Estate of Dickerson v. Commissioner

T.C. Memo. 1997-165
UNITED STATES TAX COURT
ESTATE OF DAVID J. DICKERSON, DECEASED, DOROTHY DICKERSON,
EXECUTOR AND DOROTHY DICKERSON, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 23458-94, 23459-94, Filed April 1, 1997.
23518-94.
Audrey J. Orlando, for petitioner.
Lavonne D. Lawson, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined the following
deficiencies in, additions to, and penalties on petitioners'
Federal income taxes:
1
Cases of the following petitioners are consolidated
herewith: Michael and Beverly Michoff, docket No. 23459-94;
Michael Michoff, Jr., and Kimberly L. Michoff, f.k.a. Kimberly
Colombo, docket No. 23518-94.
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Estate of David Dickerson and Dorothy Dickerson (the
Dickersons):
Penalty
Year Deficiency Sec. 6662(a)
1989 $21,113 $4,223
1990 26,378 5,276
Michael Michoff, Sr., and Beverly Michoff (Michoff, Srs.):
Additions to Tax Penalty
Year Deficiency Sec. 6653(a)1 Sec. 6661 Sec. 6662(a)
1986 $29,594 $1,480 $7,399 -0-
1987 8,447 422 2,112 -0-
1989 4,360 -0- -0- $872
1990 3,647 -0- -0- 729
Michael Michoff, Jr. (Michoff, Jr.):
Additions to Tax Penalty
Year Deficiency Sec. 6651 Sec. 6653(a) Sec. 6654 Sec. 6661 Sec. 6662(a)
1
1986 $103,152 $25,788 $5,158 $4,991 -0- -0-
1
1987 30,846 7,712 1,542 1,668 -0- -0-
1988 8,379 -0- 419 -0- $2,095 -0-
1989 24,921 -0- -0- -0- -0- $4,984
Michael Michoff, Jr., and Kimberly Michoff, f.k.a. Kimberly
Columbo, (together known as Michoff, Jrs.):
Penalty
Year Deficiency Sec. 6662(a)
1990 $9,208 $1,842
Kimberly Colombo:
Addition to Tax Penalty
Year Deficiency Sec. 6653(a)1 Sec. 6661
1986 $16,587 $829 $4,147
1
If the penalty under sec. 6653(a)(1)(A) applies, the
penalty under sec. 6653(a)(1)(B) will also apply. Sec.
6653(a)(1)(B) includes 50 percent of the interest attributable to
that portion of the underpayment which is due to negligence or
disregard of the rules or regulations.
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Pursuant to respondent's motion, these cases have been
consolidated for trial, briefing, and opinion. All section
references are to the Internal Revenue Code in effect for the
years in issue. All Rule references are to the Tax Court Rules
of Practice and Procedure.
After concessions,2 the issues for decision are:
Issues With Respect to the Dickersons
1. Whether the Dickersons incurred taxable gain in the
amount of $57,855 in the 1990 tax year from the sale of two lots
of real property;
2. whether the Dickersons received rental income in the
amount of $3,550 in the 1990 tax year from the rental of real
property;
3. whether the Dickersons received unreported taxable
income in the 1989 and 1990 tax years in the amounts of $55,097
and $2,800, respectively;
2
The following issues have been conceded:
The Michoff, Srs., claimed exemptions to which they were not
entitled for their sons, Michael Michoff, Jr., and Steven
Michoff, in the 1986 tax year.
The Michoff, Srs., claimed exemptions to which they were not
entitled for Steven Michoff in the 1987 and 1989 tax years.
The Michoff, Srs., received unreported interest income in
the 1989 and 1990 tax years in the amounts of $54 and $62,
respectively.
The Michoff, Srs., failed to report taxable State income tax
refunds on their 1989 and 1990 income tax returns in the amounts
of $39 and $159, respectively.
Michael Michoff, Jr., received unreported interest income in
the 1986 and 1987 tax years in the amounts of $2,089 and $854,
respectively.
Respondent concedes the deficiency against Kimberly Michoff
for the 1986 tax year.
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4. whether the Dickersons are entitled to any Schedule C
deductions with regard to a Christmas tree farm for the 1989 and
1990 tax years;
5. whether the Dickersons are entitled to Schedule A
deductions for loan origination fees and mortgage interest in the
1989 and 1990 tax years; and
6. if any underpayments of tax exist, whether such
underpayments by the Dickersons are due to negligence or
disregard of rules or regulations.
Issues With Respect to the Michoff, Srs.
7. Whether the Michoff, Srs., failed to report a taxable
withdrawal from their pension fund in the amount of $9,047 for
the 1987 tax year;
8. whether the Michoff, Srs., received unreported taxable
income in the 1986, 1987, 1988, and 1989 tax years in the
respective amounts of $75,740, $10,107, $10,673, and $4,600;
9. whether the Michoff, Srs., are entitled to itemized
deductions for casualty losses and telephone expenses for their
1989 and 1990 tax years;
10. whether the Michoff, Srs., are entitled to any Schedule
C deductions with regard to a Christmas tree farm for their 1990
tax year;
11. if any underpayments of tax exist, whether such
underpayments by the Michoff, Srs., are due to negligence or
disregard of rules or regulations; and
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12. whether the Michoff, Srs., substantially understated
their tax in the 1986 and 1987 tax years.
Issues With Respect to Michoff, Jr., and Kimberly Michoff
13. Whether Michoff, Jr., received unreported income in the
1986, 1987, 1988, and 1989 tax years in the amounts of $39,850,
$29,879, $24,422, and $68,798, respectively;
14. whether the Michoff, Jrs., had unreported taxable
income in the 1990 tax year in the amount of $22,649;
15. whether Michoff, Jr., realized a capital gain from the
sale of a partnership interest in the 1986 tax year in the amount
of $26,058;
16. whether Michoff, Jr., is entitled to any Schedule C
deductions with regard to a limousine activity for his 1989 tax
year;
17. whether Michoff, Jr., failed to timely file his Federal
income tax returns for the 1986 and 1987 tax years;
18. whether Michoff, Jr., failed to pay estimated tax for
the 1986 and 1987 tax years;
19. if any underpayments exist, whether the underpayments
of tax for Michoff, Jr., are due to negligence or disregard of
rules or regulations;
20. whether Michoff, Jr., substantially understated his tax
for the 1988 tax year; and
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21. if any underpayment of tax exists, whether such
underpayment by the Michoff, Jrs., for the 1990 tax year is due
to negligence or disregard of rules or regulations.
Some of the facts have been stipulated and are so
found. The stipulation of facts and attached exhibits are
incorporated herein by this reference.
All petitioners in these consolidated cases resided in
California at the time they filed their respective petitions.
These consolidated cases involve three generations of the same
family. For convenience, we combine our findings of fact with
our opinion under each separate issue heading.
Burden of Production
Petitioners argue that the notices of deficiency are
arbitrary and excessive on their face, and, therefore, the burden
of production should shift to respondent. We disagree.
Respondent's determinations are entitled to a presumption of
correctness. Rule 142(a); Welch v. Helvering, 290 U.S. 111
(1933). The burden is upon petitioners to demonstrate in the
first instance that the determination is arbitrary and
unreasonable in order to deprive it of the presumption of
correctness. Harbin v. Commissioner, 40 T.C. 373, 376 (1963).
Petitioners have failed to so demonstrate. Respondent has
provided sufficient evidence to convince this Court that the
notices of deficiency were neither arbitrary nor unreasonable.
Therefore, unless otherwise indicated, for all of the issues the
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burden rests with petitioners to demonstrate that respondent's
determinations are erroneous. Rule 142(a).
A rare exception to this rule is where the Commissioner, in
a case involving unreported income, introduces no evidence but
rests on the presumption of correctness and the taxpayer
challenges the deficiency on the grounds that it is arbitrary.
Schad v. Commissioner, 87 T.C. 609, 618 (1986), affd. without
published opinion 827 F.2d 774 (11th Cir. 1987). The
Commissioner in these circumstances must show some minimal
evidentiary foundation connecting the taxpayer to an income-
producing activity or to the funds. Edwards v. Commissioner, 680
F.2d 1268, 1270 (9th Cir. 1982), affg. an Order of this Court;
Weimerskirch v. Commissioner, 596 F.2d 358, 361-362 (9th. Cir.
1979), revg. 67 T.C. 672 (1977). Whether or not respondent has
substantiated her determination of unreported income with this
evidentiary foundation will be discussed as the issue is
addressed for each petitioner.
Petitioners in these cases rely heavily on their own
testimony. We found some of petitioners' testimony to be
general, vague, conclusory, and/or questionable in certain
material respects. Under the circumstances presented here, we
are not required to, and generally do not, rely on petitioners'
testimony to sustain their burden of establishing error in
respondent's determinations. See Lerch v. Commissioner, 877 F.2d
624, 631-632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger
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v. Commissioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per
curiam T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74,
77 (1986).
Gain From the Sale of Real Property
In May 1990, the Dickersons received $9,748 in proceeds from
the sale of property located at lot 58 of Lake Mont Pines (lot
58). The Dickersons had a zero basis in lot 58.3 Also in 1990,
the Dickersons sold lot 59 of Lake Mont Pines (lot 59) for
$89,000. The Dickersons' total basis in lot 59 was $32,061.47.
The parties have stipulated that the Dickersons had taxable gain
from the sale of the two lots in the amount of $57,855. The
Dickersons now argue that they should be entitled to increased
basis in the property due to litigation costs which were not
reimbursed. The evidence relating to these costs was solely in
the form of trial testimony. Petitioners presented no further
evidence of any litigation costs. Petitioners have failed to
prove that any litigation costs were incurred and, if they had
been incurred, why petitioners are entitled to an increase in
basis as a result. We sustain respondent on this issue.
Rental Income
Respondent argues that the Dickersons received unreported
rental income in 1990 in the amount of $3,550. The Dickersons
leased residential property (the Green Ridge residence) to Roger
and Linda Barrett (the Barretts) in 1990. The Dickersons
3
This was conceded by petitioners on brief.
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received a $1,000 cleaning deposit from the Barretts in that
year. The Dickersons received payments from the Barretts with
regard to the lease of the Green Ridge residence in the amount of
$850 each on August 20, 1990, September 20, 1990, and October 30,
1990. The Dickersons never lived at the Green Ridge residence.
The Dickersons presented no arguments why this amount should not
be included in income. We therefore consider this issue to be
abandoned and sustain respondent on this issue. See Lime Cola
Co. v. Commissioner, 22 T.C. 593, 606 (1954).
Unreported Income--General
Respondent, using a bank deposits and expenditures analysis,
determined that each of the petitioners had unreported income for
some of the years in issue.
The United States Court of Appeals for the Ninth Circuit, to
which an appeal of this case would lie, has held that in order
for the presumption of correctness to attach to the notice of
deficiency in unreported income cases, the Commissioner must come
forward with substantive evidence establishing “some evidentiary
foundation” linking the taxpayer to the income-producing
activity, Weimerskirch v. Commissioner, supra at 361-362, or
“demonstrating that the taxpayer received unreported income”,
Edwards v. Commissioner, 680 F.2d at 1270; see also Rapp v.
Commissioner, 774 F.2d 932, 935 (9th Cir. 1985), affg. an Order
of this Court. We must examine the record to determine whether
there is a minimal evidentiary foundation supporting respondent's
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determination of unreported income. The record, however, does
contain substantive evidence supporting respondent's
determination of unreported income.
Revenue Agent Anita Russell, using a bank deposits analysis,
determined that petitioners had unreported income. Use of the
bank deposits method for reconstructing income is well
established. DiLeo v. Commissioner, 96 T.C. 858, 867 (1991),
affd. 959 F.2d 16 (2d Cir. 1992); Estate of Mason v.
Commissioner, 64 T.C. 651, 656 (1975), affd. 566 F.2d 2 (6th Cir.
1977). Under the bank deposits method, there is a rebuttable
presumption that all funds deposited to a taxpayer's bank account
constitute taxable income. Price v. United States, 335 F.2d 671,
677 (5th Cir. 1964); Hague Estate v. Commissioner, 132 F.2d 775,
777-778 (2d Cir. 1943), affg. 45 B.T.A. 104 (1941); DiLeo v.
Commissioner, supra at 868. Once there is evidence of actual
receipt of funds by the taxpayer, that taxpayer has the burden of
proving that all or a part of those funds are not taxable.
Tokarski v. Commissioner, supra. The Commissioner must take into
account any nontaxable sources of deposits of which she is aware
in determining the portion of the deposits that represent taxable
income, but she is not required to trace deposits to their
source. Petzoldt v. Commissioner, 92 T.C. 661, 695-696 (1989).
This case is distinguishable from Weimerskirch v.
Commissioner, supra at 362, where “the Commissioner did not
attempt to substantiate the charge of unreported income by any
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other means, such as by showing Weimerskirch's net worth, bank
deposits, cash expenditures, or source and application of funds.”
Id. Additionally, in Weimerskirch, the taxpayer was not shown by
admissible evidence to have actually possessed any of the funds
that the Commissioner determined to be taxable income. In the
instant case, the various petitioners were connected to the funds
forming the basis of the deficiency by respondent's analysis of
bank deposits and expenditures. “[C]onnecting * * * [the
taxpayer] to the funds that form the basis of the deficiency is
sufficient to give him the burden of proving the deficiency
determination erroneous.” Schad v. Commissioner, 87 T.C. 620.
Respondent has substantiated her determination with
predicate evidence; she used the bank deposits and cash
expenditures method of income reconstruction. See Blohm v.
Commissioner, 994 F.2d 1542, 1549 (11th Cir. 1993), affg. T.C.
Memo. 1991-636 (once the Tax Court has found the Commissioner has
made a minimal evidentiary showing, the deficiency determination
is presumed correct); Erickson v. Commissioner, 937 F.2d 1548,
1551 (10th Cir. 1991), affg. T.C. Memo. 1989-552 (the key is
connecting taxpayers to assets, not to a business). The burden
of proof therefore lies with petitioners to show error in
respondent's determinations.
Unreported Income--the Dickersons
Revenue Agent Anita Russell, using a bank deposits analysis,
determined that the Dickersons had unreported income in the
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amounts of $55,097 and $2,800 for the tax years 1989 and 1990,
respectively.4
The Dickersons made specific payments on their Primeline
credit account in the total amount of $9,200, which is in issue
in the 1989 tax year. These were not, however, the total
payments made by the Dickersons on their Primeline credit account
in the 1989 tax year.
The Dickersons made deposits into their El Dorado savings
account in the amounts of $37,100 and $2,800 in the 1989 and 1990
tax years, respectively. These were not the total deposits made
into this account in the 1989 and 1990 tax years.
Respondent also identified a cash expenditure which she
added to the unreported income of the Dickersons for the 1989 tax
year. This expenditure was the purchase of a cashier's check in
the amount of $8,797 for purposes of purchasing the Green Ridge
Drive residence.
Petitioners argue that the $8,797 cashier's check was
purchased with loans from Dan Maggard. However, the check from
Dan Maggard was deposited into the El Dorado account.
Petitioners failed to show a canceled check that was used to
4
Petitioners objected to respondent's proposed finding of
fact which reads as follows: "Respondent's revenue agent
conducted a bank deposits analysis of the Dickerson's income for
1989 and 1990." On brief, however, petitioners do not dispute
that respondent's revenue agent conducted a bank deposits
analysis; rather they argue that it was conducted improperly.
This is typical of the argumentative and contradictory statements
that appear throughout petitioners' briefs.
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purchase the cashier's check, nor did they otherwise prove that
the funds to purchase the check came from the El Dorado account.
Petitioners have failed to establish that the cashier's check was
purchased with funds from nontaxable sources.
Dorothy Dickerson testified that some of the money that she
deposited into her El Dorado savings account was from checks from
Michoff, Jr., her grandson, and that the rest was from cash that
she had gathered “here and there.” Petitioners further argue
that the deposits came from gambling winnings that were offset by
losses. For both the 1989 and 1990 tax years, the Dickersons
reported substantial income from gambling as well as losses to
offset that income. In performing the bank deposits analysis,
respondent's agent backed out any gambling income that was
reported on the Dickersons' income tax returns. The Dickersons
have failed to prove any additional gambling losses beyond those
already reported by them and allowed by respondent in the 1989
and 1990 tax years.
Additionally, petitioners contend that the $9,200 which they
paid toward their Primeline credit account came from their cash
reserves as well as previous withdrawals from that account.
Petitioners, however, offered no persuasive evidence to
substantiate this claim. Petitioners have failed to meet their
burden of proof regarding this amount.
A $5,500 deposit made into the El Dorado account on March
20, 1989, came from a cashier's check purchased by Dan Maggard
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and payable to Michoff, Jr. Michoff, Jr., then endorsed the
check over to the Dickersons. This money was given to the
Dickersons by Michoff, Jr., either as a gift or as a loan and is
not therefore taxable to the Dickersons.
Respondent identified gambling as a source of the
Dickersons' additional income. Dorothy Dickerson loves to
gamble. Dorothy Dickerson could not identify what amounts she
won and lost at gambling.
Respondent further contends that the Dickersons engaged in
transactions with Michoff, Jr., from whom they received moneys
and with whom they freely transferred property. Respondent
contends that Michoff, Jr., had sources of income which included
a lucrative activity of selling drugs. Respondent has not made
any preliminary showing of why income from a drug selling
activity of Michoff, Jr., should result in income to the
Dickersons. However, respondent has shown gambling to be a
possible source of additional income which is sufficient to
satisfy respondent's initial burden of connecting the Dickersons
to an income-producing activity. Furthermore, even without this
showing, respondent has met her minimal evidentiary burden by
performing a bank deposits analysis.
With respect to all items except the $5,500 deposit,
petitioners have failed to show that the source of the funds was
nontaxable. Respondent's determination is sustained as to all
amounts above the $5,500.
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Loan Origination Fees and Mortgage Interest in 1989 and 1990
The Dickersons contend that they are entitled to a deduction
of $2,199 for loan origination fees incurred to purchase the
Green Ridge residence in 1989. Additionally, the Dickersons
argue that they are entitled to deductions for mortgage interest
of $4,012 and $8,779 for the years 1989 and 1990, respectively.
Respondent contends that they are not entitled to these
deductions because they were not made on a qualified residence
within the meaning of section 163(h)(2)(D). Section 163(h)(2)(D)
allows a deduction for any qualified residence interest. Section
163(h)(3)(A) provides, inter alia, that qualified residence
interest includes acquisition indebtedness with respect to any
qualified residence of the taxpayer. A qualified residence
includes the principal residence of the taxpayer as well as one
other residence which is used by the taxpayer as a residence.
Sec. 163(h)(4)(A). This includes use by a family member,
including a grandson. Secs. 280A(d)(2)(A), 267(c)(4). Michoff,
Jr., the Dickerson's grandson, lived in the Green Ridge residence
during 1989 except for the months the residence was rented to the
Barretts. The Green Ridge residence therefore qualifies as a
qualified residence during 1989. Because the residence was used
by a family member for the requisite number of days during the
year, the Dickersons have established that they are entitled to
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deduct the loan origination fees5 as well as the mortgage
interest, subject to substantiation. Secs. 280A(d)(1) and (2),
267(c)(4). Respondent further argues that the Dickersons have
not substantiated the claimed deductions and therefore are not
entitled to them. Petitioners provided a U.S. Department of
Housing and Urban Development Settlement Statement (settlement
statement) which substantiates that petitioners paid $2,199 in
loan origination fees as well as some amount of interest. If the
record provides sufficient evidence that the Dickersons paid the
mortgage interest, but they are unable to prove the exact amount,
we can estimate the amount of the payments. Cohan v.
Commissioner, 39 F.2d 540, 544 (2d Cir. 1930). In order for the
Court to make such an estimate, we must have some basis in fact
upon which an estimate may be made. Vanicek v. Commissioner, 85
T.C. 731, 743 (1985). Without such a basis, any allowance would
amount to unguided largesse. Williams v. United States, 245 F.2d
559, 560 (5th Cir. 1957). Mrs. Dickerson testified that the
Dickersons paid the mortgage on the Green Ridge residence.
Although we cannot determine the exact amount of interest paid by
the Dickersons, we conclude that, based on Mrs. Dickerson's
testimony and the settlement statement, it was at least as much
as claimed on their Schedule A, and therefore we hold that they
5
The loan origination fees are deductible ratably, over
the life of the loan. Sec. 461(g)(1); cf. Huntsman v.
Commissioner, 91 T.C. 917, 920 (1988), revd. 905 F.2d 1182 (8th
Cir. 1990).
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are entitled to the claimed deductions. Respondent is sustained
to the extent petitioners deducted loan origination fees above
those ratably allocable to the 1989 tax year.
Christmas Tree Farm
The Dickersons claimed Schedule C expense deductions with
regard to a tree farm business in the amounts of $1,345 and
$1,100 in the 1989 and 1990 tax years, respectively. The
Dickersons claimed Schedule C losses for the tree farm business
in the tax years 1985, 1986, 1987, 1988, 1989, and 1990. The
Dickersons reported zero receipts with regard to the tree farm
business in the 1985, 1986, 1987, 1988, and 1989 tax years. The
Dickersons reported $800 in receipts with regard to the tree farm
business in the 1990 tax year. Respondent argues that the
Dickersons are not entitled to the claimed deductions because the
tree farm business was not engaged in for profit within the
meaning of section 183. This is a factual inquiry requiring a
weighing of the evidence in the record. Petitioners contend that
they entered into and carried on the tree farm activity with the
requisite profit objective and that, as a result, the deductions
are allowed under section 162 or section 212.
Section 183(a) provides generally that, if an activity is
not engaged in for profit, no deduction attributable to such
activity shall be allowed except as provided in section 183.
Section 183(c) defines an “activity not engaged in for
profit” as “any activity other than one with respect to which
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deductions are allowable for the taxable year under section 162
[trade or business] or under paragraph (1) or (2) of section 212
[expenses for the production of income]." For a deduction to be
allowed under section 162 or section 212(1) or (2), taxpayers
must establish that they engaged in the activity with an actual
and honest objective of making an economic profit independent of
tax savings. Antonides v. Commissioner, 91 T.C. 686, 693-694
(1988), affd. 893 F.2d 656 (4th Cir. 1990); Dreicer v.
Commissioner, 78 T.C. 642, 644-645 (1982), affd. without opinion
702 F.2d 1205 (D.C. Cir. 1983). Their expectation of profit need
not have been reasonable; however, they must have entered into
the activity, or continued it, with the objective of making a
profit. Hulter v. Commissioner, 91 T.C. 371, 393 (1988); sec.
1.183-2(a), Income Tax Regs.
The burden is on petitioners to show error in respondent's
determination that the Christmas tree farming activity was not
engaged in for profit. Rule 142(a). Whether the requisite
profit objective exists is determined by looking to all the
surrounding facts and circumstances. Keanini v. Commissioner, 94
T.C. 41, 46 (1990); sec. 1.183-2(b), Income Tax Regs. Greater
weight is given to objective facts than to a taxpayer's mere
statement of intent. Thomas v. Commissioner, 84 T.C. 1244, 1269
(1985), 792 F.2d 1256 (4th Cir. 1986); sec. 1.183-2(a), Income
Tax Regs.
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Section 1.183-2(b), Income Tax Regs., provides a list of
factors to be considered in the evaluation of a taxpayer's profit
objective: (1) The manner in which the taxpayer carries on the
activity; (2) the expertise of the taxpayer or his advisers; (3)
the time and effort expended in carrying on the activity; (4) the
expectation that assets used in the activity may appreciate in
value; (5) the success of the taxpayer in carrying on other
similar or dissimilar activities; (6) the taxpayer's history of
income or losses from the activity; (7) the amount of occasional
profits, if any, from the activity; (8) the financial status of
the taxpayer; and (9) elements of personal pleasure or
recreation. The number of factors for or against the taxpayer is
not necessarily determinative, but rather all facts and
circumstances must be taken into account, and more weight may be
given to some factors than to others. Cf. Dunn v. Commissioner,
70 T.C. 715, 720 (1978), affd. 615 F.2d 578 (2d Cir. 1980). This
list is nonexclusive, and no single factor or even a majority of
factors necessarily controls. Abramson v. Commissioner, 86 T.C.
360, 371 (1986); sec. 1.183-2(b), Income Tax Regs.
After weighing all of the objective factors coupled with
petitioner's statements of intent, we conclude that the
Dickersons were not engaged in the tree farming activity for
profit. There is objective evidence which shows that the
Dickersons did not have a profit objective in carrying on the
tree farming business: The Dickersons gave away many trees; no
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business records were kept; there were losses over many years;
the Dickersons only reported receipts in one year of operation;
and the trees provided personal pleasure because they were
located at the Dickerson's residence. Petitioners offer no legal
argument but to say that they were engaged in the tree farming
activity for profit; they offer no evidence but their own
uncorroborated testimony. Petitioners have failed to meet their
burden of proof. Petitioners are, however, entitled to deduct
their expenses to the extent that they received gross income from
the activity. Sec. 183(b)(2). To the extent that respondent has
disallowed expenses in excess of gross receipts for the tree
farming activity for the 1989 and 1990 tax years, we sustain
respondent.
Failure To Report Pension Fund Withdrawal in 1987
The Michoff, Srs., made a taxable withdrawal from their
pension plan in the 1987 tax year in the amount of $9,047. The
Michoff, Srs., failed to report their pension income. This
withdrawal was an early distribution from their pension plan.
The parties stipulated to the above facts, and the Michoff, Srs.,
made no argument in their opening brief concerning the issue. In
their reply brief, the Michoff, Srs., object to the stipulated
facts and contend that this withdrawal was a total distribution
as a result of the disability of Mr. Michoff, Sr., and therefore
the 10-percent penalty should not apply. See sec.
72(t)(2)(A)(iii). Gross income includes any amount received from
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an annuity, including a retirement plan, where an exception does
not apply. Sec. 72(a). Additionally, unless an exception
applies, there is a 10-percent additional tax on early
withdrawals from qualified retirement plans. Sec. 72(t)(1). The
Michoff, Srs., have offered no testimonial or documentary
evidence to contradict their stipulations or to support an
exclusion. Respondent's determination is therefore sustained on
this issue.
Unreported Income--Michoff, Srs.
Revenue Agent Anita Russell, using a bank deposits analysis,
determined that the Michoff, Srs., received unreported taxable
income in the 1986, 1987, 1988, and 1989 tax years. Based on
this analysis, respondent, after concessions, argues that the
Michoff, Srs., had unreported income for those years in issue in
the amounts of $75,740, $10,107, $10673, and $4,600,
respectively.
The Michoff, Srs., purchased a cashier's check from El
Dorado Savings and Loan Association for the purpose of purchasing
real property in the amount of $64,500 in the 1986 tax year.
The Michoff, Srs., made deposits in the amounts of $11,240
and $10,107 which are in issue to their El Dorado Savings and
Loan Association account in the 1986 and 1987 tax years,
respectively. These deposits do not make up the total amount
deposited into this account in these years.
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The Michoff, Srs., made deposits into their Placer savings
account in the amounts of $6,200 and $4,600 which are in issue in
the 1989 and 1990 tax years, respectively. These deposits do not
make up the total amount of deposits into this account in 1989
and 1990. Some of these deposits were part of larger deposits.
The Michoff, Srs., made a payment on their Bank of America
Visa account in the amount of $4,472.64 on August 18, 1989.
Respondent contends that the above deposits and expenditures
are from unreported income of the Michoff, Srs. The Michoff,
Srs., contend that the amounts at issue came from the following
sources: “insurance refund”, “cash reserve”, "gambling winnings
equal losses”, “withdrawn and replaced from accounts”, “cash
withdrawn and replaced”, “refund”, “repayment of loan to Michael
Michoff”, and “transfer from Golden Union #1". The Michoff,
Srs., argue that Beverly Michoff had saved money over many years
and hid it from her husband because he had a gambling problem.
They contend that many of the deposits in issue came from this
cash reserve. Beverly Michoff testified that at one time she had
almost $100,000 in cash in a can. Petitioners argue that some of
the cash reserves came from a personal injury settlement of
Michoff, Sr. Beverly Michoff testified that around 1971 they
received approximately $60,000 in settlement of the back injuries
of Mr. Michoff, Sr. No documentary evidence was presented
regarding the personal injury settlement, and Beverly Michoff's
testimony in this regard was vague. Beverly Michoff testified
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that she took the settlement money along with money from the
paychecks of Michoff, Sr., and hid them from Michoff, Sr. The
funds that she used allegedly came from a personal injury
settlement of Michoff, Sr., as well as the paychecks of Michoff,
Sr., which were made out to him and which he picked up at work.
We find it unlikely that Beverly Michoff could have taken these
funds and hid them from Michoff, Sr., for so many years.
Additionally, Beverly Michoff testified that her husband did not
believe in banks. However, during the years in issue the
Michoff, Srs., actively used savings accounts, credit card
accounts, and a credit union account. Under all the
circumstances, we are not required to accept the self-serving
testimony of petitioner. Tokarski v. Commissioner, 87 T.C.
77. Based on our review of the record and the circumstances, we
find Beverly Michoff's explanation of a cash hoard not to be
credible.
The explanations of the Michoff, Srs., as to their other
deposits and expenditures which are at issue are equally lacking
in credibility. They seek to rely on uncorroborated testimony
and unsupported argument. This is not sufficient evidence to
meet their burden of proof. The Michoff, Srs., have failed to
prove that any of the amounts at issue are from nontaxable
sources.
As a source of additional income, respondent identified the
transactions of the Michoff, Srs., with their son. Respondent
- 24 -
argues that the evidence shows that the Michoff, Srs., freely
transferred moneys and property between themselves and Michoff,
Jr., and that Michoff, Jr., was involved in the sale of drugs
during this period, which resulted in substantial income to
himself and to his family, including the Michoff, Srs.
Respondent contends that the Michoff, Srs., received money from
Michoff, Jr., from his drug business but offers no explanation of
why this would be taxable to the Michoff, Srs. We conclude that
this is not a taxable source of income to the Michoff, Srs.
Respondent did, however, analyze the bank deposits and
expenditures of the Michoff, Srs., to determine the amount of
unreported income. Petitioners have failed to prove that any of
the disputed amounts are from nontaxable sources. Respondent is
sustained on this issue.
Casualty Losses and Telephone Expenses
The Michoff, Srs., claimed miscellaneous itemized deductions
for alleged job required phone usage in the 1989 and 1990 tax
years in the amounts of $264 and $394, respectively. The
Michoff, Srs., admitted on brief that no evidence was provided to
establish the deductions claimed for the alleged job required
phone usage. Petitioners failed to meet their burden of proof,
and therefore respondent's determination regarding the deductions
for phone usage is sustained.
The Michoff, Srs., claimed itemized casualty loss deductions
for the 1989 and 1990 tax years in the amounts of $3,965 and
- 25 -
$3,325, respectively. Michael Michoff, Sr., did not testify on
behalf of the Michoff, Srs. Beverly Michoff did not know in what
years the alleged casualty losses occurred. Beverly Michoff was
unsure whether the items for which casualty losses were claimed
were insured. The Michoff, Srs., did not provide any documentary
evidence to establish the alleged casualty losses claimed on the
1989 and 1990 income tax returns of the Michoff, Srs. The
Michoff, Srs., have the burden of proving that they are entitled
to the deduction. Smith v. Commissioner, 76 T.C. 459, 463
(1981). The Michoff, Srs., have failed to meet this burden.
Thus, respondent is sustained on this issue.
Christmas Tree Farm for the 1990 Tax Year
Respondent determined that the Michoff, Srs., improperly
claimed Schedule C deductions in the amount of $4,300 with regard
to a Christmas tree farm business. In their answers to
respondent's requests for admissions the Michoff, Srs., admit
that they were not entitled to claim any loss on the Christmas
tree farm during the years in issue. Additionally, the parties
have stipulated that the Michoff, Srs., claimed Schedule C
deductions, to which they were not entitled, pertaining to a
Christmas tree farm. The Michoff, Srs., never sold any trees
from the tree farm. On brief, the Michoff, Srs., contend that
they entered the tree farm business with the intent to make a
profit. “Petitioner has the burden of proof as to both the
deductibility and substantiation of her claimed business
- 26 -
expenses.” Rule 142(a); Ronnen v. Commissioner, 90 T.C. 74, 102
(1988). Based upon the lack of any evidence provided by
petitioners, and taking into account their stipulations and
admissions, we find that they have failed to carry their burden
of proof with respect to both the deductibility and the amount of
the claimed deductions. Accordingly, we sustain respondent on
this issue.
Substantial Understatement Penalty--Michoff, Srs.
Respondent determined additions to tax of $7,339 and $2,112
under section 6661 for the tax years 1986 and 1987, respectively,
for the Michoff, Srs. Section 6661(a) imposes an addition to tax
of 25 percent of the amount of any underpayment attributable to a
substantial understatement of tax. An understatement is the
difference between the amount required to be shown on the return
and the amount actually shown on the return and is substantial if
it exceeds the greater of (1) 10 percent of the tax required to
be shown on the return for a taxable year, or (2) $5,000. Sec.
6661(b)(1) and (2)(A). The understatement is reduced to the
extent that the taxpayer has (1) adequately disclosed his or her
position or (2) has substantial authority for the tax treatment
of an item. Sec. 6661; sec. 1.6661-6(a), Income Tax Regs.
Petitioners have the burden of proving they are not liable for
the addition to tax. Rule 142(a).
The Michoff, Srs., contend that they should not be liable
for the substantial understatement penalty because their
- 27 -
understatement for each of the years 1986 and 1987 was minimal.
Based on our findings, it is clear that the Michoff, Srs., did
substantially understate their Federal income tax. Respondent is
sustained to the extent, consistent with this opinion, there is
an underpayment attributable to such understatement for each of
the years 1986 and 1987.
Unreported Income--Michoff, Jr.
Revenue Agent Anita Russell conducted a bank deposits
analysis of the 1986, 1987, 1988, and 1989 tax years of Michoff,
Jr. Respondent additionally refers to the United States Bureau
of Labor Statistics (BLS) in order to determine petitioner's
unreported income for each of the years in issue. Based on this
analysis, respondent, after concessions, argues that Michoff,
Jr., had unreported income of $39,850, $29,879, $24,422, and
68,798 in the 1986, 1987, 1988, and 1989 tax years, respectively.
As a potential source for additional income, respondent argues
that Michoff, Jr., had a lucrative business selling drugs.
Michoff, Jr., was convicted of a felony in California for
possession of drugs for sale.
Deposits were made into the Michaels & Michaels Autobody
Shop's (the autobody shop) CapFed account in the amount of
$71,544 in the 1986 tax year. Michael Juarez testified that he
did not remember making deposits in this amount into the CapFed
account for the autobody shop in the 1986 tax year. The autobody
shop's CapFed account remained active through October of 1986,
- 28 -
and deposits were made into that account through October of 1986.
No records from the autobody shop were ever provided to
respondent's revenue agent. Respondent's revenue agent computed
the autobody shop's profit as follows: Total receipts of $83,544
consist of the deposits into its bank account of $71,544 and cash
expenditure for annual rent which was approximately $12,000.
From this total, Ms. Russell subtracted cost of goods sold of 40
percent. Ms. Russell computed that the partnership had a net
profit of $35,726. Michoff, Jr., retained a 25-percent interest
in the autobody shop through 1986. Ms. Russell therefore
determined that the net profit of Michoff, Jr., was $8,932, which
was 25 percent of the net profit from the partnership. Neither
Michoff, Jr., nor Michael Juarez filed a partnership return for
the autobody shop for the 1986 tax year.
Michoff, Jr., made a $10,000 cash down payment on the
purchase of property from Mr. and Mrs. Knight (the Knight
property) in the 1986 tax year. Michoff, Jr., contends that the
source of this payment was a loan from Dan Maggard. However,
Michoff, Jr., failed to prove this contention. Michoff, Jr.,
testified that these funds came from a loan, and he presented a
list of loans which he claims to have received from Dan Maggard.
This list was recently prepared by Michoff, Jr., in preparation
for this litigation. Additionally, it is only signed by Dan
Maggard and not Michoff, Jr. Mr. Maggard signed this document at
the request of Michoff, Jr. At trial, Mr. Maggard testified that
- 29 -
he did not remember the terms of these loans. He further
testified that he and Michoff, Jr., did not document these loans.
Michoff, Jr., later testified that they did document the various
loans. Furthermore, until 1995, there is no evidence that any of
the amounts were ever repaid. Michoff, Jr., has failed to prove
that any of the funds came from loans.
Michoff, Jr., made deposits into his Downey savings account
in the amount of $3,334 which is in issue in the 1986 tax year.
This is not the total amount of deposits in this account in the
1986 tax year. This amount does not include $1,000 that was
identified as a transfer.
Michoff, Jr., made a deposit of $3,686 into Kimberly
Michoff's Great Western account in the 1986 tax year. This
amount is not the total amount deposited into this account in the
1986 tax year by Michoff, Jr. Michoff, Jr., conceded on brief
that this deposit has not been identified as coming from a
nontaxable source.
Michoff, Jr., made deposits into his Pacific Valley Bank
account in the amount of $220 in the 1986 tax year.
In the 1987 tax year, Michoff, Jr., made payments to the
Knights in the amount of $76,195 toward the purchase of the
Knight property. Of this amount, respondent contends that
$15,682 cannot be traced to previously taxed or nontaxable
sources. Of the $15,682, Michoff, Jr., admits that $622 is from
unknown sources.
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Michoff, Jr., did not file an income tax return for the 1986
or 1987 tax year.
In the 1988 tax year, Michoff, Jr., made payments of $6,000
toward the purchase of the Knight property.
Michoff, Jr., made deposits in the amount of $3,500 in his
World Savings Bank account in the 1988 tax year. These amounts
are not the total amount of deposits to this account in the 1988
tax year.
Michoff, Jr., reported total income for the 1988 tax year in
the amount of $10,135.
Michoff, Jr., and Kimberly Michoff expended the following
amounts in the 1989 tax year on the Green Ridge residence: $900
as a deposit; $29,500; and $8,797.6 The total amount of $39,1977
was spent by Michoff, Jr., and Kimberly Michoff on the Green
Ridge residence in the 1989 tax year.8
6
The $8,797 is the same amount that the Dickersons
expended on a cashier's check in the same year to purchase the
Green Ridge residence. Petitioners do not argue that this is a
duplication, and, without evidence to so indicate, we do not
assume that it is.
7
On brief, petitioner argues that “There was no proof
offered that Michael Michoff, Jr., had $39,197 in funds for the
Green Ridge property purchase.” We find the parties' stipulation
to this fact to be sufficient proof that this amount was expended
by Michoff, Jr., and Kimberly Michoff.
8
The stipulation reached by the parties states that the
funds were expended by Michoff, Jr., and Kimberly Michoff. The
deficiency for the 1989 tax year was asserted only against the
income tax of Michoff, Jr., however, because of the deemed
concession discussed below we do not inquire into what portion of
the funds were expended by Kimberly Michoff.
- 31 -
Michoff, Jr., made deposits to his World Savings Bank
accounts of $5,207 which is in issue in the 1989 tax year. These
are not the total amount of deposits made into these accounts in
the 1989 tax year.
Respondent contends that the source of the $39,197 in
payments and the $5,207 in deposits has not been identified by
petitioners. In response to respondent's proposed findings of
fact on these issues, Michoff, Jr., states: “Objection.
$5,207.00 receipts from limousine business reported on
Petitioner's Schedule 'C' and included in $6,000 gross receipts.”
Because this is the only objection to respondent's proposed
findings of fact regarding those amounts, we consider the $39,197
expenditure to have been conceded to be unreported income.9
Additionally, Michoff, Jr., provided no evidence that the $5,207
came from previously taxed income.
Michoff, Jr., made deposits into his Placer savings account
in the amount of $1,528 which is in issue in the 1989 tax year.
This amount is not the total amount deposited into this account
in the 1989 tax year. Of this amount, Michoff, Jr., contends
that $1,098 came from Kimberly Michoff's salary. The only proof
of this source is the vague, unsubstantiated testimony of
Michoff, Jr. Michoff, Jr., contends that most of the remaining
9
We rely extensively on petitioners' responses to
respondent's proposed findings of fact. On brief, petitioners
state: “Petitioners have extensively explained their 'unreported
income' in the Objection to Respondent's Requested Findings of
Fact and, therefore, it is unnecessary to repeat them here.”
- 32 -
amounts came from a refund, his salary, or a gift. The only
proof of these amounts is, again, his vague, unsubstantiated
testimony. Furthermore, for $13 Michoff, Jr., offers no source
but contends that it is not taxable income.
Michoff, Jr., and Kimberly Michoff lived together during
1986, 1987, 1988, and 1989. Pursuant to the BLS, the personal
living expenditures, excluding housing, for a couple in 1986,
1987, and 1988 would be $13,678, $14,197, $14,922, respectively.
Pursuant to the BLS, the personal living expenditures for a
couple in 1989 would be $24,549. In her notice of deficiency,
respondent used the BLS to reconstruct petitioner's income. This
Court and other courts have approved the use of those statistics
as an acceptable and reasonable method of reconstructing income.
E.g., Pollard v. Commissioner, 786 F.2d 1063, 1066 (11th Cir.
1986), affg. T.C. Memo. 1984-536; Giddio v. Commissioner, 54 T.C.
1530, 1532-1533 (1970).
Michoff, Jr., contends that he should not be charged with
personal living expenses for 1986 because he was residing with
his grandparents and they were providing his room and board.
Additionally, he contends that any incidental expenses he had
were covered by amounts he received from loans, gifts, and
repayments by Michael Juarez. In her determination, respondent
used BLS statistics that excluded housing for 1986 as well as for
1987 and 1988. Michoff, Jr., has not established that he did not
- 33 -
have personal expenditures or that the amounts paid for personal
expenditures came from nontaxable sources.
Michoff, Jr., has the burden of proving that respondent's
determinations are in error. Rule 142(a). He has failed to meet
this burden with regard to any of the amounts determined to be
unreported income. Respondent is sustained on this issue.
Unreported Income--Michoff,Jr., and Kimberly Michoff
Michoff, Jr., and Kimberly Michoff filed a joint Federal
income tax return for the 1990 tax year.
Respondent's revenue agent conducted a bank deposits
analysis of the 1990 tax year of Michoff, Jr., and Kimberly
Michoff. Based on this analysis, respondent, after concessions,
argues on brief that Michoff, Jr., and Kimberly Michoff had
unreported income of $22,649 in the 1990 tax year. Petitioners
concede the deposits in 1990 but claim that they were transfers
from accounts, loans, and gifts and that some of the amounts were
duplicated by the revenue agent and counted more than once.
The amount that Michoff, Jr., and Kimberly Michoff spent on
personal expenditures by check was subtracted from the bank
deposits total. Michoff, Jr., and Kimberly Michoff made deposits
into their First Interstate Bank account in the amount of $3,187
which is in issue in the 1990 tax year. This amount is not the
total amount of deposits into this account in the 1990 tax year.
The Michoff, Jrs., made deposits into their Placer Savings
Bank accounts in the amount of $18,892 in the 1990 tax year.
- 34 -
Petitioners argue that many of these deposits came from
their wages, which were reported on their individual income tax
return. However, they have offered no proof of this beyond
vague, unsubstantiated testimony. Additionally, respondent's
revenue agent backed out net income that was reported on
petitioners' return when she performed her bank deposits
analysis.
Michoff, Jr., contends that a $3,000 deposit which is in
issue came from the sale of a Porsche to Bill McKay. Michoff,
Jr., contends that he purchased the Porsche for $2,000 and put
$1,000 worth of repairs into the car. Other than his own
testimony, which we find lacking in credibility, Michoff, Jr.,
presented three exhibits as proof of his purchase price and cost
of repairs; these exhibits lack any probative value as well as
any indicia of trustworthiness.10
10
As proof of his purchase price Michoff, Jr., submitted
two exhibits to the Court. First, Michoff, Jr., submitted a
document from the State Board of Equalization Occasional Sales
Use Tax Unit. This document is a letter which states that
Michoff, Jr.'s, Certificate of Purchase Price, indicating his
purchase price of the car, was selected for routine verification
and that he would need to submit other evidence providing
verification of value. This document proves nothing as it is
merely a request for information. Second, Michoff, Jr.,
submitted a bill of sale purportedly showing that he purchased a
Porsche for $2,000. However, this bill of sale lacks a Vehicle
Identification Number, a transfer date, and the address of the
seller. There is no indication that this is an actual bill of
sale.
As proof of the cost of repairs, Michoff, Jr., submitted a
pile of receipts. These receipts do not show for what car the
parts were ordered or the work done. Additionally, Michoff, Jr.,
included receipts dated as late as May 28, 1991, for a car which
(continued...)
- 35 -
We have considered petitioners' arguments regarding all
other deposits that are in dispute and consider them to be
without merit. Petitioners have failed to carry their burden of
proving a nontaxable source with respect to the disputed deposits
and expenditures. Therefore we hold that respondent is sustained
on this issue.
Capital Gains from the Sale of a Partnership Interest in 1986
Prior to the years in issue, Michoff, Jr., had a 50-percent
partnership interest in Michaels & Michaels Autobody Shop (the
autobody shop). At the beginning of 1986, Michoff, Jr., disposed
of half of his partnership interest in the autobody shop,
retaining a 25-percent interest. The parties stipulated that the
amount of capital gain from that disposition was $30,644.
Respondent determined that Michoff, Jr., failed to report this
gain.
Despite these stipulations, Michoff, Jr., argues that he had
no gain from the sale of his partnership interest. Michoff, Jr.,
offered no documentary evidence to disprove respondent's
determinations and chose instead to rely on unsubstantiated
claims on brief. Michoff, Jr., has failed to meet his burden of
proof. We therefore sustain respondent on this issue.
Limousine Activity
In her notice of deficiency, respondent disallowed Schedule C
deductions claimed by Michoff, Jr., on his 1989 income tax return
10
(...continued)
he claims to have sold on or prior to Mar. 26, 1990.
- 36 -
with regard to an alleged limousine service. Respondent's
determinations carry the presumption of correctness. Michoff,
Jr., must establish that he is entitled to the claimed
deductions. Rule 142(a). Deductions are a matter of legislative
grace; petitioner has the burden of showing that he is entitled
to any deduction claimed. New Colonial Ice Co. v. Helvering, 292
U.S. 435, 440 (1934).
Michoff, Jr., attempts to meet his burden of proof through
his own testimony as well as various receipts. On brief,
Michoff, Jr., had no objection to the following proposed findings
of fact by respondent relating to the receipts:
The receipts are deficient as follows:
a. The copy of the receipt in the amount of
$405.61 does not indicate what it's for, or who issued
it, or when it was made.
b. A receipt in the amount of $18.18 is for the
1988 tax year.
c. A receipt in the amount of $49.19 is for the
1990 tax year.
d. A receipt in the amount of $4.91 is for the
1991 tax year.
e. The All Parts Auto Store receipts, B&M
Automotive Parts receipts, Carl Chevrolet receipts,
Kragen Auto receipts, Checker Schuck's Kragen receipt,
49er Auto Parts invoice, Color-rite Paint Co. invoice,
C&H Paint & Equipment Supply invoice, and Carl
Chevrolet invoice do not indicate whether they are for
a limousine activity or for some other use, such as
personal use.
f. Many of these items are invoices and do not
indicate that payments were made.
g. The Swift Dodge document statement for $250.00
is an invoice and not a receipt.
- 37 -
h. The Central Valley Towing document is
duplicated several times. The insurance application is
duplicated several times. The check made out to
Gilbert Insurance is duplicated several times. The
Swift Dodge document is duplicated several times.
Michoff, Jr., has offered no evidence that the claimed
deductions were ordinary and necessary to a trade or business.
The receipts offered do not indicate that they were incurred with
regard to the limousine activity of Michoff, Jr., or with regard
to any business activity. Additionally, many of the receipts
offered to substantiate the claimed deductions were duplicated
and were for tax years not subject to this issue. Michoff, Jr.,
has failed to substantiate most of his claimed deductions, and he
has failed to establish that any of the claimed deductions were
for expenses ordinary and necessary to a trade or business.
Accordingly, respondent's determination regarding this issue is
sustained.
Failure To Timely File Federal Income Tax Returns
Respondent contends that Michoff, Jr., is liable for the
addition to tax for failure to timely file for the 1986 and 1987
tax years. Michoff, Jr., contends that he had less than $3,000
of income for each of those years and thus was not required to
file a return. It is undisputed that Michoff, Jr., failed to
file an income tax return for the 1986 and 1987 tax years.
Section 6651(a) provides an addition to tax for failure to
timely file an income tax return by the prescribed due date
unless the taxpayer can establish that such failure was due to
reasonable cause and not willful neglect. Although reasonable
- 38 -
cause is not defined in the Code, the regulations state: “If the
taxpayer exercised ordinary business care and prudence and was
nevertheless unable to file the return within the prescribed
time, then the delay is due to a reasonable cause.” Sec.
301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect has
been defined as a “conscious, intentional failure or reckless
indifference.” United States v. Boyle, 469 U.S. 241, 245 (1985).
In the instant case regarding Michoff, Jr., we have found
that he did have income sufficient to require the filing of a
return in both the 1986 and 1987 tax years. The unverified
belief of Michoff, Jr., that he had no taxes owing does not
constitute reasonable cause of the sort that will allow him to
escape the addition to tax under section 6651(a)(1). See Olsen
v. Commissioner, T.C. Memo. 1993-432. We sustain respondent on
this issue.
Failure To Pay Estimated Tax
Respondent determined an addition to tax for failure to pay
estimated tax for the 1986 and 1987 tax years for Michoff, Jr.
Section 6654 imposes an addition to tax for failure to pay
estimated income tax. Michoff, Jr., contends that he did not
have sufficient income in 1986 or 1987 to require him to pay
estimated taxes. Michoff, Jr., bears the burden of proving that
he is not liable for this penalty. Rule 142(a). Michoff, Jr.,
contends that he had a loss carryover from his business in 1985
and, thus, did not have sufficient income in 1986 or 1987 to
require him to pay estimated taxes. Michoff, Jr., offered no
- 39 -
proof regarding his entitlement to such a loss carryforward nor
that such a loss would have reduced his income such that he would
not be required to pay estimated taxes. Once again he makes
conclusory and unsupported arguments that fail to support his
burden of proof. Respondent is sustained on this issue.
Substantial Understatement Penalty--Michoff, Jr.
Respondent determined an addition to tax of $2,095 under
section 6661 for the tax year 1988 for Michoff, Jr. Section
6661(a) imposes an addition to tax of 25 percent of the amount of
any underpayment attributable to a substantial understatement of
tax. An understatement is the difference between the amount
required to be shown on the return and the amount actually shown
on the return and is substantial if it exceeds the greater of (1)
10 percent of the tax required to be shown on the return for a
taxable year, or (2) $5,000. Sec. 6661(b)(1) and (2)(A). The
understatement is reduced to the extent that the taxpayer has (1)
adequately disclosed his or her position or (2) has substantial
authority for the tax treatment of an item. Sec. 6661; sec.
1.6661-6(a), Income Tax Regs. Petitioner has the burden of
proving he is not liable for the addition to tax. Rule 142(a).
The only argument of Michoff, Jr., is that he is not liable
for understating his taxes in 1988 and, thus, should not be
charged with the substantial understatement addition to tax.
Based on our findings in this case, there was a substantial
understatement, and, thus, respondent's determination is
sustained.
- 40 -
Additions to Tax for Negligence and Accuracy-related Penalty
Respondent determined that all petitioners in these cases
are liable for additions to tax or accuracy-related penalties for
negligence for the years in which they had underpayments.
Different sections apply to the various years in issue. Secs.
6653(a)(1)(A) and (B) (for 1986 and 1987), 6653(a)(1) (for 1988),
6662(a) (for 1989 and 1990). Negligence is defined as a lack of
due care or failure to do what a reasonable and ordinarily
prudent person would do under the circumstances. Neely v.
Commissioner, 85 T.C. 934, 947-948 (1985). Petitioners bear the
burden of proving that respondent's determinations are erroneous.
Rule 142(a).
The Dickersons claim that they should not be liable for the
negligence penalty because they are entitled to the deductions
they claimed or because their unreported rental income was offset
by expenses. This is essentially arguing that they are not
liable for the negligence penalty because they did not underpay
their tax. We have already found that they did underpay their
tax. Respondent is sustained with respect to the negligence
penalty resulting from underpayments by the Dickersons.
The Michoff, Srs., “admit they unintentionally omitted items
from their tax return due to inadvertence and lack of knowledge”
but contend that they should not be burdened with additions to
tax for negligence or the accuracy-related penalty. The Michoff,
Srs., have failed to offer any proof that they were not negligent
in their underpayment. Respondent is sustained with respect to
- 41 -
the additions to tax and the negligence penalty resulting from
underpayments by the Michoff, Srs.
For the taxable years 1986, 1987, and 1988, the contention
of Michoff, Jr., that he is not liable for additions to tax for
negligence consists of one sentence: “Michael Michoff, Jr., is
not liable for the penalties due under IRC [sections]
6653(A)(1)(a) and 6653(A)(1)(b) because he was not guilty of
negligence or disregard of rules or regulations.” This
contention is not an argument; it is a conclusion. Respondent is
sustained on this issue.
Michoff, Jr., presented no argument that he is not liable
for the negligence penalty for the 1989 tax year. The burden
rests with petitioner to prove that respondent's deteminations
are in error. Rule 142(a). We cannot be sure that petitioner
intended to abandon the issue, but in any case respondent's
determination of the applicable penalty resulting from the
underpayment of tax must be sustained with respect to the 1989
tax year of Michoff, Jr.
For the 1990 tax year Michoff, Jr., and Kimberly Michoff
argue that they are not liable for the accuracy-related penalty
because they have accounted for all of the deposits which were
questioned by the revenue agent. As we have already found, they
did not. Respondent is sustained on this issue.
- 42 -
We have considered all arguments by petitioners and, to the
extent not discussed above, find them to be irrelevant or without
merit.
To reflect the foregoing,
Decisions will be
entered under Rule 155.