Higbee v. Comm'r of Internal Revenue, 14035–99.

• Citation: 116 T.C. 438,116 T.C. No. 28
• Decision Date: 06 June 2001
• Docket Number: No. 14035–99.,14035–99.
• Parties: Earl G. HIGBEE and Lesley A. Higbee, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: United States Tax Court

116 T.C. 438

116 T.C. No. 28

Earl G. HIGBEE and Lesley A. Higbee, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 14035–99.

United States Tax Court.

June 6, 2001.

Taxpayers petitioned for redetermination of deficiencies arising from overstated deductions and penalties. The Tax Court, Vasquez, J., held that: (1) burden of proof was on taxpayers who failed to introduce credible evidence; (2) IRS' burden for imposing penalty was producing sufficient evidence indicating penalty was appropriate; and (3) addition to tax for untimely filing and accuracy-related penalties were warranted.

Decision for IRS. Ps filed a petition seeking redeterminations of R's disallowance of several deductions and imposition of an addition to tax and accuracy-related penalty. The parties settled most of the issues regarding the disallowed deductions except one regarding certain Schedule C deductions. At trial, Ps claimed additional deductions on account of a casualty loss, charitable contributions, unreimbursed employee expenses, and Schedule C and E expenses that were neither claimed by Ps on their tax returns nor raised in the notice of deficiency. The examination in the instant case took place after the effective date of sec. 7491, I.R.C., as amended by the Internal Revenue Service Restructuring and Reform Act of 1998, Pub.L. 105–206, sec. 3001, 112 Stat. 685, 726.Held: Because Ps failed to introduce credible evidence, Ps failed to meet the requirements of sec. 7491(a), I.R.C., as amended, so as to place the burden of proof on R for the factual issues relating to the deductions in issue.Held, further, to meet his burden of production pursuant to sec. 7491(c), I.R.C., as amended, R must come forward with sufficient evidence indicating that it is appropriate to impose a penalty, addition to tax, or additional amount.Held, further, R met his burden of production with regard to the addition to tax and accuracy-related penalty.Earl G. Higbee and Lesley A. Higbee, pro sese.

Erin K. Huss, for respondent.

OPINION

VASQUEZ, J.

Respondent determined the following deficiencies in, addition to, and accuracy-related penalty on petitioners' 1996 and 1997 Federal income taxes:

+--------------------------------------------------------------------+
                ¦Year¦Deficiency¦Addition to Tax Sec. 6651(a)(1)¦Penalty Sec. 6662(a)¦
                +--------------------------------------------------------------------¦
                ¦                                                                    ¦
                +--------------------------------------------------------------------¦
                ¦1996¦$10,796   ¦$2,669                         ¦—                   ¦
                +----+----------+-------------------------------+--------------------¦
                ¦1997¦12,443    ¦—                              ¦$2,488.60           ¦
                +--------------------------------------------------------------------+
                

Unless otherwise stated, 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, we must decide whether petitioners are entitled to the following deductions: (1) $1,328 for a casualty loss, (2) $6,937.20 for charitable contributions, (3) $6,468.09 for unreimbursed employee expenses, (4) certain amounts paid on account of a failed business as part of a chapter 13 bankruptcy proceeding, and (5) various expenses related to two rental properties. Finally, we must decide whether petitioners are liable for an addition to tax under section 6651(a)(1) and an accuracy-related penalty under section 6662(a).

Background

Petitioners contest respondent's determinations with regard to their 1996 and 1997 tax years. In the notice of deficiency, respondent disallowed the following deductions for 1996:(1) A $3,000 capital loss, (2) $57,099 in expenses listed on petitioners' Schedule A, Itemized Deductions, (3) $5,487 in expenses listed on petitioners' Schedule C, Profit or Loss From Business, and (4) $25,811 in expenses listed on petitioners' Schedule E, Supplemental Income and Loss. After concessions, the parties agreed that petitioners are entitled to: (1) The $3,000 capital loss, (2) $7,070 in itemized deductions,¹ (3) $3,567 in Schedule C expenses (with the remainder still in dispute), and (4) the $25,811 Schedule E expenses.

With regard to the 1997 tax year, respondent disallowed the following deductions: (1) A $3,000 capital loss, (2) $41,172 in itemized deductions, and (3) $25,965 in Schedule E expenses. After concessions, the parties agreed that petitioners are entitled to: (1) The $3,000 capital loss, (2) $12,083 in itemized deductions,² and (3) the $25,965 Schedule E expenses.

At trial, the only issue remaining with regard to the notice of deficiency was whether petitioners were entitled to the $1,920 in Schedule C deductions reported on petitioners' 1996 tax return and disallowed by respondent. Petitioners, however, raised new issues at trial by claiming additional deductions for a casualty loss, charitable contributions, unreimbursed employee expenses, and Schedule C and E expenses that were neither claimed on their returns nor raised in the notice of deficiency.

We combine our findings of fact and opinion under each separate issue heading. Some of the facts have been stipulated and are so found. The stipulation of facts, the supplemental stipulations of facts, and the attached exhibits are incorporated herein by this reference. At the time petitioners filed their petition, they resided in Phoenix, Arizona.

Discussion

I. Disallowed Deductions

Deductions are a matter of legislative grace, and a taxpayer bears the burden of proving that he is entitled to the deductions claimed. See Rule 142(a); INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 112 S.Ct. 1039, 117 L.Ed.2d 226 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 (1934). The taxpayer is required to maintain records that are sufficient to enable the Commissioner to determine his correct tax liability. See sec. 6001; sec. 1.6001–1(a), Income Tax Regs. In addition, the taxpayer bears the burden of substantiating the amount and purpose of the claimed deduction. See Hradesky v. Commissioner, 65 T.C. 87, 90, 1975 WL 3047 (1975), affd. per curiam 540 F.2d 821 (5th Cir.1976).

Section 7491(a), a new provision created by Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 1998), Pub.L. 105–206, sec. 3001, 112 Stat. 685, 726, places the burden of proof on respondent with regard to certain factual issues. Section 7491 applies to examinations commenced after July 22, 1998. See RRA 1998 sec. 3001(c), 112 Stat. 727. The examination in the instant case commenced after July 22, 1998; accordingly, we evaluate whether respondent bears the burden of proof pursuant to section 7491(a).

Section 7491(a)(1) provides that if, in any court proceeding, the taxpayer introduces credible evidence with respect to factual issues relevant to ascertaining the taxpayer's liability for a tax (under subtitle A or B), the burden of proof with respect to such factual issues will be placed on the Commissioner. For the burden to be placed on the Commissioner, however, the taxpayer must comply with the substantiation and record-keeping requirements of the Internal Revenue Code. See sec. 7491(a)(2)(A) and (B). In addition, section 7491(a) requires that the taxpayer cooperate with reasonable requests by the Commissioner for “witnesses, information, documents, meetings, and interviews”. Sec. 7491(a)(2)(B). Finally, the benefits of section 7491(a) are unavailable in the cases of partnerships, corporations, and trusts unless the taxpayer meets the net worth requirements of section 7430(c)(4)(A)(ii). See sec. 7491(a)(2)(C).

Respondent argues that because petitioners have failed to meet the requirements of section 7491(a)(1) and (2), the burden of proof should remain with petitioners as to the remaining issue associated with respondent's determination of petitioners' 1996 tax liability. We therefore examine the evidence to establish whether petitioners have presented credible evidence and have met the other requirements of section 7491(a)(1) and (2) so as to place the burden of proof on respondent.

A. Casualty Losses

Pursuant to section 165(a) and (c)(3), a taxpayer is allowed a deduction for an uncompensated loss that arises from fire, storm, shipwreck, or other casualty. Section 165(h), however, states that any “loss * * * shall be allowed only to the extent that the amount of the loss to such individual arising from each casualty * * * exceeds $100” and only to the extent that the net casualty loss “exceeds 10 percent of the adjusted gross income”.

When property is damaged rather than totally destroyed by casualty, the proper measure of the amount of the loss sustained is the difference between the fair market value of the property immediately before and after the casualty, not to exceed the property's adjusted basis. See sec. 1.165–7(b)(1), Income Tax Regs. The fair market values required by the Treasury regulations must generally be ascertained by competent appraisal. See sec. 1.165–7(a)(2)(i), Income Tax Regs. As an alternative, the Treasury regulations provide that if the taxpayer has repaired the property damage resulting from the casualty, the taxpayer may use the cost of repairs to prove the casualty loss. See sec. 1.165–7(a)(2)(ii), Income Tax Regs. In general, estimates of the cost of repairs are not evidence of the actual costs of repairs unless the repairs are actually made. See Lamphere v. Commissioner, 70 T.C. 391, 396, 1978 WL 3307 (1978); Farber v. Commissioner, 57 T.C. 714, 719, 1972 WL 2424 (1972).

Petitioners claim a casualty loss deduction in the amount of $1,328 on account of alleged damage to their home and personal property which was not deducted on their tax return. Mr. Higbee testified that the $1,328 represents the damage to petitioners' property which was not reimbursed by their insurance company but awarded by...