 2000. Pursuant to
section 162(a), a taxpayer may deduct all of the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business including a trade or business as
an employee. Lucas v. Commissioner, 79 T.C. 1, 6 (1982).
Petitioner did not produce any evidence at trial to substantiate
the claimed unreimbursed employee business expenses.
Accordingly, we sustain respondent’s determination regarding the
unreimbursed employee business expenses.
Petitioner attached to her posttrial brief documents to
support her claimed deduction for unreimbursed employee expenses.
Evidence must be submitted at trial; documents attached to briefs
and statements made therein do not constitute evidence and will
not be considered by the Court. Rule 143(b); Evans v.
Commissioner, 48 T.C. 704, 709 (1967), affd. per curiam 413 F.2d
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1047 (9th Cir. 1969); Lombard v. Commissioner, T.C. Memo.
1994-154, affd. without published opinion 57 F.3d 1066 (4th Cir.
1995). Accordingly, we disregard these documents in reaching our
decision about the unreimbursed employee expenses deduction.
3. Section 68(a) Limit on Itemized Deductions
If a taxpayer’s adjusted gross income (AGI) exceeds an
“applicable amount,” her itemized deductions are subject to a
reduction. Sec. 68(a). The applicable amount for 2000 was
$128,950. Rev. Proc. 99-42, 1999-2 C.B. 568. We have held that
petitioner cannot deduct her claimed carryover on her 2000
Federal income tax return. Therefore, petitioner’s AGI for 2000
was $208,095, and her itemized deductions are subject to a
computational reduction under section 68(a).
II. Additions to Tax
A. Burden of Production
Section 7491(c) provides that the Commissioner will bear the
burden of production with respect to the liability of any
individual for additions to tax and penalties. “The
Commissioner’s burden of production under section 7491(c) is to
produce evidence that it is appropriate to impose the relevant
penalty, addition to tax, or additional amount”. Swain v.
Commissioner, 118 T.C. 358, 363 (2002); see also Higbee v.
Commissioner, 116 T.C. 438, 446 (2001). If a taxpayer files a
petition alleging some error in the determination of an addition
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to tax or penalty, the taxpayer’s challenge will succeed unless
the Commissioner produces evidence that the addition to tax or
penalty is appropriate. Swain v. Commissioner, supra at 363-365.
The Commissioner, however, does not have the obligation to
introduce evidence regarding reasonable cause or substantial
authority. Higbee v. Commissioner, supra at 446-447.
B. Section 6651(a)(1)
Respondent determined that petitioner is liable for an
addition to tax pursuant to section 6651(a)(1) for 2000. Section
6651(a)(1) imposes an addition to tax for failure to file a
return on the date prescribed (determined with regard to any
extension of time for filing), unless the taxpayer can establish
that such failure is due to reasonable cause and not due to
willful neglect. See sec. 6651(a)(1); United States v. Boyle,
469 U.S. 241, 245 (1985).
Petitioner stipulated that she did not file a tax return for
2000. Accordingly, respondent has met his burden of production
for the section 6651(a)(1) addition to tax for 2000.
Petitioner testified that she was unable to timely file her
2000 Federal income tax return because her accounting manager
would not give her the information necessary to prepare the
return. Assuming arguendo that we were to accept petitioner’s
testimony about why she failed to file a tax return for 2000, the
unavailability of information or records does not necessarily
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establish reasonable cause for failure to file a timely tax
return. See Elec. & Neon, Inc. v. Commissioner, 56 T.C. 1324,
1342-1343, (1971), affd. without published opinion 496 F.2d 876(5th Cir. 1974). A taxpayer is required to file timely based
upon the best information available and to file thereafter an
amended return if necessary. Estate of Vriniotis v.
Commissioner, 79 T.C. 298, 311 (1982).
Petitioner has not established that her failure to timely
file for 2000 was due to reasonable cause. See Higbee v.
Commissioner, supra at 446-447. Accordingly, petitioner is
liable for the section 6651(a)(1) addition to tax for 2000.
C. Section 6654(a)
Respondent determined that petitioner is liable for an
addition to tax pursuant to section 6654(a) for 2000. Section
6654(a) imposes an addition to tax for failure to pay estimated
income tax. The amount of the credit for withholding is deemed
to be a payment of estimated tax. See sec. 6654(g).
Petitioner’s Form W-2, Wage and Tax Statement, indicates that
petitioner had $1,235 withheld for her 2000 tax year. Petitioner
stipulated that she did not make any estimated income tax
payments for 2000. We have found for respondent on the issue of
petitioner’s claimed deductions for the year 2000.
We conclude that respondent has satisfied his burden of
production regarding this issue. Petitioner has failed to come
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forward with evidence sufficient to persuade the Court that
respondent’s determination is incorrect. See Rule 142(a); Welch
v. Helvering, 290 U.S. at 115; see Higbee v. Commissioner, supra
at 447.
We hold that petitioner is liable for the addition to tax
pursuant to section 6654(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.