Dorval v. Comm'r

• Decision Date: 01 October 2018
• Docket Number: Docket No. 17307-15.,T.C. Memo. 2018-167
• Parties: KATUCHA J. DORVAL AND ROMANE G. DORVAL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

KATUCHA J. DORVAL AND ROMANE G. DORVAL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2018-167

Docket No. 17307-15.

UNITED STATES TAX COURT

October 1, 2018

Katucha J. Dorval and Romane G. Dorval, pro sese.

Derek P. Richman, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

PUGH, Judge: In a notice of deficiency dated March 31, 2015, respondent determined the following deficiencies and penalties:¹

Year

Deficiency

Penalty

sec. 6663(a)

2010

$17,780

$7,370

2011

37,367

23,294

2012

23,911

15,716

The issues for decision are: (1) whether petitioners had unreported taxable income for the 2010, 2011, and 2012 tax years; (2) whether petitioners are entitled to deduct expenses reported on Schedules C, Profit or Loss From Business, for the 2010, 2011, and 2012 tax years; (3) whether petitioners are entitled to deduct expenses related to their rental activity in 2010; (4) whether petitioners are entitled to American Opportunity credits for the 2010, 2011, and 2012 tax years; (5) whether petitioners are liable for self-employment taxes for the 2010, 2011, and 2012 tax years; and (6) whether petitioner Romane Dorval is liable for civil fraud penalties under section 6663 for the 2010, 2011, and 2012 tax years.

FINDINGS OF FACT

Petitioners resided in Florida when they timely filed their petition. On August 27, 2015, respondent filed an answer alleging the facts on which he relied to support his determination of the deficiencies and penalties for the years at issue. Petitioners did not file a reply to respondent's answer. On October 29, 2015, respondent filed a motion under Rule 37(c) for an order that the undenied allegations in his answer be deemed admitted. In their response to respondent's motion, petitioners failed to respond with specific admissions or denials to the allegations in respondent's answer. See Rule 37(b). In a letter seeking additional time to respond, Mr. Dorval instead stated his general disagreement with respondent's answer in its entirety, claimed that he had filed his returns, and broadly asserted that he did not earn the amount of income respondent determined.

The Court ordered petitioners to file a proper reply in accordance with Rule 37(a) and (b), but petitioners failed to comply with the Order even after we granted additional time. As petitioners failed to respond to the substance of the affirmative allegations, the Court granted respondent's motion and deemed admitted the undenied allegations of fact in respondent's answer. See Rule 37(c); Doncaster v. Commissioner, 77 T.C. 334, 335-337 (1981). In respondent's pretrial memorandum and again at trial, counsel for respondent stated that he intended to rely on those admissions. At trial we asked Mr. Dorval repeatedly why he did not respond to the Court's order. He responded only that the Internal Revenue Service (IRS) already had the evidence he was offering. In any event, we find that petitioners did not offer any credible evidence that would contradict the admissions or prompt us to vacate our prior order that deemed them admitted.

We therefore adopt those admissions, as well as the facts that the parties have stipulated, as our own findings and incorporate them herein by this reference. See Vogt v. Commissioner, T.C. Memo. 2007-209, 2007 WL 2198381, aff'd, 336 F. App'x 758 (9th Cir. 2009).

I. Background on Petitioners and Tax Return Preparation Business

Petitioner Romane Dorval is a licensed realtor. During the tax years at issue Mr. Dorval worked as a tax return preparer, having received Federal income tax training from Jackson Hewitt Tax Service, Inc., and Mrs. Dorval worked as a nurse. In 2010 Mr. Dorval opened a tax return preparation business with his brother, Dr. Michel Dorval. The business--Dorval Taxes, LLC, later Dorval Taxes & Accounting, LLC--employed one tax return preparer, David Newberg. Mr. Dorval was issued a preparer tax identification number to enable him to prepare income tax returns for compensation. Mr. Dorval prepared some income tax returns for clients of his return preparation business in 2011 but not in 2010. However, Mr. Newberg used Mr. Dorval's electronic filing identification number to prepare returns in 2010.

Petitioners had several bank accounts during the taxable years at issue; the record includes bank account records from five accounts with JPMorgan Chase Bank (Chase) and three accounts with Wells Fargo (previously Wachovia). Mr. Dorval and Dr. Dorval were signatories for the Chase accounts ending in 6855 and 7788, and Dorval Taxes, LLC, was the designated account title or depositor. Petitioners--but not Dr. Dorval--were signatories for the Chase accounts ending in 2430 and 3075, and Dorval Taxes & Accounting, LLC, was the designated account title or depositor. The business address was used for those four Chase accounts. A fifth Chase account, ending in 6231, was a personal account held in petitioners' names, and petitioners' home address was used. Two Wells Fargo accounts also were held in petitioners' names, and one was held only in Mrs. Dorval's name. Petitioners' home address was used for all three of those accounts.

The business bank statements show various charges at Wal-Mart, at fast food restaurants, and for gas and other items. In 2010 Mr. Dorval cashed checks drawn on Dr. Dorval's personal bank account made out to cash or to Mr. Dorval, and endorsed by Mr. Dorval.²

Mrs. Dorval failed to appear at trial.³ The morning before trial Mr. Dorval provided respondent's counsel with documents he intended to present. The documents included carbon copies of checks, check registers, a handwritten list of expenses, and copies of invoices that Mr. Dorval claimed detailed his business expenses.

II. Petitioners' Joint Income Tax Returns

Petitioners filed joint Forms 1040, U.S. Individual Income Tax Return, for the 2010, 2011, and 2012 tax years.⁴

Petitioners attached Schedules C to their 2010, 2011, and 2012 Forms 1040. Petitioners attached two Schedules C to their 2010 Form 1040--one for Mr. Dorval's business activities listing "Realtor/Self Employe[d]" as his principal business or profession, and the other for Mrs. Dorval's business activities listing "LPN/Nurses" as her principal business or profession. The Schedule C for Mr.Dorval's business activities reported $4,000 of gross receipts and claimed deductions for the following expenses: $2,288 for car and truck expenses, $45 for taxes and licenses, and $5,108 for other expenses (consisting of $2,013 for "Upkeep/Tools", $2,055 for "Suits/Clothes/Shoes", and $1,040 for "Dry Cleaners"). The Schedule C for Mrs. Dorval's business activities reported no income or gross receipts but claimed deductions for the following expenses: $2,016 for car and truck expenses, $150 for taxes and licenses, and $4,866 for other expenses (consisting of $2,011 for "Upke[e]p/Tools", $2,015 for "Clothes/Uniforms/Shoes", and $840 for "Dry Cleaners"). No Schedule C for the tax preparation business was attached to petitioners' 2010 Form 1040.

Petitioners reported $8,500 of gross receipts related to Mr. Dorval's business activities as "Realtor/Self Employe[d]" on their 2011 Schedule C. Petitioners also claimed deductions for the following expenses related to Mr. Dorval's business activities on their 2011 Schedule C: $200 for advertising, $3,112 for car and truck expenses, $140 for taxes and licenses, $2,311 for meals and entertainment, and $5,059 for other expenses (consisting of $2,044 for "Upkeep/Tools", $2,095 for "Suits/Clothes/Shoes", and $920 for "Dry Cleaners"). No Schedules C for Mrs. Dorval's business activities or Mr. Dorval's tax preparation business were attached to petitioners' 2011 Form 1040.

Only in 2012 did petitioners file a Schedule C for Dorval Taxes & Accounting, LLC. That Schedule C reported $8,000 of gross receipts and claimed deductions for the following expenses: $250 for advertising, $1,300 for meals and entertainment, and $1,919 for other expenses (consisting of $1,244 for "Suits Clothing Shoes" and $675 for "Dry Cleaners").

Petitioners also attached Schedule E, Supplemental Income and Loss, to their 2010 Form 1040. Petitioners claimed deductions for the following expenses related to their rental activity: $575 for cleaning and maintenance, $9,013 for mortgage interest, and $1,223 for supplies.

Petitioners attached Forms 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to their 2010, 2011, and 2012 Forms 1040. On their Forms 8863, petitioners claimed refundable American Opportunity Credits of $1,901, $1,893, and $1,000 for tax years 2010, 2011, and 2012, respectively. Petitioners claimed nonrefundable education credits of $393, $818, and $1,174 for tax years 2010, 2011, and 2012, respectively.

Neither Dorval Taxes, LLC, nor Dorval Taxes & Accounting, LLC, has ever filed a Federal income tax return, although, as we described above, petitioners did attach a Schedule C listing Dorval Taxes & Accounting, LLC, to their 2012 Form 1040. At trial Mr. Dorval offered unsigned copies of Forms 1120, U.S. Corporation Income Tax Return, for Dorval Taxes, LLC, for the 2010 and 2011 tax years and carbon copies of checks made out to the IRS in the amounts shown as owed on the Forms 1120: $46 for 2010 and $561 for 2011. The record includes copies of bank statements showing that these checks were cashed, and copies of two U.S. Treasury checks made out to Dorval Taxes, LLC: one for $46 and the other for $561. An IRS computer printout shows that no Form 1120 was filed for either 2010 or 2011.

III. Bank Deposits Analysis

Respondent performed a bank deposits analysis for 2010, 2011, and 2012 using bank account statements from petitioners' accounts described above. Respondent determined that petitioners' deposits totaled $74,960 for the 2010 tax year, $136,074 for the 2011 tax year, and $112,459 for the 2012 tax year. Respondent then excluded wages, rental income, and unemployment compensation. Next, respondent added amounts that ...