Reynoso v. Comm'r

• Decision Date: 22 January 2013
• Docket Number: Docket No. 17215-10,Docket No. 5475-10,T.C. Memo. 2013-25
• Parties: RAMON REYNOSO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

RAMON REYNOSO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

T.C. Memo. 2013-25

Docket No. 5475-10

Docket No. 17215-10

UNITED STATES TAX COURT

Filed January 22, 2013

Russell P. Briesacker, Jr., for petitioner.

Mindy S. Meigs, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

MARVEL, Judge: In notices of deficiency for 2006 and 2007 respondent determined the following deficiencies and additions to tax with respect to petitioner's Federal income tax:

+---------------------------------------------------------------------------------------+
                ¦Year  ¦Deficiency  ¦Sec. 6651(a)(1)  ¦Additions to tax Sec. 6651(a)(2)  ¦Sec. 6654(a)  ¦
                +------+------------+-----------------+----------------------------------+--------------¦
                ¦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:

+---------------------------------------------------------------------------------------+
                ¦Year  ¦Deficiency  ¦Sec. 6651(a)(1)  ¦Additions to tax Sec. 6651(a)(2)  ¦Sec. 6654(a)  ¦
                +------+------------+-----------------+----------------------------------+--------------¦
                ¦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 tax for the years at issue; (4) whether and to 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 sections 6651(a)(1)² and (2) and 6654 for the years at issue.³

FINDINGS OF FACT

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.

I. Background

Petitioner, a permanent U.S. resident, works in the construction industry. In 1999 he married Erika Avila Blanca (Mrs. Reynoso). He has seven children; Mrs. Reynoso is the mother of his three youngest children.

II. Petitioner's Property Transactions

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'sWelding 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.

III. Petitioner's Business Activities

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 underthe trade names R&R Construction 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.⁶ 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.

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.

IV. Petitioner's Failure To Keep Records and Substantiate Business Expenses

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 of payroll records.

Petitioner paid both business and personal expenses using his Bank of America accounts. See infra. He engaged in numerous cash transactions, including substantial cash deposits and withdrawals. Although petitioner paid various business expenses in 2006 and 2007 with respect to the construction work he performed for PAMA, he made minimal effort to reconstruct his business expenditures during the course of these proceedings.

V. Petitioner's Bank Accounts

During 2006 petitioner maintained two personal bank accounts at Bank of America, account No. 1420 and account No. 1421.⁷ 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".⁸ 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. 4099) 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. 4098) titled "Ramon Reynoso R and R Construction".¹⁰ In 2007 he deposited 23 checks from PAMA, totaling $126,000,into account No. 4099, and he deposited 107 checks from PAMA, totaling $588,700, into account No. 4098.¹¹

VI. Notices of Deficiency

Petitioner failed to timely file tax returns for 2006¹² and 2007.¹³ Consequently, respondent prepared substitutes for returns under section 6020(b) for 2006 and 2007. On the basis of the substitutes for returns, respondent mailed to petitioner notices of deficiency for 2006 and 2007.

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 sections 6651(a)(1) and (2) and 6654. Respondent determined the 2006 income tax deficiency using married filing separately filing status for petitioner.

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 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 sections6651(a)(1) and (2) and 6654. Respondent determined the 2007 income tax deficiency using a single filing status for petitioner.

VII. Petitioner's Tax Court Proceedings

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