Decisions will be entered under
MARVEL,
| 2006 | $229,591 | $51,487 | $34,324 | $10,825 |
| 2007 | 379,339 | 85,351 | 43,624 | 17,265 |
In an amended answer respondent asserted an increased deficiency and increased additions to tax for 2006. The deficiencies and additions to tax with respect to petitioner's Federal income tax in dispute are as follows:
| 2006 | $313,800 | $70,434 | $78,259 | $14,810 |
| 2007 | 379,339 | 85,351 | 43,624 | 17,265 |
After concessions, 1 the issues for decision are: (1) whether petitioner had unreported income of $207,400 and $1,055,000 for 2006 and 2007, respectively; (2) whether and to what extent petitioner is entitled to business expense deductions for the years at issue; (3) whether petitioner is liable for self-employment *27 tax for the years at issue; (4) whether and to 2013 Tax Ct. Memo LEXIS 28">*29 what extent petitioner must recognize short-term capital gain from the sale of a property in 2006; (5) whether petitioner is entitled to joint filing status for 2007; and (6) whether petitioner is liable for additions to tax under
Some of the facts have been stipulated and are so found. The stipulation of facts is incorporated herein by this reference. Petitioner resided in California when he filed his petition.
Petitioner, a permanent U.S. resident, works in the construction industry. In 1999 2013 Tax Ct. Memo LEXIS 28">*31 he married Erika Avila Blanca (Mrs. Reynoso). He has seven children; Mrs. Reynoso is the mother of his three youngest children.
On November 27, 2005, Aida Avila, petitioner's relative, signed a grant deed transferring the title to a property at Berkshire Drive, Riverside, California (Berkshire property), to petitioner, ostensibly for no consideration. 4 Before transferring the title to petitioner Ms. Avila refinanced the Berkshire property and secured a new mortgage. Petitioner and Mrs. Reynoso moved into the Berkshire property at some point in 2005.
While residing at the Berkshire property petitioner decided to renovate and improve the property. On April 3, 2006, he secured an $85,000 loan from Money Solutions Group, which he used in part to fund renovation work on the Berkshire property, including improvements to the horse stables and driveway, installation of a tennis court and a block wall, and interior improvements, such as installation of crown molding and new flooring. On a date that is not in the record he hired Alfredo's Welding to perform welding work on the horse stables. Alfredo's *29 2013 Tax Ct. Memo LEXIS 28">*32 Welding had a mechanic's lien on the Berkshire property as security for payment.
On or about May 31, 2006, petitioner sold the Berkshire property for $675,000. Petitioner received a closing statement showing gross proceeds of $675,000 with respect to the sale and various payees who received proceeds from the sale. At the closing petitioner received a check for $5,243, the balance due to him after payment of various liabilities and expenses. Respondent received a Form 1099-S, Proceeds From Real Estate Transactions, from New Century Title Co. (New Century), on which New Century reported that petitioner received gross proceeds of $675,000 from the sale of the Berkshire property.
On August 14, 2006, petitioner purchased property at Ridge Point Way, Riverside, California (Ridge Point property). Petitioner and Mrs. Reynoso resided at the Ridge Point property beginning in August 2006 and throughout 2007.
In 1997 petitioner began working as a contractor for Nijjar Realty, Inc., d.b.a. PAMA Management Co. (PAMA), a property management company. 5 During the years at issue he worked for PAMA as an independent contractor under *30 the trade names R&R Construction 2013 Tax Ct. Memo LEXIS 28">*33 and Los Brothers Co., his sole proprietorship construction businesses.
During 2006 and continuing until sometime in early 2007 petitioner also worked with Peter Ortiz to provide construction services for PAMA. After petitioner ceased working with Mr. Ortiz on joint projects, Mr. Ortiz, doing business as Peter Ortiz RCI, continued to provide construction services to PAMA independently. However, Mr. Ortiz and petitioner continued to help each other on PAMA projects from time to time.
As payment for petitioner's services PAMA wrote checks to R&R Construction and Los Brothers Co. When PAMA issued a check, a PAMA employee would record the check in its vendor histories. 62013 Tax Ct. Memo LEXIS 28">*34 During 2006 PAMA issued 6 checks to R&R Construction and 33 checks to Los Brothers Co., totaling $21,000 and $186,400, respectively. During 2007 PAMA issued 186 checks to R&R Construction totaling $961,000.
*31 Respondent did not receive any information returns with respect to petitioner's business activities for 2006. For 2007 respondent received the following information returns with respect to petitioner's business activities: (1) a Form 1099-MISC, Miscellaneous Income, from Peter Ortiz RCI reporting nonemployee compensation of $94,000; and (2) a Form 1099-MISC from PAMA reporting nonemployee compensation of $961,000.
Petitioner did not maintain any ledgers or journals in which he recorded the income and expenses of his construction businesses. He did not maintain records showing the addresses of the worksites and the materials, workers, and subcontractors required to complete the job. He did not maintain any form 2013 Tax Ct. Memo LEXIS 28">*35 of payroll records.
Petitioner paid both business and personal expenses using his Bank of America accounts.
During 2006 petitioner maintained two personal bank accounts at Bank of America, account No. XXXX and account No. XXXX. 7 He did not deposit any checks from PAMA into either account during 2006. However, petitioner made a number of large cash deposits into the accounts. During 2006 he maintained a third bank account under the name "R&R Construction". 82013 Tax Ct. Memo LEXIS 28">*36 He deposited at least some of his checks from PAMA into this third account.
From February 13 through November 21, 2007, petitioner maintained an account at Bank of America (account No. XXXX) titled "Ramon Reynoso R and R Construction". 9 From February 13 through December 24, 2007, he maintained an account at Bank of America (account No. XXXX) titled "Ramon Reynoso R and R Construction". 10 In 2007 he deposited 23 checks from PAMA, totaling $126,000, *33 into account No. XXXX, and he deposited 107 checks from PAMA, totaling $588,700, into account No. XXXX. 11
Petitioner failed to timely file tax returns for 2006 12 and 2007. 13 Consequently, respondent prepared substitutes for returns under
*34 2013 Tax Ct. Memo LEXIS 28">*38 In the notice of deficiency for 2006 mailed on November 30, 2009, respondent determined that petitioner had compensation income of $25,419, interest income of $20, and a short-term capital gain of $675,000. Respondent also determined that petitioner was liable for additions to tax under
In an amended answer respondent made further adjustments with respect to petitioner's 2006 taxable year. Respondent alleged in the amended answer that, in addition to the income items and capital gain set forth in the notice of deficiency, petitioner had unreported Schedule C gross receipts of $207,400 from work he performed for PAMA. 14 Respondent also determined that petitioner was liable for self-employment tax with respect to his income from PAMA.
In the notice of deficiency for 2007 mailed on April 26, 2010, respondent determined that petitioner had nonemployee 2013 Tax Ct. Memo LEXIS 28">*39 compensation of $1,055,000 and was liable for self-employment tax with respect to that compensation. Respondent also determined that petitioner was liable for additions to tax under sections *35
After receiving the notices of deficiency petitioner 152013 Tax Ct. Memo LEXIS 28">*40 filed petitions contesting respondent's determinations with respect to petitioner's 2006 and 2007 taxable years. We consolidated the two cases for trial, briefing, and opinion. During the course of the trial petitioner did not call any subcontractors, laborers, or suppliers in an effort to reconstruct his expenses. Petitioner also did not introduce any expert testimony regarding the customary profit margin in the construction industry.
Petitioner failed to file Federal income tax returns for 2002-05 and 2007-10. The record contains no indication that petitioner has ever filed Federal employment tax returns or made any estimated tax payments. Petitioner's history *36 shows an extended failure to comply with his tax reporting and payment obligations.
Generally, the Commissioner's determinations in a notice of a deficiency are presumed correct, and the taxpayer bears the burden of proving that the determinations are erroneous.
Petitioner does not contend that
Under
*38 Respondent received two information returns with respect to petitioner's income for 2007: 17 a Form 1099-MISC from PAMA showing compensation of $961,000 and a Form 1099-MISC from Peter Ortiz RCI showing compensation of $94,000. 182013 Tax Ct. Memo LEXIS 28">*43 Petitioner does not dispute that he received income from PAMA in 2007. However, he does dispute the accuracy of the amount of income PAMA reported on the Form 1099-MISC.
Petitioner has offered only vague contentions that the amount of income reported on the Form 1099-MISC submitted by PAMA is erroneous. Furthermore, in his brief, petitioner conceded that he "generally agrees" with the $961,000 amount PAMA reported on the Form 1099-MISC. Petitioner's vague assertions are insufficient to shift the burden of production to respondent under
*39 Petitioner also disputes that he received any income from Peter Ortiz RCI in 2007. Petitioner admitted, however, that he worked for Mr. Ortiz during 2007. He further testified that he deposited checks made payable to Mr. Ortiz into his own bank account. 20 Petitioner's attempt to dispute the accuracy of the information return under these circumstances is not reasonable. Accordingly, we find that the burden of production with respect to petitioner's 2007 income from Peter Ortiz RCI did not 2013 Tax Ct. Memo LEXIS 28">*44 shift to respondent under
The Commissioner has great latitude in reconstructing a taxpayer's income.
As noted above, the Commissioner's deficiency determination normally is entitled to a presumption of correctness.
The parties stipulated that during the years at issue petitioner operated two sole proprietorship construction businesses and provided construction services for PAMA through those businesses. Petitioner testified that he did not keep any sort of ledger or journal with respect to the income of his construction businesses. He stipulated that he received PAMA checks during 2006 and 2007, but he testified that he did not record his receipt of checks from PAMA. The parties also stipulated that petitioner maintained bank accounts into which he deposited receipts during the years at issue. Accordingly, we find that respondent acted reasonably in reconstructing petitioner's income. We address each year 2013 Tax Ct. Memo LEXIS 28">*47 in turn.
Respondent introduced copies of PAMA's vendor histories showing that in 2006 PAMA made payments to R&R Construction and Los Brothers Co. of $21,000 and $186,400, respectively. Respondent also introduced copies of canceled checks that PAMA wrote to R&R Construction and Los Brothers Co. during 2006. Petitioner's endorsement appears on a number of the canceled checks.
Petitioner testified that he worked on all of the properties listed on PAMA's 2006 vendor histories for R&R Construction and Los Brothers Co. He further testified that he deposited checks from PAMA into one of his bank accounts.
We find that respondent has connected petitioner with the income-producing activity. Consequently, petitioner bears the burden of proving that respondent's determinations were erroneous,
Respondent relies on PAMA's vendor histories, canceled checks, and petitioner's own admissions, all of which show that petitioner, operating through his sole proprietorship construction businesses, performed services for and received income from PAMA during 2013 Tax Ct. Memo LEXIS 28">*48 2006. Petitioner has raised no issues with *43 respect to respondent's determination and, in his brief, has conceded that he "generally agrees" with respondent's determination of unreported income for 2006. Accordingly, we sustain respondent's determination with respect to petitioner's unreported income for 2006.
For 2007 respondent introduced a wage and income transcript showing that petitioner received compensation from PAMA and Peter Ortiz RCI of $961,000 and $94,000, respectively, and that respondent received Forms 1099-MISC from PAMA and Peter Ortiz RCI with respect that income. Respondent also introduced a copy of PAMA's vendor history for R&R Construction showing payments of $961,000 to R&R Construction during 2007. Respondent introduced deposit slips for account Nos. XXXX and XXXX showing that petitioner deposited checks from PAMA made payable to R&R Construction and to Mr. Ortiz. Respondent also introduced copies of canceled checks from PAMA that petitioner had endorsed. Petitioner admitted at trial that he worked for PAMA and Mr. Ortiz during 2007.
We find that respondent has introduced sufficient evidence to connect petitioner with the income-producing activities. Consequently, 2013 Tax Ct. Memo LEXIS 28">*49 petitioner bears the burden of proving that respondent's determinations were arbitrary or erroneous.
*44 Petitioner raises two arguments with respect to respondent's reconstruction of income. First, while petitioner has conceded that he "generally agrees" that he received $961,000 from PAMA in 2007, he continues to question the accuracy of PAMA's records. Second, he disputes that he received payments from Peter Ortiz RCI during 2007.
Petitioner examined copies of the canceled checks from PAMA at trial and testified that he did not cash certain checks. With respect to some of the checks, petitioner testified that he did not work at the jobsite identified on the face of the check. With respect to at least two of the disputed checks, however, petitioner later testified that he did work at that jobsite. In addition, when respondent questioned petitioner about one of the checks during cross-examination, he admitted that he may have cashed the check and that he was not sure whether the signature on the check was his own.
In response to petitioner's testimony that he did not cash certain checks, respondent introduced copies of deposit slips for 2013 Tax Ct. Memo LEXIS 28">*50 petitioner's bank accounts showing that he deposited a number of the disputed checks into his bank accounts. While the endorsements on some of the other disputed checks are illegible, a number of the checks bear the endorsement "R&R Construction". With respect to check No. 1316, petitioner testified that he did not cash the check and that Mr. *45 Ortiz endorsed the check; however, the check bears markings including petitioner's birthdate and identification card number and a stamp indicating that it was cashed at Mira Loma Market, a place where petitioner regularly cashed checks.
Petitioner offered no evidence to explain why other individuals would have cashed or deposited checks made payable to his sole proprietorship businesses. At one point petitioner testified that he was unsure as to whether anyone else had signatory authority on his bank accounts. However, he also testified that he was the only individual with signatory authority on his bank accounts.
Petitioner's testimony was inconsistent during trial and conflicts with other credible evidence in the record. In the absence of corroborating evidence, we find his testimony regarding the disputed checks to be self-serving and unreliable. 2013 Tax Ct. Memo LEXIS 28">*51
With respect to the income from Peter Ortiz RCI, respondent introduced copies of deposit slips for petitioner's account Nos. XXXX and XXXX. The deposit slips show that during 2007 petitioner deposited checks made payable to Peter Ortiz R&R Construction, and Peter Ortiz RCI Construction, totaling $15,800, into *46 account No. XXXX. Respondent also introduced copies of canceled checks made payable to Peter Ortiz R&R Construction that petitioner cashed.
Petitioner testified that he worked on some projects for Mr. Ortiz in 2007 and that he may have received payment from Mr. Ortiz. He further testified that if Mr. Ortiz could not work on a particular PAMA project, he would complete the project under Mr. Ortiz's name. He testified that Mr. Ortiz may have performed work for PAMA under petitioner's name. Petitioner testified that he deposited checks made payable to Mr. Ortiz into his bank accounts. He further testified that the payments he received may have derived from 2013 Tax Ct. Memo LEXIS 28">*52 his sale of trucks to Mr. Ortiz in 2007.
Petitioner neither called Mr. Ortiz as a witness at trial nor introduced any documents relating to his alleged sale of trucks to Mr. Ortiz. Moreover, petitioner admitted that he worked for Mr. Ortiz during 2007. Petitioner has failed to introduce any credible evidence that he did not work for Peter Ortiz RCI or that Peter Ortiz RCI incorrectly reported compensation paid to petitioner during 2007.
Generally, a taxpayer is entitled to deduct ordinary and necessary expenses paid or incurred in carrying on a trade or business.
Deductions are a matter of legislative grace, and ordinarily a taxpayer must prove that he is entitled to the deductions he claims.
When a taxpayer establishes that he paid or incurred a deductible expense but does not establish the amount of the expense, we may estimate the amount of the deductible expense.
Petitioner 2013 Tax Ct. Memo LEXIS 28">*55 admits that he failed to maintain and produce adequate records to substantiate his claimed business expenses. 212013 Tax Ct. Memo LEXIS 28">*56 Petitioner contends, however, that this Court should estimate his business expenses pursuant to
The record contains copies of receipts and invoices from 2006-07, as well as check registry excerpts and carbon copies of checks for 2007. The majority of the *51 receipts and invoices are not credible, 262013 Tax Ct. Memo LEXIS 28">*58 2013 Tax Ct. Memo LEXIS 28">*59 2013 Tax Ct. Memo LEXIS 28">*60 and the check registry excerpts and *52 carbon copies are unreadable.
The record also contains copies of PAMA's vendor histories for 2006 and 2007. The vendor histories show that PAMA issued checks to petitioner as payment for labor, workers, materials, subcontractor expenses, permits, and inspections. With respect to the subcontractor expenses, PAMA's vendor histories 2013 Tax Ct. Memo LEXIS 28">*61 indicate that PAMA issued checks to petitioner for particular subcontractor *53 services. For example, PAMA's vendor history for Los Brothers Co. for 2006 shows that PAMA issued checks for roofing, asphalt, painting, and carport work. 27
Petitioner testified that he purchased materials to complete work for PAMA. Although this testimony may be credible, petitioner did not introduce any other credible evidence to substantiate the purported materials expenses. Furthermore, when questioned about a particular job, he could not recall what materials he purchased or how much he spent. He also testified that he may have used funds from checks designated as payments for materials for other purposes.
With respect to permit expenses he allegedly incurred, petitioner testified as follows: • He received 2013 Tax Ct. Memo LEXIS 28">*62 payment from PAMA for securing permits; • he would pay for the permits and PAMA would refund him the money; and • he used almost the full amounts of the checks designated as permit *54 payments for securing the permits.
With respect to subcontracting expenses he allegedly incurred, petitioner testified as follows: • He hired subcontractors to work on PAMA properties when necessary; • he hired subcontractors to perform asphalt, concrete, roofing, framing, 28 landscaping, stucco, extensive painting, and mold and mildew work; • he paid the subcontractors in cash and with checks; • after he paid the subcontractors, the subcontractors would sign a lien release; and • when he hired subcontractors to work on a PAMA job, he typically had a 10% to 15% profit margin. 292013 Tax Ct. Memo LEXIS 28">*63
*55 Petitioner did not introduce any credible evidence to substantiate the purported subcontracting expenses. He did not introduce copies of canceled checks showing payments to subcontractors or the lien releases the subcontractors purportedly signed. Furthermore, while petitioner testified as to the names of the subcontractors he hired for different PAMA projects, he was unable to recall the subcontractors he hired for particular PAMA projects, and he did not call any subcontractors to testify.
With respect to worker expenses that he allegedly incurred, petitioner testified as follows: • He hired daily workers and that he paid them in cash and with checks; • he typically paid daily workers $80 to $100 a day, but he paid some daily workers up to $150 per day; • he did not keep any money from the checks that PAMA designated as payment for workers; and • the daily workers signed documents indicating that they were paid in full.
*56 Petitioner did not introduce any credible evidence to substantiate the purported worker expenses. He did not introduce any documents signed by the workers 2013 Tax Ct. Memo LEXIS 28">*64 showing that petitioner actually paid the workers. Petitioner's bank statements do not show any large cash withdrawals that can be tied to a particular project or the regular occurrence of cash withdrawals in similar amounts. While petitioner testified as to the names of some of the individuals he hired as daily workers for PAMA jobs, he did not call any of the workers to testify. Furthermore, petitioner's testimony was inconsistent at best. For instance, he testified that he occasionally hired daily workers to assist with inspections, then later testified that the checks designated as payment for inspections constituted pure profit to him. He also testified that he used checks designated for worker payment to pay other expenses and that the checks that PAMA designated as payment for labor were payments to petitioner personally.
Petitioner also testified regarding his use of Ray Roy Moorefield's contractor's license as follows: • Because he did not have a contractor's license, petitioner arranged to use Mr. Moorefield's contractor's license; • Mr. Moorefield's contractor's license was under the name R&R Construction; *57 • he agreed to pay Mr. Moorefield 10% of the contract price for projects 2013 Tax Ct. Memo LEXIS 28">*65 that required use of the contractor's license; and • Mr. Moorefield would secure permits for him in some instances.
Petitioner admitted that he did not maintain records of his business expenses for the years at issue. Most of the records petitioner introduced to substantiate his reported expenses were either not credible or not sufficient to adequately substantiate any business expenses. His failure to call witnesses or introduce evidence within his control gives rise to the presumption that such evidence would be unfavorable.
Although petitioner urges us to adopt his proposed profit margin estimate, petitioner offered only his own self-serving, unverified testimony to support the estimate. Petitioner's testimony alone is an inadequate basis for us to accept his proposed estimate of the amounts of his business expenses for the years at issue.
While petitioner has failed to introduce credible evidence to substantiate the precise amounts of his business expenses or allow us to accept his proposed profit *59 margin estimate, petitioner has introduced evidence that he incurred some business expenses. The record shows that petitioner made large cash withdrawals consistent with his testimony. He introduced a number of invoices purportedly related to his construction businesses, some of which provided credible evidence of his business expenses.
On the basis of petitioner's testimony and the evidence in the record, 2013 Tax Ct. Memo LEXIS 28">*68 we are convinced that petitioner was operating a construction business and necessarily had a variety of expenses in connection with the operation of that business, which would be allowed as deductions under
A taxpayer's self-employment 2013 Tax Ct. Memo LEXIS 28">*69 income is subject to self-employment tax. *61 The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in
During 2006 petitioner performed services for PAMA through his sole proprietorship construction businesses. He was an independent contractor and not an employee of PAMA. All of his unreported income for 2006 arose from his performance of services for PAMA. Accordingly, all of petitioner's unreported income for 2006, less the attributable deductions allowed, is self-employment income that is subject to self-employment tax.
During 2007 petitioner performed services for PAMA through his sole proprietorship construction businesses. He was an independent contractor and not an employee of PAMA. During 2007 petitioner also provided services to Peter Ortiz RCI. He received nonemployee compensation 2013 Tax Ct. Memo LEXIS 28">*71 of $94,000 from Peter Ortiz RCI. Petitioner admitted that during 2007 he was self-employed. Accordingly, all *62 of petitioner's unreported income for 2007, less the attributable deductions allowed, is self-employment income that is subject to self-employment tax.
Gross income includes all income from whatever source derived, including gains derived from dealings in property.
The first step in determining gain on the sale of property involves calculating the amount realized. The amount realized is the sum of any money received plus the fair market value of any other property received, reduced by the expenses of selling the property.
Petitioner sold the Berkshire property on May 31, 2006, for $675,000. Respondent concedes that petitioner incurred the following selling expenses: (1) a buyer's credit of $16,225; (2) commissions of $16,875; (3) escrow charges of $1,396; (4) title charges of $3,580; and (5) a property disclosure settlement amount of $50. Accordingly, respondent contends that petitioner may reduce his amount realized by $38,126. Petitioner appears to contend that he incurred additional "seller fees" of $2,848.
The seller closing statement shows that part of the sale proceeds was used to satisfy various liabilities, including a liability identified as the "GMAC Mortgage". With respect to the "GMAC Mortgage", the seller closing statement identifies the following 2013 Tax Ct. Memo LEXIS 28">*73 costs: payoff of the principal balance, accrued interest, prepayment, recon fee, interest, late charge, and other fees and costs. The seller closing statement identifies the $2,848 amount as "Other Fees and Costs - GMAC Mortgage". Petitioner has introduced no evidence regarding the meaning of "other fees and costs". He simply has identified the other fees and costs amount as "seller fees" in his brief without providing any explanation. Petitioner has failed *64 to satisfy his burden of proving that he incurred additional selling expenses and therefore he is not entitled to reduce his amount realized by an additional $2,848. Accordingly, we find that petitioner's amount realized from sale of the Berkshire property was $636,874.
To calculate the gain realized from petitioner's sale of the Berkshire property, we must subtract his adjusted basis in the property from the amount he realized from its sale.
Under
Petitioner appears to argue that he had a basis 322013 Tax Ct. Memo LEXIS 28">*76 in the Berkshire property of *66 $447,949. In the notice of deficiency respondent determined that petitioner had a basis of zero in the Berkshire property. However, in respondent's opening brief, respondent appears to concede that petitioner had a basis of $447,949 in the Berkshire property by requesting a finding of fact that petitioner had a basis of $447,949. Moreover, in respondent's reply brief, respondent abandons any argument that petitioner had a basis of zero in the property. Because respondent effectively has conceded that petitioner had a basis of $447,949 in the Berkshire property, we find that petitioner had a basis of $447,949 in the Berkshire property.
In his opening brief petitioner argues for the first time that he is entitled to itemized deductions 2013 Tax Ct. Memo LEXIS 28">*77 for the real property taxes and interest charges related to the sale of the Berkshire property. Petitioner contends that he is entitled to deduct the following: (1) interest charges of $17,221, $14,850, $1,417, and $1,178; 33 (2) *67 property taxes and penalties of $6,467; and (3) supplemental taxes and penalties of $343. 34
Petitioner did not attach a Schedule A to his untimely filed 2006 return and he did not elect to itemize his deductions for that year.
Most importantly, petitioner did not give respondent any notice in his petition, his pretrial memorandum, or at trial that he was claiming these itemized deductions. In the reply brief respondent contends that petitioner untimely raised this issue and the parties did not try the issue by consent. Given the lack of evidence in the record and petitioner's delay in raising the issue until his opening brief, we conclude that petitioner did not timely raise the issue, and we decline to *68 decide it.
We find that petitioner's amount realized from the sale of the Berkshire property was $636,874 and that he had an adjusted basis in the Berkshire property of $447,949. Accordingly, petitioner must recognize a short-term capital gain of $188,925 with respect to his 2006 sale of the Berkshire property.
For 2007 neither petitioner nor Mrs. Reynoso filed a Federal income tax return. Accordingly, we sustain respondent's determination to use a married filing separately status for petitioner for 2007. 352013 Tax Ct. Memo LEXIS 28">*80
If the taxpayer assigns error to the Commissioner's determination that a taxpayer is liable for an addition to tax, the Commissioner has the burden, under
Respondent determined that petitioner is liable for additions to tax for failure to timely file a return for each year in issue under
*71 Petitioner stipulated that he did not timely file returns for the years at issue. In addition respondent introduced Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters, for 2006 and 2007 which confirm that petitioner failed to timely file returns for the years at issue. Consequently, we conclude that respondent has satisfied his burden of production under
Respondent also determined that petitioner is liable for additions to tax for failure to pay tax shown on a return under
Respondent introduced into evidence substitutes for returns that satisfy the requirements of
Respondent also determined that petitioner is liable for additions to tax for failure to pay estimated tax under
Respondent introduced evidence to prove that petitioner was required to file Federal income tax returns for 2006-07, that petitioner failed to file returns for 2005 and 2007 and failed to timely file a return for 2006, and that petitioner did not make any estimated tax payments for 2006 and 2007.
Because petitioner did not file a return for 2005, petitioner's required annual payment for 2006 was equal to 90% of the tax shown on his return for that year at issue 2013 Tax Ct. Memo LEXIS 28">*87 or, if no return was filed, 90% of his tax for the year.
We reach a different conclusion with respect to 2007, however. Petitioner failed to file a return for 2007, but he filed a return for 2006 before respondent mailed the notice of deficiency for 2007. On petitioner's 2006 return, he reported total tax of $3,813. After petitioner subtracted his credits against tax from his total tax figure, he calculated that he had zero tax due and requested a refund.
We have considered all the other arguments made by the parties, and 2013 Tax Ct. Memo LEXIS 28">*89 to the extent not discussed above, find those arguments to be irrelevant, moot, or without merit.
To reflect the foregoing,
1. In a stipulation of settled issues the parties stipulated that for 2006 petitioner did not receive wages of $25,419 as set forth in the notice of deficiency and that petitioner received interest income of $20. At trial respondent conceded that petitioner is entitled to joint filing status, and the parties agreed that petitioner is entitled to three dependency exemptions for 2006.
For 2007 respondent has conceded that petitioner is entitled to a married filing separately status. At trial the parties agreed that petitioner is entitled to three dependency exemptions for 2007. With the exception of the issues addressed in this opinion, the remaining adjustments are computational.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), as amended and in effect for the years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. Some monetary amounts have been rounded to the nearest dollar.
3. In his opening brief petitioner raised two new issues: (1) whether he is entitled to itemized deductions claimed on a Schedule A, Itemized Deductions, with respect to the real property taxes and interest related to the property he sold in 2006; and (2) if we disallow petitioner's claimed joint filing status for 2007, whether he is obligated to report only half of his income on the basis of California community property laws. With respect to petitioner's claimed itemized deductions, all of the claimed deductions related to the property he sold in 2006; accordingly, we will address his claim in part V.C. of this opinion.
4. The grant deed was not recorded until March 17, 2006.↩
5. PAMA classified petitioner as an independent contractor and not as an employee during the years at issue.↩
6. PAMA maintains vendor histories for each vendor. A PAMA employee enters the relevant information when PAMA issues a check to a vendor. Each entry includes the check number, amount, and date, as well as a description of the work performed, including the name of the property where the vendor performed the work. The descriptions of the work performed include the following: rehab, partial, roof or roofing, asphalt, paint or painting, decking, carports, final, workers, stucco, redesign, cement, labor, additional, wood, demolish, inspection, extra, facial, garage, mold/mildew, beams, permits, construction, and inside units.
7. Petitioner made taxable deposits of $301,223 into account No. XXXXPetitioner made taxable deposits of $301,223 into account No. XXXX during 2006. From April 1 through December 31, 2006, he made taxable deposits of $21,700 into account No. XXXX during 2006. From April 1 through December 31, 2006, he made taxable deposits of $21,700 into account No. XXXX. As of January 29, 2007, Bank of America had closed account No. XXXX.. As of January 29, 2007, Bank of America had closed account No. XXXX.↩
8. The record does not contain copies of account statements or deposit slips for this third account.
9. During 2007 petitioner made taxable deposits of $147,500 into account No. XXXX, including the 23 PAMA checks.During 2007 petitioner made taxable deposits of $147,500 into account No. XXXX, including the 23 PAMA checks.↩
10. During 2007 petitioner made taxable deposits of $631,735 into account No. XXXX, including the 107 PAMA checks.During 2007 petitioner made taxable deposits of $631,735 into account No. XXXX, including the 107 PAMA checks.↩
11. During the years at issue petitioner also cashed a number of checks, including checks from PAMA. He often cashed his checks at Mira Loma Market.↩
12. On March 5, 2010, respondent received petitioner's Form 1040, U.S. Individual Income Tax Return, for 2006. On the Form 1040 petitioner used a filing status of married filing jointly and listed his occupation as "construction". He reported a total tax liability of $3,813. He also claimed the earned income credit, the additional child tax credit, a credit for Federal telephone excise tax paid, and a refund of $1,109.
On an attached Schedule C, Profit or Loss From Business, petitioner identified his business name as R&R Construction and reported gross receipts and total expenses of $41,000 and $14,016, respectively. He attached to his return a Form 4562, Depreciation and Amortization, relating to depreciation of vehicles purportedly used in his business activity. On an attached Schedule D, Capital Gains and Losses, he reported a long-term gain of $24,922. He also attached a Form 4797, Sales of Business Property, on which he reported that on May 21, 2006, he sold the Berkshire property for $675,000. On the Form 4797 he reported a gain of $24,922 from the sale of the Berkshire property.↩
13. Petitioner had not filed a Federal income tax return for 2007 as of the date of trial.↩
14. Respondent did not consider the income reported on petitioner's untimely filed 2006 return in determining the amount of his unreported Schedule C gross receipts set forth in the amended answer.↩
15. Petitioner and Mrs. Reynoso jointly filed a petition contesting respondent's determinations with respect to 2006. Respondent subsequently filed a motion to dismiss for lack of jurisdiction as to Mrs. Reynoso and to change caption on the grounds that no notice of deficiency or notice of determination had been issued to Mrs. Reynoso for 2006. We granted respondent's motion and dismissed the case for lack of jurisdiction as to Mrs. Reynoso.
16. The term "Secretary" means "the Secretary of the Treasury or his delegate",
17. The record also contains a copy of a Form 1099-MISC purportedly issued by PAMA showing payment of $146,400 of nonemployee compensation to Los Brothers Co. in 2006. The record contains no evidence that PAMA actually filed the Form 1099-MISC.↩
18. Petitioner does not dispute the accuracy of the 2006 Form 1099-S respondent received with respect to the Berkshire property.
19. Even if we were to assume that petitioner's dispute is reasonable, respondent has introduced probative evidence that petitioner had unreported taxable income as shown on the information returns.↩
20. In addition, respondent introduced evidence that petitioner failed to cooperate. Petitioner testified that he previously told respondent's counsel that he never had worked for Mr. Ortiz. He admitted during his testimony that he began working with Mr. Ortiz in 2005 and that he worked with Mr. Ortiz through 2007.↩
21. Petitioner appears to argue that this Court should estimate his business expenses because his accountant, William Turner, lost petitioner's business records. We reject this argument because petitioner has not convinced us that his accountant had any of petitioner's business records. In addition, when a taxpayer's records have been destroyed or lost due to circumstances beyond his control, for example, fire, flood, earthquake, or other casualty, the taxpayer may substantiate the claimed deductions by a reasonable reconstruction of his expenditures.
22. Petitioner does not contend that he is entitled to deduct any business expenses with respect to the income he received from Peter Ortiz RCI. Furthermore, he has introduced no evidence and offered no testimony regarding whether he incurred business expenses while working for Peter Ortiz RCI. Accordingly, we consider only whether petitioner incurred business expenses in performing services for PAMA during the years at issue.↩
23. Petitioner testified that he typically earned a 15% profit from jobs that required subcontractor work. He has conceded that because he failed to maintain the required books and records, he is not entitled to use a 15% profit margin in calculating his expenses. He doubled the 15% profit margin figure and used a 30% profit margin to calculate his expenses with respect to the subcontractor payments.
24. Petitioner contends that a 10% profit margin is appropriate because he used almost the entirety of the worker and permit payments to pay for business expenses.↩
25. Petitioner contends that this Court should use a 50% profit margin to calculate business expenses incurred with respect to the other payments because petitioner expected to earn a higher profit from smaller jobs that he completed himself.↩
26. A number of invoices show the purchaser as an individual other than petitioner. None of the delivery addresses on the invoices correspond with the addresses for the PAMA properties where petitioner worked during 2006. Some of the invoices clearly relate to work petitioner performed outside of his employment with PAMA. In particular, a number of invoices related to work performed at a property on Gerona Street. The record contains no evidence regarding the owner of the Gerona Street property and what type of work, if any, petitioner performed at the property.
Petitioner also introduced copies of permit applications filed in 2006; two of the permit applications do not bear an address for the relevant property, and one application shows the relevant address as the Gerona Street property. He also introduced receipts from the Home Depot and a lumber store. The receipts do not show that petitioner made the purchases or the property for which petitioner purportedly purchased the supplies.
Additionally, petitioner introduced invoices to substantiate depreciation deductions he claimed on his 2006 Form 4562. The record includes a schedule, ostensibly prepared by Mr. Turner, showing that petitioner claimed depreciation with respect to four vehicles: a 1985 Ford truck, a 2002 Chevrolet truck, a 1993 Peterbilt dumptruck, and a 2004 Ford Expedition. With respect to the 1985 Ford truck, the record shows that the vehicle actually was purchased by Anatalio Hidalgo, Jr. With respect to the 2002 Chevrolet truck, the record contains a copy of a purchase agreement showing that Gilberto Ruiz Olvera purchased the truck and that the primary use of the truck was personal, family, or household. With respect to the 2004 Ford Expedition, the record contains a copy of a purchase agreement showing that Esther Soto and petitioner purchased the vehicle and that the primary use of the truck was personal, family, or household.
Petitioner introduced the following documents purportedly to substantiate his claimed business expenses for 2007: (1) an invoice from Dunn-Edwards, Corp., (2) a signed statement from Wheeler Paving, Inc., and (3) nine invoices from J.R. Painting Cleaning Services. We find that the signed statement from Wheeler Paving, Inc., is not credible. The statement from Wheeler Paving, Inc., indicates that on July 3, 2007, petitioner paid Wheeler Paving, Inc., a $10,000 deposit for work on a PAMA property. However, petitioner's bank statements show that he neither wrote a check for $10,000 during July 2007 nor withdrew a sufficient amount of cash to pay the deposit.
We find that the invoices from Dunn-Edwards and J.R. Painting Cleaning Services are credible. The Dunn-Edwards invoice shows the purchaser as RCI Construction and the total amount due as $1,051.54. The record contains a copy of a canceled check drawn on petitioner's Bank of America account for $1,051.54 made payable to Dunn-Edwards. Furthermore, the invoice and check bear a notation showing that the job location was one of the PAMA properties where petitioner worked. The J.R. Painting Cleaning Services invoices, which total $3,860, each bear a notation showing that job location as one of the PAMA properties where petitioner worked. Furthermore, petitioner made a large cash withdrawal from account No. XXXXas $1,051.54. The record contains a copy of a canceled check drawn on petitioner's Bank of America account for $1,051.54 made payable to Dunn-Edwards. Furthermore, the invoice and check bear a notation showing that the job location was one of the PAMA properties where petitioner worked. The J.R. Painting Cleaning Services invoices, which total $3,860, each bear a notation showing that job location as one of the PAMA properties where petitioner worked. Furthermore, petitioner made a large cash withdrawal from account No. XXXX around the same time as the delivery date on the invoices. Accordingly, petitioner has substantiated business expenses of $5,382 for 2007. Because we find that petitioner is entitled to deduct as business expenses an amount equal to 30% of his total PAMA gross receipts,
27. Daljit Kler, a PAMA employee, testified that when a PAMA property required construction work, a PAMA employee would request proposals from petitioner and other contractors. She further testified that petitioner was required to submit a proposed budget for each project itemizing the various costs. Petitioner did not introduce any copies of his proposals or budgets with respect to his work on PAMA properties.↩
28. On its vendor histories PAMA identified framing work as "facials".↩
29. Ms. Kler testified that subcontractors who worked for petitioner on PAMA properties would demand payment from her for their work because petitioner had not paid them. Ms. Kler further testified that in some instances, petitioner received full payment for projects that he failed to complete.
30. For example, petitioner proposed a 10% profit margin with respect to the worker payments; however, he testified that he used funds from checks designated as worker payments to pay other expenses and that he occasionally retained the funds from those checks. Additionally, petitioner used a 10% profit margin with respect to payments designated as labor payments, but he testified that the labor payments constituted pure profit to him.
31. With respect to the old-age, survivors, and disability tax imposed by
32. In a letter to respondent regarding the notice of deficiency, Mr. Turner wrote that petitioner had a basis in the Berkshire property of $578,860. On the Form 4797 attached to his 2006 return, petitioner reported that he had a basis in the Berkshire property of $650,078. In his brief petitioner contends that he had a basis in the Berkshire property of $488,903.84. In calculating his basis of $488,903.84, petitioner included the following amounts: (1) the payoff amount of the GMAC mortgage principal balance ($447,949.45); (2)"seller fees" of $2,848.39; (3) escrow charges of $1,396; (4) title charges of $3,580; (5) commissions of $16,875; and (6) a buyer's credit of $16,255. As noted, the escrow charges, title charges, commissions, and buyer's credit are expenses that reduce petitioner's amount realized on the sale of the Berkshire property.
Although petitioner argued that he had a basis of $650,078 on the Form 4797 attached to his 2006 return, petitioner abandoned this argument in his subsequent filings with this Court. Accordingly, we deem petitioner to have abandoned his argument that he had a basis in the Berkshire property in excess of $488,903.84. Because the escrow charges, title charges, commissions, and buyer's credit properly are applied to reduce petitioner's amount realized, we find petitioner's argument to be that he had a basis of $447,949 in the Berkshire property.↩
33. The seller closing statement shows that the amounts petitioner claims as interest are related to the GMAC mortgage as follows: (1) $17,221 for accrued interest to May 18, 2006; (2) $14,850 for prepayment; (3) $1,417 for interest from May 19 through June 2, 2006; and (4) $1,178 for a late charge.↩
34. With respect to the property taxes, petitioner acknowledges that he is not entitled to deduct the amount of property taxes paid for the period from May 31 through July 1, 2006.↩
35. In his opening brief petitioner argues for the first time that if joint filing status is disallowed for 2007, petitioner must report only half of his income because California is a community property State. Petitioner did not give respondent any notice in his petition, his pretrial memorandum, or at trial that he was claiming that he was obligated to report only half of his income. Petitioner's failure to raise his community property argument before briefing prejudiced respondent. Respondent did not introduce evidence or elicit testimony to rebut the statutory presumption that the income was community property,
36. We note that petitioner failed to file returns for 2002-05 and 2007-10. Petitioner's pattern of noncompliance weighs against a finding of reasonable cause.
37. The
38. Unless a statutory exception applies, the sec. 6654(a) addition to tax is mandatory,
39. Furthermore, we note that a taxpayer's estimated tax liability is determined on the basis of the original tax return, and not on the basis of the notice of deficiency or our decision with respect to the taxpayer's ultimate liability.
