                         T.C. Summary Opinion 2012-98



                         UNITED STATES TAX COURT



                 RAQUEL S. ANTONIOUS, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket No. 17630-10S.                        Filed October 10, 2012.




      Raquel S. Antonious, pro se.

      Rachel L. Schiffman, for respondent.



                              SUMMARY OPINION


      ARMEN, Special Trial Judge: This case was heard pursuant to the

provisions of section 7463 of the Internal Revenue Code in effect when the petition
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was filed.1 Pursuant to section 7463(b), the decision to be entered is not reviewable

by any other court, and this opinion shall not be treated as precedent for any other

case.

        Respondent determined a deficiency of $2,250 in petitioner’s 2008 Federal

income tax and an accuracy-related penalty of $450 under section 6662(a). The

issues raised by the pleadings and tried to the Court are: (1) Whether petitioner is

entitled to deduct $8,160 of rental expenses that respondent disallowed for lack of

substantiation; and (2) whether she is liable for the accuracy-related penalty for

negligence or disregard of rules or regulations.2 We hold that petitioner is entitled

to deduct $995 of the rental expenses disallowed by respondent and further hold that

she is liable for the accuracy-related penalty.




        1
         Unless otherwise indicated, all subsequent section references are to the
Internal Revenue Code in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
        2
         The notice of deficiency includes an adjustment to income of $62 that
petitioner never challenged. Accordingly, that adjustment is deemed to be
conceded. See Rule 34(b) (4) (“Any issue not raised in the assignments of error
shall be deemed to be conceded.”).
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                                     Background

      Some of the facts have been stipulated, and they are so found. We

incorporate by reference the parties’ stipulation of facts and accompanying exhibits.

Petitioner resided in the State of New York when the petition was filed.

      At all times relevant petitioner worked and resided in New York City, and

petitioner’s parents resided together in St. Petersburg, Florida. Petitioner’s mother

was the sole owner of a single-family home in Largo, Florida, that she held as rental

property (Florida property). In addition, petitioner’s parents were the sole

shareholders of a property management company called Jermc Management Corp.

(Jermc) for which her father served as president. Jermc was in the business of

managing rental real estate, including the Florida property.

      According to petitioner and her father, sometime in 2007 petitioner entered

into an agreement with her parents to rent the Florida property in order to sublet it

for investment purposes with the option to purchase the property at some later date.

Under the agreement as described by petitioner and her father, petitioner would pay

her mother (as owner of the Florida property) rent of $750 per month beginning on

October 1, 2007. Pursuant to the agreement, petitioner would also pay utility

expenses of $360 per year. To memorialize the agreement, petitioner and her

mother signed a purported lease drafted by petitioner’s father.
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        Petitioner never resided at the Florida property. Petitioner’s father, as

president of Jermc, managed the Florida property for her mother in general and for

petitioner as a lessee of the property.

        In 2008 petitioner’s father entered into an oral agreement with a family friend

to sublet the Florida property on a month-to-month basis for $1,200 per month. The

family friend moved out of the Florida property after the first month, however, and

petitioner’s father was unable to find another tenant in 2008. Consequently,

petitioner received only $1,200 of rental income from the Florida property during

2008.

        Petitioner’s father prepared her 2008 Federal income tax return. Attached to

that return was a 2008 Schedule E, Supplemental Income and Loss, on which

petitioner reported $1,200 of rental income and claimed rental expenses of $9,360

with respect to the Florida property.

        In a notice of deficiency respondent allowed a deduction for $1,200 of the

claimed rental expenses but disallowed the remaining $8,160 because of lack of

substantiation.
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                                     Discussion

I.    Rental Expenses

      We begin with several fundamental principles of tax litigation that inform our

decision in this case. First, as a general rule, the Commissioner’s determinations are

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

determinations are erroneous.3 See Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992); Welch v. Helvering, 290 U.S. 111, 115 (1933).

      Second, deductions are a matter of legislative grace, and the taxpayer bears

the burden of proving entitlement to any deduction claimed. See Rule 142(a);

Deputy v. du Pont, 308 U.S. 488, 493 (1940); New Colonial Ice Co. v. Helvering,

292 U.S. 435, 440 (1934); Welch v. Helvering, 290 U.S. at 115. Further, taxpayers

must maintain adequate records to substantiate the deductions claimed on their




      3
          Pursuant to sec. 7491(a)(1), the burden of proof as to factual matters shifts
to the Commissioner under certain circumstances. However, sec. 7491(a)(1) applies
only if, inter alia, the taxpayer has complied with the substantiation and
recordkeeping requirements of the Internal Revenue Code. See sec. 7491(a)(2)(A)
and (B). Petitioner neither alleged that sec. 7491(a)(1) was applicable nor
established that she complied with the requirements of sec. 7491(a)(2).
Accordingly, the burden of proof remains on petitioner.
                                         -6-

Federal income tax returns.4 See sec. 6001; sec. 1.6001-1(a), Income Tax

Regs.; see also Bailey v. Commissioner, T.C. Memo. 2012-96, 2012 WL 1082928,

at *17.

      Third, the Court is not bound to accept as gospel the unverified and

undocumented self-serving testimony of a taxpayer. Tokarski v. Commissioner, 87

T.C. 74, 77 (1986); Hradesky v. Commissioner, 65 T.C. 87, 90 (1975), aff’d per

curiam, 540 F.2d 821 (5th Cir. 1976).

      Fourth, a party’s failure to introduce documentary evidence that is within her

possession or control and which she implies would be favorable to her gives rise to

the presumption that, if produced, such evidence would be unfavorable. Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946), aff’d, 162 F.2d

513 (10th Cir. 1947).

      4
           Sec. 6001 provides that “[e]very person liable for any tax imposed by this
title, or for the collection thereof, shall keep such records * * * and comply with
such rules and regulations as the Secretary may from time to time prescribe.”
           Sec. 1.6001-1(a), Income Tax Regs., provides that “any person subject to
tax * * * shall keep such permanent books of account or records * * * as are
sufficient to establish the amount of * * * deductions”.
           Sec. 1.6001-1(e), Income Tax Regs., provides that “[t]he books or records
required by this section shall be kept at all times available for inspection by
authorized internal revenue officers or employees, and shall be retained so long as
the contents thereof may become material in the administration of any internal
revenue law.”
                                         -7-

      Finally, transactions between family members are generally given close

scrutiny. See Caligiuri v. Commissioner, 549 F.2d 1155, 1157 (8th Cir. 1977)

(“Inasmuch as this alleged debt involves an intra-family transaction, we must give

particularly close scrutiny to the facts.”), aff’g T.C. Memo. 1975-319; Perry v.

Commissioner, 92 T.C. 470, 481 (1989) (“A purported loan between family

members is always subject to close scrutiny * * * [t]he same is true as to a

purported investment.”), aff’d without published opinion, 912 F.2d 1466 (5th Cir.

1990); Vinikoor v. Commissioner, T.C. Memo. 1998-152, 1998 WL 201755, at *3

(“We always examine intrafamily transactions with special scrutiny.”); Hunt v.

Commissioner, T.C. Memo. 1989-335 (“Transactions between family members are

given close scrutiny.”).

      A taxpayer may choose to conduct business in cash, but that choice does not

relieve the taxpayer of the duty to maintain adequate records and substantiate the

payment of expenses claimed on the taxpayer’s return. See supra note 4.

According to petitioner and her father, she did not make regular monthly rent

payments of $750 but instead typically made irregular payments in cash of varied

amounts whenever she had sufficient funds. However, neither petitioner nor her

father could generally recall when rent payments were made or in what specific
                                         -8-

amounts. Although petitioner claimed to maintain a spreadsheet account of her

payments, that spreadsheet was never produced at trial, giving rise to the

presumption that its contents would be unfavorable to her case. See Wichita

Terminal Elevator Co. v. Commissioner, 6 T.C. at 1165. Moreover, petitioner

provided no documentary evidence regarding the $360 she allegedly paid for utility

expenses. Aside from one check for $995 from her bank account made payable to

her father, petitioner provided no reliable documentary evidence that any

expenditure in excess of that allowed by respondent was ever made.5

      Our close scrutiny of her family transaction as well as the inadequate

documentary evidence in the record compels us to hold that petitioner failed to

satisfy her burden of proof with respect to most of her claimed rental expenses.

Thus, on the basis of the record as a whole, we conclude that petitioner is entitled to

a deduction of only $995 in addition to the $1,200 respondent allowed with respect

to her Schedule E for 2008.




      5
          Petitioner and her father testified that the check represented a rent payment
for the Florida property. Although respondent contends otherwise, we are satisfied
that the check, coupled with the testimony of petitioner and her father, is sufficient
to establish that petitioner paid additional rent of $995 with respect to the Florida
property in 2008.
                                          -9-

II.     Accuracy-Related Penalty

        Section 6662(a) and (b)(1) imposes a penalty equal to 20% of the amount of

any underpayment attributable to negligence or disregard of rules or regulations.

The term “negligence” includes any failure to make a reasonable attempt to comply

with tax laws, and “disregard” includes any careless, reckless, or intentional

disregard of rules or regulations. Sec. 6662(c). Negligence also includes any failure

to keep adequate books and records or to substantiate items properly. Sec. 1.6662-

3(b)(1), Income Tax Regs.

        Section 6664(c)(1) provides an exception to the imposition of the accuracy-

related penalty if the taxpayer establishes that there was reasonable cause for, and

the taxpayer acted in good faith with respect to, the underpayment. Sec. 1.6664-

4(a), Income Tax Regs. The determination of whether the taxpayer acted with

reasonable cause and in good faith is made on a case-by-case basis, taking into

account the pertinent facts and circumstances. Sec. 1.6664-4(b)(1), Income Tax

Regs.

        With respect to a taxpayer’s liability for any penalty, section 7491(c) places

on the Commissioner the burden of production, thereby requiring the Commissioner

to come forward with sufficient evidence indicating that it is appropriate to impose

the penalty. Higbee v. Commissioner, 116 T.C. 438, 446-447 (2001). Once the
                                          - 10 -

Commissioner meets his burden of production, the taxpayer must come forward

with persuasive evidence that the Commissioner’s determination is incorrect. See

id. at 447; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115.

      Respondent has proven, and has therefore discharged his burden of

production under section 7491(c), that petitioner failed to keep adequate records and

properly substantiate $7,165 (i.e., $8,160 - $995) of her claimed rental expenses.6

See sec. 1.6662-3(b)(1), Income Tax Regs.

      Petitioner has not met her burden of persuasion with respect to reasonable

cause and good faith.7 Thus, on the record before us, we are unable to conclude that

petitioner acted with reasonable cause and in good faith within the meaning of

section 6664(c)(1). Accordingly, petitioner is liable for the accuracy-related


      6
         We do not regard respondent as having any burden of production as to the
accuracy-related penalty insofar as it relates to petitioner’s failure to report interest
income of $62 because petitioner never raised any issue regarding the applicability
of the penalty to that adjustment. See Swain v. Commissioner, 118 T.C. 358, 364-
365 (2002).
      7
         Petitioner was silent at trial regarding the penalty issue and did not allege
that she acted with reasonable cause and in good faith regarding her failure to
properly substantiate her rental expenses. On brief, petitioner had little to say
regarding this issue other than to allege that “[t]he petitioner and the landlord
followed all the laws set forth by the U.S. Tax Court and thus the petitioner should
not be charged with any penalties.” We note that statements on brief do not
constitute evidence. Rule 143(c). In any event, we find petitioner’s argument in
this regard to be conclusory in nature and unpersuasive.
                                          - 11 -

penalty under section 6662(a) on the amount of the underpayment of tax to be

computed as part of the Rule 155 process.8

                                      Conclusion

      We have considered all of the arguments advanced by the parties, and, to the

extent not expressly addressed, we conclude that those arguments do not support a

result contrary to our decision herein.

      To give effect to our disposition of the disputed issues as well as petitioner’s

deemed concession,


                                                         Decision will be entered

                                                   under Rule 155.




      8
         Petitioner also requests that all “interest be cancelled”. However, apart
from a few limited exceptions not applicable here, we lack jurisdiction over interest
that accrues on a tax deficiency that has yet to be assessed. See McCauley v.
Commissioner, T.C. Memo. 1988-431; cf. sec. 6404(h); Rules 280-284. Thus, we
are bound by our jurisdictional limits and cannot adjudicate petitioner’s request.
