Pearson v. Comm'r

T.C. Memo. 2007-341
UNITED STATES TAX COURT
CREED J. PEARSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16460-06. Filed November 19, 2007.
Creed J. Pearson, pro se.
Mary Ann Waters, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GOEKE, Judge: Respondent determined deficiencies in, and
additions to, petitioner’s Federal income tax for taxable years
1999 through 2003 as follows:
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Additions to Tax
Sec. Sec. Sec.
Year Deficiency 6651(f) 6651(a)(2) 6654
1999 $379,134 $274,850.40 $94,776.00 $18,346.93
2000 281,581 204,144.05 70,394.50 15,040.43
2001 452,670 328,185.75 113,167.50 18,090.37
2002 109,345 79,275.13 20,775.55 3,653.96
2003 70,143 50,853.68 9,118.59 1,835.66
All section references are to the Internal Revenue Code in effect
for the years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure. After concessions,1 the
issues remaining for decision are:
(1) Whether petitioner is entitled to any expense
deductions claimed on Schedule A, Itemized Deductions, or
Schedule C, Profit or Loss From Business, above those that
respondent concedes. We hold that he is not;
(2) whether petitioner may audit an organization that is
not a party to this case and pay the taxes he owes from the
proceeds of that audit. We hold that the Internal Revenue Code
(the Code) does not permit this offset against petitioner’s
income tax deficiency;
1
Petitioner concedes that he received income in the amounts
that respondent determined for the years in issue. Respondent
concedes that petitioner is entitled to some Schedule A itemized
deductions and Schedule C business expense deductions.
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(3) whether petitioner is liable for an addition to tax for
fraudulent failure to file a return under section 6651(f) or,
alternatively, an addition to tax for failure to file a timely
return under section 6651(a)(1), for each year in issue. We hold
that he is liable for an addition to tax for failure to file a
timely return under section 6651(a)(1) for each year;
(4) whether petitioner is liable for an addition to tax for
failure to pay his tax liability under section 6651(a)(2) for
each year in issue. We hold that he is;
(5) whether petitioner is liable for an addition to tax for
failure to pay estimated tax under section 6654 for each year in
issue. We hold that he is liable for additions to tax for years
2000 through 2003, but not for 1999.
FINDINGS OF FACT
Some facts have been stipulated and are so found. The
stipulated facts and the exhibits submitted therewith are
incorporated herein by this reference.
At the time he filed his petition, petitioner resided in
Arlington, Virginia.
Petitioner received taxable income of $926,511, $692,617,
$1,116,134, $284,120, and $201,718 in 1999, 2000, 2001, 2002, and
2003, respectively. The bulk of this was self-employment income
that petitioner received as a hospital reimbursement consultant.
During the relevant period, petitioner worked with nearly 1,000
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hospitals reviewing and preparing Medicare cost reports.
Petitioner performed all of the auditing work himself, and the
hospitals compensated him with a percentage of the additional
payments he obtained for them. In connection with his business,
petitioner paid commissions to business associates who obtained
contracts for him, made Freedom of Information Act (FOIA)
requests, and incurred other expenses. Petitioner also paid
$75,503 of mortgage interest during this period.
Petitioner began his business before 1996, and he timely
filed his Federal income tax returns and paid his tax liabilities
every year through 1998. Petitioner filed extensions to file tax
returns for years 1999 through 2003, but he did not file returns
for those years. During an examination of the years in issue, a
revenue agent attempted to meet with petitioner and to obtain
documents from him, but petitioner was unresponsive. As a
result, respondent requested documents from third parties and
prepared returns for years 1999 through 2003 pursuant to section
6020(b). Petitioner did not make estimated tax payments or have
any withholding for those years, but he did make a $112,000
payment toward his 2000 tax liability.
On May 24, 2006, respondent issued a notice of deficiency to
petitioner for years 1999 through 2003, and petitioner timely
petitioned this Court contesting respondent’s determinations.
Petitioner strongly opposes the beliefs and actions of a
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particular organization (the Organization), and he asks that we
allow him to audit the Organization and pay the taxes he owes out
of the proceeds of that audit, even though petitioner’s tax
liability is not related to the Organization. Petitioner has not
filed Federal income tax returns for any year after 2003, and he
does not intend to file voluntarily any returns or pay any tax
until respondent takes some action against the Organization. In
trying to resolve some of the issues in this case, petitioner has
provided summaries of his expenses for the years in issue but has
not provided any corroborating documents.
OPINION
Deductions
A taxpayer bears the burden of proving that the
Commissioner’s determinations set forth in the notice of
deficiency are incorrect. Rule 142(a)(1); Welch v. Helvering,
290 U.S. 111, 115 (1933). Tax deductions are a matter of
legislative grace, and a taxpayer has the burden of proving that
he is entitled to the deductions claimed. Rule 142(a)(1);
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); New
Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). In
addition, a taxpayer must keep sufficient records to substantiate
any deductions claimed. Sec. 6001; New Colonial Ice. Co. v.
Helvering, supra at 440. Section 7491(a) does not apply in this
case because petitioner has not substantiated the deductions he
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seeks or shown that he has maintained sufficient records. Sec.
7491(a)(2)(A) and (B).
In his petition, petitioner claimed that respondent erred by
not computing his deductions for Schedule C expenses, Schedule A
interest, charitable contributions, and property taxes paid
during the years in issue, but he did not state how much these
expenses amounted to. As evidence that he is entitled to
deductions, petitioner introduced two summaries of his expenses
during the years in issue. The summaries contain general
captions such as “PHONE”, “DONATIONS”, and “AM EXP GOLD”, the
amounts of the expenses, and usually dates for each expense.
However, the summaries provide no indication of which expenses
were for business purposes and which were for personal purposes,
and it is not clear which of the expenses petitioner is seeking
to deduct. Petitioner credibly testified that he paid
commissions to business associates in exchange for referrals, and
the names of these associates match some of the captions on the
expense summaries.
On the basis of this evidence and information that
petitioner provided while negotiating with respondent, respondent
concedes that under section 162(a) petitioner is entitled to
$214,645, $122,520, $239,965, $82,986, and $29,904 of Schedule C
business expense deductions for commissions and FOIA request fees
paid for taxable years 1999, 2000, 2001, 2002, and 2003,
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respectively. On the basis of third party information returns,
respondent also concedes that under section 163 petitioner is
entitled to Schedule A deductions for mortgage interest expenses
in the amounts of $22,000, $18,933, $17,909, and $16,661 for
taxable years 2000, 2001, 2002, and 2003, respectively. We
accept these concessions. See Cohan v. Commissioner, 39 F.2d
540, 543-544 (2d Cir. 1930).
As to the remaining expenses, petitioner offered no evidence
that he actually incurred them or that he is entitled to a
deduction for them, and therefore he has not met his burden of
proving that he is entitled to claim deductions for any expenses
to the extent that they exceed respondent’s concessions.
Petitioner’s Audit Request
Petitioner asks that we allow him to audit the Organization,
which is not a party to this case, and that he be able to pay his
taxes out of the proceeds of that audit. There is no provision
in the Code that gives us the authority to allow one taxpayer to
audit another taxpayer in order to reduce his tax deficiency.
Therefore, we deny petitioner’s request.
Additions to Tax
Section 6651(f) and (a)
Respondent asserts that petitioner is liable for an addition
to tax under section 6651(f) for each year in issue. Section
6651(f) imposes a penalty of up to 75 percent of the amount of
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tax required to be shown on the tax return if a taxpayer fails to
file a required return due to fraud. Alternatively, respondent
asserts that petitioner is liable for additions to tax under
section 6651(a). Section 6651(a) imposes an addition to tax of
up to 25 percent of the amount required to be shown as tax if a
taxpayer fails to file a timely return.
Petitioner concedes that he received significant income each
year from 1999 through 2003, and he failed to file Federal income
tax returns for those years. Therefore, to determine whether
petitioner is liable for the additions to tax under section
6651(f), we need only to determine whether petitioner possessed
the requisite fraudulent intent.
The Commissioner bears the burden of proving fraud by clear
and convincing evidence. Sec. 7454(a); Rule 142(b). Mere
suspicion of fraud is not sufficient. Petzoldt v. Commissioner,
92 T.C. 661, 700 (1989). Fraud is an intentional wrongdoing
designed to evade taxes believed to be owing. Miller v.
Commissioner, 94 T.C. 316, 332 (1990).2 Therefore, the
Commissioner must show that the taxpayer failed to file a
required return with the intent to evade taxes known or believed
2
We consider the same factors under sec. 6651(f) that are
considered in imposing the fraud penalty under sec. 6663 and
former sec. 6653(b). Clayton v. Commissioner, 102 T.C. 632, 653
(1994); see also Neely v. Commissioner, 116 T.C. 79, 85-86 (2001)
(applying the extensive body of law addressing fraud in the
context of income, estate, and gift taxes to the employment tax
context).
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to be owing by conduct intended to conceal, mislead, or otherwise
prevent the collection of taxes. Parks v. Commissioner, 94 T.C.
654, 661 (1990). The Commissioner may not simply rely upon the
taxpayer's failure to show error in the determinations of the
deficiencies. DiLeo v. Commissioner, 96 T.C. 858, 873 (1991),
affd. 959 F.2d 16 (2d Cir. 1992). Furthermore, the mere failure
to report income is not sufficient to establish fraud, Merritt v.
Commissioner, 301 F.2d 484, 487 (5th Cir. 1962), affg. T.C. Memo.
1959-172, but a pattern of consistent underreporting of income,
especially when accompanied by other circumstances showing an
intent to conceal, may justify the inference of fraud, Holland v.
United States, 348 U.S. 121, 139 (1954); Parks v. Commissioner,
supra at 664. However, where there is no evidence of fraudulent
intent, such as falsification, concealment, or deception, the
Commissioner has not carried his burden. Kotmair v.
Commissioner, 86 T.C. 1253, 1260 (1986).
After considering petitioner’s testimony as a whole, we find
that petitioner lacked the requisite fraudulent intent at the
times he was required to file returns for 1999 through 2003. As
respondent points out, petitioner failed to file returns for 1999
through 2003, did not make estimated tax payments for those
years, and was not particularly cooperative with respondent, and
these are “badges of fraud” from which we may infer fraudulent
intent. Bradford v. Commissioner, 796 F.2d 303, 307 (9th Cir.
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1986), affg. T.C. Memo. 1984-601. However, respondent offered no
evidence that petitioner tried to mislead, conceal, or deceive
respondent. Mere unhelpfulness is not sufficient. Petitioner
has clearly been consumed with the Organization for many years,
and his testimony at trial was strong evidence that this
obsession, rather than an intention to deceive, was the cause of
petitioner’s failure to file timely returns. While his current
position is that he will not file returns or pay taxes unless his
demands are met, there is no evidence that petitioner had formed
this intention when he was required to file his returns for 1999
through 2003. Therefore, we find that respondent has failed to
carry his burden of proving fraud by clear and convincing
evidence.
Section 6651(a)(1) imposes an addition to tax if a taxpayer
fails to timely file a required Federal income tax return, unless
the taxpayer shows that the failure is due to reasonable cause
and not due to willful neglect. Section 7491(c) places the
burden of production on the Commissioner to present sufficient
evidence showing that the imposition of an addition to tax or
penalty on a taxpayer is appropriate. Higbee v. Commissioner,
116 T.C. 438, 446 (2001). If the Commissioner makes such a
showing, the burden of proof is on the taxpayer to raise any
issues that would negate the appropriateness of the penalty, such
as reasonable cause. Id.
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Petitioner stipulated that he failed to file Federal income
tax returns for 1999 through 2003. Furthermore, petitioner’s
only explanation for failing to file is that he was not sure that
he was required to file, which is not a reasonable cause in these
circumstances. See United States v. Boyle, 469 U.S. 241, 251
(1985). Therefore, we find that petitioner is liable for an
addition to tax under section 6651(a) for each year in issue.
Section 6651(a)(2)
Respondent claims that petitioner is liable for an addition
to tax under section 6651(a)(2) for each year in issue. Section
6651(a)(2) imposes an addition to tax of 0.5 percent per month
(up to a maximum of 25 percent) for failure to make timely
payment of the tax shown on a return, unless the taxpayer shows
that the failure is due to reasonable cause, and not due to
willful neglect. The addition to tax applies only when an amount
of tax is shown on a return. Cabirac v. Commissioner, 120 T.C.
163, 170 (2003). Under section 6651(g), a return prepared by the
Secretary pursuant to section 6020(b) is treated as a return
filed by the taxpayer for the purpose of determining the amount
of an addition to tax under section 6651(a)(2).
The Commissioner bears the burden of producing evidence that
the imposition of an addition to tax under section 6651(a)(2) is
appropriate, and upon such proof the taxpayer bears the burden of
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proving that his failure to pay was due to a reasonable cause.
Sec. 7491(c); Higbee v. Commissioner, supra.
The parties stipulated that respondent prepared returns
pursuant to section 6020(b), and petitioner has not paid any of
the liability shown on those returns above the $112,000 he
already paid toward his 2000 tax liability. Petitioner’s
statement that he will pay his tax liabilities when respondent
takes action against the Organization does not establish that he
failed to pay his tax liabilities due to a reasonable cause, and
therefore we hold that petitioner is liable for the addition to
tax under section 6651(a)(2) for each of the years 1999 through
2003 as computed by respondent.
Section 6654
Respondent also determined that petitioner is liable for
additions to tax under section 6654 for failure to pay estimated
income taxes for 1999 through 2003. A taxpayer has an obligation
to pay estimated tax for a particular year only if he has a
“required annual payment” for that year. Sec. 6654(d). A
“required annual payment” is equal to the lesser of (1) 90
percent of the tax shown due for the year in issue (or, if no
return is filed, 90 percent of his tax for such year), or (2) if
the taxpayer filed a return for the immediately preceding taxable
year, 100 percent of the tax shown on that return. Sec.
6654(d)(1)(B). If the adjusted gross income shown on the
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taxpayer’s return for the preceding taxable year exceeds
$150,000, a higher percentage may apply. Sec. 6654(d)(1)(C).
Respondent has proven that petitioner (1) was required to
file returns for 1999 through 2003, (2) did not file returns for
those years, (3) had an obligation to pay tax for each of those
years, and (4) did not make any estimated tax payments for those
years or have any tax withheld. Therefore, respondent has met
his burden of production with respect to taxable years 2000
through 2003 because petitioner had a required annual payment
under section 6654(d)(1)(B) for each of those years. Sec.
7491(c). Petitioner has provided no contrary evidence, and we
find that no exemption under section 6654(e) applies.
Accordingly, we hold that petitioner is liable for the additions
to tax under section 6654 for taxable years 2000 through 2003.
With respect to taxable year 1999, petitioner stipulated
that he had a tax liability for 1998 and paid this liability, but
the record contains no evidence as to the amount of petitioner’s
tax liability for 1998. We have held that the Commissioner must
introduce evidence showing whether a taxpayer filed a return for
the year preceding the year in issue and, if so, the amount of
the tax shown on the return, in order to meet his burden; without
that information, the Court cannot complete the comparison
required by section 6654(d)(1)(B). Wheeler v. Commissioner, 127
T.C. 200, 212 (2006); Smith v. Commissioner, T.C. Memo. 2007-121;
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Brooks v. Commissioner, T.C. Memo. 2007-80. The present case is
partially distinguishable because it is undisputed that
petitioner filed a return for 1998, he had some tax liability in
1998, he made no estimated tax payments for 1999, and he had no
tax withheld for 1999. Therefore, petitioner had an obligation
to make some amount of estimated tax payment for 1999, but he
failed to do so. However, respondent produced no evidence of how
much tax was shown on petitioner’s return for 1998. Without this
evidence we cannot ascertain whether the required annual payment
for 1999 is determined by the amount of petitioner’s tax
liability for 1999, as respondent determined, or the amount shown
on his 1998 return, which could yield a much lower addition to
tax. Therefore, respondent has not met his burden of producing
evidence that petitioner is liable for an addition to tax under
section 6654(a) for taxable year 1999. See Wheeler v.
Commissioner, supra; Higbee v. Commissioner, supra.
Conclusion
In sum, we conclude that petitioner is not entitled to any
Schedule A itemized deductions or Schedule C business expense
deductions above those that respondent has conceded. In
addition, petitioner’s proposal to audit the Organization to
offset his income tax deficiency is not permitted by the Code.
Finally, petitioner is liable for additions to tax under section
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6651(a)(1) and (2) for each year in issue, and under section 6654
for years 2000 through 2003.
To reflect the foregoing and concessions by the parties,
Decision will be entered
under Rule 155.