T.C. Memo. 2011-227



                      UNITED STATES TAX COURT



    BERNARD J. WILLIAMS AND MARTHA WILLIAMS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 27928-08.                Filed September 22, 2011.



     Bernard J. Williams and Martha Williams, pro sese.

     Karen J. Lapekas, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


     MORRISON, Judge:   On August 18, 2008, the IRS issued a

notice of deficiency to Bernard J. Williams and Martha Williams.

The notice stated that the IRS had determined that for tax year

2006:   (1) the Williamses had a $99,099 deficiency in income tax,

and (2) the Williamses were liable for a $19,815.80 accuracy-

related penalty.   On November 15, 2008, the Williamses filed a
                                  -2-

petition under Internal Revenue Code section 6213(a) challenging

the IRS’s determinations.1   This Court has jurisdiction under

section 6214 to redetermine the deficiency and the penalty

determined in the notice of deficiency.      There are three issues

for decision:

     (1) What is the amount of business-expense deductions

allowable for Bernard Williams’ Schedule C business of serving as

an office manager for Southeast Capital Mortgage Co.?      We hold

that the amount is $6,790.

     (2) Are the Williamses liable for additional self-employment

tax as a result of adjustments to the income from the Schedule C

business?   We hold they are liable.

     (3) Are the Williamses liable for the section 6662(a)

penalty on inaccurate tax returns?      We hold they are liable.

                          FINDINGS OF FACT

     Some of the facts have been stipulated by Bernard Williams

and the IRS.    These stipulated facts are adopted by the Court.2

Bernard and Martha Williams are married.      They lived in Florida

when they filed their petition.




     1
      Unless otherwise indicated, references to sections are to
the Internal Revenue Code, as amended, effective for the
Williamses’ 2006 tax year.
     2
      Martha Williams did not sign the stipulation.     Nor did she
appear at trial.
                                  -3-

     Bernard Williams was self-employed as the “office manager”

of the Miami Lakes branch of Southeast Capital Mortgage Co.       He

was paid on a commission basis.    He claims he had to split each

commission on a 50-50 basis with a loan officer.    This claim is

not supported by the evidence, as we explain below.     Bernard

Williams incurred other expenses as office manager.     These

expenses were not reimbursed.

     According to the stipulation, Southeast Capital Mortgage Co.

wrote checks totaling $119,439.84 to Bernard Williams during

2006.    However, Southeast Capital Mortgage Co. reported to the

IRS on an information return that it had paid Bernard Williams

$324,128 of nonemployee compensation during 2006.

     For 2006, the Williamses filed a joint federal income-tax

return (Form 1040, U.S. Individual Income Tax Return).     Included

with the return was a Schedule C, Profit or Loss From Business,

for a business referred to as “Southeast Capital Mortgage Co.”

This Schedule C reflected the income Bernard Williams earned as

an office manager for Southeast Capital Mortgage Co.3     The

Schedule C reported gross receipts of $75,000.    It also reported

expenses of $73,065, which comprised:

     •      $37,500 of commission expenses (i.e., exactly one-half

            of the $75,000 in reported gross receipts);



     3
      The Williamses filed a second Schedule C for another
business, but the IRS did not challenge it.
                                -4-

     •    $15,575 of car-and-truck expenses;

     •    $13,200 of expenses for “Other business property”; and

     •    $6,790 of other expenses, which were composed of (1)

          $1,500 for legal-and-professional services, (2) $840

          for office expenses, (3) $2,500 for supplies expenses,

          (4) $1,300 for travel expenses, and (5) $650 for

          deductible meals-and-entertainment expenses.

The profit was reported as $1,935, which is equal to $75,000

minus $73,065.

     In the notice of deficiency, the IRS determined that:

     •    of the $73,065 in expenses reported on the Schedule C,

          $66,275 should be disallowed and $6,790 allowed;4

     •    the gross receipts reported on the Schedule C should be

          increased from $75,000 to $324,128;

     •    the Williamses had failed to report $73 of dividend

          income;

     •    the Williamses were liable for additional self-

          employment tax; and

     •    the Williamses were liable for the section 6662(a)

          penalty.

     At trial, Bernard Williams and the IRS agreed that the

correct amount of gross receipts attributable to the Schedule C


     4
      The $6,790 comprised all the expenses reported on the
Schedule C except the commission expenses, the car-and-truck
expenses, and the expenses for “Other business property.”
                                -5-

business was $119,439.84.   In a joint status report filed on

February 5, 2010, the Williamses conceded that the IRS’s $66,275

adjustment to Schedule C business expenses and its $73 adjustment

to dividend income were correct.

                              OPINION

     One procedural matter requires attention before proceeding

to the merits of this case.   When the case was called for trial,

Martha Williams did not appear, nor was there any appearance on

her behalf.   Bernard Williams did appear.   The IRS filed a motion

to dismiss as to Martha Williams for lack of prosecution, and

this motion was taken under advisement to be acted upon at the

time the merits of the case were decided.    As Bernard Williams

had no authority to represent his wife, and there was no other

appearance by her or on her behalf, the motion to dismiss will be

granted and decision will be entered against Martha Williams for

a deficiency and a penalty in the same amounts as those

ultimately determined against Bernard Williams.

1.   The Allowable Business-Expense Deductions for the “Southeast
     Capital Mortgage Co.” Business Are $6,790.

     On the Schedule C for the “Southeast Capital Mortgage Co.”

business, the Williamses claimed deductions for expenses of

$73,065, an amount which included $37,500 of commission expenses.

In the notice of deficiency, the IRS took the position that none

of the commission expenses were deductible and that the total

deductible Schedule C expenses for the business were $6,790.    On
                                -6-

November 12, 2009, the Court ordered the parties to file, on or

before February 12, 2010, a report advising the Court of the

status of the case and, “in particular, the progress made towards

resolution, by settlement or otherwise, of the issues raised in

this matter.”   Pursuant to that order, the Williamses and the IRS

filed a joint status report on February 5, 2010.    The report

stated that the Williamses conceded that the IRS’s adjustment to

the Schedule C business-expense deductions was correct, which

meant that they agreed that the allowable Schedule C business-

expense deductions were only $6,790.   The status report was

signed by counsel for the IRS and by both of the Williamses.     The

IRS pretrial memorandum stated that the parties had settled the

adjustments in the notice of deficiency that related to the

Schedule C business-expense deductions, a statement which is

consistent with what the parties said in the status report.      The

Williamses did not prepare a pretrial memorandum.    When the case

was tried on December 8, 2010, Bernard Williams asserted that the

Williamses were entitled to Schedule C business-expense

deductions for $59,719.92 of commission expenses, an amount in

addition to the $6,790.5

     The status report bars Bernard Williams from contending that

the deductible Schedule C business expenses are greater than


     5
      The $59,719.92 is one-half of the $119,439.84 that the
parties agreed at trial was the gross receipts attributable to
the Schedule C business.
                                -7-

$6,790.   Whether the statement in the status report is considered

a settlement or a stipulation, Bernard Williams is precluded from

repudiating it.   There is no evidence that it was based on fraud

or mutual mistake.   See Dorchester Indus. v. Commissioner, 

, 330 (1997) (quoting Manko v. Commissioner, T.C. Memo.

1995-10 (“‘This Court has declined to set aside a settlement duly

executed by the parties and filed with the Court in the absence

of fraud or mutual mistake.’”)), affd. without published opinion

(3d Cir. 2000).   Allowing Bernard Williams to

contend that the deductible Schedule C business expenses are

greater than $6,790 would likely prejudice the IRS, which

reasonably thought the issue had been resolved before trial.    See

Rule 91(e), Tax Court Rules of Practice and Procedure

(stipulations are binding, although the Court may permit a party

to contradict a stipulation if justice so requires).

     Even if Bernard Williams is not precluded from contending

that the correct commission-expense deductions totaled

$59,719.92, he has failed to show by a preponderance of the

evidence that he incurred any commission expenses.   Although he

testified that he paid commissions of $59,719.92, we disbelieve

this testimony given the lack of documentary evidence and the

lack of corroborating testimony.
                                 -8-

2.     The Williamses Are Liable for Additional Self-Employment Tax
       as a Result of Adjustments to the Income of the Schedule C
       Business.

       Section 1401 imposes a tax on self-employment income.   Self-

employment income is defined as the gross income derived from any

trade or business activity, less deductions.     Sec. 1402(a) and

(b).    As a result of the adjustments to the Schedule C gross

receipts and expenses, the Williamses’ self-employment income is

greater than the amount reported on their return.     Moreover, they

are entitled to an income-tax deduction under section 164(f)

equal to one-half of the additional self-employment tax.

3.     The Williamses Are Liable for the Section 6662(a) Accuracy-
       Related Penalty.

       Sections 6662(a) and (b)(1) and (2) impose a penalty equal

to 20 percent of the portion of any underpayment of tax that is

attributable to (1) negligence or disregard of rules or

regulations, or (2) any substantial understatement of income tax.

The IRS has the burden of producing evidence of liability for the

section 6662(a) penalty.    See sec. 7491(c).   Bernard Williams has

the burden of proving that there is no liability for the penalty.

See Rule 142(a), Tax Court Rules of Practice and Procedure.

       We hold that the entire underpayment of the Williamses’ 2006

income tax was attributable to negligence.      Bernard Williams did

not keep books or records of his Schedule C business, “Southeast

Capital Mortgage Co.”    He admitted that the gross receipts and
                                  -9-

the commission expenses that the Williamses reported on their

Schedule C were merely guesses.

     Whether the underpayment is also attributable to a

substantial understatement of income tax will depend on the final

computation of the Williamses’ correct tax liability.     An

understatement of tax is the amount of tax required to be shown

on a return, minus the amount actually shown, minus amounts

attributable to tax-return positions for which there was

substantial authority or a reasonable basis.   See sec.

6662(d)(2)(A) (defining understatement) and (B) (understatement

reduced for (1) positions for which there is substantial

authority and (2) positions for which there is reasonable basis

that are factually disclosed on the return).   The Williamses

reported an incorrect tax liability on their return.    It has not

been demonstrated that there was substantial authority or a

reasonable basis for the underreporting.   See Higbee v.

Commissioner, 

, 446 (2001) (taxpayer has burden of

proving exemption from penalty under substantial-authority

provision or “similar provisions”; the IRS does not have burden

of production).   Thus, there was an understatement of income tax.

An understatement is substantial if it exceeds $5,000 and 10

percent of the tax required to be shown on the return.     See sec.

6662(d)(1)(A).    The computation under Rule 155 of the Tax Court

Rules of Practice and Procedure will determine the amount of the
                                 -10-

Williamses’ understatement.   If it is substantial, then their

underpayment was attributable to a substantial understatement of

income tax.

     Bernard Williams has not shown that in filing the erroneous

tax return the Williamses acted with reasonable cause or in good

faith.   See sec. 6664(c)(1) (no penalty imposed if there was

reasonable cause for tax return position and the taxpayer acted

in good faith); Higbee v. Commissioner, supra at 446 (taxpayer

has burden of proving reasonable cause and good faith; IRS does

not have burden of production).    The Williamses are therefore

liable for the section 6662(a) penalty.

     To reflect the foregoing,


                                        Decision will be entered under

                                 Rule 155 with respect to Bernard

                                 Williams, and an appropriate order

                                 and decision will be entered with

                                 respect to Martha Williams.