T.C. Memo. 2011-296



                UNITED STATES TAX COURT



               ILLYA BELL, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 26557-09.            Filed December 22, 2011.



     P filed his 1996 tax return over 10 years late. R
disallowed certain deductions claimed on Schedule C and
determined a sec. 6651(a)(1), I.R.C., addition to tax and a
sec. 6662(a) accuracy-related penalty.

     Held: R’s determinations are sustained to the extent
decided herein.



Illya Bell, pro se.

Laura J. Mullin and Katherine Holmes Ankeny, for respondent.
                               - 2 -

             MEMORANDUM FINDINGS OF FACT AND OPINION


     WHERRY, Judge:   This case is before the Court on a petition

for redetermination of an income tax deficiency of $12,333, a

section 6651(a)(1) addition to tax of $3,083.25, and a section

6662(a) accuracy-related penalty of $2,466.60 that respondent

determined for petitioner’s 1996 tax year.1   The issues for

decision are (1) whether petitioner is entitled to deductions

claimed on Schedule C, Profit or Loss From Business; (2) whether

the wage income reported on petitioner’s 1996 tax return was

overstated; (3) whether petitioner is liable for a section

6651(a)(1) failure to file addition to tax; and (4) whether

petitioner is liable for a section 6662(a) accuracy-related

penalty.2




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1986, as amended and in effect for
the taxable year at issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
     2
      The notice of deficiency also disallowed certain itemized
deductions. Petitioner did not contest respondent’s adjustment
of $13,800 for his 1996 tax year. Therefore, except as they are
the result of any correlative computational adjustments which are
required as the result of this opinion, we deem those statutory
notice of deficiency adjustments conceded. See Levin v.
Commissioner, 

, 722-723 (1986) (citing Rule 142(a) for
the proposition that because “petitioners have made no argument
with respect to * * * deductions claimed * * * [, they] are
deemed to have conceded their nondeductibility”), affd. 

(7th Cir. 1987).
                                - 3 -

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and the

stipulations, with the accompanying exhibits, are incorporated

herein by this reference.    At the time he filed his petition,

petitioner resided in California.

     Petitioner started a landscaping business in 1995.     During

1996 he had two landscaping jobs, one for the residential

community in which he lived and one for Wal-Mart.     Petitioner was

able to work at the residential community for only 30 days during

the 1996 tax year because of a restraining order requiring him to

stay 100 yards away from his ex-wife and children.3     Petitioner

worked for Wal-Mart the entire year and was paid $1,000 per

month.   Wal-Mart issued petitioner a Form 1099-MISC,

Miscellaneous Income, showing the wages paid to him.

     Petitioner claimed he kept paperwork and records of his

income and expenses from the landscaping business but lost them.

He claimed he gave up on the landscaping business and was

unemployed from 1996 until 2006 when he began working full time

as a healthcare provider.4


     3
      From the record, it appears that   petitioner, at some point,
lived with his ex-wife and children at   the residential community
where he worked. But it is unclear to    the Court when
petitioner’s divorce occurred and what   his living arrangements
were after the divorce.
     4
      Forms W-2, Wage and Tax Statement, provided to this Court
after trial show that contrary to his testimony, petitioner did
earn at least $880.68 during the 1998 tax year.
                               - 4 -

     In 2007 the State of California Franchise Tax Board issued a

notice to petitioner and his employer that they were going to

start garnishing his wages to collect delinquent taxes owed to

the State of California in the total amount of $13,975.25 for the

1996 and 1997 tax years.   Petitioner erroneously believed the

garnishment order was from the Internal Revenue Service (IRS).

     When the garnishment started, petitioner went to Beverly A.

Arrington for help in sorting out his tax liabilities.

Petitioner claimed that the only information he provided to Ms.

Arrington was the Form 1099 he had received from Wal-Mart.

     Ms. Arrington prepared petitioner’s tax return and sent it

to him.   Petitioner signed the tax return and mailed it in

without taking “the opportunity to even take a look at it”.

Petitioner’s Form 1040, U.S. Individual Income Tax Return, for

his 1996 tax year was filed October 31, 2007.   The Form 1040

showed wages, salaries, and tips of $41,696 and a business loss

from the landscaping business of $18,839.    A Schedule C attached

to the Form 1040 reported gross receipts of $17,296 and expenses

of $36,135 leading to the loss of $18,839.

     The reported expenses were taxes and licenses--$750;

supplies--$6,678; rent or lease of vehicles, machinery, and

equipment--$7,880; advertising--$6,525; repairs and maintenance--

$5,252; legal and professional services--$225; and car and
                               - 5 -

truck--$8,825.   Petitioner signed the return beneath the

statement “Under penalties of perjury, I declare that I have

examined this return and accompanying schedules and statements,

and to the best of my knowledge and belief, they are true,

correct, and complete.”

     Respondent issued a notice of deficiency on August 6, 2009,

disallowing all of petitioner’s claimed Schedule C deductions

except the deduction for legal and professional services expenses

of $225 and determining a deficiency in income tax of $12,333, a

section 6651(a)(1) addition to tax of $3,083.25, and a section

6662(a) accuracy-related penalty of $2,466.60.   Petitioner timely

petitioned this Court, arguing that he needed additional time to

find documentation for his reported expenses.    Trial was held on

December 13, 2010, in Los Angeles, California.

     Petitioner elaborated at trial, claiming he had entrusted

Ms. Arrington to help him with his taxes but later found out “the

tax for 1996 were [sic] basically done wrong”.   Petitioner

claimed he does not know where Ms. Arrington got the expenses

reported on Schedule C but “would say a couple of them are pretty

accurate”.   Petitioner also acknowledged that he did not pay

$6,000 for advertising expenses.

     As for the other reported expenses, petitioner stated he

purchased a Chevy truck for $8,500 in 1995 and mostly used

equipment such as lawnmowers, edgers, trimmers, shovels, and
                                - 6 -

rakes, etc., costing around $6,000 in 1995 and 1996.   He claimed

he rented equipment such as trenchers and trucks for sod.

Petitioner stated he had no documentation of his expenses because

“It has been all destroyed due to the [criminal] case that I was

dealing with in ‘96.   I had a choice of walking away or doing

jail time, and I chose to walk away”.5

      Immediately before trial, for the first time petitioner

alleged that he realized after talking with respondent’s counsel

that his tax return showed $41,696 of wage income.   He asserted

at trial that he was self-employed throughout 1996 and had no

income other than from his landscaping business, stating he “did

not earn $41,000” in 1996.

                               OPINION

I.   Burden of Proof

      As a general rule, the Commissioner’s determination of a

taxpayer’s liability in the notice of deficiency is presumed

correct, and the taxpayer bears the burden of proving that the

determination is improper.   See Rule 142(a); Welch v. Helvering,

, 115 (1933).    However, pursuant to section 7491(a),

the burden of proof on factual issues that affect the taxpayer’s




      5
      The circumstances leading to petitioner’s divorce, which
occurred in the general timeframe of 1995-97, are unclear.
However, it appears that his ex-wife filed charges against him at
the time the divorce proceedings were taking place.
                               - 7 -

tax liability may shift to the Commissioner in certain

situations.6   Petitioner has neither claimed nor shown that he

satisfied the requirements of section 7491(a), and therefore he

bears the burden of proof.

II.   Schedule C Deductions

      Deductions are a matter of legislative grace, and taxpayers

bear the burden of proving entitlement to any claimed deduction.

Rule 142(a); INDOPCO, Inc. v. Commissioner, 

, 84

(1992).   Taxpayers are required to identify each deduction

available and show that they have met all requirements as well as

to keep books or records to substantiate all claimed deductions.

Sec. 6001; Roberts v. Commissioner, 

, 836-837 (1974).

      Section 162(a) authorizes a deduction for “all the ordinary

and necessary expenses paid or incurred during the taxable year

in carrying on any trade or business”.   A trade or business

expense is ordinary for purposes of section 162 if it is normal

or customary within a particular trade, business, or industry,

and is necessary if it is appropriate and helpful for the

development of the business.   Commissioner v. Heininger, 

, 471 (1943); Deputy v. du Pont, 

, 495 (1940).




      6
      Sec. 7491 is effective for court proceedings that arise in
connection with examinations commencing after July 22, 1998.
Internal Revenue Service Restructuring and Reform Act of 1998,
Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
                                - 8 -

     Even if the expenses reported on Schedule C are ordinary and

necessary, petitioner has failed to adequately substantiate the

claimed deductions.   The record relating to the claimed

deductions is limited to petitioner’s trial testimony and is

unsupported by written substantiation.    Petitioner conceded some

of the reported expenses were not accurate and admitted that some

were paid in 1995, not 1996.

     Petitioner claims that he kept records but they were

destroyed.   When a taxpayer’s records are lost or destroyed

through circumstances beyond his control, the taxpayer is

entitled to substantiate deductions by reconstructing

expenditures through credible evidence.     Villarreal v.

Commissioner, T.C. Memo. 1998-420 (citing Malinowski v.

Commissioner, 

, 1125 (1979)).    However, this Court is

not bound to accept unverified, undocumented testimony of a

taxpayer.    

v. Commissioner, 

, 90

(1975), affd. per curiam 

(5th Cir. 1976)).     As

petitioner introduced no evidence to substantiate the claimed

Schedule C deductions other than his unsupported testimony at

trial, he failed to fully and adequately reconstruct the claimed

expenditures.

     However, except for expenses subject to heightened scrutiny

pursuant to section 274, if a taxpayer establishes that he paid a

deductible expense but is unable to substantiate the precise
                               - 9 -

amount, we may, after “bearing heavily * * * upon the taxpayer

whose inexactitude is of his own making”, estimate the amount.

We may do this only if we are convinced that the taxpayer paid

such an expense and we have a basis upon which to make an

estimate.   Cohan v. Commissioner, 

, 543-544 (2d Cir.

1930); Vanicek v. Commissioner, 

, 742-743 (1985).     We

do not doubt that petitioner operated a landscaping business

during 1996.   Some of the expenses reported on his tax return are

not deductible (but should have been capitalized and depreciated

over time).

     We shall not allow petitioner to deduct all reported

expenses solely on the basis of his testimony.   Nevertheless, it

is inconceivable that he did not pay some expenses operating the

landscaping business.   We believe petitioner had to have paid

expenses such as for the rental of machinery, for repairs and

maintenance of his equipment, and incidental expenses such as gas

for lawnmowers and related equipment.   On the evidence before us,

we believe that petitioner’s allowable expense deductions for his

1996 tax year should be $3,283.7


     7
      On Schedule C, petitioner reported, among others, expenses
for repairs and maintenance of $5,252 and rent or lease of
vehicles, machinery, and equipment of $7,880. We believe
petitioner to have paid some amount for these two reported
expenses and arrive at $3,283 by giving petitioner 25 percent of
these reported expenses. We give only 25 percent because
petitioner testified that he spent “under $6,000 [buying or
renting equipment]. Maybe $6,000 total”. Of the items
purchased, some may have been items which had to be capitalized
                               - 10 -

     For these reasons, and except as noted above, we sustain

respondent’s determination and disallowance of the claimed

Schedule C deductions per the notice of deficiency.

III. Overstatement of Income

     At trial petitioner alleged that the amount reported as wage

income for his 1996 tax year was fabricated by Ms. Arrington and

that the only income he earned during 1996 was from his

landscaping business and was reported on Schedule C.

     We are not required to consider issues that have not been

pleaded.    Foil v. Commissioner, 

, 418 (1989), affd.

(5th Cir. 1990).   Whether an issue has been

properly raised depends upon whether the opposing party has been

given fair notice of the matter in controversy.   Rule 31(a).

Rule 34 requires that the petition contain clear and concise

assignments of each and every error alleged and statements of

facts on which the petitioner relies to sustain each assignment

of error.   Petitioner did not raise the issue of an overstatement

of income until trial, and respondent had no notice of this issue

until then.

     We recognize that petitioner is proceeding pro se and is not

well versed in the law.   But even if the issue were properly

pleaded, he bore the burden of proving an overstatement of income



rather than expensed. Additionally, his testimony indicated he
bought equipment in both 1995 and 1996.
                              - 11 -

and has failed to meet that burden.    The record contains only

petitioner’s unsupported testimony.    He did not attempt to

explain why Ms. Arrington might have included wage income that he

did not in fact earn or where those numbers might have come from.

Nor did he call Ms. Arrington as a witness or as a pretrial

matter alert respondent to the issue so that he could call Ms.

Arrington or others to clarify the matter or find documents in

his possible possession to do so.    We also find unlikely

petitioner’s claim that he never glanced at his tax return before

signing it.   Notably, as with all individual Federal income tax

returns, it was signed under penalties of perjury and constitutes

an admission against interest here.    See Doll v. Commissioner,

T.C. Memo. 2005-269 (quoting Times Tribune Co. v. Commissioner,

, 452 (1953)).   Consequently, we shall not reduce

petitioner’s taxable gross income from wages, salary, tips, etc.,

as reported on line 7 of his Form 1040 as to any portion of the

$41,696 stated thereon.

IV.   Section 6651 Addition to Tax

      Section 6651(a)(1) imposes an addition to tax for failure to

file a return on time unless it is shown that such failure is due

to reasonable cause and not due to willful neglect.    This

addition to tax is in the amount of 5 percent of the tax required

to be shown on the return for each month or fraction thereof

until the return is filed, not to exceed 25 percent.
                                  - 12 -

       Respondent bears the burden of production with regard to

the section 6651(a)(1) addition to tax.       See sec. 7491(c);8

Higbee v. Commissioner, 

, 446-447 (2001).         To meet

his burden, respondent must produce sufficient evidence

establishing that it is appropriate to impose the addition to

tax.       See Higbee v. Commissioner, supra at 446.   Petitioner bears

the burden of proving that the failure to file was due to

reasonable cause and not willful neglect.       

       Petitioner filed his 1996 tax return in 2007, over 10 years

late.       Further, petitioner has not presented any evidence that

his failure to file was due to reasonable cause and not willful

neglect.       Respondent has thus met his burden of production, and

petitioner has not shown his failure to timely file was due to

reasonable cause and not willful neglect.       Accordingly, we

sustain the addition to tax under section 6651(a)(1).

V.     Section 6662(a) Accuracy-Related Penalty

           Respondent bears the burden of production with respect to

petitioner’s liability for the section 6662(a) penalty.        See sec.

7491(c).       This means that respondent “must come forward with

sufficient evidence indicating that it is appropriate to impose

the relevant penalty” but “need not introduce evidence regarding

reasonable cause, substantial authority, or similar provisions




       8
        See supra note 6.
                               - 13 -

* * * it is * * * [petitioner’s] responsibility to raise those

issues.”   Higbee v. Commissioner, supra at 446.

     Section 6662(a) imposes an accuracy-related penalty of 20

percent on any underpayment that is attributable to causes

specified in subsection (b).    Respondent determined petitioner is

liable for a substantial understatement of income tax.     See sec.

6662(b)(2).   An understatement is the excess of the amount of tax

required to be shown on the return over the amount of tax

actually shown on the return less any rebates.     Sec.

6662(d)(2)(A).    A substantial understatement of income tax occurs

in any year where the amount of the understatement exceeds the

greater of 10 percent of the amount required to be shown on the

return or, in the case of individual taxpayers, $5,000.     Sec.

6662(d)(1)(A).    Respondent has met his burden of production.

     Section 6664(c) provides for an exception to the accuracy-

related penalty where a taxpayer can demonstrate (1) reasonable

cause for the underpayment and (2) that the taxpayer acted in

good faith with respect to the underpayment.    Sec. 6664(c)(1).

The determination of reasonable cause and good faith “is made on

a case-by-case basis, taking into account all pertinent facts and

circumstances.”    Sec. 1.6664-4(b)(1), Income Tax Regs.   To

establish good faith reliance on the advice of a return preparer,

a taxpayer must establish that (1) he gave the preparer complete

and accurate information, (2) an incorrect return was a result of
                               - 14 -

the preparer’s mistakes, and (3) he believed in good faith that

he was relying on a competent return preparer’s advice.    Estate

of Goldman v. Commissioner, 

, 324 (1999), affd.

without published opinion sub nom. Schutter v. Commissioner, 

(10th Cir. 2000); see also Neonatology Associates, P.A.

v. Commissioner, 

, 99 (2000), affd. 

(3d

Cir. 2002).

     Petitioner filed his 1996 tax return over 10 years late.     He

has produced no records to substantiate his reported Schedule C

expenses or to show where the numbers on the Form 1040 might have

come from.    He admits that the only information he gave Ms.

Arrington was a Form 1099.    He blindly signed the Form 1040 under

penalties of perjury without even making a cursory review of it.

Petitioner has failed to show that the reasonable cause and good

faith exception applies.    Accordingly, we sustain the section

6662(a) accuracy-related penalty.


                                     Decision will be entered

                                under Rule 155.