Dyer v. Commissioner
| Decision Date | 06 August 2012 |
| Docket Number | T.C. Memo. 2012-224,Docket No. 25736-10 |
| Parties | SHARRIFF MALIK DYER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Michelle T. Aaron, for petitioner.1
Mindy Y. Chou, Robert D. Heitmeyer, and Armand Gary Begun, for respondent.
LARO, Judge: Petitioner petitioned the Court pursuant to section 6213(a)2 to redetermine respondent's determination of the following deficiencies, additions to tax, and accuracy-related penalties in respect of his 2004 through 2007 Federal income tax:
+--------------------------------------------+
¦ ¦ ¦Addition to tax¦Penalty ¦
+----+----------+---------------+------------¦
¦Year¦Deficiency¦Sec. 6651(a) ¦Sec. 6662(a)¦
+----+----------+---------------+------------¦
¦2004¦$18,023 ¦$4,505.75 ¦$3,604.60 ¦
+----+----------+---------------+------------¦
¦2005¦29,387 ¦7,346.75 ¦5,877.40 ¦
+----+----------+---------------+------------¦
¦2006¦30,217 ¦7,554.25 ¦6,043.40 ¦
+----+----------+---------------+------------¦
¦2007¦7,418 ¦1 1,854.50 ¦1,483.60 ¦
+--------------------------------------------+
1 Respondent's answer asserts that for 2007 petitioner is liable for a failure to file addition to tax of $18,454.50 and not $1,854.50 as determined in the notice of deficiency. We regard the increased addition to tax as a typographical error and not a newly pleaded matter because if we construed it as such, which we do not, the failure to file addition to tax for 2007 would exceed 25% of the deficiency in violation of sec. 6651(a)(1).
After the parties' concessions, as summarized in our findings of fact section, we decide the following issues: (1) whether petitioner had unreported "additional income" for 2004 through 2007. We hold he did to the extent stated herein; (2) whether petitioner is entitled to trade or business expense deductions for 2004 and2005 in addition to those respondent has allowed. We hold he is not; (3) whether petitioner's filing status for 2004 through 2007 is single as claimed on his Federal income tax returns for those years or married filing separately as determined in the notice of deficiency. We hold it is married filing separately; (4) whether petitioner is liable for each year at issue for a section 6651(a)(1) addition to tax for failure to file. We hold he is; and (5) whether petitioner is liable for each year at issue for a section 6662(a) accuracy-related penalty for a substantial understatement of income tax. We hold he is.3
FINDINGS OF FACT
The Court deemed certain facts and exhibits established pursuant to Rule 91(f).4 The parties also filed with the Court a supplemental stipulation of facts and related exhibits. The stipulated facts, including those deemed admitted, and the accompanying exhibits are incorporated herein by this reference. The stipulatedfacts are found accordingly. Petitioner has at all relevant times been married to Kristele Baker, and he was a Michigan resident when he petitioned the Court.
During the years at issue petitioner owned and operated Magnum Property Management, L.L.C. (Magnum), through which he bought, sold, rented, invested in, and managed real estate. Petitioner also worked as a self-employed mortgage broker during 2004 and 2005. Petitioner incurred various expenses in connection with his real estate and mortgage brokerage businesses, though he did not keep a formal (if any) set of books and records.
Petitioner owned at least two bank accounts during the years at issue: a personal account (personal account) and Magnum's business account (business account). The parties' redaction of substantially all the financial account numbers prevented us from more precisely describing petitioner's accounts. The record is clear, however, that petitioner used the personal account for business transactions.
Petitioner, through Magnum, sold at least two properties during the years at issue. First, he sold to Marcus Taylor for $73,000 real property in Detroit, Michigan (Parkside property) on November 22, 2006. The gross proceeds payable to Magnum from the sale of the Parkside property were reduced by, in addition to other settlement charges and closing costs, a management fee purportedly paid to Ms. Baker of $56,118.70 (purported management fee). Second, on January 12,2007, petitioner deposited a $94,142.52 check from LandAmerica Commonwealth Bank to the business account from the sale of real property (phantom property).
Petitioner had not filed Federal income tax returns for 2000 through 2007, and in or about October 2008, respondent selected him for a nonfiler examination.5 After the audit began, on June 11, 2009, petitioner filed with respondent Federal income tax returns for 2004 through 2006 (2004 return, 2005 return, and 2006 return, respectively). Nearly five months later, on November 3, 2009, petitioner filed with respondent his 2007 Federal income tax return (2007 return). Each of the 2004 through 2007 returns was prepared by a paid preparer, and each reported petitioner's filing status as single. We note that Ms. Baker filed separate and apart from petitioner a Federal income tax return for each year at issue, though the record is unclear whether she claimed a filing status of single or married filing separately.
The 2004 through 2007 returns reported business income from petitioner's real estate and/or mortgage brokerage businesses of $63,225, $71,387, $77,087, and $5,197, respectively. Attached to those returns were one or more Schedules C,Profit or Loss From Business, reporting the following aggregated items of income and expense:
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¦Income ¦2004 ¦2005 ¦2006 ¦2007 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Gross receipts or sales ¦$357,129¦$612,439¦$519,424¦$10,926¦
+-------------------------------+--------+--------+--------+-------¦
¦Costs of goods sold ¦269,427 ¦506,587 ¦429,252 ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Gross profit ¦87,702 ¦105,852 ¦90,172 ¦10,926 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Other income ¦-0- ¦-0- ¦-0- ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Gross income ¦87,702 ¦105,852 ¦90,172 ¦10,926 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Expenses ¦ ¦ ¦ ¦ ¦
+-------------------------------+--------+--------+--------+-------¦
¦Advertising ¦-0- ¦-0- ¦$2,000 ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Car and truck ¦$6,770 ¦$2,415 ¦2,901 ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Office expense ¦2,010 ¦-0- ¦1,274 ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Insurance ¦1,132 ¦-0- ¦-0- ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Legal and professional services¦484 ¦-0- ¦-0- ¦$2,000 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Rent or lease ¦8,000 ¦-0- ¦-0- ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Repairs and maintenance ¦2,263 ¦3,615 ¦-0- ¦2,900 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Supplies ¦-0- ¦22,325 ¦-0- ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Taxes and licenses ¦1,138 ¦1,652 ¦295 ¦-0- ¦
+----------------------------------------+--------+--------+-------¦
¦Travel, meals, and entertainment 17 ¦-0- ¦-0- ¦-0- ¦
+----------------------------------------+--------+--------+-------¦
¦Utilities ¦1,176 ¦-0- ¦-0- ¦-0- ¦
+-------------------------------+--------+--------+--------+-------¦
¦Other ¦1,487 ¦4,458 ¦6,615 ¦829 ¦
+-------------------------------+--------+--------+--------+-------¦
¦Total ¦24,477 ¦34,465 ¦13,085 ¦5,729 ¦
+------------------------------------------------------------------+
Attached to the 2005 return was Schedule E, Supplemental Income and Loss, for a rental property with an address described as "RESIDENTIAL". That Schedule E reported rental income of $6,111, mortgage interest expense of $6,111, and zero income. The 2006 return similarly attached Schedule E reporting rental income of $36,011, mortgage interest expense of $36,011, and zero income for property withan address described as "IRC 469(c)(A)(7)". Also attached to the 2006 return was Form 4797, Sales of Business Property, reporting the sale of a property described as "HOUSE" on August 2, 2006, for $120,000. The record is not clear whether the property reported on the Form 4797 is the same as the Parkside property.
Attached to the 2007 return were three Schedules E listing 4 rental properties on each for 12 properties in total. Three of the four Schedules E have lines drawn through them, ostensibly to show that the real estate activities reported thereon were neither taxable to nor reportable by petitioner. The 2007 return also reported that even though petitioner may or may not have owned 12 properties, he earned zero net supplemental income therefrom. The 2007 return is unreliable, and we note, for discussion purposes only, that petitioner did not report the sale of the phantom property on the 2007 return.
Respondent's revenue agent reconstructed petitioner's income for each year at issue on the basis of information included in summoned bank records and real estate closing documents.6 Specifically,...
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